Net expenses for claims and benefits €bn –39.7 –39.9 –41.0 –40.9 –36.6 Net operating expenses €bn –12.0 –12.4 –12.6 –12.0 –11.1
Comparability with the year 2010 is thus limited. 3 For 2010, 2013 and 2014, this contains own shares earmarked for retirement. 4 Including those apportionable to minority interests and policyholders. 5 The figures for 2011 are not adjusted for relief of 1.4 percentage points from economic risk transfer to the capital markets. 6 Excluding health insurance conducted like life insurance.
Countries in which Munich Re (Group) is represented by a subsidiary or branch: Reinsurance Primary insurance Reinsurance and primary insurance
/r es ul t d ev el op m en t
Consolidated financial statements and notes 155 Consolidated balance sheet 158 Consolidated income statement 160 Statement of recognised income and expense 161 Group statement of changes in equity 162 Consolidated cash flow statement 164
General information 305 Glossary 306 Index of key terms 314 Important addresses 315 Imprint/Service Inside back cover
The seemingly erratic ups and downs in the financial markets are increasingly perplexing, not only for investors, but also for the general public. Such high volatility is not an inevitable feature of a globalised economy, but the consequence of growth that has often been overly dependent on debt and a financial system overflowing with liquidity. This leads to a rapid rise in the prices of many investments, which makes subsequent price falls all the more likely and dramatic. The larger a growth bubble becomes, the greater the risk of a shock correction when it bursts.
From my point of view, it would be preferable to see a slower and more constant rise in values. High volatility in the financial markets hampers stronger long-term growth, and major fluctuations in the capital markets generally go hand-in-hand with a less equitable distribution of income and assets.
Against this background, a critical view should be taken of the relaxed monetary and liquidity policy of major central banks. The European Central Bank recently even increased access to cheap money when it took the decision in January to purchase government bonds. In my opinion, this was a step in the wrong direction. The main argument for doing this – to counter an apparent threat of deflation – does not really hold water. And even if the analysis of deflation was correct, the purchase of government bonds by the ECB would not be the right solution, as it would cause considerable collateral damage while hardly alleviating any deflation that may occur. In view of the continuing rise in market liquidity, there will be a greater risk of substantial disruption to price structures and creation of price bubbles for some investments. This has already happened to many bonds. There is also less pressure on eurozone countries to introduce sustainable reforms to stimulate their economies, to reduce unemployment for young people in particular, and to consolidate their finances.
Much of this business potential lies at the interface between insurance and reinsurance. With our strategy of combining primary insurance and reinsurance under one roof, we are well positioned to move into previously untapped fields of business. As a Group, we are more innovative; this is a further advantage of our structure in addition to synergy effects and greater diversification.
Looking back, 2014 was a good year for Munich Re – despite the difficult environment. We were able to surpass our original result target of €3bn. Under the share buy-back programme approved last year, we will have repurchased €1bn worth of shares by the 2015 Annual General Meeting. We are proposing to the Annual General Meeting an increase in the dividend to €7.75 per share in order to allow you, our shareholders, to participate commensurately in the Group’s success. Our
19 March 2014 The Supervisory Board appoints two new Board of Management members: und Vertrieb AG is launched. It provides uniform client-consulting and quality assurance tools to ERGO’s tied-agency sales forces, which have been amalgamated into two units from a former total of five. The reorganisation of ERGO’s sales forces in Germany is thus completed.
27 August 2014 Munich Re’s primary insurance subsidiary Great Lakes Australia (GLA) reaches an agreement to support Australia’s largest broker network, the Steadfast Group (Steadfast) in their proposed acquisition of Calliden Group Ltd (Calliden). Munich Re acquires the insurance company, Calliden Insurance Limited. At the same time, GLA
Pina Albo (51) is appointed a member of the Board of Management with effect from 1 October 2014. Albo takes on responsibility for the Europe and Latin America Division in conjunction with 30 April 2014 Munich Re pays an increased dividend of €7.25 per share for the financial year 2013 (previous year: €7.00). This puts Munich Re’s overall payout to shareholders at more than €1.3bn.
obtains access to a leading-edge underwriter platform for commercial insurance covers and key expert personnel, previously part of Calliden, to strengthen GLA’s business package and commercial insurance product distribution.
20 March 2014 Munich Re’s Board of Management avails itself of the authorisation granted at the Annual General Meeting on 30 April 2013 to buy back shares. On 20 March 2014, it resolves to acquire in the period between 1 May 2014 and, at the latest, the next Annual General Meeting on 23 April 2015 up to 13 million Munich Re shares for a maximum total purchase price of €1bn via the stock exchange. The repurchased shares are to be retired in order to optimise the Company’s capital structure.
Rainer Tögel 26 May 2014 Munich Re and the German software company RIB sign an exclusive agreement to jointly develop the first global IT-based insurance product for major construction projects, covering elements of unplanned increases in construction costs. The innovative solution is geared to project owners and combines RIB’s iTWO Technology with Munich Re’s risk know- how.
12 September 2014 Since severe weather events are increasing, protection against floods is becoming more important – not only in the vicinity of rivers. With its new product line for homeowners’ comprehensive insurance, ERGO pioneers insurance cover against flooding and heavy rainfall in all areas, including for residential buildings in regions with extreme exposure to flooding. Another core element of this product line is the “Get your house back” guarantee.
Joachim Wenning Board member responsible for personnel and welfare matters Life Human Resources
Jörg Schneider Chief Financial Officer Group Reporting Group Controlling Corporate Finance M&A Integrated Risk Management Group Legal Group Taxation Investor and Rating Agency Relations
The investment year 2014 was dominated by declining interest rates and geopolitical risks on the one hand, and economic hopes and expansionary monetary policies of central banks on the other. At the end of 2014, the yield on ten-year German government bonds reached a new historical low of only around 0.5%. Shares thus became more attractive again given their generally higher dividend yield. The unresolved sovereign debt crisis drew much less attention in the capital markets than in previous years.
In the second quarter, the stock markets continued to be volatile. Whilst a few historical highs were still reached in March, prices in some stock markets dropped by mid-April to below the levels recorded at the beginning of the year. Poor economic data, especially from Europe, were responsible for this development. Thereafter, hopes for economic recovery in the second half of the year alternated with fears of a reduction in the expansive monetary policy. The ECB’s announcement that it intended to maintain its loose monetary policy caused the DAX to break the 10,000-point mark for the first time in June.
— Munich Re shares showed solid performance: The share price increased by 3.5% in 2014, giving a return (including dividends) of 8.2%
— In 2014, own shares were repurchased with a transaction value of €1.4bn
To our shareholders Munich Re shares 1 European share price index = DJ EURO STOXX 600
Buoyed by higher bond prices, carrying amounts in the insurance sector improved further. Due to higher share prices across the board, by the end of the year the pricing levels for insurance stocks were thus about the same as in the previous year.
Having seen gratifying performance in the previous year, Munich Re shares again increased in value in 2014, despite the challenging environment, thus reaffirming their attractiveness as an investment. The price performance was underpinned by the still robust growth in operating earnings, and by the fact that our original profit guidance issued at the beginning of 2014 was again exceeded, the latter benefiting from the relatively low levels of 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 May 2014. This underscores the Board’s commitment to disciplined and responsible capital management in line with shareholders’ interests.
Share price performance 1.1.2014 = 100 2 European bank index = DJ EURO STOXX Banks
From a sustainability perspective, Munich Re shares remain an interesting investment. Since 2001, Munich Re has been an ever-present member of 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 won the German Investors’ Award for Responsible Business Practices (Deutscher Investorenpreis für verantwortliches Wirtschaften) in December 2014. This was the fourth time that publishing house DuMont Verlag and Deutsche Asset & Wealth Management conferred the award on companies that understand sustainability to be a strategic objective and implement it in an exemplary way.
For the financial year 2014, the Board of Management and the Supervisory Board intend to propose a dividend of €7.75 (previous year €7.25) at the Annual General Meeting on 23 April 2015. Altogether, this would mean a total payout of €1.3bn (previous year: €1.3bn). Subject to approval by the Annual General Meeting, the dividend will be paid on 24 April 2015. With an increase in the dividend, we are again underlining the profitability of our business model and the solidity of our capital position.
With a dividend yield of approximately 4.7% (dividend for the 2014 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.
Around 185 million Munich Re shares with a total volume of some €27.8bn were traded on German stock exchanges in the year under review, putting our shares in 13th place among the DAX stocks. In terms of market capitalisation, we ranked 15th with free-float market capitalisation of around €25bn.
2 Previous years’ figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”.
An overview of Munich Re’s ratings can be found on page 100
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 economic life manageable – for our clients and for us.
Our business model is supported by disciplined financial management based on Group-wide integrated risk management, an investment policy geared to the structure of our liabilities, and active capital management.
Our risk management encompasses much more than just the risks from our insurance business. It includes investment, credit and operational risks, and also models interactions between these different risks. Our investment policy takes into account the due dates, the currencies and the inflation sensitivity of our underwriting liabilities, thus reducing reinvestment, currency and inflation risks. With our active capital management, we ensure that Munich Re’s capitalisation is always appropriate. Our economic equity covers the capital requirement derived from our internal risk model and takes into account the stipulations of regulators and rating agencies. Excess capital is returned to our shareholders in the form of dividends and share buy-backs.
An important success factor is the constant improvement of the value-based processes we use to control and manage our business. One important performance indicator in this context is return on risk-adjusted capital (RORAC), which relates the profit earned to the required risk capital, allowing the management of all activities in the Group to be geared to economic value added.
To meet our own requirements and those of our stakeholders, we have committed ourselves not only to the ten principles of the UN Global Compact, but also throughout our Group to codes and principles that go beyond what the law requires. Examples of this are the Principles for Sustainable Insurance (PSI), to which we were among the first signatories, and the Principles for Responsible Investment (PRI) for specific sustainability criteria on the investment side. By systematically anchoring the aspects of ecology, social responsibility and corporate governance (ESG aspects) in our core business and investments, we are able to identify risks even more extensively, and devise solutions for them together with our clients.
Munich Re operates in virtually all classes of reinsurance. Our products range from traditional reinsurance, comprehensive services and consultancy to complex individual solutions for assuming risks and optimising our clients’ capital. In our business, we pursue an underwriting policy consistently based on risk-commensurate prices, terms and conditions. The transfer of risks to the capital markets is another service we offer to clients.
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, 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 and capacity of a leading global risk carrier.
C or po ra te g ov er na nc e 19Corporate governance
Focal points of the meetings of the full Supervisory Board There were seven meetings of the Supervisory Board in the year under review. Two representatives of the German Federal Financial Supervisory Authority (BaFin) routinely attended one of the meetings as guests. We regularly held in depth discussions with the Board of Management about Munich Re’s business performance and current topics, with a special focus on strategic considerations of the Board of Management with respect to the individual business fields. In this context, we also always critically examined developments in life primary insurance. The Board of Management reported regularly on the situation of Munich Re’s investments, addressing the development of the global economy and financial markets in detail, and their impact on the Group’s assets and earnings. It also kept us informed about the relevant supervisory requirements, particularly regarding the developments in Solvency II, Europe’s new supervisory regime. We also dealt with the following topics in the individual meetings in 2014: The meeting on 19 March focused on the Company and Group financial statements for 2013 and the motions for resolution by the 2014 Annual General Meeting. We conferred and took decisions regarding two new
Munich Re Group Annual Report 2014 appointments to the Board of Management and regarding the extension of another appointment, and on related adjustments to the Board of Management’s distribution of responsibilities. In addition, we established the personal objectives for the Board members’ variable remuneration for 2014. We also asked for an overview of the Group’s restructured compliance organisation, and the Board of Management informed us about developments in the reinsurance markets and Munich Re’s positioning in those markets.
The Audit Committee met six times in the period under review, and two of these meetings were attended by the external auditors. At these meetings attended by the auditors, the Audit Committee discussed the annual financial statements and the management reports for the Company and for the Group, the auditors’ reports, and the Board of Management’s proposal for the appropriation of the net retained profits for the financial year 2013. The Committee also concerned itself with the quarterly financial reports in 2014, and discussed the half-year financial report for 2014 in detail with the auditor.
Pursuant to rule 7.5 of the rules of procedure, the Conference Committee for the Supervisory Board did not need to be convened in 2014.
Corporate governance and Declaration of Conformity The Supervisory Board pays close attention to good corporate governance. Together with the Board of Management, we therefore published the mandatory annual Declaration of Conformity pursuant to Section 161 of the German Stock Corporation Act (AktG) in November 2014. We again complied with all recommendations of the German Corporate Governance Code, and intend to continue to comply with it in future. We confirmed the assessment we made in 2013 that all 20 members of the Supervisory Board are to be regarded as independent and that they do not have any relevant conflicts of interests.
Munich Re offered an internal information event to all the members of the Supervisory Board in 2014. Nearly all of them took advantage of the opportunity to enhance their understanding of increasing digitalisation and data management in the insurance industry, particularly at Munich Re, and to hold intensive discussions about these issues. Munich Re also held an induction course for newly elected members of the Supervisory Board. This provided a customised overview of risk management, corporate governance, financial control, accounting and Board remuneration with particular reference to Munich Re.
Changes on the Board of Management Dr. Doris Höpke was appointed a member of the Board of Management with effect from 1 May 2014, and has since been responsible for the business field Munich Health. Giuseppina Albo was appointed a member of the Board of Management with effect from 1 October 2014. Until 31 December 2014, she was jointly responsible with Georg Daschner for the Europe and Latin America Division; since 1 January 2015, she has had sole responsibility for this function.
Georg Daschner, who has been a member of the Board of Management since 2003, retired on 1 January 2015. We would like to thank him for his many years of dedicated service to the Group, and for his outstanding contribution to the success of Munich Re over many years.
Details of this can be found in the corporate governance report on page 26 ff.
Corporate governance stands for a form of responsible company management and control geared to long-term creation of value. One of our aims in this context is to foster the confidence of investors, clients, employees and the general public. Efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies and with the Group’s staff, and open and transparent corporate communications are also very important for us.
Corporate governance report 1 In accordance with Section 3.10 of the German Corporate Governance Code.
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).
Munich Reinsurance Company is a joint-stock company (Aktiengesellschaft) within the meaning of the German Stock Corporation Act (AktG). It has three governing bodies: the Board of Management, the Supervisory Board and the Annual General Meeting. Their functions and powers are derived from the Act, the Articles of Association, the co-determination agreement, rules of procedure and internal guidelines. The principle of parity co-determination on the Supervisory Board has been upheld in the co-determination agreement, and strengthened by taking into account staff employed in the rest of Europe.
Pursuant to Article 16 of the Articles of Association, the Board of Management must consist of at least two members; beyond this, the number of members is determined by the Supervisory Board. The Board of Management of Munich Reinsurance Company had eight to ten members in the year under review (taking into account the two new appointments to the Board during the course of the year). In the period under review, the Supervisory Board appointed two women to the Board of Management who have extensive international experience and thus strengthen its diversity und internationality.
The remuneration system for the Board of Management and the remuneration tables are provided on page 49 ff. of the management report
— In selecting candidates for membership, the Supervisory Board should pay due regard to diversity, especially in terms of age, internationality and gender. The Supervisory Board set itself the objective that at the beginning of the current term of office at least 20% of the members should be women, with this figure increasing to at least 30% by the start of the following term of office (scheduled for 2019). This objective has already been surpassed: in the period under review, there were five women on the Supervisory Board until 30 April 2014, and eight after this date. This means that women made up 25% of the members until 30 April 2014 and 40% after that date.
In addition, the Supervisory Board’s rules of procedure provide for a recommended age limit of 70 for candidates.
An overview of the composition of the Supervisory Board can be found on page 43 ff. More details about the work of the Supervisory
Board can be found in the Statement on Corporate Governance and in the Report of the Supervisory Board on page 21 ff.
Munich Re 033 Group structure 033 Important tools of corporate management 039 Governing bodies of Munich Re 043 Remuneration report 049
Macroeconomic and industry environment 070 Capital markets 070 Insurance industry 071
Business performance 072 Board of Management’s overall assessment of the business performance and situation of the Group 072 Munich Re’s business performance – Overview and key figures 072 Reinsurance – Life 075 Reinsurance – Property-casualty 078 ERGO Life and Health Germany 083 ERGO Property-casualty Germany 087 ERGO International 089 Munich Health 091 Investment performance 093
Stakeholders 108 Clients and client relationships 108 Staff 111 Shareholders 113 Environment and society 115
Munich Re combines primary insurance and reinsurance under one roof. This enables the Group to cover large stretches of the value chain in the risk market. At the same time, it leverages synergies in revenue and costs, whilst reducing the risk-based capital required through broad diversification. Almost all reinsurance units operate worldwide under the uniform brand of Munich Re. The ERGO Insurance Group (ERGO) is active in nearly all lines of life, health and property-casualty insurance. International business is increasingly gaining in importance for ERGO. The Group has taken this into account by changing our internal management reporting and thus also our segment reporting as of the fourth quarter of 2014. Our international health reinsurance business and health primary insurance outside Germany are combined under the Munich Health brand. Munich Re’s investments worldwide are managed by MEAG, which also offers its expertise to private and institutional investors outside the Group. As of the fourth quarter of 2014, we are no longer showing asset management as a separate segment because MEAG’s activities focus on intra-Group business.
— The majority of primary insurance operations are concentrated in ERGO Insurance Group.
— Munich Health streamlines its organisation and consolidates its market position in order to tap into growth opportunities in the international health insurance market.
The reinsurance divisions Our international life business is written in the Life Division. This is split into four geographical regions and one international unit responsible for global activities in the area of risk and capital management, particularly the reinsurance of guarantees for savings products and transactions in the area of corporate financial management. In order to ensure proximity to our clients, we are represented in many markets with local subsidiaries and branches.
Our primary insurer transacts life and property-casualty insurance under the ERGO brand. This broad offering is supplemented by legal protection insurance from D.A.S., health insurance from DKV, and travel protection insurance from ERV or ERGO Direkt, ERGO’s specialist for direct sales. ERGO’s many different sales channels include not only its companies’ own successful intermediary organisations and direct selling by phone and via the internet but also broker relationships and cooperations with banks and other marketing partners.
Europe and Latin America Munich Re do Brasil Resseguradora S.A., São Paulo3 Munich Re, Madrid3 Munich Re, Milan Munich Re, Paris Munich Re, London (General Branch)
Germany, Asia Pacific and Africa Great Lakes, Sydney Great Lakes, Auckland Munich Re, Sydney Munich Holdings of Australasia Pty. Ltd., Sydney Munich Mauritius Reinsurance Co. Ltd., Port Louis Munich Re, Kuala Lumpur Munich Re, Kuala Lumpur (Retakaful Branch) Munich Re, Beijing3 Munich Re, Hong Kong3 Munich Re, Seoul3 Munich Re, Auckland Munich Reinsurance Company of Africa Ltd., Johannesburg Munich Re, Singapore3
The set-up of Munich Health Munich Health operates global health reinsurance business under the Munich Re brand, and also assists local insurance companies with customised cost and quality control services. In primary insurance, we are active in many international markets via subsidiaries, participations and joint ventures. Vis-à-vis our clients, we operate under our proven local brands, e.g. DKV Seguros in Spain and DKV Belgium or Daman National Health Insurance in Abu Dhabi.
In 2014, we streamlined and restructured our organisation from a regional orientation in which primary insurance and reinsurance were combined, to a structure that separates primary insurance and reinsurance. We expect this organisational realignment to align ourselves more closely with the needs of our clients and to strengthen our market positions for growth opportunities.
Property-casualty Germany D.A.S. Deutscher Automobil Schutz Allgemeine Rechtsschutz-Versicherungs-Aktiengesellschaft, Munich ERGO Versicherung Aktiengesellschaft, Düsseldorf
Munich Re’s overarching 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. A guiding principle of our entrepreneurial thinking and activity is to increase Munich Re’s share price on a sustained basis. This is the aim of our active capital management and the consistent application of value-based management systems.
Economic earnings The starting point for value-based management is the economic value added in a reporting period. We calculate the value we have created in a given period at Group level using the key performance indicator economic earnings, largely in alignment with the future Solvency II supervisory regime. Economic earnings are defined as the change in available financial resources in a given period, adjusted for capital measures, especially dividend payouts and share buy-backs.
Details of our capital management are provided on page 102 f.
Details of our risk strategy are available on page 118 ff.
Information on the calculation of available capital and capital measures can be found on page 133 f.
Return on risk-adjusted capital (RORAC) To highlight Munich Re’s value orientation, we also use the after-tax return on riskadjusted capital (RORAC) as a Group performance indicator applied at Group level. RORAC relates the performance indicator customary in the capital markets (IFRS consolidated result), which we adjust to eliminate the return on additional avail able equity, to the risk-based capital required (economic risk capital). We determine the level of risk-based capital with our internal, economically focused risk model that is oriented towards future regulatory frameworks.
Information on the internal risk model is provided on page 126 ff.
RORAC = Net income – Interest rate x (1 – Tax rate) x Additional available economic equity
We explain how the additional available economic equity is calculated on page 134
Other performance indicators Market Consistent Embedded Value (MCEV) For life insurance and most of our health primary insurance business, Group corporate management is carried out on the basis of Market Consistent Embedded Value (MCEV), which is valued on the basis of the European Insurance CFO Forum Market Consistent Embedded Value Principles ©1. The change in MCEV within one year, adjusted for effects from exchange-rate fluctuations, acquisition or sale of companies, dividends and capital injections, is shown as the total embedded value earnings. Additional adjust- ments to eliminate the influences of changes in fiscal and capital market parameters result in the operating embedded value earnings, which are a measure of the operative business performance for one year. This performance indicator can be broken down into parameters including “value added by new business” and “changes in value of in-force business”. Our corporate management takes these two parameters into account.
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. Operating expenses chiefly comprise the costs arising in the acquisition of new business and for the ongoing administration of insurance contracts.
Dr. rer. pol. Thomas Blunck Special and Financial Risks Reinsurance Investments Central Procurement (until 31 December 2014)
Georg Daschner (until 31 December 2014) Europe and Latin America (from 1 October 2014 together with Giuseppina Albo)
Dr. oec. publ. Joachim Wenning (Labour Relations Director) Life Human Resources
Marco Nörenberg (Deputy Chairman since 30 April 2014) Member since 22 April 2009, last re-elected 30 April 2014 Employee of ERGO Versicherungsgruppe AG
Herbert Bach Member from 9 December 1994 until 30 April 2014 Employee of Munich Reinsurance Company
Dina Bösch Member from 22 April 2009 until 30 April 2014 Member of the National Executive Board of ver.di (trades union)
Annika Falkengren Member from 20 April 2011 until 30 April 2014, President and Chief Executive Officer of Skandinaviska Enskilda Banken AB (publ)
Prof. Dr. rer. nat. Peter Gruss Member since 22 April 2009, last re-elected 30 April 2014 President of the Max Planck Society for the Advancement of Science (until 5 June 2014) Former Scientific Member of the Max Planck Society for the Advancement of Science
Standing Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Herbert Bach (until 30 April 2014) Hans Peter Claußen (until 30 April 2014) Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann Wolfgang Mayrhuber Marco Nörenberg (since 30 April 2014) Andrés Ruiz Feger (since 30 April 2014)
Audit Committee Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann (Chair) Christian Fuhrmann Dr. iur. Anne Horstmann (since 30 April 2014) Marco Nörenberg (until 30 April 2014) Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder Anton van Rossum
Nomination Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Prof. Dr. oec. Dr. iur. Ann-Kristin Achleitner (since 30 April 2014) Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann Peter Löscher (until 30 April 2014)
Conference Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Herbert Bach (until 30 April 2014) Hans Peter Claußen (until 30 April 2014) Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann Marco Nörenberg (since 30 April 2014) Angelika Wirtz (since 30 April 2014)
Supervisory Board1 Seats held on supervisory boards of other German companies
Volkswagen AG Securitas AB (publ), Sweden Swedish Bankers’ Association, Sweden (Chair)
Christian Fuhrmann – Munich Re Holding Company (UK) Ltd., United Kingdom2 (until July 2014)
Wolfgang Mayrhuber Bayerische Motoren-Werke AG Infineon Technologies AG (Chair) Deutsche Lufthansa AG (Chair)
The remuneration system for the Board of Management focuses strongly on long- term objectives, and thus creates a pronounced incentive for sustainable corporate development. It complies with the recommendations of the German Corporate Governance Code applicable since 2014, and with the provisions of the German Remuneration Regulation for Insurance Companies (VersVergV) of 6 October 2010.
– Pensionable basic remuneration (= 25% of target overall direct remuneration2) Number of years on the Board
Fixed > Retirement > Insured event > Premature termination or non-extension of employment contract under certain circumstances
1 For the variable remuneration, the share shown presupposes 100% performance evaluation/achievement of objectives. 2 Target overall direct remuneration comprises basic remuneration plus variable remuneration based on 100% performance evaluation/achievement of objectives.
Remuneration in kind/fringe benefits Remuneration in kind and fringe benefits include – in particular – company cars, policy benefits, security measures, health screening examinations and anniversary benefits, and are in line with what is normally offered in the market (DAX 30 companies). Income tax on the benefits in question is paid individually for each member of the Board of Management, with the Company bearing the amount due. Remuneration in kind and fringe benefits are valued on the basis of expenditure for disclosure in the annual report.
Processes have been laid down for specifying objectives and assessing their achieve- ment. 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 and evaluation of objectives is measured at the end of the one-year 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.
Details of the assessment bases for the multi-year performance can be seen in the following table: 1 The objectives are weighted individually according to the responsibilities of the individual Board members. 2 Further information on RORAC is provided on page 40. 3 Further information on economic earnings is provided on page 39 f.
Category of objective Share1 Assessment basis Parameters Collective contribution 25%–55% 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 – Reinsurance Value-based economic Components of performance indicators: economic earnings:3
– Property-casualty reinsurance – Value added – Life reinsurance – Value added by new business – Change in the value of in-force business – ERGO Value-based economic Economic earnings3 performance indicator Individual contribution 25%–55% to corporate success Divisional objectives Value-based economic Components of performance indicators: economic earnings:3
Share-based remuneration agreements that resulted in payments during the reporting period Long-Term Incentive Plan This remuneration component, with a long-term perspective, was linked to the sustained appreciation of Munich Re’s share price. The Long-Term Incentive Plan was set up each year from 1999 to 2009 for members of the Board of Management. The participants were granted a certain number of stock appreciation rights. These could only be exercised if, after a two-year vesting period, Munich Re’s share price had risen by at least 20% since inception of the plan and the shares have outperformed the EURO STOXX 50 at least twice over a three-month period during the term of the plan.
Category of objective Share1 Assessment basis Parameters Collective contribution 0%–60% to corporate success Business-field objectives (three-year average) – Reinsurance Value-based economic Components of performance indicators: economic earnings:2
The exercising of the rights and proceeds obtained depended on the development of the share price and on fulfilment of the exercise conditions. The amount of income from the stock appreciation rights was limited. The members of the Board of Management were only able to exercise stock appreciation rights under the plans set up in 1999 and 2003–2009. There were no more exercisable stock appreciation rights in the reporting year, only payments based on the exercise of rights at the end of 2013.
Continued payment of remuneration in the case of incapacity to work In the case of temporary incapacity to work due to illness or for another cause beyond the Board member’s control, the remuneration is paid until the end of the contract of employment. The Company may terminate the contract prematurely if 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 (permanent incapacity to work). In this event, the Board member will receive a disability pension.
Other remuneration Remuneration for other board memberships In the case of seats held on other boards, remuneration for board memberships must be paid over to the Company or is deducted in the course of regular remuneration computation. Exempted from this is remuneration for memberships explicitly recognised by the Company as private.
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 prematurely, payments due may not surpass the equivalent of two years’ total remuneration (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of Section 29 (2) of the Securities Acquisition and Takeover Act – WpÜG) and may not cover more than the remaining period of the employment contract. If the employment contract is terminated for good cause on grounds that are within the Board member’s control, no payments are made to the Board member. The calculation is to be based on the overall remuneration for the past financial year and, if necessary, on the probable overall remuneration for the current financial year.
As of 2009, members of the Board appointed for the first time have become members of a defined contribution plan. For this plan, the Company provides the Board members with a pension contribution which is geared to their target overall direct remuneration for each calendar year (contribution year) during the term of their contract and uniformly amounts to 25.5%. The pension contribution is paid over to an external pension insurer. The insurer’s guaranteed interest rate is 2.25% (or 1.75% for Board
The Supervisory Board determines the relevant target pension level for pension com- mitments from defined benefit plans and defined contribution plans – also considering length of service on the Board – and takes account of the resultant annual and longterm cost for the Company.
— Under the defined contribution plan for members first appointed as from 2009: Annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum
— Under the defined contribution plan for members first appointed as from 2009 or from 1 April 2012: 80% of the insured occupational pension up to the age of 59 or 61, with subsequent occupational pension
— Under the defined contribution plan for members first appointed as from 2009: Annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum at the date the pension benefit is claimed
— In the case of a combination between defined benefit plans and defined contribution plans: Entitlement of between 30% and 60% of pensionable basic remuneration, reduced by 2% for each year or part thereof short of the Board member’s 65th birthday; the Company assumes payment of the difference between the monthly occupational pension and the monthly incremental pension from the external insurance.
Vested benefits under the Employers’ Retirement Benefits Act (BetrAVG) Board members have vested benefits under the Employers’ Retirement Benefits Act if they leave the Company before reaching the age of 60 or 62 and the pension commitment has existed for at least five years previously.
The improved vested benefits do not apply to Board members first appointed as from 2009. For Board members with a combination between defined benefit plans and defined contribution plans, the improved vested benefits apply only to that part of their pension resulting from the vested pension under the defined benefit plan.
Provision for surviving dependants In the event of the death of a Board member during active service, the surviving dependants receive the previous monthly basic remuneration for a period of six months if the deceased was appointed to the Board of Management before 2006. In the case of Board members appointed as from 2006, the previous monthly basic remuneration is paid to the beneficiaries for a period of three months. If the Board member’s death occurs after retirement, the surviving dependants receive the previous monthly occupational pension for a period of three months, provided the marriage/registration of the civil partnership took place and/or the child was born before the Board member started drawing the occupational pension. If the Board member’s occupational pension was reduced owing to early retirement, benefits for surviving dependants are based on the reduced occupational pension.
— Doubling of the orphan’s pension if no widow(er)’s pension or pension for registered civil partner is payable
— Surviving dependants’ pensions together may not exceed the occupational pension of the Board member. If necessary, the orphans’ pensions will be reduced proportionally.
The benefits for surviving dependants are not payable for widow(er)s or registered civil partners if the marriage or registered civil partnership was not contracted until a point in time when the Board member was already drawing the occupational pension, and for orphans if they were not born until after such a point in time. The entitlement for orphans ceases on their reaching the age of 18 (or 20 for orphans of Board members with a combination between defined benefit plans and defined contribution plans). For orphans who are in full-time education or vocational training, doing military or civilian service, or unable to support themselves owing to a physical or mental disability, the entitlement is extended until they reach the age of 25 (or 27 for orphans of Board members with a combination between defined benefit plans and defined contribution plans). The entitlement to a surviving dependant’s pension under the defined contribution plan ceases if the Board member draws the pension in the form of a lump sum. Pensions for surviving dependants cease upon their death.
Board of management remuneration is disclosed under two different sets of rules: on the basis of German Accounting Standard No. 17 (DRS 17, revised 2010) and the new provisions of the German Corporate Governance Code applicable since financial year 2014. There are therefore deviations in individual remuneration components and total remuneration.
Fixed and variable remuneration components The members of Munich Reinsurance Company’s Board of Management received remuneration totalling €24.1m (22.9m) 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 €1.2m compared with the previous year’s figure, which was adjusted for the remuneration of a Board member who had left the Board as at 1 January 2014. The basic remuneration and remuneration in kind/fringe benefits accounted for €0.7m and the multi-year performance for €0.7m. In addition, the amount paid out for annual performance is projected to decrease by €0.2m, as the overall achievement of objectives was lower than in the previous year according to current estimates.
For the 2013 annual performance, a total of €224,510 more was paid out than had been reserved in the financial year 2013. The additional/reduced expenditure breaks down as follows: von Bomhard €78,960, Arnoldussen –€27,930, Blunck €15,760, Daschner €12,285, Jeworrek €14,962, Röder €27,930, Schneider €58,653, Wenning €43,890. This results in the following actual bonus payments for 2013: von Bomhard €1,075,200, Arnoldussen €498,750, Blunck €498,750, Daschner €552,825, Jeworrek €748,125, Röder €542,640, Schneider €754,110, Wenning €450,870.
The amounts shown for the annual performance 2014 comprise the respective provision for 2014 and the relevant additional/reduced expenditure for 2013. 2 The amounts paid out in 2014 were for multi-year performance 2011–2013. 3 Remuneration in kind/fringe benefits for 2014 including travel expenses for flights home to family members owing to the maintenance of two households. 4 Remuneration in kind/fringe benefits for 2014 including anniversary payment.
Remuner- Basic ation in Annual Multi-year Financial remuner- kind/fringe perform- performName year ation benefits ance1 ance2 Total 2013 – – – – –
The following table shows the amounts payable for the variable remuneration: Pension entitlements Personnel expenses of €4.9m (4.4m) were incurred in the financial year to finance the pension entitlements for active members of the Board of Management. Of these, €1.2m was apportionable to defined benefit plans and €3.7m 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 pensionspecific 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%
2 The remuneration set for multi-year performance for 2014 is payable in 2017, that for 2015 in 2018. 3 The information on the assessment bases and parameters on page 52 f. for the amounts set for 2014 also applies to the amounts set for 2015.
Board of Management remuneration under the German Corporate Governance Code As required by the provisions of the German Corporate Governance Code, the following table shows the benefits granted and remuneration paid out to individual members of the Board of Management in the reporting year.
Defined contribution plan Pension Present contribution value of rate for target Entitlement entitlement Financial total direct as at as at Personnel Name year remuneration 31 December 31 December expenses
Georg Daschner8 2014 – – – – 2013 – – – –
Nikolaus von Bomhard Giuseppina Albo Chairman of the Board of Management Board member Joined: 1.10.2014
Remuneration in kind/fringe benefits 34,293 34,293 34,293 34,418 134,808 134,808 134,808 37,459
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 manage- ment level, the higher the share of the Company result bonus. The way this bonus works ensures that the performance of Munich Re as a whole is systematically reflected in the remuneration of all staff and that the bonus amount bears a reasonable relationship to overall corporate performance.
The individual variable components are granted – subject to different weightings – at all management levels. For the first management level below the Board of Management, the share of aggregate variable remuneration is more than 50% of total remuneration (fixed remuneration plus all variable components). Proceeding down the management hierarchy, this percentage decreases successively, making up around one-third at the lowest management level. There is a well-balanced combination of short- and longterm components. At the first management level below the Board of Management, the Mid-Term Incentive Plan makes up around 25% of total remuneration or more than 50% of overall variable remuneration, so that there is provision for a longer-term incentive system. No guaranteed variable remuneration components are granted.
By resolution of the Annual General Meeting 2013, remuneration of the Supervisory Board was put on a purely fixed-remuneration basis. In addition, the remuneration for serving on Supervisory Board committees is to be adapted to reflect the amount of responsibility and actual work involved. The new rules are effective for remuneration to be paid as from the financial year 2014.
Each member of the Supervisory Board shall receive annual remuneration of €90,000. The Chairman of the Supervisory Board shall receive annual remuneration of €180,000, and the Deputy Chairman annual remuneration of €135,000.
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 also receive double the amounts stated for members. No additional remuneration is paid for serving on the Nomination Committee or the Conference Committee.
1 Plus turnover tax (USt) in each case, in accordance with the relevant provisions of the respective Group companies’ articles of association. 2 Including attendance fees in each case insofar as provided for under the relevant provisions of the articles of association.
In 2014, as in the previous year, the global economy grew only moderately. Recovery in the eurozone was disappointing, and the Japanese economy slid back into recession. Slumps in the USA and China at the start of the year also had a dampening effect, though the world’s two largest economies recovered during the year. The strong upturn in the United Kingdom continued.
Uncertainty in the global capital and foreign exchange markets increased in 2014, due mainly to geopolitical conflicts, deteriorating prospects in the eurozone and the steep fall in the oil price.
Long-term interest rates in the USA and in Germany fell significantly over the course of the year. At the year-end, yields on US and German bonds with periods to maturity of ten years were 2.2% and 0.5% respectively, compared with 3.0% and 1.9% at the end of 2013. The fall in interest rates had a positive impact on the market value of fixedincome bonds, but the deteriorating terms for new investments and reinvestments were a considerable burden for insurers. Regular interest income saw a further slight decline, because yields on new fixed-interest securities with high ratings are far lower than the average return on the securities maturing or sold. Life insurers, which have to meet interest-rate guarantees, are particularly affected.
According to provisional estimates, the German insurance industry’s premium income increased appreciably overall in 2014. While premiums in both property-casualty insurance and life insurance rose strongly as in the previous year, premium growth in health insurance was weak.
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. 0,0
The return on risk-adjusted capital (RORAC) totalled 13.2% for the 2014 financial year, compared with 12.1% in 2013. The RORAC for 2014 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 very difficult to reach in the current environment of very low interest rates. We exceeded our profit target of €3bn for 2014, which is equivalent to a RORAC of over 12%.
Return on risk-adjusted capital (RORAC) and economic earnings 2014 Prev. year Change %
Dividend 2014 Prev. year Change % Total dividend payout €bn 1.3 1.3 3.5
Gross premium income was down on the previous year. This was due to the development of exchange rates, which resulted in a 1.5% reduction in premium income, and to the reduction of large-volume reinsurance treaties.
Expenditure for major losses, particularly from natural catastrophes, was well below the expected range. This is also reflected in the combined ratio for property-casualty reinsurance, which at 92.7% (92.1%) was better than the around 94% we had projected for 2014.
Dividend proposal: €7.75 per share 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 Excluding health insurance conducted like life insurance.
Key figures1 2014 Prev. year Change % Gross premiums written €bn 48.8 51.1 –4.3 Combined ratio
Investments (including insurance-related investments) €bn 8.5 7.3 15.8 Net technical provisions €bn 198.4 187.7 5.7
MEAG MUNICH ERGO AssetManagement GmbH (MEAG) is the asset manager of Munich Re. In addition, MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH also offers its expertise to private and institutional clients. The volume of assets under management rose by €1.0bn to €13.9bn. The increase of €0.6bn to €10.8bn in portfolios for institutional investors is particularly gratifying.
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. The solar park has a total installed capacity of 5 megawatts.
Detailed information on the business performance of our segments can be found on page 75 ff.
Assets under management for third parties 31.12.2014 Prev. year Change €bn €bn % Third-party investments 13.9 12.9 8.2
Premium development was significantly influenced by large-volume treaties. These serve as a capital substitute and were written especially in recent years. Some of these treaties were terminated as planned or renewed with a lower volume.
There were again positive impulses from growing markets in Asia, and from our selective underwriting of longevity risks in the United Kingdom.
The technical result totalled €280m (359m), which was below our target of around €400m. The operating result totalled €460m (542m) and the consolidated result €410m (403m). The reasons for this unsatisfactory technical result lie in Australia and the USA.
In Australia, as a result of negative impacts from disability business in 2011 and 2013, we took measures to ensure a sustained improvement in the quality of our business. For our disability business, this led to further burdens on the result of approx. €100m.
Key figures 2014 Prev. year Change % Gross premiums written €m 10,040 10,829 –7.3 Share of gross premiums written in reinsurance % 37.5 38.9 Share of international business in gross premiums written % 96.2 96.7 Operating result €m 460 542 –15.1
In the third quarter, we posted a one-off impact from the commutation of individual life treaties in the USA. Business written over the past decade continued to have an adverse effect on our result also in the year under review. Overall, claims experience in the USA was in line with our current expectations.
At €811m, the investment result was at the same level as the previous year (€810m). The decline in regular income and the poorer result from derivatives were offset by higher gains on the disposal of equities and interest-bearing securities.
In life reinsurance, we operate on a global basis and have local presences in most of the important markets. Our business model is geared to the characteristics of the individual markets and the particular needs of our clients. Our focus is on traditional reinsurance solutions that concentrate on the transfer of biometric risks: the mortality risk predominates worldwide, but recent years have seen a significant increase in the reinsurance of living benefits products such as disability, long-term care, and critical illness. We write living benefits business selectively in specific markets. 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 required, the assumption of insurance risks is complemented by a wide range of services along our clients’ entire value chain. These include software solutions for automating the risk assessment process that are available worldwide from our subsidiary Munich Re Automation Solutions Limited. We also offer tailor-made structured concepts geared to optimising liquidity or specific items on our clients’ balance sheets. These concepts have met with particular success in Europe, Asia and North America.
Based on premium volume, over half (approx. 55%) of our global life reinsurance business is written in North America, where the USA (approx. 20%) lags behind Canada (approx. 35%). Over a fifth (approx. 20%) of our premium comes from Europe, of which approx. 10% is from the United Kingdom and approx. 5% from Germany. Further shares are contributed by Asia (approx. 10%) and Australia/New Zealand (approx. 10%). We are also well positioned in Africa and Latin America, but due to the size of the markets their share of our global business is small (approx. 5%).
Our Canadian branch, Munich Re, Toronto (Life), had another successful year in 2014. Although premiums written in the life reinsurance segment decreased to €3.5bn (4.3bn), mainly due to the restructuring of a large-volume treaty, the unit was able to maintain its leading market position and posted a very good technical result.
In Asia, our premium income remained almost unchanged at €870m (871m), with the decrease in large-volume treaties outlined above causing the underlying growth dynamics to slow. The technical result continued to develop at a pleasing level.
— Slight decline in premium income of 1.7% to €16.7bn influenced by currency translation effects
Global Clients and North America 40% (38%) Germany, Asia Pacific and Africa 21% (21%) Europe and Latin America 21% (21%) Special and Financial Risks 18% (20%)
Key figures 2014 Prev. year Change % Gross premiums written €m 16,730 17,013 –1.7 Share of gross premiums written in reinsurance % 62.5 61.1 Share of international business in gross premiums written % 95.4 95.4 Loss ratio % 60.2 61.7
The renewals in 2014 took place under market conditions that remained highly competitive. The demand for reinsurance has been falling in general, since the good capitalisation of primary insurers allows them to hold higher retentions. In some cases, these developments were accompanied by measures that curb demand, such as the centralisation of reinsurance buying. However, the capacity offered by reinsurers remained high, and there was intense worldwide competition between the traditional market players. This situation was exacerbated in the US market by the ongoing availability of alternative capital. Pension funds and hedge funds regard reinsurance as an attractive investment alternative for diversifying risks and meeting return requirements in the present low-interest-rate environment. These difficult overall conditions led to strong pressure on prices worldwide, and even to significant price falls in the area of non-proportional natural catastrophe covers.
Major-loss expenditure totalling –€1,162m (–1,689m) after retrocession and before tax was lower than in the previous year and below expectations. As in the previous year, 2014 was marked by a large number of major losses, but there were no individual occurrences that have exceptional loss potential. Reserve strengthening and run-off profits for major losses from previous years almost balance each other out.
Aggregate losses from natural catastrophes came to –€538m (–764m), representing 3.3% (4.7%) of net earned premiums. The largest major loss of 2014 (–€305m) was the snowstorm in Japan at the beginning of the year. Reserves of –€59m were set aside for Hurricane Odile, which hit Mexico in late summer. There was also an impact from an earthquake on the north coast of Chile (–€51m). Heavy summer rainfall in the northeast of the USA caused sizeable losses (–€50m), as did a strong hailstorm in Brisbane, Australia (–€42m). In addition, like other market players, we had to increase our provisions for the earthquakes in New Zealand in 2010 and 2011, as the series of three quakes in rapid succession made it more difficult for our cedants to settle claims.
At –€625m, man-made major losses were below the level of the previous year (–€925m), or 3.9% (5.7%) of net earned premiums. Extensive losses resulted from an explosion at a Russian refinery (–€150m), and –€60m was reserved for damage to a power station in Germany. Moreover, aircraft crashes impacted our result, with the two largest crashes costing us –€52m. Finally, a forest fire in Sweden in the summer caused losses of –€33m.
The investment result amounted to €1,785m (1,766m). The slightly increased figure was due to significantly higher gains on the disposal of equities and interest-bearing securities, which contrasted with a diminished result from our equity, inflation, interest and commodity derivatives, and a decline in regular income.
This division writes business in Germany, the Asia-Pacific region and Africa. In terms of the division’s premium income, approximately 40% is written in Australia/New Zealand and Japan combined, around 25% in Greater China and approximately 10% in Africa/ MENA. Whilst the focus in Australia/New Zealand and Japan is on natural hazards cover, the Greater China portfolio is largely made up of motor business.
The division’s premium volume increased to €3,588m (3,524m) in total, which was mainly due to our portfolio in Australia. A decline in prices in natural catastrophe business led to attrition of business, but this was more than compensated for by a large tailored reinsurance treaty in motor business. We were also able to expand our business in Southeast Asia, South Korea and Africa, and the portfolio in Japan was renewed successfully, despite strong pressure on prices. By contrast, our premium volume in China and Germany was down year on year. Overall, we are consistently pursuing our strategy of seizing growth opportunities, but at the same time system- atically reducing our portfolio where risk-commensurate prices, terms and conditions cannot be achieved.
The Europe and Latin America Division writes business in Europe (except Germany), the Caribbean, and Central and South America. Approximately 75% of the division’s premium income derives from Europe. While the focus in the Caribbean and in Central 4030 Key figures 2014 Prev. year Change % Gross premiums written €m 3,588 3,524 1.8 4035 Key figures 2014 Prev. year Change % Gross premiums written €m 3,452 3,677 –6.1
Munich Re Group Annual Report 2014 and South America is on property business, particularly in the area of natural hazards covers, in addition to property insurance our European business is strongly weighted in favour of UK motor business.
The premium income of our primary insurance companies American Modern and Hartford Steam Boiler Group (HSB Group) improved to €1,109m (967m) and €752m (712m) respectively, and, in contrast to traditional reinsurance, we profit here from slightly increasing original premiums. These contribute around 40% to our premium in North America, and a further €2,239m (2,300m) was contributed by Munich Reinsurance America. The results of our subsidiaries in the USA also developed very pleasingly. In 2014, they paid dividends totalling US$ 910m to the Group parent Munich Reinsurance Company. Our strategy of combining insurance and reinsurance activities again proved successful, and we intend to continue along this path in future.
The division’s combined ratio improved significantly to 89.5% (94.9%). We benefited from a very low incidence of major losses and from positive loss reserve releases for prior years.
Key figures 2014 Prev. year Change % Gross premiums written €m 2,988 3,341 –10.6
The Special and Financial Risks Division writes business in the specialty classes of agriculture (around 30%), credit and bond (around 20%), and aviation and space (around 15%). This division also comprises the unit Corporate Insurance Partner (around 20%), the Risk Trading Unit, and our Swiss subsidiary New Reinsurance Company Ltd. (New Re) (around 15%).
— Technical result of €144m — Gratifying investment result of €4.5bn — Good consolidated result of €269m
The technical result in the ERGO Life and Health Germany segment was €144m (383m). The fall is partly due to higher benefits in life and health insurance. At €4.5bn (3.8bn), the investment result developed favourably, one of the positive contributing factors being a higher balance from write-ups and write-downs, mainly due to writeups of interest-rate derivatives. The drop in our technical result was the main reason for the decreased operating result of €44m (188m). The consolidated result climbed by 70.3% to €269m (158m). It includes a positive result contribution that is significantly 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.
Key figures 2014 Prev. year Change % Total premium income1 €m 10,730 10,981 –2.3 Gross premiums written €m 9,812 9,987 –1.8 Share of gross premiums written by ERGO % 58.6 59.9 Operating result €m 44 188 –76.6
Munich Re Group Annual Report 2014 attributable to an anticipated tax refund. The main reason for this is a 2014 court decision at the highest instance that clarifies contested legal issues dating back to the time of introduction of the “half-income method”. It is expected that the refund of taxes paid will be in the three-digit million euro range.
At €4.4bn (4.5bn), overall premium income in German life business was down 3.8% on the previous year. Gross premiums written were down by 4.1% to €3.6bn (3.7bn). The decrease was due especially to lower regular premium volume. By contrast, single- premium business increased by 1.4%, partly due to new business growth in company pension business. New business (regular premium) was down by 12.3% to €207m (236m). As in 2013, persistently low interest rates again created a difficult market environment in the past financial year. New business decreased slightly by 1.6% overall. In terms of annual premium equivalent (APE, i.e. regular premium income plus onetenth of single-premium volume), which is the performance measure customary among investors, new business was down by 8.8%.
Munich Re Group Annual Report 2014 the European Union and the German Federal Court of Justice regarding policyholders’ right to withdraw from life insurance policies concluded under the policy model. In the past financial year, the investment result totalled €2.9bn (2.3bn). This improvement was largely attributable to higher net gains on derivatives, mainly due to write-ups of interest-rate derivatives. The improvement in our investment result was one of the main reasons for the increased operating result of €53m (–119m).
At €5.25bn (5.29bn), premium income for the financial year 2014 was only slightly lower (–0.7%) than in the previous year. Premiums for 2014 showed 0.7% year-on-year growth in supplementary health insurance and fell by 0.8% in comprehensive health insurance. In comprehensive health business, premium growth was mainly impacted by two effects: the falling number of insureds, and low premium adjustments benefiting our customers as at 1 April 2014. New business in comprehensive health insurance declined year on year (–19.6%) as a result of a difficult market environment. We also saw a decline in new business in supplementary health insurance (–2.6%).
In travel insurance, which we account for in our Health Germany field of business and write in Germany and abroad, premium volume totalled €433m (448m) and was thus below the level of the previous year (–3.3%). German business expanded by 9.2%, whilst international business shrank by 22.9%.
German direct business encompasses direct life, health and property-casualty insurance business transacted in Germany. Life insurance accounts for approximately 50% of the business field’s premium income. Approximately 36% of the premium income derives from health insurance, and around 14% from property-casualty insurance.
Key figures 2014 Prev. year Change €m €m % Total premium income1 1,117 1,156 –3.4 Gross premiums written 1,009 993 1.6 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.
Annual premium equivalent1 42 50 –16.0 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
Protection against floods is gaining in importance – not only in the vicinity of rivers. Prompted by the consequences of the flooding on the Danube and Elbe in 2013, ERGO improved insurance coverage for residential buildings in Germany and permitted insurance cover to be given even for those buildings that are situated in particularly exposed areas, i.e. in zone 4 of the ZÜRS zoning system. Since September 2014, ERGO has been offering coverage against flooding and heavy rainfall in all areas.
In 2014, premium income totalled €4.2bn (3.9bn). This represents an 8.7% increase. Adjusted to eliminate currency translation effects, premium growth would have been even higher. Expansion was particularly strong in Poland, Austria, Belgium and Russia. Our gross premiums written amounted to €3.8bn (3.5bn).
In property-casualty business, we recorded an improved combined ratio of 97.3% (98.7%). The result improvement measures we have taken in recent years are paying off. In the financial year 2014, we achieved improvements in particular in the Netherlands, the Baltic and in Greece. Paid claims and the change in claims provisions totalling –€1,152m (–1,209m), along with net operating expenses of –€763m (–754m), compared with net earned premiums of €1,968m (1,989m).
Annual premium equivalent1 280 221 26.7 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
— Gross premiums of €5.3bn below level of last year — Slightly higher combined ratio of 98.8% in the year under review — Decreased investment result of €87m — Consolidated result down to €109m
Gross premiums written were lower than in the previous year, falling by 18.5% to €5.3bn (6.6bn).
In reinsurance, the decrease of 12.1% to €4.0bn (4.6bn) was attributable to adverse effects from the exchange rate of the Canadian dollar, and to a reduction of our share in a large-volume treaty in North America. In primary insurance, there was a decrease of 33.6% to €1.3bn (2.0bn), which was mainly due to the sale of the Windsor Health Group (WHG). By contrast, our companies in Belgium and Spain increased their premium income. If exchange rates had remained unchanged, and adjusted for the sale of WHG, Munich Health’s gross premiums would have decreased by 4.6% year on year.
Key figures 2014 Prev. year Change % Gross premiums written €m 5,342 6,551 –18.5 Share of international business in gross premiums written % 98.6 99.0 Loss ratio1 % 82.0 79.8 Expense ratio1 % 16.8 18.5 Combined ratio1 % 98.8 98.3 Operating result €m 118 168 –29.8 Consolidated result €m 109 150 –27.3
At €77m (135m), the technical result was significantly below the level of the previous year, owing mainly to positive one-off effects generated by WHG in that period. This can also be seen in the fall of the operating result, which decreased to €118m (168m), and in a declining consolidated result of €109m (150m). Munich Health generated an investment result of €87m (95m). The decrease of 8.4% was attributable to lower regular income.
The Munich Health combined ratio of 98.8% (98.3%) relates only to short-term health business, not to business conducted like life insurance. Business conducted like life insurance accounted for 9.9% (7.8%) of gross premiums written in the year under review. In reinsurance, the combined ratio amounted to 99.4% (99.8%); in primary insurance, it was 95.5% (93.5%).
— High portfolio weight of government bonds with very good credit ratings; rise in market values due to reduced interest-rate level
Designated as at fair value through profit or loss Fixed-interest 204 163 25.2 Non-fixed-interest 1 1 –
Deposits retained on assumed reinsurance 8,750 9,636 –9.2 1 Previous year’s figures adjusted owing to separate disclosure of insurance-related investments.
We select our investments according to economic criteria and gear them to the characteristics of our technical provisions and liabilities. In addition, we use derivative financial instruments for portfolio management (especially for acquisition preparation), to hedge against fluctuations and protect against inflationary developments on the interest-rate, equity and currency markets. Volatilities on the capital markets result in changes in the values of derivatives, which under IFRS accounting we recognise in profit or loss.
Covered bonds 27% (29%) Corporate bonds 10% (10%) Cash positions/other 4% (5%) Structured products (credit structures) 3% (4%) Bank bonds 3% (3%) Policy and mortgage loans 3% (3%)
Off-balance-sheet Fair values unrealised gains and losses Carrying amounts €m 31.12.2014 Prev. year 31.12.2014 Prev. year 31.12.2014 Prev. year
Other securities – 5 – – – 5 1 Including owner-occupied property.
Other investments 8% (9%) Shares and equity funds 4% (4%) Real estate 2% (2%) Participating interests 1% (1%)
Covered bonds make up 27% of our fixed-interest securities. Despite a decline owing chiefly to scheduled redemptions, the emphasis remained on German pfandbriefs, with around 35%.
Our investment in bank bonds is limited and at the reporting date amounted to 3% of our portfolio of fixed-interest securities. Financial instruments from states in southern Europe and Ireland make up 6% of the portfolio. Most of our bank bonds (81%) are senior bonds, i.e. bonds that are not subordinated or subject to loss participation. Subordinated bonds and loss-bearing bonds made up 19% of our bank bond holdings.
Our portfolio of structured credit products at market value sank to €6.0bn (7.1bn). This asset class involves securitised receivables (asset-backed securities or mortgagebacked securities), e.g. securitisations of real estate finance, consumer credit or student loans. Around 56% of our portfolio of asset- and mortgage-backed securities have a rating of AAA.
In primary insurance, the durations of fixed-interest investments have diverged from those of the technical liabilities. In an environment of falling interest rates, the duration of technical liabilities increased more strongly than for fixed-interest investments.
In the 2014 financial year, regular income fell slightly against the previous year, despite the increased value of the investment portfolio. Our reinvestment return was 2.1% (2.4%). Higher dividend earnings only partially offset the lower interest payments from fixed-interest securities. Due to the decline in interest rates in the past financial year, yields on new investments remain far lower than the average return on our existing portfolio of fixed-interest investments.
Write-ups/write-downs of non-derivative investments –234 –0.1 –436 –0.2 Gains/losses on the disposal of non-derivative investments 2,629 1.2 1,759 0.8 Net gains on derivatives –1,068 –0.5 –985 –0.5 Other income/expenses –528 –0.2 –514 –0.2
— Increase in equity, especially due to rise in reserve for currency translation adjustments and improved net unrealised gains and losses on investments
— Further reduction in debt leverage — Group capital around 3.1 times the legal solvency requirement
Rating agency Rating Outlook A.M. Best A+ (Superior) Stable Fitch AA– (Very strong) Stable Moody’s Aa3 (Excellent) Stable Standard & Poor’s AA– (Very strong) Stable
Consolidated result attributable to equity holders of Munich Reinsurance Company 3,153 3,304 –4.6 Non-controlling interests 271 243 11.5
Reinsurance business accounts for approximately 32% of technical provisions, around 67% comes from primary insurance and about 1% is from Munich Health. In contrast to liabilities under loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will arise. This is especially true of reinsurance. Whereas in property insurance a major portion of the provisions is generally paid out within two to three years, in life or liability insurance substantial amounts may still be due decades after the contracts were concluded. The currency distribution of our provisions reflects the global orientation of our Group. Besides the euro, our main currencies are the US dollar and the British pound sterling.
Through active capital management, we ensure that Munich Re’s capital is always maintained at an appropriate level. Our available financial resources must always be sufficient to cover the capital requirements determined both by our internal risk model and by the requirements of supervisory authorities and rating agencies. We aim to ensure that our financial strength is such that it enables us to take advantage of profitable opportunities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains at a reasonable level even in the wake of major loss events or substantial falls in the stock markets. At the same time, we also define an appropriate level of Group economic equity as one which does not lastingly exceed that which is required. Such a needs-based, risk-commensurate capital level makes a decisive contribution to financial discipline in all our business processes.
In the financial year 2014, Munich Reinsurance Company generated net retained profits of €1,340m according to German GAAP accounting. Including these net retained profits, the Company’s revenue reserves amounted to €3,179m (3,812m) as at the balance sheet date. The shareholders’ equity of Munich Reinsurance Company as determined under German GAAP accounting is protected effectively against the risk of loss arising from a random accumulation of losses by a claims equalisation provision totalling €9.1bn. Given this robust capitalisation according to all calculation methods, we intend – subject to the approval of the Annual General Meeting – to pay our shareholders a dividend that is €0.50 higher than in the previous year at €7.75 per share, or a total of €1.3bn, from Munich Reinsurance Company’s net retained profits for the financial year 2014.
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 Section 121a (1) and (7a) of the German Insurance S upervision Act (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. The Board of Management currently comprises nine members. 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 between 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
Direct Indirect % holding holding Warren E. Buffett, USA 0,053 10,191 Berkshire Hathaway Inc., Omaha, USA 10,191 OBH LLC, Omaha, USA 10,191 National Indemnity Company, Omaha, USA 10,191
Munich Re Group Annual Report 2014 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.
Powers of the Board of Management with particular regard to the option of issuing or buying back shares The powers of the members of the Board of Management are defined in Sections 71 and 76–94 of the German Stock Corporation Act. The Board of Management has the following powers to issue and buy back shares: — On 30 April 2014, the Annual General Meeting authorised the Company, pursuant to Section 71 (1) no. 8 of the Stock Corporation Act, to buy back shares until 29 April 2019 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 20 March 2014, the Board of Management decided to utilise this authorisation to acquire own shares. Around 4.4 million shares had been acquired by 31 December 2014 at a purchase price of €694m.
— The Annual General Meeting of 28 April 2010 authorised the Board of Management to issue, with the consent of the Supervisory Board, convertible bonds or bonds with warrants on one or more occasions up to 27 April 2015 for a maximum nominal amount of €3bn with or without a limited maturity period. Shareholders are generally entitled to a subscription right in respect of these bonds, but the Board of Management is authorised, with the consent of the Supervisory Board, to exclude this subscription right in the cases specified in the authorisation. The holders of such bonds may be granted conversion or option rights in respect of shares issued
The complete text of the authorisations mentioned is provided in the agenda of the Annual General Meetings mentioned on our website at www.munichre.com/hv/archive. Munich Reinsurance Company’s
Munich Re Group Annual Report 2014 by the Company up to a maximum amount of €117m of the share capital, in accordance with the respective bond or warrant conditions; as a precautionary measure, capital of €117m was conditionally authorised under Article 4 (3) of the Articles of Association (Contingent Capital 2010).
— 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 19 April 2016 by an amount of up to €10m by issuing new shares against cash contribution (Authorised Capital Increase 2011). 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.
Solvency in the case of insurance companies is generally understood to be the ability of an insurer to always meet the obligations assumed under its contracts. In concrete terms, this means an insurance company must fulfil specific minimum capital requirements. The aim of the “adjusted solvency” rules is to prevent the multiple use of equity to cover risks from underwriting business at different levels of the Group hierarchy. To calculate the adjusted solvency, the minimum equity required for the volume of business (required solvency margin) is compared with the eligible equity actually available (actual solvency margin) on the basis of the IFRS consolidated financial statements. To determine the eligible capital elements, the IFRS equity is adjusted; in particular, it is increased by portions of the subordinated liabilities and reduced by intangible assets. Munich Re’s eligible capital is around 3.1 times higher than the legal requirement.
The adjusted solvency ratio increased from 262.4% in the previous year to 307.9% in 2014. The increase was due mainly to the higher IFRS equity.
Outflows from investing activities were determined by payments for purchasing investments. They exceeded the inflows from the sale and/or maturity of investments by €4,431m.
In the financial year 2014, Munich Re acquired 100% of the voting shares in SHC Insurance Pte. Ltd. (SHC), Singapore for approx. €69m. In the cash flow statement, we have reduced the sales price by the cash held by the company acquired.
Overall in the year under review, cash – which encompasses cash with banks, cheques and cash in hand – rose by €92m (including currency effects) to €2,912m. There were items pledged as security and other restrictions on title amounting to €15m (26m).
keIn exCel Bereinigte Solvabilität Adjusted solvency 31.12.2014 Prev. year Change % Eligible capital of the Group €bn 30.6 26.2 +17.1 Adjusted solvency ratio % 307.9 262.4 5015Consolidated cash flow statement 2014 Prev. year Change €m €m % Cash flows from operating activities 7,527 2,187 244.2 Cash flows from investing activities –4,939 292 – Cash flows from financing activities –2,694 –2,558 –5.3 Cash flows for the financial year –106 –79 –34.2
Munich Re has different client bases in reinsurance and primary insurance.
We want to have the best possible understanding of our clients and their risks, and to develop and offer them customised insurance solutions. Therefore, we need to be close to our clients to understand their needs and to give them comprehensive advice. All three business fields focus particularly on close consultation and successful cooperation with our clients and sales partners with the objective of offering them optimum solutions. We want to be a competent, reliable and transparent partner, whom they can trust.
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 client representatives and key know-how partners in developing new, client-centric solutions.
Client managers are responsible for determining clients’ needs as precisely as possible and offering tailor-made solutions and support. To this end, we bring all our knowledge and innovative strength to bear and do not shy away from taking unusual approaches – true to our claim NOT IF, BUT HOW. We regularly assume a pioneering role in new coverage concepts, such as preparing European cedants for the introduction of Solvency II. We reach new client groups through our operating field Risk Solutions, where we provide customised solutions for corporate clients and industrial firms. Predominantly in North America, but also in the Asia-Pacific region, we generate business via managing general agencies (MGAs). Beyond this, our target groups include public-private partnerships and insurance pools. With branches and subsidiaries around the world, we ensure that our clients can always find us where they need us.
Changed parameters generate demand for new insurance solutions Economic growth and changes in the areas of technology, climate, society and politics mean that entirely new areas of risk are arising worldwide, and these can be covered with the help of innovative insurance solutions. We develop complex customised solutions together with our clients, and extend the frontiers of insurability with innovative products, such as coverage for cyber risks, business interruption, and reputational risk.
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.
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. Since 2014, it has also been possible, in addition to private liability insurance, to select personal accident insurance from a modular structure and to make the application online. Further products are to follow. Since September 2014, ERGO Direct clients have been able to take out term life insurance by completing health questionnaires with an electronic signature.
In light of increasing severe weather events, in 2014 ERGO responded to the demand for flood insurance in risk areas with a new homeowners’ comprehensive insurance product line. It offers flood protection insurance in all areas of Germany, so that even homeowners in areas with extreme exposure to flooding are able to take out insurance.
In 2011, ERGO responded to consumer demand for clear and comprehensible communication with its “clear language” initiative. Insurance conditions and product information have been simplified and shortened, letters to clients revised and binding writing rules issued. As the first German insurer, ERGO underwent extensive testing by TÜV Saarland for comprehensibility, and received the TÜV certification for understandable communication in 2013. The TÜV experts will continue to monitor and evaluate these activities with the aim of anchoring the idea of comprehensibility in the company.
In reinsurance, our cedants around the world are serviced locally by our client managers in regional units. We provide our clients with market-specific data models and reinsurance models. Alongside specialised client managers, further specialists are available to advise our clients directly on business development and offer specific service packages. These include underwriters for product design, actuaries for pricing and claims specialists for processing operative business. For mission-critical business processes such as claims handling, Munich Health offers clients supporting computer programs with automated test algorithms. Feedback from our clients plays a major role in the further development of our range of products.
MEAG’s investment experts adopt a stringent, risk-based approach with the aim of generating excess return – for the same risk – compared with the requirements of their clients within the Group and externally. Munich Re’s insurance units derive their asset management targets from their payment obligations in their core business (asset- liability management) and also specify their risk and return preferences.
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 implementation of Solvency II. Whether by means of online training, internal conferences or traditional seminars, the communication of current developments ensures that our knowledge base is kept up-to-date and comprehensive.
Information on our asset-liability management is available on page 41 f.
The extensive development of the management culture and competences is the focus of the two-year initiative “ERGO – Focus on Leadership” launched in the autumn of 2013. All of ERGO’s approximately 2,300 managers in Germany are currently completing this “manager triathlon” – a mandatory, multi-stage development programme. In parallel, staff are giving systematic feedback on their managers in the form of upward appraisals. The initiative is an excellent example of our willingness to invest in the development of our staff.
A long-term and important issue for both staff and the Group is the maintenance of health. In all areas of the Group, staff benefits include measures to promote good health. Reinsurance staff in Munich are able to anonymously seek advice for professional and private crisis situations from external specialists. This Employee Assistance Programme goes beyond established internal corporate health-support initiatives. ERGO has also had a positive response to its group coaching and stress prevention training.
Internationality is one of the three main pillars of diversity management. In this connection, the number of international assignments, job rotations and international project teams was further increased in 2014. The Group now employs staff from more than 55 countries, and the number of employees outside Germany has once again increased in this reporting year. Another directly measurable success of diversity management is the continually increasing number of women in management positions in the Group over the past four years. This is also illustrated by the fact that in 2014, more than 40% of all new managers in our German reinsurance business were women.
Our investor relations work continues to meet with a positive response. In several crosssector analyses of the quality of investor dialogue, Munich Re once more achieved leading positions in 2014, with our business partners particularly appreciating the consistency and transparency of our reporting. All the presentations we use in our meetings with analysts and investors and in our conferences and roadshows are published on the internet, and are also sent to interested private investors on request. Many of these events are transmitted live via webstreaming. Enquiries reaching us via our shareholder hotline or by e-mail are answered promptly by our team for private investors. Additionally, the service pages of our shareholder portal on the internet provide our registered share-holders with a wide range of information and communication options.
Buffett and the companies in his group is available on page 104
In addition to strategic integration of sustainability aspects, the topics environment and social commitment constitute major elements of our corporate responsibility strategy.
In order to reduce the CO2 emissions which arise from our business operations, Munich Re decided in 2011 to combine all its efforts in a unified approach to achieve carbon neutrality throughout the Group by 2015. In addition, we set ourselves the Group-wide target of lowering CO2 emissions across the Group by 10% in the period from 2009 to 2015. This reduction target is being implemented in our decentralised units, and was all but achieved as at 31 December 2014. Our environmental managers and the Board members in charge of the respective divisions are responsible for ensuring that we meet our environmental targets by defining corresponding goals and objectives. If these targets are met, it also impacts on remuneration of the respective staff members and Board remuneration. We are currently revising our environmental and climate protection strategy, and will define targets for the period 2016–2020.
Another focus is protecting natural resources. We have drawn up Group-wide environmental guidelines in order to minimise our environmental impact.
Improving environmental performance We monitor and develop our environmental measures with the aim of continually imroving environmental protection and our environmental performance in business operations.
Avoiding and reducing emissions We avoid and reduce emissions wherever possible (from business travel, energy, water, paper and waste), establishing the highest technical standards wherever economically reasonable. We consider environmental principles while choosing materials, suppliers and service providers.
Raising staff awareness We increase environmental awareness and the sense of responsibility of all staff members and motivate them to actively protect the environment.
Communication to stakeholders We communicate openly and inform our stakeholders about our environmental activities and environmental performance on a regular basis. We raise awareness and share information on environmental issues where appropriate. Thus we promote a general culture of environmental protection.
Our involvement in a public-private partnership (PPP) created by Water Benefit Partners (WBP) and the Swiss Agency for Development and Cooperation (SDC). The participants here are committed to developing an innovative financing and certification mechanism for sustainable water projects in regions with an acute water shortage. The Water Benefit Standard (WBS) developed in the meantime quantifies and certifies the results of water projects, mainly the volume of water savings, resulting from the use of innovative technology. The savings thus achieved enable other water projects to be set up, create jobs in the medium to long term, and are therefore intended to raise income levels of the local population in the project regions.
Examples of our non-profit projects and information about progress can be found in our corporate responsibility portal www.munichre.com/cr-en
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 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 economic solvency ratio, which shows the extent to which available financial resources cover economic risk capital.
— 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, though they would not threaten Munich Re’s existence, could cause lasting damage to the confidence in the Group of clients, shareholders and staff.
The risk appetite laid down ensures that an appropriate balance is maintained between business opportunities and risks incurred. Our risk strategy process has proved its worth during both the financial crisis and the sovereign debt crisis. 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
Munich Re Group Annual Report 2014 investment for our shareholders. With our broadly diversified portfolio of investments, we are well equipped for all market scenarios – even extreme ones – that could realistically arise.
Our implementation of risk management at operational level embraces the identification, measurement, analysis and assessment of risks, which provide a basis for risk report- ing, 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.
We are constantly refining our risk measurement tools, which are tailored to each field of business. Our internal model is based on economic principles. We regularly compare the results produced by our risk model with those of supervisory authorities, rating agencies and commercial modelling companies at, for example, Group, field-of-business or legal entity level, or by risk type. We also regularly perform benchmarkings of our risk-model results and participate in industry surveys to constantly challenge and refine our risk measurement tools.
Risk analysis and assessment are carried out at the highest level in IRM in the form of a consolidated Group view. They are based on the analyses prepared by the fields of business. Besides this, IRM is responsible for checking and validating the analyses of upstream units, working closely with numerous areas and specialists to this end. This provides us with a quantitative and qualitative assessment that considers possible interactions between risks.
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. Achievement of this objective is a supplementary parameter of our corporate management and is monitored at regular intervals. We currently assume that our financial strength, our good competitive position and our sophisticated risk management will continue to be recognised through correspondingly high ratings.
For each field of business, the ICS delivers a risk map at process level, thereby systematically linking every step in a process to the significant risks and the controls relating to them. By making our risk situation transparent in this way, we can focus on and react to weaknesses. This enables us to identify operational risks at an early stage, locate control shortcomings immediately and take effective remedial action.
The Audit Committee of the Supervisory Board regularly calls for reports on the effectiveness of the ICS and changes to the risk and control landscape from the previous year. These describe the controls applied and state whether all controls considered necessary have been correctly performed. The reports of our external auditors and Group Audit support this.
An important feature of the accounting process is timely compliance with new legal requirements in our preparation of financial statements and our reporting. By means of an accounting manual and regular circulation of information on changes required, Munich Re ensures that uniform rules are applied throughout the Group for the treatment, valuation and disclosure of all items in the balance sheet, income statement and other components of the financial statements Any amendments are subject to a prescribed procedure as regards timing, responsibilities and circulation of information.
Internal risk reporting provides the Board of Management with regular information on the risk situation in the individual risk categories and the Group as a whole. Early- warning mechanisms thus ensure that negative trends are identified in sufficient time for countermeasures to be taken. The Audit Committee of the Supervisory Board and the Federal Financial Supervisory Authority (BaFin) also receive the quarterly internal risk report.
Premium risk Line management have primary responsibility for controlling the premium risk, taking account of both the specific exposures in their business and the knowledge and experience of their staff.
Due to the diversity and extensive ramifications of the business, it is not possible to produce a set of rules for acceptance that would fully cover relevant risks. The expertise of our underwriters on the ground is therefore of prime importance, particularly in reinsurance. We recognise this by providing advanced training and IT systems for risk assessment and pricing, publishing internal information sheets and underwriting recommendations, and setting up working groups to create and transmit underwriting knowledge.
Reserve risk The estimation of reserves is subject to uncertainty due to the fact that the settlement of claims that have arisen before the balance sheet date is dependent on future events and developments. Unforeseen loss trends can arise for a variety of reasons, for example court rulings, changes in the law, differences in loss adjustment practice or medical and long-term care, or economic factors such as inflation. They can have a significant impact on run-off results.
Changes in customer biometrics or lapse behaviour are risks that have a long-term effect on the value of a portfolio, making it necessary to adjust the actuarial assumptions. In health insurance, morbidity risks and risks linked to changes in the cost of treatment are understandably important, whereas mortality, longevity and disability risks are the most significant in life insurance. Limits are laid down for the short-term pandemic scenarios and the longer-term longevity scenarios in conformity with the risk strategy.
Further information on risks in life and health insurance can be found in the notes to the consolidated financial statements on page 268 ff.
Market risk We define market risk as the risk of economic losses resulting from price changes in the capital markets. This includes equity risk, general and specific interest-rate risk, property risk and currency risk. The general interest-rate risk relates to changes in the risk-free yield curves, whereas the specific interest-rate risk arises out of changes in credit risk spreads, for example on government bonds or credit default swaps (CDSs). We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options). Fluctuations in market prices affect not only our investments but also our underwriting liabilities, especially in life insurance. Due to the long-term interest-rate guarantees given in some cases and the variety of options granted to policyholders in traditional life insurance, the amount of the liabilities can be highly dependent on conditions in the capital markets.
We use a cross-balance-sheet counterparty limit system valid throughout the Group to monitor and control our Group-wide credit risks. The limits for each counterparty (a group of companies or country) are based on its financial situation as determined by the results of our fundamental analyses, ratings and market data, and the risk appetite defined by the Board of Management. The utilisation of limits is calculated on the basis of credit-equivalent exposure (CEE). 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 CDSs in the financial sector is additionally limited by a financial sector limit at Group level.
We also make use of credit derivatives, especially CDSs, in our management of credit risks.
In order to take account of country risks other than the credit risk on government bonds, our advisory unit for strategic and economic issues, Group Development, also produces specific country scores in addition to the pure default ratings. The scores cover the significant political and economic risks and those relating to a country’s internal security, and reflect its sustainability performance. They enable us to comprehensively assess additional country risks of varying importance for different fields of business.
In the area of retrocession and external reinsurance related to primary insurance activities in reinsurance and at ERGO and Munich Health, we manage the default risk through the Retro Security Committee. The experts on the committee review the quality of our main retrocessionaires and reinsurance counterparties independently and on the basis of various criteria (e.g. minimum ratings, market data and capital requirements) and allocate appropriate limits for the counterparties based on underwriting guidelines laid down by the risk management function.
Information on our ICS can be found on page 120 f.
The action we take to monitor and limit reputational risk ranges from the general identification and recording of risks for the ICS to establishment of whistleblower procedures.
Our risk model indicates the profit and loss distribution of the available financial resources over a one-year time horizon. It is based on specially modelled distributions for the risk categories property-casualty, life and health, market, credit and operational risks.
Every risk category in reinsurance and at ERGO is shown. In the Munich Health field of business, the life and health risk categories and operational risks are shown, but not market and credit risk, which we cover through our internal risk control in reinsurance.
A key figure calculated using the internal model is our economic risk capital (ERC). By economic risk capital, we mean the amount of capital that Munich Re needs to have available, with a given risk appetite, to cover unexpected losses in the following year. To determine Munich Re’s economic risk capital, we use the economic profit and loss distribution across all fields of business. The economic risk capital corresponds to 1.75 times the value at risk of this distribution over a one-year time horizon with a confidence level of 99.5%. The value at risk with a confidence level of 99.5% equates to the economic loss for Munich Re which, given unchanged exposures, will be statistically exceeded in no more than one year in every 200. It represents the future risk tolerance under Solvency II. Our Group’s approach of setting its capital requirement at 1.75 times this risk tolerance figure is thus conservative and provides its clients with a high degree of security.
We use primarily historical data for the calibration of our internal risk model, 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 show 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. At the same time, we recognise through tail dependencies that the various risks are not independent of each other. This gives rise to a smaller diversification effect than if independence is assumed.
— The rise of €3.2bn in the economic risk capital for the life and health category was due primarily to currency effects as for the property-casualty category and to lower interest rates worldwide. The latter notably caused a significant rise in the economic risk capital for German life primary insurance, mainly due to the higher value of options and guarantees.
Segment diversification Group 31.12.2014 Prev. year 31.12.2014 Prev. year Change €bn €bn €bn €bn €bn %
— The rise of €0.3bn in the economic risk capital for operational risks resulted from the dependencies between the scenarios underlying the modelling being taken into account for the first time.
— The diversification effect between the risk categories property-casualty, life and health, market, credit and operational risk increased by €2.6bn and stood at 32.6%. The main reasons for this were both the increase of €5.8bn to €39.9bn in the sum of the economic risk capital requirements for the individual risk categories, which led to a rise in the absolute amount of the diversification, and an improvement in the relative diversification effect between the risk categories as a result of their becoming closer in size.
Compared to the previous year, the economic risk capital requirement for basic losses increased as a result of the depreciation of the euro against most of the main currencies and the lower interest rates.
The economic risk capital for large and accumulation losses was also higher. This was due mainly to the appreciation of the US dollar against the euro, which led to an increase in the risk in euro terms for some major natural hazard scenarios. In addition, external reinsurance cover was reduced slightly. As in 2013, the largest natural catastrophe exposure for Munich Re is the €3.4bn currently retained for the “Atlantic Hurricane” scenario (value at risk for a 200-year return period). The second-largest scenario is “Storm Europe” with a retention of €2.3bn, followed by the “Los Angeles earthquake“ scenario with a retention of €1.9bn.
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
life and health In life and health business, the risk modelling takes account of both short- and longterm developments in risk drivers that influence the value of our business.
Life primary insurance products in particular, and a large part of our health primary insurance business, are long-term in nature, and the results they produce are spread over the entire duration of the policies. The adverse development of risk drivers with a long-term impact, such as changes in the forecast mortality and disablement trends, can cause the value of the insured portfolio to fall (trend risks). The risk modelling attributes probabilities to each modified assumption and produces a complete profit and loss distribution. We use primarily historical data extracted from the underlying portfolios to calibrate these probabilities and additionally apply general mortality rates for the population to model the mortality risk.
In the reinsurance field of business, the market value of interest-sensitive investments as at 31 December 2014 was €72.3bn (64.0bn). Measured in terms of modified duration, the interest-rate sensitivity of those investments was 5.6 (4.4), while that of the liabilities was 4.6 (3.1). The change in the freely available financial resources in the event of a decrease in interest rates of one basis point would have been approximately €0.4m (4.1m),
In the ERGO field of business, the market value of interest-sensitive investments as at 31 December 2014 was €135.2bn (120.4bn). The modified duration was 8.3 (7.4) for interest-sensitive investments and 9.2 (8.1) for liabilities. Overall, we continue to have an exposure to falls in interest rates as a result of the long-term options and guarantees given in the life insurance business written. A decrease in interest rates of one basis point would have reduced the freely available financial resources by approximately €16.8m (10.3m).
The reason for the increase in the general interest-rate risk in the reinsurance field of business was the higher sensitivity to changes in the yield curve caused by the lower interest rates and the depreciation in the euro. In the ERGO field of business, the increase in risk resulting from lower interest rates was more than offset by the improved diversification between life and health insurance business, so that the general interestrate risk decreased.
Credit risks Munich Re determines credit risks using a portfolio model, which takes into account both changes in market value caused by rating migrations and debtor default. The model is calibrated over a credit cycle. The credit risk arising out of investments (including deposits retained on assumed reinsurance and CDSs) and the reinsurers’ shares in technical provisions is calculated by individual debtor. We use historical capital-market data to determine the associated migration and default probabilities. Correlation effects between debtors are derived from the sectors and countries in which they operate, and sector and country correlations are based on the interdependencies between the relevant stock indices. We use our own historical company loss experience to calibrate the credit risk arising out of receivables. For life and health primary insurance business, we also take account of the share of the mitigating effect on the credit risk resulting from policyholders’ participation in profits.
The market value of our investments in fixed-interest securities and loans as at 31 December 2014 was €199.7bn (176.6bn), representing 84.7% (83.9%) of the total market value of Munich Re’s investments. These securities thus made up the bulk of our portfolio.
Our reserves ceded to reinsurers were assignable to the following rating categories as at 31 December 2014: The shifts are mainly due to changes in the ratings of a small number of reinsurers.
In property-casualty and Munich Health, we use actuarial methods to project future claims payments, discounting estimated cash flows and adding a risk margin derived in accordance with strict economic principles.
In the case of our life and health business for which we show a Market Consistent Embedded Value (MCEV), we regard the embedded value as capital available to cushion risks, and hence adjust the portion not already included in IFRS equity. The MCEV also includes a risk margin determined in accordance with economic principles. To determine it, we calculate a risk-capital figure based on our internal economic risk capital model for non-hedgeable risks.
Capitalised goodwill and other intangible assets on the other hand are included in the Group’s IFRS equity, but we deduct them when calculating economic equity, as they might not retain their value in crisis situations. We treat deferred tax assets recognised for loss carry-forwards under IFRS in the same way if they are not covered by an excess of deferred tax liabilities over deferred tax assets at the company concerned or in the US tax group.
Available financial resources €bn 31.12.2014 Prev. year Change IFRS equity 30.3 26.2 4.1 Off-balance-sheet unrealised gains and losses 1.5 1.3 0.2 Value adjustments for property-casualty and life and health1 4.8 9.1 –4.3 Goodwill and other intangible assets –3.6 –4.0 0.4 Tax effects and other –0.1 –0.2 0.1
The “additional available economic equity” is also relevant for the calculation of RORAC: it is the difference between the economic equity and the economic risk capital, and amounted to €6.0bn (8.7bn) as at 31 December 2014.
Global and regional economic and financial crises Munich Re has substantial investments in the eurozone. We attach importance to maintaining a correspondingly broad diversification of investments to cover our technical provisions and liabilities in euros. We use government bonds to match our underwriting liabilities in terms of currency and duration, especially for life and health primary insurance. Growth in the eurozone stabilised in 2014, but economic uncertainty increased, further stoked for the future by the ECB’s expansionary monetary policy. The spreads on government bonds of peripheral eurozone countries as compared to German Bunds have decreased further, though not in the case of Greek government bonds where there are still considerable political risks that could affect the eurozone.
economic solvency ratio components 31.12.2014 Prev. year Change (A) Economic equity €bn 32.9 32.4 0.5 (B) Available financial resources €bn 38.8 38.2 0.6 (C) Available financial resources after announced dividend and share buy-back €bn 37.2 36.2 1.0 (D) Economic risk capital (ERC) €bn 26.9 23.7 3.2
We report on our regulatory solvency requirement on page 106 f.
The fundamental state of public finances remains critical in many countries. It is particularly difficult for national governments to reconcile the need for further budget consolidation with weak growth and high unemployment.
On the basis of defined stress scenarios relating to further developments in the eurozone sovereign debt crisis, our experts forecast potential consequences for the financial markets, the market values of our investments, and the present values of our underwriting liabilities. At Group level, we counter any negative effects with the high degree of diversification in both our investments and our liability structure, and with our active Group-wide asset-liability management.
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 made available to all business areas, and to Corporate Underwriting and Integrated Risk Management.
Whilst we are in a position to assess the known risks in our portfolio adequately on the basis of current climate research, scientific research into climate change is complex. The political and regulatory environment in which we operate is developing fast and we must remain vigilant with regard to the identification and evaluation of new and changing risks. We adopt a multidisciplinary approach, using and combining the
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 further 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.
Our Group-wide network of coordinators ensures that there is an exchange of expertise and experiences in all parts of the Group – an exchange that also extends beyond the individual companies to others in the insurance industry via the Principles for Sustainable Insurance Initiative and the CRO Forum’s Working Group on Sustainability.
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 consquences are increasingly difficult to foresee – past examples of this are the earthquake in Japan and the floods in Thailand in 2011. Not only did both natural catastrophes have a devastating impact on the population, infrastructure and economy in the affected regions, but they also hit worldwide supply chains, with industrial production being interrupted in far-away countries. Such chains of events will take on greater importance in future. We therefore adopt a system-based approach to analyse dependencies in complex risks, for which we have developed our Complex Accumulation Risk Explorer software (CARE). Using this method, risks and their interaction can be made more transparent
After the federal legislative procedure for the US Fairness in Asbestos Injury Resolution Act foundered in February 2006, several US states adopted legislation initiatives (tort reform), which in our view may have a positive effect on the settling of asbestos claims. Following revelations about often questionable asbestos-related disease diagnoses and the resulting litigation, a number of investigation committees are looking into these issues. Similar questionable practices have come to light in silicosis litigation. These 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 confirmed the judgment, according to which customers may still have a right to
In the American Modern Insurance Group (American Modern), it was discovered that agents appointed by American Modern for its Financial Institutions Division had been quoting and charging some policyholders rates that were in some cases lower than, but in other cases higher than, the rates approved by the regulators. American Modern self-reported the rate deviations to the responsible regulators, and is currently in the process of completing a corrective action plan in consultation with the regulators.
Tax risks As a reaction to the financial markets and sovereign debt crisis, a trend towards increased corporate tax burdens is apparent across Europe. In Germany, discussion has focused on the introduction of a financial transactions tax and the restriction of tax privileges for investment funds. After the already implemented abolition of tax exemption for free-float dividends, it is not unlikely that in future there will be taxation of gains on disposals of free-float shareholdings. Which of these ideas will actually become reality is not yet clear. Additional annual tax burdens in the lower three-digit million euro range as a result of the plans under discussion cannot be ruled out.
Work is still in progress at a global level on additional supervisory requirements for systemically important financial institutions (SIFIs). Systemic importance is deter- mined not by the fundamental significance of a sector for the economy, but by the impact the insolvency of a company could have on global financial markets and the real economy. The insurance industry believes that the core business of primary insurers and reinsurers does not give rise to systemic risk. In fact, during the financial crisis insurers contributed towards increased stability. Nonetheless, the Financial Stability Board (FSB) has published a list of nine globally operating primary insurance companies that it classifies as systemically important – the “G-SIIs” (global systemically important insurers). A review of the potential systemic importance of reinsurers has been repeatedly postponed by the FSB and is now expected to be undertaken in 2015. It is possible that the global debate will be followed by a national one. In addition, certain
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.
Expanded business avenues will open up for Munich Re if key macroeconomic parameters develop better than expected. Stronger economic growth in the USA or Germany and a more rapid economic recovery in the eurozone or in major emerging markets would have a positive impact on the demand for insurance cover, and trigger higher premiums in most classes of insurance. Besides this, such a development could lead to a normalisation of the bond markets and thus to a gradual increase in yields, including those on US and German government bonds. This would have a negative impact in the short term on our investment result, but it would bring higher returns in the long run, thus benefiting our long-term insurance business.
By signing the Principles for Sustainable Insurance (PSI), Munich Re has undertaken to integrate environmental, social and governance aspects (ESG aspects) even more strongly into its core business. The consideration of these aspects and hence a broadened view of potential risks is becoming increasingly important for our clients. Owing to Munich Re’s competence in this field, we have the capacity to offer our clients even better assistance – for instance, through innovative coverage concepts and risk management services. As a precondition for entering into business relations with Munich Re, some clients now expect us to prove that we have strategic alignment concepts that are responsible and future-oriented. A number of international cooperation agreements were concluded only because we had these established structures in place.
— Development of emerging countries provides options for expanding and further diversifying the portfolio
— Opportunities also derive from innovative product and service solutions for our clients in key future areas such as renewable energies and weather risks
Other trends and upheavals with an impact on our clients’ demand for insurance and on supply include technological progress, in particular the key future issue of digitalisation, demographic shifts, and changes in the legal and regulatory environ- ment. Given our good capitalisation and high degree of expertise, Munich Re can exploit this demand in all of its business fields. This will also benefit our clients, who will profit from a rapid adjustment of our product solutions to the circumstances of newly emerging or changing markets and regulations.
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. Munich Re now offers a broad spectrum of reinsurance solutions in this field and is also able to cover accumulation perils such as virus-related losses.
The positive economic dynamics in many emerging countries 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.
Demand for insurance is rising as values grow in regions exposed to natural hazards
In primary insurance, ERGO is consistently pursuing the strategy it adopted with its brand proposition “To insure is to understand”. Its strong focus on customer requirements is a key differentiating factor in the market. This is a competitive advantage that is opening up additional growth opportunities for us. A technically supported customer advice and care process that is geared to the individual requirements of customers and interested parties safeguards the quality of sales. ERGO utilises the potential of its staff and sales partners, and promotes this in a targeted and consistent manner with forward-looking staff development. The competence and commitment of ERGO’s staff and sales partners secure its success, which also benefits customers. ERGO’s aim is to expand its high quality and performance levels, and this will enable ERGO to exploit competitive opportunities.
Customers are increasingly purchasing insurance cover via traditional and online channels in parallel, and so ERGO is offering its products through a variety of channels commensurate with requirements. In 2013, ERGO further enhanced its direct sales organisation. In the same year, the first health and property insurance products became available for purchase online. Its online product range was systematically extended with additional products, including motor insurance and personal accident policies. ERGO is 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. Hence, ERGO is investing heavily in the development of e-services, and it has already implemented various measures aimed at providing customers with tailored access to the various distribution channels. To promote and develop digital innovations, ERGO is also exploring avenues outside the organisation, e.g. with digital research laboratories in Berlin. ERGO’s activities are also finding recognition outside the industry. In 2014, ERGO received the
The global health market is one of the fastest-growing sectors of the economy. The main reasons for this include worldwide population growth and increasing life expectancy, combined with the rising prosperity of broad sectors of the population and an enhanced medical infrastructure, particularly in developing and emerging countries. These developments are being accelerated by advances in medicine and the increasing significance of prevention and disease management programmes to support health preservation.
In industrialised countries, the pressure to reform historically evolved health and social security systems is rising. Consequently, there are opportunities for us in personal lines business in these highly developed markets. For the analysis of health risks, for example, we provide our reinsurance clients with modern programmes and tools for standardised medical risk assessment. To enhance the efficiency of internal processes, Munich Health offers new automation options and test algorithms, e.g. in the transmission of claims and their processing. Technical development in the area of digitalisation enables us to offer end customers more closely tailored products. Our aim is to strengthen customer ties even further and make our spectrum of services more comprehensive by offering digital solutions. These enable new and increased activities, especially in the field of prevention, including the use of wearables in diabetes prevention and management. Wearables are body-worn devices equipped with sensors for recording vital data and communicating it via an app to patients’ smart phones. Doctors can thus monitor their patients remotely, thus creating the basis for improved healthcare.
Comparison of prospects for Munich Re (Group) for 2014 with results achieved
— Consolidated result of €3.2bn beats target for 2014 — Dividend proposal for 2014: €7.75 per share — Expected return on investment of at least 3% for 2015 — Consolidated result of €2.5–3bn envisaged for 2015
At €3.2bn, our technical result was below our target of €3.7bn. Above all, this was due to the participation of our policyholders in an anticipated tax refund in the ERGO Life and Health Germany segment, and to deterioration in the life reinsurance market.
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 13.2% for 2014, as well as with the return of 11.3% on total IFRS capital (return on equity, ROE).
The reinsurance business field posted gross premiums of €26.8bn, a figure that was below the target of around €28bn. Gross premiums in life reinsurance totalled €10bn, thus coming in below expectations of around €10.5bn. At €16.7bn, property-casualty reinsurance also did not reach the original forecast of around €17.5bn. In each case, the main reason why we missed our targets was negative currency effects. In life reinsurance, there was also a reduction in large-volume reinsurance treaties.
The technical result in life reinsurance totalled €280m, which meant that we fell short of our 2014 target of over €400m, mainly due to reserve strengthening in Australia and the USA.
Munich Re changed its segment reporting in the fourth quarter of 2014, and now shows the business transacted by ERGO in the three segments Life and Health Germany, Property-casualty Germany, and ERGO International. Therefore, with respect to primary insurance business it is not possible to compare the figures for the changed segments as shown in this annual report with the outlook for 2014 we reported in our 2013 Annual Report. For this reason, we have taken the forecast results from the 2013 Annual Report and amended them to reflect the new segmentation when we compare the forecast for 2014 with the results achieved for the three new ERGO segments.
Total premium income in the ERGO field of business was €18.1bn, thus reaching the 2014 target of slightly more than €18bn; at €16.7bn, gross premiums written were also consistent with the forecast of “a good €16.5bn”. In ERGO Life and Health Germany, total premium income was €10.7bn, whereas our outlook had been around €10.9bn. Gross premiums written totalled €9.8bn and were in line with expectations. In ERGO International, gross premiums written totalled €3.8bn; at the beginning of the year, our assumption had been around €3.6bn. At 97.3%, the combined ratio in this segment was somewhat better than the expected figure of around 98%. In ERGO Property-casualty Germany, gross premiums written totalled €3.1bn, although our target for 2014 had been €3.3bn. At 95.3%, the combined ratio in this segment was higher than the anticipated figure of around 92%.
Reinsurance remains an attractive business field, with a wide variety of long-term earnings opportunities for us. Although insurance density in the western industrialised countries and individual Asian nations that have been well advanced for decades is already high, even these markets often have an additional need for insurance cover. This is because weather-related natural hazards exposure is showing an increasing trend as the climate changes and the concentration of values in exposed regions becomes greater. And even previously, a large share of the losses from major natural catastrophes have also not been insured. In regions with very rapid economic development, the demand for insurance remains high for protecting the large centres of high-quality industrial manufacturing and the rising prosperity of the population. Moreover, generally only a small portion of the risks from potential liability claims by third parties are insured, particularly for those advanced and complex technologies that are important for the overall benefit of society. As a result, the strongly increasing capacity supply in the primary insurance and reinsurance sectors at present is matched by a demand potential in many classes of business that is not yet exhausted.
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 structure our products so that they are tailored to our clients’ needs while conforming to our risk strategy.
Munich Re Group Annual Report 2014 that have previously focused on this area of business are seeking to diversify into other areas. The prices, terms and conditions for reinsurance cover have therefore come under increasing pressure across the board. This has also impacted Munich Re’s portfolio, as the price erosion in the most recent treaty renewals has shown.
As a well-diversified reinsurer with extensive know-how, we are able to offer tailor-made solutions – in contrast to most providers. These include multi-year treaties (occasionally incorporating cross-line and cross-regional covers), retroactive reinsurance solutions, transactions for capital relief, and the insurance of complex liability, credit and industrial risks. Moreover, with our technical expertise and risk knowledge, we are in a position to support rapidly growing industries and to judiciously extend the boundaries of insurability with needs-based covers.
The renewals at 1 April 2015 (mainly Japan) and 1 July 2015 (parts of the portfolio in the USA, Australia and Latin America) will involve a premium volume of almost €3bn of reinsurance treaty business. Munich Re is proceeding on the assumption that the market environment will not change significantly in these renewal rounds in 2015, unless extraordinary loss events occur or there are any major changes in the market.
We expect gross premiums written to roughly maintain their current level in Health Germany. In private health insurance, the premium adjustment we make in the financial year 2015 will be slightly higher than in the previous year. The falling number of insureds is leading to a decline in premium volume in comprehensive health cover. In supplementary health business, by contrast, we see good growth opportunities overall, particularly in supplementary long-term care insurance and company health insurance. In travel insurance, we are adhering to our risk- and profit-oriented underwriting policy. We therefore expect a slight downward trend in premium, also due to the continuing difficult economic and political conditions in important travel destinations.
In 2015, gross premiums written for direct business in Germany should remain largely stable compared with 2014. Falls in life primary insurance will probably be compensated for in the ongoing year by renewed growth in health 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 we are consistently implementing measures to improve the earnings situation. The combined ratio in property-casualty business in Germany should therefore improve by a good 2 percentage points, and reach a very good level of around 93%, provided major losses remain within normal bounds.
We want to achieve gross premiums written in the range of €3.5–4bn for the ERGO International segment in 2015, and generate overall premium volume of well over €4bn, with uncertainty concerning the demand for single-premium business in life insurance. We should see growth in property-casualty business provided there are no economic setbacks or exchange rate losses. There will also be a contribution from our business in Singapore, which we acquired in the second half of 2014 but which was first included in our figures in the third quarter of 2014. The combined ratio should be around 97%.
The duration of the investment portfolio is a key lever of our asset-liability management. We gear the duration of our investments closely to the duration of our liabilities. As a result, both sides of the economic risk-based balance sheet – important for managing our business – respond similarly to changes in interest rates, whilst there may be significant fluctuations in the consolidated balance sheet under IFRS. The duration in the business field reinsurance increased in the financial year 2014, but decreased relative to the liabilities. In life primary insurance, we aim to prolong the average investment period somewhat in 2015. Besides the duration, we also take the individual currencies and inflation sensitivity of our liabilities into account in the development of our investment strategy. For 2015, we plan to keep our portfolio of inflation-linked bonds constant. Over the course of the year, we will make the fine-tuning of our investments dependent on our current market assessments, whilst rigorously adhering to our fundamental strategy of gearing assets to the structure of our liabilities.
In 2014, our investments and investment commitments in infrastructure (including renewable energies and new technologies) were kept largely constant in comparison with the previous year. We are planning to further expand this investment in 2015, provided that the parameters are reliable and we can generate an appropriate return. We continue to rely heavily on a regional, and technology- and infrastructure-specific diversification of these investments, thus spreading the risk of the portfolio, and focusing in particular on bonds and loans for infrastructure projects in 2015. We plan to slightly expand our real estate portfolio over the next few years, subject to market developments.
For 2015, we expect interest-rate levels to remain very low overall, and hence generate lower regular income from reinvestment of fixed-interest securities and loans. We also intend to only moderately increase our moderate equity-backing ratio of 5.2%, so that write-down risks are low. Regular income from our investments should total around 3%, or 0.2 percentage points lower than last year. Taking into consideration the result from the disposal of investments, write-ups and write-downs, and other income and expenses, we expect the investment result to be lower than last year, but still reaching at least €7bn, equivalent to an annual investment return of at least 3%.
We expect that the Group’s gross premiums written for 2015 will be in the range of €47–49bn; the median value is around €0.8bn lower than the previous year.
Provided that major-loss experience is in line with expectations, our assumption for 2015 is that Munich Re will post a technical result that is lower than last year at almost €3bn.
In the period from the middle of May 2014 to the end of February 2015, we bought back shares with a value of around €866m; another €134m are to be repurchased before the Annual General Meeting in April 2015. We are using this measure to return unneeded capital to shareholders. Despite the buy-back, 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 €7.9bn. Subject to approval by the Annual General Meeting, the dividend will rise by 50 cents to €7.75 per share.
Consolidated balance sheet 158 Consolidated income statement 160 statement of recognised income and expense 161 group statement of changes in equity 162 Consolidated cash flow statement 164 notes to the consolidated financial statements Application of international Financial Reporting standards (iFRss) 165 Declaration of Conformity with the german Corporate governance Code in accordance with section 161 of the german stock Corporation Act (Aktg) 165 Recognition and measurement 165 Consolidation 175
Assets A intangible assets 182 b investments 182 C insurance-related investments 186 D Ceded share of technical provisions 187 e Receivables 187 F Cash at banks, cheques and cash in hand 187 g Deferred acquisition costs 188 h Deferred tax assets 188 i other assets 188 equity and liabilities A equity 189 b subordinated liabilities 189 C gross technical provisions 189 D gross technical provisions for unit-linked life insurance 192 e other accrued liabilities 192 F Liabilities 193 g Deferred tax liabilities 194
Foreign currency translation 194 segment reporting segment assets 196 segment equity and liabilities 196 segment income statement 198 non-current assets by country 200 investments in non-current assets per segment 200 gross premiums written 201 notes to the consolidated balance sheet – Assets 02 other intangible assets 205 03 Land and buildings, including buildings on third-party land 207 04 hierarchy for the fair value measurement of investments 208 05 investments in affiliated companies, associates and joint ventures 214 07 other securities held to maturity 216 08 other securities available for sale 217 09 other securities at fair value through profit or loss and insurance-related investments 218 10 Deposits retained on assumed reinsurance 221 11 other investments 222
12 Ceded share of technical provisions 223 13 other receivables 223 14 Deferred acquisition costs 225 15 Deferred tax 227 16 other assets 229 17 non-current assets and disposal groups held for sale and sold during the reporting period 230 notes to the consolidated balance sheet – equity and liabilities 19 Fair value hierarchy of liabilities 233 20 subordinated liabilities 236 21 unearned premiums 237 22 Provision for future policy benefits 239 23 Provision for outstanding claims 240 24 other technical provisions 244 25 gross technical provisions for unit-linked life insurance 245 26 other accrued liabilities 246 27 bonds and notes issued 251 28 Deposits retained on ceded business 251 29 other liabilities 251 notes to the consolidated income statement 31 income from technical interest 254 32 expenses for claims and benefits 255 33 operating expenses 257 34 investment result 259 35 insurance-related investment result 263 36 other operating result 263 37 other non-operating result, impairment losses of goodwill and net finance costs 264 38 taxes on income 265
Disclosures on risks from insurance contracts and financial instruments 39 Risks from life and health insurance business 268 40 Risks from property-casualty insurance business 274 41 Credit risks from ceded reinsurance business 279 42 Market risks from financing instruments – sensitivity analysis 280 other information 44 Related parties 282 45 Personnel expenses 282 46 Long-term incentive Plan 282 47 Mid-term incentive Plan 285 48 Remuneration report 286 49 number of staff 287 50 Auditor’s fees 287 51 Contingent liabilities, other financial commitments 287 52 significant restrictions 288 54 events after the balance sheet date 290 55 earnings per share 290 56 Proposal for appropriation of profit 291
Notes 31.12.2014 Prev. year Change €m €m €m €m €m % A. Intangible assets i. goodwill (1) 3,063 3,292 –229 –7.0 ii. other intangible assets (2) 1,220 1,380 –160 –11.6
B. Investments i. Land and buildings, including buildings on third-party land (3) 3,732 3,762 –30 –0.8 ii. investments in affiliated companies, associates and joint ventures (5) 1,559 1,514 45 3.0 thereof: Associates and joint ventures accounted for using the equity method 1,280 1,291 –11 –0.9 thereof: held for sale 27 – 27 –
F. Cash at banks, cheques and cash in hand 2,912 2,820 92 3.3 G. Deferred acquisition costs (14) gross 9,555 9,603 –48 –0.5 Ceded share –79 –61 –18 –29.5
Notes 31.12.2014 Prev. year Change €m €m €m €m % A. Equity (18) i. issued capital and capital reserve 7,417 7,426 –9 –0.1 iV. Consolidated result attributable to Munich Reinsurance Company equity holders 3,153 3,304 –151 –4.6
D. Gross technical provisions for unit-linked life insurance (25) 7,837 7,043 794 11.3
F. Liabilities i. bonds and notes issued (27) 282 248 34 13.7 ii. Deposits retained on ceded business (28) 2,673 2,762 –89 –3.2 iii. Current tax liabilities 2,729 2,795 –66 –2.4
» Consolidated balance sheet – equity and liabilities (XLs, 48 Kb)
Notes 2014 Prev. year Change €m €m €m €m €m % Gross premiums written 48,848 51,060 –2,212 –4.3 3. Expenses for claims and benefits (32) gross –40,415 –40,709 294 0.7 Ceded share 722 782 –60 –7.7
Ceded share 313 326 –13 –4.0 thereof: income from associates and joint ventures accounted for using the equity method 77 7 70 1,000.0 10. Deduction of income from technical interest –7,503 –6,764 –739 –10.9 13. Other non-operating result (37) –496 –671 175 26.1 14. Impairment losses of goodwill (37) –445 –29 –416 <–1,000.0 thereof: Attributable to Munich Reinsurance Company equity holders 3,153 3,304 –151 –4.6 Attributable to non-controlling interests (18) 18 29 –11 –37.9
Change resulting from cash flow hedges gains (losses) recognised in equity 1 –1 Recognised in the consolidated income statement – –
€m 2014 Prev. year Consolidated result 3,171 3,333 net change in technical provisions 5,193 4,049 Change in deferred acquisition costs 60 –360 Change in deposits retained and accounts receivable and payable 1,262 –847 Change in other receivables and liabilities 456 –1,898 gains and losses on the disposal of investments –1,808 –1,058 Change in securities at fair value through profit or loss –1,129 –839 Change in other balance sheet items –88 –178 other income/expenses without impact on cash flow 410 –15 i. Cash flows from operating activities 7,527 2,187 Change from losing control of consolidated subsidiaries – –34 Change from obtaining control of consolidated subsidiaries –113 –74 Change from the acquisition, sale and maturities of other investments –4,431 752 Change from the acquisition and sale of investments for unit-linked life insurance contracts –411 –343 other 16 –9 ii. Cash flows from investing activities –4,939 292 inflows from increases in capital and from non-controlling interests – 107 outflows to ownership interests and non-controlling interests –1,392 –296 Dividend payments –1,257 –1,258 Change from other financing activities –45 –1,111 iii. Cash flows from financing activities –2,694 –2,558 Cash flows for the financial year (I + II + III) –106 –79 effect of exchange-rate changes on cash 198 39 Cash at the beginning of the financial year 2,820 2,860 Cash at the end of the financial year 2,912 2,820
Declaration of Conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG) In November 2014, the Board of Management and Supervisory Board of Munich Reinsurance Company published an updated Declaration of Conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG) and made this declaration permanently available to shareholders on the internet.
Non-current assets and disposal groups classified as “held for sale” are recognised at the lower of carrying amount or fair value less sales cost and shown separately in the consolidated balance sheet.
Our presentation currency is the euro (€). Amounts are rounded to million euros, with figures in brackets referring to the previous year. Expenses, outflows and losses are shown using the minus sign; income and inflows are shown without a plus or minus sign.
Changes in accordance with the rules of IAS 8 necessitated the retrospective adjustment of the figures from the consolidated balance sheet for the financial years 2012 and 2013, and of the consolidated income statement and relevant items of the notes to the consolidated financial statements for the year 2013 (see section “Changes in accounting policies and other adjustments”). The other previous-year figures have been calculated on the same basis as the figures for the financial year 2014.
In the financial year 2014, the following new or amended IFRSs had to be applied for the first time: IFRS 10 (05/2011), Consolidated Financial Statements, supersedes the provisions of IAS 27 and SIC 12 and creates a uniform definition for control, irrespective of whether this control is based on company law or on contractual or economic circumstances. There are no longer any independent provisions for structured entities (special purpose entities). A situation of control exists when an investor has the ability to direct an investee’s relevant activities and is exposed to the returns from those activities.
Furthermore, IFRS 10 addresses issues that have not been dealt with until now, including the rule that a situation of control exists even if an investor holds less than a majority of the voting rights but regularly has a de facto majority of voting rights at the annual general meetings. The changes do not have any major effects on Munich Re’s group of consolidated companies. Only one associate is now to be recognised as a fully consolidated company. We have therefore applied the amendments prospectively, as a retrospective application for prior periods did not appear appropriate, also from a costbenefit point of view. The conversion from the equity method to full consolidation led to a minor result effect of less than €2m and increased the balance sheet total by around €10m in the first quarter.
IFRS 11 (05/2011), Joint Arrangements, defines joint operations and joint ventures and specifies how they are to be recognised in the balance sheet. The changes compared with IAS 31, Interest in Joint Ventures, mainly concern the elimination of the option of proportionate consolidation for joint ventures, the amended definition of joint control, and the extended scope of application of joint operations. These may now include arrangements structured through a separate vehicle. The elimination of the option of proportionate consolidation has no impact on Munich Re, as we do not avail ourselves of this option and already apply the equity method. The two other amendments do not have any major effects on Munich Re.
IAS 28 (rev. 05/2011), Investments in Associates and Joint Ventures, specifically includes amendments following from the publication of IFRS 11 and IFRS 12. Among other things, the standard integrates the balance sheet recognition of joint ventures and circumstances previously governed by SIC 13, Jointly Controlled Entities – Non-Monetary Contributions by Venturers. Furthermore, investments in associates or joint ventures held by open-ended investment funds or for unit-linked insurance, for example, are no longer excluded from the scope of application of the standard. Instead, there is now an option to measure these at fair value with impact on profit or loss. The amendments do not have any material effects for Munich Re.
IFRS Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (10/2012) introduces a definition of the term “investment entities” and specifies that in future such entities are to be generally excepted from the requirement to consolidate their subsidiaries. Instead, they are required to measure them at fair value through profit or loss. The exception from the consolidation requirement does not apply to parents of investment entities that are not themselves investment entities. There are also additional disclosure requirements for investment entities. The amendments are of no relevance for Munich Re.
The amendments to IAS 32 (rev. 12/2011), Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities, clarify some issues in relation to the requirements for offsetting financial assets and financial liabilities. The changes currently have no practical significance for Munich Re.
In 2014, Munich Re further optimised its internal management reporting, resulting in changes in its segment reporting. The corresponding items in the segment reporting and the notes to the consolidated financial statements have been adjusted for the previous year.
As part of the change in segmentation of the ERGO Insurance Group, other improvements have also been made to management reporting. The asset management segment was divided among the segments that write insurance business, to better reflect the close interlinking between asset management and insurance, since the assets managed mainly comprise Group assets.
Analogous to our internal management, since the fourth quarter of 2014 the result from unit-linked life insurance and our other insurance-related investments has been disclosed separately from the result of other investments in the new line item “Insurance-related investment result” in our segment income statement. Assets have been disclosed analogously. The modified management reporting takes account of the fact that the result from unit-linked life insurance is not allocable to shareholders. Besides, separate disclosure of other insurance-related investments underscores their increased importance.
For reasons of consistency and comparability, we have adjusted the structure of our consolidated income statement in accordance with our segment income statement. Differences merely exist in the degree of detail of the items, which is more limited in segment reporting in line with the performance measures defined. In addition, the segment income statement now shows only the net figures for technical and non- technical results, without any subdivision of the amounts indicated as “thereof” items. The segment-specific disclosures required under IFRS 8 can be found in the corresponding sections of the notes to the consolidated income statement. For the sake of clarity, the investment result is also shown net in the consolidated income statement. In addition, the structure of the consolidated balance sheet has been adjusted, with insurancerelated investments and other investments disclosed separately. The adjustments increase the usefulness of the information for the purposes of making decisions to the users of the financial statements.
The following modifications were also applied retrospectively and the previous year’s figures were adjusted: a) Since the first quarter of 2014, we have adjusted the disclosure of “other provisions” and “miscellaneous liabilities” in order to improve the information content. Liabilities hitherto allocated to “other provisions”, but more certain than provisions in terms of the timing and amount of their payment, are shown under “miscellaneous liabilities” with immediate effect. “Outstanding invoices”, “bonuses”, “holiday and overtime pay” and “miscellaneous” are affected.
c) In future the insurance-related investment result will be disclosed as a new line item in the operating result. The portfolio is separated in the balance sheet in the same way (see above).
The changes a) and c) have been made in accordance with IAS 8.14 and IAS 8.22. The consolidated balance sheet for the financial years 2012 and 2013 is affected by the adjustments as follows: Consolidated balance sheet
Changes 31.12.2012 due to as originally adjustments recognised in 2012 31.12.2012 €m a) b) c) Assets B. IV. Other securities 3. At fair value through profit or loss 3,015 – – –532 2,483 C. Insurance-related investments 5,958 – – 532 6,490 E. II. Other receivables 11,475 – 19 – 11,494 H. Deferred tax assets 6,219 – 6 – 6,225 Equity and liabilities A. II. Retained earnings 10,938 – –37 – 10,901 A. IV. Consolidated result attributable to Munich Reinsurance Company equity holders 3,188 – 3 – 3,191 E. Other accrued liabilities 4,318 –397 – – 3,921
The IASB concluded the project Annual Improvement to IFRSs 2011–2013 Cycle in December 2013 with the publication of the revised standards. These amendments concern IFRS 1, First-time Adoption of International Financial Reporting Standards; IFRS 3, Business Combinations; IFRS 13, Fair Value Measurement; and IAS 40, Investment Property Measured at Fair Value. These amendments provide clarifications of individual provisions that have turned out to be unclear in practice; they are unlikely to be relevant for Munich Re.
Thereof: Attributable to Munich Reinsurance Company equity holders 3,313 –9 – 3,304
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 can now be accounted for in the same way as property, plant and equipment. Currently, the amendments do not appear to be relevant for Munich Re.
The amendments published in September 2014 as part of the project Annual Improvements to IFRSs 2012–2014 Cycle, affect IFRS 5, Non-current Assets Held for Sale and Discontinued operations; IFRS 7, Financial Instruments: Disclosures; IAS 19, Employee Benefits; and IAS 34, Interim Financial Reporting. The amendments mainly concern clarifications of individual provisions that have turned out to be unclear in practice; they are unlikely to be relevant for Munich Re.
The amendments in 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. This amendment is unlikely to have any material effects on Munich Re.
In December 2014, amendments to IFRS 10, IFRS 12 and IAS 28 were published in Investment Entities: Applying the Consolidation Exception. 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, the categorisation of financial assets will be made in future 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 possibility of voluntary measurement at fair value (fair value option) remains. However, the requirement for separate accounting of the component parts of certain structured products is no longer mandatory; under IFRS 9 they must be measured in their entirety at fair value through profit or loss. For financial liabilities, there are no changes in the measurement rules except that if the fair value option is applied, value changes attributable to a change in the entity’s credit risk must be recognised without impact on profit or loss in future.
Hedge accounting under IFRS 9 focuses more strongly on the entity’s risk management activities than was the case under the current rules of IAS 39. The new rules include provisions to ease requirements with respect to qualified hedged items and hedging instruments, and the assessment of hedge effectiveness.
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. They are particularly important for Munich Re, and will involve significant implementation costs.
IFRS 15 (05/2014), Revenue from Contracts with Customers, governs the time and amount of the company’s revenue to be recognised. As the recognition of revenue from insurance contracts and financial instruments does not fall within the scope of the new standard, it is not material for the accounting of our core business. We do not currently expect that the revisions will have any significant effects for Munich Re. The standard is mandatory for financial years beginning on or after 1 January 2017.
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 role of the fund manager (including our assessment of its status as an agent for us), of similar rights that could lead to us exercising control over the fund, and of the degree of variability in the remuneration of the fund manager. This can sometimes result in an assessment that we do exercise control even though the shareholding is below 50%.
Reductions –4 –9 –13 1 In addition, 58 German and 4 non-German investment funds were included in the consolidated group.
A list of all our shareholdings can be found in the section “List of shareholdings as at 31 December 2014 pursuant to Section 313 (2) of the German Commercial Code (HGB)”.
Cash flows arising from obtaining control €m 2014 Prev. year Total consideration for obtaining control –134 –95 Non-cash consideration for obtaining control – – Cash consideration for obtaining control –134 –95 Cash over which control was obtained 21 21 Total –113 –74
Net assets obtained €m 2014 Prev. year Goodwill/gain from bargain purchase 28 –2 Other intangible assets 40 9
With legal effect from 2 January 2014, via its subsidiary Cannock Chase Holding B.V., Amsterdam, Munich Re acquired 100% of the voting shares in Cannock Chase B.V., Leidschendam, 100% of the voting shares in Cannock Chase Incasso B.V., The Hague, 100% of the voting shares in Cannock Connect Center B.V., Brouwershaven, 100% of the voting shares in Mandaat B.V., Druten, 100% of the voting shares in Cannock Chase Purchase B.V., The Hague, and 62.50% of the voting shares in X-Pact B.V., The Hague. The Cannock Chase Group is the market leader in the public-sector client segment of the credit-management services market. The acquisitions are aimed at expanding the market position of DAS Nederlandse Rechtsbijstand Verzekeringmaatschappij N.V., Amsterdam, in the area of credit management. A purchase price of €32m in cash was paid for the acquisition.
The provisional IFRS carrying amounts of ERGO Insurance at the acquisition date are as follows: Investments totalling €59m; ceded share of technical provisions amounting to €31m; cash at banks, cheques and cash in hand of €3m; intangible assets, receivables and other assets of €31m; equity of €48m; gross technical provisions of €65m; and other provisions, liabilities and deferred tax liabilities of €11m.
Gross premiums written of €15m and a result of €0.4m for ERGO Insurance have been included in the consolidated income statement. If Munich Re had acquired ERGO Insurance at the beginning of the financial year, ERGO Insurance would have contributed €39m in gross premiums written to the consolidated premium and a result of €3m to the consolidated result.
The annual financial statements of the consolidated subsidiaries are subject to uniform accounting policies.
We classify a small number of entities as associates even though we hold less than 20% of the voting rights, mainly because we are represented on their supervisory boards and/or have significant business relations with them.
Under IFRS 11, a joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of that arrangement.
Under IFRS 11, a joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets specified in the arrangement, and assume obligations for the liabilities relating to the arrangement. Unlike a joint venture, a joint operation does not confer rights to net assets.
Consolidated structured entities In 2014, Munich Re provided no financial or other support to consolidated structured entities, or intended to do so in future, without having a contractual obligation to do so.
Munich Re above all invests 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 forestry, infrastructure (including renewable energies and new technologies) and private equity.
Securitisation vehicles Munich Re invests in debt securities that are issued by securitisation 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.
Munich Re Group Annual Report 2014 value) is used as an indicator for the valuation of the size of the structured entity. The size of the funds refers to both the issued volume of the securitisation vehicles set up by Munich Re and that of those securitisation vehicles in which Munich Re has invested.
Normally, the maximum exposure to loss for investments for unit-linked life insurance is also the carrying amount of the interests. However, the investment is held for the benefit of policyholders who bear the investment risk.
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 as an expense 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 €28m in the financial year 2014. The value of fund assets under management provides information about the size of the unconsolidated structured entities. As at 31 December 2014, the managed fund assets amounted to €3,073m, and Munich Re itself also holds a small interest in these funds.
Sponsored unconsolidated structured entities Sponsored unconsolidated structured entities Munich Re provides structuring and consultancy services for clients within the context of the foundation and structuring of third-party securitisation vehicles. As at 31 December 2014, Munich Re did not have any interests in these structured entities.
Investment funds – Securiti- Securiti- Investment Investments sation sation funds – for unit- vehicles – vehicles – Munich Re linked life Debt Underwriting investments insurance securities risks Total
Deposits retained on assumed reinsurance – – – 343 343 Investments for unit-linked life insurance contracts – 7,395 – – 7,395 Ceded share of technical provisions – – – – –
Technical provisions – – – – – Other liabilities – – – 1 1 Total equity and liabilities – – – 1 1
Goodwill resulting from the first-time consolidation of subsidiaries is tested for impairment at least annually, in accordance with IAS 36. We additionally carry out ad-hoc impairment tests if there are indications of impairment. For impairment testing, the goodwill is allocated to the cash-generating units or groups of cash-generating units expected to derive benefit from the synergies of the business combination. To ascertain whether there is any impairment, the carrying amount (including allocated goodwill) of a cash-generating unit or group of cash-generating units is compared with that unit’s or group’s recoverable amount. The recoverable amount is the greater of the fair value less costs to sell and the value in use. If this recoverable amount is lower than the carrying amount, a write-down for impairment is made on the goodwill.
Acquired insurance portfolios are recognised at their present value on acquisition (PVFP – present value of future profits). This is determined as the present value of expected profits from the portfolio acquired, without consideration of new business and tax effects. The acquired insurance portfolios are amortised in accordance with the realisation of the profits from the insurance portfolios underlying the PVFP calculation. They are regularly tested for impairment using a liability adequacy test as per IFRS 4; see notes under Liabilities C – Gross technical provisions. Write-downs are recognised under operating expenses.
Self-developed and other software, acquired sales networks, client bases and brand names are carried at cost. Self-developed and other software is amortised on a straight-line basis at a rate of 20–33% over its useful life – three to five years – or in exceptional circumstances at a rate of at least 10% over a period of up to ten years. The useful lives and depreciation rates of the acquired sales networks and client bases are 2–17 years or 6–50% respectively, and those of the brand names 1–30 years or 3–100%; the items in question are generally amortised on a straight-line basis. Impairments or impairment losses reversed are recognised if required. Recognised impairments and impairment losses reversed are distributed in the consolidated income statement between investment expenses, expenses for claims and benefits and operating expenses. If it is not possible to allocate impairments and impairment losses reversed to the functional areas, they are shown under other non-operating expenses or income.
Land and buildings shown under investments comprise property used by third parties and are carried at cost. Maintenance expenses are recognised as an expense. Structural measures equivalent to 5% or more of the historical cost of a building are generally assessed with regard to whether they have to be capitalised. Buildings are depreciated on a straight-line basis in accordance with the component approach, depending on the 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 (market values); 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. Changes in the fair value are recognised in “other reserves” under unrealised gains and losses.
Securities at fair value through profit or loss comprise securities held for trading and securities designated as at fair value through profit or loss. Securities held for trading are all fixed-interest and non-fixed-interest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences. In addition, they include all derivative financial instruments with positive fair values which we have acquired to manage and hedge risks but which do not meet the requirements of IAS 39 for hedge accounting. Securities designated as at fair value through profit or loss comprise structured securities. This designation may only be made at the time of acquisition; reallocation to this category in later periods is not possible.
Other investments comprise deposits with banks and tangible assets in renewable energies, physical gold, and forestry investments. Deposits with banks are measured at cost in accordance with the effective interest method. Tangible assets in renewable energies are generally accounted for at amortised cost. The items in question are amortised on a straight-line basis at a rate of at least 5% over a useful life of 20 years at most. In addition, these items are tested for impairment at each balance sheet date and write-downs for impairment or reversals of impairments are made if required. We measure physical gold at the acquisition cost; if the recoverable amount is lower than the carrying amount, a write-down for impairment is made. If there is a subsequent recovery in value, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the acquisition cost. Forestry investments are measured at fair value less estimated costs to sell.
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 fair value hierarchy provides for three levels.
Net investment result The net investment result comprises regular income, income from write-ups, gains and losses on the disposal of investments, other income, write-downs of investments, management expenses, interest charges and other expenses. Regular income and
Munich Re Group Annual Report 2014 expenses from investments not measured at fair value through profit or loss are calculated in accordance with the effective interest method, i.e. any premiums or discounts are deducted from or added to the acquisition costs, with impact on profit or loss, until maturity.
We determine acquisition cost on the basis of the average purchase price. In the case of an impairment, a write-down is made to the fair value at the balance sheet date, i.e. generally the publicly quoted market price. If there is a further fall in the fair value of equity investments that have already been written down once, a further write-down recognised in the income statement is made again immediately. Such impairments recognised in profit or loss may not be reversed through profit or loss. If, in a subsequent period, the reasons for the impairment of fixed-interest securities or loans cease to apply, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the original amortised cost.
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. Insurance-linked
Net insurance-related investment result The net result from these investments comprises regular income, income from writeups, gains and losses on the disposal of insurance-related investments, other income, write-downs of insurance-related investments, management expenses, interest charges and other expenses.
Current tax receivables are accounted for in accordance with local tax regulations and other receivables at amortised cost. In impairment tests of our receivables, we generally first assess whether objective evidence of impairment exists for items that are individually significant. If this is not the case, and also in the case of individually insignificant items, the impairment test is carried out collectively on the basis of groups of similar receivables. Receivables that are individually assessed for impairment are not included in the collective assessment. The amount of the probable loss is measured as the difference between the amortised cost and the present value of estimated future cash flows. The impairment thus determined is recognised as an expense. We generally deduct impairments directly from the items concerned on the assets side, without using a value adjustment account. If, in a subsequent period, the reasons for the impairment cease to apply, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the original amortised cost.
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 pursuant to IFRS 4; see Equity and liabilities – C Gross technical provisions.
For contracts in accordance with FAS 60, the provision for future policy benefits is calculated from the present value of estimated future policy benefits (including claims adjustment expenses) less the present value of future net level premiums. Net level premium is that part of the gross premium that is needed to finance future policy benefits. Life primary insurance contracts with limited premium payment are generally valued in accordance with FAS 97.
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 Technical provisions for unit-linked life insurance (gross).
The interest rate at which the pension obligations are discounted is based on the yields for long-term high-quality bonds (e.g. commercial or government bonds).
Deferred tax liabilities are shown under equity and liabilities item G.
In the case of intra-Group sales of assets where a provision for premium refunds has to be posted, the latter always has to be shown by the selling segment.
Intra-Group loans are completely eliminated in the balance sheet through consolidation. By contrast, the expenditure for the borrowers and income for the lenders is shown unconsolidated under “Other non-operating result, impairment losses of goodwill and net finance costs” for the segments concerned. All intra-Group shareholdings are consolidated, and all earnings and expenditure of the subsidiaries are shown in their segments.
IV. Other securities 1. Held to maturity – – – – – 5 – – – – – – – 5
Reinsurance Goodwill from the acquisition of Munich Re America Other €m 2014 Prev. year 2014 Prev. year Gross carrying amount at 31 Dec. previous year 1,001 1,046 440 454 Accumulated impairment losses at 31 Dec. previous year – – –51 –51 Carrying amount at 31 Dec. previous year 1,001 1,046 389 403 Currency translation differences 139 –45 51 –16
Munich Health Total Goodwill from the acquisition of Other €m 2014 Prev. year 2014 Prev. year Gross carrying amount at 31 Dec. previous year 156 156 3,908 3,964 Accumulated impairment losses at 31 Dec. previous year –156 –156 –616 –588 Carrying amount at 31 Dec. previous year – – 3,292 3,376 Currency translation differences – – 188 –61
Reclassifications – – – – Impairment losses – – –445 –28 Carrying amount at 31 Dec. financial year – – 3,063 3,292 Accumulated impairment losses at 31 Dec. financial year –156 –156 –1,061 –616 Gross carrying amount at 31 Dec. financial year 156 156 4,124 3,908
Munich Re Group Annual Report 2014 management purposes. In reinsurance, we have allocated the goodwill to divisions or groups of divisions, while in primary insurance it has been allocated to the ERGO segments Life and Health Germany and Property-casualty Germany, and to legal entities.
Our goodwill was fully allocated to the following cash-generating units or groups of cash-generating units: The goodwill from the acquisition of Munich Re America has been allocated to a group of divisions (cash-generating units), which together make up the “reinsurance propertycasualty segment”. Apart from the goodwill from the acquisition of Munich Re America, the carrying amount shown for this includes other goodwill that is impairment-tested on the basis of cash-generating units at the level of divisions or groups of divisions within the segment. This other goodwill is not significant in comparison with the total goodwill and is tested for impairment on the basis of the same key assumptions used for the goodwill from the acquisition of Munich Re America. The goodwill from the acquisition of shares in the ERGO Insurance Group was originally allocated to the cash-generating unit “ERGO”. The change in management reporting and the corresponding change in segment reporting (see Recognition and measurement – Change in accounting policies and other adjustments) required a reallocation of the goodwill, as there has been a change in the composition of the cash-generating unit ERGO. On the basis of a relative valuation, the goodwill has been allocated to the new primary insurance segments ERGO Life and Health Germany, ERGO Property-casualty Germany and ERGO International. The goodwill proportionately allocated to the segment ERGO International for the acquisition of shares in ERGO Insurance Group was written off in full after impairment testing (see “Amount of impairment losses recognised in profit or loss during the period”).
ERGO ERGO Reinsurance Life and Property- Various property- Health casualty cash casualty segment segment generating €m segment Germany Germany units
The calculation of these values in use is based on distributable target results derived from the current market environment and the latest corporate planning approved by management. Prepared in an interactive process involving the operational units, the responsible controlling units and the Board of Management, the corporate plans are reviewed and updated at least every quarter. The aforementioned key assumptions regarding premium income development, the combined ratios and the results derive from the aggregation of the company plans of the individual companies of a cash- generating unit. The key assumptions regarding developments in the equity market and interest-rate level are uniformly defined within Munich Re (Group) on the basis of the current market environment. After the detailed planning phase, we estimate the target results achievable long term on the basis of the last adjusted planning year and a growth rate derived in taking macroeconomic forecasts into account.
Cost-of-equity rates derived using the Capital Asset Pricing Model (CAPM) were used as discount rates. Calculations are based on distributable target results after consideration of normalised taxes. In the above table, for disclosure purposes, a corresponding discount rate before tax is given in each case. Sensitivity analyses were performed for the discount rates, growth rates and distributable target results. No impairments were identified.
Reinsurance ERGO ERGO Cash-generating unit or group of property-casualty Life and Health Germany Property-casualty Germany cash-generating units segment segment segment Basis for calculating the Value in use Value in use Value in use recoverable amount Key assumptions regarding In the detailed planning phase For the detailed planning For the detailed planning the planning calculation (three years), we expect a rise (three years), we expect phase (three years), we (at the time of the planning) in premium income with a results to fall initially. expect a rise in premium higher combined income with a significantly ratio. improved combined ratio.
Acquired insurance portfolios Software Self-developed Other €m 2014 Prev. year 2014 Prev. year 2014 Prev. year Gross carrying amount at 31 Dec. previous year 1,309 1,311 358 350 956 889 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year –924 –818 –256 –220 –697 –659 Carrying amount at 31 Dec. previous year 385 493 102 130 259 230 Currency translation differences 8 –3 – – 5 –4 Additions
Disposals Loss of control – – – – – – Other – – –9 – –5 –3
Carrying amount at 31 Dec. financial year 318 385 82 102 279 259 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year –1,002 –924 –285 –256 –770 –697 Gross carrying amount at 31 Dec. financial year 1,320 1,309 367 358 1,049 956
The impairment losses are distributed between the following different Group segments: in reinsurance, –€1m (–3m) is apportionable to life and –€27m (–11m) to property-casualty; in the ERGO field of business, –€6m (–43m) is apportionable to Life and Health Germany, – (–€1m) to Property-casualty Germany and –€62m (–) to ERGO International. The Munich Health segment saw impairment losses of – (–€3m).
Miscellaneous Total Self-developed Other €m 2014 Prev. year 2014 Prev. year 2014 Prev. year Gross carrying amount at 31 Dec. previous year – – 88 83 3,836 3,917 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year – – –34 –28 –2,456 –2,353 Carrying amount at 31 Dec. previous year – – 54 55 1,380 1,564 Currency translation differences – – 1 –1 49 –22 Additions
Disposals Loss of control – – – – – – Other – – –7 – –40 –4
Amortisation – – –9 –8 –239 –232 Impairment losses – – – – –96 –61
Intangible assets from the purchase of sales networks/client bases were written down by –€86m, mainly owing to reduced business prospects. The impairments were recognised in the segments property-casualty reinsurance (–€25m) and ERGO International (–€61m).
The impairment losses reversed are distributed between the following: in reinsurance, €2m (1m) is apportionable to life and €8m (4m) to property-casualty; in the ERGO field of business, €22m (15m) is apportionable to Life and Health Germany and €1m (–) to Property-casualty Germany.
Impairment losses reversed are chiefly attributable to appreciations in value following the revitalisation of real estate and to positive market development.
All investments recognised at fair value are allocated to one of the fair value hierarchy levels of IFRS 13, as are those investments which are not recognised at fair value in the balance sheet but for which a fair value has to be disclosed in the notes. Information on the criteria for allocation to the individual levels of the fair value hierarchy can be found in the notes under Assets – B Investments, Determining fair values. Regularly, at each reporting date, we assess whether the allocation of our investments to the levels of the fair value hierarchy is still appropriate. If changes in the basis of valuation have occurred – for instance, if a market is no longer active or the valuation was performed using inputs requiring another allocation – we make the necessary adjustments.
The following table provides an overview of the models used to measure the fair values of our investments.