Earthquake zones, storm tracks, hail fields. What geo risks have to be reckoned with and where? The interactive DVD shows worldwide natural hazards and climate effects at a glance – yesterday, today and in the future. Extensive knowledge modules for historical catastrophes, megacities and change processes are linked with each other and displaced on the maps, making geo risks transparent and easier to assess.
1 Before elimination of intra-Group transactions across segments. 2 Adjusted pursuant to IAS 8. 3 Previous years adjusted owing to a change in methodology.
Munich Re’s market capitalisation at 31 December2 €bn 22.9 29.0 29.9 26.3 20.8
System requirements Windows 2000/XP/Vista, Pentium IV , 512 MB RAM (1 GB recommended), 1024 x 768 resolution, 16-bit graphics card (32-bit graphics card recommended), 8-speed DVD-ROM drive (16-speed recommended), DirectX 7 or above, sound card
Munich Re Group 2008 Members of the Board of Management 4 Notable events in 2008 6 Report of the Supervisory Board 8 Munich Re shares 12 Strategy 18
Management report 47 Munich Re Group 49 Parameters 66 Business performance 70 Financial position 110 Other success factors 122 Corporate governance report 130 Prospects 144 Risk report 155
Notes to the consolidated fi nancial statements 187 Affi liated companies 275
Which brings us back to risk management: in January 2009, the German Federal Financial Supervisory Authority published its circular on the minimum supervisory requirements for the risk management of insurance companies. A draft had been available since the beginning of 2008, when we already met most of these requirements, having devoted ourselves intensively to this topic since 2004. In order to satisfy the standards in every respect, we set about taking the measures still necessary without delay. In the light of the fi nancial crisis, I can say that our efforts over many years have paid off – our risk management has passed an extremely severe test.
In the fi rst few months of 2009, the crisis has continued to hold the markets fi rmly in its grip: almost every day, we are confronted with reports of new record losses and the threat of insolvencies at leading companies. The future development of the economy is uncertain at present. You can read our assessment of the perspectives and the outlook for the capital markets later on in this annual report, in the prospects section of the management report.
Times will remain diffi cult. But I am not going to join the general chorus of lamentation. We are guardedly optimistic of weathering this crisis well, having created the best possible foundations for doing so. We do not have to change the basic points of our strategy and can continue to realise projects that we launched at the end of 2007.
These projects included an initiative of our Changing Gear programme for profi table growth which has led to an extensive restructuring of our reinsurance group. The fi rst step was to redefi ne the tasks of our central divisions and optimise their interfaces with each another and with the operational divisions. A short time later, we gave our operational units an even greater client focus. Both projects have now been concluded. The renewal of a large portion of our treaty business at 1 January 2009 took place using the new structure. We reported the satisfactory outcome to the public on 4 February 2009.
We cannot determine our market environment, but we can prepare ourselves for it. With our fi nancial strength and our risk-carrying capacity, we are ideally equipped. In a setting characterised by great uncertainty, this should prove a competitive advantage and open up opportunities for profi table new business for us. We are renowned for our risk knowledge and have strong marketing teams for business with private clients. We can deploy various risk carriers and service providers as needed to offer our clients appropriate solutions. We thus systematically cover the individual elements of the value chain in the insurance industry, as illustrated particularly clearly in the business fi eld of Inter national Health. And, fi nally, we have the fi nancial wherewithal to assume a shaping role in the expected consolidation of the markets, always provided the crisis does not take an even more dramatic turn. You can rely on us to continue applying the care and discipline in our business to which you are accustomed and rightly expect from us.
From left to right Thomas Blunck Special and Financial Risks | Reinsurance Investments | Central Procurement Torsten Jeworrek Chairman of the Reinsurance Committee Reinsurance Development | Corporate Underwriting | Accounting, Controlling and Central Reserving for Reinsurance | Information Technology | Global Business Architecture | Geo Risks Research/Corporate Climate Centre Jörg Schneider Group Reporting | Group Controlling | Corporate Finance Mergers & Acquisitions | Integrated Risk Management | Group Legal, Compliance | Group Taxation | Investor and Rating Agency Relations Ludger Arnoldussen Germany, Asia Pacifi c and Africa | Services
New Board members at ERGO Jochen Messemer, previously member of the Board of Management at DKV and Victoria, is appointed to the ERGO Board of Management on 1 October 2008, with responsibility for international operations as from 1 January 2009. As from 1 April 2008, Ulf Mainzer becomes ERGO Board member for Human Resources and General Services.
In April 2008, Munich Re fi nalises the acquisition of a 100% stake in US primary insurer The Midland Company. The purchase price for one of the US’s leading specialist insurers in niche segments is around US$ 1.3bn (€0.9bn).
The acquisition of Sterling Life Insurance Company is also completed in April. The purchase of the leading US provider of health insurance benefi ts for seniors strengthens the International Health business segment.
Munich Re sets up subsidiary in Brazil Munich Re has had a representative offi ce in São Paulo for ten years. In spring 2008, it takes advantage of the opening of the Brazilian reinsurance market to set up a subsidiary, thus securing the best possible market access.
Brazil is by far the largest insurance market in Latin America. Liberalisation of the insurance market coupled
Joachim Wenning: New Board member in charge of the Life Division.
with the country’s overall economic development is expected to boost demand for reinsurance solutions in Brazil.
EUROPÄISCHE and Mercur Assistance are now part of ERGO Europäische Reiseversicherung and Mercur Assistance become part of the ERGO Insurance Group on 1 January 2009. This combines Munich Re’s primary insurance activities and creates the opportunity to strengthen our position in the international travel market.
MEAG launches KlimaStrategie equity fund With its new KlimaStrategie equity fund, MEAG gives customers the opportunity to invest in a widely diversifi ed portfolio of companies benefi ting from measures in connection with climate change. The fund invests worldwide in companies that work in areas concerned with adapting to climate change or provide solutions for reducing greenhouse gas emissions.
Before the storm: Hurricane Ike approaching the coast of Texas in September 2008.
The Munich Climate Insurance Initiative (MCII) succeeds in incorporating insurance solutions for the developing nations into the Intergovernmental Panel on Climate Change. Under the Kyoto Protocol, which is valid until 2012, insurance options have not yet been explicitly formulated.
The Board of Management satisfied all its reporting obligations towards the Supervisory Board. We were informed directly of all decisions of fundamental significance and, where necessary, granted our approval after detailed consultation and examination. The Board of Management reported to us regularly both orally and in writing about all important business transactions. We debated these reports at our meetings and regularly discussed suggestions and proposals for improvement. The Board of Management sought our advice in its deliberations and decisions. Collaboration between the Boards was always open, constructive and characterised by a spirit of mutual trust.
Between the meetings, the Board of Management reported to us on an ad-hoc basis concerning current activities in the Group – for example, the key figures of the 2007 financial statements, the setting-up of a reinsurance subsidiary in Brazil, a further primary insurance joint venture in India, and the losses due to Hurricanes Gustav and Ike. The Board of Management informed us several times (also in writing) of the development of the financial crisis and its effects on Munich Re, as well as of the resulting opportunities for the Group. We were also involved in Munich Re’s participation in the rescue package for Hypo Real Estate and in the purchase of the Hartford Steam Boiler Group, a former AIG subsidiary.
At no time in the year under review did we see cause to carry out inspection measures in accordance with Section 111 para. 2 sentence 1 of the German Stock Companies Act.
Work of the committees The composition of the committees of the Supervisory Board (Personnel Committee, Audit Committee, Standing Committee, Nomination Committee and Conference Committee) is shown in the overview on page 63. Dr. Albrecht Schmidt as Chairman of the Audit Committee, and I as Chairman of the other committees, provided detailed information on the committees’ work at all meetings of the full Supervisory Board. Overall, committee work once again took up more time in the year under review.
The Standing Committee met three times in the year under review, devoting itself mainly to the preparation of Supervisory Board meetings and to topics of corporate governance. It also received regular reports on the status of the register of shareholders.
In the past financial year, there was once again no need to convene the Conference Committee as per Section 27 para. 3 of the German Co-Determination Act.
In November 2008, the Board of Management and Supervisory Board submitted their annual declaration of conformity with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act, which can be read on page 133 of this report and on the Company’s website.
The Supervisory Board also checked the Company financial statements, the Group financial statements, the Company management report, the Group management report, the auditor’s report and the proposal of the Board of Management for appropriation of the net retained profits. After conducting its own concluding examination and having heard the auditor’s report, the Supervisory Board raised no objections to the Company financial statements and Group financial statements prepared by the Board of Management, and agreed with the result of the audit. On 13 March 2009, it approved the Company financial statements and Group financial statements. The financial statements were thus adopted. Having carefully considered all the relevant aspects, the Supervisory Board also agreed with the Board of Management’s proposal for appropriation of the net retained profits.
Words of thanks to the The Supervisory Board wishes to thank the members of the Board of ManageBoard of Management and employees ment and all staff members in the Group for their hard work and personal commitment. They have done an excellent job in a difficult environment and achieved a respectable business result for Munich Re.
The financial sector worldwide was confronted with enormous problems in 2008. Contrary to hopes of a quick end, the subprime mortgage crisis in the US triggered a global contagion, depressing prices on the world’s stock exchanges to their lowest levels for several years. The share prices of banks were especially badly hit, but insurance stocks were also caught in the downward spiral, in some cases suffering severe price setbacks. It is therefore all the more gratifying that Munich Re’s share price performance for the year showed only a comparatively moderate loss of 16.5%. Investors rewarded our prudent investment policy, with its low equity-backing ratio and very limited involvement in the market for structured credit products. By contrast, the European insurance index EURO STOXX Insurance fell by 45.2%, whilst the global MSCI insurance index lost 46% on a euro basis.
With the collapse of US investment bank Lehman Brothers in mid-September, the market turbulence entered a new phase. It fast grew into a crisis of confidence in the whole financial system, with investors deeply unsettled. The VDAX, which functions as a kind of “fear barometer” for the German stock market, rose to record levels. Only after billion-dollar rescue packages from central banks and governments did prices bottom out in November and subsequently rise a little. Nevertheless, the DAX closed the year 40.4% down on the beginning of the year. The EURO STOXX 50 even fell by 44.3%, while the US indices Dow Jones and S&P 500 showed losses of 33.8% and 38.5% respectively.
But in the subsequent weeks, our shares demonstrated their relative strength. Whereas the DAX had climbed by just under 20% from its year-low by the end of December, Munich Re shares rallied by a pleasing 46%.
The performance of our shares is also striking from a longer-term perspective: over the last three and five years, their price – including dividend payments – has bettered the DAX.
Share price gains expected More than 40 banks and broker houses regularly evaluate Munich Re shares. by majority of analysts At the end of December 2008, 52% of the analysts recommended our shares as a “buy”, in some cases seeing substantial potential for price gains. Some 38% tagged the shares with “hold”, whilst only 10% gave them a negative rating.
Despite the reduction in the result for 2008, the Board of Management and Supervisory Board will therefore propose an unchanged dividend of €5.50 per share at the Annual General Meeting on 22 April 2009. Altogether, this would mean a total payout to shareholders of €1.074bn. Last year’s payout was €1.124bn. The dividend will be paid on 23 April 2009, the day after the Annual General Meeting.
Share profile Munich Re shares are no-par-value registered shares. Each share carries one vote. First admitted for trading on the stock exchange in Munich on 21 March 1888, they are today listed on all the German stock exchanges, although in the meantime trading takes place almost exclusively via the electronic trading platform Xetra.
Our largest shareholder at the end of 2008, with over 5%, was AllianceBernstein L. P., a US investment and asset management company belonging to the AXA Group. Its shareholding is designated a purely financial investment without strategic interest. Allianz SE reduced its share in Munich Re to below 2% when it redeemed its BITES convertible bond at the end of February 2008.
The proportion of international investors remained at around the same level as in the previous year. At year-end 2008, nearly 70% of the shares were held by foreign investors.
Since 2001, our shares have also been included in the Dow Jones Sustainability and the FTSE4Good index families. These sustainability indices only accept companies that fulfil exacting ecological and social standards and are among the best in their sector. Here Munich Re plays a pioneering role with its sustainability strategy and enjoys an excellent reputation among socially responsible investors (SRIs), who hold some 2% of our stock.
1 Percentage of share capital at 31 December 2008. Source: Munich Re share register
Besides our annual analysts’ conference on 8 May 2008, the investors’ days we held in London met with a very positive response: the event on 19 February 2008 was devoted to property-casualty reinsurance, whilst that on 7 October focused on life reinsurance. At our analysts’ conference on 3 March 2009, we presented our figures for the year 2008 as a whole and our strategy for the Munich Re Group, for primary insurance and for reinsurance. More than one hundred institutional investors took part in each case, either in person or via videostreaming.
High proportion of shares represented Some 4,100 investors accepted our invitation to the 121st Annual General at the Annual General Meeting Meeting on 17 April 2008 at the International Congress Center Munich. Many other shareholders arranged for their voting rights at the Annual General Meeting to be exercised by proxies, especially banks and shareholders’ associations. The proposals of the Board of Management and Supervisory Board on the individual agenda items were adopted by the shareholders with clear majorities in each case.
We publish the resolutions adopted at the Annual General Meeting straight away on our website. Our shareholders can find further important information regarding the Annual General Meeting at www.munichre.com/agm and in the dedicated section of our shareholder portal at www.munichre.com/register.
At year-end, the undated euro tranche was listed at 58.0%, the bond maturing in 2023 at 92.2%, and the pound sterling bond maturing in 2028 at 94.2%. Munich Re America’s senior bonds closed the year at 88.0%.
Munich Re continues to be among the companies with very low CDS spreads at both national and international level. At the end of 2008, the spread – and thus the implicit credit risk – was even lower than that of some western European states.
1 First callable on 12 June 2017. 2 First callable on 21 June 2013.
Bank Austria Creditanstalt Versicherung AG 5, Vienna €13m Secondary market yield on federal bonds (Austria) + 70 BP
Bank Austria Creditanstalt Versicherung AG 5, Vienna therafter fl oating 2001 Undated –
US$ 0.4bn6 7.45% 1996 2026 CUSIP No. 029163AD4 ISIN, Reuters: – Bloomberg: AMER RE CORP MUNRE
Transparent and consistent – that is the essence of Munich Re’s approach to implementing its strategy. In May 2007, we unveiled our Changing Gear programme for profitable growth and our corporate objectives for the years up to 2010. In this period, we aim
Our financial strength, reflected in these payouts, certainly played a key part in our clients’ voting us “Best Overall Reinsurer” in life and non-life in the Europewide Flaspöhler survey last autumn.
For instance, we have transferred Europäische Reiseversicherung and Mercur Assistance – previously held directly by Munich Reinsurance Company – to ERGO, where they will become part of a new centre of competence combining our insurance and services for the growing market of private and business travellers.
The acquisition of the remaining shares in the Turkish company ERGOISVIÇRE from the family founders and additional shares in Bank Austria Creditanstalt Versicherung were important steps in further internationalising ERGO, even if the global economic crisis is likely also to have a curbing effect on the development of these subsidiaries in the immediate future.
Realignment in the USA In the USA, the world’s most important insurance market, we have decided on gains momentum a strategic realignment of our business, which we have lost no time in implementing: in April, we concluded the acquisition of specialty insurer The Midland Company and also purchased The Roanoke Companies, a large underwriting agency and broker of marine insurance. Roanoke complements the international network of our Watkins Syndicate, which has not been represented in North America before. In return, Roanoke can offer its clients the broader spectrum that Watkins provides.
From virtuality to reality International Health, our third field of business alongside primary insurance and reinsurance, was last year more closely unified, regionally aligned, and given its own management, establishing it even more clearly as a third pillar in the Group. International Health integrates our Group’s international ex pertise and more than 20 years’ experience with health risks, in a market that is growing at an above-average rate globally.
Knowledge at work Risk management 21Munich Re Group Annual Report 2008
The law of gravity appeared to have been suspended. But what had soared to dizzying heights then plummeted: mortgages without collateral, credit without cover. New virtues have arisen from the crisis. The natural laws that no longer seemed to apply have been rediscovered. Securities must be secure, solidity must be solid. Knowledge must be applied – only then is it significant. Munich Re has always respected these laws – and has done so openly and transparently. This led a few of the high-fliers to look down on us. We ignored them, and concentrated on our core business: risks and their management. Because excellence in risk management is what makes us a leading risk carrier. And our knowledge is always at work.
Munich Re is one of the world’s largest investors. Did the fi nancial crisis cause you sleepless nights last year? Jörg Schneider: 2008 was a very turbulent year, of course, but I never suffered sleepless nights. Probably because of my conviction that we had made Munich Re crisis-proof at an early stage. Joachim Oechslin: We had acted very prudently. But I cannot deny that I was a bit tense, perhaps like a student who has prepared very well for his fi nals but is still nervous the night before the exam.
Schneider: I quite agree. We are also more resilient, because our business portfolio is widely diversifi ed. With primary insurance and reinsurance under one roof, we can compensate better for negative developments in individual segments.
In his best-seller “The Black Swan”, fi nancial mathematician Nassim Taleb criticises the false certainty of supposed knowledge derived from the conventional consideration of risks. Can models still be relied on or is a dash of intuition also needed? Schneider: Intuition is good, but fi rst and foremost the head must rule the heart. Around the turn of the century, many companies in the fi nancial sector established risk management systems which seemed to offer certainty. In the belief that risk managers had understood and checked everything, decision-makers took on risks that they did not really comprehend. Common sense was neglected because people believed that protection mechanisms had been institutionalised.
Looking ahead, do you see a danger that risk managers may overreact and miss opportunities because of extreme risk aversion? Schneider: Yes, and that would be a pity, because opportunities are now opening up for which we have waited a long time. The phase of extreme risk aversion should be relatively short. It is part of people’s nature to forget quickly – often too quickly – when things start to get better again. Oechslin: But that does not mean that the crisis is over. In recent months, we have seen recurrent setbacks after brief phases of recovery, with companies who thought they were safe needing government help shortly afterwards.
How could uniform global supervisory rules help stabilise the system? Oechslin: They could contribute a great deal. With Solvency II, we have a set of rules on the table that is just right for the insurance industry, also in the light of this crisis. Solvency II would be a huge advance. However, there is the danger that the good fundamental concept may fall victim to political rejection or poor compromise.
My greatest concern in such a case is that the fi nancial sector will be hit by a blanket wave of regulations which are either unsuitable or even destructive for the insurance industry.
Walter Stahel (left) from the Geneva Association and Jo Oechslin, CRO Munich Re.
Margarita von Tautphoeus of Munich Re and René Cado, CRO Groupama.
Choline crystals: A significant com ponent in the formation of neurotransmitters, choline affects the performance of the brain. Just as all substances in the chemical process complement each other. we can only achieve the highest level of competence by exchanging knowledge with other experts.
The risk landscape in the global market is changing at a breathtaking pace. This means the demand for coverage of complex risks and multifaceted accumulation hazards is continually increasing. With a view to being the leader in product development, underwriting and risk management, we analyse, evaluate and quantify a constantly widening spectrum of risks and scenarios. In doing so, we build on our experience, use sophisticated models and continually advance our own specialist knowledge. But through cooperations and networks we also draw on the expertise of external partners who can provide precisely the knowledge we need: RMS, RAND, GEM or the LSE – four examples that impressively underline our new cooperation strategy.
What benefi t do we derive from networking with other knowledge car riers? Board member Torsten Jeworrek puts it like this: “Ultimately every cooperation must provide added value for our clients or our shareholders. We want to constantly improve our own risk knowledge and our methods and models in terms of quality, breadth and speed, to ‘refi ne’ more risks, to respond at an early stage to emerging risk complexes, to make these controllable and thus to push back the frontiers of insurability.
Everyday impact of climate change: Farming is especially affected by weather extremes – worldwide.
Since October 2008, Munich Re has been collaborating with the renowned London School of Economics and Political Science (LSE). Munich Re is a founding corporate partner of the Centre for Climate Change Economics and Policy, chaired by Professor Lord Nicholas Stern within the new Grantham Research Institute. What implications does climate change have for the economy? To fi nd out, the British government commissioned the services of Sir Nicholas Stern, former Chief Economist at the World Bank. In 2006, he presented his results: doing nothing would be more expensive than acting. According to Stern, the economic costs of climate change would be much higher than the economic costs that would be incurred as a result of taking swift action. Nicholas Stern in response to the question of what he expects from the cooperation between the LSE and Munich Re: “Policy on climate change must be effective, effi cient and equitable, both in reducing emissions and in adapting to the consequences of changes that occur. The formulation of policy in accordance with these principles requires careful analysis of risk and practical policies. As one of the leading reinsurance companies in the world, Munich Re analyses risks and their management in a careful and thoughtful way. They are ideal partners for this very important work.” At the interface between climate research and economics, the partners aim to describe more precisely the implications of climate change for industry and insurance. At the same time, the benefi ts of adaptation and prevention strategies and of the related expansion of new technologies are to be made calcu lable.
The fi ndings are to inform decision-makers in politics and at company level and to identify approaches for innovative solutions in the fi nance and insurance industry. The research projects of the fi ve-year cooperation agreement are combined in the independent Munich Re programme “The Economics of Climate Change and Opportunities for the Insurance Industry” and support our strategic business development, including innovative risk solutions.
Lord Stern outside the London School of Economics and Political Science.
Natural hazards – Both an accumulation risk and a risk of change
31Munich Re Group Annual Report 2008 35_Magazinteil_e 31 13.03.2009 13:10:04 Uhr
RAND and Munich Re – Close liaison With around 1,600 employees, the RAND Corporation (Research ANd Development) is the largest think tank in the USA. The nonprofi t, politically neutral organisation was set up after the Second World War. It advises politicians on important social issues of security and education, healthcare and the legal system. Munich Re is the only European company represented on the Board of the US RAND Institute for Civil Justice, and is also on the Board of the newly formed RAND Europe. There is close cooperation on the issue of mass litigation. Eight case studies on the subject of “complex litigation” deal with the great variety of technological, social and fi nancial risks. Our active role and contributions are much sought after, not least owing to our external perspective of the US system and our overview of differently structured insurance markets and legal systems. The exchange of views with leading experts, including judges, lawyers and representatives from insurance companies, gives us an excellent insight into circumstances and experiences in the US market. Besides this, contacts are established with the interdisciplinary network of RAND experts.
Mass litigation is an area of particularly close cooperation between Munich Re and the RAND Corporation.
But we also keep an eye on the opportunities, given that there will be signifi cant growth in the demand for insurance solutions, e.g. for new technologies and renewable energies, as part of adjusting to the already unavoidable consequences of climate change and curbing a further increase in temperature.
The specialists in CCC form a knowledge hub for all questions relating to this topic and are the link between geoscientifi c research and operational business. They advise underwriters and clients on the development of future-oriented products.
Over 80,000 copies of the CD-ROM version of 2000 have been supplied to clients – a feat achieved by no other service product in Munich Re’s history. Since early 2009, the fully updated fourth-generation version has been available. The bilingual DVD (German and English) shows natural hazards and climate effects at a glance: the global maps are presented on a 3D globe, underlaid with satellite images.
The hazard complexes of hail, tornado, winter storms have been completely revised and fl ood incorporated as a new hazard. Users can home in on and enlarge any location on earth, and an extensive location database makes searching easy. The knowledge modules for historical catastrophes, megacities and change processes can be linked with each other and displayed on the maps.
Completely new is the integration of the topic of climate change: various depictions of climate effects and projections show in which regions of the world risk situations are likely to arise in future. Thanks to its comprehensive information, the globe is an important tool for identifying risk locations worldwide, evaluating them from a geoscientifi c perspective, and thus increasing transparency.
But see for yourself: on the last page of this annual report, you can fi nd our current DVD edition of the Globe of Natural Hazards.
Expenditure on health is increasing worldwide The healthcare market has achieved growth rates almost unmatched by any other business sector in recent years. And this is by no means just a passing trend: According to estimates by the World Health Organization (WHO) and Munich Re, health expenditure is likely to more than double by the year 2015 compared with 2005.
Knowledge at work International Health 35Munich Re Group Annual Report 2008 35_Magazinteil_e 3535_Magazinteil_e 35 13.03.2009 13:15:12 Uhr13.03.2009 13:15:12 Uhr
DAMAN offers two products: a statesubsidised basic policy, which covers visits to the doctor and in-patient stays in private and state hospitals, and additional private cover. The basic plan is designed for all foreign employees (“expats”) who earn less than €900 a month, i.e. about 75% of them. “For the basic policy, we currently have around 850,000 clients”, explains Bitzer. In this case, the state of Abu Dhabi carries the risk alone, while Munich Re organises the administration and handles the day-to-day business.
Other factors besides risk knowledge are key. “Our staff hail from 42 countries. It is certainly benefi cial if they have already gained experience with a range of different mentalities in a globally operating group”, says Bitzer, underlining this strength. But marketspecifi c customs also play a central role. The DAMAN CEO, who has been working in the Arab region since 2001, speaks from experience: “Trust and personal contact are even more important here than elsewhere.” A good deal of patience is also required. “Decisions usually take a long time, but once they have been reached, business partners attach importance to putting them quickly into practice.”
Besides further growth in Abu Dhabi, we intend to transfer the successful model to other countries. We have already established initial contacts with governments outside the Gulf region as well, and interest is huge. Our experience from Abu Dhabi will help us to develop integrated healthcare models. For the fact is that problems such as the lack of medical or billing standards are similar in most of the emerging markets. The healthcare market is undergoing change in Europe, too. In Spain, for example, we are demonstrating our competence as a health insurer in the new pilot project DKV Seguros in the Denia region.
In autumn 2008, International Health began a visionary project for a public-private partnership in the Denia region on the Costa Blanca. Over the next 15 years, our Spanish subsidiary DKV Seguros will assume responsibility for the public healthcare of the 225,000 inhabitants of the municipality of Denia and for the 350,000 tourists who visit the region annually. The objective is improved medical care at a lower cost. The key is a closer networking of medical providers and expansion of the infrastructure with medical centres and a hospital. This integrated healthcare concept from a private provider is unique in Europe and is likely to become a model for other regions.
Aren’t you concerned that you might run out of steam, given the fi nancial market crisis? Oletzky: Defi nitely not! We deliberately set long-term goals and have the necessary qualities of endurance. Therefore, it would be wrong to scale back our ambitions because of the admittedly diffi cult events of recent months. We won’t lose our heads, just because such tasks cannot be solved in one year. Besides, we have already made a good deal of progress. In Germany, we have successfully initiated our cost and effi ciency programme and paved the way for its implementation.
We are also making rapid advances internationally, having launched our cooperation with UniCredit banks in central and eastern Europe, for ex ample.
The fi nancial crisis, which started smouldering in mid-2007, has got worse and now has the whole economy fi rmly in its grip. Where does it affect you most? Oletzky: The direct consequences are evident in our investments. In the medium term, the insurance industry will not be able to fully escape the consequences of a recession on the premium side either. But you have to differentiate: demand for propertycasualty insurance is naturally more dependent on the state of the economy. A recession will curb its growth. By contrast, the fi nancial market crisis presents additional opportunities for traditional life insurance. Clients are attaching more importance to stability and security again. And precisely these are life insurance’s strengths. I am convinced that this instrument of old-age provision will regain importance in relation to other forms of investment.
Currently, 75% of the premium in come comes from Germany, but there are limits to growth in this market. So you are aiming to make your business more international. Where is the journey heading? Oletzky: Our international expansion is clearly focused on eastern Europe and Asia. In eastern Europe, we are already present in several markets and we will tap into others through our cooperation with UniCredit. We have set up a joint back offi ce in Austria for this purpose, and our position has been further strengthened by the acquisition of a majority stake in BACA Versicherung, taking us into third place in the Austrian life insurance market. We have also established a footing in India and South Korea. With our joint-venture partner HDFC, we are already doing business in property-casualty on the Indian subcontinent.
What percentage of foreign business are you aiming for in the medium term? Oletzky: Since the formation of ERGO, we have continually expanded our international business. Whereas in 1997 only 8% of our premium income came from abroad, today the fi gure is around 25%. By 2012, international business is set to account for a third of our corporate value – an absolutely realistic target.
Might the fi nancial crisis even play into your hands, as regards potential acquisitions, for example? Oletzky: Of course, there will be opportunities, and we are currently looking at a number of options with colleagues from Munich. But we are carefully scrutinising what matches our strategic goals and whether the basis is right. Before paying too much for an acquisition, we would rather grow organically.
What role does belonging to the Munich Re Group play in realising your international strategy? Oletzky: Munich Re’s global presence and its in-depth knowledge of the different insurance markets are an entrance ticket. Let’s take India. Without Munich Re’s market knowledge and reputation, it would not have been possible to fi nd a suitable partner and begin operations in such a short time. At the same time, we make use of our broad set-up. We have experts for all classes of insurance and distribution channels, and their joint specialist knowledge is a powerful asset. With this combination, we can push forward into new growth markets and diversify further.
“By 2012, international business is set to account for a third of our corporate value – an absolutely realistic target.”
Like a phoenix from the ashes: The Yas Island megaproject is scheduled to be realised in the desert sand of Abu Dhabi by 2014. Behind the 34-billion dollar project is the financial strength and risk management of Munich Re.
Particularly in the United Arab Emirates, structures are being constructed that could have come from a science fi ction fi lm. At the end of 2008, the island of Palm Jumeirah was opened in Dubai, which is also where Burj Dubai with its incredible height of 820 metres will be fi nished in the autumn of 2009. In the neighbouring emirate of Abu Dhabi, the foundation stone was laid at the end of 2007 for Yas Island, a 25-km² complex around the new Formula One track with theme parks, hotel complexes, shopping centres, apartments, and yacht harbours. Munich Re is the leading reinsurer for these gigantic projects and is also responsible for risk management on the insurance side. How did this come about?
Munich Re’s expertise in the fi eld of engineering insurance is second to none – and has been for over a hundred years. Starting with the relatively simple form of machinery insurance that was introduced in 1900, concepts soon evolved for insuring more complex projects. Erection all risks insurance was brought onto the market with Munich Re’s support in 1924, and special insurance cover for buildings and structures has been available since 1929. The sums for mega-buildings, which are covered under such policies, are in the multi-billion euro range nowadays.
Dubai: Burj Dubai, currently the tallest building in the world (above) and the aquarium in the newly opened mall (below) attract visitors from all over the world.
Munich, November 2007: The phone rings in a Leopoldstrasse offi ce. A primary insurer from the Arab region is seeking reinsurance backing for Yas Island, currently the world’s largest single construction project. The insurer proposes a meeting in Abu Dhabi to discuss the details. Christian Bendel, a civil engineer at Munich Re with responsibility for projects in the Middle East, shakes his head when he hears that the industrious executive from the local project developer thinks it will take only a 15-minute presentation plus question time to clear up all the technical points that need to be discussed before we can make an offer. Just over an hour for a 34-billion-dollar project involving about a hundred separate construction sites all being handled by different fi rms? Is that really pos sible?
Abu Dhabi, Summer 2008: Our expert is on the scene again, accompanying the insurer on an inspection of the construction site and talking to the project developer’s representatives. In order to provide the client with optimum risk management, Munich Re has also acquired the services of the local offi ce of an international fi rm of engineering consultants. Their representatives visit the site just about every other day and act as our “extended arm”.
But this is no substitute for exercising control ourselves: “The external en gineers are always present, they keep their eyes and ears open for us, and they report to us on a regular basis, but every other month we take a look for ourselves. After all, risk management from the technical perspective of a reinsurer is a question of experience. You really do learn from losses. Munich Re has already been confronted with scen arios that even long-serving site managers have not experienced or have fortunately not been forced to experience.” Fire protection, for example, is of major signifi cance because the majority of losses are caused by fi re. Just one little discarded cigarette can cost many millions. “It is our job to apply our powers of persuasion and to push through the measures that are necessary. And this is something we can do, as evidenced by the work on Dubai Mall, where the fi re protection measures were tightened following Munich Re’s intervention, with sprinkler systems being installed in the storage area,” the engineer ex plains. “Dubai Mall was inaugurated at the beginning of November 2008. We were able to complete this project without any major losses.”
Christan Bendel worked for an international construction company for ten years before joining Munich Re, where he is currently an underwriter for facultative business in a team of some twenty civil engineers. In his former role, he was responsible for the acquisition of large projects and for project and site management.
Munich Re Group 49 Structure of the Munich Re Group 49 Important tools of corporate management 54 Binding standards for underwriting and pricing 60 Governing bodies of the Munich Re Group 61 Other seats held by Board members 64
Business performance 70 Overview and key fi gures 70 Reinsurance 75 Life and health 77 Property-casualty 82 Primary insurance 91 Investment performance 97 Investments of the Munich Re Group 97 Third-party investments 109
Financial position 110 Analysis of our capital structure 110 Asset-liability management 111 Capital management 111 Group equity 113 Information in accordance with Section 315 para. 4 of the German Commercial Code and explanatory report of the Board of Management 114 Strategic debt 116 Group solvency 117 Rating 118 Analysis of the consolidated cash fl ow statement 120
Risk report 155 Risk governance and risk management system 155 Economic risk capital 162 Available fi nancial resources 167 Selected risk complexes 169 Outlook 171 40_Lagebericht_e 4840_Lagebericht_e 48 10.03.2009 11:29:05 Uhr10.03.2009 11:29:05 Uhr
The Munich Re Group is one of the world’s leading risk carriers. Our business covers the whole value chain in insurance and reinsurance, and we are also active in the field of asset management.
The reinsurance companies in our Group operate globally. Our primary insurers traditionally concentrate on Germany and European markets with strong growth, but have meanwhile been looking to extend their activities to highpotential Asian markets such as South Korea or India. We conduct our business from our respective headquarters and also via a large number of branches, subsidiaries and holding companies. Domination and profit-transfer agreements are in place with many subsidiaries, especially between ERGO Versiche rungsgruppe AG and its subsidiaries. Since 2005, “unified control” within the meaning of the German Stock Companies Act has existed between Munich Reinsurance Company and the ERGO Insurance Group. The relevant statutory regulations and a Group directive govern the distribution of responsibilities and competencies for key decisions between Group management and ERGO.
The Board of Management, which for legal purposes represents Munich Reinsurance Company externally, has created two Board committees, the Group Committee and the Reinsurance Committee, with a view to maintaining clearly defined strategic management of the equal-ranking business fields and to clearly assigning responsibility.
As at 31 December 2008, our reinsurance business was organised in seven divisions. As part of our Changing Gear programme, we adjusted our set-up with effect from 1 April 2008 to the new requirements in our business environment, creating client management positions and separate underwriting functions in the divisional units. This puts our organisation in a position to cooperate closely with our cedants in designing solutions geared even more specifically to their needs.
Special and Financial Risks is in charge of the classes of credit, aviation and space, agriculture, enterprise, contingency and political risks, and of alternative markets business. Insurance risk securitisation and risk transfer to the capital markets are handled by our Risk Trading Unit, which includes the entity Munich Re Capital Markets New York. In addition, the division also attends to our own reinsurance requirements (retrocession).
Life Allfinanz Limited, Dublin Munich Reinsurance Company of Australasia Ltd, Sydney Munich Reinsurance Company UK Life Branch, London Munich Reinsurance Company Canadian Life Branch, Toronto Munich Reinsurance Company Life Reinsurance Eastern Europe/Central Asia, Moscow Munich American Reassurance Company, Atlanta, Georgia Munich Re India Services Private Limited, Mumbai Family Caring Network Inc., Waltham, Massachusetts Munich Re Polska Services So. Z. o. o., Warsaw Münchener Consultora Internacional S. R. L., Santiago de Chile LifePlans LTC Services, Inc., Ontario Munich Life Management Corporation Ltd., Toronto
HealthCare Cairnstone Inc., Wilmington Sterling Life Insurance Company, Bellingham MedNet Greece S. A., Athens Jordan Health Cost Management Services W. L. L., Amman Apollo DKV Insurance Company Limited, Hyderabad DKV Salute S. p. A., Milan MedNet Bahrain W. L. L., Bahrain MedNet Gulf E. C., Manama MedNet Sağlik Hizmetleri Yönetim ve Danismanlik Anonim Sirketi, Istanbul MedNet UAE FZ L.L.C., Dubai MR Salute S. r. L., Milan Newmed S. p. A., Milan
Special and Financial Risks Great Lakes Reinsurance (UK) Plc., London Great Lakes Australia Branch, Sydney Great Lakes Switzerland Branch, Zurich Munich Re Capital Markets New York, Inc., Wilmington, Delaware Munich Re of Malta Holding Limited, Floriana Munich Re of Malta p. l. c., Floriana New Reinsurance Company, Geneva Nouvelle Compagnie de Réassurance, Hamilton
Primary insurance group The second pillar of the Munich Re Group is primary insurance business.
1 In 2008, the Watkins Syndicate was shown in primary insurance. From the 2009 financial year, it will be reported in reinsurance, reflecting the fact that Watkins has been incorporated into the reinsurance group.
2 Only ERGO companies with a premium volume of more than €50m are listed by name.
D. A. S. subsidiaries and branches in Austria, Belgium, Canada, the Czech Republic, Estonia, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland, the Slovak Repub lic, Spain, Switzerland, and the UK
With locations in 14 countries, as well as a network of strategic cooperation agreements, Europäische Reiseversicherung is an effective international alliance. Its most important product is travel cancellation insurance. With its integration into ERGO, we have established a Travel Centre of Competence, combining the whole range of travel-related insurance products.
Asset management MEAG MUNICH ERGO AssetManagement GmbH combines Munich Re’s and the ERGO Insurance Group’s investment activities. Virtually the entire asset management of the Munich Re Group has been concentrated in MEAG, which as at year-end 2008, had the major part of the Munich Re Group companies’ investments under management. Its subsidiary MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH is one of the major investment fund companies in Germany. It also offers its extensive know-how to external institutional investors and private clients, whose assets under management total around €9bn.
Munich Re’s value-based The Munich Re Group’s objective is to analyse risks from every conceivable management philosophy angle and to assess and diversify them, thereby creating lasting value for its shareholders, clients and staff. A guiding principle of our entrepreneurial thinking and activity is to increase Munich Re’s share price on a sustained basis. This is also the aim of our active capital management, be it through the payment of dividends or the repurchasing of shares if added value cannot be created for our shareholders through other measures. The main features of our shareholder value approach in practice are the consistent application of value-based management systems within the Group. In our view, this is one of the main reasons why Munich Re shares held up well, despite the difficult capital market environment in 2008.
Besides value-based performance measures, we observe a range of important additional conditions in managing our business. These conditions may be reflected in supplementary targets within the Group, or in isolated cases may even determine a unit’s short-term orientation in a particular situation. They include the rules of local accounting systems, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements.
– With value-based performance indicators we ensure the necessary comparability of alternative initiatives and prioritise them.
All initiatives are ultimately geared to the overriding financial objective of enhancing corporate value.
Our value-based management In property-casualty insurance and reinsurance and in health reinsurance, system takes into account the i.e. business that is mainly of a short-term nature, we employ the following individual characteristics of the simple formula for measuring the value added annually by our insurance business segments business and for managing and monitoring our business activities: The adjusted result serves as the basis for determining the value added. It consists of the technical result (derived from the income statement), the investment result, and the remaining non-technical result. In each case, value-based adjustments are made, including the smoothing of expenditure for major losses, the normalisation of investment income, and the recognition of future claims expenses at present value.
We compare the result adjusted in this way with the requisite cost of equity. A significant factor in the calculation of the cost of equity is the risk-based capital, which we determine using our internal model. In the property-casualty business and health reinsurance measured on the basis of one calendar year, value is added to the extent that the adjusted result exceeds the cost of equity.
The products of life primary insurance and reinsurance, and the bulk of our health primary insurance business, are characterised by their long-term nature and the distribution of results over the duration of the policies. For valuing such long-term portfolios, whose performance cannot be reasonably measured on the basis of a single year, we follow the Principles and Guidance of European Embedded Value, published by the CFO Forum in May 2004. Even if we, like most companies, have not yet fully applied the Market Consistent Embedded Value Principles© for 2008, the calculation of our embedded value is already determined on the basis of market-consistent principles.
The development of the insurance portfolio is modelled according to the current expectations for biometrics, lapses and costs. In primary insurance, the participation of policyholders in surplus is modelled according to the current planning and in line with the statutory regulations, and thus taken into account in the valuation. The embedded value is also shown after deduction of taxes to be paid by the Group in connection with the valued business. For the individual companies, the tax rates and calculations used are based on national regulations; in add ition, tax loss carry-forwards are included in the calculation. Withholding taxes on dividends of Group companies are disregarded. The cost of holding capital includes not only the taxes and costs of investment management but also the not explicitly modelled risks of the business and, for primary insurance, the participation of policyholders in profits.
In addition to these purely financial performance factors, non-financial performance measures like innovation, speed of processes, staff-training level and client satisfaction play a part. In the long term, a firm can only be successful if it operates sustainably and takes account of such future-oriented qualitative factors as well.
We closely link strategy and operative planning by defining our strategies in structured overviews or “scorecards,” from which we derive initiatives, performance measures and responsibilities. The scorecards have four dimensions: “financial”, “market and client”, “process” and “employee”. We promote an entrepreneurial culture among our staff through the clear allocation of responsibility and accountability, recognising how much the individual, unit or field of business contributes to increasing value. As part of our Changing Gear programme, we have enhanced the incentive systems for staff, executives and the Board, thus supporting our clear commitment to value creation. The higher a staff member or executive is positioned in the management hierarchy, the more strongly their remuneration is based on performance.
In order to give more emphasis in external communication to the Munich Re Group’s value orientation – as implemented through our internal management tools – we have geared our Group return target to risk-adjusted performance indicators, which are explained in more detail below.
In the past year, the business of insurance companies was strongly impacted by the financial crisis, and the Munich Re Group also felt the effects. As a result of the financial market turmoil in 2008, our return on risk-adjusted cap ital, which stood at 6.9%, fell clearly short of our general target of 15% after tax over the full cycle (a definition of RORAC is provided on page 59). The main reason for this was the return of 3.4% (5.2%) on our investments, which was lower than the long-term average. The return on investment is the ratio between the investment result of €5.8bn and the average market value of the investment portfolio at the year-end and quarterly reporting dates, totalling €172bn. With the Munich Re Group’s absolute consolidated profit declining to €1.5bn, the return on equity or RoE fell to 6.7% in terms of the average value of IFRS equity at the year-end and quarterly reporting dates. Compared with our competitors, however, the Munich Re Group has weathered the financial crisis well thanks to our especially robust capitalisation and balanced investment policy. This fact is reflected in particular in the development of our share price, which has sustained significantly lower losses than those of our competitors.
When it comes to interpreting the combined ratio, the particular circumstances of the class of business in question have to be taken into account. The composition of the portfolio, for example, is of great significance. The following factors (among others) are important: – The more the claims burden fluctuates over time, the greater the risk is and so the premiums needed to cover the risk must be higher. This means that the loss ratios in good years are low, as are the average loss ratios that provide the reinsurer with an adequate return for assuming the risk. This is particularly true in the case of natural catastrophes, which may occur rarely, but are often very severe when they do.
– Another important distinguishing feature relates to the time-lag between premiums being received and claims being paid. The longer such a period is, the longer the premiums received can be invested in the capital markets. High combined ratios in classes of business in which claims settlement takes a long time (e.g. casualty) therefore generally entail higher returns from investments with which the loss reserves are covered. These returns are not reflected in the combined ratio.
Given the financial crisis and the clear signs of a worldwide recession, it is difficult to define guidelines for our future entrepreneurial success. Nevertheless, the targets we have set ourselves for 2009 are ambitious against the background of the crisis. Whether we achieve them is naturally highly un certain in such a situation. For this purpose, we are employing a risk-based performance measure which we have used for external communication since 2006: return on risk-adjusted capital (RORAC). We derive this target by placing the profit achieved or aimed at, expressed in euros, in relation to the necessary risk capital, the amount of which we determine using our internal risk model and publish once a year. Information on the internal risk model is provided on page 162. We thus take into account the economic standards currently underlying (at least to some extent) the requirements of supervisory authorities and rating agencies – standards that are set to play a decisive role in future.
RORAC is defined as follows: The numerator in the formula comprises the published IFRS net income adjusted for post-tax income (interest rate x [1 – tax rate]) generated on capital not subject to risk within the given risk tolerance. The basis for the adjustment is the capital exceeding the necessary risk-based capital, which is referred to as additional available economic equity. Its determination is described in detail on page 168. It is also necessary for rating and solvency purposes, as well as for profit able growth, but we strive to keep it lean through our active capital management. This is because the additional available economic equity in the system presented here only earns a risk-free interest rate, as all the risk com ponents of the investment and underwriting are covered with risk-based capital by the internal risk model, and thus assigned return requirements. Even though we take a risk-adjusted return as our target, we aspire to meet the high, but fair expect ations of our investors also with regard to the return on total capital placed at our disposal.
What assumptions is this In both primary insurance and reinsurance, we are proceeding on the basis of target based on? statistically expectable claims experience. Provided there are no significant shifts in the composition of our business portfolio, we reckon with a combined ratio in the order of 97% in property-casualty reinsurance, which includes an amount of 6.5% of net earned premiums as projected claims expend iture for natural catastrophes. In property-casualty primary insurance, we expect a combined ratio of under 95%.
Embedded values as In life primary insurance and reinsurance and in German health primary additional performance indicators insurance, European Embedded Value (EEV) is one of the foundations of our value-based management.
In primary insurance, we write both personal lines and commercial business. This results in a heterogeneous portfolio of risks. We therefore have line- and segment-related guidelines for pricing and underwriting designed to ensure the requisite risk balance in the community of policyholders. In addition, the actuaries responsible (life and health insurance) and the heads of the actuarial departments (property-casualty insurance) make sure that pricing is appropriate and that sufficient reserves are set up to cover the obligations assumed. We regularly check by means of independent audit processes that these guidelines are appropriate.
Board of Management Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management) (Chairman of the Group Committee) Group Development Group Investments Group Communications Group Audit Group Executive Affairs
Conference Committee Dr. Hans-Jürgen Schinzler (Chairman) Herbert Bach Dr. Bernd Pischetsrieder Judy Võ
Nomination Committee Dr. Hans-Jürgen Schinzler (Chairman) Dr. Bernd Pischetsrieder Dr. Albrecht Schmidt 40_Lagebericht_e 6340_Lagebericht_e 63 10.03.2009 11:29:05 Uhr10.03.2009 11:29:05 Uhr
Dr. rer. pol. Thomas Blunck Münchener & Magdeburger Global Aerospace Underwriting Managers Ltd. Agrarversicherung AG (GAUM), London New Reinsurance Company, Geneva2
Dr. rer. pol. Peter Röder EXTREMUS Versicherungs-AG Munich Re America Corp., Wilmington2
Supervisory Board3 Seats held on supervisory boards of Membership of comparable bodies of other German companies German and foreign business enterprises
Prof. Dr. rer. nat. Drs. h. c. mult. Bayerische Motoren- Werke AG Georg von Holtzbrinck GmbH Hubert Markl
Dr.-Ing. e. h. Bernd Pischetsrieder Dresdner Bank AG Tetra-Laval Group, Pully METRO AG
Dr. phil. Ron Sommer – Motorola Inc., Schaumburg JFSC Sistema, Moscow Tata Consultancy Services Ltd., Mumbai Weather Investments S. p. A., Rome 4 Own group company within the meaning of Section 18 of the German Stock Companies Act.
Our business environment is one of increasing complexity, with an upward trend in natural catastrophes. We are also seeing a disproportionate rise in man-made losses in relation to economic activity. The causes for this include climate change, technological progress and advancing geopolitical interdependencies. In addition, concentrations of values are mushrooming and regions are becoming ever more dependent upon each other. New risk potentials and accumulation hazards are emerging as a consequence of these developments, meaning that risk models require continual refinement and the swift incorporation of new findings.
Fundamental changes are also resulting from demographic trends. In combination with falling birth rates, increasing life expectancy is placing enormous pressure on pay-as-you-go social security systems. By 2030, every two people in paid work in Europe will have to finance one person who is not. This means Europeans can only maintain their standard of living and high-quality healthcare in the medium term if they make additional private provision – a major opportunity for the private insurance industry.
Economy The effects of the financial crisis dampened global economic growth in 2008. China, Europe and the USA remained the principal engines of the global economy.
In the first half of 2008, the global environment was characterised by price increases for commodities, especially oil, and foodstuffs. In the wake of this, inflation rates in most industrial nations rose to the highest levels for many years. This development reversed in the second half of 2008. Owing to the global economic slowdown, a reduction in inflationary pressure was observable. Nevertheless, seen over the course of the year, rates of inflation in the USA and the eurozone increased compared with the previous year. Extensive government rescue packages were launched in response to the problems of the international financial markets. Furthermore, the central banks of the largest economies slashed their key interest rates. The US Federal Reserve, for example, reduced its reference interest rate from 4.25% at the start of the year to 0–0.25% at the end of 2008. The European Central Bank lowered its reference interest rate from 4.0% to 2.5%, and the Bank of England cut its key interest rate from 5.5% to 2.0%.
Owing to a drastic decline in growth in the fourth quarter, the Japanese economy shrank by 0.7% in real terms in 2008, contrasting with expansion of 2.4% in 2007.
Economic growth also weakened in the eurozone in 2008, amounting to 0.7% in real terms, a much lower figure than that of the previous year (2.6%). There were again substantial regional differences, partly because the impact of the financial crisis varied in intensity from country to country. The increase in real GDP in the Netherlands and Greece, for example, was well above average, whereas economic growth in Italy remained below par and Ireland experienced a decline in GDP.
Germany’s economy was also weaker in 2008 than in the previous year, but was better than the eurozone average. The most significant contributions to growth came from investments and the export sector. Robust growth until the middle of the year had a positive effect on the labour market. The unemployment rate stood at 7.4% in December and was thus 0.7 percentage points lower than in December 2007.
Economic deceleration effects were particularly noticeable in the UK, which was hit relatively hard by the turbulence on the international financial markets. GDP grew by only 0.7% in 2008, compared with 3.0% in 2007.
Capital markets The international stock markets experienced historic share-price setbacks in 2008. The EURO STOXX 50 declined by 44.4% over the course of the year. In the USA, the S&P ended 2008 down 38.5% overall. The DAX lost 40.4% compared with the beginning of the year, and the Japanese Nikkei Index recorded a decrease of 42.1%.
Premium development in the insurance industry, particularly in propertycasualty insurance, is strongly influenced by the overall economic situation, and further by the effects of the market cycle. Apart from macroeconomic stimuli, changes in the legal and tax environment also play a key role in the market dynamics of life and health insurance.
Development of the US$/€ exchange rate from January to December 2008
Regulatory changes As a result of the global crisis in the banking sector and the financial markets, regulatory changes are to be expected worldwide. Even if the focus of the reforms will probably be on the supervision of banks, it is likely that insurance companies will be affected. However, it is currently not foreseeable what the actual changes will be.
In this context, the ninth amendment of the German Insurance Control Act entered into force on 1 January 2008. In anticipation of Solvency II, the legislation incorporates new provisions on risk management and risk reporting at insurance companies.
The statutory provisions are interpreted in more detail by a circular from the German Federal Financial Supervisory Authority (BaFin) on the Minimum Requirements for Risk Management (MaRisk). As the objective here is to give companies a flexible framework for structuring their internal risk management, the requirements are limited to setting up appropriate internal man agement, steering and control processes. The measures and processes implemented must be proportional to the company’s individual risk, the type and scope of its operations, and the complexity of the business model selected.
With a consolidated result of €1.5bn, we fell well short of our original target corridor of €3.0–3.4bn, a forecast we had already lowered to over €2bn at the half-year stage. With a return on risk-adjusted capital (RORAC) of 6.9% after tax, we clearly failed to reach our long-term target of 15% in 2008. This is mainly due to the reduction in our investment result, which was significantly lower than originally expected because of the turmoil on the world’s financial markets. In this context, however, special mention must be made of our balanced investment policy: although it could not prevent losses from declining values in the markets, it did enable us to keep them to a manageable level. Considering the challenging parameters, the results of our insurers and re insurers were satisfactory overall.
As a consequence, we are in a position to maintain our profit distribution at a high level: the Board of Management will propose to shareholders at the Annual General Meeting a dividend of €5.50 (5.50) per dividend-bearing share. We will therefore distribute a total of €1.1bn (1.1bn) to our shareholders. In 2008, we repurchased 11.8 million Munich Re shares worth €1,386m (3.4 million shares or a volume of €444m under the share buy-back programme concluded by the Annual General Meeting on 17 April 2008, and 8.4 million shares or a total of €942m within the framework of the 2008/2009 programme). Of the total repurchased in 2008, 1.3 million shares worth €149m were attributable to the put options sold in February 2008 and expiring in October 2008. This means that since the start of the share buy-backs in November 2006, including dividend payouts, we had returned a total of around €6bn to our shareholders by the end of 2008.
For the reporting on individual fields of business, the following principle applies: volumes and results that derive from business within a segment are eliminated, whereas figures that derive from business with companies from other segments (e.g. intra-Group reinsurance cessions from primary insurers to reinsurers) are included in the following data. Where the information re lates to national accounting law, this is mentioned specifically.
Result In the year under review, we achieved a consolidated result of €1.5bn (3.9bn). The Group’s operating result decreased appreciably by 35.5% to €3.3bn (5.1bn).
Reinsurance performed satisfactorily overall in 2008, even though, as in the previous year, we were considerably affected by man-made major losses and in particular by losses from natural catastrophes, such as Winter Storm Emma in Europe, the floods in Australia, and Hurricanes Gustav and Ike in the USA. Owing to the strong decrease in the investment result in reinsurance, our profit for the year totalling €2.3bn fell clearly short of our target range of €2.7–2.9bn for the segment. Also included in the reinsurance result is an intra-Group dividend payment of €947m (114m) from ERGO to Munich Re in the second quarter of 2008. This income has no impact on the Group consolidated result after the elimination of intra-Group transactions across segments. The reinsurance investment result came to €4.0bn (4.3bn), but adjusted to eliminate the ERGO dividend it totalled €3.1bn and was thus significantly lower than in the previous year (€4.2bn). At €1.8bn (2.6bn), the result in the property-casualty segment remained well below that of the previous year due to the high claims burden and decreased investment result. In addition, rates in the renewals in 2008 declined marginally as a result of in creasing competitive pressure, but we have nevertheless been firmly ad hering to risk-adequate prices, terms and conditions. The heavier claims burden of 6.2% (4.7%) from natural catas trophes and the cycle-related fall in rates are reflect ed in the increase of 3.1 percentage points in the combined ratio to 99.5% (96.4%). Likewise, the result of the segment life and health was down on the previous year, mainly owing to the lower investment result. The financial crisis had only a small effect on the European Embedded Value (EEV) of our life reinsurance business. Despite good results, EEV dropped by €0.5bn to €6.1bn, mainly owing to currency effects.
Primary insurance business performed satisfactorily in 2008. As in reinsurance, we were unable to reach our result target of €600–800m on account of the lower investment result of €3.0bn (5.6bn). Our consolidated result in primary insurance in the year under review totalled €163m (984m). In property-casualty insurance including legal expenses business, we succeeded in achiev ing a combined ratio which, at 91.2%, was well within our target of 95%, despite the high claims costs from Winter Storm Emma and Windstorm Hilal. A further fall in the expense ratio played an appreciable part in this achievement. In life and health business, our result amounted to €7m (358m). European Embedded Value for overall life insurance business and our German health in surance fell to €3.5bn (5.4bn). Of critical significance in our market-consistent valuation were the major upheavals in the interest-rate markets at year-end with 1 Adjusted pursuant to IAS 8.
Management report Business performance low interest rates and extremely high volatilities. This development is de- scribed in detail in the report on business performance in the life and health insurance segment (see page 93 f.).
In reinsurance, gross premiums written in 2008 showed a slight increase of 1.2% to €21.8bn (21.5bn). In terms of the average exchange rates relevant for the income statement, the euro gained in strength against many other currencies. If exchange rates had remained the same, premium volume would have increased by 7.3% compared with the previous year. Premiums of €562m from Midland and €538m from Sterling were included in our premium income for the year under review, following their first-time consolidation as at 1 April 2008.
In the life and health segment, gross premiums written fell by 2.2% to €7.1bn (7.3bn). The decrease was due to exchange-rate effects. Adjusted to eliminate currency effects, premium revenue shows an increase of €3.6%.
The growth engine in 2008 was again health insurance, which expanded its premium volume by 2.5% to €5.4bn (5.3bn), thanks to further marketing successes with supplementary insurances. In comprehensive health insurance, premium income rose by a mere 1.2%, reflecting the distinctly adverse impact of the German health reform on new business in this line. In the propertycasualty segment, premium income rose by 4.9% to €5.9bn (5.6bn), boosted by the integration of the South Korean direct insurer ERGO Daum Direct acquired in the previous year and by the positive development in Poland. But even without the acquisition of ERGO Daum Direct, volume grew by 3.0%. Our life insurers posted an overall decrease in premium volume of 1.8% to €7.2bn (7.3bn). This was due to the development of new business in Germany, which declined year on year for two reasons: the more complicated sales process resulting from the reform of the German In surance Contract Act, which came into force in January 2008, and uncertainty among clients owing to the financial crisis. By contrast, we grew significantly in international business owing to the first-time consolidation of Bank Austria Creditanstalt Ver sicherung (BACAV) with effect from the fourth quarter of 2008, and above all due to organic growth.
The Munich Re Group operates in virtually all classes of reinsurance. We offer a full range of products, from traditional reinsurance to innovative solutions for risk assumption.
Overview and key figures In the year under review, the Munich Re Group’s reinsurance business performed satisfactorily overall. As in the previous year, we were affected by considerable burdens from natural catastrophes and man-made major losses in 2008. Winter Storm Emma in Europe, the floods in Australia and Hurricanes Gustav and Ike in the USA had an especially negative impact. The combined ratio for 2008 came to 99.5% (96.4%). The share of natural catastrophes in the loss ratio was 6.2 (4.7) percentage points higher than in the previous year. In the life and health segment, we achieved a solid business result in 2008. Overall, our strict adherence to the underwriting principle of “profit before growth” continued to stand us in good stead.
Result In the year under review, the reinsurance segments life and health and property -casualty accounted for €0.6bn (0.7bn) and €1.8bn (2.6bn) of the consolidated result respectively. The overall result for reinsurance in 2008 was thus 29.5% down on the previous year. The decrease is mainly attributable to the significant reductions in the investment result, which in 2007 had benefited from high gains on disposals in a very favourable capital market environment, whereas this year we had to make substantial write-downs in our equities portfolio. In addition, the expenditure for natural catastrophes in the propertycasualty segment was once again high. Our operating result for reinsurance, which also includes the investment result, fell by 9.2% to €3.8bn (4.1bn). It was positively influenced by ERGO’s special dividend of €947m, of which €767m was apportionable to the property-casualty segment and €180m to the life and health segment.
We continued to adhere strictly to our underwriting policy of risk-adequate prices, terms and conditions. We offset the reductions in volume resulting from this policy with increases in premium income from selectively acquired new business by meeting demand from our clients for additional solvency relief, and through the acquisition of The Midland Company (Midland) and Sterling Life Insurance Company (Sterling), so that development remained stable overall.
Gross premiums by segment 43_Lagebericht_e 7643_Lagebericht_e 76 10.03.2009 11:28:33 Uhr10.03.2009 11:28:33 Uhr
At €7.1bn (7.3bn), the gross premiums written in life and health reinsurance were below the previous year’s level owing to currency translation effects. Adjusted to eliminate the effects of changes in exchange rates, premium income showed an increase of 3.6%. While there was a decline in premium volume in life reinsurance due to a scheduled reduction of large-volume treaties, premium income in health reinsurance was up significantly.
In Germany, “Riester” and “basic” pension products were the main sales drivers for German life insurers in 2008. All in all, however, life insurance sales were rather sluggish. Owing to the professionalisation of risk management in life insurance since the stock market crash of 2002, the industry was relatively well-positioned to tackle the challenges of the financial crisis. Nevertheless, the effects of the crisis on the companies’ investment portfolios and financial resources were still appreciable.
Our new business could not fully compensate for the scheduled reduction of large-volume quota share treaties with low result contributions. As a consequence, premium volume decreased by €0.4bn to €0.7bn (1.1bn) in 2008. The reduction in the large-volume reinsurance treaties has been concluded for the present, which gives us reason to expect a rise in premium income for 2009. The trend towards disability risks continued in new business.
In the USA, our subsidiary Munich American Reassurance Company (MARC) increased its gross premiums to US$ 2.0bn (1.7bn), thus maintaining its position among the leading life reinsurers. Despite the trend towards increasing retentions, MARC sees significant opportunities to further increase its market share in the area of pure mortality covers as well as disability and long term care covers by offering substantial capacity to the market and providing tailormade financial solutions to address clients’ needs. The operating result of US$ 18m was below the exceptional result achieved in 2007 (US$ 146m) primarily due to an unusually high number of large death claims.
Our branch in Canada, Munich Reinsurance Company Canada Branch (Life), continues to lead the Canadian life reinsurance market, with the number one market share in all lines in which it conducts business: life, disability, health, critical illness and long term care. The branch has further strengthened its market leadership position in Canada through creatively developing programmes to help its clients grow business. Premium income in the life segment in 2008 fell to €0.8bn (1.2bn) as expected on account of a reduction of a large-volume reinsurance treaty. Excluding this treaty and currency translation effects, the branch’s premiums grew by 7% in 2008. The operating result increased compared with the previous year, primarily due to strong mortality experience gains. As part of a reorganisation, the management geared the branch’s structures even more consistently to its clients’ demands. With this structural change as a base, our Canadian branch is well-positioned to continue producing good results in 2009.
Given its extremely rapid economic development and corresponding expansion in the life insurance industry, Asia has gained significantly in importance. For life reinsurance, Asia is one of the prime growth regions: over the past five years, Munich Re has raised its premium volume here by an average 25% p.a. In 2008, we continued to expand our involvement in the region and made selected investments with a view to benefiting even more strongly in the long run from the business opportunities present. Independent client surveys show that Munich Re is seen as the first choice in life reinsurance in Asia, too.
Product development for our clients is and will remain an important driver for reinsurance business in the region. The local life insurance markets are relatively young with considerable potential, so that support in developing products such as long term care or critical illness is in great demand, and a large proportion of the business is reinsured.
Our subsidiary Munich Reinsurance Company of Australasia (MRA), which writes life reinsurance business in Australia and New Zealand, increased premium income by 14% in original currencies while maintaining stable profit margins.
On the African continent, our subsidiary Munich Reinsurance Company of Africa (MRoA) continued to grow profitably, increasing premiums in original currencies by 19%. Including the effects of exchange-rate changes, however, premium income translated into euros was down 4% to €76m. The African market offers above-average opportunities for profitable growth in the medium term.
In recent years, we have been able to strengthen our leading position with a series of innovative projects. We are pursuing a holistic business approach in which we pool the Munich Re Group’s international healthcare expert ise. In the new segment of International Health, this approach supplements riskcarrying with additional health-related services, enabling us to add value to our offerings with a clear link to our core business of risk. As part of an internal reorganisation project started in mid-2008, the Inter national Health segment is to be transferred to an independent organisational unit within Munich Re, thus paving the way for further successful growth in this attractive market. Since implementation will not occur until the second quarter of 2009, the following descriptions for 2008 refer exclusively to the activities managed fully from within the reinsurance group.
In the year under review, premium income in health rose by around 38%, from €1.3bn to €1.8bn. The main driver was our largest single market, the USA, where we were able to grow our premium volume from €448m to €884m thanks to the purchase of Sterling Life Insurance Company (Sterling), one of the leading providers of health insurance benefits for seniors. This acquisition was successfully concluded in April 2008.
The combined ratio in the reporting period stood at 99.1% (98.4%), the deterioration being chiefly due to the difficult environment in the US reinsurance market. Our consistent focus exclusively on profitable business relationships enabled us to achieve technical profitability again in the 2008 underwriting year. We expect that this positive trend will continue in 2009.
Management report Business performance one of the strongest growth segments of the US healthcare sector. The acquisition price for 100% of Sterling’s share capital totalled around €223m.
Our 100% stake in Cairnstone, a leading provider of employer stop-loss products, enables us to cover even more elements of the value chain and tap profitable growth potential as part of our International Health strategy. The purchase price for increasing the stake in Cairnstone from 25% to 100% in September 2007 was €18.3m. Managing a business volume of over US$ 58.5m in 2008, Cairnstone offers employers in the USA stop-loss covers for the healthcare expenditure they finance for their employees. The integration of Cairnstone is complete.
In Germany, premium volume in 2008 amounted to €236m (250m). For statutory health insurance, the past year was dominated by preparations for the new health fund, which will lead to a reorganisation of financing in this field as from 1 January 2009. It is against this background that the government introduced, as announced, the new insolvency code for statutory health insurers. There are first signs that the statutory health insurers are likely to have a greater need for risk protection. At the same time, they are required to invest increasingly in healthcare management. Given the unclear financial situation for 2009, they will need to minimise the investment risk. This market situation may therefore give rise to a potential need for novel reinsurance solutions specially tailored to statutory health insurance com panies.
Private health insurance too is beginning to show an increasing need for reinsurance protection against large losses and catastrophe losses as new advances in medicine are made. As things stand at present, it is likely that the introduction of the new insurance supervision principles (Solvency II) will lead to a differentiated view of holistic risk management and a greater need for customised reinsurance solutions, which in turn will promote even closer ties with clients.
The two record results in 2006 and 2007 were followed by a solid result in property-casualty reinsurance in the 2008 financial year. The profitability of our basic business was good, albeit not at the level of the previous year owing to a continued increase in competitive pressure in the reinsurance markets. The burdens from major loss events rose significantly compared with the previous year due to higher loss expenditure for natural catastrophes and man-made loss events. We expect that the falling prices for reinsurance protection in the last couple of years will be succeeded in 2009 by noticeably improved market conditions. Given our still very robust capital base and leading pos ition in the world market, we are ideally placed for the hard-market phase anticipated for the next few years. We will take consistent advantage of any opportunities to advance our Changing Gear programme for profitable growth.
Extensive damage was wreaked by a series of severe weather events in Queensland, Australia, in January and February 2008, causing losses in the coal-mining industry. In addition, monsoon-like rains in February led to heavy flooding. Taken together, these loss events gave rise to expenditure of around €122m. Moreover, severe damage was triggered in parts of Europe by Winter Storm Emma, for which Munich Re’s burden totalled €72m.
The 2008 hurricane season in the North Atlantic proved to be much stronger than in the previous year and was within the average range for the warm phase that began in the mid-1990s and is associated with high cyclone activity. The most severe loss events were Hurricanes Gustav and Ike in the USA and the Caribbean, resulting in insured market losses totalling around US$ 15–20bn. Munich Re’s share in these events amounted to €560m and was thus higher than our first estimate of around €390m in the third quarter of 2008. The adjusted estimate in the fourth quarter was necessary because the overall extent of damage caused by the cyclone in coastal waters and inland was not fully known at the time the first projections for Hurricane Ike were made.
The combined ratios recorded by the individual divisions were below the previous year’s level in a few instances but in most cases were marginally to significantly higher. Some 1.1 (0.1) percentage points of the combined ratio were ascribable to retrocession cover for the whole reinsurance group – business which is fully accounted for in the Special and Financial Risks Division.
In the Germany, Asia Pacific and Africa Division, the combined ratio stood at 106.5% (106.0%). The increase largely reflects a strengthening of reserves in the motor and liability segments. At the same time, we also again recorded major losses within the long-term average.
In the Special and Financial Risks Division, the combined ratio was up by 15.2 percentage points to 99.0%. The increase was due to the unusually low combined ratio of 83.8% in the previous year, as well as above-average majorclaims frequency in industrial business and a recession-related increase in losses in trade credit and D&O business in the year under review.
Global Clients and North America 101.8 95.8 91.9 129.9 106.8 44_Lagebericht_e 8344_Lagebericht_e 83 10.03.2009 11:28:18 Uhr10.03.2009 11:28:18 Uhr
The strength of the euro, particularly against the US dollar, impacted premium income to the tune of €893m.
Trends in selected markets Premium volume for business with our global clients and Lloyd’s, which toand at our subsidiaries gether with other business was booked in the restructured Global Clients and
The United Kingdom remains the largest market for our Europe and Latin America Division. Despite greater competition in the reinsurance market, we achieved satisfying premium growth of 4.3% at good prices. One of the main growth drivers was Managing General Agencies (MGA) business, where we made rapid progress with the integration of Bell & Clements and had our expectations of profitable business growth confirmed. Proportional motor business also developed positively. A further gratifying contribution to our overall result was made by our London General Branch, which transacts individual risk business in the local broker market.
The premium income of our subsidiary in Italy, which operates in the fields of property-casualty, health and life reinsurance, was down 16% to €510m (608m), mainly due to terminations of unprofitable business in the motor and property lines. The net loss ratio showed a significant improvment from 71.2% in the previous year to 62.4% in 2008. Overall, the combined ratio dropped from 100.1% in 2007 to 98.5% in the year under review. The annual result rose compared with 2007, totalling €31.3m. In order to simplify organisational structures within the Munich Re Group, we merged Münchener Rück Italia into Munich Reinsurance Company in January 2009.
Gross premiums by class of business 44_Lagebericht_e 8444_Lagebericht_e 84 10.03.2009 11:28:18 Uhr10.03.2009 11:28:18 Uhr
Thanks to our strong local presence in Latin America, we achieved an increase in premium volume to €823m (688m). The result was exceptionally positive, and rates were adequate on the whole. We maintained our position as market leader in our established target markets. Particularly worthy of mention in this regard are developments in Brazil, where the nearly 70-year state reinsurance monopoly was ended in April 2008, opening the market to private reinsurers. Brazil is Latin America’s largest insurance market by far and offers significant growth potential. Munich Re was the first international reinsurer to be granted a licence to operate a subsidiary – Münchener Rück do Brasil, headquartered in São Paulo – in May 2008. This solution secures optimum market access to profitable business for Munich Re. With our subsidiary, we can provide the market with the best possible support and offer our clients all-round capacity. Our aim is to obtain an adequate share in the anticipated profitable expansion of the market. Total premium volume in 2008 was around €80m, and the result amounted to a gratifying €2m.
In Germany, premium income dropped to €1,553m (2,169m), since we reduced a large-volume proportional treaty and withdrew from business where our requirements with regard to risk-adequate prices, terms and conditions could not be realised. Other reasons for the decline were lower original rates charged by primary insurers and higher cedant retentions.
Investments R$ 146 44_Lagebericht_e 8544_Lagebericht_e 85 10.03.2009 11:28:18 Uhr10.03.2009 11:28:18 Uhr
Compared with the previous year, premium income in Australia and New Zealand remained constant at €431m (431m). Notwithstanding the turmoil on the capital markets, the capitalisation of Australian primary insurance com panies remained very solid, so that medium-term growth potential in traditional reinsurance business is still limited. In order to further expand our business in the Australian insurance market, we established Great Lakes Australia at the beginning of 2008, with the aim of writing industrial and agency business. Development is proceeding according to plan, and our business model is proving successful.
Our Swiss subsidiary New Re once again achieved a positive result albeit lower than in the previous year. In traditional business, New Re continued to focus on non-proportional covers and wrote a considerable volume of natural catastrophe business. It is rigorously pursuing its anticyclical strategy and has actively withdrawn from underpriced business. At Sfr 1,124m (1,241m), its premium volume was virtually unchanged, since new fields of business were tapped in the life and non-life segments.
Investments US$ m 14,394 14,983 44_Lagebericht_e 8744_Lagebericht_e 87 10.03.2009 11:28:18 Uhr10.03.2009 11:28:18 Uhr
In 2008, the Munich Reinsurance Canada Non-Life Group – Munich Reinsurance Company of Canada (MROC) and Temple Insurance Company – again produced very good results despite a minimal decline in premium income. Whilst in-force business in the market’s highly competitive environment was managed profitably, we made further progress especially with the extension of our activities in specialised insurance via Temple Insurance Company.
Special and financial risks business In marine reinsurance, where total premium income amounted to €1.2bn (1.2bn), our Watkins Syndicate at Lloyd’s in London generated a volume of €372m (462m), reported in the primary insurance segment. From the 2009 financial year, we will report the business of the syndicate in reinsurance, since Watkins has been incorporated into the reinsurance group. Given the difficult market situation in the energy sector, we reduced our portfolio in this line significantly. In other marine lines, by contrast, good expansion opportunities presented themselves. The acquisition of Roanoke Trade in Chicago enabled us to strengthen our distribution network in the USA. Its integration into the Watkins Syndicate is proceeding according to plan. To secure the long-term growth of our German and Continental European marine business, we set up a new company, Köln Assekuranz.
Our result declined appreciably to –€1m (115m), reflecting losses from natural catastrophes in the energy sector and the negative performance of a few P&I treaties that have meanwhile been remediated. For 2009, we see business opportunities and rising prices, especially because of the high natural catastrophe losses in 2008.
Investments Can$ m 1,545 1,554 44_Lagebericht_e 8844_Lagebericht_e 88 10.03.2009 11:28:18 Uhr10.03.2009 11:28:18 Uhr
In our business field financial risks, credit and bonding reinsurance is one of our core business fields, where we reinsure default risks related to the sale of goods and services worldwide or accepted via bonds. In the last few years, we have refrained from transacting credit derivatives business and have fully commuted the portfolio of business written in the past. In credit and bonding, we achieved a technical result of €12m (97m) in 2008 owing to the worldwide credit crisis. Our premium volume in European business stagnated, but rose in Latin America and Asia.
The Risk Trading Unit places insurance risks on the capital and retrocession markets. We not only provide the unit’s services to clients but also use them for our own purposes where laying off insurance risks is opportune from the risk management point of view. In 2008, we effected a total of three transactions: a client transaction (“Muteki”, US$ 300m, to cover earthquake in Japan) and two transactions for Munich Re (“Nathan”, US$ 100m, to cover excess mortality; and “Queenstreet”, €170m, to cover windstorm in Europe). With Munich Re Capital Markets New York, which is an integral part of the Risk Trading Unit, we are in a position to place catastrophe bonds with a large number of investors and thus cover the entire value chain in the promising field of insurance risk securitisation and capital-market placement.
Our clients in the alternative markets segment are large international corporations. The business is handled by our subsidiary Munich-American RiskPartners (MARP), which has offices in Munich and London. In 2008, MARP’s total premium reached the same level as in the previous years. Our profitabilityoriented underwriting policy is particularly important in the highly competitve market of large-scale industrial risks. The result was burdened by an aboveaverage frequency of major losses.
New developments and expansion In 2008, Munich Re continued to tap attractive fields of business via new of various activities segments and markets. This is part of our Changing Gear initiative of positioning ourselves selectively in profitable niche segments. The business is transacted out of re insurance, as it requires special expertise and is to some extent directly coupled with reinsurance as the risk carrier.
With the aim of expanding these profitable niche segments, we took advantage of a major acquisition opportunity by purchasing The Midland Company (Midland), a leading US provider specialised in insurance cover for manufactured housing, mobile homes and motorcycles. As a general rule, the lending banks require insurance cover as a condition for loans on these objects. Midland is a perfect fit for our portfolio and provides the basis for expanding our primary insurance operations in the USA, which we combined with Munich Re Amer ica’s existing activities at the beginning of 2008, thereby laying the main foundations for synergies and growth. Premium income since the first-time consolidation as at 1 April 2008 was €562m.
On the basis of an agreement concluded on 22 December 2008, Munich Re is acquiring the HSB Group from US insurer American International Group (AIG). The HSB Group is one of the world’s leading providers of specialist insurances and inspections of engineering risks. The planned purchase is another step towards realising our US strategy within the context of our Changing Gear programme, expanding our position in highly specialised and thus profitable niche segments. The agreed purchase price for the 100% stake is US$ 742m (€531m) – plus or minus any changes in HSB’s equity occurring between 30 September 2008 and the ultimate completion date – and will be fully financed from our own resources. The acquisition is expected to be completed at the end of the first quarter of 2009, once the requisite approvals have been obtained from the competent authorities.
Our new Special Enterprise Risks unit is currently in the start-up phase. Our target clients here are companies that intend to implement a quantitative risk management system and, owing to heightened risk awareness, have a greater need for risk transfer solutions, e.g. in the case of political risks or project financing risks, or to protect their supply chain.
– Growth of 1.5% in overall premium income to €18.5bn compared with the previous year
– Consolidated result of €163m impacted by effects of the financial crisis – Good combined ratio of 91.2%, despite numerous natural hazard events
Europäische Reiseversicherung works with more than 17,000 partners in the tourist industry, making it the leading travel insurance provider. Travel agents and the European railways have been its main sales partners for some 100 years.
Combined ratio property-casualty, including legal expenses insurance % 91.2 93.4 90.8 93.1 93.0
Consolidated result life and health €m 7 358 319 594 25 45_Lagebericht_e 9145_Lagebericht_e 91 10.03.2009 11:26:39 Uhr10.03.2009 11:26:39 Uhr
The Watkins Syndicate, which operates within Lloyd’s of London, is one of the leading primary insurers in international marine business. The syndicate has a wide and efficient network: apart from its branch offices in the UK and Ireland, it also transacts business from its Hong Kong, Singapore and Dubai offices. Since the acquisition of Roanoke Trade in April 2008, we have been able to selectively expand our marine business in the USA by using the company’s broad network of branch offices throughout the country.
Premium In the financial year 2008, our primary insurers wrote total premium income of €18.5bn (18.3bn), equivalent to a rise of 1.5%. Growth was especially apparent in our international business, in particular in property-casualty and health insurance. Premium written outside Germany climbed by 9.1% to €4.4bn (4.0bn), chiefly as a result of organic growth. Adjusted to eliminate the effect of changes in the consolidated group (first-time consolidations of the South Korean company ERGO Daum Direct from the second quarter onwards and of the Austrian insurer BACAV as from the fourth quarter), premium income from outside Germany grew by a satisfying 4.3%. This positive development is largely due to good growth in Poland and Belgium. At €13.9bn (14.0bn), overall premium income from Germany was down on the previous year. Moderate growth in health (1.6%) and property-casualty (1.6%) contrasted with a reduction in premium volume (–4.4%) in life insurance.
We value the life, health and personal accident insurers with their long-term liabilities on the basis of market-consistent European Embedded Value (EEV). This is the sum of a company’s equity and the present value of its future net earnings from business in force – established on the basis of actuarial principles – less the explicitly determined cost of holding capital.
The financial crisis in 2008 triggered not only sharp falls on the stock markets but also major upheavals on the interest-rate markets, especially towards the end of the year. At 31 December 2008, the low level of interest rates coupled with extremely high volatilities had a major adverse impact on the economic assessment of long-term liabilities in life, health and personal accident insurance. The CFO Forum has announced that it will be reviewing its valuation principles in this connection. In spite of these conditions, we decided to adhere to a strictly market-consistent valuation as at the reporting date of 31 December 2008, even if we are convinced that the capital market parameters used are not representative and the high volatility in particular will revert towards the long-term average level.
At 31 December 2008, the above-mentioned upheavals on the interest-rate markets resulted in a major rise from –€138m to –€1,359m in the negative time value of options and guarantees for German life primary insurance from the shareholders’ perspective. This would be the shareholders’ cost of hedging against the impact of future capital-market fluctuations on the result as at the valuation date. In fact, through the mechanisms described above, companies generally have much more effective instruments to decisively influence the time value of options and guarantees over the course of time.
Altogether, the market-consistent European Embedded Value of our life insurance business and our German health primary insurance business fell to €3,509m (5,406m); this includes acquisitions of €388m. The overall loss of European Embedded Value totalling €2,237m was mainly attributable to the development of the portfolio value in life insurance. Given the extremely un favourable underlying parameters, the modelled value added by new business decreased to –€45m (164m). Because of current market conditions, profitable business written in the course of the year is reported with a negative value contribution, due to the market-consistent valuation as at the end of the year.
German new business was down on the previous year, with a decline of 3.4% in the annual premium equivalent (APE), i.e. total regular premium income and one-tenth of single-premium volume. The decrease was due to an initial effect of the German insurance contract law reform which has made the sales pro cess more complicated, as well as to uncertainty among clients in the wake of the financial market turmoil. The beginning of the fourth subsidisation stage for Riester policies at the turn of the year was unable to offset these factors.
Gross premium income in legal expenses insurance rose by 0.9% to €916m (908m). Whilst the volume of German legal expenses insurance grew slightly by 0.3%, international business showed a higher increase of 1.6%.
In 2008, the ERGO Insurance Group acquired the majority of shares in the life insurer BACAV, increasing its stake to 90% since 30 September. The remaining 10% are held by the UniCredit subsidiary Bank Austria. ERGO now ranks third in the Austrian life insurance market and is expanding its inter national business by systematically using Austria as a platform for developing business in the promising central and eastern European markets.
In Italy, we are restructuring our activities. In 2008, we submitted a voluntary tender offer to the external shareholders of the listed life insurer ERGO Previdenza. After conclusion of the offer, we held 93.1% of the shares in ERGO Previdenza and aim to acquire the remaining shares in the life insurer in the course of the delisting process. The next step is to enhance the integration of ERGO Previdenza within the Italian group. The revised strategy is clearly focused on profitability in new business and strict cost control, even at the expense of a reduction in premium income. Our objective is to increase the efficiency of the ERGO companies in Italy.
Investment principles Our investment strategy naturally considers supervisory requirements aimed at ensuring optimum security and profitability, with sufficient liquidity at all times, and an appropriate mix and spread. We continue to satisfy all applic able accounting and taxation requirements and invest only in assets from which we expect an adequate return, our asset managers paying strict attention to the risk tolerance of each company. In reinsurance in particular, we limit currency risks by matching our expected liabilities with assets in correl ated currencies where possible. We also take care that the maturities of our fixed-interest securities are aligned with those of our liabilities. The methods we use to control investment risks are described in detail in the risk report on page 155; our approach to asset-liability management is explained on page 111.
Our investment strategy is committed to the principle of sustainability. We aim to invest at least 80% of the market value of our investments in assets that are included in a sustainability index or satisfy generally recognised sustainability criteria. Since mid-2007, we have used the services of oekom research, an independent rating agency for sustainability, to advise us in this area. Our sustainability criteria for corporate and bank bonds have been considerably tight ened as a result.
Until 31 October 2008 and under certain conditions, the amendments permitted non-derivative financial instruments in the categories “securities held for trading” and “securities available for sale” to be reclassified under other categories retroactively to 1 July 2008. As of 1 November 2008, the reclassification will become effective as of the date of execution, enabling such securities to be recognised at amortised cost. As a consequence, losses in value occurring in the second half of the year and in the future generally need no longer be recognised in the income statement or in equity.
Investments for the benefi t of life insurance policyholders who bear the investment risk –562 2 –
Expenses for the management of investments and other expenses 542 404 34.2
Other income/expenses –1,295 –628 – 556 – 594 –1,021 46_Lagebericht_e 9946_Lagebericht_e 99 10.03.2009 11:26:26 Uhr10.03.2009 11:26:26 Uhr
The spread of the turbulence to other capital-market-oriented companies such as AIG and Washington Mutual will have no notable impact on our results. In Germany, along with the banks and almost the entire insurance sector, we are participating in the rescue package for Hypo Real Estate (HRE) by reguaran teeing €111.1m to cover a possible claim on the federal government. In addition, Munich Reinsurance Company has underwritten a governmentguaranteed bearer bond and a bearer bond secured by HRE Group assets, each for an amount of €70.7m. Of the last-mentioned bearer bond, €70.1m has been transferred to ERGO Group companies.
The carrying amount of the Munich Re Group’s investments showed a slight fall of 0.7% since the beginning of the year. A large portion of the reduction is attributable to our much-reduced equity portfolio, which was affected chiefly by disposals and by the marked decline in share prices, with the value of nonfixed -interest securities available for sale and accounted for at fair value continuing to fall up to the reporting date. Besides this, foreign exchange losses of €1.3bn led our total investment portfolio to shrink somewhat, due particularly to the strong depreciation in the pound sterling since the beginning of the year. Opposite effects resulted from the growth in value of our portfolio of fixed-interest securities and loans. Alongside interest-rate trends, this effect was due above all to our higher investments in loans, which are almost all held by our life and health primary insurers. The reduction of our investment portfolio was also mitigated slightly by the first-time consolidation (in the third quarter) of our new subsidiary BACAV with its investments, which totalled €3.7bn.
Reinsurance Primary insurance Asset Total Life and health Property-casualty Life and health Property-casualty management €m1 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev. 2008 year² 2008 year 2008 year 2008 year 2008 year 2008 year²
Land and buildings, including buildings on third-party landn 399 452 696 649 2,486 2,500 90 94 61 58 3,732 3,753
Investments in affi liated companies 35 39 58 57 38 34 91 73 12 12 234 215
Other securities held to maturity – – – – 138 192 5 8 – – 143 200
(both at market value and including investments in affiliated companies and associates). Over the course of the year, this hedge quota climbed significantly from 21.8% to 52.3% at the reporting date.
Fixed-interest securities and loans Our investment portfolio is chiefly made up of fixed-interest securities and loans, which totalled €150bn at 31 December 2008, making up around 85.6% of our overall investments at carrying amounts. This is a clear increase of 11.2 percentage points compared with the situation at 31 December 2007.
Portfolio of equities and long-term equity investments Before hedging (€bn) After hedging (€bn)
Fixed-interest securities and loans, including short-term items, on a market-value basis1
Thereof: 20% cash positions 46_Lagebericht_e 10546_Lagebericht_e 105 10.03.2009 11:26:26 Uhr10.03.2009 11:26:26 Uhr
In our choice of investments, we estimated the risk of continued inflation expectations as high, gradually adding to our portfolio of inflation-indexed bonds over the course of the year to protect us from the inflation risk and the associated rise in interest rates. In this way, we also compensated to some degree for the risks arising from the inflation-related increase in our claims payment obligations. The above-mentioned bonds are linked to a consumer price index, ensuring that where there is inflation, interest payments and redemptions increase continuously. Our expectations were initially fulfilled: inflation grew until mid-year, and the prices of inflation-indexed bonds rose. As the financial crisis escalated, however, so too did fears of a recession, leading to a sharp decline in inflation. Consequently, in line with our active portfolio management, we sold off part of our portfolio of inflation-indexed bonds in the fourth quarter. The resulting losses on disposal were confined to the low two-digit million range. As at 31 December 2008, the volume of inflationindexed bonds at market values was just under €6.5bn (3.3bn), thus making up 4.3% of our portfolio of fixed-interest securities and loans at market values.
Our entire balance sheet portfolio of fixed-interest investments has a good rating structure, described in detail in the notes to the consolidated financial statements on pages 217–222.
Structured product portfolio €m AAA AA A BBB <BBB Not rated Total
Since the beginning of the year, net unrealised gains on equities dropped by €4.8bn to €1.8bn. Some €0.2bn of this fall derives from equity funds.
Duration of fixed-interest securities and loans as at 31 December 2008 (in years)
In the course of the year up to the reporting date, there was a distinct slump in risk-free interest rates. By contrast, risk spreads expanded steadily in the period under review. Although the rise in risk spreads may predominate in individual asset classes, overall the reduction in risk-free interest rates more than compensated for the rise in risk spreads because our portfolio of fixedinterest securities and loans is mainly composed of lower-risk assets. The positive effect of this development on the market value of our fixed-interest securities available for sale was bolstered further for by the first-time consolidation of BACAV, which has 49% of its investments in such securities. There was an opposite effect from the foreign exchange losses due to the marked depreciation in the pound sterling. Altogether, therefore, between January and December we recorded a clear increase of €13.3bn to €107.9bn (94.6bn) in the market value of our fixed-interest securities available for sale, thus achieving a marginally positive balance of €1.4bn (–) in terms of net unrealised gains over the course of the year.
As in previous years, loans are carried in the balance sheet at amortised cost. Nevertheless, like fixed-interest securities available for sale, they still have a value which is influenced by fluctuations in market interest rates and the credit rating of the respective debtor. This means that their performance (and with it the development of hidden reserves) is also linked to market inter est rates with regard to both the risk-free interest rate and the risk spreads.In consequence, rising interest-rate levels lead to losses in the market value of even low-risk, long-term securities, and falling interest rates lead to market-value gains.
In addition to the overall drop in interest rates, increased new investment in the period under review also resulted in a considerable improvement in market value from €6.9bn to €41.1bn, of which €2.8bn was apportionable to the fourth quarter.
MEAG MUNICH ERGO AssetManagement GmbH is the asset manager of Munich Re and the ERGO Insurance Group. In addition to its function as asset manager for the Group, MEAG also offers its expertise to private and institutional clients.
The monies managed by MEAG in private-client business decreased to €1.7bn (2.5bn) due to the negative market trend affecting equities and bonds alike. On account of the market ructions, private investors were also very restrained where new investments were concerned – so much so that they even disregarded the incentive of not having to pay tax on gains made on the future sale of equity funds purchased before the end of 2008.
MEAG’s assets under management for institutional clients grew slightly over the course of the year to €6.8bn (6.7bn). Owing to the difficult environment, the result of this business decreased to €36m (60m).
The assets managed by PICC Asset Management Company Ltd. (PAMC), Shanghai, 81% of which belongs to PICC People’s Insurance Company of China, and 19% to MEAG, reached €11.0bn (6.5bn).
Given our solid capitalisation, we decided in May 2008 to continue our share buy-back and repurchase shares with a value of €1bn by the next Annual General Meeting on 22 April 2009. We have virtually completed this share buyback programme 2008/2009. By 2 March 2009, we had repurchased 8.9 million shares worth €989m. This means that since November 2006, including dividends for the financial years 2006 and 2007, we have paid out a total of around €6bn to our shareholders.
On account of this capital returned and a strong decrease in net unrealised gains, equity decreased by €4,160m in 2008. Also, equity’s share of total cap ital fell marginally compared with the previous year.
Since we are an international (re)insurance group, some of our financial resources are subject to restraints on disposal. Supervisory authorities in some countries, for example, require foreign reinsurers to establish premium and reserve deposits with primary insurers. At the reporting date, this affected investments with a volume of €11.9bn (12.1bn).
In addition, there were contingent liabilities, which are described in the notes to the financial statements (see page 272). Off-balance-sheet financing does not play a significant role in the Munich Re Group.
To configure our asset management as effectively as possible, we also use derivative financial instruments, which are described on page 220 ff. of the notes to the financial statements.
We return surplus capital to equity holders through attractive dividends and share buy-backs, within the scope permitted by Munich Reinsurance Company’s revenue reserves as determined under German commercial law, and provided this does not impair our strategic flexibility or our overall capital strength. As things stand at present, we aim in principle to continue the share buy-back programme we announced in 2007. Given the economic crisis, however, we will – in the interests of our shareholders – carefully weigh the benefit of the buy-backs against the advantages of comfortable capitalisation, also with a view to our opportunities for organic and possible external growth. In addition, subject to the approval of the Supervisory Board and the Annual General Meeting, we intend to pay our shareholders a dividend of €5.50 per share for the financial year 2008.
Essentially, we see efficient and transparent capital management – always geared to what is feasible – as an appropriate means of achieving our goal of being recognised as a reliable partner in the capital markets. This should guarantee our ability to raise capital quickly and easily on the capital markets, especially for large potential growth opportunities and the optimisation of our capital structure.
The available capital should not only be adequate, it should also be deployed efficiently. We use our value-based management to set performance targets designed to ensure that every investment achieves a sustainable return commensurate with the risk involved. To limit fluctuations in results owing to major losses, we have also developed guidelines and limit systems within the framework of integrated risk management and corporate underwriting for our reinsurance companies. We protect the results and capital of our primary insurance and reinsurance companies against unacceptable fluctuations by means of suitable reinsurance and retrocession covers. We also use asset- liability management and a system of limits to restrict the risks involved in our investments.
Our internal risk model plays a central role in capital management. We use it to analyse how certain risk scenarios affect segment results and investments. We explain how we determine our economic risk capital on page 162 ff. in the risk report. The risk report also provides information on the economic equity (see page 167 f.).
Compared with the end of 2007, our equity decreased by €4.2bn or 16.4% to €21.3bn in the year under review. The most important changes in equity were due to the following: – The consolidated profit attributable to Munich Re equity holders fell by 60.9% to €1.5bn. The previous year’s profit of €3.8bn, net of the dividend payment for 2007 (€1,124m), was transferred to retained earnings.
– Net unrealised gains were €2,725m lower than at the beginning of the year. Owing to the marked reduction in risk-free interest rates, which altogether more than compensated for the rise in risk spreads, there was a positive balance in terms of net unrealised gains on our fixed-interest securities classified as available for sale. By contrast, net unrealised gains in our portfolio of equities classified as available for sale decreased, owing to disposals and the fall in stock market prices persisting since the start of the year.
– Our equity is affected by changes in the exchange rates of foreign currencies against the euro (see explanations on page 74). At the reporting date of 31 December 2008, our reserve for currency translation adjustment showed a slight reduction of €25m to €1,186m mainly as a result of two opposite effects. The rise due to the appreciation in the US dollar over the course of the year was marginally exceeded by the marked depreciation in the pound sterling.
Valuation reserves not recognised in the balance sheet. including those apportionable to minority interests and 47_Lagebericht_e 11347_Lagebericht_e 113 10.03.2009 11:53:35 Uhr10.03.2009 11:53:35 Uhr
As at the balance sheet date, 58,846 shares issued in an employee share programme were also subject to a restriction on disposal until 31 July 2009.
Shares with special control rights There are no shares with special control rights.
System of control for employee Like other shareholders, employees exercise control rights directly on shares share scheme where the control issued to them, in accordance with statutory provisions and the Articles of rights are not exercised directly Association.
– The Annual General Meeting of 28 April 2005 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 2010 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 by the Company up to a maximum amount of €100m of the share capital, in accordance with the respective bond or warrant conditions; as a precautionary measure, capital of €100m was conditionally authorised under Article 4 para. 4 of the Articles of Association.
The above-mentioned authorisations to issue or buy back shares are within the range of what is customary in the market and allow the Company to engage in active capital management. They enable it to cover any capital needs, even at short notice, for taking swift and flexible advantage of market opportunities in different fields of business. As demonstrated by the Com pany’s share buy-backs, the authorisations also offer the opportunity to return capital that is no longer required to the equity holders.
Further information and explanations relating to items 6 to 9 of Article 315 para. 4 of the German Commercial Code may be found in the corporate governance report on page 130 ff.
We define as strategic debt all financial instruments with the character of outside financing that do not have a direct link with our operative business. It supplements our equity and is essentially designed to reduce the cost of capital and ensure that we have sufficient liquidity at all times. With a view to making our capital structure transparent, we detail below the calculation of our debt leverage, which is defined as the ratio of strategic debt to the sum of Group equity and strategic debt expressed as a percentage. Our technical provisions are not considered, even though they are mostly available to us on a very long-term basis as a source of financing for investment.
The subordinated bond with a volume of €1.5bn issued by Munich Re in June 2007 is a perpetual bond, but callable by us for the first time from ten years after the date of issue. The term of the Munich Re subordinated bond issued in 2003 is limited. The tranches with nominal values of €3.0bn and £300m will mature in 2023 (euro tranche) and 2028 (pound sterling tranche) and are callable by us for the first time on 21 June 2013 and 21 June 2018 respectively.
The other strategic debt was incurred to finance our operating activities in the long term. A portion of this, namely US$ 79m of the Munich Re America Corporation senior bond, was paid back in August 2008 through a cash tender offer.
As at 31 December 2008, our debt leverage was 20.7%, up 3.1 percentage points on the previous year. The interest expenses for strategic debt are shown separately in the consolidated income statement under “finance costs” and are explained in detail in the notes to the financial statements. At 10.3 (16.0), our interest cover – an indicator of our ability to service our strategic interest payments from the result before finance costs, tax and impairment losses of goodwill – was at a comfortable level for 2008.
Munich Reinsurance Company 6.75% until 2013, thereafter floating, €3,000m Subordinated bonds 2003/2023 a+ A+ A2 A–
Bank Austria Creditanstalt Versicherung AG 4.95%, €50m Subordinated registered bonds 2004/2014 Not rated
Bank Austria Creditanstalt Versicherung AG Secondary market yield on federal government bonds (Austria) +70 BP, €13m3 Subordinated registered bonds 1998/perpetual Not rated
Bank Austria Creditanstalt Versicherung AG, 6% until 2010, thereafter floating, €12m4
Subordinated registered bonds 2001/perpetual Not rated 1 Bank Austria Creditanstalt Versicherung AG has bonds with a nominal value of €2m in its portfolio; the volume outstanding has been reduced accordingly.
Our primary insurance and reinsurance operations have a significant influence on the cash flow of the Munich Re Group. We generally first collect the premiums for the risks assumed and do not make payments until later, in the event of a loss. The cash flow statements of insurance companies are therefore of limited relevance. The cash flow statement is adjusted to eliminate the effects of fluctuations in exchange rates and changes in entities consolidated.
The cash outflows for investment activities were determined by payments for the acquisition of investments. These exceeded the inflows from the sale/ maturity of investments by €3,461m. In the financial year, we completed the following main acqusitions: in the second quarter, we acquired 100% of the shares in the US primary insurer The Midland Company. The purchase price of €861m has been reduced in the cash flow statement by the cash of €131m held. The Munich Re Group additionally assumed a total of €643m in investments and €466m in technical provisions through the acquisition. On 30 September 2008, we acquired a further 61% in BACAV, thus increasing our share holding to 90%. The purchase price of €416m has been reduced by the cash of €96m held. The acquisition added investments of €3,851m and tech nical pro visions of €3,920m to the Munich Re Group’s books. Besides this, we purchased Sterling Life Insurance Company and Olympic Health Management Systems Inc. in the year under review for a total of €223m. We paid the amount in cash, reducing this in the cash flow statement by the cash of €92m held. As a result of the acquisition, the Munich Re Group assumed a total of €96m in 1 Adjusted pursuant to IAS 8.
Overall in the year under review, cash – which encompasses cash with banks, cheques and cash in hand – fell by €151m to €2,354m.
Reinsurance As reinsurers, we aspire to be the preferred partner in risk for our clients. We consequently provide companies wishing to cede insurance risks with the full range of underwriting products. They benefit not only from our financial strength but also from our risk knowledge. Our clients’ appreciation of this was again endorsed by the 2008 Flaspöhler Survey: last autumn, in this most important client opinion poll for the reinsurance industry, they voted Munich Re the best reinsurer overall in both life and non-life business.
In order to further optimise our client management, we reorganised the servicing of our cedants in the divisional units in 2008. Our new client man agement is designed to achieve uniform quality standards and intensify cooperation. Thus each cedant has its own contact who knows its needs and market specifics especially well. This not only promotes open dialogue but also facilitates more individual and precise consultancy.
Our client portal connect.munichre usefully augments our client management. Here cedants and business partners can access services, analysis and quotation tools, and knowledge from all our divisional units, globally and round the 48_Lagebericht_e 12248_Lagebericht_e 122 10.03.2009 11:25:59 Uhr10.03.2009 11:25:59 Uhr
Last but not least, our cedants benefit from our local presence. Branches and subsidiaries around the world ensure that clients can always find us where and when they need us. And by combining international know-how with indepth knowledge of local conditions, we can always offer our clients individual solutions.
Primary insurance In primary insurance, we focus on private clients, who make up the bulk of our clientele, along with small and medium-sized commercial firms. From ERGO, they can obtain a full range of products from one source: life and health insurance, property-casualty insurance, legal expenses insurance, fund products offered by MEAG, and bank products from our cooperation partner UniCredit Group. Consultancy and other services supplement the portfolio. ERGO is working constantly at expanding this range and networking it to achieve integrated solutions. This enables us to provide flexible answers to all clients’ needs, even if these change over time. Among other things, ERGO is set to combine its knowledge in various centres of competence, e.g. for all products related to travel or bancassurance.
Risk knowledge is our most important resource. Securing it and using it efficiently requires a living culture of dialogue. We have therefore established over 50 knowledge networks in which experts exchange information about business topics across divisions and borders. These knowledge and topic networks can be accessed by all staff in the reinsurance group worldwide.
Some of our centres of competence are recognised for their importance beyond the insurance industry. A prime example is our Corporate Climate Centre (CCC), in which all Munich Re’s activities in the field of climate change have been concentrated since May 2007. Internally, the CCC forms the link between our geoscientific research and operative underwriting. It makes its knowledge available to the Group’s underwriters on the one hand and clients throughout the world on the other, with the aim of providing them with support in the quantification and risk management of natural hazards.
Primary insurance In primary insurance, we place the emphasis of our research and development on analysing and forecasting demographic trends. After all, these trends constitute important parameters for calculating policy durations and thus for structuring products. Besides this, demographic change is affecting social security systems and consequently influencing our clients’ need for private provision. Our product development combines our own know-how with scientific findings, e.g. of the Intergenerational Compacts Research Centre at the Albert Ludwig University in Freiburg.
Reinsurance In connection with Changing Gear, we have restructured our Human Resources Division. We are aiming for a more pronounced performance culture throughout the Group. We have therefore introduced a new performance management system, bringing together individual tools for the agreement of object ives, performance appraisals, salary structuring and career planning, and have consistently improved incentive systems. In addition, we attach great importance to the development and further training of our staff, in order to maintain their knowledge edge. We thus make substantial investments in specialist and personal training measures: in 2008, these amounted to a total of 9,465 participant days throughout Germany, at a cost of €7,326,333. We also support swift and flexible acquisition of knowledge Group-wide by means of innovative methods such as e-learning. Our objective is “to lead through knowledge”. Consequently, our leadership monitoring, in which all staff regularly assess their managers, is also designed to help ensure that learning and talent management are realised as central tasks of management.
Primary insurance With a view to enhancing its competitiveness on a lasting basis, ERGO launched the project “Continuous improvement of our competitive position” in 2008, which also has important implications for employees. The objective is to further improve administration and acquisition cost ratios in Germany, as well as increasing service quality in business processes. In order to achieve the expense ratio target for 2010, ERGO aims to save office and personnel expenses of €180m by 2010, which involves a reduction of 1,800 jobs. Against this background, the ERGO Insurance Group’s management and the ERGO Group Staff Council have agreed on an extensive package of measures. Besides important agreements to reach savings targets, it comprises arrangements relevant for co-determination, such as the introduction of a Group social plan and a Group internal agreement on the topic of “compatibility of family and working life”. An understanding has been reached that there will be no forced redundancies for desk staff or salaried field staff before 31 December 2012. The agreements with the Staff Council enable ERGO to start implementing the measures without delay. Independent of this, a continual process of permanent improvement in quality and service is planned.
Asset management The high professional quality of staff in asset management is a crucial success factor. MEAG has taken advantage of the fluctuation in the market resulting from the financial crisis to recruit further qualified staff. This applies particularly to the core functions in asset management. In real-estate operations, structures have been further streamlined and adjusted to meet increased market requirements. The “quality offensive” is rounded off by programmes for new executives and top management.
At a number of its locations, the Munich Re Group has implemented environmental management systems certified to EMAS (EU Eco-Management and Audit Scheme) and to ISO 14001. The environmental management systems at our international locations are to be continually extended.
Selectively promoting scientific work and sponsoring cultural and social projects is a key part of our corporate responsibility. Munich Re supports a large number of scientific institutions globally. For example, we collaborate with the London School of Economics and Political Science (LSE) to substantially advance research into the economic consequences of climate change. In the field of culture, we have been sponsoring the pan-European Gustav Mahler Jugendorchester for a number of years now. As part of our social commitment, we focus on supporting socially disadvantaged groups such as the disabled and the homeless.
Primary insurance ERGO also has a tradition of social commitment. DKV, for instance, has been collaborating with the German Hygiene Museum in Dresden for ten years and supports this all-round museum as an institutional sponsor. Then there is the “victorianer helfen e. V.” association, which backs such causes as the provision of medical and psychological care for war-traumatised children from various nations. In the “DASler helfen” initiative, staff also support charitable projects for people in need. The Hamburg-Mannheimer foundation “Jugend hat Zu kunft” (Youth has a future), whose main aim is to improve prospects for deprived youngsters, enjoys a high public profile, especially when it awards its €100,000 national promotion prize: in 2008, the motto of this prestigious award was “Music moves”, for which 155 projects from all over Germany were entered. The first prize went to the Jamliner Music Bus from Hamburg, a team of music teachers who, using instruments and sound systems, introduce music, composition and texts to youngsters in run-down inner cities.
Meeting these objectives requires professional risk management in all the Group’s operational and central units. Central responsibility for the coordination and monitoring of the relevant activities lies with the unit Group Secur ity and Continuity Management (GSCM), located in the Integrated Risk Management Division. We focus particularly on an appropriate cost-risk relationship and on the consistency and balance of the loss prevention and minimisation measures taken. Headed by the Chief Security Officer (CSO), the GSCM ensures that the relevant processes and guidelines are implemented, updated and complied with throughout the Group. The CSO is also respon sible for coordinating the protection of persons, property and information, as well as availability management. He supervises a global network of specialists from reinsurance, primary insurance and asset management with interfaces to the compliance officers, to internal audit, to data protection officers and to the operational units for protection of persons and property, as well as IT security. In addition, he is in charge of the security training and awareness programme for employees, geared to developing the security culture as a cornerstone of a successful protection concept.
It is our conviction that good corporate governance creates lasting value. We therefore apply the highest standards to our operations and activities, complying with all the recommendations and proposals of the German Corporate Governance Code. Beyond this, we have our own Munich Re Code of Conduct specifying high-level ethical and legal requirements that must be met by em ployees. This document is available from our website at www.munichre.com.
What rules apply to Munich Re? Due to its international organisation, the Munich Re Group has to consider corporate governance rules in different national legal systems. Clearly, we observe not only the respective national standards but also internationally recognised best practices. In Germany, where Munich Re has its headquarters, corporate governance rules are laid down above all in the German Stock Companies Act, the German Co-Determination Act and the German Corporate Governance Code. The latter, which entered into force in 2002 and has since been amended several times, contains the main legal rules that must be observed by German listed companies. In addition, it includes recommendations and proposals based on nationally and internationally recognised standards of good and responsible management. Every year, Munich Re’s Board of Management and Supervisory Board publish a declaration stating how far the Code’s recommendations have been complied with. The 2008 declaration of conformity can be found on page 133.
Corporate legal structure Munich Re is a joint-stock company (“Aktiengesellschaft”) within the meaning of the German Stock Companies Act. It has three governing bodies: the Board of Management, the Supervisory Board and the Annual General Meeting. Their functions and powers are derived from this Act and our Articles of Association. This means that our Articles of Association (which can be accessed on our website) are of considerable importance.
The Board of Management is responsible for managing the Company. In doing so, it must safeguard Company interests and endeavour to achieve a longterm increase in the Company’s value. The Board of Management must ensure compliance with statutory requirements and internal company directives, and is responsible for effecting adequate risk management and risk controlling in the Company.
Munich Re’s Board of Management had eight members in the 2008 financial year. An overview of its composition can be found on page 61. Additional information on individual members of the Board of Management is available on our website. 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 has had two committees since 1 January 2006 – one for Group operations and one for reinsurance operations – in order to enhance the efficiency of its work. Rules of procedure issued by the Supervisory Board regulate the work of the Board of Management, in particular the allocation of responsibilities between the individual Board members, matters reserved for the full Board of Management, and the required majority for Board of Management resolutions.
Statutory regulations and provisions in the Articles of Association governing the appointment and dismissal of members of the Board of Management
Powers of the Board of Management with particular regard to the option of issuing or buying back shares
Management report Corporate governance report of this authorisation by its resolution of 6 May 2008. By 31 December 2008, a total of approximately 8.4 million shares had been purchased for an overall price of around €942m. As part of the 2007/2008 share buy-back programme, around 3.4 million own shares were acquired in 2008 for an overall price of approximately €444m. These shares have already been retired.
The Board of Management and Supervisory Board cooperate closely to the benefit of the Company. The Board of Management coordinates the Com pany’s strategic approach with the Supervisory Board and discusses the current state of strategy implementation with it at regular intervals. It reports regularly to the Supervisory Board about all questions relevant to the Company. The Supervisory Board has defined the Board of Management’s infor mation and reporting requirements in detail. Specific types of transaction, such as investments of substantial size and individual capital measures, generally require the Supervisory Board’s consent.
Supervisory Board The Supervisory Board monitors the Board of Management and gives counsel where appropriate. Certain transactions like major investments or capital measures require its approval, but it is not authorised to take management action. The Supervisory Board also appoints the external auditor of the financial statements. Remuneration of the members of the Supervisory Board is regulated in the Articles of Association, i.e. is determined by the shareholders. The 2008 Annual General Meeting adjusted the existing remuneration structure to current developments; the new structure generally applies as of the 2009 financial year. Most significantly, a long-term compensation component was introduced in accordance with the Corporate Governance Code. The cri teria for variable short-term remuneration have been made more stringent. Furthermore, greater allowance than in the past has been made for the substantial workload and specialist knowledge required by the chairs of the Supervisory Board and its committees by awarding higher supplements for these positions.
In compliance with the law and the Company’s Articles of Association, Munich Re’s Supervisory Board has a total of 20 members. Half are elected representatives of the employees, and half representatives of the shareholders, elected by the Annual General Meeting. Supervisory Board resolutions on the nomination of candidates for election to the Supervisory Board at the Annual General Meeting only require the majority of votes cast by the Supervisory Board members representing the shareholders. An overview of the members of the Supervisory Board can be found on page 62. Additional information on individual members of the Supervisory Board (shareholder representatives) is available on our website.
Annual General Meeting The regular responsibilities of the Annual General Meeting include reaching a resolution on the appropriation of profits and approving the actions of the Board of Management and Supervisory Board.
Corporate governance topics in 2008 At its meeting on 10 November 2008, the Supervisory Board decided that in future the Supervisory Board (and not, as previously, the Personnel Committee) will determine the system used for the Board of Management’s remuneration, along with the key elements of relevant contracts.
Recommendations and proposals In November 2008, the Board of Management and the Supervisory Board of the German Corporate published the following declaration of conformity, in accordance with Governance Code Section 161 of the German Stock Companies Act: “Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München fulfils all the recommendations of the German Corporate Governance Code of 6 June 2008 (published on 8 August 2008) and will continue to do so in future. Since the last declaration of conformity in November 2007, Münchener Rückversicherungs -Gesellschaft Aktiengesellschaft in München has fulfilled all the recommendations of the German Corporate Governance Code of 14 June 2007 (published on 20 July 2007).”
Munich Re also complies with all the proposals of the German Corporate Governance Code.
In accordance with the German Corporate Governance Code, in future the remuneration system for the Board of Management, along with the key elements of relevant contracts, will be determined by the full Supervisory Board. The Supervisory Board’s Personnel Committee will prepare the draft resolutions for submission to the full Supervisory Board, which will review the remuneration system at least every three years unless earlier reviews become necessary in individual cases.
Medium-term bonus 20% Consolidated result 50 –150% (fully achieved = 100%)
– 20% share price increase – MR shares have outperformed EURO STOXX 50 twice at the end of three-month period during the term of the plan
Pension entitlement – Basic remuneration Number of years on the Board
The processes defined to specify objectives and assess their achievement also involve the external auditor, who subjects the envisaged financial objectives to a predefined review procedure regarding their consistency and assessability, which includes analysing the calculation of the individual results achieved. The outcome of this review and any potentially controversial aspects are rendered transparent for the Supervisory Board’s Personnel Committee.
The medium-term bonus is based on performance over a three-year period and is measured on the basis of the Group result category from the short-term compensation component. Payments are made only if the achievement rate is at least 50% on average for the three-year period. The most recent three-year planning period expired on 31 December 2008.
A medium-term bonus has again been set up for the 2009 financial year, although its structure differs significantly from the previous three-year bonus plans. Whilst the new mid-term incentive plan is also geared to performance over a three-year period, it is set up afresh each year. It is intended to promote the mid- and long-term increase in the Munich Re Group’s value in terms of internal value creation (value-based success factors) and improving the Munich Re share’s total shareholder return (TSR).
Whether the stock appreciation rights can be exercised and, if so, when, is not certain at the time they are granted. The exercising and proceeds depend on the development of the share price and the exercise price and date. The amount of income is limited. Up to now, stock appreciation rights have only been exercised under the plans set up in 1999 and 2003 to 2005. Further information on the long-term incentive plans can be found on pages 267 to 270 of the notes to the consolidated financial statements.
Weighting of In the case of 100% achievement of objectives (annual bonus, medium-term remuneration components bonus) and based on the imputed value of the share-price-linked compensation (long-term incentive plan) at the granting date, the weightings of the individual components in terms of total remuneration are as follows: basic remuneration approx. 25%, annual bonus approx. 35%, medium-term bonus approx. 20%, and long-term incentive plan approx. 20%. Annual bonus, mediumterm bonus and long-term incentive plan together form a well-balanced and economic, i.e. strongly risk-based incentive system, ensuring that the targets set for the members of the Board of Management do not have undesirable effects.
The total remuneration is set at an appropriate level by the Supervisory Board’s Personnel Committee and reviewed at regular intervals, also taking into consideration data from peer-group companies. Criteria for the appropriateness of compensation are in particular the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole and the financial situation, performance and future prospects of Munich Re. New Board members are generally placed at a level which allows sufficient potential for development in the first three years.
Pension Up to and including 2008, the members of the Board of Management are members of a defined benefit plan under which they will receive a fixed pension whose amount depends on their basic remuneration and years of service on the Board. The pension level starts at 30% and can reach a maximum of 60% of annual basic remuneration.
Contract ends owing to non-extension or revocation of Board member’s appointment, but not due to – gross violation of duties – the Board member giving notice
– The Board member is incapacitated for longer than 12 months and will probably be permanently unable to fully perform duties of offi ce
Widow(er)’s/orphan’s pension a) Active Board member b) Retired Board member a) and b)
– For three months, previous monthly basic remuneration (in the case of Board members appointed since 2006)
As a consequence of the risk transfer to an external insurer, there will be a clearly noticeable and lasting increase in the visible pension costs as of 2009. The Company accepts this increase in order to avoid higher costs in future and to eliminate long-term pension-specific risks.
The presentation of remuneration after allocation to appropriate periods shows the economic apportionment of the amounts between the individual financial years, which is particularly relevant for the medium-term bonus 2006–2008. In this view, the total remuneration shows a reduction of €6.2m compared with the previous year, the main reasons being the economic situation and the resultant lower result foreseeable in the achievement of objectives for the remuneration components “annual bonus” and “medium-term bonus” in 2008. After allocation to appropriate periods, total remuneration for the year under review amounts to €10.7m (16.9m).
Remuneration of individual Board members in accordance with DRS 17 (in accordance with Section 285 sentence 1 item 9a sentences 5–9 of the German Commercial Code and Section 314 para, 1 item 6a sentences 5–9 of the German Commercial Code)
Pension entitlements Personnel expenses of €1.4m (1.3m) were incurred in the financial year to finance the pension entitlements of active members of the Board of Management. The following pension commitments result for the individual members of the Board of Management: 1 At the balance sheet date, no Board resolution had yet been passed on the amounts to be paid for 2008. The amount shown for the annual bonus is based on estimates and the corresponding provisions posted. In the financial year 2007, a total of €6,716,127 was reserved for the annual bonus, whereas the actual amount paid out was €6,636,047 (including a total payment of €516,787 to Dr. Hasford and Mr. Phelan).
2 At the balance sheet date, no Board resolution had yet been passed on the amounts to be paid. The amount shown for the medium-term bonus is based on estimates and the corresponding provisions posted. For the financial year 2006, provisions of €3,630,000 were posted for the 2006–2008 medium-term bonus. The bonus is to be paid in the financial year 2009.
3 Member of the Board of Management since 1 October 2007.
Total remuneration of the The current rules applicable to the remuneration of the Supervisory Board Supervisory Board provide for a fixed remuneration component of €45,000 and a variable resultrelated remuneration component. The Chairman of the Supervisory Board receives twice (two-and-a-half times as of the 2009 financial year), and the Deputy Chairman one-and-a-half times, this fixed and variable remuneration.
The limitation of the total remuneration of each member of the Supervisory Board to two-and-a-half times the fixed remuneration (as of the 2009 financial year: three times) ensures that the overall remuneration of individual Supervisory Board members remains appropriate even if further committees are set up.
Prof. Dr. Heinrich von Pierer 2008 45,000.00 – 13,500.00 58,500.00 49_Lagebericht_e 14349_Lagebericht_e 143 10.03.2009 11:25:34 Uhr10.03.2009 11:25:34 Uhr
– Challenges in a difficult economic environment; opportunities for the Group thanks to our relative strength – Impact of economic crisis uncertain: recession-related losses versus increased need for security among clients – Better prices, terms and conditions probable, especially in reinsurance – Adherence to long-term result target of 15% after tax on risk-adjusted capital
The slowdown in global economic growth, rising levels of unemployment and sinking real incomes will naturally have a curbing effect on demand for insurance and reinsurance covers. In such a situation, fewer cars are purchased and insured, industrial production requiring insurance declines, and consumers have less scope for making private provision. Nevertheless, a number of factors also act in the opposite direction and should lead to a stabilisation of insurance terms and conditions. After all, price losses on the capital markets have hit investments, thus reducing the entire insurance industry’s capital base. As a consequence, insurance and reinsurance capacities worldwide will tend to become scarcer. At the same time, the general need for security will grow, which – all other circumstances remaining equal – will have a stimulating impact on demand for insurance protection. This applies to some lines of primary insurance but in particular to the relations between reinsurers and their clients, the insurance companies. Primary insurers have lost capital and therefore risk-bearing capacity. As they are currently only able to borrow fresh capital, if at all, at very unfavourable terms and conditions, they need more reinsurance cover. This increased demand coincides with a reduced supply of reinsurance, resulting in an improvement in prices, terms and conditions. The high security of the Munich Re Group companies has become a distinct competitive advantage in this context, and our financial solidity provides us with market opportunities in a difficult economic environment.
For the financial year 2008, the Board of Management and the Supervisory Board propose to pay our shareholders a dividend of €5.50 per share in 2009, i.e. the same level as last year. This is equivalent to a total of approximately €1.1bn for the shares currently issued. We are essentially still committed to our share buy-back programme but, as hitherto, will carefully review the advantages and disadvantages before implementing it further.
As far as terms and conditions are concerned, the capacity effects described in the overview will stand strong insurers and reinsurers in good stead. In the renewals of reinsurance treaties at 1 January 2009, market terms and conditions were already hardening and even improved markedly in some segments. This trend is likely to continue. After all, sustained risk-adequate prices, terms and conditions are also in the interests of end clients, who attach more importance than ever before to reliable protection by strong insurers.
The insurance industry must cope not only with macroeconomic uncertainties but also with political risks, including even stronger state influence on private health insurance or other disadvantageous measures in the field of social, economic and fiscal policy. Further risks may result from the expected tightening of supervisory regulations. Although the general conviction is that the worst deficiencies occurred in the banking industry, there is a danger that remedial measures designed for the banking sector will be applied to the insurance industry in an undifferentiated way. Conceivable in this context are excessive reporting regulations, exaggerated capital requirements and restrictions for individual types of business.
In the insurance markets, a recession-related slump in demand could trigger unexpectedly fierce price competition. For instance, financially weakened providers might pursue an aggressive pricing policy and thereby exceed their risk-bearing capacity, hoping just to be fortunate or to receive government help. The state umbrellas could thus stand in the way of the self-healing and rehabilitation of the markets that is so desirable from the competitive point of view. In this case, state intervention to combat the crisis would have an adverse impact on the structure of competition and the opportunities available to healthy companies. Providers with relatively strong finances will find it difficult to exploit their competitive advantage against this background. They will need to focus on profitability rather than volume and on the effectiveness of their risk-based management and control systems. Responsible buyers, as well as the state supervisory authorities, should consider the durability of providers’ financial strength and make their price tolerance conditional on the quality of the cover offered by the different companies.
Management report Prospects have increasingly enabled us to negotiate better prices and conditions with our clients than those obtained by a number of less well-positioned competitors.
Of the total business up for renewal, 17.6% (around €1.5bn) was not renewed. New business of €954m was written in more attractive segments. Together with the renewed business (around €6.8bn) and a slight rise in shares in existing business (€256m), the net outcome was a reduction of 3% in premium volume to around €8.0bn. The price level improved by 2.6% compared with the previous year – an increase required just to offset the lower interest income and thus satisfactory at best.
The acquisition of the HSB Group, one of the world’s leading providers of specialty insurances and the inspection of engineering risks, is an important step towards realising our new US strategy, enabling us to expand our position in highly specialised and thus profitable niche segments. The purchase price for the 100% stake is US$ 742m (€531m) – plus or minus any changes in HSB’s equity occurring between 30 September 2008 and the ultimate completion date – and will be fully financed from our own resources. The transaction is expected to be concluded at the end of the first quarter of 2009, once the requisite approvals have been obtained from the competent authorities.
In health business, we are aiming for a rise of around 2% in Germany, whereas in international business we consider a higher increase in premium income possible. Especially in the field of supplementary health insurance, growth should be attainable owing to people’s heightened awareness of the need to bridge the ever greater gaps in state health insurance coverage by taking out private insurance.
Premium volume in property-casualty insurance is likely to show an increase, especially in non-German business. We are also aiming for a slight increase in German business in 2009, although the market as a whole is stagnating. However, it must be feared that the poor overall economic situation will have a stronger impact on insurance demand than we currently expect. It is, for instance, unlikely that premium volume in German motor business will rise in 2009, since sales of new and used cars have collapsed. A counterbalancing effect derives from the fact that people’s need for protection tends to rise in economically challenging times. Our goal is to keep the combined ratio for property-casualty business including legal expenses insurance at the good level of under 95%.
Central banks have reacted by introducing sharp interest-rate cuts, and governments all around the world have adopted economic programmes, providing capital injections for banks and guarantees for bank bonds worth several trillion euros. A rapid end to the turmoil in the financial sector and a restoration of confidence are not yet in sight; a deep-seated structural change in the industry has only just begun. Since the events of 2008, with a credit crunch and recession, will also impact 2009, we expect the inflation rate to continue to fall and volatilities to remain high in the current year. The yields on bonds issued by countries assessed as safe are likely to retain their present low levels. Heightened demand for investment alternatives carrying a reasonable amount of risk has already caused the greatly increased risk spreads for corporate bonds with good security to narrow slightly.
2008 was an especially bleak year for equities. After the financial crisis increasingly clouded economic prospects and caused share prices to plummet, equity investments suffered from the fact that there was sufficient liquidity on the always functioning stock markets: shares were the only risk-carrying assets that could be sold in the volume desired.
As in previous years, we again significantly reduced our equity portfolio and equity exposure in 2008. As at 31 December 2008, our economic exposure to equities accounted for only 1.7% of our investments at market value. Unrealised losses on the remaining equity portfolio totalled €319m as at 31 December 2008, and will burden our investment result for 2009 in the form of impairments if the markets remain unchanged. Unrealised gains on equities totalled €2,105m. As we expect further uncertainties on the stock markets, we are currently planning on the basis that our economic equity exposure will still be well below 5% at the end of 2009. Since an end to the financial crisis is not yet in sight, we will refrain in particular from investing in financial stocks.
All in all, the financial crisis is likely to have a distinctly negative impact on our investment result in 2009. The economic slump will lead to an at least temporary deterioration in companies’ credit ratings. This will probably be reflected in a decrease in the market values of the investments concerned insofar as this development has not already been anticipated in the current market values.
Focus on long-term result target The uncertainty is even greater when it comes to the development of our result, making a serious projection of the annual profit for 2009 impossible. The financial crisis and global recession have led to a fundamental change in the parameters for our result target of €18 earnings per share by 2010 announced in May 2007, i.e. before the onset of the developments described here. Therefore, achieving this target no longer appears realistic at present. In view of the considerably reduced risk-free market interest rates and our noticeably decreased equity exposure, we must expect an appreciably lower investment result for 2010 than we could have foreseen in 2007. All in all, however, we remain confident with regard to the Munich Re Group’s value-based corporate development and are adhering to our long-term objective of a 15% RORAC after tax across the cycle. After the failure of many financial service providers who aimed for much higher profitability targets, it has become clear that while our objective is certainly ambitious, it does not and will not induce us to take irrational risks.
Capital management and dividend For the 2008/2009 share buy-back programme, which will be concluded by the Annual General Meeting on 22 April 2009, we resolved to repurchase further Munich Re shares with a volume of €1bn. Altogether, we had already repurchased 8.9 million shares with a total volume of €989m by 2 March 2009. We will conclude the programme as planned by the Annual General Meeting. For the following two twelve-month periods preceding the Annual General Meeting 2011, we had intended to carry out further share buy-backs totalling over €1bn. As things stand at present, we are still able to adhere to this objective and essentially wish to do so. However, in view of the economic crisis, we wish to pause for reflection before further implementing the share buy-backs. In the interests of our shareholders, we will in particular carefully weigh up the benefit of the buy-backs against the advantages of comfortable capitalisation, also with a view to opportunities for organic and possibly external growth.
Subject to the approval of the Supervisory Board and Annual General Meeting, the proposed dividend in 2009 for the financial year 2008 is €5.50 per share (i.e. the same level as last year), equivalent to a total of €1.1bn for the shares currently issued. We are thus one of the few companies that remain committed to an attractive dividend policy in these turbulent times.
Risk management organisation, Risk management: Remit and objectives roles and responsibilities Risk management is a key part of our corporate management. Its task is not only to safeguard the Group’s financial strength in order to satisfy our obligations to clients and create sustained value for our shareholders, but also to protect Munich Re’s reputation. We achieve these objectives through global risk management encompassing all areas of our operations.
The basis for accepting risks is determined by the Board of Management’s directives and decisions on risk appetite. These are defined by the Group’s risk strategy, adopted in the annual planning, and consider the impact on capitalisation, liquidity and earnings volatility. They include “whole portfolio criteria” as well as “supplementary” criteria designed to limit and steer peak expos ures, concentrations, accumulations and systematic risks across the Group.
Of key importance within these requirements and processes is our Strategic Risk Management Framework (SRMF). Through close integration into strategic and operative planning, the SRMF enables the Group’s risk appetite to be determined and the limits derived from it to be monitored, with a view not only to limiting risks but also to taking business opportunities. The calibration of the limits defined in the SRMF gives due regard to the interests both of our clients and of our shareholders. Consequently, the main limits are geared to securing our capital strength and avoiding “financial distress”, i.e. restricting the likelihood of an economic loss for the year. These main criteria are supplemented by additional limits for individual risks, e.g. concentration limits for natural catastrophes, terrorism or pandemic risks, and criteria for market and credit risks. In the current financial market crisis, the SRMF requirements – especially the criteria “result volatility” – are subjected to a stress test.
The risk appetite determined by the Board of Management enables us to consider the limits and rules relevant for risk management at the business planning stage and to anchor these in operational business management. In the event of capacity shortages or conflicts with the systems of limits and rules, there are fixed escalation and decision-making processes which ensure that business interests and risk management aspects are reconciled. If necessary, risks are ceded or hedged by means of reinsurance, securitisation or other forms of risk relief.
Risk identification is performed by means of appropriate systems and indicators (quantitative component) and through various risk surveys, which are supplemented by expert opinions and assessments by selected top managers (qualitative component). Our ad-hoc reporting process provides for staff to report risks to central risk management (IRM) at any time.
Risk monitoring is carried out at central points for the quantitative monitoring (based on indicators), e.g. at MEAG for investments. As far as qualitative risks are concerned, we monitor these on a decentralised or centralised basis, depending on their significance and classification.
Control and monitoring systems In mid-2008, we launched a project geared to harmonising and coordinating the various control and monitoring systems in the Group more closely, in order both to satisfy future legal requirements and to take account of the Group’s development (through acquisitions, for example). This refinement of our integrated internal control system will take some time and will continue to occupy us in the current year (cf. outlook section on page 171 f.).
Other risks, such as operational risks, are monitored and minimised using specific approaches. For example, prior to launch all new products of the Munich Re Group – be they insurance or capital market products – have to go through a “new product process”, which ensures not only that regulations are complied with, administrative rules adhered to and risk management or accounting aspects taken into account, but also that products are critically examined in terms of risk-return criteria.
The aim of our external risk reporting is to provide a clear overview of the Group’s risk situation. This includes information on our risk management methods and processes, our risk governance, and the individual risks to which Munich Re is exposed.
Significant risks At Munich Re Group level, we classify risks as significant if their implications are serious enough to endanger the viability of the Group as a whole. Bearing in mind individual risk tolerance, we have applied this definition consistently to the individual business units and legal entities. The assessment of whether a risk is significant for a unit within the meaning of this definition is carried out in the risk management units, i.e. Group IRM or ERGO’s IRM. This involves taking particular account of how the risks affect our main criteria of financial strength and earnings volatility.
In life insurance and reinsurance, biometric and lapse risks are especially relevant. The calculation of technical provisions is based on “biometric” actuarial assumptions, i.e. on assumptions with regard to mortality and disablement, which take future trends into account and are regularly adjusted to reflect new knowledge.
The remarks on underwriting guidelines and limits and on our corporate underwriting (see “property-casualty” section) also apply to life and health business.
We deal with market risks by means of suitable limit and early-warning systems and through our asset-liability management. We limit the deviations in current investments from those investments that are economically required to cover underwriting liabilities (referred to as the replicating portfolio). Furthermore, we take account of risk-relevant restrictions for investments under German Commercial Code and/or IFRS accounting.
A presentation of the economic risk capital for market risks can be found on page 165 f.
We define credit risk as an economic loss which the Munich Re Group could incur as a result of changes in the financial profile of a counterparty, issuer of securities or other debtor with liabilities towards our Group.
In order to monitor and control our Group-wide credit risks, we have implemented a cross-balance-sheet counterparty limit system valid throughout the Group. The limits per individual counterparty (a group of companies or country ) are based on its financial situation and the risk tolerance defined by the Board of Management. The Group-wide limit per counterparty is broken down for the primary insurance and reinsurance segments, and for the underwriting and investment sides. The recording of the exposure is based on the estimated financial loss in the event of default by the counterparty, after realisation of collateral (loss given default – LGD). These factors are estimated on the basis of historical evaluations and expert opinions.
In the area of retrocession, we control the default risk through the Retro Security Committee, which monitors the quality of our potential retrocessionaires independently based on various criteria, and issues appropriate limits. With this system, we achieve a broad spread of our cessions in the reinsurance market.
The credit exposure of capital market placements, such as our catastrophe bond, is generally reduced by depositing first-class collateral or integrating suitable hedging mechanisms. We further adjusted these measures in the year under review in the light of experience gained in the financial crisis.
Our risk management system considers liquidity risks in a similar way to, for example, market risks. As a rule, they are integrated in our system of rules and limits, which is updated annually. To this end, IRM has developed a range of scenarios from which the limits and procedures are derived. IRM proposes the general regulations, procedures and limits for approval by the Board of Management. On this basis, liquidity risks are managed in the first instance on a decentralised basis, depending on the underlying scenario, with aggregation provided by our reinsurance and primary insurance liquidity management departments, which report regularly to the Board committees responsible. These departments are monitored by the two units responsible for asset-liability management in primary insurance and reinsurance, which – depending on the selected scenario – also function as liquidity risk managers for risks requiring an overall perspective.
Detailed liquidity planning at legal-entity and segment level ensures that the Group companies are able to make the necessary payments at all times. Funding requirements for Group financing activities as well as Group acquisitions and divestitures are taken into account in an overall Group-wide view.
Munich Re defines strategic risk as the risk of making wrong business decisions, implementing decisions poorly, or being unable to adapt to changes in our operating environment.
On the following pages, we provide several examples of the above-mentioned risks and how we deal with them.
The table shows the economic risk capital of the Munich Re Group and its risk categories as at 31 December 2008. Over the past year, the economic risk cap ital remained constant at €16.5bn. The following contributory factors worked in different directions: – The economic risk capital for the risk category “property-casualty” rose by around €1bn, of which €0.5bn is due to a modelling effect in respect of the peak risk “Storm Europe”. At year-end 2007, exposures that were difficult to assess (e.g. facultative business) were modelled using a high correlation in the aggregation process. In the 2008 model for “Storm Europe”, such exposures were included directly in the exposure calculation. The overall influence of this modelling change on the Group ERC is negligible. A further €0.25bn results from an improved modelling of and change in external relief cover (retrocession, cat bonds). Changes in business composition lead to an increase of €0.2bn.
– The economic risk capital for market risks fell by about €2.5bn, chiefly on account of the substantial decrease in the equity risk due to the reduction of our equity-backing ratio.
– The change in the operational risk is due to a modelling improvement. Whereas at the end of 2007 the operational risk was essentially derived as a percentage of the ERC of the other risk categories, the calculation is now based on a number of explicit scenarios individually quantified with loss probability and loss potential. These scenarios were prepared by various expert teams from the Group in close cooperation with IRM and will be annually reviewed and refined as part of the ICS review (see outlook section on page 171 f.). Besides this, operational risks are now aggregated under the assumption of a certain diversification with the other risk categories
Diversification effect –5.0 –5.5 –1.3 – –4.4 –3.8 –0.9 – –0.6 55_Lagebericht_e 16355_Lagebericht_e 163 10.03.2009 11:59:05 Uhr10.03.2009 11:59:05 Uhr
Altogether, all changes to the risk model, proceeding from the situation at the end of 2007, had an accumulated influence of €0.7bn. Given the constant ERC of €16.5bn, this means that total Group ERC effectively reduced by €0.7bn in 2008.
The greatest natural catastrophe exposure for Munich Re Group is currently the €3.6bn (value at risk for return period of 200 years) retained for the “Storm Europe” scenario. Our exposure to hurricanes in North America has been quantified using the scenarios we have developed as €2.6bn for own account.
Whereas the exposure in the Storm Europe scenario is almost unchanged, there is a clear increase in the Atlantic Hurricane scenario. The reasons for this derive from the expansion of business in North America and additional expos ure from the acquisition of Midland in 2008, as well as currency translation effects.
The underwriting risk capital for property-casualty is made up as follows from the two components “basic losses” and “large and accumulation losses”: Losses with a return period of two or more years involving individual risks are classified as major losses. Accumulation losses are losses affecting more than one risk (or several lines of business). We classify all other losses as basic losses.
The marked increase in the risk capital for large and accumulation losses is largely due to the fact that we have refined our “Storm Europe” natural catastrophe scenario.
As a global risk carrier, we can diversify our portfolio through the broadest possible mix and spread of individual risks, thus significantly reducing the volatility of total claims payments and substantially increasing the value added by all divisional units.
Diversification effect –3.3 –3.3 –0.2 – –3.1 –2.9 –0.3 – –0.2
Our sophisticated limit system and our well-established administration systems have served us well overall, also in turbulent market situations like those experienced in 2008, and enable us to manage our investments efficiently and successfully.
The table shows the Munich Re Group’s available financial resources as at 31 December 2008. Compared with the previous year, economic equity fell by around €9.8bn, of which approximately €2.5bn was due to dividends and share buy-backs. Furthermore, particularly the first-time consolidation of Midland, Sterling and BACAV resulted in a rise in goodwill and other intan g ible assets in our IFRS balance sheet, but we do not recognise this rise in the economic balance sheet. This effect reduced economic equity by around €0.9bn. The net retained profits of €1.5bn and other changes in IFRS equity 1 Adjusted pursuant to IAS 8.
Value adjustments for property-casualty and life and health 2.9 7.8 –4.9
(–€3.1bn) are also reflected in the changes in economic equity.1 Finally, the valuation adjustments for property-casualty and life and health were reduced by around €4.9bn, especially for two reasons: the market-consistent embedded value of the German life insurers declined, because the interest-rate level in the eurozone fell, while at the same time the implicit volatilities of equities and interest rates rose substantially; on the other hand, the overall reduction in the interest-rate level influenced the discounting effect for property-casualty liabilities. As there was virtually no change in the hybrid capital compared with the previous year, all effects together reduced the available financial resources by €9.7bn.
The economic capital buffer shows the amount by which the available financial resources exceed the economic risk capital. The economic solvency ratio is the quotient of the available financial resources (less announced but not yet completed capital measures such as the 2008/09 share buy-back and dividend payment for the financial year 2008) and the economic risk capital. Over the course of the time, the situation has developed as follows: The economic solvency ratio of 142% reflects Munich Re’s capital strength. It is worth pointing out again here that Munich Re’s economic risk capital, which produces the above solvency ratio, corresponds to 1.75 times the capital that will probably be necessary under Solvency II.
Regulatory solvency requirements We report on regulatory solvency requirements in the section “Group solvency“ on page 117 of the management report.
1 The overall change of around –€4.1bn in IFRS equity is made up of the net retained earnings of €1.5bn, the change of –€2.5bn resulting from the dividend payment and share buy-backs, and other changes of –€3.1bn.
On the insurance side, current indications are that the Munich Re Group is potentially exposed mainly via the liability classes D&O and professional indemnity (PI). Specifically, there is the prospect of liability arising out of alleged misconduct in the form of inadequate advice, mismanagement or negligence on the part of sales organisations, banks or other financial intermediaries. Even if courts ultimately do not award damages, any defence costs covered under insurance policies could be considerable. Since such lawsuits are typically very prolonged, it will take several years before there is final clarity regarding the extent of the losses. At the turn of the year 2008/2009, we had received isolated provisional notifications from our liability reinsurance clients, which we have taken into account through the establishment of IBNR reserves. A prolonged, deep recession can lead to a marked rise in claims in this area.
Management report Risk report our equity exposure, especially through hedging activities. All in all, it can be said that although our exposure in the acute cases of the crisis has been relatively small, the Munich Re Group has not been able to fully avoid the repercussions of the developments on the global capital markets.
Like other players in the insurance industry, the Munich Re Group is exposed in this case to risks from a marked increase in mortality and morbidity and from disruptions in the capital markets. We counter this risk by analysing our overall exposure in detail (scenario analysis), defining suitable limits, and optimising our risk structure by transferring risk – e.g. through the launch of the pandemic bond programme “Nathan”.
Risk of change “climate change” Whilst we are in a position to adequately assess the known risks in our portfolio, the growing complexity and dynamism of the environment in which we operate means that we must also remain vigilant with respect to the detection and representation of new or emerging risks. We follow a multidisciplinary approach, using and combining the experience and expertise of geoscientists, biologists, specialist underwriters, lawyers, economists, sociologists and actuaries. Climate change represents one of the greatest risks of change for the insurance industry. In Munich Re’s Corporate Climate Centre, we analyse and evaluate the related risks for all divisional units and for asset management. But climate change also opens up many business opportunities. Applying the knowledge of this topic we have accumulated over decades, we exploit these opportunities – through new insurance products for innovative energy technologies, for example, or through our Kyoto Multi Risk Policy.
Risk of change “emerging risks” Within our early-warning system, we also consider “emerging risks”. These are risks that may have unidentified effects on our risk portfolio due to changes in risk factors (e.g. legal, socio-political, scientific and technological), where the degree of uncertainty as regards the extent of damage and occurrence probability is by nature very high. We identify trends and faint signals in many ways: this includes systematic trend research in Group Development, using Munich Re‘s knowledge management, and regular structured “emerging risks” surveys. Cooperation with external partners complements our internal early-warning system. One example is our collaboration with the US Rand Institute for Civil Justice on the issue of mass litigation (cf. page 33).
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 may have a positive effect on the settling of asbestos claims. Following revelations about questionable asbestos-related disease diagnoses and resultant lawsuits, various investigation committees are at work. Similar questionable practices that have come to light in silicosis lawsuits are also relevant for US asbestos claims. These developments indicate that the legal situation in the USA is moving in a positive direction. However, it is too early to say whether and to what extent this will have favourable implications for future loss development in the insurance industry. We are currently still being affected by late-reported claims – in some cases for high amounts – for asbestos-related diseases and similar liability complexes. In addition, the recent elections in the US have led to a Democratic Congressional majority and a Democratic Presidency. Traditionally, the Democratic Party has adopted pro-consumer and pro-plaintiff legislation, which may counterbalance the positive state reforms.
Since January 2008, the Spanish antitrust authority (Comisión Nacional de la Competencia) has been investigating various primary insurers and reinsurers on the grounds of suspected collusion restricting competition in Spanish decennial liability business – compulsory insurance for guarantee claims in respect of contract works. Munich Re’s Spanish branch (Münchener Rückversicherungs-Gesellschaft, Sucursal España y Portugal) is affected by this investigation and is cooperating fully with the antitrust authorities.
In 2008, Munich Re adopted a concept for an integrated internal control system (ICS) to systematise and harmonise the Munich Re Group’s existing risk management and its risk-control and steering functions. The Group-wide programme set up to implement the ICS is based on existing ICS elements. It takes account of new statutory and supervisory requirements as well as internal rules and prin ciples, with a view to identifying, evaluating, controlling and managing risks even more efficiently and effectively. The ICS thus represents a significant component of our corporate governance. In addition to the ICS, other statutory and supervisory requirements resulting from Section 64 a of the German Insurance Control Act and the German Minimum Requirements for Risk Management are being identified and addressed.
In accordance with the prescribed process, Munich Re’s Board committees explicitly defined the risk appetite for significant risk categories in the year under review and quantified it by means of specific figures. We determined and documented the risk appetite across the Group hierarchy and communicated it throughout Munich Re. Risk exposures were regularly quantified and compared with the risk tolerance. Since risk exposure was always within the risk tolerance, we assess the Munich Re Group’s risk situation as manageable and under control.
Consolidated financial statements Consolidated balance sheet 174 Consolidated income statement 176 Statement of recognised income and expense 177 Group statement of changes in equity 178 Consolidated cash flow statement 179 Segment reporting – Segment assets 180 – Segment equity and liabilities 182 – Segment income statement 184 – Investments 186 – Gross premiums written 186 60_Abschluss_e 17360_Abschluss_e 173 10.03.2009 11:25:00 Uhr10.03.2009 11:25:00 Uhr
Assets Notes Prev. year1 Change Opening balance sheet Prev. year1 €m €m €m €m €m % €m
I. Land and buildings, including buildings on third-party land (3) 3,732 3,753 –21 –0.6 4,720
Thereof: Investment property held for sale (16) 16 78 –62 –79.5 1,164
F. Cash at bank, cheques and cash in hand 2,354 2,505 –151 –6.0 2,172
Thereof: Deferred tax assets relating to disposal groups (16) – 3 –3 –100.0 16 60_Abschluss_e 17460_Abschluss_e 174 10.03.2009 11:25:00 Uhr10.03.2009 11:25:00 Uhr
Consolidated financial statements Consolidated balance sheet 1 Adjusted pursuant to IAS 8.
Equity and liabilities Notes Prev. year1 Change Opening balance sheet Prev. year1 €m €m €m €m % €m
IV. Consolidated result attributable to Munich Re equity holders 1,503 3,840 –2,337 –60.9 3,425
Thereof: Provision for deferred premium refunds relating to disposal groups (16) – –172 172 100.0 –169
II. Deposits retained on ceded business (26) 2,086 2,231 –145 –6.5 2,241
Total income (1–3) 46,127 47,299 –1,172 –2.5 4. Expenses for claim and benefi ts (31)
Ceded share 287 393 –106 –27.0 7. Result before impairment losses of goodwill 3,429 5,068 –1,639 –32.3
Thereof: Attributable to Munich Re equity holders 1,503 3,840 –2,337 –60.9 Attributable to minority interests (17) 25 83 –58 –69.9
Statement of recognised income and expense 2008 Prev. year1 €m €m
Changes pursuant to IAS 8 6 –51 1 Adjusted pursuant to IAS 8.
Allocation to retained earnings – – 2,445 – – – – –2,445 – –
Thereof: Adjustments pursuant to IAS 8 – – 6 – – – – – – 6
Retirement of own shares – – –1,498 1,498 – – – – – –
Change in deposits retained and accounts receivable and payable 763 4,491
Cash fl ows for the fi nancial year (I + II + III) –141 362
Cash at the beginning of the fi nancial year 2,505 2,172
The Munich Re Group’s segment reporting is based on IAS 14 and the principles of German Accounting Standard No. 3 (DRS 3) issued by the German Standards Board (DSR). This has been supplemented by the requirements of DRS 3–20, which applies specifically to insurance companies.
II. Investments in affi liated companies and associates 2,207 2,480 3,720 3,427
Thereof: Other segment assets relating to disposal groups – – – –
Life and health Property-casualty 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year1 65_Abschluss_e 181 13.03.2009 13:24:23 Uhr
II. Provision for future policy benefi ts 14,060 14,666 300 748
C. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholder – – – –
Life and health Property-casualty 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year1
Total equity and liabilities 215,417 214,292 65_Abschluss_e 18365_Abschluss_e 183 10.03.2009 11:24:52 Uhr10.03.2009 11:24:52 Uhr
The ERGO Insurance Group has concluded profit-transfer agreements with nearly all of its German insurance companies. In our segment reporting, expenditure incurred as a result of profit transfer is deemed appropriation of net income. The segments are thus adjusted to eliminate these expenses, the elimination being carried out in the “consolidation” column.
Thereof: Attributable to Munich Re equity holders 573 714 1,755 2,586 Attributable to minority interests – – – –
Life and health Property-casualty 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year1 65_Abschluss_e 18565_Abschluss_e 185 10.03.2009 11:24:52 Uhr10.03.2009 11:24:52 Uhr
Reinsurers Primary insurers Asset management Total €m 31.12.2008 Prev. year2 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year2
Africa, Near and Middle East 1,099 684 93 40 – – 1,192 724 1 After elimination of intra-Group reinsurance across segments. Presentation of the figures in the management report differs from this (cf. note on page 71).
Reinsurers Primary insurers Total €m 2008 Prev. year2 2008 Prev. year 2008 Prev. year2
Notes to the consolidated financial statements 70_Konzernanhang_e 18770_Konzernanhang_e 187 10.03.2009 11:24:43 Uhr10.03.2009 11:24:43 Uhr
Notes to the consolidated financial statements Application of International Financial Reporting Standards (IFRSs) 190 Declaration of conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Companies Act 190 Figures for previous years 190 Consolidation 190 Recognition and measurement 195 Changes in accounting policies 196 Standards or changes in standards not yet entered into force 198
Assets (A) Intangible assets 200 (B) Investments 200 (C) Investments for the benefit of life insurance policyholders who bear the investment risk 204 (D) Ceded share of technical provisions 204 (E) Receivables 204 (F) Cash with banks, cheques and cash in hand 204 (G) Deferred acquisition costs 204 (H) Deferred tax assets 205 (I) Other assets 205
(2) Other intangible assets 215 (3) Land and buildings, including buildings on third-party land 215 (4) Investments in affiliated companies and associates 216
(6) Other securities held to maturity 217 (7) Other securities available for sale 218 (8) Other securities held for trading 220 (9) Deposits retained on assumed reinsurance 223 (10) Other investments 223 (11) Ceded share of technical provisions 223 (12) Other receivables 224 (13) Deferred acquisition costs 225 (14) Deferred tax 225 (15) Other assets 226 (16) Non-current assets and disposal groups held for sale 227 70_Konzernanhang_e 18870_Konzernanhang_e 188 10.03.2009 11:24:43 Uhr10.03.2009 11:24:43 Uhr
(19) Unearned premiums 233 (20) Provision for future policy benefits 233 (21) Provision for outstanding claims 234 (22) Other technical provisions 238 (23) Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 239 (24) Other accrued liabilities 240 (25) Bonds and notes issued 244 (26) Deposits retained on ceded business 244 (27) Other liabilities 244
(50) Events after the balance sheet date 273 (51) Earnings per share 274 (52) Proposal for appropriation of profit 274
Declaration of the Board of Management 278 70_Konzernanhang_e 18970_Konzernanhang_e 189 10.03.2009 11:24:43 Uhr10.03.2009 11:24:43 Uhr
Application of International Financial Munich Re’s consolidated financial statements have been prepared on the Reporting Standards (IFRSs) basis of Section 315 a paragraph 1 of the German Commercial Code in conjunction with Article 4 of Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 concerning the application of international accounting standards. We have complied with the international accounting standards adopted in accordance with Articles 2, 3 and 6 of the aforementioned Regulation and with the Commercial Code rules designated in Section 315 a para. 1 of the German Commercial Code. The consolidated financial statements thus also meet all the requirements of IFRSs. Our presentation currency is the euro (€). Amounts are rounded to million euros, with figures in brackets referring to previous years.
Declaration of conformity with the In November and December 2008 respectively, the Board of Management and German Corporate Governance Code Supervisory Board of Munich Reinsurance Company and the corresponding in accordance with Section 161 Boards of ERGO Versicherungsgruppe AG published, in each case, an updated of the German Stock Companies Act declaration of compliance with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act and made this declaration permanently available to shareholders on the internet.
Figures for previous years In accordance with IAS 8, changes in recognition and measurement necessitated the retrospective adjustment of the consolidated balance sheet as at 31 December 2007 and the consolidated income statement for the financial year 2007. Details are given in the section “Changes in accounting policies“. Otherwise, the previous-year figures have been calculated on the same basis as the figures for the financial year 2008.
The following disclosures regarding first-time recognition are provisional, since among other things there may still be changes in the purchase prices.
The Midland Company On 3 April 2008, through its subsidiary Munich-American Holding Corporation, Wilmington, Delaware, the Munich Re Group acquired 100% of the share capital of US primary insurer The Midland Company (Midland) based in Cincinnati, Ohio, for a total price of €860.9m. The purchase price includes all the incidental acquisition expenses and other charges, such as fees for consulting services and taxes incurred. Via its wholly owned subsidiary American Modern Insurance Group, Midland is a leading US specialty insurer in niche segments such as insurance for manufactured housing, motorcycles, watercraft, snowmobiles and mobile homes and also credit life insurance.
Midland’s opening balance sheet at the time of acquisition includes the following IFRS figures (amounts directly prior to the business combination): intangible assets of €267.5m (35.2m), investments of €642.5m (642.5m), a ceded share of technical provisions of €89.3m (89.3m), receivables of €104.4m (104.4m), cash at banks, cheques and cash in hand of €130.8m (130.8m), deferred acquisition costs of €74.2m (74.2m), deferred tax assets of €34.0m (34.0m), other assets of €54.3m (54.3m), subordinated liabilities of €15.4m (15.4m), gross technical provisions of €466.0m (466.0m), other provisions and liabilities of €170.5m (170.5m), and deferred taxes of €138.9m (56.4m).
In connection with the acquisition of Midland, goodwill of €254.7m and other intangible assets of €237.5m have been recognised. The goodwill is based mainly on the exploitation of additional future business potential and the use of the sales and insurance know-how and the capital strength of the Munich Re Group. In addition, we expect cost savings from economies of scale.
In the course of the impairment test, we identified impairment losses of goodwill, leading to a write-down of €165.7m to €60.8m.
Sterling is a leading provider of health insurance benefits for seniors in the USA. The additionally acquired service company Olympic offers administration and management services for insurers. Olympic’s operations currently focus on managing Sterling’s business operations.
The combined opening balance sheet of Sterling and Olympic at the time of acquisition, after elimination of their reciprocal business, includes the following provisional IFRS figures (the figures in brackets are the amounts directly prior to the business combination): intangible assets of €74.4m (0.6m), investments of €95.9m (95.9m), a ceded share of technical provisions of €2.3m (2.3m), cash at banks, cheques and cash in hand of €92.4m (92.4m), receivables, deferred acquisition costs and other assets of €24.5m (25.4m), gross technical provisions of €71.8m (71.8m), and other provisions, liabilities and deferred taxes of €27.9m (28.2m).
ERGO Daum Direct Auto Insurance Co. As at 28 March 2008, we acquired 65% of the share capital of ERGO Daum
ERGO Daum Direct has an exceptional competitive position in the South Korean direct motor insurance market and is the country’s second-largest motor insurer.
The opening balance sheet at the time of acquisition includes the following IFRS figures (the figures in brackets are the amounts directly prior to the business combination): intangible assets of €7.6m (1.8m), investments of €112.1m (112.1m), a ceded share of technical provisions of €55.0m (55.0m), other assets of €50.7 (50.7m), gross technical provisions of €121.9m (121.9m), and other liabilities of €53.4m (51.8m).