Gross premiums written €bn 17.5 17.4 Investments (incl. insurance-related investments)1 €bn 141.4 139.4 Net technical provisions €bn 137.6 135.2 Combined ratio property-casualty Germany % 97.5 97.0 97.9 95.3 96.7
Off-balance-sheet unrealised gains and losses2 €bn 15.0 17.3 16.0 17.4 8.7
These disasters have once again highlighted the importance and necessity of reinsurance cover, and Munich Re is committed to providing strong support for the insurance industry in all lines of business and throughout the world. Nevertheless, we need to change. With ever-shorter innovation cycles, increased competition in the reinsurance markets, persistently low interest rates, digitalisation sweeping through all areas of life and work, and disruptive new business models, our world is changing fast – as are the demands on our Company. We are transforming Munich Re in order to seize new opportunities, including those offered by digitalisation, and sustain our earnings power in the long term.
Munich Re is investing heavily in digital transformation. We have set up dedicated units to capture, structure, and analyse data, and we make these findings available to our business
Munich Re Group Annual Report 2017 units. Munich Re already employs over 200 data specialists, and more than 300 staff work in innovation. And these numbers are set to rise. More and more of our experts are spending most or all of their time coming up with innovative solutions to meet existing and new requirements in their area of expertise. We are developing new digital business models – such as for the Internet of Things. We are the world leader in the rapidly growing cyber insurance market. And insurance start-ups see Munich Re as their go-to partner. We also have our own start-up, as it were, in the form of our purely digital insurer, nexible. We are investing heavily in digitalisation at ERGO, and are working to offer customers a seamless and modern customer experience – whether they choose to deal with us online, by telephone, or in person at one of our offices.
These are just a few examples of the profound digital transformation taking place in our Group. Our strategy is not to imitate the business models of data and internet companies – but rather to enhance our core business and push back its boundaries by adding digital elements. Reinsurance and insurance will continue to be the heart of our business.
At the same time as building digital competence, we are reducing complexity in other areas. Internal processes are being streamlined and made more efficient. We are reducing costs and lowering our headcount where we can do so without harming our business. This is how we are making Munich Re fit for the future.
We will halt the downward profit trend that we have seen in recent years – even adjusted for the major-loss expenditure in 2017 – and gradually increase our profitability. With this in mind, we have launched ambitious initiatives for profitable growth in our two fields of business and at our asset- management subsidiary, MEAG.
Munich Re Group Annual Report 2017 still for ERGO to contribute at least €600m to the consolidated result for the year as from 2021, and lay the strategic foundations for a successful future.
The hurricanes in the USA and the Caribbean, the fierce wildfires in California, and the earthquakes in Mexico had a severe impact on our result in the reinsurance field of business. Property-casualty reinsurance, which usually generates most of Munich Re’s profits in normal years, posted a loss in 2017. But – and this is the good news – prices for reinsurance business renewed at the start of the year increased as a result of the huge market losses. This positive development is likely to intensify later in the year when many other treaties come up for renewal in the markets affected by the catastrophes. We are confident that market conditions will continue to improve.
In addition, we want to grow profitability in reinsurance with our own initiatives. We will be resolute in seizing opportunities for profitable business. In some selected markets, we will increase our willingness to take on risk without compromising our underwriting principles. At the same time, we will vigorously pursue new markets in uninsured or under-insured risks. One good example of this is the partnership we struck with the World Bank and the World Health Organization last year to cover pandemic risk in developing countries.
We will continue to reward your investment in Munich Re by making high payouts, and increasing them where possible. You can rely on the Munich Re dividend, which we have not lowered for almost 50 years. Of course, we strive to continue this success story. Despite a fi nancial year marked by large losses – and subject to the approval of the Supervisory Board and Annual General Meeting – Munich Re will pay an unchanged dividend of €8.60 per share.
Overall, we can look to the future with optimism. Munich Re is well on track to actively use digital transformation to provide our clients with better, more e� icient and tailored solutions. At the same time, we are cutting costs and setting targeted impulses for profi table growth. We have the fi nancial strength to expand through acquisitions, but especially through organic growth. We envisage generating a profi t in the range of €2.1–2.5bn for the year 2018, which is a slight increase on our profi t guidance for 2017.
Corporate governance report 014 Corporate legal structure 014 Annual General Meeting 014 Board of Management 014 Collaboration between Board of Management and Supervisory Board 015 Supervisory Board 015 Share trading and shares held by Board members 016 Responsibilities and seats held by the Board of Management 016 Supervisory Board and seats held by members of the Supervisory Board 018
With the exception of Peter Gruss and Renata Jungo Brüngger, all members of the Supervisory Board and of the committees took part in over half of the respective meetings. Peter Gruss chose to step down from the Supervisory Board in order to pursue a new role in Japan. Renata Jungo Brüngger only joined the Supervisory Board in 2017. As Supervisory Board meetings are arranged far in advance, Renata Jungo Brüngger was only able to participate in 50% of the meetings in her first year of membership.
Collaboration between Supervisory Board and Board of Management The Board of Management involved the Supervisory Board in all important business transactions and decisions of fundamental significance for the Group. In our meetings, we discussed all reports from the Board of Management at length. Cooperation with the Board of Management was characterised in every regard by targeted and responsible action aimed at promoting the successful development of Munich Re. The Board of Management satisfied its reporting obligations towards the Supervisory Board in all respects, both verbally and in writing.
Corporate governance Report of the Supervisory Board and a change to the Board of Management, and established the personal objectives for the Board members’ variable remuneration for 2017. We also made decisions concerning the Guideline on fringe benefits. In addition, we received updates on the Group-wide compliance management system. Representatives of the German Federal Financial Supervisory Authority (BaFin) routinely attended this meeting as guests.
The meeting on 25 April dealt with matters involving the Board of Management, specifically the evaluation of the individual Board members’ annual performance for 2016 and their multi-year performance for 2014–2016. We also dealt with a selfassessment of the members of the Supervisory Board concerning their knowledge of specific fields that are important for the supervision of Munich Re. We found that the Supervisory Board as a whole possesses the appropriate diversity of qualifications, knowledge and experience to ensure that Munich Re is supervised in a professional manner, taking account of the company-specific characteristics.
On 19 October, we discussed corporate governance issues including the results of the annual efficiency review, the adoption of amendments to the Munich Re Fit and Proper Policy, and the resolution regarding the annual Declaration of Conformity with the German Corporate Governance Code. And, in the light of new non-financial reporting requirements, we decided to amend the allocation of responsibilities on the Supervisory Board. The Board of Management also reported on digitalisation and innovation initiatives at Munich Re.
After a comprehensive discussion, on 14 December we decided on the redesign of the structure of the remuneration system for the Board of Management, which takes effect as from 2018. We also made decisions on changes to the standard contract for Board of Management members and to the rules of procedure for the Supervisory Board. We discussed the Group’s risk strategy against the backdrop of the yearly report on Munich Re’s risk situation provided by the Group Chief Risk Officer. The Board reported on Group planning for 2018 to 2020. The Board also presented us with the Group human resources report for 2016/2017 and detailed the focal points of human resources work and workforce planning within the Group. Furthermore, there was a report on changes in the Life and Health Division.
Work of the committees There are six Supervisory Board committees. These are assigned certain matters for resolution and also prepare the topics which are to be addressed and decided upon by the full Supervisory Board. At each Supervisory Board meeting, detailed information about the work of the committees was provided to the full Supervisory Board by the respective chairs of the committees.
The Supervisory Board set up a separate Remuneration Committee with effect from 1 January 2018, of which the Chairman of the Supervisory Board and one representative each of the shareholders and employees are members. Following the 2019 Supervisory Board election, the Committee is to be set up in such a way that the two shareholder representatives may not be members of the Supervisory Board for more than ten years. This enables us to comply with a key demand of our investors. As a result of the establishment of the Remuneration Committee, responsibility for all remunerationrelated matters concerning members of the Board of Management has been transferred from the Personnel Committee to the Remuneration Committee. This has no effect on the remaining tasks of the Personnel Committee, such as the appointment and dismissal of Board members or the conclusion of contracts.
Munich Re offered the members of the Supervisory Board specific training at an internal information event in 2017. Almost all members took the opportunity to learn more about selected topics related to investment, accounting and reinsurance.
Changes on the Supervisory Board Renata Jungo Brüngger, who had been appointed successor to Wolfgang Mayrhuber by an order of the Amtsgericht (Local Court) of Munich dated 3 January 2017, was elected to the Supervisory Board by the 2017 Annual General Meeting for the remainder of Wolfgang Mayrhuber’s term of office. With effect from 1 January 2017, Henning Kagermann was appointed Wolfgang Mayrhuber’s successor on the Personnel Committee, and Gerd Häusler as his successor on the Standing Committee.
Company and Group financial statements for 2017, Solvency II reporting and non-financial information Auditor KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, München duly audited the Company and Group financial statements and the combined management report as at 31 December 2017, and issued them with an unqualified auditor’s opinion.
On the basis of this comprehensive examination, the Supervisory Board raised no objections concerning the outcome of the external audit. It approved the Company and Group financial statements on 14 March 2018. The financial statements were thus adopted. Having carefully weighed all relevant aspects, the Supervisory Board followed the proposal of the Board of Management for appropriation of the net retained profits.
The Standing Committee dealt with the separate non-financial (Group) statement on 5 February 2018. On 14 March 2018, the full Supervisory Board examined this statement, taking due consideration of the external audit, and approved the statement.
More information on corporate governance can be found at www.munichre.com/cg-en. There, you can also find the Statement on Corporate Governance in accordance with Sections 289f and 315d of the German Commercial Code (HGB) and the Declaration of Conformity by the Board of Management and Supervisory Board with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG). The remuneration report can be found on page 27 ff. of the combined management report.
Objectives of the Supervisory Board concerning its composition, diversity, independence and competences
− When nominating candidates for election to the Supervisory Board in future, it should be borne in mind that, as a rule, no candidate should have been on the Supervisory Board for a continuous period of more than ten years at the time of election. Normally, Supervisory Board members should not serve on the Board for a continuous period of more than twelve years.
Further information about compliance and the key features of the CMS can be found at www.munichre.com/ en/compliance.
Dr. oec. publ. Joachim Wenning Labour Relations Director (until 26 April 2017) Chairman of the Board of Management (since 27 April 2017) Chairman of the Group Committee (since 27 April 2017)
Dr. jur. Nikolaus von Bomhard (until 26 April 2017) Chairman of the Board of Management Chairman of the Group Committee
Group Holdings Group Communications Group Compliance Group Audit Group Human Resources
Dr. rer. pol. Ludger Arnoldussen (until 26 April 2017) Germany, Asia Pacific and Africa Central Procurement Services
The Supervisory Board is of the opinion that its composition meets the defined criteria and that it fulfils the competence profile.
Munich Reinsurance Company publishes information of this kind on its website without undue delay.
The Supervisory Board’s Nomination Committee selects candidates for the shareholder representatives based on a defined set of criteria. Besides the objectives mentioned, these criteria include a good overall understanding of the Company’s business model, sufficient time availability and specific skills and competence. Consequently, it must be ensured that the Supervisory Board as a whole possesses adequate knowledge, skills and experience with regard to markets, business processes, competitors, the requirements of reinsurance, primary insurance and investment, as well as having an adequate knowledge of risk management; accounting; financial control and management accounting, and internal auditing; asset liability management; legal and regulatory affairs; compliance; and taxation. The members must collectively be familiar with the sector in which the Company operates.
Dr. jur. Doris Höpke Labour Relations Director (since 27 April 2017)
Apollo Munich Health Insurance Company Ltd., India Global Aerospace Underwriting Managers Ltd. (GAUM), United Kingdom New Reinsurance Company Ltd., Switzerland2 (Chair)
Hermann Pohlchristoph (since 27 April 2017) Germany, Asia Pacific and Africa Central Procurement Services
Dr. rer. pol. Markus Rieß Primary insurance/ERGO Third Party Asset Management
Dr. rer. pol. Peter Röder Global Clients and North America Europe and Latin America (since 1 January 2018)
Munich Re Group Annual Report 2017 17Corporate governance Corporate governance report
Dr. jur. Benita Ferrero-Waldner Partner in the law firm of Cremades & Calvo Sotelo, Spain Member since 12 February 2010, last re-elected 30 April 2014
Supervisory Board and seats held by members of the Supervisory Board
Dr. iur. Anne Horstmann Employee of ERGO Group AG Member since 30 April 2014
Andrés Ruiz Feger Employee of Munich Re, Sucursal en España, Spain Member since 22 April 2009, last re-elected 30 April 2014
Gabriele Sinz-Toporzysek Employee of ERGO Beratung und Vertrieb AG Member since 30 April 2014
Investmentaktiengesellschaft für langfristige Investoren TGV, Bonn (Chair) Möller & Förster GmbH & Co. KG, Hamburg (Chair of Advisory Council)
1 As at 31 December 2017. 2 Seats held on supervisory boards of German companies and memberships of comparable bodies of German and foreign business enterprises. 3 Own Group company within the meaning of Section 18 of the German Stock Corporation Act (AktG). 4 Listed on the stock exchange.
Munich Re Group Annual Report 2017 19Corporate governance Corporate governance report
Business performance 052 Board of Management’s overall assessment of the business performance and situation of the Group 052 Business performance of the Group and overview of investment performance 052 Reinsurance – Life and health 056 Reinsurance – Property-casualty 057 ERGO 060 ERGO Life and Health Germany 060 ERGO Property-casualty Germany 062 ERGO International 063
Risk report 068 Risk governance and risk management system 068 Significant risks 068 Solvency ratio under Solvency II 075 Other risks 075 Summary 076
Opportunities report 077 Business environment 077 Innovation and digitalisation 077 Social and economic trends 077 Expanding the limits of insurability 077
Munich Reinsurance Company (Information reported on the basis of German accountancy rules) 082 Market environment and major factors of influence 082 Business performance 082 Financial position 086 Statement of Corporate Governance for the 2017 financial year pursuant to Section 289f and Section 315d of the German Commercial Code (HGB) 087 Further information 087
In our estimation, the talent and performance of our staff are the keystones to Munich Re’s long-term success. Our international and diversity-focused human resources work sets great store in a corporate and leadership culture which promotes motivation and innovation in our highly qualified staff members. More information can be obtained at www.munichre.com/employees.
As at 31 December 2017, our Group employed 42,410 (43,428) staff members worldwide, 28.6% (28.5%) of whom worked in reinsurance and 71.4% (71.5%) at ERGO.
In addition, we continuously expand our tailor-made structured concepts for clients seeking to optimise their capitalisation, liquidity, or key performance indicators.
In order to ensure proximity to our clients, we are represented in many markets with local subsidiaries and branches. We write the main portion of our business via our Canadian branch and our subsidiary in the USA. We service the European markets from our operations in Germany, the United Kingdom, Spain and Italy. At the same time, we have a strong local presence in Australia and South Africa, and in all important growth markets in Latin America and Asia. Since 2017, we also have a branch in India. Asian business is centrally managed by a dedicated branch in Singapore, which underlines the strategic importance of this region for life reinsurance.
The property-casualty reinsurance divisions Global Clients and North America handles our accounts with major international insurance groups, globally active Lloyd’s syndicates and Bermuda companies. It also pools our know-how in the North American market and is responsible for our property-casualty subsidiaries in this region and for international special-lines business such as workers’ compensation. The three major US-based subsidiaries are Munich Reinsurance America, Inc. (Munich Re, US), The Hartford Steam Boiler Inspection and Insurance Company (HSB), and American Modern Insurance Group, Inc. (American Modern). Munich Re, US writes property-casualty reinsurance business and niche primary insurance business. The primary insurers HSB and American Modern specialise in products for which in reinsurance understanding of the exposure and client proximity are paramount.
As reinsurers, we write our business in direct collaboration with primary insurers, but also via brokers and increasingly within the framework of exclusive, strategic partnerships. In addition to traditional reinsurance business, we participate in insurance pools, public-private partnerships, business in specialist niche segments, and also as a primary insurer. Through our operating field Risk Solutions, we offer our clients in industrial and major- project business a wide range of specialised products, customised insurance solutions and services, which we manage from within our reinsurance organisation. Our clients thus have direct access to the expertise, innovative strength and capacity of a leading global risk carrier. Thanks to our capital management know-how, we are a sought-after partner for products geared to our clients’ balance-sheet, solvency and rating-capital requirements, as well as their risk models.
The international health primary insurance business managed by Munich Health was transferred to ERGO International from 1 February 2017.
Via ERGO, we offer products in all the main classes of insurance: life insurance, German health insurance, and in nearly all lines of property-casualty insurance, as well as travel insurance and legal protection insurance. With these products – in combination with the provision of assistance, other services and individual consultancy – we cover the needs of private and corporate clients. ERGO serves over 35 million (mainly private) clients in more than 30 countries, with the focus on Europe and Asia. Up-to-date information on ERGO can be found at www.ergo-group.com.
The diagram does not show all companies of the Group or give a precise representation. A detailed list of shareholdings can be found on page 170 ff.
It also includes a description of the new remuneration system for the Board of Management, which was implemented as at 1 January 2018 and will be put to the vote at the 2018 Annual General Meeting.
The previous remuneration system for the Board of Management was already geared to providing incentives for Munich Re’s long-term and sustainable success and to bringing the interests of the members of the Board of Management into line with those of our shareholders. It met the relevant company and supervisory law requirements, including those of the German Corporate Governance Code.
The remuneration system for the Board of Management comprised fixed and variable components as well as the occupational retirement scheme. Details can be found in the following table: Structure of the remuneration system for the Board of Management
Variable remuneration 30% annual performance (for 100% achievement of objectives/ performance evaluation)
Objectives for the fields of business – Reinsurance – ERGO Personal objectives Overall performance 0–200% (fully achieved = 100%)
Munich Re Group Annual Report 2017 performance criteria not included in the agreed objectives were also taken into consideration in particular, and could be assessed as either positive or negative. In addition, the Supervisory Board was able to address developments that were beyond the influence of Board members during the appraisal period.
Details of the assessment bases for the annual and multiyear performance are provided in the following tables.
Variable remuneration The variable remuneration component was geared to the overall performance of the Group and defined divisional units, and to the personal performance of the individual members of the Board of Management.
Severance cap and change of control Members of the Board of Management appointed before 1 January 2017 have no contractual right to severance
Limit to variable remuneration (malus) The remuneration system for the Board of Management was designed in such a way that, owing to the “overall performance” component, a negative contribution to profits led to a reduction in variable remuneration on an annual and multi-year basis. Moreover, the financial multiyear objectives were conceived such that the result of an adverse year caused the overall achievement of objectives to drop to zero. Hence, owing to the decline in the result for 2017, which was attributable to hurricane losses, no bonus for the Group objective for annual performance was paid and three multi-year bonus schemes were significantly impacted. On account of the flexible bonus policy, it was also possible for no variable remuneration to be paid at all. In addition, the malus principle also involved the obligation on members of the Board of Management to invest in Company shares, as a result of which part of the bonus paid was placed at risk again and thus linked to the interests of shareholders.
Category of objective Share1 Assessment basis Parameters Collective contribution 50–60% to corporate success Business-field objectives (three-year average)
1 The objectives were weighted individually according to the responsibilities of the individual Board members. 2 Further information on economic earnings is provided on page 50.
Benefit: − In the case of defined contribution plans: 80% of the insured occupational pension up to the age of 59 or 61, with subsequent occupational pension.
Board members appointed before 2009 were transferred to the new system. They kept their pension entitlement from the defined benefit plan (fixed amount in euros) existing
Provision for surviving dependants In the event of the death of a Board member during active service, the surviving dependants continue to receive the previous monthly basic remuneration for a period of six months if the deceased was appointed to the Board of Management before 2006. In the case of Board members appointed for the first time as from 2006, the previous monthly basic remuneration is paid to the beneficiaries for a period of three months. If the Board member’s death occurs after retirement, the surviving dependants receive the previous monthly occupational pension for a period of three months, provided the marriage/registration of the civil partnership took place and/or the child was born before the Board member started drawing the occupational pension. Surviving spouses and registered civil partners normally receive a pension amounting to 60% of the defined benefit or insured occupational pension; single orphans receive 20% and double orphans 40%. The total amount may not exceed the occupational pension of the Board member. If the Board member’s occupational pension was reduced owing to early retirement, benefits for surviving dependants are based on the reduced occupational pension.
Board of Management remuneration is disclosed under two different sets of rules, namely German Accounting Standard No. 17 (DRS 17, revised 2010) and the German Corporate Governance Code. There are therefore deviations in individual remuneration components and total remuneration.
1 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2017 annual performance. The amounts shown for annual performance remuneration are based on estimates, i.e. the relevant provisions and the additional/reduced expenditure for 2016. The amounts shown for the 2016 annual performance comprise the respective provision for 2016 and the relevant additional/reduced expenditure for 2015. The actual bonus payments for 2016 can be seen in the remuneration tables “Remuneration paid in accordance with the German Corporate Governance Code” on page 38 ff.
Remuneration of individual Board members as per DRS 17 (revised 2010) (in accordance with Section 285 sentence 1 (9a) sentences 5–8 of the German Commercial Code (HGB) and Section 314(1) (6a) sentences 5–8 of the German Commercial Code)
Nikolaus von Bomhard (until 26 April 2017) 2017 420,000 11,664 205,535 1,767,920 2,405,119
1 The remuneration set for the annual component for 2017 is payable in 2018, that for 2018 in 2019. 2 The remuneration set for the multi-year component for 2017 is payable in 2020, that for 2018 in 2022.
3 Information on the assessment bases and parameters for the amounts set for 2017 is available on page 28 f., and for the amounts set for 2018 on page 41 ff. 4 The amounts set for 2017 were granted pro rata temporis for a period of four months. 5 The entitlement to variable remuneration was forfeited owing to departure. 6 The amounts set for 2017 were granted pro rata temporis for a period of eight months. 7 The compensation components that Markus Rieß receives for his work at ERGO Group AG are included in the remuneration agreed for 2017.
Owing to changes to the remuneration system, ERGO Group AG will no longer grant Markus Rieß any variable target amounts with effect from 2018.
Joachim Wenning (Chairman of the Board 2017 2018 667,500 1,557,500 2,225,000
Giuseppina Albo5 (until 31 December 2017) 2017 2018 – – –
Ludger Arnoldussen4 (until 26 April 2017) 2017 2018 – – –
Joachim Wenning4, 5 (Chairman of the Board 2017 – 16,414 1,164 2016 – – –
thereof for Munich Reinsurance Company – 42,116 10,944 thereof for Munich Reinsurance Company – 14,319 10,370
12 Munich Reinsurance Company: see footnote 11; ERGO Group AG: no defined contribution plan within the meaning of IAS 19, so present value shown.
Joachim Wenning4, 5 (Chairman of the Board 2017 25.50 162,812 –11 888,250 2016 – – – –
Board member Board member (leaving date: 31 December 2017) (leaving date: 26 April 2017)
Munich Re Group Annual Report 2017 1 Albo: The entitlement to variable remuneration not paid out was forfeited owing to departure. 2 Arnoldussen: Compensation for a post-contractual non-competition agreement totalling €1,515,000 for the period May to December 2017. 3 Rieß: Remuneration also includes compensation components and pension expenses for work at ERGO Group AG. 4 Rieß: Compensation, payable in four equal instalments, for the forfeited variable remuneration from the previous employer.
Remuneration in kind/fringe benefits 140,167 140,167 140,167 115,717 49,342 49,342 49,342 39,677
Torsten Jeworrek Hermann Pohlchristoph Board member Board member (joined: 27 April 2017)
Multi-year variable remuneration Multi-year performance 2014–20161 177,166 89 862,400 88 Multi-year performance 2015–20173 – – 609,952 62
Other Total 742,420 1,111,545 905,406 1,938,014 Pension expenses 524,622 474,047 489,047 659,513 Total remuneration 1,267,042 1,585,592 1,394,453 2,597,527
Other Total 1,573,221 1,949,400 1,428,485 1,385,866 Pension expenses 511,187 493,859 523,257 472,348 Total remuneration 2,084,408 2,443,259 1,951,742 1,858,214
3 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2015–2017 multi-year performance; the amount shown is based on estimates and the relevant provisions posted.
Remuneration in kind/fringe benefits 140,167 115,717 49,342 39,677 Total 1,116,417 1,091,967 386,842 377,177 One-year variable remuneration
Remuneration of the members of the Board of Management from 2018 Separate Remuneration Committee from 2018 The Supervisory Board set up a separate Remuneration Committee with effect from 1 January 2018, of which the Chairman of the Supervisory Board and one representative each of the shareholders and employees are members. Following the 2019 Supervisory Board election, the Committee is to be set up in such a way that the two shareholder representatives may not be members of the Supervisory Board for more than ten years. This enables us to comply with a key demand of our shareholders. As a result of the establishment of the Remuneration Committee, responsibility for all remuneration-related matters concerning members of the Board of Management has been transferred from the Personnel Committee to the Remuneration Committee. This has no effect on the remaining tasks of the Personnel Committee, such as the appointment and dismissal of Board members or the conclusion of contracts.
The structure of the remuneration system for the members of the Board of Management with effect from 2018 is shown below. A particular focus is on the changes compared with the previous remuneration system, and reasons are given in each particular case.
Variable remuneration Assessment bases and link to corporate strategy Variable remuneration has been completely revamped. It continues to comprise an annual and multi-year component, both of which are related to the future (as was previously the case). The assessment bases used, however, differ from those in the previous remuneration system. One of the main reasons for this is that disclosure of the financial objectives set for members of the Board of Management – which was requested by investors for the sake of greater transparency – was previously out of the question owing to its relevance for the competition and impact on clients’ interests. The assessment bases of the new remuneration system do not have these disadvantages.
Going forward, the exact target for the IFRS consolidated result used for the annual bonus, and the respective figures for a 0% and 200% achievement of objectives (linear scaling) will be communicated externally. The target cannot be adjusted retroactively. After the assessment period has ended, the IFRS consolidated result achieved and the corresponding achievement of this objective will also be disclosed. As regards the total shareholder return (TSR) of Munich Re’s shares used for the multi-year bonus, which is measured in relative terms in comparison with the peer group, the specific values for assessing the achievement will not be available until the end of the plan period. The values used for 0% and 200% of the linear scaling will be communicated externally prior to the 2018 Annual General Meeting. After assessing this achievement, this too will be communicated together with the comparable values for the peer group. This ensures comprehensive transparency regarding the financial objectives.
Fixed remuneration Fixed remuneration comprises basic remuneration plus the remuneration in kind and fringe benefits (including company cars and insurance policies) previously granted. The payroll tax on the remuneration in kind and fringe benefits will continue to be borne by Munich Re.
Munich Re Group Annual Report 2017 generating good results and creating value for our shareholders. Surpassing the performance of our peer group can be in the interests of shareholders – even in a weak market environment.
In evaluating overall performance, in particular financial and non-financial criteria for the individual member’s performance and the performance of the respective divisional unit/division and the field of business need to be taken into consideration. Other aspects, such as those relating to periods prior to the appraisal period in question, may also be taken into account. For this purpose, the Supervisory Board has compiled a set of criteria with the following examples of bonus-malus aspects: Munich Re’s business strategy is geared to profitable growth and successful positioning among our competitors. As an established result aggregate and relevant key figure for the capital market, the IFRS consolidated result takes account of high and stable earnings power in the annual variable remuneration component. The target for the IFRS consolidated result is based on annual planning figures, which in turn reflect Munich Re’s business strategy.
Based on its long-term strategic orientation and economic management of the Group, Munich Re is convinced of its ability to sustainably create value for its shareholders in the form of TSR. TSR takes account of dividend payments as well as share price performance. A multi-year component based on an increase in TSR in comparison with our peer group makes up the largest portion of the new variable remuneration for the Board of Management. From Munich Re’s point of view, the relative TSR is well suited for bringing in line the interests of shareholders and of the members of the Board of Management. As TSR is measured over a period of several years, it reflects Munich Re’s sustainable and long-term performance not only in absolute terms, but also in relative terms. After all, above-average TSR development in comparison with the peer group is not conceivable in the long term without simultaneously
Transparency is provided with regard to whether and for what loadings or reductions were made and what they amounted to.
The multi-year bonus spans five calendar years. In the first calendar year, the initial TSR is established, and at the end of the scheme, the end TSR is computed and compared in order to determine achievement of the objective. The calculations are made on the basis of reporting date figures.
Deferral The run time of the flexible and deferred multi-year bonus takes account of the nature and time horizon of the Company’s business activities. The TSR in the multi-year bonus fully reflects the sustainable and long-term performance of Munich Re’s shares, so that a further multi-year deferral period – which in turn is geared to share price performance – is neither expedient nor necessary. In the case of the annual bonus, a deferral period does not offer any significant added value either, as the annual bonus makes up only 15% of overall remuneration.
Contractual clawback provisions requiring reimbursement of variable remuneration components already paid out are triggered in the event of a serious breach of duty. With effect from 2018, all employment contracts of the members of the Board of Management include a provision according to which, in particular pursuant to Section 93 of the German Stock Corporation Act (AktG), a member of the Board of Management is required to reimburse the Company for any damage attributable to them as a result of a breach of duty. The contractual indemnity provision protects the Company; it is designed to safeguard the Company’s assets in the event of a serious breach of duty. In the Company’s view, an additional clawback provision for bonuses already paid is therefore not required.
Upper remuneration limits The target corridor of 0–200% defines an upper limit for variable remuneration paid to members of the Board of Management. Any higher achievement of objectives is capped at 200%; in this case, there is therefore also no loading as a result of the overall performance evaluation. In addition, there are caps on the maximum amounts of total remuneration and its variable components in accordance with the German Corporate Governance Code.
Total value XETRA of shares in Number Closing Total value % of basic of shares on price on of shares on remuneration Members of the Board of Management 29.12.20171 29.12.20171 29.12.20171 for 2017
Joachim Wenning2 10,202 180.75 1,844,011.50 176 Giuseppina Albo3 (until 31 December 2017) 3,525 180.75 637,143.75 104
Pensions There have been no changes to the pensions for members of the Board of Management compared with 2017.
Members of the Board of Management appointed for the first time after 1 January 2017 whose contracts are terminated by the Company without good cause have a contractual right to a severance payment. Such payments may not exceed the equivalent of two years’ remuneration, and are restricted by the remaining term of the Board member’s contract if this term is shorter. Annual remuneration is calculated on the basis of annual basic remuneration and variable remuneration paid out for the prior full financial year before the contract was terminated; remuneration in kind, other fringe benefits and contributions to occupational retirement schemes are not taken into account. Payments received by a Board member during a period of notice after termination of the appointment are offset against any severance payment. There will be no right to severance payments in the event of extraordinary termination of the Board member’s contract by the Company for good cause.
Amount of remuneration As previously, the level of the target overall direct remuneration for the members of the Board of Management is set by the Supervisory Board, taking into account the responsibilities and performance of each member of the Board of Management, the performance of the full Board of Management and the financial situation, performance and future prospects of Munich Re. It takes into consideration whether the remuneration is standard practice and appropriate compared with other companies of the peer group (including DAX 30 companies). The target overall direct remuneration for the Chairman of the Board of Management is based on the median remuneration paid to the chairs of the boards of management of DAX 30 companies. In addition, the Supervisory Board takes into account the level of the salaries paid to the Board of Management in relation to the level of salaries paid to senior managers and to general staff members over time.
The chairs of these committees receive double the amounts stated for members. No additional remuneration is paid for serving on the Nomination Committee or the Conference Committee.
Bernd Pischetsrieder 2017 180,000 126,000 17,000 323,000 Chairman 2016 180,000 126,000 15,000 321,000 Marco Nörenberg 2017 135,000 13,500 6,000 154,500 35,000 – – 35,000
Benita Ferrero-Waldner 2017 90,000 – 5,000 95,000 2016 90,000 – 6,000 96,000 Christian Fuhrmann 2017 90,000 45,000 12,000 147,000 2016 90,000 45,000 12,000 147,000 Ursula Gather 2017 90,000 – 6,000 96,000 2016 90,000 – 5,000 95,000 Peter Gruss (until 30 June 2017) 2017 45,000 – – 45,000 2016 90,000 – 6,000 96,000 Gerd Häusler 2017 90,000 13,500 6,000 109,500 2016 90,000 – 6,000 96,000 Anne Horstmann 2017 90,000 45,000 12,000 147,000 52,500 7,500 – 60,000
Andrés Ruiz Feger 2017 90,000 13,500 6,000 109,500 2016 90,000 13,500 6,000 109,500 Gabriele Sinz-Toporzysek 2017 90,000 – 6,000 96,000 15,000 – – 15,000
Throughout the year, the euro exchange rate increased significantly against most important currencies. At the end of December 2017, the euro was up year on year by around 14% against the US dollar, 6% against the Canadian dollar and 4% against the pound sterling. Compared with 2016, the average annual value of the euro against the US dollar was up by only 2% for 2017. It was roughly the same against the Canadian dollar, but saw an appreciable increase of around 7% against the pound sterling. Further information on exchange rates can be found in the notes to the consolidated financial statements on page 115.
During the renewals of property-casualty reinsurance treaties in the first half of the year, prices fell only slightly. The inflow of alternative capital remained strong and was responsible for the fact that there was more than enough capacity on the reinsurance market. The competitive environment remained difficult overall, not least because of the continuing robust capital base held by reinsurance companies. The second half of the year was marked by huge lossses, especially on account of the hurricanes in North America and the Caribbean, earthquakes in Mexico and forest fires in California. In 2017, economic losses from natural catastrophes thus hit the second-highest level ever recorded. In the renewals at 1 January 2018, prices saw across-the-board increases, although these were of moderate intensity, also against the background of slightly rising interest-rate levels.
Important tools of corporate management Munich Re’s management philosophy – Based on value creation
Return on risk-adjusted capital (RORAC) Munich Re’s value orientation is also reflected in the aftertax return on risk-adjusted capital (RORAC). RORAC is a
Maria led to a result of –€476m (2,025m) in propertycasualty reinsurance, and the combined ratio deteriorated to 114.1% (95.7%) of net earned premiums. In life and health reinsurance, we posted a technical result of €428m (561m). This figure is just below the profit of €450m we forecast at the start of the year, and is actually higher than the reduced target of €400m projected in August. The segment was impacted by high expenditure for the recapture of long-term reinsurance treaties, but this recapture will enable us to improve our result in future years. With a consolidated result of €273m (41m), the ERGO field of business surpassed the increased target range of €200–250m we had projected in our Half-Year Financial Report. A significantly improved technical result in Germany and abroad, and lower expenditure, contributed to this gratifying result.
Key figures1 2017 Prev. year Change % Gross premiums written €bn 49.1 48.9 0.5 Combined ratio
Economic earnings were attributable to factors from new and in-force business deriving from underwriting, and to the effects of changes in capital market parameters. As regards the capital market environment, reinsurance business was impacted by negative effects from foreign currencies; in contrast, there were positive effects for reinsurance and ERGO alike from the slight increase in risk-free interest rates in the eurozone, reduced risk spreads for fixed-interest securities, and higher share prices. In property-casualty reinsurance, operational value creation was hit by the high major-loss expenditure, but remained positive for the Group’s other segments.
The consolidated result for 2017 was significantly below the level of the previous year, chiefly on account of the substantial decline in the technical result owing to the high natural catastrophe losses. The investment result (excluding insurance-related investments) remained basically stable.
In the year under review, our effective tax rate was –315.0% (22.7%). The US tax reform had a positive one-off effect of €79m.
Life and health reinsurance 28% (28%) Property-casualty reinsurance 36% (36%) ERGO Life and Health Germany 19% (19%) ERGO Property-casualty Germany 7% (7%) ERGO International 10% (10%)
Other securities available for sale 143,845 149,059 10,883 11,573 143,845 149,059
Deposits retained on assumed reinsurance 5,690 5,240 0 0 5,690 5,240 1 Including on- and off-balance-sheet unrealised gains and losses.
Munich Re Group Annual Report 2017 above all in Spanish, Australian and Finnish government bonds, and reduced our bond holdings mainly from issuers in Germany and Turkey. The purchase of government bonds from emerging markets, which accounted for 8.7% of our government bond portfolio, is part of our balanced investment strategy.
Our portfolio of government bonds, covered bonds and corporate bonds had a good rating structure: as at 31 December 2017, some 83% of securities were rated AAA to A.
The portfolio of structured credit products at fair values declined as a result of sales, and totalled 2% of the overall portfolio as at the reporting date. This asset class involves securitised receivables (asset-backed securities or mortgage-backed securities), e.g. securitisations of real estate finance, consumer credit or student loans. Around 52% of our credit structures have a rating of AAA.
Fixed-interest portfolio by economic category1 1 Presentation essentially shows fixed-interest securities and loans, including deposits and cash at banks, at fair value. The approximation is not fully comparable with IFRS figures.
In the year under review, we expanded our portfolio of corporates and government bonds, but lowered our investments in covered bonds, bank bonds, and credit structures.
We recorded lower net write-downs of non-derivative investments, both on our equity portfolio and on fixedinterest securities.
The figures for 2017 and the previous year include the reinsurance units of our health business which were taken over from Munich Health on 1 February 2017 and merged with the Life division.
Health reinsurance closed the year with a loss in the single-digit millions caused by reserve strengthening in the USA.
Our Canadian branch Munich Re, Toronto posted stable premium income of €5.0bn (5.0bn). Premium volume is mainly determined by a few large-volume treaties. The unit maintained its leading market position, and again posted a very good technical result – thus accounting for a disproportionately large contribution to the overall result.
The development of our premium volume was driven by opposing trends in the portfolio. A reduction in treaty shares across all lines of business and regions and the targeted withdrawal from unprofitable business (especially large proportional treaties in China) led to a significant erosion of gross premiums written. This erosion was offset by selective underwriting of attractive new business and organic growth of our business with existing clients. As in previous years, these business opportunities arose worldwide, especially in North America, and in all lines of business, above all casualty and property reinsurance, and aviation.
The 2017 renewals again took place in a highly competitive market environment, not least because there continued to be sufficient reinsurance capacity in all classes of business. Prices declined, but to a much lesser degree than in previous years’ renewals, confirming the signs of stabilisation previously seen in the marketplace. In a few markets, we were able to selectively exploit business opportunities that offered adequate margins. Overall, we are adhering to our profit-oriented underwriting policy.
in the previous year, claims expenditure in life reinsurance returned to a level in line with expectations. We are very satisfied with new business development, both in terms of volume and profitability.
In Asia, our premium income climbed to €1.4bn (1.3bn). New business continued to develop very well. Thanks to our broad diversification, we are in a position to benefit from the growth potential in the region. The technical result was good, and in line with expectations.
At our subsidiary Munich Reinsurance Company of Australasia Ltd., which writes our life reinsurance business in Australia and New Zealand, premium income increased to €850m (729m). This was due to a large-volume treaty written in the third quarter of 2016 that was not recognised in the income statement in full until 2017. Nevertheless, we apply a very restrictive underwriting policy in the Australian market, as large parts of the disability business still do not meet our profitability requirements. Given that claims expenditure in this area was above expectations – due in particular to the duration of benefits – we posted a negative technical result.
Our individual core markets and selected special lines Based on premium volume, around 45% of our global property-casualty reinsurance business including Risk Solutions is written in North America (including Canada). Around 35% of our premium comes from Europe, of which more than half is generated in the United Kingdom. Further substantial shares are contributed by Asia (about 10%), Australia/New Zealand (approximately 5%) and Latin America (approximately 5%).
In the US market, we were able to grow our existing reinsurance business with selected clients and, in addition, write profitable new business. As a result, Munich Reinsurance America Inc. significantly increased its premium volume to €3,409m (2,410m). Reinsurance prices continued to be under pressure in the first half of the year. In the second half, the results of all US entities were dominated by hurricanes Harvey, Irma and Maria. In addition, other natural hazard events such as the wildfires in California, local hail events and tornadoes also had an impact on the results.
European business is dominated by property business and UK motor business. In the United Kingdom, premium volume remained largely stable at €3,210m (3,266m). If exchange rates had remained unchanged, however, premium volume would have grown. This increase was mainly attributable to the expansion of our primary insurance activities and to rate increases in motor business. In Continental Europe, premium volume also remained stable despite the difficult market environment. Growth in primary insurance business and alternative capital solutions was able to more than compensate for the decline from our consistent cycle- and profitabilityoriented portfolio management in traditional reinsurance.
At our Swiss subsidiary New Reinsurance Company Ltd. (New Re), business volume in the area of propertycasualty fell by 22% to €574m in the 2017 financial year. Here, an increase in premiums from traditional reinsurance business was eroded by a decline in premium volume from structured business.
In Germany, we succeeded in slightly raising premium income to €646m (566m) in 2017 – despite the still challenging market environment.
In China, we selectively withdrew from unprofitable proportional large-volume treaties in line with our consistently profitability-oriented portfolio management. This reduction was partially offset by organic growth and selective business expansion. Overall, premium income declined to €615m (1,190m).
In the Caribbean and in Latin and Central America, we still provide high capacity for the coverage of natural hazards, in particular windstorm and earthquake. We were able to hold our strong market position. Despite rate reductions in natural catastrophe business, we grew our premium volume to €1,050m (992m), with adequate margins.
Programme in 2021, ERGO intends to make a sustainable contribution of more than €600m to the annual result of Munich Re. ERGO has made significant progress in reorganising its sales force. Since the beginning of 2017, there has been only one single tied agents’ organisation. About 70% of the reduction of jobs targeted in the course of the Strategy Programme has already been realised.
The technical result generated by the ERGO Life and Health Germany segment was up on the previous year, thanks to increases in the Life Germany and Health Germany segments. The investment result fell year on year, mainly owing to a lower net balance of derivatives and a decline in regular income. Overall, the operating result and consolidated result improved, partly because of the absence of special effects that had influenced the previous year.
Key figures 2017 Prev. year Change €m €m % Total premium income1 3,525 3,735 –5.6 Gross premiums written 2,865 2,988 –4.1 Technical result 112 –12 –
The rise in the technical result is partly attributable to a less pronounced low-interest-rate environment and the absence of one-off effects that had impacted the previous year. In the past financial year, the investment result totalled €2,699m (3,064m), mainly on account of a lower net balance of derivatives. Market interest rates rose and interest-rate hedging instruments were adversely impacted. On balance, the operating result saw an increase.
Key figures 2017 Prev. year Change €m €m % Total premium income 5,320 5,179 2.7 Gross premiums written 5,320 5,179 2.7
(120m), one negative contributing factor being diminished regular income. All in all, the operating result decreased.
The technical result in 2017 was slightly lower than in the previous year. The investment result declined to €114m
The technical result in the ERGO Property-casualty Germany segment was just under the level achieved last year. Overall, major-loss expenditure in the past financial year was somewhat above our expectations. The investment result increased especially on account of higher gains on disposals and lower write-downs of equities. The increased investment result and absence of restructuring expenses were responsible for the improved consolidated result.
The 2017 combined ratio was 0.5 percentage points higher than in the previous year. This was attributable to a higher loss ratio, driven – among other things – by losses from natural hazard events and reserve strengthening in the second half of the year. The expense ratio improved year on year. Paid claims and the change in claims provisions totalled €2,053m (1,955m) and net operating expenses came to €1,072m (1,108m), compared with net earned premiums of €3,204m (3,158m).
The technical result in the ERGO International segment was up on the previous year. The favourable development was attributable to the absence of negative one-off effects in Italy, such as had been seen in the previous year, and price adjustments in Polish property-casualty business. Owing chiefly to reduced gains from disposals and lower regular income, the investment result was down year on year. The absence of one-off effects on the other nonoperating result and the increased technical result were chiefly responsible for the improved consolidated result.
Gross premiums written were slightly up year on year, mainly owing to significant growth in international property-casualty insurance. We also saw growth in international health business. The slight decrease in overall premium was attributable to a lower volume of life insurance business.
Development of Group equity 31.12.2017 Prev. year Change €m €m % Issued capital and capital reserve 7,418 7,417 0.0
Other reserves 5,183 6,628 –21.8 Consolidated result attributable to equity holders of Munich Reinsurance Company 375 2,580 –85.5 Non-controlling interests 186 269 –30.8
Reinsurance business accounts for approximately 33% of technical provisions; around 67% comes from primary insurance. In contrast to liabilities under loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will arise. This is especially true of reinsurance. Whereas in property insurance a major portion of the provisions is generally paid out within two to three years, in life or liability insurance substantial amounts may still be due decades after the contracts were concluded. The currency distribution of our provisions reflects the global orientation of our Group. Besides the euro, our main currencies are the US dollar, the Canadian dollar and the Australian dollar.
As at 31 December 2017, Munich Reinsurance Company’s share capital of €587,725,396.48 was divided into 155,027,908 registered, no-par-value, fully paid shares. The rights and obligations deriving from these shares follow from the applicable statutory requirements and the Company’s Articles of Association. With respect to the Company, the only parties deemed shareholders in accordance with Section 67 of the German Stock Corporation Act (AktG) are those entered as such in the Company’s register of shareholders.
Restrictions on voting rights and the transfer of shares The listed registered shares are subject to transfer restrictions. The issuing of restrictedly transferable registered shares by Munich Reinsurance Company dates back to the Company’s foundation in 1880. Restricted transferability means that these shares may be transferred to another holder only with the Company’s consent, which, according to Article 3(2) of Munich Reinsurance Company’s Articles of Association, is granted at the Company’s discretion. Since the share-trading processes have been made very efficient, the consent requirement does not lead to any delays in entry in the register. In recent decades, it has been granted without exception. Contractual agreements are in place with the members of the Board of Management providing for two or four-year minimum holding periods for the shares of the Company they have to purchase as part of share-based remuneration programmes.
Each share carries one vote at the Annual General Meeting and determines the shareholders’ participation in the Company’s profit. This excludes own shares held by the Company, from which it enjoys no rights. In the cases specified in Section 136 of the German Stock Corporation Act (AktG), voting rights from the shares concerned are excluded by law. If shareholders are entered under their own name for shares which belong to a third party and exceed at this time the upper limit of 2% of the share capital as stated in the Articles of Association, pursuant to Article 3(5) of the Articles of Association the shares entered shall not carry any voting rights.
Between 2006 and 2017, we returned a total of €24.3bn to our shareholders. In March 2017, the Board of Management launched another share buy-back programme. We intend to buy back shares up to a maximum purchase price of €1bn by the Annual General Meeting on 25 April 2018. During the reporting year, we had bought back shares with a total volume of €1,017m.
The powers of the members of the Board of Management are defined in Sections 71 and 76–94 of the Stock Corporation Act (AktG). The Board of Management has the following powers to issue and buy back shares: − The Annual General Meeting of 26 April 2017 authorised the Company, pursuant to Section 71(1) no. 8 of the Stock Corporation Act, to buy back shares until 25 April 2022 up to a total amount of 10% of the share capital. The shares acquired, plus other own shares in the possession of the Company or attributable to the Company in accordance with Section 71a ff. of the Stock Corporation Act, may at no time amount to more than 10% of the share capital. In accordance with the provisions of the authorisation, the shares may be acquired in various ways. The Company may buy back shares amounting to a maximum of 5% of the share capital using derivatives. The Board of Management is authorised to use shares thus acquired for all legally permissible purposes, in particular those specified in the authorisation, whilst excluding subscription rights. Among other things, the Board of Management is empowered under Section 71(1) no. 8 of the Stock Corporation Act to retire the shares without requiring further approval from the Annual General Meeting. By resolution of 15 March 2017, the Board of Management decided to utilise this authorisation to acquire own shares. Around 3.8 million shares had been acquired by 31 December 2017 at a purchase price of approximately €684m.
The complete text of the aforementioned authorisations and the declaration by the Board of Management is provided in the agenda of the respective Annual General Meetings at www.munichre.com/agm/archive. Munich Reinsurance Company’s Articles of Association are available at www.munichre.com/articles-of-association.
Based on our underwriting guidelines, our reinsurance agreements generally include a clause that grants both parties to the agreement a right of extraordinary cancellation in the event that “the other party merges with another company or its ownership and control undergoes a material change”. Such or similar clauses are typical of the industry. They are also common in joint venture or cooperation agree ments between shareholders of a joint investment company.
In the consolidated cash flow statement, the consolidated profit of €392m is used as the starting point for determining the cash inflows from operating activities. The consolidated result is also adjusted by €6,003m to take account of the higher technical provisions. The net gains on the disposal of investments – which in adjusting the consolidated profit have to be deducted from the cash flows – are essentially attributable to the disposal of securities available for sale.
Defining the risk strategy The risk strategy, which is aligned with Munich Re’s business strategy, defines where, how and to what extent we are prepared to incur risks. The further development of our risk strategy is embedded in the annual planning cycle, and hence in our business planning. It is approved by the Board of Management, and discussed regularly with the Audit Committee of the Supervisory Board as a material element of the own risk and solvency assessment (ORSA) process.
Our risk strategy is determined by defining risk appetites for prescribed risk criteria based on available capital and liquidity and our profit targets, with which units in the Group must comply.
Implementation of strategy and the risk management cycle The risk appetite defined by the Board of Management is reflected in our business planning and integrated into the management of our operations. If capacity shortages or conflicts with the limit system or regulations arise, defined escalation and decision-making processes are followed. These have been designed to ensure that the interests of the business are reconciled with risk management considerations. Our implementation of risk management at operational level embraces the identification, analysis and assessment of all material risks. This provides a basis for risk reporting, the control of limits and monitoring.
Reinsurance ERGO Diversification 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year €m €m €m €m €m €m Property-casualty 6,210 6,688 403 381 –321 –311 Life and health 4,331 4,389 808 1,284 –224 –474
Diversification effect –7,397 –7,709 –1,923 –2,509 – – Tax –2,144 –2,180 –597 –1,003 – –
Group 31.12.2017 Prev. year Change €m €m €m % Property-casualty 6,292 6,759 –467 –6.9 Life and health 4,914 5,199 –285 –5.5
Diversification effect –9,133 –9,992 860 –8.6 Tax –2,287 –2,615 327 –12.5
The decrease in the solvency capital requirement, which we observed in all risk categories, was mainly due to changes in the capital markets, particularly the appreciation of the euro against all relevant currencies and the moderate rise in euro interest rates. Updates in the models for the risk categories market and credit and in the natural catastrophe models also contributed to the reduction.
We differentiate between losses involving a cost exceeding €10m in one field of business (large losses), losses affecting more than one risk or more than one class of insurance (accumulation losses), and all other losses (basic losses). For basic losses, we calculate the risk of subsequent reserving being required for existing risks within a year
We limit our risk exposure by, for example, setting limits and budgets not only for natural catastrophe risks but also for potential man-made losses. Our experts develop scenarios for possible natural events, taking into account the scientific factors, occurrence probabilities and potential loss amounts. On the basis of these models, the impact of various events on our portfolio is calculated and represented in mathematical terms in the form of a stochastic model.
Reinsurance ERGO Diversification 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year €m €m €m €m €m €m
Group 31.12.2017 Prev. year Change €m €m €m % Basic losses 3,443 3,714 –272 –7.3 Large and accumulation losses 5,696 6,178 –482 –7.8
Munich Re Group Annual Report 2017 effects reduce the value of the insurance portfolio (trend risks). The risk drivers mortality and disability are dominated by the reinsurance field of business, particularly by exposure in North America. The risk driver longevity risk is to be found in the products marketed by ERGO in Germany, together with typical risks from policyholder behaviour, such as the lapse risk, but we also underwrite longevity risk in the reinsurance field of business, especially in the United Kingdom. To a lesser extent, risks connected with the increase in treatment costs arise in the ERGO field of business.
The risk modelling attributes probabilities to each modified assumption and produces a complete profit and loss distribution. We use primarily historical data extracted from the underlying portfolios to calibrate these probabilities and additionally apply general mortality rates for the population to model the mortality trend risk. To enable us to define appropriate parameters for the modelling of the range of areas in which we operate, portfolios with a homogeneous risk structure are grouped together. We then aggregate the individual profit and loss distributions taking account of the dependency structure to obtain an overall distribution.
Our largest short-term accumulation risk in the life and health risk category is a severe pandemic. We counter this risk by analysing our overall exposure in detail (scenario analysis) and defining appropriate measures to manage the risks.
Our internal model treats the accumulation-risk scenarios as independent events. The diagrams show how we estimate our exposure for the coming year to the peak scenarios for a return period of 200 years.
We use appropriate limit and early-warning systems in our asset-liability management to manage market risks. Derivatives such as equity futures, options and interestrate swaps – which are used mainly for hedging purposes – also play a role in our management of the risks. The impact of options is taken into account in the calculation of solvency capital requirements. Information on derivative financial instruments can be found in the notes to the consolidated financial statements on page 135 f.5106 A+B
General interest-rate risk 3,416 3,987 –571 –14.3 Specific interest-rate risk 3,925 4,998 –1,073 –21.5
We use a cross-balance-sheet counterparty limit system valid throughout the Group to monitor and control our Group-wide credit risks. The limits for each counterparty (a group of companies or country) are based on its financial situation as determined by the results of our fundamental analyses, ratings and market data, and the risk appetite defined by the Board of Management. The utilisation of limits is calculated on the basis of creditequivalent exposure (CEE). There are also volume limits for securities lending and repurchase transactions. Group-wide rules for collateral management, for example for OTC derivatives and catastrophe bonds issued, enable the associated credit risk to be reduced. Exposure to issuers of interest-bearing securities and CDSs in the financial sector is limited by a financial sector limit at Group level.
In monitoring the country risks, we do not simply rely on the usual ratings, but perform independent analyses of the political, economic and fiscal situation in the most important of the countries issuing paper in which we might potentially invest. On this basis, and taking account of the investment requirements of the fields of business in the respective currency areas and countries, limits or actions that are mandatory throughout the Group for investments and the insurance of political risks are approved by the Group Investment Committee.
Interest-rate risk The fall in the general and specific interest-rate risk in the reinsurance field of business was substantially the result of a reduction in long-term liabilities and a moderate decrease in credit exposure. The interest-rate risk fell considerably in the ERGO field of business. A large part of the decrease was caused by the moderate rise in interest rates in the eurozone and the improved depiction of the life and health units in market risk.
In the ERGO field of business, the market value of interest-sensitive investments as at 31 December was €130.6bn (132.5bn). The modified duration was 8.8 (9.3) for interest-sensitive investments and 9.5 (10.5) for liabilities. This resulted in exposure to falling interest rates arising mainly out of the long-term options and guarantees in life insurance business. A decrease in interest rates of one basis point would have reduced the freely available financial resources by approximately €9.8m (22.1m).
A central IT solution with general ledgers largely standardised throughout the Group is used to produce the consolidated financial statements. Ongoing checks are performed to protect it from unauthorised access. It is based on harmonised basic data, uniform processes and posting rules, and a standard interface for delivery of data to the Group or subgroup. Authorisation procedures regulate access to accounting systems. Group Audit regularly audits data management in the accounting systems to ensure that it is being performed in a proper and orderly manner.
The sensitivity in the internal model is regularly checked against the most important input parameters. This mainly relates to the dependence of the result on frequency and loss amounts and the parameters for the correlations between scenarios. The analyses showed no anomalies in the financial year.
Solvency capital requirement – Operational risk The reduction in the solvency capital requirement was due to updated assessments of some scenarios, in particular reflecting risk-mitigating measures taken in the area of cyber risks.
Reputational risk We define reputational risk as the risk of damage to Munich Re’s reputation as a consequence of a negative public image resulting in a deterioration in its credit rating, corporate value, etc. The reputational-risk aspect of relevant issues (e.g. business transactions or strategic decisions) is assessed in the fields of business by “Reputational Risk Committees”. Where a reputational risk could potentially have an impact on Munich Re as a group, central divisions at Group level are involved in the assessment.
Solvency capital requirement – Credit The decline in the solvency capital requirement was due mainly to developments in the capital markets, particularly the appreciation of the euro against all important currencies. Model updates also contributed to the reduction, in particular the more refined depiction of migration and default probabilities.
A key purpose of the ICS is to guarantee the reliability of the annual financial statements at both consolidated and individual-company level and to identify, manage and control risks in the accounting process. It is essential for all items in our accounts to be correctly recorded and measured appropriately, and for the information provided in the notes and the management report to be complete and correct. To assist in achieving this, the Group has an Accounting Manual, and a system for regular
Strategic risk We define strategic risk as the risk of making wrong business decisions, implementing decisions poorly, or being unable to adapt to changes in the operating environment. The existing and new potential for income generation in the Group and the fields of business in which it operates creates strategic risks, which we manage by carrying out risk analyses for significant strategic issues and regularly monitoring the implementation of measures deemed necessary. The Chief Risk Officer is involved in operational business planning and the processes for company mergers and acquisitions.
Liquidity risk Our objective in managing liquidity risk is to ensure that we are in a position to meet our payment obligations at all times. To guarantee this, the liquidity position at our units is continuously monitored and subject to stringent requirements for the availability of liquidity. The shortterm and medium-term liquidity planning is submitted to the Board of Management on a regular basis. The liquidity risk is managed within the framework of our holistic risk strategy, with the Board of Management defining limits on which minimum liquidity requirements for our operations are based. These risk limits are reviewed annually, and compliance with the minimum requirements is continuously monitored. Using quantitative risk criteria, we ensure that Munich Re has sufficient liquidity available to meet its payment obligations even under adverse scenarios, with the liquidity position being assessed both for insurance catastrophe scenarios and for adverse situations in the capital markets. Further information on liquidity risks in life and health insurance business and in property-casualty business can be found in the notes to the consolidated financial statements on page 159 ff. and page 161 ff.
Security risk We define security risks as risks arising out of threats to the safety of our employees, data, information and property. We are intensifying our analysis of cyber risks in particular in recognition of the increasing spread of information technology in society and the economy. Security Risk Committees have been set up in the fields of business to manage and coordinate measures taken to counter security risks. The members of the Security Risk Committees are managers from operational areas (e.g. IT Security), the control functions (e.g. the Information Security Officer and the Data Protection Officer) and representatives from business units and central divisions.
As part of the normal course of business, Munich Re (Group) companies are involved in court, regulatory and arbitration proceedings in various countries. The outcome of pending or impending proceedings is neither certain nor predictable. However, we believe that none of these proceedings will have a significant negative effect on the financial position of Munich Re.
In accordance with the prescribed processes, our Board committees explicitly defined the risk appetite for significant risk categories in the year under review, and quantified it with key figures. We determined and documented the risk appetite across the Group hierarchy and communicated it throughout the Group. During the whole of 2017, risk exposures were regularly quantified and compared with the risk appetite. We assess Munich Re’s risk situation to be manageable and under control.
cannot be excluded. A number of Munich Re insurance and reinsurance units conduct business in the United Kingdom, and the country’s departure from the EU will have implications for that business. We have set up a Group-wide project to ensure that our local structure is adapted to the direct effects of Brexit. Besides these direct effects, there may also be indirect effects on our business – for instance, owing to negative economic development, falling exchange rates or rising inflation. However, also because there may be contrary effects, what this may mean for Munich Re is not currently foreseeable. Taking into account the various possible Brexit scenarios, as things stand at present we do not expect any significant negative direct or indirect effects overall on Munich Re’s assets, liabilities, financial position or results. In Germany, the continuing discussions on a “citizens’ insurance scheme” could lead to government action with implications for private health insurance, though it is not possible at the present time to predict what they might be.
Apart from the political imponderables in Europe and the situation in the emerging countries and the Middle East, the differences between the USA and North Korea are also creating uncertainty. Further escalation could have significant consequences for the region and the global capital markets.
Our strong client focus, global risk management capabilities and industry knowledge put us in a strong position to benefit from continuously evolving markets and changes in client behaviour, whilst we create new business opportunities by developing customised solutions for our clients. Unless stated otherwise, the opportunities for Munich Re outlined below generally relate equally to all fields of business.
The currently strong global economic growth should have a positive impact on the demand for insurance cover, and trigger higher premium volume in most classes of insurance. A less expansionary monetary policy could also lead to a normalisation of the bond markets. This would entail price losses and have a negative impact in the short term on our investment result, but would be favourable to our insurance business and bring higher returns in the long run. At the same time, the pressure on our cedants from the still prevailing low-interest-rate environment opens up diverse business opportunities for our reinsurance activities.
Markets are being increasingly shaped by digitalisation, and changes in client behaviour call for flexibility in terms of coverage and solutions. Munich Re is investing heavily in our digital infrastructure and skills as well as in cooperation with strategic partners – including start-ups – in order to help bring about the requisite changes in terms of innovative products, services and processes. With Munich Re’s presence in major start-up hubs, the collaboration with accelerators, and the new Digital Partners and Digital Ventures units, numerous new business and cooperation ideas are arising which will help us to expand our business model beyond the insurance value chain and tap the growth opportunities offered by the digital world.
We strive to obtain the highest possible degree of automation throughout the value chain and across all business units to not only meet our clients’ and our own needs as regards quality, speed and security, but also to improve efficiency. Significant investments in data, infrastructure, and human resources make it possible for us to use big data analytics even more systematically for our own business and make the technology available to our clients. Our US subsidiary Hartford Steam Boiler
(HSB), for example, uses sensor technology to develop innovative insurance solutions for the Internet of Things together with our industrial clients. The fact that our clients are increasingly using traditional and digital channels to gain information and make purchases encourages us in our efforts to promote the integration of products and distribution channels and the expansion of direct sales in all lines of primary insurance. Furthermore, we utilise the growing digital opportunities to further reduce and cover health risks, moving away from pure cost coverage for illness and towards health maintenance and prevention.
The positive economic dynamics and low levels of insurance penetration in many developing and emerging markets provide opportunities for profitably expanding and further diversifying our business portfolio. In life and health insurance, the ageing population will lead to increasing demand for private-provision products. Together with the primary insurance and reinsurance undertakings of our Group, MEAG plays an important role with its expertise in asset management; as a reinsurer, we also provide life insurance companies outside our Group with integrated financial and reinsurance solutions for the benefit of clients.
We expect climate change to lead to an increase in weather-related natural catastrophes in the long term. This growing loss potential will lead to increased demand for primary insurance and reinsurance products. Our expertise in risk management, together with our highly developed risk models, allow us to professionally assess these risks, calculate adequate prices for traditional covers, and develop new solutions for our primary insurance and reinsurance clients.
Together with our clients, we strive to expand the boundaries of insurability in many ways, working on cyber risks and enhanced cover options, among other things. We now offer our clients diverse coverage concepts for risks and damage caused by faulty product software and cyber attacks. In addition to this, we are developing a broad range of covers for new risks, such as entrepreneurial risks in their multitude of different forms. Many of these risks in our changed world are now of much greater significance than the perils traditionally covered by the insurance industry.
In the light of the persistently low interest rates on lowrisk investments, a 15% return on risk-adjusted capital (RORAC) after tax throughout the cycle can no longer be realistically achieved. For this reason, the target is no longer being pursued.
Comparison of prospects for Munich Re (Group) for 2017 with results achieved
Consolidated result €bn 2.0–2.4 0.4 1 Including the result from reinsurance treaties recognised in the non-technical result owing to insufficient risk transfer. 2 Excluding insurance-related investments.
At ERGO Life and Health Germany, we had forecast total premium income of “just under €10bn” and at €9.9bn, we achieved this. At €9.2bn, gross premiums written were above our expectations of “around €9bn”. In Life Germany, we achieved premium volume of €3.5bn, in line with our expectation of around €3.5bn. At €5.3bn, gross premium in Health Germany was within the target corridor of €5–5.5bn.
The consolidated result for 2017 in the reinsurance field of business amounted to €120m, falling far short of our initial expectations of €1.8–2.2bn.
Gross premium in reinsurance as a whole should be in the range of €29–31bn in 2018, i.e. below last year’s figure, although currency translation effects could potentially have a considerable impact on this estimate. We project that the consolidated result for 2018 in reinsurance will total between €1.8bn and €2.2bn. This projected result is therefore significantly higher than the 2017 result, which was marked by exceptional major-loss accumulation.
Negotiations concerning treaties taking effect at the beginning of 2018 were influenced by the exceptionally high major losses from natural catastrophes in 2017. Contrary to expectations at the beginning of the renewal
In the period from June 2017 to the end of February 2018, we bought back shares with a value of €919m; another €81m are to be used for share buy-backs before the Annual General Meeting in April 2018. We are using this measure to return unneeded capital to shareholders. Despite the buy-backs, our good capital position will allow us to continue paying attractive dividends and selectively utilising opportunities for profitable growth. Subject to approval by the Annual General Meeting, Munich Re will pay a dividend of €8.60 per share in 2018, as in the previous year. This is equivalent to a total payout of €1.3bn.
Total premium volume in 2018 in the ERGO field of business should be at roughly the same level as the previous year, approximately €18–19bn, with gross premiums written of €17–18bn. For the ERGO field of business, we anticipate a consolidated result in the range of €250–300m in 2018, approximately the same level as the 2017 financial year, which was surprisingly successful.
Owing to methodological differences, we expect the economic earnings for 2018 to be slightly higher than the envisaged IFRS result of €2.1–2.5bn. Our projection is based on the assumption of stable capital markets, normal major-loss incidence and unchanged modelling parameters. Deviations from these assumptions may have a different impact on economic earnings than on IFRS accounting. Further information on our economic earnings management tool can be found on page 50.
Combined management report Munich Reinsurance Company Information reported on the basis of German accountancy rules
Munich Re Group Annual Report 2017 with regard to intangible assets, investments, financial instruments, individual underwriting assets and liabilities, and deferred taxes.
Market environment and major factors of influence The macroeconomic and industry environment of Munich Reinsurance Company essentially corresponds to that of the Group. Further information on this can be found on page 49.
For the 2017 financial year, Munich Re again utilised the option of publishing a combined management report in accordance with Section 315(5) in conjunction with Section 298(2) of the German Commercial Code (HGB). Supplementary to our Munich Re (Group) reporting, this section provides details on the performance of Munich Reinsurance Company.
Munich Re Group Annual Report 2017 in the previous year and exceeded our expectations. Just as in the previous year, 2017 was also marked by a large number of major losses, but hurricanes Harvey, Irma and Maria, which caused massive destruction in the Caribbean and the USA in August and September, were by far the most expensive loss events of the year.
At €2,862m, aggregate losses from natural catastrophes were significantly higher than in the previous year (€702m), accounting for 20.8 (5.0) percentage points of net earned premiums.
In many of our most important markets, competition was unrelenting. In addition, in many markets the persistently low-interest-rate environment continued to subdue our clients’ business, in turn curbing demand for traditional reinsurance. While we are very satisfied with the development of new business in Asia, business in other markets is stagnant or slightly down.
In the 2017 financial year, Munich Reinsurance Company’s gross premium income totalled €22,612m (23,527m), a year-on-year decrease of 3.9%, mainly owing to the reduction in treaty shares, the targeted withdrawal from unprofitable business, and changes in the value of the euro as against other currencies.
Gross premium volume in life and health reinsurance was lower than in the previous year. Gross premiums written were down moderately by 0.6% to €10,798m (10,869m). A large part of the fall in premium volume was attributable to negative currency translation effects. If exchange rates had remained unchanged, our premium income would have increased moderately by 0.6% in life and health reinsurance.
Our technical result before claims equalisation provision amounted to –€1,990m in the 2017 financial year, compared with a profit of €596m in the previous year. This deterioration of the result was mainly attributable to exceptionally high major-loss expenditure. A customary review of provisions for the full year also resulted in a relatively lower reduction in the provisions for claims from prior years. Over the years, the safety margin in the provisions has remained unchanged at a high level, as Munich Reinsurance Company has adhered to its careful approach to determining and adjusting loss provisions. Major-loss expenditure totalling €3,428m (1,249m) after retrocession and before tax was significantly higher than
In liability business, treaty reductions led to a fall in premium volume in the 2017 financial year. A significant increase in major-loss expenditure caused the technical result before claims equalisation provision to deteriorate substantially year on year. In addition, fewer loss reserves for prior accident years could be released.
Owing to the high level of pricing pressure, the premium level in marine reinsurance was down significantly compared with the previous year. The technical result before claims equalisation provision improved significantly. After the negative result posted in the previous year, the technical result was positive in the year under review, mainly owing to lower major-loss expenditure compared with the previous year.
In health reinsurance, premium income in the year under review showed an increase, which was essentially attributable to business expansion in particular in Canada and the United Kingdom. The result was up slightly compared with the previous year.
Health 2017 Prev. year Change % Gross premiums written €m 3,079 2,939 4.8 Combined ratio % 99.5 100.4 Underwriting result before claims equalisation provision and similar provisions €m 14 –10 –
In engineering reinsurance (machinery, EAR, CAR, EEI, etc.), premium income was down significantly on the previous year owing to treaty cancellations. After having generated a small profit in the previous year, the technical result before claims equalisation provision fell into negative territory, owing primarily to a sharp increase in major-loss expenditure.
The global low-interest-rate environment continued to pose great challenges for investment by insurers. Yields on ten-year German government bonds reached a new record level of 0.6% in July, following speculation about an imminent end to the ECB’s expansionary monetary policy, but fell back again to 0.4% by the end of the year. Yields on government bonds remained at a relatively low level in the USA as well – despite strong economic growth and key-interest-rate increases. This was partly attributable to persistently weak core inflation. The equity markets saw appreciable increases in prices, and volatility was very low. The EURO STOXX 50 climbed by around 6% in the period under review. The US Dow Jones Index rose by around 25% – driven by the expectation that many companies would benefit from the tax reform adopted at the end of the year. Throughout the year, the euro exchange rate increased significantly against most important currencies. At the end of December 2017, the euro was up year on year by around 14% against the US dollar, 6% against the Canadian dollar and 4% against the pound sterling.
Other classes 2017 Prev. year Change % Gross premiums written €m 2,332 2,355 –1.0 Combined ratio % 102.7 100.7 Underwriting result before claims equalisation provision and similar provisions €m –42 –16 –162.2
Aviation 2017 Prev. year Change % Gross premiums written €m 486 443 9.8 Combined ratio % 73.3 75.3 Underwriting result before claims equalisation provision and similar provisions €m 132 111 18.6
Fire 2017 Prev. year Change % Gross premiums written €m 3,278 3,551 –7.7 Combined ratio % 142.8 83.7 Underwriting result before claims equalisation provision and similar provisions €m –1,248 497 –
Engineering 2017 Prev. year Change % Gross premiums written €m 567 752 –24.6 Combined ratio % 122.0 95.9 Underwriting result before claims equalisation provision and similar provisions €m –125 28 –
The decline in the investment result is principally the consequence of reduced gains on disposals in the year under review. The positive contribution to profits
The lower tax expenditure was mainly attributable to a sharp decrease in the branch results compared with the previous year.
In the 2017 financial year, Munich Reinsurance Company generated net retained profits of €1,333m (1,754m) according to German accountancy rules. Including these net retained profits, the Company’s revenue reserves amounted to €4,422m (4,574m) as at the balance sheet date, of which €376m (407m) is subject to a restriction on distribution. The distributable funds thus amount to €4,046m (4,167m).
The shareholders’ equity of Munich Reinsurance Company as determined under German accountancy rules is protected effectively against the risk of loss arising from a random accumulation of losses by a claims equalisation provision totalling €7,724m (10,126m). Given our robust capitalisation according to all calculation methods, we intend – subject to the approval of the
Deferred items 270 332 –18.7 Excess of plan assets over pension liabilities 456 534 –14.7 Total assets 85,246 86,670 –1.6
Deposits retained on retroceded business 1,686 2,057 –18.1 Other liabilities 6,620 7,292 –9.2 Deferred items 19 28 –30.7 Total equity and liabilities 85,246 86,670 –1.6
Annual General Meeting – to pay our shareholders a yearon -year stable dividend of €8.60 per share, or a total of €1,290m, from Munich Reinsurance Company’s net retained profits for the 2017 financial year.
The carrying amount of Munich Reinsurance Company’s investments excluding deposits retained on assumed reinsurance fell by €3,063m to €64,010m (67,073m) in the 2017 financial year. Investments in fixed-interest securities fell by €2,369m as a result of foreign exchange losses and sales. We primarily reduced our portfolios of German, UK and US government bonds and European covered bonds. As at 31 December 2017, 95% of our fixedinterest securities were investment-grade and around 87% were rated “A” or better.
The balance sheet item “claims equalisation provision and similar provisions” was down by €2,382m to €8,263m (10,645m) in the 2017 financial year. Owing to the negative results, we had to withdraw significant amounts from the claims equalisation provision in some classes of business – especially in fire –€1,419m (–116m) and liability –€258m (+209m), as well as in engineering –€127m (–18m), credit –€100m (–48m) and marine –€92m (–35m). In addition, the prerequisites for establishing a claims equalisation provision no longer existed in the aviation class of business, so the entire amount of –€720m (–37m) was withdrawn.
Equity1 €m 2017 Prev. year Issued capital 573 573 Capital reserve 6,845 6,845 Revenue reserves 3,089 2,821 Net retained profits 1,333 1,754
Statement of Corporate Governance for the 2017 financial year pursuant to Section 289f and Section 315d of the German Commercial Code (HGB)
Munich Reinsurance Company has submitted the Statement of Corporate Governance in accordance with Section 289f of the Commercial Code (HGB), and the Group Statement of Corporate Governance in accordance with Section 315d HGB. The Statements have been combined and can be found at www.munichre.com/cg-en.
The projections by Munich Reinsurance Company about the future development of its business are essentially subject to the same influences as the reinsurance life and health and reinsurance property-casualty segments presented in the consolidated financial statements. You will find this information on page 79 f.
The investment result of Munich Reinsurance Company is expected to decrease in the 2018 financial year. This applies in particular to regular income, which is also attributable to income from affiliated companies and shares in investment funds. As things stand at present, we expect to achieve an adequate German GAAP result in 2018, although it is likely to be lower than in the year under review owing to the allocation to the claims equalisation provision.
Remuneration report of Munich Reinsurance Company The principles regarding the structure and design of the compensation system of Munich Reinsurance Company correspond to those of the Group. The remuneration report can be found on page 27 ff.
Fi na nc ia l s ta te m en ts a nd n ot es3 89Consolidated financial statements and notes
Consolidated balance sheet 092 Consolidated income statement 094 Statement of recognised income and expense 095 Group statement of changes in equity 096 Consolidated cash flow statement 098
Notes to the consolidated financial statements Application of International Financial Reporting Standards (IFRSs) 099 Declaration of Conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG) 099 Recognition and measurement 099 Consolidation 104
Segment reporting 117 Segment assets 118 Segment equity and liabilities 118 Segment income statement 120 Other disclosures 120 Notes on determining the combined ratio 122 Non-current assets by country 122 Investments in non-current assets per segment 122 Gross premiums written 123
Other information 42 Related parties 165 43 Personnel expenses 165 44 Mid-Term Incentive Plan 165 45 Remuneration report 166 46 Number of staff 166 47 Auditor’s fees 166 48 Contingent liabilities, other financial commitments 167 49 Significant restrictions 168 51 Events after the balance sheet date 169 52 Earnings per share 169 53 Proposal for appropriation of profit 169
Notes 31.12.2017 Prev. year Change €m €m €m €m €m % A. Intangible assets I. Goodwill (1) 2,584 2,817 –233 –8.3 II. Other intangible assets (2) 1,105 1,303 –198 –15.2
B. Investments I. Land and buildings, including buildings on third-party land (3) 5,121 4,444 677 15.2 II. Investments in affiliated companies, associates and joint ventures (5) 2,216 1,711 505 29.5 Thereof: Associates and joint ventures accounted for using the equity method 2,010 1,565 445 28.5
IV. Other securities 1. Available for sale (7) 143,845 149,059 –5,215 –3.5 2. At fair value through profit or loss (8) 1,979 2,695 –716 –26.6
Notes 31.12.2017 Prev. year Change €m €m €m €m % A. Equity (17) I. Issued capital and capital reserve 7,418 7,417 1 0.0
D. Gross technical provisions for unit-linked life insurance (24) 8,971 8,429 542 6.4
G. Deferred tax liabilities (14) 1,456 2,230 –774 –34.7 H. Liabilities related to assets held for sale (16) 65 0 65 – Total equity and liabilities 265,722 267,805 –2,083 –0.8
Notes 2017 Prev. year Change €m €m €m €m €m %
Thereof: Income from associates and joint ventures accounted for using the equity method 145 121 24 19.8 10. Deduction of income from technical interest –6,376 –6,390 14 0.2 13. Other non-operating result (37) –926 –437 –489 –112.0 14. Impairment losses on goodwill (37) –9 –28 19 66.9
Earnings per share (52) 2.44 16.13 –13.69 –84.9 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”.
Statement of recognised income and expense for the financial year 2017 €m 2017 Prev. year Consolidated result 392 2,581 Currency translation
Unrealised gains and losses on investments Gains (losses) recognised in equity 970 1,394 Recognised in the consolidated income statement –610 –1,129
Group statement of changes in equity for the financial year 2017
Equity attributable to Munich Reinsurance Company Non-controlling Total equity holders interests equity Consolidated Issued capital Capital reserve Retained earnings Other reserves result Retained Remeasurement earnings before Unrealised Currency gains/losses deduction of Treasury gains and translation from cash flow €m own shares shares losses reserve hedges Balance at 31.12.2015 573 6,845 14,793 –683 4,185 1,848 –1 3,107 298 30,966
Purchase/sale of own shares –21 0 0 –949 0 0 0 0 0 –971
Unrealised gains and losses on investments 0 0 0 0 366 0 0 0 –6 360 Change resulting from valuation at equity method measurement 0 0 –41 0 4 0 16 0 0 –20 Change resulting from cash flow hedges 0 0 0 0 0 0 –1 0 0 –1 Remeasurements of defined benefit plans 0 0 –37 0 0 0 0 0 1 –36
Purchase/sale of own shares –21 0 0 –994 0 0 0 0 0 –1,015
Thereof: Cash not attributable to disposal group2 3,625 3,353 Cash attributable to disposal group 3 0 Restricted cash 45 10
Discretionary judgements and estimates are of significance for the following items in particular and are described in more detail in the respective explanatory notes: − Consolidated group − Goodwill and other intangible assets − Fair values and impairments of financial instruments − Deferred acquisition costs − Technical provisions − Provisions for post-employment benefits − Deferred tax − Contingent liabilities
Our presentation currency is the euro (€). Amounts are rounded to million euros. Due to rounding, there may be minor deviations in summations and in the calculation of percentages, with figures in brackets referring to the previous year. Expenses, outflows and losses are shown using the minus sign; income and inflows are shown without a plus or minus sign.
− Amendments to IAS 7 (rev. 1/2016), Disclosure Initiative − Amendments to IAS 12 (rev. 1/2016), Recognition of Deferred Tax Assets for Unrealised Losses − Amendments published as part of the “Annual Improvements to IFRSs 2014–2016 Cycle”, (12/2016) Amendments to IFRS 12, Disclosure of Interests in Other Entities.
Munich Re’s consolidated financial statements have been prepared on the basis of the International Financial Reporting Standards (IFRSs), as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315a 1) of the German Commercial Code (HGB).
The adjustments had the following effects on the consolidated balance sheets for the 2015 and 2016 financial years, and on the consolidated income statement for 2016: The other amendments have little or no material effects on Munich Re.
As part of the regular review of the calculation methods for income from technical interest, changes have been made with regard to German health primary insurance, with the
Consolidated balance sheet 31.12.2015 Changes due as originally to adjustments recognised in 2015 31.12.2015 €m Assets B. Investments III. Loans 53,516 1,038 54,555 IV. Other securities 144,094 1,348 145,442 2. At fair value through profit or loss 2,551 24 2,574 VI. Other investments 4,635 108 4,742 E. Receivables II. Other receivables 11,823 –2,494 9,328
IFRS 17, Insurance Contracts, which reorganises the recognition and measurement of insurance contracts, was published in May 2017; please refer to the separate remarks on this topic below. These new rules will not be mandatory until 2021. Due to the close interlinking of underwriting liabilities and investments of insurance companies, it is essential to have an aligned measurement of these line items in the balance sheet in order to prevent balance sheet distortions. For this reason, the insurance industry has been pressing for a postponement of the mandatory first application of IFRS 9 for the industry until application can be aligned with the insurance standard. The IASB took account of these concerns, and published an amendment standard to IFRS 4, Insurance Contracts, in September 2016. This gives the possibility of postponing the first-time application of IFRS 9 until 2021, but requires evidence on the basis of the financial statements as at 31 December 2015 that most of the Group’s activity is in insurance. Insurance business is considered “predominant” if at the time of measurement more than 90% of total liabilities were related to insurance business. Besides liabilities that fall within the scope of IFRS 4, these also include liabilities from investment contracts measured at fair value and other liabilities resulting from insurance business. At Munich Re, liabilities related to insurance business accounted for a share of around 96.5% of total liabilities as at 31 December 2015. In the meantime, there have been no changes to our business activities that would necessitate a reassessment. In the interim period, additional qualitative and quantitative investment disclosures will have to be made from 2018 onwards in order to ensure a degree of comparability with companies that ware already applying IFRS 9. This involves in particular the disclosure of fair values and their changes during the financial year with respect to financial assets, which must be separated into assets measured at fair value through profit or loss and assets where this is not the case. The entity also needs to provide transparency as to how it proved that it is qualified to postpone the first-time application of IFRS 9. Munich Re
Standards or changes in standards not yet entered into force Unless otherwise stated, all standards or amendments to standards that have entered into force will be applied by Munich Re for the first time as from the mandatory effective date for entities with their registered office in the European Union. The relevant dates for the mandatory first-time application are shown in the following list of new standards.
Due to the great importance of this standard for Munich Re, we have established a Group-wide project to analyse the provisions in detail, and we are currently driving forward the required implementation processes.
Munich Re will take advantage of the exceptions permitted for current assets and leases for low-value assets, according to which recognition in the balance sheet is not required. On transitioning to IFRS 16, we intend to continue to apply the exception regarding maintenance of the definition of leasing. IFRS 16 will therefore be applied to all contracts concluded prior to 1 January 2019 and identified as leases in accordance with IAS 17, Leases, and IFRIC 4, Determining whether an Arrangement Contains a Lease.
As at 31 December 2017, future minimum lease payments under non-cancellable operating leases (on a non-discounted basis) totalled €409m (see Other information (50) Leasing. In general, we do not expect the new rules to have any material effects on the consolidated financial statements of Munich Re.
Measurement is not made at the individual contract level, but on the basis of portfolios that are subdivided into specified groups. This should largely take account of all cash flows resulting from the conclusion of insurance contracts, which by implication means that certain items currently shown separately in our financial statements will not be included in future.
will make use of this option, and will thus publish information about the effects of IFRS 9 from 2018 onwards.
Another new feature is the clearly stipulated differentiation in the income statement between the technical result – which is precisely defined in IFRS 17 and comprises insurance revenue and insurance service expenses – and insurance finance income or expenses. Insurance revenue is defined in order to allow for comparability with the revenues of other industries. In particular, savings premiums (“deposit components”) may no longer be recognised as result components. The new definition will thus require a fundamental rethink of the way we disclose revenue, which currently includes all premium components. IFRS 17 contains an option regarding the recognition of changes in value because of amendments to financial parameters. The option allows for recognition either in the income statement or directly in equity. It can be exercised at individual portfolio level.
The new rules require detailed reconciliations to be disclosed for changes to individual measurement components, as under IFRS 17 the measurement of insurance business is made on the basis of models that include unobservable inputs. Notes about the risks from insurance contracts will remain largely unchanged.
IFRS 17 will involve fundamental changes to the accounting for insurance contracts and related processes. As the required changes will involve a considerable amount of work, we have started to analyse them in great detail. In a parallel implementation project that has also already been set up, all important areas of our reinsurance and primary insurance Group are involved from the outset in order to ensure at an early stage that all special aspects of the individual insurance lines of business are taken into account.
IFRS 9, IFRS 15 and IFRS 16 were adopted into European law in September 2016 and October 2017 respectively. The endorsement of IFRS 17 is still outstanding.
− Amendments published as part of the “Annual Improvements to IFRSs 2014–2016 Cycle”, (rev. 12/2016) Amendments to IFRS1, First-time Adoption of IFRS, and IAS 28, Sale or Contribution of Assets between an Investor and its Associate or Joint Venture − Amendments to IAS 28 (rev. 10/2017), Long-term Interests in Associates and Joint Ventures − Amendments published as part of the “Annual Improvements to IFRSs 2015–2017 Cycle”, (12/2017): − Amendments to IAS 12, Income Taxes; IAS 23, Borrowing Costs; IFRS 3, Business Combinations; and IFRS 11, Joint Arrangements − IFRIC 22 (12/2016), Foreign Currency Transactions and Advance Consideration − IFRIC 23 (6/2017), Uncertainty over Income Tax Treatments
The amendments will become mandatory in 2018 or 2019, but have little or no material effects on Munich Re.
Cash flows arising from obtaining control €m 2017 Prev. year Total consideration for obtaining control –100 –428 Non-cash consideration for obtaining control 0 0 Cash consideration for obtaining control –100 –428 Cash over which control was obtained 52 32 Total –48 –397
Net assets acquired €m 31.12.2017 Prev. year Goodwill/gain from bargain purchase –2 9 Other intangible assets 4 289
Cash flows arising from losing control €m 2017 Prev. year Total consideration for losing control 9 294 Non-cash consideration for losing control 0 0 Cash consideration for losing control 9 294 Cash over which control was lost 0 –59
A list of all our shareholdings can be found in the section “List of shareholdings as at 31 December 2017 in accordance with Section 313(2) of the German Commercial Code (HGB)”.
Property 661 Other investments 169 Cash at bank, cheques and cash in hand 52 Other assets1 48
Liabilities assumed 376 Other liabilities 325 Other liability items 51 Contingent liabilities recognised pursuant to IFRS 3.23 0 1 The fair value of the receivables acquired as part of the transaction largely corresponds to the carrying amount. No material defaults were expected at the acquisition date.
Securitisation vehicles Munich Re invests in debt securities that are issued by securitisation vehicles which are not set up by Munich Re. Munich Re also uses securitisation vehicles to issue catastrophe bonds, and it also invests in third-party catastrophe bonds. Securitisation vehicles are self-financed by issuing securities.
Entities and special funds are considered joint ventures if we are able to determine their relevant operations solely by unanimous agreement of all parties entitled to joint control, and we only have rights to their net assets.
A joint operation exists if its relevant operations can only be determined by unanimous agreement of all parties entitled to joint control, and these parties – due to the legal form of the joint operation, contractual provisions or other circumstances – have rights to assets and obligations for the liabilities of the joint operation, instead of rights to net assets.
Munich Re has interests in both consolidated and unconsolidated structured entities.
Sponsored unconsolidated structured entities Munich Re provides structuring and consultancy services for clients within the context of the foundation and structuring of third-party securitisation vehicles. As at 31 December 2017, Munich Re did not have any interests in these structured entities.
Deposits retained on assumed reinsurance 0 0 0 356 356 Investments for unit-linked life insurance contracts 0 6,866 0 0 6,866 Ceded share of technical provisions 0 0 0 0 0
Investments in affiliated companies, associated companies, associates and joint ventures that are not material for assessing the Group’s financial position are generally accounted for at fair value. Changes in the fair value are recognised in “other reserves” under unrealised gains and losses. For the consolidated financial statements, investments in associates and joint ventures are measured using the equity method, i.e. with our share of their equity, and our earnings are included in the investment result. As a rule, the equity and annual result from the most recent individual or consolidated financial statements of the associate or joint venture are used. In the case of financial statements of important associates or joint ventures, appropriate adjustments are made to ensure they conform with Munich Re’s accounting policies and exceptional transactions are recognised in the same reporting period.
Determining fair values IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All investments and other assets and liabilities that are recognised at fair value, and such investments and other items for which a fair value is disclosed solely in the notes, are allocated to one of the fair value hierarchy levels of IFRS 13, which provides for three levels.
Other investments mainly include deposits with banks and investments in renewable energy and physical gold, and are accounted for at amortised costs. We apply the effective interest method for deposits with banks. Investments in renewable energies are amortised on a straight-line basis at a rate of at least 4%, but mostly at 5%, over a useful life of 20–25 years. If required, impairment losses or impairment losses reversed follow the annual impairment test. If the recoverable amount of physical gold is lower than the carrying amount, a write-down for impairment is carried out. If higher, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the acquisition cost.
We determine acquisition cost on the basis of the average purchase price. In the case of an impairment, a writedown is made to the fair value at the balance sheet date and recognised in profit or loss.
Other insurance-related investments Other insurance-related investments are not utilised for asset-liability management. They include insurancelinked derivatives, derivatives to hedge variable annuities, weather and commodity derivatives, and physical gas. Insurance-linked derivatives include derivatives embedded in variable annuities, the derivative components of natural catastrophe bonds and from securitisations of mortality and morbidity risks, individually structured insurancelinked derivatives, and derivative components which are separated from their host insurance contract in accounting. Insurance-linked derivatives also include retrocessions in the form of derivatives to hedge insurance risks assumed. Insurance risks are defined as risks which – in a modified form – can also be covered by an insurance contract within the meaning of IFRS 4. Other insurance-related investments are accounted for at fair value, although we recognise changes in value in profit or loss. For physical gas, the fair value is reduced by estimated costs to sell.
Technical provisions are shown as gross figures in the balance sheet, i.e. before deduction of the ceded share; see the explanatory remarks on Assets – D Ceded share of technical provisions. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements. Acquisition costs for insurance contracts are recognised and amortised over the terms of the contracts; see note Assets – G Deferred acquisition costs. The measurement of technical provisions is based on US GAAP FAS 60 (life primary insurance without performance-related participation in surplus, health primary insurance and the bulk of reinsurance treaties), FAS 97 (life primary insurance based on the universal life model, unit-linked life insurance and life reinsurance for assumed business based on FAS 97) and FAS 120 (life primary insurance with performance-related participation in surplus). Credit insurance contracts are accounted for in accordance with the rules of IFRS 4.
The line item issued capital and capital reserve contains the amounts that the equity holders of Munich Reinsurance Company have paid in on shares. The issued capital comprises the subscribed capital less the accounting value of own shares held by Munich Reinsurance Company at the balance sheet date. Retired shares are taken into account in the subscribed capital and retained earnings at their accounting value. The capital reserve contains gains from the sale of own shares by Munich Reinsurance Company.
Besides this, there are provisions for deferred premium refunds, which are posted for the amounts apportionable to policyholders from the measurement differences between IFRS and local GAAP on the basis of the expected future participation quotas. For unrealised gains and losses on investments available for sale, which are recognised directly in equity (see Assets – B Investments – Fixed-interest or non-fixed-interest securities available for sale), the resultant provision for deferred premium refunds is also posted without impact on profit or loss; otherwise, changes in this provision are recognised in the income statement.
Liability adequacy test All technical provisions are regularly subjected to a liability adequacy test in accordance with IFRS 4. If current experience shows that the provisions posted on the basis of the original assumptions – less the related deferred acquisition costs and the present value of the related premiums – are inadequate to cover the expected future benefits, we adjust the relevant technical provisions with recognition in profit or loss and disclose this under impairment losses in the notes to the consolidated balance sheet; see Notes to the consolidated balance sheet – Assets (2) Other intangible assets, Assets (13) Deferred acquisition costs, and Equity and liabilities (21) Provision for future policy benefits. The appropriateness of unearned premiums and of the provision for outstanding claims is assessed in relation to the realistically estimated future amount to be paid. The appropriateness of the provision for future policy benefits is assessed on the basis of realistic estimates of the actuarial assumptions, the proportional investment result and, for contracts with participation in surplus, future profit sharing.
The provision for outstanding claims is for payment obligations arising from insurance contracts in primary insurance and reinsurance where the size of the claim or the timing of the payment is still uncertain. Part of the provision is for known claims for which individually calculated provisions are posted. Another part is for expenses for claims whose occurrence is not yet known. There are also provisions for claims that are known, but whose extent has turned out to be greater than originally foreseen. All these provisions include expenses for internal and external loss adjustments. The provision for outstanding claims is based on estimates: the actual payments may be higher or lower. The amounts posted are the realistically estimated future amounts to be paid; they are calculated on the basis of past experience and assumptions about future developments (e.g. social, economic or technological factors). Future payment obligations are generally not discounted; exceptions are some provisions for occupational disability pensions and annuities in workers’ compensation and other lines of property-casualty business. For determining the provision for outstanding claims, Munich Re uses a range of actuarial projection methods. Where ranges have been calculated, a realistic estimated value for the ultimate loss is determined within these. In applying the statistical methods, we regard large exposures separately.
The miscellaneous provisions included in this item are established in the amount of the probable requirement. Such amounts are not discounted if the interest-rate effect is insignificant.
This item comprises bonds and notes issued, deposits retained on ceded business, current tax liabilities, and other liabilities. Financial liabilities are generally recognised at amortised cost. Derivative financial instruments are recognised at fair value. Details of how the fair value is determined are provided under Assets – B Investments – Determining fair values.
The following table shows the exchange rates of the most important currencies for our business: Currency translation rates
The Munich Health field of business was disbanded on 1 February 2017. The reinsurance part of Munich Health was merged with the life reinsurance segment, and the primary insurance part was transferred to ERGO International. The reinsurance life segment was renamed life and health reinsurance. Internal management was adapted accordingly, and the corresponding items in the segment reporting and the notes to the financial statements were adjusted for the previous year.
Income and expenses from intra-Group loans are shown unconsolidated under “Other non-operating result, net finance costs and impairment losses on goodwill” for the segments concerned. These are otherwise shown after elimination of intra-Group transactions and shareholdings.
Reinsurance ERGO Total Life and Health Property-casualty Life and health Property-casualty Germany Germany International €m 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year
B. Gross technical provisions I. Unearned premiums 295 372 6,034 6,265 214 204 468 465 1,846 1,677 8,857 8,984 II. Provision for future policy benefits 10,825 11,221 26 26 87,774 86,676 433 440 9,897 9,745 108,956 108,108 III. Provision for outstanding claims 8,694 9,197 45,004 42,355 2,935 2,841 4,483 4,254 2,849 2,715 63,965 61,362
D. Ceded share of technical provisions 735 923 2,727 2,004 15 17 78 128 615 597 4,169 3,669
Interest expense –17 –17 –46 –14 –42 –46 –9 –10 –17 –13 –132 –100 Depreciation and amortisation –42 –49 –140 –112 –79 –62 –50 –58 –80 –91 –392 –370
Other operating expenses –112 –108 –394 –374 –149 –172 –91 –100 –178 –184 –924 –938 Income from associates and joint ventures accounted for using the equity method 0 0 82 73 31 25 4 2 28 21 145 121
Net expenses for claims and benefits –13,467 –10,730 –2,069 –1,985 –2,068 –1,954 Net operating expenses –5,600 –5,496 –1,072 –1,108 –1,022 –990
Other underwriting income –24 –7 –5 –5 –24 –20 Change in remaining technical provisions and
Investments in non-current assets per segment1 €m 2017 Prev. year Life and health reinsurance 51 338 Property-casualty reinsurance 150 570 ERGO Life and Health Germany 772 251 ERGO Property-casualty Germany 108 46 ERGO International 65 170
Non-current assets by country1 €m 31.12.2017 Prev. year 1 The non-current assets mainly comprise intangible assets (especially goodwill) and our owner-occupied and investment property, as well as investments in renewable energy.
Latin America 1,230 1,378 1 The premiums are generally allocated according to the location of the risks insured.
Notes to the consolidated balance sheet – Assets 1 Goodwill Changes in goodwill €m 2017 Prev. year Gross carrying amount at 31 Dec. previous year 4,358 4,303 Accumulated amortisation and impair- ment losses at 31 Dec. financial year –1,541 –1,513 Carrying amount at 31 Dec. previous year 2,817 2,790 Currency translation differences –217 45
Significant assumptions for determining the recoverable amount in impairment testing Impairment tests for cash-generating units to which a significant portion of the goodwill is allocated are based on the assumptions shown below.
Property- ERGO casualty Property- Various reinsurance casualty cashsegment and Germany generating €m divisions segment units
Key assumptions regarding the planning In the detailed planning phase (three years), For the detailed planning phase (four years), calculation (at the time of planning) we expected increasing premium income we expected a slight rise in premium income and a slight improvement in the combined with an improved combined ratio. ratio if major losses remain stable.
Acquired insurance portfolios Software Internally developed Other €m 2017 Prev. year 2017 Prev. year 2017 Prev. year Gross carrying amount at 31 Dec. previous year 1,334 1,329 405 388 1,186 1,106 Accumulated amortisation and impairment losses at 31 Dec. previous year –798 –1,035 –363 –326 –898 –811 Carrying amount at 31 Dec. previous year 536 294 42 62 288 295 Currency translation differences –24 8 –1 0 –7 0 Additions
Carrying amount at 31 Dec. financial year 433 536 30 42 272 288 Accumulated amortisation and impairment losses at 31 Dec. financial year –870 –798 –383 –363 –972 –898 Gross carrying amount at 31 Dec. financial year 1,304 1,334 413 405 1,244 1,186
Acquired Acquired distribution Acquired licences/ brand names networks/client bases patents €m 2017 Prev. year 2017 Prev. year 2017 Prev. year Gross carrying amount at 31 Dec. previous year 235 234 733 726 298 318 Accumulated amortisation and impairment losses at 31 Dec. previous year –199 –196 –576 –534 –76 –60 Carrying amount at 31 Dec. previous year 36 38 158 192 222 258 Currency translation differences –4 1 –15 3 –8 –17 Additions
Miscellaneous Total €m 2017 Prev. year 2017 Prev. year Gross carrying amount at 31 Dec. previous year 85 88 4,277 4,189 Accumulated amortisation and impairment losses at 31 Dec. previous year –64 –55 –2,974 –3,018 Carrying amount at 31 Dec. previous year 21 33 1,303 1,171 Currency translation differences 0 –1 –59 –6 Additions
Amortisation –3 –6 –231 –202 Impairment losses 0 –6 –18 –49
Development of investments in land and buildings, including buildings on third-party land €m 2017 Prev. year Gross carrying amount at 31 Dec. previous year 5,668 5,538 Accumulated amortisation and impairment losses at 31 Dec. previous year –1,224 –1,220 Carrying amount at 31 Dec. previous year 4,444 4,317 Currency translation differences –67 5 Additions
The fair value of investment property at the balance sheet date amounted to €7,865m (6,857m). The portfolio managed by the Group is measured by valuers within the Group, and the portfolio managed by third parties is valued by external valuers. Property is allocated to Level 3 of the fair value hierarchy; see Assets – B Investments – Determining fair values. Determining the sustainability of cash inflows and outflows, taking into account the market conditions at the property location, is material for measurement. The fair value is determined individually per item by discounting the future cash flow as at the measurement date. Depending on the type of property and its individual opportunity/risk profile, discount rates of 1.25% to 4.25% are used for residential buildings, 2.75% to 6.5% for office buildings, and 3% to 6.5% for retail.
The following table provides an overview of the models used to measure the fair values of our assets when market prices are not available.
Derivatives Pricing method Parameters Pricing model Equity and index risks OTC stock options Theoretical price Listing of underlying shares Black-Scholes (European) Effective volatilities Cox, Ross and Rubinstein Money-market interest rate (American) Dividend yield Monte Carlo simulation Equity forwards Theoretical price Listing of underlying shares Present-value method Money-market interest rate Dividend yield Interest-rate risks Interest-rate swaps Theoretical price OIS/swap curve Present-value method Swaptions/interest-rate Theoretical price At-the-money volatility matrix and skew Bachelier/ guarantee OIS/skew swap curve Normal Black Interest-rate currency swaps Theoretical price Swap curve Present-value method Currency spot rates Money-market interest-rate curve Inflation swaps Theoretical price Zero-coupon inflation swap rates Present-value method OIS curve Bond forwards (forward transactions) Theoretical price Listing of underlying Present-value method Swap curve Currency risks Currency options Theoretical price Volatility skew Garman-Kohlhagen Currency spot rates (European) Money-market interest-rate curve Currency forwards Theoretical price Currency spot rates Present-value method Money-market interest-rate curve, CCY spreads Other transactions Insurance derivatives Theoretical price Fair values of cat bonds Present-value method (excluding variable annuities) Historical event data Interest-rate curve Insurance derivatives Theoretical price Biometric and lapse rates Present-value method (variable annuities) Volatilities Interest-rate curve Currency spot rates Catastrophe swaps Theoretical price Fair values of catastrophe bonds Present-value method Interest-rate curve Credit default swaps Theoretical price Credit spreads Present-value method Recovery rates ISDA CDS Standard Model Interest-rate curve Total return swaps on Theoretical price Listing of underlying index Index ratio calculation commodities Commodity options Theoretical price Listing of underlying Black-Scholes (European) Effective volatilities Cox, Ross and Rubinstein Money-market interest rate (American)
Bonds with embedded Pricing method Parameters Pricing model derivatives Callable bonds Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix CMS floaters Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix Zero-to-coupon switchable bonds Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix CMS floaters with variable cap Theoretical price OIS/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Volatility skew Inverse CMS floaters Theoretical price OIS/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Volatility skew CMS steepeners Theoretical price OIS/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Stochastic volatility model Volatility skew Correlation matrix Convergence bonds Theoretical price Money-market/swap interest-rate curves Replication model (Hagan) Issuer-specific spreads Stochastic volatility model Volatility matrix Correlation matrix Multi-tranches Theoretical price At-the-money volatility matrix and Bachelier/ skew Normal Black, Swap curve Present-value method Money-market interest-rate curve Sector-, rating- or issuer-specific yield curve FIS loans against borrower’s note Theoretical price At-the-money volatility matrix and Bachelier/ skew Normal Black, Swap curve Present-value method Money-market interest-rate curve Sector-, rating- or issuer-specific yield curve Swaption notes Theoretical price At-the-money volatility matrix and Bachelier/ skew Normal Black, Swap curve Present-value method Money-market interest-rate curve Sector-, rating- or issuer-specific yield rate curve
Funds Pricing method Parameters Pricing model Real estate funds – – Net asset value Alternative investment funds (e.g. private equity, infrastructure, forestry) – – Net asset value
In the financial year, we maintained the allocation to the individual levels of the fair value hierarchy unchanged. The minor transfer amounts relating to Level 3 of the fair value hierarchy are adjustments to our Group requirements.
The following table presents the reconciliation from the opening balances to the closing balances for investments allocated to Level 3.
Gains (losses) recognised in the consolidated income statement are shown in the investment result or insurance-related investment result, while gains (losses) recognised in equity are shown in the statement of recognised income and expense for the 2017 financial year under “Unrealised gains and losses on investments, Gains (losses) recognised in equity”. Gains (losses) recognised in the consolidated income statement that are attributable to investments shown at the end of the financial year are shown in the statement of recognised income and expense for the 2017 financial year under “Unrealised gains and losses on investments, Recognised in the consolidated income statement”.
Other securities at fair value through profit or loss Held for trading, and hedging derivatives1 157 2,203 0 2,360 Designated as at fair value through profit or loss 222 178 2 402
Investments in affiliated Investments in associates companies measured at and joint ventures fair value measured at fair value €m 2017 Prev. year 2017 Prev. year Carrying amount at 31 Dec. previous year 138 145 8 8 Gains and losses 4 –1 0 0
Insurance-related investments Total €m 2017 Prev. year 2017 Prev. year Carrying amount at 31 Dec. previous year 277 1,052 5,959 6,198
Other securities available for sale Fixed-interest Non-fixed-interest €m 2017 Prev. year 2017 Prev. year Carrying amount at 31 Dec. previous year 2,683 2,160 2,814 2,803 Gains and losses –14 77 3 –1
Gains (losses) recognised in the income statement 74 38 1 –28 Gains (losses) recognised in equity –89 39 3 27
Transfer out of Level 3 –19 –47 0 –27 Changes in the fair value of derivatives 0 0 0 0 Carrying amount at 31 Dec. financial year 2,675 2,683 2,860 2,814 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 74 39 –39 –35
Designated as at fair value Held for trading, Other through profit or loss and hedging derivatives investments €m 2017 Prev. year 2017 Prev. year 2017 Prev. year Carrying amount at 31 Dec. previous year 2 0 0 0 37 30
Changes in the fair value of derivatives 0 0 0 0 0 0 Carrying amount at 31 Dec. financial year 0 2 2 0 36 37 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 0 0 0 0 –1 7
In the financial year, shares of losses of associates and joint ventures amounting to €3m (0m) were not recognised in the balance sheet. This was also the total amount of losses not recognised in the balance sheet.
Aggregated financial information on investments in associates and joint ventures accounted for using the equity method €m 31.12.2017 Prev. year Overall result for the year after tax from continued operations 106 153 Result after tax from discontinued operations 0 –1 Income and expenses recognised directly in equity 9 –5 Total recognised income and expenses 115 147
Disposal proceeds in the financial year €m 2017 Prev. year Fixed-interest securities 48,780 58,408 Non-fixed-interest securities
Over 40% of the corporate debt securities are covered bonds or issues by development banks and comparable institutions. The remaining portfolio is composed of securities issued by companies outside the banking sector, with each individual risk making up less than 1%, bonds issued by banks and state central savings banks, and asset-backed securities/mortgage-backed securities. The asset-backed securities/mortgage-backed securities are largely rated A or better. Assets pledged as security and other restrictions on title amount to €7,677m (8,661m). None of the securities shown had been loaned to third parties at year-end (previous year €1,715m). Loaned securities are not derecognised, as the main resultant risks and rewards remain with Munich Re. Of the €10,883m (11,573m) in unrealised gains and losses, €4,672m (4,309m) has been recognised in equity (other reserves), after deduction of provisions for deferred premium refunds, deferred taxes, non-controlling interests, and consolidation and currency translation effects.
Carrying amounts Unrealised gains/losses Amortised cost €m 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year Fixed-interest securities Government bonds
As at 31 December 2017, Munich Re held collateral for derivatives in the form of securities with a rating of at least AA. The fair value of this collateral amounts to €26m (785m). The collateral received is subject to a title transfer collateral arrangement, but is not re-sold or pledged.
Securities at fair value through profit or loss comprise securities of €1,623m (2,293m) held for trading and securities of €357m (402m) designated as at fair value through profit or loss.
The securities held for trading are made up of fixedinterest securities totalling €18m (18m), non-fixed-interest securities totalling €67m (68m) and derivatives held for trading amounting to €1,538m (2,207m). The securities designated as at fair value through profit or loss comprise €146m (179m) assignable to fixed-interest securities and €211m (223m) to non-fixed interest securities. Some €15m (10m) of the securities at fair value through profit or loss is due within one year.
For securities at fair value through profit or loss, items pledged as security and other restrictions on title amount to €36m (0m).
Although the derivatives used by Munich Re essentially serve to hedge against risks, only an amount of €21m (59m) meets the requirements of IAS 39 for hedge accounting.
Munich Re Group Annual Report 2017 being the main instruments employed. Changes in the fair value of the hedging instrument are recognised directly in equity for this purpose. Only when the actual cash inflow or outflow takes place – as a result of the hedged circumstance – is the relevant equity item reversed with recognition in profit or loss. The change in fair value assignable to the ineffective portion of the hedging was negligible at the reporting date. At the balance sheet date, there is an equity item of €7m (–8m) from cash flow hedges. The net fair value of the derivatives falling into this category amounted to €21m (28m) at the balance sheet date.
Development of investments in renewable energies €m 2017 Prev. year Gross carrying amount at 31 Dec. previous year 676 645 Accumulated amortisation and impairment losses at 31 Dec. previous year –195 –148 Carrying amount at 31 Dec. previous year 482 496 Changes due to currency translation –6 –22 Additions
The investments in renewable energies include items pledged as security and other restrictions on title amounting to €182m (206m).
the derivatives used for this purpose amounted to €31m at the 2016 balance sheet date. At the 2017 balance sheet date, these derivatives were no longer part of the portfolio. In the 2017 financial year, the following changes in value were recognised in the consolidated income statement: –€31m for the hedging instruments and €32m for the relevant underlyings.
Cash flow hedges play a role in countering fluctuations that may be caused, for example, by variable interest payments. Munich Re uses cash flow hedges chiefly to hedge against interest-rate risks, with interest-rate swaps 9 Deposits to cedants
Periods to maturity and amount of the hedged cash flows at the balance sheet date €m < 1 year 1–2 years 2–3 years 3–4 years 4–5 years > 5 years 31.12.2017 Prev. year Notional amounts of hedged transactions 39 150 100 0 0 0 289 314
Of all our receivables on underwriting business at the balance sheet date, €379m (346m) was outstanding for more than 90 days. The average defaults of the last three years amount to €282m (261m).
In the ERGO Life and Health segment, there was an adjustment in 2017 to the assumptions regarding future lapses, expenses, and long-term interest-rate levels that are geared to the long-term regular return on investments. Overall, these adjustments led to a reversal of impairment losses on deferred acquisition costs.
In the ERGO International segment, there was an adjustment in 2017 to the assumptions regarding future lapses, expenses, and long-term interest-rate levels that are geared to the long-term regular return on investments. Overall, these adjustments led to impairment losses on deferred acquisition costs.
Of the amounts receivable on primary insurance business, €653m (485m) is apportionable to receivables from insurance agents. The miscellaneous receivables include receivables of €2,306m (1,968m) resulting from contracts without significant risk transfer, which do not fall within the scope of IFRS 4.
Breakdown of other receivables €m 31.12.2017 Prev. year Amounts receivable on primary insurance business 2,615 1,306 Accounts receivable on reinsurance business 6,202 5,901 Miscellaneous receivables 4,568 4,376
The available tax loss carry-forwards and tax credits are broken down as follows.
Expiring in up to three years 24 43 67 36 65 101 Expiring in over three years and up to ten years 266 66 332 126 86 212 Expiring in over ten years 206 25 231 154 21 175
These mainly comprise property, plant and equipment, with owner-occupied property totalling €2,280m
(2,374m), and plant and equipment amounting to €241m (272m). Advance payments on insurance amounted to €333m (339m), derivatives totalled €27m (68m), and miscellaneous deferred items came to €170m (177m).
Gross carrying amount at 31 Dec. previous year 3,554 1,038 34 4,625 Accumulated amortisation and impairment losses at 31 Dec. previous year –1,179 –765 –24 –1,967 Carrying amount at 31 Dec. previous year 2,374 272 11 2,657 Currency translation differences –23 –3 –1 –27 Additions
Depreciation –65 –92 –4 –161 Impairment losses 0 –1 0 –1
Owner- Operating occupied and office €m property equipment Other Total Prev. year Prev. year Prev. year Prev. year Gross carrying amount at 31 Dec. previous year 3,580 1,049 33 4,662 Accumulated amortisation and impairment losses at 31 Dec. previous year –1,178 –760 –25 –1,963 Carrying amount at 31 Dec. previous year 2,402 289 8 2,699 Currency translation differences 5 –1 0 4 Additions
Disposals Loss of control 0 0 0 0 Other –50 –11 –2 –64
Depreciation –66 –99 –4 –168 Impairment losses –8 0 0 –8
Net unrealised gains on investments recognised in “other reserves” comprise €0.4m in net unrealised gains from the disposal groups.
Non-current assets and disposal groups held for sale €m 31.12.2017 Assets Land and buildings, including buildings on third-party land 22 Other securities available for sale 75 Other investments 3 Other assets of the disposal group 17 Total assets 118 Liabilities Gross technical provisions 57 Other liabilities of the disposal group 8 Total liabilities 65
The fair value of the land and buildings amounts to €2,936m (2,912m). This is allocated to Level 3 of the fair value hierarchy; see Assets – B Investments, Determining fair values. The methodology for determining the fair values is described in the Notes to the consolidated balance sheet – Assets (3) Land and buildings, including buildings on third-party land.
The expenditures recognised in the carrying amount for assets in the course of construction totalled €4m (8m) for property and €22m (25m) for plant and equipment. Commitments to acquire property total €3m (3m) and commitments to acquire plant and equipment €12m (15m).
In the fourth quarter of 2017, we classified two of the ERGO Life and Health Germany segment’s investment properties as “held for sale”. Their carrying amounts total €22.2m. Both properties were sold in the first quarter of 2018. Taking account of taxes and policyholder participations, the expected gain resulting from the disposal will not be material in terms of the consolidated profit.
Notes to the consolidated balance sheet – Equity and liabilities 17 Equity
The total share capital of €587,725,396.48 as at 31 December 2017 is divided into 155,027,908 no-par-value registered shares, each fully paid up and entitled to one vote. The number of shares in circulation was as follows
Disposals from hedging stock appreciation rights under long-term incentive plans 200 471
On 31 December 2017, a total of 3,768,477 Munich Reinsurance Company shares with a calculated nominal value of around €14.3m were held by Group companies. This represents around 2.4% of the share capital.
In the financial year, Munich Re bought back 5,643,062 shares. This includes the 2016/2017 share buy-back programme completed on 11 April 2017, and the 2017/2018 programme approved by the Board of Management of Munich Reinsurance Company on 15 March 2017, which provides for the acquisition of shares up to a value of €1bn before the 2018 Annual General Meeting.
The acquisition costs of all Munich Re shares in the possession of Group companies at the end of the financial year totalled €683,557,316.33.
A total of €1,333m was distributed to Munich Reinsurance Company’s equity holders for the financial year 2016 in the form of a dividend of €8.60 per dividend-bearing share.
Composition of the authorised capital €m 31.12.2017 Authorised Capital 2013 (until 24 April 2018) 10 Authorised Capital 2015 (until 22 April 2020) 280 Total 290
Composition of contingent capital €m 31.12.2017 Contingent Capital 2015 (until 22 April 2020) 117 Total 117
The “other reserves” include €365m (2,195m) from currency translation and €7m (–8m) resulting from valuation of cash flow hedges. In addition, “other reserves” contain unrealised gains and losses distributed between the different items as follows:
The taxes of €121m (57m) recognised directly in equity comprise an amount of €120m (23m) for deferred tax assets, and current taxes on unrealised gains of €1m (34m) on assets.
Income and expense recognised directly in equity –1,651 121 –1,530 487 57 544
Gains (losses) recognised in the consolidated income statement are shown in the insurance-related investment result, while gains (losses) recognised in equity are shown in the statement of recognised income and expense for the 2017 financial year in the item Unrealised gains and losses on investments, Gains (losses) recognised in equity. Gains (losses) recognised in the consolidated income statement that are attributable to liabilities shown at the end of the financial year are shown in the statement of recognised income and expense for the 2017 financial year, in the item Unrealised gains and losses on investments, Recognised in the consolidated income statement.
Only derivatives with a negative fair value are currently recognised at fair value. Of these, we allocate the insurance derivatives to level 3 of the fair value hierarchy.
The following table presents the reconciliation from the opening balances to the closing balances for these insurance derivatives: Reconciliation for liabilities allocated to Level 3
Gains (losses) recognised in the income statement 1 –82 Gains (losses) recognised in equity 50 –7
Disposals –211 –92 Transfer to Level 3 0 2 Transfer out of Level 3 0 0 Change in the fair value of derivatives 3 0 Carrying amount at 31 Dec. financial year 471 545 Gains (losses) recognised in the income statement that are attributable to liabilities shown at the end of the financial year 143 –71 8136 A
Liabilities not measured at fair value Subordinated liabilities 3,250 57 2 3,309 Bonds and notes issued 354 0 0 354 Amounts due to banks 0 120 485 606 Other liabilities from financial transactions 0 352 16 368
In the case of Munich Reinsurance Company bonds, annual outflows of liquidity amounting to the respective interest payments occur until the first possible call dates. In the financial year, these amounted to €254m (263m). Thereafter, the liquidity outflows will vary, depending on the respective interest-rate level. For the registered bonds of ERGO Versicherung Aktiengesellschaft, and for the HSB Group bonds, the annual outflow is variable, depending on the respective interest-rate levels.
Development of gross unearned premiums €m 31.12.2017 Prev. year Status at 31 Dec. previous year 8,984 8,841 Currency translation effects –535 –45 Changes in consolidated group/Other –16 0 Gross premiums written 49,115 48,851 Earned premiums –48,691 –48,664 Status at 31 Dec. financial year 8,857 8,984
Term life insurance 3,317 3,363 Other life insurance 25,490 26,718 Annuity insurance 33,210 32,268 Disability insurance 1,337 1,292 Contracts with combination of more than one risk 47 31
Development of gross provision for future policy benefits €m 2017 Prev. year Status at 31 Dec. previous year 108,108 108,572 Currency translation differences –175 –520 Changes in consolidated group/Other 301 –694 Changes
The change shown under “Changes in consolidated group/other” contains €321m (462m) in savings premiums for capitalisation products and –€517m (–2,434m) for portfolio entries and withdrawals.
Gross provision by type €m 31.12.2017 Prev. year Annuity claims provision 7,105 7,222 Case reserve 24,592 24,895 IBNR reserve 32,268 29,245
In the financial year, most sectors experienced comparatively low claims-reporting activity from previous years, which had a positive influence on the ultimate-loss projection.
Development of the claims reserve in the property-casualty segment1 2017 Prev. year Ceded Ceded €m Gross share Net Gross share Net Balance at 31 Dec. previous year 48,877 –2,235 46,643 48,218 –2,208 46,009 Currency translation differences –3,266 164 –3,102 540 –67 473 Changes in consolidated group/Other –30 0 –30 0 0 0 Claims expenses
For the year under review 19,201 –1,209 17,992 15,978 –602 15,376 For previous years –1,084 –20 –1,104 –1,624 153 –1,471
For the year under review –5,239 132 –5,107 –5,737 151 –5,587 For previous years –6,678 413 –6,265 –8,557 341 –8,216
Total payments –11,917 545 –11,372 –14,294 491 –13,803 Balance at 31 Dec. financial year 51,831 –2,757 49,074 48,877 –2,235 46,643 1 Comprises the segments property-casualty reinsurance, ERGO Property-casualty Germany and the property-casualty section of the ERGO International segment.
€m Accident year Calendar year ≤ 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total
31 Dec. 2007 38,275 31 Dec. 2008 30,409 8,820 31 Dec. 2009 25,888 5,963 8,690 31 Dec. 2010 22,209 4,279 5,472 8,592 31 Dec. 2011 19,207 3,401 3,729 5,547 11,563 31 Dec. 2012 16,866 2,826 3,123 3,841 7,529 8,594 31 Dec. 2013 15,596 2,458 2,762 3,230 5,317 5,482 8,642 31 Dec. 2014 14,046 1,924 2,097 2,668 3,877 3,917 5,665 8,868 31 Dec. 2015 12,523 1,626 1,638 2,099 3,201 3,278 4,408 6,048 8,477 31 Dec. 2016 11,041 1,437 1,445 1,560 2,326 2,895 3,455 4,577 5,825 9,116 31 Dec. 2017 10,511 1,361 1,412 1,316 2,185 2,600 2,906 3,707 4,300 6,338 12,409 49,044
Of the provision for premium refunds based on national regulations, €77m (84m) is apportionable to propertycasualty insurance. The provision for deferred premium refunds is established solely for life and health insurance.
Development of provision for deferred premium refunds €m 2017 Prev. year Status at 31 Dec. previous year 10,155 9,190 Changes in consolidated group 0 –337 Change resulting from unrealised gains and losses on investments (recognised directly in equity) –769 748 Change resulting from other remeasurements (recognised in profit or loss) 323 553 Status at 31 Dec. financial year 9,709 10,155
Expenses for defined contribution plans in the year under review totalled €66m (67m), with €113m (111m) for contributions to state plans.
The present value of obligations under defined pension plans is €5,924m (6,095m), and the plan assets to be offset amount to €3,253m (3,388m). Defined benefit plans comprise the following main plans: Munich Reinsurance Company’s pension obligations account for €1,490m (1,550m) of the present value of obligations under defined pension plans and €1,619m (1,718m) of plan assets. The obligations include disability and old-age pensions, and pensions for surviving dependants. The amount of the pensions generally depends on salary and length of service. The defined benefits granted up to 31 December 2007 are financed through a fund. New members on or after 1 January 2008 receive pension commitments in the form of defined contribution plans financed by means of intra-Group insurance contracts securing the obligations under pension schemes. The fund and insurance contracts have been grouped in a contractual trust agreement (CTA). Owing to reduced expectations with regard to participations in surplus deriving from insurance concluded to cover benefit obligations, the present value of obligations under defined pension plans and plan assets is down by €110m.
The pension obligations of the ERGO Group account for €2,960m (2,967m) of the present value of obligations under defined pension plans and €422m (420m) of plan assets. The obligations include disability and old-age pensions, and pensions for surviving dependants. The amount of the pensions generally depends on salary and length of service. The commitments are generally funded through pension provisions. New members receive pension commitments in the form of defined contribution plans financed by means of intra-Group insurance contracts securing the obligations under pension schemes. There are also medical-care benefit obligations.
The pension obligations of Munich Reinsurance America, Inc. account for €694m (771m) of the present value of obligations under defined benefit plans, and €501m (530m) of plan assets. The obligations include pensions for employees and surviving dependants. The amount of the pensions generally depends on includable compensation and length of service. The plan is financed through a trust and pension provisions. The plan was closed to new members effective 1 January 2006, and to all remaining members effective 31 December 2011. With effect from 1 January 2012, all members now receive pension commitments in the form of defined contribution plans. There are also retiree medical-care benefit obligations.
The present value of medical-care benefit obligations amounted to €281m (310m) at the balance sheet date.
The present value of the obligations under defined benefit plans breaks down as follows:
% 31.12.2017 Prev. year No quoted market price in an active market Cash or cash equivalents 1 1 Real estate 1 0 Fixed-interest securities 1 1 Non-fixed-interest securities 4 4
% 31.12.2017 Prev. year Quoted market price in an active market Fixed-interest securities 40 41 Non-fixed-interest securities 23 24
Present value of defined benefit obligations 2,743 2,760 Other –1 0 Net balance sheet liability 2,741 2,760
Present value of defined benefit obligations 3,181 3,335 Fair value of plan assets –3,253 –3,388 Assets from the defined benefit plan 303 343 Effect of asset ceiling 13 9 Other –4 0 Net balance sheet liability 241 299
The relationship between the fair value of the plan assets and the present value of the defined benefit obligations is referred to as the funded status. If the present value of defined benefit obligations exceeds the fair value of the plan assets, this excess of liabilities over assets is financed by means of provisions for post-employment benefits.
If the fair value of the plan assets exceeds the present value of the defined benefit obligations, an asset arises out of the defined benefit plan. As each plan is analysed individually, this may give rise to both a provision for postemployment benefits and an asset from the defined benefit plan.
Change in the provision for defined benefit plans €m 2017 Prev. year Balance at 31 Dec. previous year 3,058 2,751 Currency translation differences –45 8 Changes in consolidated group 1 4
Payments –67 –88 Payments from plan settlements 2 3 Capital transfer to plan assets –90 –80 Transfer of assets 5 0 Transfer to other receivables –36 142 Actuarial gains/losses recognised in equity –14 91 Other –4 13 Balance at 31 Dec. financial year 2,982 3,058
The actual losses on plan assets amount to €1m (actual gains of €400m), and the actual gains on reimbursements to €1m (15m).
% 31.12.2017 Prev. year Active members 50 52 Deferred members 15 14
Multi-year variable compensation 131 31 –26 –16 –10 109 Early retirement benefits/semi-retirement 65 46 –5 0 –3 102
Salary obligations and other remuneration for desk and field staff 122 96 –117 –17 –1 84
The weighted average contractual period to maturity of our pension obligations is 20 (21) years.
An increase or decrease in the following essential actuarial assumptions has an impact on the present value of defined benefit obligations: Sensitivity analysis €m 31.12.2017 Prev. year Increase in actuarial discount rate by 50 BP –534 –564 Decrease in actuarial discount rate by 50 BP 627 653 Increase in salary/entitlement trends by 10 BP 22 28 Decrease in salary/entitlement trends by 10 BP –22 –28 Increase in pension trends by 10 BP 61 66 Decrease in pension trends by 10 BP –59 –60 Increase in medical cost trend rate
Decrease in medical cost trend rate by 100 BP –39 –42 Increase in mortality rate by 10 % –161 –163 Decrease in mortality rate by 10 % 171 172
Carrying amounts €m 31.12.2017 Prev. year Up to one year 8,549 8,948 Over one year and up to two years 125 102 Over two years and up to three years 770 237 Over three years and up to four years 48 37 Over four years and up to five years 159 82 Over five years and up to ten years 1,069 1,153 Over ten years 820 998
The major portion of the liabilities up to one year involve interest-free items, where the carrying amounts and the undiscounted cash flows are identical. A total of €59m (47m) of the amounts owed to banks and €674m (391m) of the liabilities from derivatives are due within one year. Any deviations in the liabilities with remaining terms of over one year from the undiscounted cash flows are not material for presenting the significance of the financial liabilities for our financial position and performance.
Breakdown of other liabilities €m 31.12.2017 Prev. year Amounts payable on primary insurance business 3,243 2,734 Accounts payable on reinsurance business 4,690 5,477 Amounts due to banks 602 396 Miscellaneous liabilities 6,937 6,580
The miscellaneous liabilities contain liabilities of €1,622m (1,439m) resulting from reinsurance contracts without significant risk transfer, derivative financial instruments with a negative fair value of €665m (872m), and negative fair values totalling €719m (939m) for insurance-linked derivatives and hedging derivatives of variable annuities. The miscellaneous liabilities also include €25m (24m) for social security and €131m (175m) for interest and rent.
A.M. €m Best Fitch Moody’s S&P 31.12.2017 Prev. year Munich Re America Corporation, Wilmington, 7.45%, US$ 334m1, Senior Notes 1996/2026 a A+ A2 A– 277 324 1 In the second quarter 2017, and in the third quarter 2017, the issuer redeemed bonds each time with a nominal value of US$ 4m.
Assets held Liabilities to hedge from Short-term Long-term long-term financing €m borrowings borrowings borrowings activities
Ceded premiums written –1,565 –1,526 Change in unearned premiums – Ceded share 37 –20 Earned premiums ceded –1,528 –1,546
Expenses for profit commission in reinsurance are shown under “operating expenses”, not under “expenses for claims and benefits”.
Other technical result –255 –104 Gross expenses for claims and benefits –43,194 –39,167
Ceded share Claims and benefits paid 934 1,188 Change in technical provisions
Other technical result –272 –170 Net expenses for claims and benefits –41,645 –38,498
Other operating result €m 2017 Prev. year Other operating income 778 744
Thereof: Interest income 111 70 Write-ups of other operating assets 21 33
In addition to expenses of €399m (431m) for services rendered, other operating expenses chiefly include interest charges and similar expenses of €131m (92m), other write-downs of €29m (57m), and other tax of €127m (107m). They also contain expenses of €13m (24m) for owner-occupied property, some of which is also leased out.
€m 2017 Prev. year Land and buildings, including buildings on third-party land 324 383 Investments in affiliated companies –40 –159 Investments in associates and joint ventures 146 124
Deposits retained on assumed reinsurance, and other investments 247 174 Expenses for the management of investments, other expenses –554 –530
Other non-operating result, impairment losses on goodwill and net finance costs €m 2017 Prev. year Other non-operating result –926 –437 Impairment losses on goodwill –9 –28 Net finance costs –211 –219
The other non-operating result is unrelated to the conclusion, administration or settlement of insurance contracts or the administration of investments. It essentially comprises a foreign-currency result of –€294m (+485m), the other non-technical result of –€497m (–245m), write-downs of €68m (96m) on other intangible assets, and restructuring expenses of €76m (583m).
Net finance costs include all interest income, interest expenses and other expenses directly attributable to strategic debt. Debt has a strategic character for us if it does not have an original, direct link with our operative business.
Net finance costs by financing instrument €m 2017 Prev. year Subordinated bonds of Munich Reinsurance Company, Munich –181 –192 Senior notes of Munich Re America Corporation, Wilmington –25 –23 Subordinated bonds of HSB Group Inc., Delaware –3 –2 Other –2 –1 Total –211 –219 38 Taxes on income
Main components of tax expenses/income €m 2017 Prev. year Current tax for financial year –787 –1,093 Current tax for other periods 193 286 Deferred tax resulting from the occurrence or reversal of temporary differences 1,038 174 Deferred tax resulting from the occurrence or utilisation of loss carry-forwards –224 –254 Valuation allowances for deferred taxes/loss carry-forwards –38 126 Effects of changes in tax rates on deferred tax 116 1 Taxes on income 298 –760
Reconciliation to effective tax expenses/income €m 2017 Prev. year Result before taxes on income (after “other tax”) 94 3,341 Group tax rate in % 33 33 Derived taxes on income –31 –1,102 Tax effect of: Tax rate differences 104 279 Tax-free income 129 1 Non-deductible expenses –206 –299 Valuation allowances for deferred taxes/loss carry-forwards –38 126 Change in tax rates and tax legislation1 91 1 Tax for prior years 297 310 Trade tax adjustments –6 –21 Other –42 –55
In reinsurance, we use the following discount rates for the provision for future policy benefits and the provision for outstanding claims: Disclosures on risks from insurance contracts and financial instruments Munich Re’s reporting is based on various legal regulations governing risks it is exposed to as a result of its business operations: In the notes to the financial statements, risks from insurance contracts must be reported in accordance with IFRS 4 and risks from financial instruments in accordance with IFRS 7. Further disclosures on risks are required in the management report under Section 315 (2) no. 2 of the German Commercial Code (HGB) and German Accounting Standard no. 20 (DRS 20) for management reports.
Since risk reporting concerns not only accounting but also the activities of integrated risk management (IRM) at Munich Re, information on risks is provided in the risk report within the management report, in the disclosures on risks from insurance contracts, and in the disclosures on technical provisions and financial instruments in the notes to the financial statements. Where necessary, we refer to the relevant information in the risk report and information on the respective items.
The provision – stipulated by the requirements of IFRS 4 – of quantitative data on the effects of changes in the assumptions underlying the measurement of insurance contracts and/or in the market environment is also covered by information about economic risk capital stated in the risk report.
Besides this, in German health primary insurance, discount rates of 1.5–3.5% are applied for calculating the provision for premium loadings and the provision for future premium reductions, which are both part of the provision for premium refunds and total €5,148m (4,981m). These discount rates can be altered in the case of a premium adjustment.
Other market risks are of particular importance to unitlinked life insurance policies, the lump-sum option in the case of deferred annuity policies and derivatives embedded in variable annuities.
Munich Re Group Annual Report 2017 40 Disclosures on risks from propertycasualty insurance business
Expected future technical cash flow (gross)1 €m 31.12.2017 Prev. year Up to one year –3,401 –3,602 Over one year and up to five years –10,431 –10,207 Over five years and up to ten years –16,690 –15,798 Over ten years and up to 20 years –40,157 –39,076 Over 20 years –103,567 –102,062 1 Premiums less benefits guaranteed at the balance sheet date and costs (excluding unit-linked products).
Provisions for asbestos and environmental claims 31.12.2017 Prev. year €m1 Gross Net Gross Net 1 The previous year’s figures have been adjusted to eliminate currency translation effects.
The major part of the discounted provisions in reinsurance are for US workers’ compensation business, for which the discount rates are governed by supervisory law and are determined prospectively per accident year. The discounting of the provisions in primary insurance is also largely governed by supervisory law.
Payment flows and liquid funds in the individual calendar years (gross)
Claims payments for financial year –5,360 –5,882 –5,659 –5,495 –5,617 Claims payments for previous years –6,675 –8,545 –7,619 –8,193 –7,388 Costs –8,093 –7,719 –7,501 –7,298 –7,024
The following personnel expenses are included in the operating expenses, in the expenses for claims and benefits (for claims adjustment) and in the investment result: Breakdown of personnel expenses €m 2017 Prev. year Wages and salaries –2,763 –2,849 Social security contributions and employee assistance –501 –522 Expenses for employees’ pensions –199 –234 Total –3,463 –3,605 44 Mid-Term Incentive Plan
In 2017, income of €0.2m (previous year: expenses of €4.0m) was recognised for the Mid-Term Incentive Plan. The provision at the reporting date amounted to €25.3m (35.3m).
The number of staff employed by the Group at year-end totalled 19,960 (21,077) in Germany and 22,450 (22,351) in other countries.
Breakdown of number of staff 31.12.2017 Prev. year 47 Auditor’s fees For services rendered to the parent and consolidated subsidiaries by the Group auditor (KPMG Bayerische Treuhandgesellschaft AG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Munich, and its affiliated companies within the meaning of Section 271(2) of the German Commercial Code – HGB), the following fees have been recognised as an expense in the financial year: 45 Remuneration report
The members of Munich Reinsurance Company’s Board of Management received remuneration totalling €19.8m (23.1m). The total remuneration of Munich Reinsurance Company’s Supervisory Board amounted to €2.6m (2.6m); not included in this figure is €0.2m (0.2m) for membership of supervisory boards at other Group companies, so that the overall amount came to €2.8m (2.8m).
The Board members did not receive any cash advances or loans in the 2017 financial year. For their service as employees of the Group, Supervisory Board members received remuneration in the amount of €1.3m (1.3m). The Board members hold insurance policies with companies belonging to Munich Re (Group), and have small MEAG fund holdings. Beyond that, there were no significant notifiable transactions between Board members and Munich Re.
All other disclosures on the remuneration and structure of the remuneration system for the Board of Management can be found in the management report under the remuneration report. Information on share trading and shares held by members of the Board of Management and the Supervisory Board is provided in the corporate governance report.
Number of rights (for 100% achievement of objectives) on 31 December 2017 0 36,682 31,509 30,814 1 Thereof fees totalling €8,957k for KPMG Bayerische Treuhandgesellschaft AG Wirtschaftsprüfungs gesellschaft Steuerberatungsgesellschaft.
Breakdown of auditor’s fees €k 2017 Audit services1 –9,240 Other assurance and appraisal services –240 Tax consultancy services 0 Other services –4,132 Total –13,612
In accordance with the German Insurance Supervision Act (VAG), all German life and health insurers of our Group are obliged to be members of a protection fund. For life insurers, the protection fund can levy special contributions of up to one per mille of total net technical provisions, in addition to a regular contribution of 0.2 per mille of total net technical provisions. For the health insurers, there is no pre-financing, but the fund may levy special contributions of up to two per mille of net technical provisions to fulfil its functions. This could give rise to a potential payment obligation of €161m (149m) at Group level. The functions and powers of the statutory protection fund for life insurance rest with Protektor Lebensversicherungs -AG, and those of the statutory protection fund for health insurance with Medicator AG.
Munich Re is a member of the German Nuclear Reactor Insurance Association (DKVG) and the Pharma Reinsurance Community. If other members of these pools are not able to meet their payment obligations, we may be held liable for a proportional share of their obligations. However, we consider the risk of such a liability arising to be remote.
Other assurance and appraisal services concern statutory or contractual audit services, voluntary audit services – in particular, audits of compliance management systems pursuant to accounting standard 980 of the Institute of Public Auditors in Germany (IDW), and mandatory assurance and appraisal services for submission to the competent authorities.
Munich Re enters into contingent liabilities in connection with its normal business operations. In this context, the obligations from guarantees total €0m (2m) and those from legal disputes €31m (31m). There are other contingent liabilities amounting to €8m (28m). Furthermore, there is a contingent liability of £20m (20m) from our investments in associates and joint ventures. These concerned a payment obligation in the event of an associate’s over-indebtedness.
Future minimum lease payments under operating leases €m 31.12.2017 Prev. year Up to one year 255 205 More than one year and up to five years 691 575 More than five years 574 501
Munich Re Group Annual Report 2017 51 Events after the balance sheet date
Munich Reinsurance Company’s net retained profits for 2017 according to its financial statements prepared on the basis of German GAAP accounting amount to €1,333,240,008.80. The Board of Management will propose to shareholders at the Annual General Meeting that these net retained profits be used for payment of a dividend of €8.60 per dividend-bearing share, with the remaining amount being carried forward to new account.
Consolidated subsidiaries 13th & F Associates Limited Partnership, Washington, D.C.4 98.0000 40, Rue Courcelles SAS, Paris 100.0000 Adelfa Servicios a Instalaciones Fotovoltaicas S.L., Santa Cruz de Tenerife 100.0000 AEVG 2004 GmbH, Frankfurt am Main4 0.0000 AGROTIKI Insurance S.A., Athens 100.0000 ALICE GmbH, Düsseldorf 100.0000 ALLYSCA Assistance GmbH, Munich 100.0000 American Alternative Insurance Corporation, Wilmington, Delaware 100.0000 American Family Home Insurance Company, Jacksonville, Florida 100.0000 American Modern Home Insurance Company, Amelia, Ohio 100.0000 American Modern Home Service Company, Amelia, Ohio 100.0000 American Modern Insurance Company of Florida Inc., Jacksonville, Florida 100.0000 American Modern Insurance Group Inc., Amelia, Ohio 100.0000 American Modern Lloyds Insurance Company, Dallas, Texas 100.0000 American Modern Property & Casualty Insurance Company, Cincinnati, Ohio 100.0000 American Modern Select Insurance Company, Amelia, Ohio 100.0000 American Modern Surplus Lines Insurance Company, Amelia, Ohio 100.0000 American Southern Home Insurance Company, Jacksonville, Florida 100.0000 American Western Home Insurance Company, Oklahoma City, Oklahoma 100.0000 Amicus Legal Ltd., Bristol 100.0000 ArztPartner almeda AG, Munich 100.0000 ATU Landbau GmbH & Co. KG, Heiligengrabe11 94.9000 avanturo GmbH, Düsseldorf 100.0000 Bagmoor Holdings Limited, London 100.0000 Bagmoor Wind Limited, London 100.0000 Beaufort Dedicated No 1 Ltd., London 100.0000 Beaufort Dedicated No 2 Ltd., London 100.0000 Beaufort Dedicated No 5 Ltd., London 100.0000 Beaufort Underwriting Agency Limited, London 100.0000
DAS Rechtsschutz-Versicherungs-AG, Lucerne 100.0000 DAS Services Limited, Bristol 100.0000 DAS UK Holdings Limited, Bristol 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I4D), Luxembourg 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I5D), Luxembourg 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I6D o.N.), Luxembourg 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I7D o.N.), Luxembourg 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I8D o.N.), Luxembourg 100.0000 Digital Porte Inc., Toronto, Ontario 100.0000 DKV BELGIUM S.A., Brussels 100.0000 DKV Deutsche Krankenversicherung Aktiengesellschaft, Cologne 100.0000 DKV Pflegedienste & Residenzen GmbH, Cologne 100.0000 DKV Seguros y Reaseguros S.A. Española, Zaragoza 100.0000 E&S Claims Management Inc., Reston, Virginia 100.0000 EIG Co., Wilmington, Delaware 100.0000 ERGO Asigurări de Viaţă S.A., Bucharest 100.0000 ERGO Asigurări S.A., Bucharest 100.0000 ERGO Austria International AG, Vienna 100.0000 ERGO Beratung und Vertrieb AG, Düsseldorf 100.0000 ERGO Deutschland AG, Düsseldorf 100.0000 ERGO Digital Ventures AG, Düsseldorf 100.0000 ERGO DIREKT Krankenversicherung AG, Fürth 100.0000 ERGO DIREKT Lebensversicherung AG, Fürth 100.0000 ERGO DIREKT Versicherung AG, Fürth 100.0000 ERGO Életbiztosító Zrt, Budapest 100.0000 ERGO Elfte Beteiligungsgesellschaft mbH, Düsseldorf 100.0000 ERGO General Insurance Company S.A., Athens 100.0000 ERGO Generales Seguros y Reaseguros S.A., Madrid 100.0000 ERGO Group AG, Düsseldorf 100.0000 ERGO Grubu Holding A.Ş., Istanbul 100.0000 ERGO Grundstücksverwaltung GbR, Düsseldorf 100.0000 ERGO Insurance Company, Moscow 100.0000 ERGO Insurance N.V., Brussels 100.0000 ERGO Insurance Pte. Ltd., Singapore 100.0000 ERGO Insurance SE, Tallinn 100.0000 ERGO International Aktiengesellschaft, Düsseldorf 100.0000 ERGO International Services GmbH, Düsseldorf 100.0000 ERGO Invest SIA, Riga 100.0000 ERGO Lebensversicherung Aktiengesellschaft, Hamburg 100.0000 ERGO Life Insurance Company S.A., Thessaloniki 100.0000 ERGO Life Insurance SE, Vilnius 100.0000 ERGO Life S.A., Grevenmacher 100.0000 ERGO Neunte Beteiligungsgesellschaft mbH, Düsseldorf 100.0000 ERGO osiguranje d.d., Zagreb 100.0000 ERGO Partners N.V., Brussels 100.0000 ERGO Pensionsfonds Aktiengesellschaft, Düsseldorf 100.0000 ERGO Pensionskasse AG, Düsseldorf 100.0000 ERGO Poisťovňa a.s., Bratislava 100.0000 ERGO pojišťovna, a.s., Prague 100.0000 ERGO Private Capital Dritte GmbH & Co. KG, Düsseldorf 100.0000
Ibero Property Trust S.A., Madrid 100.0000 IDEENKAPITAL Financial Engineering GmbH, Düsseldorf 100.0000 IDEENKAPITAL Financial Service GmbH i. L., Düsseldorf 100.0000 IDEENKAPITAL GmbH, Düsseldorf 100.0000 IDEENKAPITAL Media Finance GmbH, Düsseldorf 50.1000 IDEENKAPITAL Metropolen Europa GmbH & Co. KG, Düsseldorf 72.3477 iii, Munich4 100.0000 IK Einkauf Objekt Eins GmbH & Co. KG, Düsseldorf 100.0000 IK Einkauf Objektmanagement GmbH, Düsseldorf 100.0000 IK Einkaufsmärkte Deutschland GmbH & Co. KG, Düsseldorf 52.0387 IK Premium Fonds GmbH & Co. KG, Düsseldorf 100.0000 IK Premium Fonds zwei GmbH & Co. KG, Düsseldorf 100.0000 IKFE Properties I AG, Zurich 63.5708 Imofloresmira – Investimentos Imobiliários S.A., Lisbon 100.0000 Insurance Company “ERGO Life” Ltd., Moscow 100.0000 ITERGO Informationstechnologie GmbH, Düsseldorf 100.0000 JSC “ERV Travel Insurance”, Moscow 100.0000 K & P Pflegezentrum Uelzen IMMAC Renditefonds GmbH & Co. KG, Düsseldorf 84.8445 KA Köln.Assekuranz Agentur GmbH, Cologne 100.0000 Kapdom-Invest GmbH, Moscow 100.0000 KS SPV 23 Limited, London 100.0000 Landelijke Associatie van Gerechtsdeurwaarders B.V., Groningen4 89.7640 LEGIAL AG, Munich 100.0000 Lietuva Demetra GmbH, Munich 100.0000 Lloyds Modern Corporation, Dallas, Texas 100.0000 Longial GmbH, Düsseldorf 100.0000 Lynt Farm Solar Limited, London 100.0000 MAGAZ FOTOVOLTAICA S.L.U., Alcobendas 100.0000 Mandaat B.V., Druten 100.0000 Marina Salud S.A., Alicante 65.0000 Marina Sp. z o.o., Sopot 100.0000 MEAG ANGLO CELTIC Fund, Munich4 100.0000 MEAG ATLAS, Munich4 100.0000 MEAG Benedict, Munich4 100.0000 MEAG Cash Management GmbH, Munich 100.0000 MEAG EDK Quantum, Munich4 100.0000 MEAG EDL CurryGov, Munich4 100.0000 MEAG EDS AGIL, Munich4 100.0000 MEAG ERGO Belgium Equities, Munich4 100.0000 MEAG ESUS 1, Munich4 100.0000 MEAG EUR Global 1, Munich4 100.0000 MEAG Euro 1, Munich4 100.0000 MEAG Euro 2, Munich4 100.0000 MEAG EURO-FONDS, Munich4 100.0000 MEAG European Prime Opportunities, Munich4 56.5871 MEAG Eurostar, Munich4 100.0000 MEAG EURO-Yield, Munich4 100.0000 MEAG FlexConcept – Basis, Luxembourg4 100.0000 MEAG FlexConcept – Eurobond, Luxembourg4 100.0000 MEAG FlexConcept – Wachstum, Luxembourg4 100.0000 MEAG GBP Global-STAR, Munich4 100.0000
The Polytechnic Club Inc., Hartford, Connecticut 100.0000 The Princeton Excess and Surplus Lines Insurance Company, Wilmington, Delaware 100.0000 Tir Mostyn and Foel Goch Limited, London 100.0000 UAB Agrofondas, Vilnius 100.0000 UAB Agrolaukai, Vilnius 100.0000 UAB Agrovalda, Vilnius 100.0000 UAB Agrovesta, Vilnius 100.0000 UAB G.Q.F., Vilnius 100.0000 UAB Sietuvė, Vilnius 100.0000 UAB Ūkelis, Vilnius 100.0000 UAB Vasaros Brizas, Vilnius 100.0000 UAB VL Investment Vilnius 5, Vilnius 100.0000 UAB VL Investment Vilnius 6, Vilnius 100.0000 UAB VL Investment Vilnius 7, Vilnius 100.0000 UAB VL Investment Vilnius 8, Vilnius 100.0000 UAB VL Investment Vilnius 9, Vilnius 100.0000 UAB VL Investment Vilnius 1, Vilnius 100.0000 UAB VL Investment Vilnius 10, Vilnius 100.0000 UAB VL Investment Vilnius 2, Vilnius 100.0000 UAB VL Investment Vilnius 3, Vilnius 100.0000 UAB VL Investment Vilnius 4, Vilnius 100.0000 UAB VL Investment Vilnius, Vilnius 100.0000 UK Wind Holdings Ltd., London 100.0000 Unión Médica la Fuencisla S.A., Compañía de Seguros, Zaragoza 100.0000 US PROPERTIES VA GmbH & Co. KG, Düsseldorf4 46.0939 Van Arkel Gerechtsdeurwaarders B.V., Leiden4 100.0000 VHDK Beteiligungsgesellschaft mbH, Düsseldorf 100.0000 VICTORIA Asien Immobilienbeteiligungs GmbH & Co. KG, Munich 100.0000 VICTORIA Italy Property GmbH, Düsseldorf 100.0000 VICTORIA Lebensversicherung Aktiengesellschaft, Düsseldorf 100.0000 VICTORIA US Property Investment GmbH, Düsseldorf 100.0000 VICTORIA Vierte Beteiligungsgesellschaft mbH, Düsseldorf 100.0000 Victoria Vierter Bauabschnitt GmbH & Co. KG, Düsseldorf 100.0000 Vorsorge Service GmbH, Düsseldorf 100.0000 welivit GmbH, Düsseldorf 100.0000 welivit Solarfonds GmbH & Co. KG, Düsseldorf 100.0000 welivit Solarfonds S.a.s. di welivit Solar Italia S.r.l., Bolzano 100.0000 WFB Stockholm Management AB, Stockholm4 50.0000 Wind Farm Iglasjön AB, Hässleholm 100.0000 Wind Farms Götaland Svealand AB, Hässleholm 100.0000 Wind Farms Västra Götaland AB, Hässleholm 100.0000 Windpark MR-B GmbH & Co. KG, Bremen2 100.0000 Windpark MR-D GmbH & Co. KG, Bremen2 100.0000 Windpark MR-N GmbH & Co. KG, Bremen2 100.0000 Windpark MR-S GmbH & Co. KG, Bremen2 100.0000 Windpark MR-T GmbH & Co. KG, Bremen2 100.0000 wse Solarpark Spanien 1 GmbH & Co. KG, Düsseldorf 75.1243 X-Pact B.V., The Hague 62.5000
DAS Lex Assistance S.L., L’Hospitalet de Llobregat 100.0000 DEAX Õigusbüroo OÜ, Tallinn 100.0000 DKV Beteiligungs- und Vermögensverwaltungs GmbH & Co. KG, Cologne 100.0000 DKV Erste Beteiligungsgesellschaft mbH, Cologne 100.0000 DKV Servicios S.A., Zaragoza 100.0000 DKV-Residenz am Tibusplatz gGmbH, Münster 100.0000 DKV-Residenz in der Contrescarpe GmbH, Bremen 100.0000 DRA Debt Recovery Agency B.V., The Hague 100.0000 Economic Data Resources B.V., The Hague 100.0000 ERGO (China) Consulting Ltd., Beijing 100.0000 ERGO Alpha GmbH, Düsseldorf 100.0000 ERGO Anlageberatung und Vertrieb GmbH i. Gr., Düsseldorf 100.0000 ERGO Asia Management Pte. Ltd., Singapore 100.0000 ERGO Digital IT GmbH, Berlin 100.0000 ERGO Fund Golden Aging, Brussels4 100.0000 ERGO GmbH, Steinhausen 100.0000 ERGO Gourmet GmbH, Düsseldorf 100.0000 ERGO Infrastructure Investment Gesundheit GmbH, Düsseldorf 100.0000 ERGO Infrastructure Investment Komposit GmbH, Düsseldorf 100.0000 ERGO Infrastructure Investment Leben GmbH, Düsseldorf 100.0000 ERGO Infrastructure Investment Pensionskasse GmbH, Düsseldorf 100.0000 ERGO Infrastructure Investment Victoria Leben GmbH, Düsseldorf 100.0000 ERGO LatAm S.A.S., Bogotá 100.0000 ERGO Leben Asien Verwaltungs GmbH, Munich 100.0000 ERGO Mobility Solutions GmbH, Düsseldorf 100.0000 ERGO Private Capital GmbH, Düsseldorf 100.0000 ERGO Pro S.r.l., Verona 100.0000 ERGO Pro Sp. z o.o., Warsaw 100.0000 ERGO Pro, spol. s r.o., Prague 100.0000 ERGO Vermögensmanagement Ausgewogen A, Munich4 97.3726 ERGO Vermögensmanagement Flexibel A, Munich4 95.4581 ERGO Vermögensmanagement Robust A, Munich4 97.0387 ERGO Versicherungs- und Finanzierungs-Vermittlung GmbH, Hamburg 100.0000 ERGO Zehnte Beteiligungsgesellschaft mbH, Düsseldorf 100.0000 ERGO Zwölfte Beteiligungsgesellschaft mbH, München 100.0000 ERV Sigorta Aracılık Hizmetleri Ltd. Şti., Istanbul 99.9980 Etics, s.r.o., Prague 100.0000 Etoblete 160016 S.L., Valencia 100.0000 Euro-Center (Cyprus) Ltd., Larnaca 100.0000 Euro-Center (Thailand) Co., Ltd., Bangkok 100.0000 Euro-Center Cape Town (Pty) Ltd, Cape Town 100.0000 Euro-Center Holding North Asia (HK) Pte. Ltd., Hong Kong 100.0000 Euro-Center Ltda., São Paulo 100.0000 Euro-Center North Asia Consulting Services (Beijing) Co., Ltd., Beijing 100.0000 Euro-Center Prague, s.r.o., Prague 100.0000 EUROCENTER S.A., Palma de Mallorca 100.0000
% share Company and registered seat of capital miCura Pflegedienste Düsseldorf GmbH, Düsseldorf 100.0000 miCura Pflegedienste GmbH, Cologne 100.0000 miCura Pflegedienste Hamburg GmbH, Hamburg 100.0000 miCura Pflegedienste Krefeld GmbH, Krefeld 100.0000 miCura Pflegedienste München/Dachau GmbH, Dachau 51.0000 miCura Pflegedienste München GmbH i. L., Munich 100.0000 miCura Pflegedienste München Ost GmbH, Munich 65.0000 miCura Pflegedienste Münster GmbH, Münster 100.0000 miCura Pflegedienste Nürnberg GmbH, Nuremberg 51.0000 MR Beteiligungen 15. GmbH, Munich 100.0000 MR Beteiligungen 18. GmbH, Grünwald 100.0000 MR Beteiligungen 2. GmbH, Munich 100.0000 MR Beteiligungen 3. GmbH, Munich 100.0000 MR Beteiligungen AG, Grünwald 100.0000 MR Digital Innovation Partners Insurance Agency LLC, Columbus, Ohio4 0.0000 MR Financial Group GmbH, Munich 100.0000 MR Forest GmbH, Munich 100.0000 MR Infrastructure Inc., Dover, Delaware 100.0000 MR RENT-Management GmbH, Munich 100.0000 MR Solar Beneixama GmbH i. L., Nuremberg 100.0000 MRHCUK Dormant No. 1 Limited, London 100.0000 Münchener Consultora Internacional SRL, Santiago de Chile 100.0000 Münchener de Argentina Servicios Técnicos S.R.L., Buenos Aires 100.0000 Münchener de Mxico S.A., Mexico 100.0000 Münchener de Venezuela C.A. Intermediaria de Reaseguros, Caracas 100.0000 Münchener Finanzgruppe AG Beteiligungen, Munich 100.0000 Münchener Vermögensverwaltung GmbH, Munich 100.0000 Münchener, ESCRITÓRIO DE REPRESENTACAO DO BRASIL Ltda, São Paulo 100.0000 Munich American Reassurance Company PAC Inc., Atlanta, Georgia4 0.0000 Munich Canada Systems Corporation, Toronto, Ontario 100.0000 Munich Columbia Square Corp., Wilmington, Delaware 100.0000 Munich Management Pte. Ltd., Singapore 100.0000 Munich Re America Brokers Inc., Wilmington, Delaware 100.0000 Munich Re America Management Ltd., London 100.0000 Munich Re Automation Solutions GmbH, Munich 100.0000 Munich Re Automation Solutions Inc., Wilmington, Delaware 100.0000 Munich Re Automation Solutions K.K., Tokyo 100.0000 Munich Re Automation Solutions Pte. Ltd., Singapore 100.0000 Munich Re Automation Solutions Pty Ltd, Sydney 100.0000 Munich Re Capital Markets GmbH, Munich 100.0000 Munich Re Digital Partners Limited, London 100.0000 Munich Re India Services Private Limited, Mumbai 100.0000 Munich Re Innovation Systems Inc., Toronto, Ontario 100.0000 Munich Re Underwriting Agents (DIFC) Ltd., Dubai 100.0000 Munich-American Risk Partners GmbH, Munich 100.0000 Munich-Canada Management Corp. Ltd., Toronto, Ontario 100.0000 MunichFinancialGroup AG Holding, Munich 100.0000 MunichFinancialServices AG Holding, Munich 100.0000
Associates and joint ventures accounted for using the equity method 1818 Acquisition LLC, Dover, Delaware 20.6400 Apollo Munich Health Insurance Co. Ltd., Hyderabad 48.7000 Avantha ERGO Life Insurance Company, Mumbai 25.9998 Consorcio Internacional de Aseguradores de Crédito S.A., Madrid5 15.0353 Consortia Versicherungs-Beteiligungsgesellschaft mbH, Nuremberg 33.7027 D.A.S. Difesa Automobilistica Sinistri S.p.A. di Assicurazione, Verona 49.9920 DAMAN – National Health Insurance Company, Abu Dhabi 20.0000 EGM Wind SAS, Paris 40.0000 ERGO China Life Insurance Co., Ltd., Jinan, Shandong Province 50.0000 Európái Utazasi Biztosító Rt, Budapest 26.0000 Europäische Reiseversicherungs-Aktiengesellschaft, Vienna 25.0100 Global Aerospace Underwriting Managers Ltd., London 40.0000 Global Insurance Company, Ho Chi Minh City 43.7500 Group Health Group Holdings Inc., Surrey, British Columbia 40.0000 HDFC ERGO General Insurance Company Ltd., Mumbai 48.2922 Invesco MEAG US Immobilien Fonds IV B, Luxembourg 37.1375 KarstadtQuelle Finanz Service GmbH i. L., Düsseldorf 50.0000 King Price Financial Services (Pty) Ltd, Pretoria5 15.0000 Marchwood Power Limited, Southampton 50.0000 MAYFAIR Holding GmbH & Co. Singapur KG i. L., Düsseldorf9 71.4285 MCAF Verwaltungs-GmbH & Co. KG i. L., Düsseldorf 50.0000 MEAG Pacific Star Holdings Ltd., Hong Kong 50.0000 MEDICLIN Aktiengesellschaft, Offenburg 35.0042 MEGA 4 GbR, Berlin 34.2912 Rendite Partner Gesellschaft für Vermögensverwaltung mbH i. L., Frankfurt am Main 33.3333 RP Vilbeler Fondsgesellschaft mbH i. L., Frankfurt am Main 40.0000 Sana Kliniken AG, Munich 22.4128 SAS Le Point du Jour, Paris 50.0000
Munichre Service Limited, Hong Kong 100.0000 Naretoblera 170017 S.L., Valencia 100.0000 Nerruze 120012 S.L., Valencia 100.0000 nexible GmbH, Düsseldorf 100.0000 Orrazipo 110011 S.L., Valencia 100.0000 P.A.N. Verwaltungs GmbH, Grünwald 100.0000 PLATINIA Verwaltungs-GmbH, Munich 100.0000 PRORENDITA DREI Verwaltungsgesellschaft mbH, Hamburg 100.0000 PRORENDITA EINS Verwaltungsgesellschaft mbH, Hamburg 100.0000 PRORENDITA FÜNF Verwaltungsgesellschaft mbH, Hamburg 100.0000 PRORENDITA VIER Verwaltungsgesellschaft mbH, Hamburg 100.0000 PRORENDITA ZWEI Verwaltungsgesellschaft mbH, Hamburg 100.0000 Reaseguradora de las Américas S.A., Havana 100.0000 Roanoke Trade Insurance Inc., Schaumburg, Illinois 100.0000 SAINT LEON ENERGIE S.A.R.L., Sarreguemines 100.0000 Schloss Hohenkammer GmbH, Hohenkammer 100.0000 Schrömbgens & Stephan GmbH Versicherungsmakler, Düsseldorf 100.0000 Smart Thinking Consulting (Beijing) Co., Ltd., Beijing 100.0000 Sopockie Towarzystwo Doradcze Sp. z o.o., Sopot 100.0000 Stichting Aandelen Beheer D.A.S. Holding, Amsterdam 100.0000 Sustainable Finance Risk Consulting GmbH, Munich 100.0000 Sydney Euro-Center Pty Ltd, Sydney 100.0000 Synkronos Italia S.r.l., Milan 80.3500 TAS Assekuranz Service GmbH, Frankfurt am Main 100.0000 TAS Touristik Assekuranzmakler und Service GmbH, Frankfurt am Main 100.0000 Three Lions Underwriting Ltd., London 100.0000 Tillobesta 180018 S.L., Valencia 100.0000 Triple IP B.V., Culemborg 100.0000 US PROPERTIES VA Verwaltungs-GmbH, Düsseldorf 100.0000 Vectis Claims Services Ltd., Tel Aviv 75.0000 VFG Vorsorge-Finanzierungsconsulting GmbH, Vienna 100.0000 VICTORIA Immobilien Management GmbH, Munich 100.0000 VICTORIA Immobilien-Fonds GmbH, Düsseldorf 100.0000 VICTORIA US Property Zwei GmbH i. L., Munich 100.0000 Victoria Vierter Bauabschnitt Management GmbH, Düsseldorf 100.0000 Viwis GmbH, Munich 100.0000 VV-Consulting Gesellschaft für Risikoanalyse, Vorsorgeberatung und Versicherungsvermittlung GmbH, Vienna 100.0000 VV-Consulting Többesügynöki Kft, Budapest 100.0000 welivit New Energy GmbH, Düsseldorf 100.0000 welivit Solar España GmbH, Düsseldorf 100.0000 Welivit Solar Italia S.r.l., Bolzano 100.0000 Windpark Langengrassau Infrastruktur GbR, Bremen 83.3300 WNE Solarfonds Süddeutschland 2 GmbH & Co. KG, Düsseldorf 100.0000 Wohnungsgesellschaft Brela mbH, Hamburg 100.0000 WP Kladrum/Dargelütz GbR, Bremen 55.6500
SEBA Beteiligungsgesellschaft mbH, Nuremberg 48.9966 SEIF II Texas Wind Holdings 1 LLC, Dover, Delaware 49.0000 SNIC Insurance B.S.C. (c), Manama 22.5000 STEAG Fernwärme GmbH, Essen 49.0000 Storebrand Helseforsikring AS, Oslo 50.0000 Suramericana S.A., Medellin5 18.8672 Taunus Holding B.V., Rotterdam 23.1913 Thaisri Insurance Public Co., Ltd., Bangkok 40.2576 T-Solar Global Operating Assets S.L., Madrid 37.0000 Vier Gas Investments S.à r.l., Luxembourg 43.7516 VV Immobilien GmbH & Co. United States KG i. L., Munich 28.9515 VV Immobilien GmbH & Co. US City KG i. L., Munich 23.0999 WISMA ATRIA Holding GmbH & Co. Singapur KG i. L., Düsseldorf9 65.0000
Verwaltungsgesellschaft “PORT MELBOURNE” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT MENIER” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT MOODY” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT MORESBY” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT MOUTON” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT NELSON” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT RUSSEL” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT SAID” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT STANLEY” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT STEWART” mbH, Bramstedt 50.0000 Verwaltungsgesellschaft “PORT UNION” mbH, Bramstedt 50.0000 VisEq GmbH, Grünwald 34.0000 Volksbanken-Versicherungsdienst GmbH, Vienna 25.2319 VV Immobilien Verwaltungs GmbH, Munich 30.0000 VV Immobilien Verwaltungs und Beteiligungs GmbH, Munich 30.0000 We Predict Limited, Swansea5 17.5900 Windpark Osterhausen-Mittelhausen Infrastruktur GbR, Bremen7 58.9400 WISMA ATRIA Holding GmbH i. L., Düsseldorf 50.0000
2 This fully consolidated German subsidiary with the legal form of a partnership, as defined in Section 264a of the German Commercial Code (HGB), intends to fulfil the conditions required pursuant to Section 264b of the Commercial Code and, in the 2017 financial year, to avail itself of the relevant provision exempting it from preparing annual financial statements.
4 Control pursuant to voting majority or other control pursuant to IFRS 10. 5 Significant influence owing to representation of Munich Re on the board of directors and/or supervisory body or an equivalent governing body of the associate.
7 No control, since the articles of association or another agreement bind the relevant operations to a quorum, which cannot be achieved by Munich Re. 8 No control and/or no significant interest, as it is a purely financial investment under the managerial responsibility of an external asset manager. 9 Significant influence owing to divergent voting power. 10 No significant influence because, under the articles of association, statutes or other agreement, all key decisions regarding the company’s financial and operating policy are subject to a quorum which cannot be attained by the majority shareholder without the non-controlling shareholders.
12 This company is not required to prepare or disclose financial statements. Accordingly, we make use of the option to exempt this company in accordance with Section 313(3), sentence 5, of the German Commercial Code, and forgo the disclosures on equity and the result for the year.
Other shareholdings as defined in Section 271(1) of the German Commercial Code (HGB) Asia Property Fund II GmbH & Co. KG, Munich (equity: €104,708k; result for year: €528k) 5.8889 Autobahn Tank & Rast Gruppe GmbH & Co. KG, Bonn (equity: €478,206k; result for year: –€314k) 9.9980 Bought by Many Limited “BBM”, London12
(equity: €---; result for year: €---) 8.7900 CBRE U.S. Core Partners Parallel Limited Partnership, Wilmington, Delaware8 (equity: €26,081k; result for year: €2,265k) 99.9000 FIA Timber Partners II LP, Wilmington, Delaware8
(equity: €143,230k; result for year: €3,388k) 39.0800 Green Acre LLC, Wilmington, Delaware8
(equity: €---; result for year: €---) 5.4000 Hines India Fund LP, Houston, Texas (equity: €63.178k; result for year: €2.248k) 11.8333 IK Australia Property Eins GmbH & Co. KG, Hamburg (equity: €14,005k; result for year: €859k) 10.6438 IK Objekt Bensheim Immobilienfonds GmbH & Co. KG, Düsseldorf (equity: €14,263k; result for year: €1,633k) 16.2445 IK US PORTFOLIO INVEST Drei GmbH & Co. KG, Düsseldorf (equity: €16,709k; result for year: –€328k) 0.0024 IK US Portfolio Invest GmbH & Co. KG, Düsseldorf (equity: €19,941k; result for year: –€3,361k) 0.0026 IK US Portfolio Invest ZWEI GmbH & Co. KG, Düsseldorf (equity: €22,740k; result for year: –€6,427k) 0.0016 K & P Objekt München Hufelandstraße Immobilienfonds GmbH & Co. KG, Düsseldorf (equity: €6,312k; result for year: €44,116k) 0.0489 M 31 Beteiligungsgesellschaft mbH & Co. Energie KG, Düsseldorf (equity: €1,081,264k; result for year: €71,357k) 18.6246 m:solarPOWER GmbH & Co. KG, Düsseldorf (equity: €434k; result for year: €115k) 0.0000 Next Insurance Inc., Wilmington, Delaware (equity: €32,291k; result for year: €---) 6.8716 PRORENDITA DREI GmbH & Co. KG, Hamburg (equity: €5,609k; result for year: –€1,108k) 0.0260 PRORENDITA EINS GmbH & Co. KG, Hamburg (equity: €7.218k; result for year: –€1.183k) 0.0590 PRORENDITA Fünf GmbH & Co. KG, Hamburg (equity: €15,283k; result for year: –€458k) 0.0384 PRORENDITA VIER GmbH & Co. KG, Hamburg (equity: €9,922k; result for year: –€1,920k) 0.0029 PRORENDITA Zwei GmbH & Co. KG, Hamburg (equity: €6,044k; result for year: –€1,097k) 0.0100 RMS Forest Growth International L.P., Grand Cayman, Cayman Islands8 (equity: €85,933k; result for year: –€3,028k) 43.4700 Slice Labs Inc., Ottawa, Ontario (equity: €5,340k; result for year: €---) 9.4100 Solarpark 1000 Jahre Fürth GmbH & Co. KG, Düsseldorf (equity: €644k; result for year: €90k) 0.9091
Valuation of the provision for outstanding claims in property-casualty business For information on the accounting and valuation policies used, please see the notes to the consolidated financial statements on page 113, and details about the estimates and assumptions used on page 99. Further information about the line items in the financial statements can be found on pages 145–148. Risk information can be found on pages 161–164 of the notes to the financial statements, and on pages 70–72 of the combined management report.
Report on the Audit of the Consolidated Financial Statements and of the Combined Management Report
− the accompanying combined management report as a whole provides an appropriate view of the Group’s position. In all material respects, this combined management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development.
− We assessed the level of reserves at the reporting date with that in previous years. We assessed the appropriateness of any adjustments made to expected values determined using actuarial methods by inspecting and critically assessing the documentation of the underlying calculations or qualitative grounds. We also spoke to the Company’s actuaries.
− We asked for explanations on the derivation of key assumptions used – including loss ratios and assumptions about run-off patterns – and assessed those assumptions.
The financial statement risk Provisions in life and health mainly comprise the provision for future policy benefits and the provision for outstanding claims. The provision for future policy benefits excluding unit-linked life insurance in the ERGO Life and Health Germany segment is €87,774m, and amounts to €10,825m in the life reinsurance segment. In ERGO International, most of the provision for future policy benefits of €9,897m is for life and health business. The provision for outstanding claims in the life reinsurance segment is €8,694m and amounts to €2,935m in ERGO Life and Health.
With regard to the technical provisions in life and health business, disclosures in the notes must be taken into account (especially information about uncertainty of estimates and sensitivities).
− We then assessed whether the accounting policies and methods used in the adequacy test were properly applied. Where market interest rates were used for valuation, we checked the adequacy of discount rates used by making a comparison with inputs observable in the market.
− We checked whether the disclosures in the notes correspond with accounting standards, and paid particular attention to whether uncertainty about estimates and sensitivities had been adequately shown.
With respect to the accounting policies, we refer to explanations in the notes to the consolidated financial statements on pages 108–110, and to the explanations about the use of estimates and assumptions on page 99. We also refer to the notes on the valuation hierarchy on pages 127–132, and to the individual instruments on pages 133–136. Information about market risk and credit risk can be found in the combined management report on pages 72–74.
− For parts of direct and indirect real estate investments, private equity funds, and risk-based samples of unlisted loans, structured products and derivatives, we checked the fair values determined by Munich Re based on our own valuations or by making comparisons with external information.
− Revaluations for unlisted securities and derivatives were carried out using our own valuation software and inputs derived from market data to compute our own fair values. The comparison with Munich Re’s fair values took account of an expected range that was determined depending on the type of financial instrument involved.
− We have reviewed the disclosures in the notes to the financial statements to determine whether they comply with accounting standards and, in particular, whether the accounting policies are presented appropriately.
Our observations The fair values of the investments have been determined correctly. The valuation assumptions are reasonable. Subsequent accounting measurements and determination of the impact on profit or loss are appropriate. The explanatory notes and disclosures in the notes to the consolidated financial statements are complete and appropriate.
Other information Management is responsible for the other information. The other information comprises the remaining parts of the annual report, with the exception of the audited consolidated financial statements and combined management report and our auditor’s report.