In connection with the acquisition of the shareholding in ERGO Daum Direct Auto Insurance, goodwill of €33.9m and other intangible assets of €5.8m have been recognised. The goodwill and other intangible assets are based on our expectations regarding the company’s profitability and growth potential, deriving in particular from the company’s good reputation and brand, experienced management team, and integration in ERGO’s international insurance network.
The Roanoke Companies, Inc. On 30 April 2008, through its subsidiary Munich Re Holding Company (UK)
Ltd., the Munich Re Group acquired 100% of the shares in the holding company The Roanoke Companies, Inc. (TRC), Schaumburg/Chicago (Illinois) for a price of €34.0m. The purchase price includes a two-year earn-out agreement with the seller, estimated at €4.5m, as well as incidental acquisition expenses, other costs such as fees for consulting services and taxes incurred. TRC owns Roanoke Trade Services, Inc. and Roanoke Real Estate Holdings, Inc. The TRC Group operates as a major marine insurance underwriting agency and broker in the USA (licensed in 50 states).
The TRC Group’s opening balance sheet at the time of acquisition includes the following IFRS figures (the figures in brackets are the amounts directly prior to the business combination): intangible assets of €43.0m (3.2m), other assets of €18.1m (18.1m), other li abilities of €12.4m (12.4m) and deferred taxes of €14.7m (0.2m).
In connection with the acquisition of the shareholding in TRC, other intangible assets of €42.8m and deferred tax liabilities of €14.5m have been recognised.
No other business combinations as per IFRS 3 are material, either individually or in the aggregate.
The balance sheet date of the consolidated companies is generally 31 December. Some of the special funds have other balance sheet dates. These funds are consolidated on the basis of interim accounts as at 31 December.
Notes owns 50% or less of the voting power, the parent-subsidiary relationship is based mainly on the power to cast the majority of votes at meetings of the board of directors or equivalent governing body, in accordance with IAS 27.13 (d). Acquisitions are accounted for by the purchase method. In order to determine the equity capital at the time of acquisition, we measure the assets and liabilities of the subsidiary or special fund at fair value. The acquisition costs of the shares are netted against the equity capital apportionable to the Group at the time of acquisition. Any residual positive amount is capitalised as goodwill. Profits earned by the subsidiaries or special funds after their first consolidation are included in Group equity. Amounts relating to intraGroup transactions (receivables and liabilities, expenses and income between consolidated companies) are eliminated unless they are determined as not being material.
Germany Other countries Total 31 Dec. fi nancial year 24 32 56
Germany Other countries Total 31 Dec. fi nancial year 41 14 55 70_Konzernanhang_e 19570_Konzernanhang_e 195 10.03.2009 11:24:43 Uhr10.03.2009 11:24:43 Uhr
b) The omitted amortisation of an acquired portfolio has been remedied.
The consolidated balance sheets for financial years 2006 and 2007 are affected by the adjustments pursuant to IAS 8 in the following manner: Consolidated balance sheet 31.12.2006 Changes due to 31.12.2006 as originally adjustments pursuant recognised to IAS 8 2006 €m a) b)
G. Deferred tax liabilities 8,142 16 –4 8,154 70_Konzernanhang_e 19670_Konzernanhang_e 196 10.03.2009 11:24:43 Uhr10.03.2009 11:24:43 Uhr
The effects on the consolidated income statement for the financial year 2007 are as follows: The following items were dealt with via an adjustment of retained earnings in the financial year 2008, since retrospective application for prior periods did not appear appropriate on cost-benefit grounds: a) In connection with the conversion and introduction of IT systems, a changeover was made to uniform methods for the valuation of assets, receivables and liabilities, and deferred taxes . This resulted in a reduction of retained earnings by €16m.
Consolidated balance sheet 31.12.2007 Total changes Changes due to 31.12.2007 as originally pursuant adjustment pursuant recognised to IAS 8 in to IAS 8 in 2007 2006 €m a) b)
A. IV. Consolidated result attributable to Munich Re equity holders 3,854 – –11 –3 3,840
C. II. Provision for future policy benefi ts 94,935 –7 5 – 94,933
C. III. Provision for outstanding claims 44,564 –4 – – 44,560
Gross premiums written 37,262 –6 – 37,256 1. Earned premiums – gross 37,187 –6 – 37,181
B. IV. 2. Other securities available for sale –2 – 3 1
The change in IAS 23 (rev. 2007), Borrowing Costs, deletes the option under which it has been permissible for borrowing costs directly attributable to the acquisition, construction or production of an asset to be recognised as an expense in the period in which they are incurred. Such borrowing costs must now be capitalised as part of the cost of the asset in every case. As the Munich Re Group has not availed itself of the option, this change will not have any impact.
The change to IAS 32 (rev. 2008), Financial Instruments: Presentation, regarding so-called puttable financial instruments and obligations arising on liquidation makes it possible to classify cancellable instruments as equity in future under certain conditions. At the same time, new disclosure requirements have been included in IAS 1 (rev. 2008), Financial Statements Presentation, which concern redeemable instruments and obligations in the event of liquidation. The amendments have no practical significance for the Munich Re Group.
Application of the following amended standards is mandatory for financial years beginning on or after 1 July 2009: The revision of IFRS 3 (rev. 2008), Business Combinations, and IAS 27 (rev. 2008), Consolidated and Separate Financial Statements, involves changes in the balance sheet recognition of non-controlling interests, successive acquisition of shares, acquisition-related costs, and contingent consideration pay able. Effects of the new rules for the Munich Re Group will, owing to their prospective application, result only for future acquisitions of shareholdings and will be dependent on the conditions of the respective acquisition.
Other intangible assets mainly comprise purchased and internally generated software and acquired insurance portfolios. The software is carried at cost less straight-line amortisation. The useful life assumed is generally three to five years, in exceptional cases up to ten years. Acquired insurance portfolios are recognised at their present value on acquisition (PVFP – present value of future profits). This is determined as the present value of expected profits from the portfolio acquired, without consideration of new business and tax effects. The items in question are amortised in accordance with the realisation of the profits from the insurance portfolios underlying the PVFP calculation. The other intangible assets are tested for impairment at each balance sheet date and write-downs made if required. Write-downs of software and other in tan gible assets are distributed in the consolidated income statement between investment expenses, expenses for claims and benefits and operating expenses. If it is not possible to allocate the expenses to these functional areas, they are shown under “other expenses“. Write-downs of purchased insurance portfolios are recognised under operating expenses. Write-ups of software and other intangible assets are included in “other income“.
Investments in affiliated companies that we do not consolidate because they are not material are carried at fair value insofar as this can be reliably measured. If the investments are quoted on a stock exchange, we use the share prices at the balance sheet date; for other investments, the fair value is measured using the discounted earnings or net asset value method. Changes in the fair value are recognised in “other reserves“ under unrealised gains and losses.
Investments in associates are valued by the equity method at the Group’s proportionate share of their net assets. The associate’s earnings attributable to the Group are included in the investment result. As a rule, the equity and annual result from the most recent individual or consolidated financial statements of the associate are used; exceptional transactions of material importance for a true and fair picture of the associate’s financial position are recognised in the same financial year. Investments in associates that are not material for assessing the Group’s financial position are accounted for at fair value insofar as this can be reliably measured. To determine the fair value, we use the share prices at the balance sheet date if the investments are quoted on a stock exchange; for other investments, the fair value is measured using the discounted earnings or net asset value method.
Use of financing instruments Financial assets in our direct portfolio are generally accounted for at the settlement date. Investments held in special funds are accounted for at the trade date.
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
Insurance derivatives Theoretical price Biometric and lapse rates Present-value method (variable annuities) Volatilities Interest-rate curve Currency spot rates
Credit default swaps Theoretical price Credit spreads Present-value method Recovery rates Interest-rate curve 71_Aktiv_Passiv_e 20271_Aktiv_Passiv_e 202 10.03.2009 11:24:33 Uhr10.03.2009 11:24:33 Uhr
Net investment result The net investment result comprises regular income, income from write-ups, gains and losses on the disposal of investments, other income, write-downs of investments, management expenses, interest charges and other expenses. Regular income and expenses from investments measured at fair value without impact on profit or loss are calculated in accordance with the effective interest method, i.e. any premiums or discounts are deducted from or added to the acquisition costs, with impact on profit or loss, until maturity.
In the impairment test for financial assets (with the exception of equity investments ), we generally first assess whether objective evidence of impairment exists for individual items. If this is not the case, and also in the case of individually insignificant items, the impairment test is carried out collectively on the basis of groups of similar financial assets. Assets that are individually assessed for impairment are not included in the collective assessment. The amount of the probable loss is measured as the difference between the amortised cost of the asset or group of assets and the present value of estimated future cash flows. The impairment thus determined is recognised as an expense. We generally deduct impairments directly from the items concerned on the assets side, without using a value adjustment account. If, in a subsequent period, the reasons for the impairment cease to apply, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the original amortised cost.
These are investments for policyholders under unit-linked life insurances. They are measured at fair value. Unrealised gains or losses from changes in fair value are included in the investment result. These are matched by corresponding changes in the technical provisions (equity and liabilities item D), which are taken into account in the underwriting result. The decision to recognise these investments at fair value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding provisions.
Other assets are generally carried at amortised cost. The owner-occupied property recognised here is accounted for as outlined under the notes on asset item B – Land and buildings. Impairment losses and impairment losses reversed in the Group’s owner-occupied property are distributed between the underwriting functional areas.
The item issued capital and capital reserve contains the amounts that the equity holders of the parent have paid in on shares. The capital reserve is reduced by the externally generated costs directly connected with equity capital measures, after taking into account tax effects.
Other reserves contain unrealised gains and losses resulting from the recognition of other securities available for sale at fair value and from investments in unconsolidated affiliated companies and in associates that we do not value at equity. These reserves also include unrealised gains and losses from the valuation of associates at equity, differences resulting from the currency translation of foreign subsidiaries’ figures, and the valuation result from the hedging of cash flows. Write-ups of equity investments available for sale are also recognised in this equity item.
Unearned premiums are accrued premiums already written for future risk periods. For primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases where the data for a calculation pro rata temporis is not available. The posting of unearned premiums is restricted to short-term underwriting business, i.e. property-casualty business (except long-term accident cover) and parts of health business, in both primary insurance and reinsurance.
The provision for future policy benefits in long-term underwriting business is posted for the actuarially calculated value of obligations arising from policyholders ’ guaranteed entitlements. As well as life insurance, this concerns portions of health and personal accident insurance, insofar as the business is conducted like life insurance. Measurement is usually based on the prospective method, by determining the difference between the present values of future benefits and future premiums. The actuarial assumptions used for their calculation include, in particular, assumptions relating to mortality, disablement and morbidity, as well as assumptions regarding interest-rate development, lapses and costs. These are estimated on a realistic basis at the time the insurance contracts are concluded and they include adequate provision for adverse deviation to make allowance for the risks of change, error and random fluctuations. The actuarial assumptions are adjusted if this is shown to be necessary by a liability adequacy test in accordance with IFRS 4.
The standard actuarial methods we use are applied both to the run-off triangles for the payments and to the run-off triangles for the reported claims, so that we obtain a range of estimates for the ultimate loss. Within this range, a realistic estimated value for the ultimate loss is determined.
This item encompasses the provision for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unitlinked life insurance). The value of the provision for future policy benefits essentially corresponds to the market value of the relevant investments shown under assets item C. Besides this, as under the provision for future policy benefits as per FAS 97, they may include additional premium components; cf. the notes on assets item C. Changes in this provision are fully recognised in the underwriting result. Insofar as these changes derive from unrealised gains and losses from alterations in the fair values of the related investments, they are matched by opposite changes of the same amount in the investment result. The decision to recognise these provisions at fair value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding investments.
The interest rate at which the pension obligations are discounted is based on the yields for long-term high-quality bonds (e.g. commercial or government bonds). Actuarial gains or losses from pension obligations and plan assets result from the deviation of actual risk experience from estimated risk experience. They are recognised directly in equity, without impact on profit or loss.
Current tax liabilities comprise current taxes on income and other taxes of the individual companies, based on their respective national taxation. Current tax liabilities are posted – without discounting – in accordance with the probable tax payments for the year under review or previous years. Deferred tax obligations are shown under equity and liabilities item G “deferred tax liabilities“.
Under IAS 12, deferred tax liabilities must be recognised if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax accounts of the reporting company and these differences will be eliminated at a later date with a corresponding impact on taxable income (temporary differences); cf. notes on assets item H.
– its fair value less costs to sell and – its value in use (present value of the future cash flows expected to be derived from a cash-generating unit or group of cash-generating units). The future cash flows used for determining the value in use are based on management ’s most recent financial plans/forecasts. Beyond the period covered by these financial plans/forecasts, the future cash flows are estimated by extrapolating the prognoses on which the financial plans/forecasts are based, applying a growth rate for the subsequent years.
As regards the cash-generating units which, in themselves, have not been allocated a significant portion of the goodwill, the key assumptions for determining their recoverable amounts differ materially from one another. There is therefore no requirement for aggregation in accordance with IAS 36.135.
In the detailed planning phase, we expect rising premium income with a marginal decrease in claims expenditure and loss ratios compared with 2008. Our general assumption was that there will be moderate upward movement on the equity markets, with interest-rate levels falling slightly in Europe and rising slightly in the USA.
For the detailed planning, growth in results is expected for the future, after a decrease in 2009. Our general assumption was that there will be moderate upward movement on the equity markets and a slight decrease in interest-rate levels.
Management approach for determining the values allocated to the main assumptions
The planning assumptions are based on past experience combined with external information on market evolution.
The discount rate has been determined in the form of the weighted average cost of capital, using the Capital Asset Pricing Model (CAPM). The discount rate is calculated from a risk-free basic interest rate plus a risk loading and the market interest rate for borrowing, taking into account the capital structure. To derive the capital cost components (risk loading, capital structure), a peer group of international insurers and reinsurers is used, in accordance with IAS 36. The derivation of the risk-free basic interest rate and the borrowing costs is based on market data. It is a pre-tax calculation. A reconciliation to Munich Re’s cost of capital is not possible.
(3) Land and buildings, including buildings on third-party land 1 Adjusted pursuant to IAS 8.
Accumulated depreciation and accumulated impairment losses at 31 Dec. previous year 645 891
Gross carrying amount at 31 Dec. fi nancial year 4,480 4,398
Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year 669 592 329 1,590 1,341
Carrying amount at 31 Dec. fi nancial year 342 721 723 1,786 1,126
Gross carrying amount at 31 Dec. fi nancial year 907 1,334 1,096 3,337 2,716 72_Erlaeut_Aktiva_e 21572_Erlaeut_Aktiva_e 215 10.03.2009 11:24:21 Uhr10.03.2009 11:24:21 Uhr
Of the carrying amount of €3,732m (3,753m) at 31 December in the financial year, €16m (78m) concerns owner-occupied property classified as “held for sale”; cf. (16) Non-current assets and disposal groups held for sale.
Property pledged as security and other restrictions on title amount to €526m (512m). Expenditures recognised in the carrying amount for assets in the course of construction total €125m (109m) at the balance sheet date, and contractual commitments to acquire property amount to €142m (53m). The fair value of investment property at the balance sheet date amounted to €4,977m (5,013m). Of this, €16m (106m) concerns investment property classified as “held for sale.” The valuation is performed for each site individually as at 31 December 2008 except where valuation units are formed. Calculations are carried out mainly by valuers within the Group but in individual cases also by external valuers. Material for the valuation is determining the sustainability of cash inflows and outflows, taking into account the market conditions at the respective property location. The fair value is determined individually per item by discounting the future cash flow to the valuation date. Depending on the type of property, discount rates of 3.0% to 6.5% are used for residential buildings, of 4.0% to 9.5% for office buildings, and of 4.5% to 10.0% for retail.
Associates recognised at fair value 14 12 72_Erlaeut_Aktiva_e 21672_Erlaeut_Aktiva_e 216 10.03.2009 11:24:21 Uhr10.03.2009 11:24:21 Uhr
The fair value of the securities is based on recognised valuation methods in line with the present value principle and taking observed market parameters into account.
Over four years and up to fi ve years 7 7 7 7
Items pledged as security and other restrictions on title amount to €11,378m (11,604m). Some €1,085m (1,467m) of the securities shown are loaned to third parties. These securities are not derecognised, as the main resultant risks and rewards remain with Munich Re. Of the €3,211m (6,680m) in unrealised gains and losses, €2,195m (4,980m) has been posted in equity (other reserves), after deduction of provisions for deferred premium refunds, deferred taxes, minority interests and consolidation effects.
Disposal proceeds in the fi nancial year €m 2008 Prev. year
Over two years and up to three years 8,438 8,845 8,411 8,853
Derivative financial instruments are used by Munich Re to hedge against currency, interest-rate and other market-price risks. This is done at the Group companies within the framework of individual supervisory regulations and additional internal company directives. The risk of default is practically nonexistent in the case of products traded on the stock exchange. Over-the-counter products, on the other hand, harbour a theoretical risk in the amount of the replacement costs. Therefore, the Munich Re Group selects only top-quality counterparties for such transactions.
Fair value Qualifying for Balance sheet item 31.12.2008 Prev. year1 hedge accounting
No Investments, other securities held for trading 1,915 562Positive Yes Other assets 703 230
Rating of fi xed-interest securities according to fair values €m 31.12.2008 Prev. year
No rating 410 353 72_Erlaeut_Aktiva_e 22072_Erlaeut_Aktiva_e 220 13.03.2009 13:48:01 Uhr13.03.2009 13:48:01 Uhr
The following table shows the fair values and the related notional principal amounts of all our open positions, broken down according to risk types. Positive and negative fair values have been netted. At 31 December 2008, the open positions amounted to €2,015m (241m), or 0.9% (0.1%) of the balance sheet total.
The derivative components of variable annuities are shown under “other risks”.
Interest-rate risks in life insurance have been hedged using swaptions. These options to receive a fixed-interest rate are shown in the category “inter estrate risks/over-the-counter.” At the reporting date, the fair values of the 1 Adjusted pursuant to IAS 8.
Periods to maturity in years < 1 1– 2 2 – 3 3 – 4 4 – 5 > 5 31.12.2008 Prev. year1
Notional principal amounts 248 – – – – – 248 55
The change in fair value assignable to the ineffective portion of the hedging was negligible at the reporting date.
Periods to maturity and amount of the hedged cash fl ows at the balance sheet date €m year years years years years years 31.12.2008 Prev. year
Notional principal amounts of hedged transactions 135 – – – – 250 385 395 72_Erlaeut_Aktiva_e 22272_Erlaeut_Aktiva_e 222 10.03.2009 11:24:22 Uhr10.03.2009 11:24:22 Uhr
This item includes deposits with banks totalling €1,992m (4,833m). In deviation from the purely economic view, the carrying amount of these deposits represents the maximum exposure to credit risk at the balance sheet date, in accordance with IFRS 7.
Life and health Property-casualty Life and health Property-casualty €m1 31.12.2008 Prev. year2 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year2
Provision for future policy benefi ts 168 550 – – 1,631 1,450 – – 1,799 2,000 72_Erlaeut_Aktiva_e 22372_Erlaeut_Aktiva_e 223 10.03.2009 11:24:22 Uhr10.03.2009 11:24:22 Uhr
(12) Other receivables €608m (601m) of the amounts receivable on primary insurance business is apportionable to receivables from insurance agents. The miscellaneous receivables contain receivables of €258m (244m) resulting from reinsurance contracts without significant risk transfer, which do not fall within the scope of IFRS 4. In deviation from the purely economic view, the carrying amount of the receivables represents the maximum exposure to credit risk at the balance sheet date, in accordance with IFRS 7.
As the other receivables mainly have a period to maturity of less than one year, the fair values largely correspond to the carrying amounts.
Over four years and up to fi ve years 21 29
Of the carrying amount of deferred tax assets totalling €5,708m (4,658m) at 31 December in the financial year, – (€3m) concerns disposal groups held for sale. Of the carrying amount of deferred tax liabilities totalling €8,828m (7,113m), – (€1m) relates to such disposal groups; cf. (16) Non-current assets and disposal groups held for sale.
Amortisation –327 –322 –880 –856 –443 –456 –208 –210 –1,858 –1,844
Status at 31 Dec. fi nancial year 1. 1,570 1,749 1,002 887 5,381 5,219 547 533 8,500 8,388 72_Erlaeut_Aktiva_e 22572_Erlaeut_Aktiva_e 225 10.03.2009 11:24:22 Uhr10.03.2009 11:24:22 Uhr
Some €18m of these impairment losses are apportionable to the reinsurance property-casualty segment and €9m to the reinsurance life and health segment.
The fair value of the property at the balance sheet date amounted to €2.574m (2.534m). The expenditures recognised in the carrying amount for assets in the course of construction totalled €52m (15m) for property and €18m (13m) for plant and equipment at the balance sheet date. Commitments to acquire property totalled €78m (24m) at the balance sheet date and commitments to acquire plant and equipment €12m (6m).
Besides this, ownership of German property first classified as “held for sale” in the first quarter of 2007 was transferred in the second quarter of 2008. This disposal group, with a carrying amount of €6m, is therefore no longer recognised either.
Thereof: Amounts due to banks relating to disposal groups 19 19
Total liabilities relating to disposal groups 19 –152 72_Erlaeut_Aktiva_e 22872_Erlaeut_Aktiva_e 228 10.03.2009 11:24:22 Uhr10.03.2009 11:24:22 Uhr
The total share capital of €587,725,396.48 at 31 December 2008 is divided into 206,403,804 registered no-par-value shares, each fully paid up and entitled to one vote. By resolution of the Annual General Meeting on 26 April 2007, Munich Re was authorised to buy back shares amounting to a maximum of 10% of the share capital up to 25 October 2008. The Annual General Meeting on 17 April 2008 renewed this resolution, thereby authorising the Board of Management to buy back shares amounting to a maximum of 10% of the share capital up to 16 October 2009. The number of shares in circulation de veloped as follows: On 31 December 2008, a total of 10,748,453 Munich Re shares with a calculated nominal value of around €30.6m were held by Group companies. This represents 5.21% of the share capital.
Acquisition of shares for retirement (share buy-back programme) including exercise of put options 11,840,105 17,734,943
Status at 31 Dec. fi nancial year 195,655,351 207,824,071 73_Erlaeut_Passiva_e 22973_Erlaeut_Passiva_e 229 10.03.2009 11:24:01 Uhr10.03.2009 11:24:01 Uhr
In addition, one subsidiary holds 1,893,855 shares to safeguard stock appreciation rights granted to the Board of Management and top Munich Re executives since 1999. In 2008, a total of 420,000 shares were acquired for these programmes at an average price of €113.19, and 82,503 shares were sold at an average price of €115.66.
Europäische Reiseversicherung AG and Mercur Assistance Deutschland GmbH acquired no further Munich Re shares in 2008 to safeguard their longterm incentive plans. At 31 December 2008, there were no shares remaining in the portfolio.
The acquisition costs of all Munich Re shares in the possession of Group companies at the end of the financial year totalled €1,180,742,532.89.
Unconsolidated affi liated companies and associates not valued at equity 151 67
Other equity 254 396 73_Erlaeut_Passiva_e 23173_Erlaeut_Passiva_e 231 10.03.2009 11:24:02 Uhr10.03.2009 11:24:02 Uhr
2 ERGO International AG holds bonds with a nominal value of €3m; the volume outstanding has been reduced accordingly. 3 ERGO AG holds bonds with a nominal value of €3m; the volume outstanding has been reduced accordingly.
Munich Reinsurance Company, Munich, 7.625%, until 2018, thereafter fl oating, £300m,
The Midland Company, Cincinnati, LIBOR +350 BP, US$ 24m, Bonds 2004/2034 17 –
Bank Austria Creditanstalt Versicherung AG, Vienna, 6%, until 2010, thereafter fl oating, €12m², Registered bonds 2001/perpetual 7 –
Life and health Property-casualty Life and health Property-casualty €m1 31.12.2008 Prev. year2 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year2 1 Adjusted pursuant to IAS 8.
Gross provision for future policy benefi ts according to type of insurance cover €m 31.12.2008 Prev. year1
Life and health Property-casualty Life and health Property-casualty €m1 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year
Change in consolidated group – – 315 8 – – – – 315 8
In primary insurance, measurement is generally carried out individually for each risk. For German life and health primary insurance, to which approximately. 87% of the provisions for future policy benefits are apportionable, biometric actuarial assumptions based on the tables of the German Association of Actuaries are used. We also largely use the tables of the national actuarial associations for the rest of the primary insurance business. The actuarial interest rate employed for discounting is limited by the respective maximum actuarial interest rate prescribed by the supervisory authorities.
Further information on the underwriting risks and discount rates can be found under (36) Risks from insurance contracts in the life and health segment and (37) Risks from insurance contracts in the property-casualty segment.
Development of gross provision for future policy benefi ts €m 2008 Prev. year1
Life and health Property-casualty Life and health Property-casualty €m1 31.12.2008 Prev. year2 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year2 73_Erlaeut_Passiva_e 23473_Erlaeut_Passiva_e 234 10.03.2009 11:24:02 Uhr10.03.2009 11:24:02 Uhr
In the life and health segment, the provision for outstanding claims consists of a provision for disability cases and a provision for other benefit cases. The disability claims provision involves periodic payments and is usually due long term. It is calculated as the present value of the expected future payments. Discount rates are disclosed in (36) Risks from insurance contracts in the life and health segment. The biometric actuarial assumptions are selected using appropriate actuarial principles. The provision for other benefit cases is largely measured at face value and is usually due short term. This provision includes an IBNR reserve, whose amounts are estimated using actuarial methods.
Provision for other benefi t cases 1,941 1,977 1,438 1,327 3,379 3,304
Over one year and up to fi ve years 41.9 40.6 38.7 36.7
For the year under review 4,562 258 4,304 4,264 182 4,082
The run-off triangles are prepared on a currency-adjusted basis. To this end, all figures are translated from the respective local currency into the Group currency (euro), consistently using the exchange rates applicable at the end of the year under review (i.e. at 31 December 2008). This ensures that neutral net run-off results in the original currency (i.e. where the ultimate loss originally estimated for an accident year and current loss estimate are identical) do not lead to currency-related run-off effects when expressed in the Group currency.
(55m) is apportionable to property-casualty insurance. The provision for deferred premium refunds is established solely for life and health insurance.
Reinsurance Primary insurance Total €m¹ 31.12.2008 Prev. year 31.12.2008 Prev. year 31.12.2008 Prev. year
Provision for deferred premium refunds – – 4,068 4,714 4,068 4,714
Thereof resulting from other revaluations (recognised in profi t or loss) – – 3,277 3,354 3,277 3,354
Provision for profi t commission 674 748 – – 674 748
Status at 31 Dec. fi nancial year 4,442 4,925 73_Erlaeut_Passiva_e 23873_Erlaeut_Passiva_e 238 10.03.2009 11:24:02 Uhr10.03.2009 11:24:02 Uhr
For Hamburg-Mannheimer Versicherungs-AG and Victoria Lebensversicherung AG, a change in the management rule for the participation of policyholders in surplus led to this portion being adjusted in the past financial year. The revaluation of the provision for deferred premium refunds resulting from the application of these amended rates was recognised either in equity or in profit or loss, depending on their origin.
Of the carrying amount of the gross provision for deferred premium refunds totalling €4,068m (4,714m) at 31 December 2008, – (–€172m) concerns disposal groups held for sale; cf. (16) Non-current assets and disposal groups held for sale.
(23) Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders
Development of provision for deferred premium refunds €m 2008 Prev. year
Change resulting from other revaluations (recognised in profi t or loss) –77 600
Status at 31 Dec. fi nancial year 2,940 2,308 73_Erlaeut_Passiva_e 23973_Erlaeut_Passiva_e 239 10.03.2009 11:24:02 Uhr10.03.2009 11:24:02 Uhr
These provisions are valued retrospectively. The withdrawal for underwriting risks from the premiums and provision for future policy benefits is made on the basis of prudent assumptions regarding expected mortality and morbidity. Here, as with the provision for future policy benefits for non-unit-linked life insurance, the underlying calculation is based on best estimates with appropriate provisions for adverse deviation.
Expenses for defined contribution plans in the year under review totalled €47m (45m).
In 2003, Munich Reinsurance Company established a contractual trust agreement in the form of a two-way trust for its unfunded company pension obligations.
Status at 31 Dec. fi nancial year 2,319 2,185 73_Erlaeut_Passiva_e 24073_Erlaeut_Passiva_e 240 10.03.2009 11:24:03 Uhr10.03.2009 11:24:03 Uhr
Funded status of the defi ned benefi t plans €m 31.12.2008 Prev. year
Change in the provision for defi ned benefi t plans €m 2008 Prev. year
The actual return on plan assets amounts to –€59m (–9m), and the actual return on reimbursements to €3m (–1m).
The fair value of the plan assets includes own shares with a fair value of – (€23m).
The consolidated companies used the following actuarial assumptions (weighted average values) for calculating their pension obligations: The expected rate of return on plan assets is determined on the basis of anticipated long-term capital yields.
Breakdown of expenses booked in the business year €m 2008 Prev. year
For the financial year 2009, capital transfers of €64m (44m) to plan assets are expected.
Present value of defi ned benefi t obligations (excluding medical-care benefi ts) 2,178 2,053 2,123
We calculate the fair value of the notes issued by Munich Re America Corporation using recognised valuation methods with observable market data. The fair value at the reporting date amounts to €317m (368m).
The ratings of the bonds and notes are given on page 119.
Deposits retained on ceded business are collateral for technical provisions covering business ceded to reinsurers and retrocessionaires, and to that extent do not trigger any cash flows. As a rule, the changes in deposits retained on ceded business derive from the changes in the relevant technical provisions covering ceded business. Deposits retained on ceded business thus do not have a fixed maturity date, their release generally being dependent on run-off of the corresponding provisions.
The miscellaneous liabilities contain liabilities of €168m (172m) resulting from reinsurance contracts without significant risk transfer and €603m (550m) from derivative financial instruments and derivative components of variable annuities with a negative fair value. Besides this, €11m (9m) of the other liabilities is apportionable to liabilities for social security, and €200m (211m) to liabilities for interest and rent.
1 Outflows of liquidity occur annually in the amount of the interest payments of US$ 35m until the notes mature.
Miscellaneous liabilities 2,438 2,890 73_Erlaeut_Passiva_e 24473_Erlaeut_Passiva_e 244 10.03.2009 11:24:03 Uhr10.03.2009 11:24:03 Uhr
Over four years and up to fi ve years 59 189
Over ten years 393 378 73_Erlaeut_Passiva_e 24573_Erlaeut_Passiva_e 245 10.03.2009 11:24:03 Uhr10.03.2009 11:24:03 Uhr
Land and buildings, including buildings on third-party land 5 62 26 260 159 500 7 34 5 –3 202 853
In addition to foreign currency exchange gains of €3,688m (1,520m), the other income mainly includes income from services rendered of €331m (346m), interest and similar income of €115m (121m), income from the release/reduction of miscellaneous provisions and adjustments of values for receivables of €203m (138m), and income of €39m (114m) from owner-occupied property that is sometimes leased out.
Other securities held for trading 1,432 1,460 74_Erlaeut_GuV_e 24874_Erlaeut_GuV_e 248 10.03.2009 11:23:52 Uhr10.03.2009 11:23:52 Uhr
Expenses for profit commission in reinsurance are shown under operating expenses, not under expenses for claims and benefits.
Provision for future policy benefi ts 518 412 19 23 640 1,771 27 38 1,204 2,244
Gross expenses for claims and benefi ts 4,818 4,925 9,663 9,131 11,840 13,997 3,575 3,261 29,896 31,314
Provision for future policy benefi ts –15 –8 – –1 59 95 – – 44 86
Expenses for claims and benefi ts – Ceded share 154 180 658 430 94 101 271 134 1,177 845
Net expenses for claims and benefi ts 4,664 4,745 9,005 8,701 11,746 13,896 3,304 3,127 28,719 30,469 74_Erlaeut_GuV_e 24974_Erlaeut_GuV_e 249 10.03.2009 11:23:52 Uhr10.03.2009 11:23:52 Uhr
The increase in finance costs compared with the previous year is mainly due to the fact that the subordinated bonds issued by Munich Reinsurance Company in June 2007 are recognised here in full in 2008, rather than pro rata tem poris as in 2007.
Information on the Group’s strategic debt can be found in the management report on page 116 f. and under (18) Subordinated liabilities and (25) Bonds and notes issued.
Ceded share of acquisition costs 18 9 15 15 –33 –1 –2 4 –2 27
A total of €160m in current and deferred taxes was debited directly to equity.
Recognised tax expenses/income broken down according to Germany and other countries €m 2008 Prev. year1
Taxes on income 1,373 801 74_Erlaeut_GuV_e 25174_Erlaeut_GuV_e 251 10.03.2009 11:23:52 Uhr10.03.2009 11:23:52 Uhr
The effective tax burden is the ratio between the taxes on income recognised and the result before taxes on income (after “other tax“). In the year under review, there was a tax burden of 47% (previous year: 17%). “Tax-free income“ is made up of tax-free gains on the sales of shareholdings in joint-stock companies, tax-free dividend income and other tax-free income.
For the same reason, write-downs were made on securities in the USA, with no deferred tax assets being recognised for the resulting tax losses. This also increased the Group effective tax rate.
Taxes on income shown 1,373 801 74_Erlaeut_GuV_e 25274_Erlaeut_GuV_e 252 10.03.2009 11:23:52 Uhr10.03.2009 11:23:52 Uhr
Notes Disclosures on type and extent of risks from insurance contracts and financial instruments
Mortality (short term): – Increase in claims expenditure due to exceptional, one-off circumstances (e.g. pandemics) Mortality (long term): – Increase in claims expenditure due to sustained rise in mortality in the portfolio
Longevity: – Increase in expected expenditure for annuities due to sustained rise in life expectancy in the portfolio
Morbidity (short term): – Increase in costs of medical treatment within the risk period – Increase in claims expenditure due to exceptional, one-off events (e.g. pandemics)
The quantitative structure of our business is shown in the notes under (20) Provision for future policy benefits.
In life primary insurance, an implicit or explicit interest-rate guarantee is granted for the majority of contracts over their whole duration, based on a fixed interest rate applying at the time the contract is concluded. The discount rate used to calculate the provision for future policy benefits is identical with this interest rate for the majority of contracts in our portfolios. An appropriate minimum return needs to be earned in the long term from the investment result (possibly also with assistance from the underwriting result) for the contractually guaranteed benefits. In health primary insurance, a discount rate is also used for calculating the provision for future policy benefits, but for longterm business this rate can generally be altered by way of premium adjustment; for short-term business, there is no direct interest-rate risk.
In reinsurance, other market risks are generally ruled out through suitable treaty design. Some reinsurance contracts contain derivative components of variable annuities. These are measured separately and their changes in value are recognised in the investment result. The valuation of these embedded derivatives is sensitive to share prices and interest rates. In those cases where such derivatives are directly matched by financial derivatives for hedging purposes, these sensitivities are nearly fully compensated for. A change in share prices of plus/minus 10% results in a gain/loss of €7m, and a change in share prices of plus/minus 30% in a gain/loss of €22m. A change in interest rates of plus/minus 100 basis points produces a gain/loss of €19m, and a change in interest rates of plus/minus 200 basis points a gain/loss of €37m. The risk inherent in these interest sensitivities is largely elimin ated through the consideration of these embedded derivatives in the economic replication portfolio used in the context of our asset-liability management.
In primary insurance, the risks to be considered in this context – besides the interest-rate guarantee, which we analyse in the modelling of the interest-rate risk – are particularly risks from unit-linked life insurance and the lump-sum option in the case of deferred annuity policies. Other embedded derivates are financially insignificant.
But there is no direct interest-rate sensitivity or market sensitivity, since the exercise of the option by the policyholder is determined to a crucial extent by individual factors and relates to the insurance components. This option is specifically taken into account when applying the liability adequacy test pre scribed by IFRS 4 to underwriting liabilities.
In reinsurance, a lapse risk derives primarily from the indirect transfer of lapse risks from cedants. As a rule, both this risk and the financial risk from extraordinary termination of reinsurance contracts are largely ruled out through appropriate contract design.
For the Munich Re Group, there could be a liquidity risk if the cash outflow for insurance claims payments and the costs related to the business were to exceed the cash inflow from premiums and investments. For our mainly longterm business, we therefore analyse the expected future balance from cash inflows due to premium payments and outflows for payment of insurance claims and benefits plus costs.
For the business at the balance sheet date, this results in the future expected technical payment balances (including variable annuities) shown in the table according to duration bands. As only the technical payment flows are considered, inflows from investments – i.e. investment income and investments that become free – are not included in the quantifications. Taking into account the inflows from investments, whose cash flows are largely aligned with those of the liabilities through our asset-liability management, items in the future expectations are positive throughout, so that the liquidity risk from this segment is minimised accordingly.
In reinsurance, the assumption of biometric risks is controlled by means of a risk-adequate underwriting policy. Risks are restricted through appropriate treaty design, specifically by limiting the coverage in the case of non-proportional business. In particular, the underwriting of longevity risks from reinsured portfolios is strictly limited. Interest-rate and other market risks are frequently ruled out by depositing the provisions with the cedant, with a guaranteed rate of interest from the deposit. In individual cases, these risks are also hedged by means of suitable capital market instruments.
In health primary insurance, there is the additional possibility of adjusting premiums for most long-term contracts. If it is foreseeable that the assumptions behind the calculation are permanently inadequate to cover expenses for claims, premiums can be raised accordingly, thus closely limiting the financial and balance sheet effects of cost increases in healthcare and permanent changes in morbidity.
In the liability adequacy test pursuant to IFRS 4, the technical provisions and deferred acquisition costs are regularly tested to ensure they are appropriate. An adjustment is made if such tests show that, as a whole, the amounts cal culated using the previous assumptions for biometric actuarial rates, for discounting provisions and for lapses are no longer sufficient. Particularly in primary insurance, the possibilities of adjusting participation in surplus are taken into account.
The sensitivities given below measure the impact of changes in the calculation bases on the calculated economic value of our business. They take account of our risk minimisation measures and tax effects.
Specifically for year-end 2008, it should be borne in mind for the following sensitivities that Munich Re adhered to the strict rules of market-consistent evaluation as at the reporting date 31 December 2008. The extraordinary situ ation on the capital markets at this date and the capital market parameters derived from it result in distortions for 2008, especially for primary insurance (and there particularly in the determination of the time value of options and guarantees). This leads to figures on the valuation date that may not cor respond to the values of the options and guarantees to be expected long term. Further explanations are provided on page 93 f. of the management report.
Of particular importance in this segment is the estimation risk with regard to the amount of the expected claims expenditure for future claims from current insurance contracts (premium risk) and for claims already incurred (reserve risk). In estimating claims expenditure, we also take cost increases into account. There is an interest-rate risk for parts of the portfolio. Besides this, the liquidity risk has to be taken into account.
As the proportion of business ceded is very small, the following analysis of underwriting risks largely adopts a gross approach.
Change in the event of a 10% decrease in the value of equities and real estate –8 –3 –25 – 192
Change in the event of an increase in mortality by 5% –1,065 –708 –14 –13 in the case of contracts mainly covering the mortality risk
Change in the event of an increase in the lapse rate by 10% –78 –190 –3 –87 75_Erlaeut_ArtAus_e 25975_Erlaeut_ArtAus_e 259 10.03.2009 11:23:39 Uhr10.03.2009 11:23:39 Uhr
2 Thereof World Trade Center and reserve strengthening at Munich Re America: 17.1%. 3 Previous years adjusted owing to a change in methodology.
Combined ratio for the last ten years 75_Erlaeut_ArtAus_e 26075_Erlaeut_ArtAus_e 260 10.03.2009 11:23:39 Uhr10.03.2009 11:23:39 Uhr
Large and very large losses are of particular relevance for property-casualty business in the reinsurance segment. The analysis below shows that the volatility of the individual years in this loss category is mainly attributable to the respective intensity of natural catastrophe losses, whilst the other accumulation risks exhibit a distinctly less volatile pattern.
Further information on risks from large and accumulation losses can be found in the risk report on page 164 f.
The provision for outstanding claims is subject to the risk that actual claims settlement may be less than or exceed the amount reserved (reserve risk). Particular attention is given to those situations where the funds dedicated to future claim payments may be inadequate.
The measurement of the provision for outstanding claims is based on an an alysis of the historical loss development data for the different classes of business. We use a range of well-established actuarial methods for this purpose, which embed various pricing, coverage and benefit/inflation levels. In so doing, we draw on the specialist knowledge present in our claims and underwriting departments and take all foreseeable future trends into account. As part of our regular results monitoring process, we keep a close eye on trends to ensure that the assumptions underlying the measurement of the provisions always reflect the latest developments. Consequently, in the course of reserve run-off, it may be necessary to revise the original estimates of the claims expenditure required and to adjust the provisions accordingly.
A particular sensitivity exists in the case of contracts with long run-off periods. This characteristic applies especially to casualty insurance, where liabilities may manifest themselves with a considerable time lag. In addition, changes in court verdicts, class actions, medical inflation and modifications in general life expectancy can alter the valuation of reserves. The following section discusses the areas in the current reserve portfolio where, within the framework of an appropriate reserve estimate, the uncertainty is the greatest.
Asbestos insurance liabilities currently emanating predominantly from the USA and some European counties are an area of concern for the entire insurance and reinsurance industry. Since the mid-eighties industrial insurers writing business worldwide have found themselves being confronted with losses from policies taken out decades before. This also applies to the Munich Re Group. In our case, the policies mainly cover claims which manifest themselves after a latency period of as long as 30 to 50 years. In response, we have posted provisions for claims under long-cancelled general liability policies which provided coverage according to the then-applicable legal environment.
Thereof other accumulation and individual losses 675 492 446 531 371 75_Erlaeut_ArtAus_e 26175_Erlaeut_ArtAus_e 261 10.03.2009 11:23:39 Uhr10.03.2009 11:23:39 Uhr
Reference is made to the risk report for information on our risk management processes; cf. page 155–158.
Such risks could result for the Munich Re Group if the cash outflow for insurance claims payments and the costs related to the business were to exceed the cash inflow from premiums and regular investments. In property-casualty insurance, a distinction must be made between payments for claims for which reserves were posted in previous years and immediate payments, i.e. payments for claims incurred in the current financial year. If claims reserves are posted, the liquidity risk can be minimised through our asset-liability management, in which investments are geared to the character of the liabilities. The proportion of immediate claims payments constitutes only a fraction of the total payments to be made and is temporally stable according to our experience. Consequently, the liquidity risks in respect of these payments can also be minimised by means of asset-liability management.
As part of the monitoring of our portfolio, we check whether original assumptions need to be adjusted. By means of the IFRS 4 liability adequacy test, we review expected claims expenditure in the light of updated assumptions, taking into account our risk minimisation measures. If this test shows that an adjustment to technical provisions is required, the amount is recognised in the consolidated income statement.
In connection with the business we cede, the credit risk is also of relevance. For our externally placed reinsurance and retrocessions, we choose only business partners that have been approved by our Retro Security Committee,
40% (40%) of the ceded share of provisions is directly collateralised through de posits, so the credit risk can be ignored for this portion.
Payment fl ows and liquid funds in the individual calendar years (gross)
Claims payments for previous years 7,714 7,597 7,722 7,713 8,132 75_Erlaeut_ArtAus_e 26475_Erlaeut_ArtAus_e 264 10.03.2009 11:23:39 Uhr10.03.2009 11:23:39 Uhr
The significant reduction in our equity portfolio compared with the previous year results in a marked reduction of the sensitivities to stock market movements.
Derivative hedging measures reduce the sensitivity to share prices further. A change in share prices by 10% only has an impact of 4.2% on the stock market value. The recognition of these hedging transactions in profit or loss has the effect that in the case of rising share prices, the overall impact on the income statement is nevertheless negative. The non-linear effects of the hedging measures, e.g. through puts or other asymmetrical strategies, are not taken into account in this pre sentation owing to the delta-weighted approach selected.
In the case of an increase of 10% in exchange rates on 31 December 2008, this would have led to a change in market value of €3.583bn (3.616bn) in the investments sensitive to changes in exchange rates totalling €40.554bn (43.772bn). Conversely, a decline of 10% in exchange rates on 31 December 2008 would have resulted in market-value changes of –€3.583bn (–3.620bn) in the investments sensitive to exchange rates. Such an increase or decline in exchange rates for the financial year 2008 would have had a small effect on equity (€0.127 and –€0.127 respectively) compared with the impact on the income statement. For 2007, the changes in value had mainly affected the income statement.
Our asset-liability management gears the currency structure of our assets to that of our liabilities. As a substantial portion of our non-euro liabilities is in US dollars, around 63% of the investments’ sensitivity to exchange rates shown above stems from the US dollar. The British pound and the Canadian dollar contribute a further 24%. In this analysis, an increase of 10% in the exchange rate means that the foreign currency appreciates by 10% against the euro.
Change in interest rates 31.12.2008 Previous year Impact on Impact on Total change in Impact on Impact on Total change in €bn profi t or loss1 equity1 market value profi t or loss1 equity1 market value
Market values 141.702 122.331 75_Erlaeut_ArtAus_e 26675_Erlaeut_ArtAus_e 266 10.03.2009 11:23:40 Uhr10.03.2009 11:23:40 Uhr
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: (43) Long-term incentive plans
Every year since 1 July 1999, Munich Reinsurance Company has set up longterm incentive plans, each with a term of seven years. Entitled to participate in these share-price-related remuneration plans are members of the Board of Management, senior management in Munich, and top executives in Munich Re’s international organisation. Participants receive a certain number of stock appreciation rights.
Notes Other information expiry of the rights and is determined on the basis of recognised valuation models, taking into account the exercise conditions. At each balance sheet date, the fair value is calculated and reserved; this amount is recognised in full. In the year under review, provisions of €63.3m (55.8m) had to be posted for the reinsurers in the Munich Re Group. The personnel expenses/income recognised in the income statement correspond(s) to the change in the provision in the year under review, taking into consideration any rights exercised. In 2008, this resulted in expenses of €10.6m (3.9m). The weighted average share price for the stock appreciation rights exercised in 2008 was €118.43 for plan year 2003, €113.98 for plan year 2004, and €117.91 for plan year 2005. The intrinsic value of the exercisable stock appreciation rights amounted to €17.7m at the balance sheet date.
Fair value 2008 for one right – €0.12 €33.87 €34.14 €37.07 €33.02 €29.84 €33.80
Number of rights on 31 Dec. 2002 109,301 132,466 – – – – – –
Number of rights on 31 Dec. 2004 106,828 134,452 437,227 456,336 – – – –
Number of rights on 31 Dec. 2005 106,286 133,772 259,678 456,028 485,527 – – –
Number of rights on 31 Dec. 2008 – 132,787 85,001 218,362 365,590 434,811 339,399 441,041 76_SonstAngaben_e 26876_SonstAngaben_e 268 10.03.2009 11:23:28 Uhr10.03.2009 11:23:28 Uhr
Incentive plans 2002–2008 of the Munich Re Group’s primary insurers and asset managers
Incentive Incentive Incentive Incentive Incentive Incentive Incentive Plan 2002 Plan 2003 Plan 2004 Plan 2005 Plan 2006 Plan 2007 Plan 2008
Old initial share price €260.37 €86.24 – – – – –
Intrinsic value 2008 for one right – €29.98 €23.35 €23.90 €3.13 – –
Number of rights on 31 Dec. 2003 57,845 168,681 – – – – –
Number of rights on 31 Dec. 2004 54,795 156,917 154,189 – – – –
Number of rights on 31 Dec. 2006 42,892 28,081 90,669 184,458 173,682 – –
Number of rights on 31 Dec. 2007 42,892 23,823 60,297 149,579 166,199 111,399 –
Number of rights on 31 Dec. 2008 42,092 17,011 49,993 125,360 162,233 109,802 172,552 76_SonstAngaben_e 26976_SonstAngaben_e 269 10.03.2009 11:23:28 Uhr10.03.2009 11:23:28 Uhr
The total remuneration of Munich Reinsurance Company’s Board of Management amounted to €18.5m (12.8m) and that of the Supervisory Board to €1.5m (2.0m).
In 2008, the Board of Management decided to pay Munich Reinsurance Company staff a bonus in the form of gratis shares, with the number of shares per staff member being calculated in relation to individual basic annual salary. The share price at the grant date amounted to €123.40. Altogether, 3,054 staff took advantage of the offer and acquired 58,846 shares. The relevant personnel expenses totalled €12.9m.
Staff of MEAG MUNICH ERGO AssetManagement GmbH or one of its subsidiaries, and staff of Europäische Reiseversicherung AG and Mercur Assistance Deutschland GmbH, had the opportunity to acquire up to five employee shares at preferential conditions. The purchase price per share was €79.20 at MEAG and €79.66 at Europäische Reiseversicherung and Mercur, resulting in a benefit of €27.00 per share based on the share price applicable at the time the programme was granted. Altogether, 456 MEAG staff took advantage of the offer and acquired 2,246 shares; personnel expenses totalled €35k. In the case of Europäische Reiseversicherung, 81 staff acquired a total of 401 shares; personnel expenses amounted to €11k. At Mercur, 35 staff acquired a total of 165 shares, and personnel expenses amounted to €4k. The programmes were carried out using own shares acquired in the financial year 2008 and, to a small extent, residual holdings of own shares acquired prior to the financial year. Differences between the cost of own shares and the personnel expenses have been recognised in retained earnings.
The number of staff employed by the Group at year-end totalled 25,437 (25,565) in Germany and 18,772 (13,069) in other countries.
The Munich Re Group enters into contingent liabilities in connection with its normal business operations. Commitments under rental, work and service contracts amounted to €111m (143m). Investment obligations total €1,291m (613m). These figures represent undiscounted nominal amounts. On the basis of an agreement concluded on 22 December 2008, Munich Re is acquiring the Hartford Steam Boiler Group (HSB) from US insurer American International Group (AIG). The HSB Group is one of the world’s leading providers of specialist insurances and inspections of engineering risks. The agreed purchase price for the 100% stake is US$ 742m (€531m) – plus or minus any changes in HSB’s equity occurring between 30 September 2008 and the ultimate completion date – and will be fully financed from our own resources. The transaction is expected to be concluded at the end of the first quarter of 2009, once the requisite approvals have been obtained from the competent authorities. Beyond this, there are other financial commitments of €54m (82m) and obligations from guarantees totalling €183m (184m). There are letters of support for €8m (14m). In connection with a sale of shares, a li ability towards the purchaser totalling a maximum of £2m has been assumed. There are contingent liabilities of €88m (72m) from a lease transaction with property.
Operating leases mainly involve leased property. The total of future minimum lease payments under non-cancellable leases at the balance sheet date was €633m (592m).
At €1m (3m), the amount of minimum lease payments under finance leases at the balance sheet date was insignificant.
Under the share buy-back programme decided on by the Munich Re Board of Management in the second quarter of 2008, we repurchased a further 450,000 Munich Re shares with a volume of €46.3m after the balance sheet date up to 2 March 2009.
In January 2009, our Swiss subsidiary New Re announced that it would be moving its head office from Geneva to Zurich; the related costs will probably be in the two-digit million range.
Later than one year and not later than fi ve years 298 278
Later than fi ve years 204 202 76_SonstAngaben_e 27376_SonstAngaben_e 273 10.03.2009 11:23:28 Uhr10.03.2009 11:23:28 Uhr
Diluting effects to be disclosed for the calculation of earnings per share were not present either on the balance sheet date or in the previous year. Earnings per share can be potentially diluted in future through the issue of shares or subscription rights from amounts authorised for increasing the share capital and from contingent capital.
The first-time application of standards did not have any impact on earnings per share in the financial year 2008. The changes in accounting policies described on page 196 reduced earnings per share for the previous year by €0.07 per share.
Munich Reinsurance Company’s net retained profits for 2008 according to its financial statements prepared on the basis of the German Commercial Code amount to €1,567,417,505.92. 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 €5.50 on each share entitled to dividend and an allocation of €432,196,583.92 to retained earnings, with the amount apportionable to own shares held or already retired at the time of the Annual General Meeting being carried forward to new account.
The Princeton Excess and Surplus Lines Insurance Company, Wilmington, Delaware 100.00% 25,967 7,752
DKV Seguros y Reaseguros, Sociedad Anónima Española, Saragossa 94.69% 106,348 19,802
D.A.S. Société anonyme belge d‘assurances de Protection Juridique, Brussels 94.67% 8,580 1,791
Quelle Lebensversicherung AG, Schwechat 52.08% 5,793 84 80_VerbundUnter_e 27580_VerbundUnter_e 275 11.03.2009 13:17:22 Uhr11.03.2009 13:17:22 Uhr
Company % share Equity Result for the of capital in €’0002 year in €’0002
Sopockie Towarzystwo Ubezpieczeniowe Ergo Hestia Spolka Akcyjna, Sopot 94.69% 156,445 30,058
D.A.S. Difesa Automobilistica Sinistri, S.p.A. di Assicurazione, Verona 47.34% 13,977 3,666
3 Result for the year after profit transfer. 4 The amount in brackets is the company‘s market capitalisation at 31 December 2008.
The following is a translation of the auditor‘s opinion in respect of the original German consolidated financial statements and Group management report: We have audited the consolidated financial statements prepared by the Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München, Munich, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the consolidated financial statements, together with the Group management report for the business year from 1 January to 31 December 2008. The preparation of the consolidated financial statements and the Group management report in accordance with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315a paragraph 1 of the German Commercial Code (HGB) are the responsibility of the legal representatives of the Company. Our responsibility is to express an opinion on the consolidated financial statements and on the Group management report based on our audit.
Klaus Becker Martin Berger Wirtschaftsprüfer Wirtschaftsprüfer (Certified public accountant) (Certified public accountant)
“To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group.”
Catastrophe bond Also referred to as “cat bonds” and “act of God bonds”, catastrophe bonds are used to transfer (natural) catastrophe risks to the capital markets. The buyers of such bonds profit from a comparatively high coupon rate, but assume all or part of the (re)insurer’s risk with regard to a (natural) catastrophe. If a catastrophe exceeds the predefined parametric trigger, some or all of the capital and interest is used to pay the (re)insurer’s financial loss from the (natural) catastrophe instead of being repaid/credited to the buyers.
Deposits retained on assumed Receivables which reinsurers have vis-à-vis their cedants for collateral (cash reinsurance and ceded business deposits) that has been retained by the cedants as a security to cover future reinsurance claims. The cedants show the retained funds as deposits withheld on ceded business.
Duration The average term of an interest-sensitive investment (or portfolio) and a measure of the risk of its sensitivity to changes in interest rates.
Gross/net In insurance terminology, the terms gross and net mean before and after deduction of the portion attributable to business ceded in reinsurance.
Major loss Loss which is of particular significance to insurers or reinsurers because its amount or other criteria are exceptional in relation to historical loss experience. A distinction is typically made between man-made major losses and major losses caused by natural catastrophes.
Net asset value The value of all tangible and intangible assets of a company minus its liabilities. It reflects a company’s fundamental value.
Policyholders’ bonuses In life and health insurance, policyholders are entitled by law and contract ually to an appropriate share of the surplus earned by their insurers. The amount of this bonus is fixed anew each year. As a rule, in life insurance these bonuses increase the benefit payable on maturity of the policy or on occurrence of the insured event; in health insurance, they are paid by way of premium refunds.
Premium The amount that has to be paid for the insurance cover provided by an insurer.
PVFP (Present value of future profits) When insurance companies or individual insurance portfolios are acquired, the present value of the expected earnings from the business acquired is cap italised as PVFP. This intangible asset arises in particular when life or health insurance companies are acquired.
Retrocessionaire Reinsurer that reinsures reinsurance business assumed by other insurance companies. Retrocession enables the reinsurer to lay off part of its risk to other insurance companies.
European insurance supervisory regulations. Solvency II follows the three- pillar approach used in Basel II: minimum capital requirements (quantitative), supervisory review processes (qualitative) and market discipline (disclosure).
Ultimate loss As calculated at the end of the calendar year under consideration, the ultimate loss for an accident year indicates the estimated aggregate claims expend iture that will have to be paid to finally settle the claim(s). It comprises the claims payments already made for the accident year in question and the remaining claims reserve posted for payments in future years. Since claims reserves are based on estimates, the ultimate loss changes from one calendar year to the next. Reference may therefore also be made to the ultimate loss position or the ultimate loss estimate.
Underwriter Member of an insurance or reinsurance company that acts on behalf of his or her employer to negotiate, accept or reject the terms of a (re)insurance contract.
Australia Munich Holdings of Australasia Pty Ltd (MHA) Munich Re House 143 Macquarie Street Sydney NSW 2000, Australia P. O. Box H35 Australia Square Sydney NSW 1215, Australia Tel.: +6 129 272 8000 Fax: +6 12 9 251 2516 E-mail: mha@munichre.com
Temple Insurance Company Munich Re Centre 390 Bay Street, 20th Floor Toronto, Ont., M5H 2Y2 Tel.: +1 416 364 2851 Fax: +1 416 361 1163 E-mail: temple_info@templeins.com www.templeinsurance.ca
South Africa Munich Reinsurance Company of Africa Limited (MRoA) Munich Re Centre 47 Empire Road, Parktown Johannesburg 2193, P.O. Box 6636 Johannesburg 2000 Tel.: +27 11 242-20 00 Fax: +27 11 242-22 00 E-mail: mroa@munichre.com
Munich American Reassurance Company 56 Perimeter Center East, N.E. Atlanta, GA 30346-2290 Tel.: +1 770 350 3200 Fax: +1 770 350 3300 E-mail: info@marclife.com www.marclife.com
ERGO Versicherungsgruppe AG Victoriaplatz 2 40198 Düsseldorf Tel.: +49 (211) 49 37-0 Fax: +49 (211) 49 37-15 00 E-mail: info@ergo.de www.ergo.de
Germany D.A.S. Versicherungen Thomas-Dehler-Strasse 2 81728 München Tel.: 0 18 05/17 01 70 Fax: +49 (89) 62 75-16 50 E-mail: info@das.de E-mail: kundenservice@das.de www.das.de 90_Gloss_Anschr_Impress_e 28690_Gloss_Anschr_Impress_e 286 10.03.2009 11:22:56 Uhr10.03.2009 11:22:56 Uhr
Europäische Reiseversicherung AG Vogelweidestrasse 5 81677 München Tel.: +49 (89) 41 66-00 Fax: +49 (89) 41 66-18 55 E-mail: contact@erv.de www.erv.de
Belgium ERGO Life N.V. Boulevard Bischoffsheimlaan 1–8 1000 Bruxelles Tel.: +32/2/5355-711 Fax: +32/2/5355-700 E-mail: info@ergolife.be www.ergolife.be
Italy ERGO Italia Via Pampuri 13 20141 Milano Tel.: +39/02/5744-1 Fax: +39/02/5744-2068 E-mail: investor.relations@ergoitalia.it www.ergoitalia.it
Further addresses may be obtained from the 2008 annual report of ERGO Versicherungsgruppe AG.
Financial crisis 2, 22 ff., 39, 66 ff., 75, 91, 97 ff., 144, 169
Munich Climate Insurance Initiative (MCII) 7 Munich Re America (MRAm) 9, 19, 50, 87 Munich Re Foundation 129 Munich Reinsurance Canada Non-Life Group 88 Munich Reinsurance Company Canada Branch (Life) 78 Munich Reinsurance Company of Africa (MRoA) 79 Munich Reinsurance Company of Australasia (MRA) 79
RAND Corporation (Research ANd Development) 33 Rating 17, 97, 118, 152 Remuneration 9, 134 ff. Return on risk-adjusted capital (RORAC) 2, 58 f., 70,145 Risk capital 24, 59, 162ff., 167 Risk management 2, 18, 23, 97, 155 ff. Risk Management Solutions (RMS) 30 Risk model 24, 59, 111, 162 Risk trading 50, 89 Roanoke Companies Inc. 6, 19, 88, 194
Picture credits Robert Brembeck, Munich, pp. 2, 4 f., 6 left, 8 Midland Company, p. 6 right picture alliance, p. 7 left and right, p. 44 bottom left, vandalay/Photocase, p. 7 centre Oliver Jung, Munich, pp. 22–24 Oliver Soulas, Munich, p. 25 Christoph Bünten, Düsseldorf, p. 38 Abu Dhabi National Insurance Co., pp. 42–43 mauritius images, p. 41 centre image source, p. 41 bottom Bildagentur Huber, p. 44 top Corbis, p. 44 bottom right Munich Re archives, p. 45
Greenhouse gas emissions resulting from paper production for this annual report are offset through Munich Re’s carbon- neutral strategy.
Net expenses for claims and benefits 28,719 30,469 29,780 33,352 31,636
Attributable to Munich Re equity holders 1,503 3,840 3,425 2,679 1,833
Primary insurance: Our primary insurers offer security mainly for private clients and for small and medium-sized businesses.
Attributable to Munich Re equity holders 1,503 133 –3 606 767
Primary insurance1 1 Adjusted pursuant to IAS 8. 2 This includes own shares earmarked for retirement.