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Large and very large losses (net) €m 1,340 854 3,293 1,201 1,054
Valuation reserves not recognised in balance sheet2 €bn 0.6 1.9 2.6 3.2 1.8
Net expenses for claims and benefi ts 30,474 29,780 33,352 31,636 32,487
Attributable to Munich Re equity holders 3,854 3,425 2,679 1,833 – 434
Combined ratio Reinsurance property-casualty % 96.4 98.0 98.4 101.8 1 Adjusted pursuant to IAS 8.
1 Adjusted pursuant to IAS 8. 2 Finance costs shown under “other expenses”.
Result before amortisation and impairment losses of goodwill 5,089 5,481 4,150 3,369 1,971
Munich Re Group 2007 27 Notable events in 2007 26 Members of the Board of Management 28 Report of the Supervisory Board 30 Munich Re shares 34 Strategy 40
General information 253 Glossary 254 Important addresses 262 Index of key terms 264
A year ago, in my outlook for the financial year 2007, I wrote that I would prefer to be able to report a “3” before the decimal point to you again one year hence. In fact, it is almost a “4”. The Munich Re Group has thus clearly been successful with its business model – to an ever-growing extent over the past few years.
With a profit of €3.9bn, we have not only easily surpassed our previous record (€3.5bn for 2006), but have even outperformed our profit guidance for 2007, which we raised to €3.5–3.8bn in August 2007. As Munich Re shareholders, you benefit directly from this high profit: at the Annual General Meeting, we will propose that the dividend per share be increased from last year’s level of €4.50 to €5.50, meaning that Munich Re will distribute €1.1bn (988m) to its shareholders. The resultant dividend yield puts us in the top group of DAX companies. But that is not all: we are keeping our equity lean and ensuring that capital we cannot employ with sufficient profitability in our business is returned to our shareholders via share buy-backs. Over the past 14 months, we have repurchased shares with a total value of €3bn, and we intend to buy back more shares with a volume of at least €3bn by the end of 2010.
In other words, for you as shareholders, the Munich Re Group’s business strategy is paying off. And the Board of Management intends to see it stays that way. That, in particular, is one of the aims of our Changing Gear programme for profitable growth, which we launched in 2007.
In property-casualty reinsurance, we bettered our combined-ratio target of 97%, achieving a figure of 96.4% even though the costs for natural catastrophe losses increased compared with 2006 and returned to the average level expected, i.e. 5% of net earned premiums. In life and health reinsurance, we improved our result for the year substantially to €725m and grew the value added by our new business to €277m. The initiatives we have embarked on with Changing Gear are designed to ensure that our reinsurance business continues to develop positively in a competitive environment. Our experience with the successful renewal of around two-thirds of our property-casualty reinsurance treaties at 1 January 2008 confirmed our ability to keep on course with our disciplined, profit-focused underwriting.
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I think that such a risk-conscious approach is appropriate for an insurer, and especially a reinsurer, given that our core service – the promise of insurance cover – is to improve our clients’ risk situation. In order to continue providing this service on a sustained basis, we must be among the best in assessing, evaluating and managing risks. It is the only way to “turn risk into value”, as we say.
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This advance is down to the successful work of a project group which, applying itself to the task with great passion, innovative spirit and untiring application, examined the potential for microinsurance in Latin America and then, in close cooperation with a primary insurance partner and a microbank, designed insurance products specially tailored to microbusinesses.
The project began with a precise analysis of the very dynamic Colombian microfi nance market, which showed great interest in supplementing its services with insurance products.
Over the last two years, this cooperation has produced three different products, two of which are already on sale. The fi rst to be launched, in August 2006, was the life insurance policy “Apoyofuturo” (support for the future), which provides cover against mortality, disability and severe illnesses for a premium of US$ 1– 6 per month. Demand for this product, whose insurance benefi ts can help bridge losses in earnings, is very high.
Small, modest businesses like basket-weaving or ice-cream vend ing are doubly threatened in the poorest countries, not only by the risks always associated with self-employment, but also by the lack of insurance for such individual enterprises. In the world’s 100 poorest countries, only 3% of the people have access to insurance products. Microinsurance could signifi cantly improve this situation. Through a fair relation ship between insurers and insureds, based on market-economic principles, poverty could be combated and stability gained – as proved by the pilot project conducted by Munich Re in Latin America.
Dr. Ralf Mentzel, member of the Innovative Solutions Team, contributed his extensive knowledge of the Latin American market to the interdisciplinary project group.
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For the project in Colombia, Munich Re left the “beaten track” and risked entering largely unknown market territory. And with great success! Taking the whole of Latin America, with its large number of potential microinsurance clients, there are interesting growth prospects in the lines of health, life and property insurance. In addition, the business fi eld of microinsurance is an ideal combination of market-economic thinking and social responsibility.
Munich Re is already an opinion leader in Colombia in the fi eld of microinsurance and at the same time supports the country’s development by enabling people with low incomes to build up and secure a living.
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In recent decades, price development for reinsurance cover in propertycasualty business has not been linear. Phases of rising premiums (“hard markets”) have recurrently been succeeded by periods in which prices fall (“soft markets”). This phenomenon was evident after the severe hurricane losses of 2004 and 2005 in the USA, when the price of reinsurance cover for natural catastrophe losses rose dramatically. At the same time, the price dropped in Europe – before Winter Storm Kyrill cost insurers €4.5bn in 2007. How do these fl uctuations come about? There are a number of causes.
The capital base of insurers is weakened by high claims burdens. Demand for reinsurance grows and the capacity available becomes scarcer – so prices go up. If the capital situation of insurers improves again, they tend to revert to carrying such risks themselves. Demand ebbs, capacity increases, and premiums fall.
Munich Re is therefore pursuing a clear strategy to counter the volatility of its business. We consistently put profi tability before growth and gear the value-based management of our business and the variation in our risk capital to this objective.
We use various levers to keep our operating result positive in softening markets. For example, we keep a close eye on market trends, knowing from experience that markets develop differently from region to region and from segment to segment. We conduct “cycle surveys” worldwide, and tailor our portfolio management to the fi ndings. In the critical phase of our annual treaty renewals, we have a detailed monitoring process in place to maintain an up-to-the-minute overview of portfolio and price development. Our managers are thus able to steer their portfolios successfully through the renewal phase.
There are objects you can rely on to keep their value: classic cars, for example. And if their owners drive carefully, they can expect a large noclaims bonus from their insurers after a few accident-free years. Insurers see things in a similar way when it comes to their own reinsurance: after years with low claims, pressure on premiums in property-casualty reinsurance increases. From Munich Re’s point of view, the situation is different: the technically correct price cannot be determined only with reference to the past – the calculation has to consider what we will need to pay for future loss events. And fate may strike tomorrow. Consequently, we practise active cycle management to keep the volatility of our business low. And classic cars actually play a small part in the equation.
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Besides our disciplined underwriting, active capital management is the second important pillar of our cycle management. By the end of 2010 we will have returned a total of €8bn to our shareholders through share buybacks and higher dividends. This en ables us to have just the right amount of capital (and thus capacity) available for profi table business. Excess capital that does not meet our ambitious return requirements is withdrawn from the market.
Cycle management is not a one-off affair but a constant process in which Munich Re involves both top management and operative levels.
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In practice, those affected have not been helped by this development, frequently having to abandon any hope of obtaining justice because they could not afford to take legal action. An untenable situation, as shown by a market study in Seoul, confi ming the need for legal protection products. With the aim of fi lling this gap, D.A.S. began working on an exceptionally innovative project: a legal expenses insurance policy for South Korea, the very fi rst of its kind in the South Korean market.
Ethical principles in East Asia, and thus in South Korea, were long based on the age-old tradition of Confucian virtues. These still govern social life today, albeit to a decreasing extent. The attitude to law in South Korean society was for centuries incompatible with that of the Western world, since a central tenet was not to disrupt social harmony. This included recognising the socially dominant ideal: living in a clearly structured community in which the crucial factor was respect of social status and the infl uence it conferred. A personal network of family and friends was considered the basis for advancement and successfully solving problems. Invoking the law in confl ict situations was more or less taboo – the reason behind the relatively weak legal tradition in South Korea.
These patterns of social co-existence have slowly but surely been breaking down since the democratisation of South Korea in 1987. Despite still being generally conservative in nature, the current generation of 30- to 40-year-olds increasingly favour other forms of resolving disputes. Especially in the burgeoning, an onymous conurbations, confl ict resolution is becoming more and more a legal matter, as the nature of road traffi c, housing markets and personal enterprise undergoes dynamic change.
– Filing of claim – Recommendation of lawyer – Provision of legal services – Representation by lawyer in court
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D.A.S. Gwolli Boho Boheom Jusikhoesa, the offi cial name of the newly formed insurance company with its head offi ce in the South Korean capital, pays the costs and advance expenses necessary to pursue legal interests. These include lawyers ’ charges, court costs, witnesses’ and experts’ fees, bail and enforcement expenses. In addition, the opposing party’s costs will be assumed where they have to be borne by the insured. D.A.S. will arrange legal counsel for policyholders and put them in a fi nancially strong position with sound professional support. It will thus help to promote the important principle of equality before the law in South Korea.
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The CIS states belong to the insurance industry’s most important emerging markets. Having recognised this trend early on, Munich Re established a liaison offi ce in Moscow in 1991, which over the next few years developed and promoted life and non-life reinsurance business in the former Soviet states. Given the favourable prospects, we began handling life reinsurance business via our own representation offi ce in 2001 to take systematic advantage of our opportunities in these new markets. Our extensive range of services offer our cedants crucial added value, including thorough training programmes for the underwriters of our client companies, who thus benefi t from our exceptionally broad market know-how. For the supervisory authorities of the most important markets, i.e. Russia, Ukraine and Kazakhstan, we have been highly sought-after discussion partners for key decisions about the basic parameters of the insurance market.
Business performance has exceeded our expectations: from 2002 to 2004, premium income in life insurance quadrupled, and our reinsurance premium volume experienced aboveaverage growth. Our signifi cant market share made us the uncontested market leader. It quickly transpired that our previous capacities were no longer suffi cient to cope with the dimensions emerging, particularly since the many international insurers entering the market were an indication that growth rates in the years to come were likely to remain high. In 2005, Munich Re therefore drafted its fi rst plans for conducting life reinsurance business in the CIS countries via an independent subsidiary.
The economies of the CIS countries are constantly growing. Millions of families in the new Russian middle class are benefi ting – achieving affl uence and signifi cantly improving their standard of living. As prosperity mounts, so does the need to revisit the issue of social security for the elderly, and the demand for life insurance policies is growing. This trend is fuelling high growth rates in the primary insurance industry. With our new subsidiary Munich Re Life Reinsurance Eastern Europe/Central Asia, we are helping to shape this highly profi table market and lead the fi eld in life reinsurance.
This coincided with the groundwork for realigning the Group’s overall international life reinsurance business. In launching our Global Life Strategy, we initiated a number of projects aimed at improving our core business and utilising alternative sales channels to spur worldwide growth in these segments. Markets with high development potential, such as those of the CIS countries, are perfectly suited to this strategy. Munich Re’s Global Life Strategy therefore acted as a catalyst for the idea of putting the business in this market “on its own feet” and thereby participating unrestrictedly in its dynamic development.
Things then moved very swiftly: Munich Re Life Reinsurance Eastern Europe/Central Asia was set up in March 2006. In October of the same year, Munich Re became the fi rst foreign reinsurance company to be granted a licence by the Russian authorities to do business in Russia. Only two weeks later, our new subsidiary was assigned an A2 rating by Moody’s – an outstanding grade for a newly established company. Last July, we were able to transfer Munich Re’s reinsurance treaties from Munich to the Russian subsidiary. Negotiating with the Russian supervisory authorities, building up a future team, creating the necessary infrastructure, fi nding suitable offi ce space, and installing the requisite information technology – all this had to be accomplished with the resources at hand. At the same time, business operations in Moscow continued with undiminished vigour. As an independent entity, Munich Re Life Reinsurance Eastern Europe/Central Asia is now extending Munich Re’s market leadership in the CIS countries. Our clients’ main contact partners are all present locally and have an outstanding knowledge of the market. We are thus in a position to meet the growing need for an increasingly differentiated range of services and expand it – for instance, to include actuarial support.
In addition, our cedants profi t from a host of other services, such as assistance in developing new products and drafting underwriting and claims management guidelines. We also offer them access to a Russian version of MIRA, our sophisticated underwriting tool for life insurers. What is more, the establishment of our subsidiary benefi ts our own risk management too: we are now in a position to match the business we write in the respective original currencies with investments in the same currencies, thereby reducing our asset-liability mismatch risks.
We have thus created a platform that allows us to tap this market’s large potential. At present, our target group for life insurance products in the CIS countries comprises some 32 million people. By 2010, the fi gure will have risen to 65 million. Until then, total annual premium volume in life primary insurance will climb from approximately €1.1bn to over €8.2bn. We have the best possible set-up in place for expanding in line with the growth of this dynamic market.
In 2010, there will be around 65 million potential life insurance clients in the CIS states. Munich Re’s premium income is therefore set to grow rapidly.
Together with insurance broker Benfi eld in London, the World Bank therefore developed a solution for the Caribbean island states that was based on a parametric trigger. If the intensity of a storm or earthquake exceeds a predefi ned threshold – measured in terms of wind speed or ground acceleration, for example – the country affected immediately receives a payment that constitutes a reasonable approximation of the expected loss. In this scheme, the CCRIF functions as a primary insurer and contract partner for the insured states and, in turn, has to reinsure itself at market conditions.
Finally, in May 2006, Benfi eld put the reinsurance capacity out to tender in a roadshow. Within a very short time, thanks to smooth interdisciplinary cooperation between our underwriting experts, geo risk researchers, mathematicians and the innovation team responsible, we were able to quote a risk-adequate but competitive price and to offer capacity of up to 100%. The successful outcome was that Munich Re assumed the syndicate lead for CCRIF’s reinsurance and obtained the lion‘s share of the reinsurance programme. In good time before the beginning of last year’s hurricane season, the CCRIF was able to offer cover, with the result that 16 Caribbean states were insured against natural catastrophe losses as from 1 June 2007.
The talk was nearly always of hurricane damage in Florida or New Orleans, but en route the hurricanes had usually left a trail of destruction across the Caribbean. The Caribbean Islands are an exposed region in which governments were unable to insure themselves against natural catastrophe losses. This has now changed. Since 2007, the island states of the Caribbean have had access to a new form of coverage for hurricane and earthquake losses via the Caribbean Catastrophe Risk Insurance Facility (CCRIF). Munich Re partnered the innovative idea from the outset and, as syndicate leader, is assuming a large part of the reinsurance.
The CCRIF enables even financially weak states to protect themselves against peak risks. The given range of cover is an occurrence probability of at least 1:20 and at most 1:150, i.e. the natural catastrophe in question occurs statistically every 20 to 150 years. Within this range, the insured states can determine the cover they desire. The retention is always at least 50%.
Within this range, the countries can select the degree of protection they desire – for instance, only starting at events with an occurrence probability of 50 years, or ending at a 125-year event. In addition, the states determine what portion of the potential losses they are willing to carry themselves, thus controlling the size of the insurance premium. In this way, even fi nancially weak states can insure themselves against peak risks.
ERGO joint venture in India ERGO International AG acquires a share of 26% in India’s pioneering housing development fi nance company, HDFC General Insurance Ltd. The joint venture unites two strong partners that are an excellent strategic, operational and cultural fi t, and are both committed to the Indian non-life market. This cooperation underlines ERGO Insurance Group’s international expansion strategy. Page 91
Changing Gear supports growth objectives With its Changing Gear programme, Munich Re announces its intention to take a clear lead in the insurance industry. Growth opportunities are to be exploited more decisively and new business segments developed successfully. This necessitates topquality client service in terms of both risk management and specialist knowledge. Beyond this, Munich Re practises active capital management by optimising the cost of its capital in 2007 with a subordinated bond, and by returning a large amount of equity to the capital markets. 15 million shares with a volume of €2bn are repurchased in the period since May, and a dividend of €5.50 is to be paid for 2007. The new record profi t of €3.9bn corroborates the success of Changing Gear.
Natural hazards in 2007 With a large number of loss events, claims costs for natural catastrophes in 2007 are higher than in the previous year . The most expensive natural catastrophe in 2007 is Winter Storm Kyrill, which swept across large parts of Europe on 18 and 19 January at wind speeds far exceeding 100 km/h on a widespread scale, leading to a claims burden for Munich Re of around €450m.
New US strategy Munich Re restructures its US business in order to signifi cantly increase its profi tability in the USA. In so doing, it focuses on the introduction of a client-group-specifi c organisation and the expansion of broker business, as well building on its leading position in niche primary insurance segments. The agreement to acquire The Midland Company, one of the leading specialist insurers of manufactured housing, motorcycles, vintage cars, watercraft, snowmobiles and motorhomes, is a major step towards profi table growth in the world’s most important insurance market.
ERGO in South Korea ERGO purchases a 65% stake in the South Korean specialty insurer Daum Direct Auto Insurance, which has an exceptional competitive position in its local direct motor insurance market. The acquisition is part of ERGO’s international strategy and complements its existing activities in health and legal expenses insurance in South Korea.
Commitment to sustainability In 2007, Munich Re engages in further sustainability and climate protection initiatives, with the objective of rendering its reinsurance activities climate neutral in Munich by 2009, and by 2012 worldwide. Munich Re also joins the United Nations’ Global Compact initiative, which establishes international standards for companies in the areas of human and labour rights, environmental protection and anti-corruption, and signs the ClimateWise principles, a commitment to rigorous assessment of climate change risks and climate protection. More information on sustainability at Munich Re is presented on the new sustainability portal htttp://sustainability.munichre.com.
Notable events in 2007 26 Munich Re Group Annual Report 2007
Dr. rer. nat. Torsten Jeworrek Chairman of the Reinsurance Committee Born 1961, mathematician, with Munich Re since 1990 – Corporate Underwriting – Reinsurance Investments – Accounting, Controlling and
Dr. rer. pol. Ludger Arnoldussen Born 1962, graduate in commercial studies, with Munich Re since 2006 – Germany, Asia Pacific and Africa – General Services
John Phelan (until 31 December 2007) Born 1947, underwriter, with Munich Re since 1973 – North America 28 Munich Re Group Annual Report 2007
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Georg Daschner Born 1949, chartered insurer, with Munich Re since 1965 – Europe and Latin America – Corporate Communications
Dr. rer. pol. Peter Röder (from 1 October 2007) Born 1960, graduate in commercial studies, with Munich Re since 1989 – Global Clients and North America 29Munich Re Group Annual Report 2007
The full Supervisory Board was briefed by the Board of Management even more intensively than hitherto between meetings, with prompt information on many current business topics in the Group, such as the impact of Windstorm Kyrill, the share buy-back, various acquisitions, the subordinated bond issued in the past financial year, and the changes on ERGO’s Board of Management.
Throughout the year under review, Dr. von Bomhard and I remained in close contact regarding questions of strategy, planning, the Company’s current business performance and risk management, and events of particular significance in the Group. The shareholder representatives and employee representatives had the opportunity prior to the Supervisory Board meetings to discuss important topics separately with the Chairman of the Board of Management.
Focal points at the meetings of the full Supervisory Board were the individual quarterly financial statements and the annual result for 2007. We obtained detailed reports on the Munich Re Group’s performance, also compared with its competitors. The Group’s strategic alignment and its further development were items debated several times in the financial year, and we engaged in a constructive exchange of ideas on these topics with the Board of Management. In keeping with the customary routine, the Board of Management presented the Group planning for 2008 and 2009 to us for discussion. It also reported to us regularly about the Group’s risk situation and profitability, en abling us to ascertain that integrated risk management and risk governance had been further refined. We were briefed by the Board of Management at each meeting about current topics and major losses affecting the Group.
The Personnel Committee held four meetings in the year under review. It decided among other things on the extent to which the Board of Management ’s objectives had been achieved in the previous year and on the individual Board members’ objectives for the coming year. It also considered succession planning for the Board of Management and the appointment and contracts of Board members. Other activities included reviewing and adjusting the Board of Management’s remuneration and pension entitlements, and authorising the acceptance of new seats on supervisory, advisory and similar boards by members of the Board of Management. In addition, the Personnel Committee prepared information for the full Supervisory Board: a review of the structure of the Board of Management‘s remuneration system, and the adjustment of the Board of Management’s distribution of responsibilities.
Changes on the On 28 February 2007, Dr. Heiner Hasford retired from Munich Re’s Board of Board of Management Management, of which he had been a member since 1993. On 31 December 2007, Mr. John Phelan also retired, having been a member of the Board of Management since 1 April 2002. We thank both gentlemen for their successful work and exceptional personal dedication.
On 1 October 2007, the Supervisory Board appointed Dr. Peter Röder to the Board of Management. In 17 years with the Munich Re Group, Dr. Röder had most recently served on ERGO International AG’s Board of Management. At Munich Re, he is Mr. Phelan’s successor as the Board member responsible for North America. He has also taken over the Global Clients Division from Dr. Torsten Jeworrek. The distribution of responsibilities on the Board of Management has been adjusted accordingly.
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Munich Re shares then became caught up in the downward spiral triggered by the subprime mortgage loan crisis in the USA. Not until mid-November were they able to detach themselves from the negative sector trend, after Munich Re had stated that it was only marginally affected by the subprime crisis. This helped the shares to advance to €132.94 by the end of the year. With a gain of 1.9% for the year, Munich Re shares clearly outperformed the MSCI insurance index. The weak performance of insurance stocks in general is attributable to some investors still expecting negative surprises from the credit crisis and pressure on premiums. However, Munich Re shareholders should continue to profit from the initiatives linked to Changing Gear.
Analysts see potential for further More than 40 banks regularly evaluate Munich Re shares. Over half of them price gains for Munich Re shares (58%) rate our shares a buy, in some cases seeing substantial scope for further price gains. Only 7% of analysts gave the shares a negative assessment.
Share buy-back programme with Share buy-backs continue to be an important element in increasing our earnings a volume of €2bn completed per share. On 4 May 2007, the Board of Management therefore announced the intention to repurchase Company shares with a volume of at least €5bn by the end of 2010. As the first step in this process, it resolved to buy back shares with a value of €2bn via the stock exchange by the Annual General Meeting
Altogether, the payout ratio to shareholders for 2007, i.e. dividend and sharebuy back, amounts to 81% of the profit for the year.
Free float still at 100% Until the end of February 2007, Allianz SE was Munich Re’s largest single shareholder, with 9.4% of the share capital. At the beginning of March 2007, Allianz redeemed the first part of its BITES exchangeable bond early with Munich Re shares, which reduced its stake in Munich Re to 4.9%. Its shareholding has since been allocated to the free float. In February 2008, the rest of the exchangeable bond was redeemed, lowering Allianz’s stake in Munich Re to around 2%.
Our largest shareholder, with over 5%, is AllianceBernstein L. P., a US investment and asset management company belonging to the AXA Group. Its stake is designated as a purely financial investment without strategic interests. Since March 2007, our free float – a prime factor for the weighting of Munich Re shares in various indices – has therefore stood at 100%.
The proportion of international investors remained at around the same level as in the previous year. At year-end 2007, approximately 70% of our shares were held by foreign investors. Private investors accounted for around 7% at the end of the financial year.
Strong weighting in many indices Munich Re shares have been represented for many years in major national and international share price indices like the DAX and the EURO STOXX 50. In the sector indices for insurance companies, Munich Re has traditionally had a high weighting.
1 Percentage of share capital at 31 December 2007. Source: Munich Re share register 37Munich Re Group Annual Report 2007
Besides our annual analysts’ conference on 4 May 2007, the investors’ days we held in London – devoted to ERGO on 13 December 2007 and to propertycasualty reinsurance on 19 February 2008 – met with a very positive response. More than one hundred institutional investors participated on each investors’ day, either in person or via videostreaming. The investors’ day on 7 October 2008 will inform investors about life reinsurance.
But our activities are not only geared to institutional investors: private investors can also contact Munich Re directly at any time. We publish all the presentations we use in our meetings with investors on the internet as well, and are glad to send these to interested shareholders on request. Many of our events can already be followed live via webstreaming. Enquiries reaching us via our shareholder hotline or by e-mail are answered promptly by our team.
Even though around 70% of the shares were held by foreign investors and the free float had increased to 100% shortly before the Annual General Meeting, more votes were represented – 45.2% of the share capital – than in the previous year (43.3%).
We see this further rise in the proportion of share capital represented as the fruit of our efforts to actively inform our investors and to encourage them to exercise their proxy voting rights at the Annual General Meeting.
4 In 2007, this subordinated bond was transferred from Munich Re Finance B. V. to
All measures used in implementing our strategy are embedded in our stringent risk management, whose integrated approach includes the area of investments in particular. This has stood us in good stead amid the current turbulence on the global financial markets. The effects of the subprime crisis have had only a relatively slight impact on us compared with other companies in the financial sector. Whilst Munich Re’s shares have been unable to escape the negative overall trend affecting financial stocks in particular, over the past year our shares have outperformed our peers – in some cases considerably – and also outstripped the MSCI and DJ EURO STOXX insurance indices.
A core element of our strategic set-up as a Group is the integrated business model we resolutely pursue. This allows us to tap the global market for risks with a focused, selective and profit-oriented approach. From a conventional perspective, this market essentially comprises the business segments of primary insurance and reinsurance. However, the establishment of our latest business segment, International Health, reveals the tremendous business opportunities that present themselves beyond the traditional horizons of “primary insurance” and “reinsurance” in the strict sense. It is therefore conceivable that in future – given adequate profitability – we could develop further business segments with insurance as their core, enabling us to cover the global risk market even better, and to offer this diverse and increasingly converging market optimal service in line with our profitability requirements.
Given this long-term strategy, we do not operate insurance and reinsurance as parallel unrelated entities. On the contrary, the firm involvement of ERGO in the Munich Re Group as its largest primary insurer is a strategic cornerstone of our integrated business model, which is founded on diversification and broad-based synergies. Housing primary insurance and reinsurance under one roof allows us to actively steer our Group through result and market cycles. Our successful business model of primary insurance and reinsurance produces high profits and thus creates value.
Clear commitment to the Last year, we specified the concrete objectives we have set for ourselves at capital markets Group level and in our business segments under Changing Gear. We have given a clear commitment to the capital markets that we will boost our earnings per share by an average of 10% each year to at least €18 by 2010, proceeding from a normalised basis defined in May 2007. In addition, between 2008 and the end of 2010, we intend to pay our shareholders dividends totalling no less than €3bn, and implement share buy-back programmes with a volume of at least €3bn.
Most profitable of top five reinsurers In reinsurance, we aspire to be the most profitable of the leading five reinsurers. Going forward, this will demand rigorous cycle management in order to achieve an average annual combined ratio of under 97%. We are working on further improving the efficiency of our processes at operational level but, most importantly, we have launched a series of business initiatives to generate profitable growth.
Recent acquisitions in the reinsurance segment systematically support these initiatives and follow our strategy of getting closer to the original risk as a reinsurer, showing a strong presence in markets and business segments with good growth prospects, and which require specific risk knowledge. This enables us to strengthen our long-standing domain of “classic” reinsurance with additional business in special market niches. We are already using a range of successful business models in this context, such as market access via managing general agents, direct business via primary insurers integrated in the re insurance group, and coinsurance models in which we participate in the business of cooperation partners. In realising this strategy, we do not rule out the possibility of additional selective acquisitions where suitable targets are available at appropriate prices. But we will continue to refrain from paying prices we consider inflated, and have no plans to purchase a major reinsurance company.
Expansion of US business We expect an increasing contribution to our EPS target to come from life reinsurance, where our target for value added by new business is an average increase of 15% annually, achieved partly via significant expansion of our US business. The USA is also a focus of our strategic growth initiatives in property -casualty reinsurance. We have changed our approach to fully exploit our potential in this market and generate profitable growth in the next hard-market phase, i.e. when prices and conditions are in line with our expectations. With the strategy adopted last year, we aim to be even more client-centric in our underwriting, to enhance our franchise strength via closer partnerships with leading broker firms and, by purchasing primary insurance subsidiaries, to service highly profitable special segments to which we previously had no access. We are also underpinning this strategic realignment with corresponding adjustments in our management structures and by appointing new staff to key functions.
These five pillars are founded on the value- and risk-based business management we are rigorously implementing. Another success factor for ERGO’s strategy is the continued rationalisation of processes for handling personal lines business. The establishment of a back office on a common IT platform for all major Group units has been concluded. We are adhering to our tried-andtested multi-brand strategy with uniform business-segment management.
Competitive edge for In International Health we have the ambitious aim of realising an annual averInternational Health age growth rate of 20% in premium and profit, thus reaching a sustainably viable level. We are pursuing an integrated business approach which spans both primary insurance and reinsurance. This approach supplements riskbearing with additional health-related services from the health business value-added chain – as long as this adds value to our offerings and there is a clear link to our core business of “risk”. In geographical terms, we are currently concentrating our activities on approximately 20 markets which already have large health insurance volumes or offer significant development potential. We recognised the profit and growth prospects of the global health market earlier than other competitors, and thus have a clear competitive advantage in this area.
Overall, the Munich Re Group’s strategy continues to be based on the three “cardinal virtues” we have described in previous years: professional handling of risk as our core business, active risk diversification, and operative excellence, i.e. constantly improving the methods and processes we use in writing, controlling and steering our business. “Turning risk into value” is the maxim to which we remain true and which, with our strategy, we are successfully putting into practice.
Munich Re Group Structure of the Munich Re Group 45 Important tools of corporate management 50 Binding standards for underwriting and pricing 56 Governing bodies of the Munich Re Group 57 Other seats held by Board members 60
Other success factors Clients and client relationships 111 Research and development 113 Staff 114 Commitment to sustainability 117 Information security 118
Prospects Overview 131 Economic parameters 132 Development of the Munich Re Group 134
The Board of Management, which for legal purposes represents Munich Reinsurance Company externally, has created two Board committees, the Group Committee and the Reinsurance Committee, with a view to maintaining clearly defined strategic management of the equal-ranking business segments of primary insurance and reinsurance and clearly assigning responsibility.
The divisions Life and HealthCare underwrite our life and health reinsurance business worldwide, and their structures reflect those of many of our clients, which conduct these two classes of business separately from property-casualty insurance, often through independent entities. Through close organisational cooperation and by establishing the International Health Board as the superordinated management body, we have brought together our HealthCare Division and foreign health primary insurers in the new International Health segment.
Special and Financial Risks (SFR) is in charge of the special classes of credit, aviation and space, enterprise risks and contingency risks, and for alternative markets business. Besides this, it develops and implements division-specific innovation projects and coordinates the overarching work of the innovation teams in the non-life divisions. Risk transfer to the capital markets is handled by our Risk Trading Unit, into which Munich American Capital Markets (MACM) – an entity that adapts a capital-market-oriented approach to structuring insurance risks for risk transfer – has been integrated. In addition, the division also attends to our own reinsurance (retrocession).
Since 1 January 2008, Global Clients and the previous North America Division, which is responsible for our subsidiary Munich Re America, for Munich Reinsurance Company of Canada and for Temple Insurance Company, have been combined in the new Global Clients/North America Division. Corporate Underwriting has been an independent entity without responsibility for operative business since 1 January 2008.
Athens, London, Madrid, Milan, Munich Ré France Branch Moscow, Paris Münchener Rück Italia Münchener Rückversicherungs-Gesellschaft Sucursal España y Portugal Munich Reinsurance Company UK General Branch
Auckland, Brisbane, Melbourne, Munich Reinsurance Company Australian Branch Perth, Sydney Munich Reinsurance Company New Zealand Branch
Atlanta, Boston, Chicago, Columbus, Dallas, Munich Reinsurance Company of Canada Hamilton, Hartford, Kansas City, Los Angeles, Munich Reinsurance America Montreal, New York, Philadelphia, Temple Insurance Company Princeton, San Francisco, Seattle, Toronto, Vancouver
D. A. S. subsidiaries and branches in Austria, Belgium, Canada, Czech Republic, Estonia, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland, Slovak Repub lic, Spain, Switzerland, and the UK
With offices in New York and Hong Kong, MEAG is internationally oriented, offering know-how across a wide range of asset classes to institutional investors and private clients.
– We clearly assign responsibilities and make the levers for adding value transparent for both management and staff.
– We closely link strategic and operative planning. All initiatives are ultimately geared to the overriding financial objective of enhancing corporate value.
The adjusted result serves as the basis for determining the value added. It consists of the underwriting result (derived from the income statement), the investment result, and the remaining non-technical result. In each case, valuebased adjustments are made, including the smoothing of expenditure for major losses, the normalisation of investment income, and the recognition of future claims expenses at present value.
We compare this adjusted result with the requisite cost of equity. A significant factor in the calculation of the cost of equity is the risk-based capital, which we determine using our internal model. In the property-casualty business and health reinsurance measured on a single-period basis, value is added to the extent that the adjusted result exceeds the cost of equity.
Embedded value is the present value of future net earnings from business in force – calculated on the basis of actuarial principles – plus the value of equity, less the explicitly determined cost of holding capital. The business in force is thus essentially projected over its whole duration according to the Principles and Guidance rules.
The embedded value relates to the portfolio existing at the valuation date. 100% of our life reinsurance business and more than 90% of our life primary insurance and long-term health primary insurance business is reflected in the embedded value. The embedded value does not include the value added by future new business. However, the valuation is made under the assumption of continued operations, i.e. taking into account the related costs in particular. Options and guarantees – especially for the policyholders – are explicitly valued using stochastic simulations. All cash flows are valued on the basis of the “swap rates” of the respective currency regions at the valuation date of 31 December 2007. Assets that are traded on the capital markets are valued on the basis of the market values observed at the valuation date.
In addition to these purely financial performance factors, non-financial performance measures like innovation, speed of processes, staff-training level and client satisfaction play a major part. In the long term, a firm can only be successful if it operates sustainably and takes account of such future-oriented qualitative factors as well.
We closely link strategy and operative planning by defining our strategies in structured overviews or “scorecards“, from which we derive initiatives, performance measures and responsibilities within a framework of four perspectives: “financial“, “market and client“, “process“ and “employee“. We promote an entrepreneurial culture among staff through the clear allocation of responsibility and accountability, recognising how much the individual, unit or field of business contributes to increasing value. The consistent integration of the financial and non-financial objectives into incentive systems for staff, executives and Board supports the clear orientation towards value creation. The higher a staff member or executive is positioned in the management hierarchy, the more their remuneration is based on performance.
In the past year, the Munich Re Group’s business performance was highly satisfactory. We achieved a return of 20.2% (20.2%) on our risk-adjusted capital, thus clearly surpassing our general target of 15% over the full cycle (a definition of RORAC is provided on page 55). This is equivalent to a return of 15.3% on the average value of IFRS equity (return on equity, RoE) at the balance sheet and quarterly reporting dates. Thanks to the very good business experience in reinsurance, the gratifying performance in primary insurance, an excellent investment result and one-off tax income resulting from the tax reform of 2008, we recorded an outstanding consolidated profit of €3.9bn. Our return on investment was a very good 5.2% (5.0%). This is the ratio of the investment result of €9.3bn to the average market value of the investment portfolio at the balance sheet and quarterly reporting dates, totalling €178.6bn.
Our combined ratio, a much-heeded performance indicator in property-casualty insurance, was convincing in both reinsurance and primary insurance. Calculated as the percentage ratio of the sum of net expenses for claims and benefits plus net operating expenses to net earned premiums, the combined ratio corresponds to the sum of the loss ratio and the expense ratio. Put simply, a combined ratio of 100% means that premium income was exactly sufficient to cover claims and costs. Net expenses for claims and benefits mainly include paid claims, the change in claims provisions, and the bulk of other underwriting expenses. The portion of other underwriting expenses not considered includes, for example, German fire brigade tax. Net operating expenses chiefly comprise the costs arising in the acquisition of new business (e.g. commission) and for the ongoing administration of insurance contracts.
In the property-casualty reinsurance segment, there were net expenses for claims and benefits of €9,172m (8,925m) and net operating expenses of €3,853m (3,846m) in 2007, compared with net earned premiums of €13,507m (13,795m). The combined ratio thus amounts to 96.4% (92.6%), a very good figure considering that the impact of major losses from natural catastrophes in 2007 was much greater at €673m, or 5.0% of net earned premiums, than in the previous year. Our cycle management and underwriting discipline therefore continue to form the basis of our highly satisfactory combined ratio.
RORAC = net income – interest rate x (1 – tax rate) x additional available capital risk-based capital e_05_Lagebericht_43-61 55e_05_Lagebericht_43-61 55 07.03.2008 16:50:08 Uhr07.03.2008 16:50:08 Uhr
Our targets – Ambitious In selecting suitable targets, contrasting aspects have to be considered and but attainable weighed up. On the one hand, undue complexity should be avoided in order to ensure transparency for investors, staff and the public. On the other hand, the challenge lies in reflecting economic realities as closely as possible, avoiding oversimplification, and enshrining added value as the Group’s overriding guiding principle. As the above description shows, the background is complex, especially as the parallel use of different performance indicators is unavoidable.
In reinsurance, the Corporate Underwriting Division develops guidelines and best-practice principles for the handling of our reinsurance business. Corporate Underwriting thus defines standards for the underwriting, pricing and claims management of our non-life business. Besides this, regular reviews are conducted to make sure that these standards are complied with. In this way, we ensure that the quality of our reinsurance business is consistently high and that we respond swiftly to changes and new developments. Since Corporate Underwriting is closely linked to our operative business, we can generate needs-oriented products and services for our clients there as well. For the life and health segments, this task is performed by specialists in the Life and HealthCare Divisions who, with the help of underwriting guidelines and re views, also see to it that the business written always meets our high standards.
Board of Management Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management) (Chairman of the Group Committee) Group Investments (from 1 March 2007) Group Development Press Internal Audit Executive Offices, Group Top Executives
Dr. rer. pol. Ludger Arnoldussen Germany, Asia Pacific and Africa General Services (from 1 March 2007)
Supervisory Board Chairman Dr. jur. Hans-Jürgen Schinzler Former Chairman of the Board of Management of Munich Reinsurance Company
Prof. Dr. rer. nat. Henning Kagermann Chairman of the Executive Board and Chief Executive Officer of SAP AG
Dr.-Ing. e. h. Bernd Pischetsrieder Former Chairman of the Board of Management of Volkswagen AG
Membership of the Standing Committee Supervisory Board Committees Dr. Hans-Jürgen Schinzler (Chairman)
Nomination Committee (set up on 9 November 2007) Dr. Hans-Jürgen Schinzler¹ (Chairman) Dr. Bernd Pischetsrieder¹ Dr. Albrecht Schmidt¹ ¹Since 1 January 2008 e_05_Lagebericht_43-61 59e_05_Lagebericht_43-61 59 07.03.2008 16:50:08 Uhr07.03.2008 16:50:08 Uhr
Georg Daschner – Münchener Rück Italia S. p. A., Milan2 (Chairman)
Dr. jur. Heiner Hasford Commerzbank AG Munich Re America Corporation, (until 28 February 2007) D. A. S. Deutscher Automobil Schutz Wilmington, Delaware2 Allgemeine Rechtsschutz-Versicherungs-AG2 ERGO Versicherungsgruppe AG2
Prof. Dr. rer. nat. Drs. h. c. mult. Bayerische Motoren Werke AG Sanofi-Aventis S. A., Paris Hubert Markl Georg von Holtzbrinck GmbH
Wolfgang Mayrhuber Bayerische Motoren Werke AG Heico Corporation, Miami Eurowings Luftverkehrs AG Swiss International AG, Basle Fraport AG
Prof. Karel Van Miert RWE AG Agfa-Gevaert NV, Mortsel Anglo American plc, London De Persgroep, Asse Royal Philips Electronics NV, Amsterdam Sibelco NV, Antwerp Solvay S. A., Brussels Vivendi Universal S. A., Paris
Prof. Dr. jur. Dr.-Ing. E. h. Deutsche Bank AG – Heinrich v. Pierer Hochtief AG ThyssenKrupp AG Volkswagen AG
Our business environment is one of increasing complexity, with an upward trend in natural catastrophes. We are also seeing a disproportionate rise in man-made losses in relation to economic activity. The reasons are many and varied, ranging from technological progress and advancing geopolitical interdependencies to climate change and developments in international liability. In addition, concentrations of values are mushrooming, and regions are becoming more dependent on each other, giving rise to new risk potentials and accumulation hazards. It is, therefore, imperative to carry on refining risk models and to swiftly incorporate new findings.
Fundamental changes are also resulting from unprecedented demographic trends. People are living longer – this is good news, but it also puts an enormous strain on social security systems. By 2030, every two people in paid work will have to finance one person who is not. This means Europeans can only maintain their standard of living and high-quality healthcare in the medium term if they make additional private provision – a great opportunity for insurers. Many countries are realigning their social security systems to these demographic requirements, and so for the time being insurers will have to cope with an uncertain legal and political climate. Speed and flexibility in product design are becoming increasingly important competitive factors. At the same time, insurers are having to adjust to the growing group of older people with special needs.
Economy Global economic growth continued in 2007, albeit with slightly less impetus. China, Europe and the USA were again the principal engines of the global economy, the importance of the USA declining against that of Europe.
In the USA, the world’s largest insurance market, economic growth slowed appreciably compared with the previous year. Chiefly responsible for this was the slackening of the housing market, which was accompanied by the collapse on the subprime mortgage market, in turn leading to a confidence crisis on the capital markets. Once again, the mainstays of the economy were private consumption and corporate investments. Year on year, real GDP rose by 2.2%.
With real growth of 2.1%, Japan’s economy also lost some momentum.
Economic growth in the eurozone, driven by domestic demand and exports, was marginally weaker in 2007 than in the previous year, amounting to 2.7% in real terms. Once again, there were marked regional differences: the increase in real GDP in Spain and Ireland, for example, was well above average, whereas economic growth in Italy and Portugal again remained comparatively subdued.
The performance of the German economy was also somewhat weaker in 2007 than in the previous year. The most significant contributions to growth came from investments and the export sector. The economic upswing continued to have a positive effect on the labour market, with an annual average rise in the number of people in employment of approximately 650,000. The unemploy ment rate stood at 8.1% in December, a year-on-year decrease of 1.5 percentage points.
Among the central and eastern European countries, Russia and Poland were among those recording higher growth than the previous year. Momentum in Hungary slackened somewhat, reflecting the current consolidation efforts of its government.
The global situation in 2007 was characterised by the rising prices of com mod ities – especially oil – and foodstuffs, which, however, contrasted with diminishing inflationary pressure owing to an economic slowdown. Over the year as a whole, rates of inflation fell moderately both in the USA and the eurozone. In this environment, and particularly against the background of the problems on the international financial markets, the US Federal Reserve pruned back its reference interest rate from 5.25% at the start of the year to 4.25% at the end of 2007. In contrast, the European Central Bank increased its reference interest rate in the first half of the year from 3.5% to 4.0% and then left it unchanged. In the same period, and thus also prior to the onset of the financial market crisis, the Bank of England put up its key interest rate from 5.0% to 5.75%, only to then lower it again in December to 5.5%.
Capital markets By and large, price developments on the international stock markets were moderately positive in 2007. The EURO STOXX 50, for instance, improved by nearly 7%, whereas in the USA the S&P 500 advanced by a good 3.5%. The DAX made gains in the region of 22%, while the Japanese Nikkei Index recorded a decrease of about 11%.
The euro gained considerable ground against the US dollar in the course of the year, its price rising from US$ 1.32 to US$ 1.46. Against the Japanese yen, it moved up only marginally from ¥157.12 at the start of the year to ¥163.33 at the end of 2007.
Insurance industry Writing business at risk-adequate prices was once more the central issue on the insurance markets in 2007. In the reinsurance renewals at the beginning of the year and at 1 April and 1 July, it was again apparent that most market players were giving priority to selective and profit-oriented underwriting.
Premium development in the insurance industry, particularly in propertycasualty insurance, is strongly influenced by the overall economic situation, as well as by the effects of the market cycle. Apart from macroeconomic stimuli, changes in the legal and tax environment also play a key role in the market dynamics of life and health insurance.
In Germany, however, despite the still robust economic situation, premium volume remained more or less unchanged in comparison with the previous year, decisive factors being the continued intensive competition, the economic uncertainty felt by many citizens, and real incomes again sinking slightly.
Extensive insurance law reforms came into force in our home market of Germany on 1 January 2008.
The amended German Insurance Contract Act (VVG reform) aims to bring the Act into line with supreme court decisions and increase consumer protection. The reform emphasises, for example, the obligations of insurance companies to provide information and consultancy prior to and on concluding contracts. The new VVG stipulates that insurance clients are to be provided with the general terms and conditions of insurance in good time before agreeing to a contract. In life and health insurance, acquisition and marketing costs will have to be disclosed in future (details of this will be regulated by an ordinance). In life insurance, the new VVG will also stipulate the participation of policyholders in their insurance company’s hidden reserves as part of profit sharing. Upon contract termination, 50% of the hidden reserves apportionable to the individual policyholders will be allocated to them on a binding basis. Additionally, the current practice of offsetting the acquisition costs against paid premiums at the commencement of the contract is no longer permitted. Instead, these costs must be spread equally over five years. This leads to higher surrender values for policyholders in the early stages of the contract.
In German private health insurance, the VVG reform specifies a framework for case and healthcare management and opens up opportunities for insurers to offer other services.
The GKV-WSG has brought with it compulsory health insurance for all German residents. Uninsured persons who were previously insured by statutory health insurers or who are allocable to statutory health insurance became subject to compulsory health insurance as of 1 April 2007. Anyone without statutory health insurance must take out private health insurance as of 1 January 2009. And insurers are no longer permitted to terminate existing health insurance policies which enable insureds to satisfy the requirement for compulsory health insurance.
Nevertheless, statutory long term care insurance will remain a non-comprehensive cover. Benefits going beyond the basic protection must be insured privately.
Private health insurers are also generally in support of measures to improve the quality of care, though they should be involved as an equal partner in quality assurance and in the development of standards, and not merely as cost carriers. The case is different with regard to the rules envisaged for application acceptance and premium capping in private long term care insurance for those insured under the basic tariff and those covered by the standard tariff, which are based on the GKV-WSG. Private health insurers also object to the regulations on the transferral of ageing reserves envisaged here. On account of the interference in the rights of the insured and insurers alike, the private health insurers consider these regulations to be unconstitutional, as with the GKVWSG.
The German Insurance Mediation Act entered into force on 22 May 2007, implementing the EU directive on insurance mediation of 2002. The new law has resulted in major changes for insurance distribution. Insurance agents now require authorisation under commercial law which will depend, among other things, upon their being sufficiently qualified. Insurance intermediaries operating exclusively on behalf of one or more insurance companies will require no authorisation if the relevant insurance products are not in competition with each other. In addition, insurance companies must accept unlimited liability for the actions of intermediaries in that capacity. A further key aspect of the new Act is the extension of consultancy and documentation obligations. Insurance agents are to advise clients according to their specific needs and circumstances, and give grounds for any specific policy recommendations made. Clients are to be provided with clear and comprehensible documentation for this purpose. Furthermore, insurance companies may work only with intermediaries who are entered in a central, publicly accessible register of insurance agents.
The ninth amendment of the German Insurance Control Act entered into force on 1 January 2008. This contains revised provisions covering the transferral of insurance portfolios. In its judgement of 26 July 2005, the German Federal Constitutional Court had declared the previous ruling unconstitutional and commissioned the legislators to formulate a regulation meeting the requirements of constitutional law by 31 December 2007. Besides this, insurance supervision has been brought into line with the changes in international standards for financial supervision, especially where risk management within companies is concerned.
Munich Re benefits from Solvency II in terms of enhanced customer loyalty and additional growth opportunities. In future, there will be a demand for customised solutions more closely aligned to individual risk parameters and offering an even higher degree of flexibility. Munich Re is thus increasingly assuming the role of a partner that creates value for primary insurers via a more comprehensive service approach akin to that of a holistic financial adviser.
In the USA, 2007 again saw intensive discussion concerning supervisory law revisions, in particular with regard to foreign reinsurers. At present, the insurance and reinsurance industry is supervised by 50 insurance commissioners in the individual US states. There is now virtual unanimity that this system is inefficient and costly, weakening the competitiveness of the US market overall. For quite some time, there have thus been plans to introduce an integrated federal supervisory authority or to further develop the existing system of individual state supervision.
The US Congress is currently considering two bills which envisage federal supervision for insurance companies. Owing to the presidential election on 4 November 2008, when the House of Representatives and parts of the Senate are also elected, a decision on these two bills is not to be expected until 2009 at the earliest.
The insurance supervisors of the individual US states, organised under civil law as the National Association of Insurance Commissioners (NAIC), have also made proposals for the further development of the existing system, according to which supervision at individual state level would be simplified – for example, only one supervisory authority would have responsibility for one foreign reinsurer. In this context, particular consideration would be given to the financial strength of the reinsurer on the basis of its rating. The NAIC proposals are problematic in that they would need to be implemented in all US states, and that individual US states have no legal possibility to conclude contracts with other countries.
If a federal supervisory authority existed, however, it would be possible to conclude legally binding international agreements on the supervision of insurance companies. Consequentially, a federal solution would be preferable from the perspective of a reinsurance company with global operations.
– Excellent consolidated result of €3.9bn – Return on risk-adjusted capital (RORAC) of 20.2% after tax – Planned dividend increase to €5.50 per share
Consolidated result in €bn Averaged result target in €bn 1 No result target was published for 2005.
Result In the year under review, we improved our consolidated result for the fourth year in succession, increasing it by €418m to an outstanding €3.9bn (3.5bn). The largest contribution came from the property-casualty reinsurance segment, with €2.6bn (2.1bn). The Group’s operating result decreased slightly by 7.3% to €5.1bn (5.5bn).
Primary insurance again contributed substantially to the Group’s success, outperforming our result target of €600–750m for the year by a considerable margin. Good business development and an excellent investment result were assisted by one-off income of around €120m from the German Business Tax Reform Act 2008. Altogether, we maintained our consolidated result in primary insurance at the high level of €984m. In property-casualty insurance including legal expenses business, we succeeded in achieving a combined ratio which, at 93.4%, was below our target of 95%, despite the high claims costs from Winter Storm Kyrill in the first quarter. A further fall in the expense ratio played an appreciable part in this achievement. The life and health segment also posted a good result. European Embedded Value (EEV) for our life insurance business and our German health insurance increased to €5.4bn (4.2bn). This benefited from the strong new business as well as the capitalmarket development and the German business tax reform.
Premium Approximately 54% of our Group premium income was earned from reinsurance and 46% from primary insurance. Whereas in reinsurance we operate on a global basis, in primary insurance 76% of our premium comes from the German market. But in both fields of business, the share of premium from outside Germany is increasing appreciably, a trend due not only to organic growth but also to selected acquisitions in growth markets.
In the life and health segment, premiums fell by 4.8% to €7.3bn (7.7bn), or by 1.2% when adjusted to eliminate currency translation effects. A major contributory factor was the scheduled reduction of large-volume individual reinsurance treaties with weak margins.
Premium in our property-casualty reinsurance fell slightly to €14.2bn (14.5bn) and showed an increase of 2.9% after adjustment for currency translation effects. Cycle management, underwriting discipline, client focus and leading know-how continue to provide the foundations for our good results. Rates in recent renewals have fallen slightly as a result of persistent competitive pressure, but we continued to adhere to risk-adequate prices, terms and conditions. We consistently refrain from participating in business that does not meet our stringent profitability requirements and aim to expand special segments with strong margins. Although reinsurance capacities increased, we were able to obtain attractive terms and conditions for both new business and renewals.
In primary insurance, gross premiums written grew by 3.2% compared with the previous year, thus meeting our expectations of €17.0–17.5bn. The increase was especially prominent in our international business, above all in propertycasualty insurance and in the health segment.
Events after the balance sheet date Under the share buy-back programme decided on by the Munich Re Board of Management in the second quarter of 2007, we repurchased a further 3.4 million Munich Re shares with a volume of €444m after the balance sheet date up to 23 January 2008.
Reinsurance Primary insurance 1 After elimination of intra-Group transactions across segments.
The Munich Re Group operates in virtually all classes of reinsurance. We offer a full range of products – from traditional reinsurance to innovative solutions for risk assumption.
Overview and key figures In the year under review, the Munich Re Group’s reinsurance business performed very favourably overall. Unlike in 2006, when we were largely spared severe natural catastrophe losses, the loss ratio for 2007 included 5.0 (1.3) percentage points attributable to natural catastrophes. Winter Storm Kyrill in Europe, the series of severe weather events in Australia (the “Queen’s Birthday Storm”), the floods in the United Kingdom, and Hurricane Dean, which swept across the Caribbean, had an especially negative impact. Despite the increased natural catastrophe losses in the financial year, we nevertheless achieved a very good combined ratio of 96.4% (92.6%).
Besides this, we recorded a good performance in life and health business and an excellent investment result. We were thus able to clearly surpass our targets, not least because we remained true to our underwriting principle of “profit before growth”.
Consolidated result life and health €m 725 561 977 432 262
Consolidated result life and health €m 725 561 977 432 262 e_08_Lagebericht_74-79 74e_08_Lagebericht_74-79 74 07.03.2008 16:49:30 Uhr07.03.2008 16:49:30 Uhr
As in the past, we continued to adhere strictly to our underwriting policy of risk-adequate prices, terms and conditions.
Gross premiums by segment e_08_Lagebericht_74-79 75e_08_Lagebericht_74-79 75 07.03.2008 16:49:31 Uhr07.03.2008 16:49:31 Uhr
At €7.3bn (7.7bn), gross premiums written in life and health reinsurance were below the previous year’s level, mainly because of currency translation effects and the scheduled reduction of large-volume individual reinsurance treaties. Adjusted to eliminate the effects of changes in exchange rates, premium income fell by only 1.2%.
The operating result of €1,091m (922m) and the consolidated result of €725m (561m) experienced an increase, the main reason being the favourable development in life. The market-consistent European Embedded Value of total life reinsurance business rose to €6,662m (5,962m), overall earnings growing by €859m (578m). At €277m, the value added by new business was also much higher than in the previous year (€228m).
Life With a gross volume of €5,959m, premium revenue in life reinsurance decreased (–6.2%) compared with the previous year (€6,356m). This is primarily linked to the reduction of several high-volume reinsurance treaties and to currency translation effects (in particular the decline in the US dollar). We expect fundamental growth impulses for our new business in future from such developments as the restructuring of the European solvency regime (Solvency II), the continuing privatisation trends in old-age and disability provision, and the dynamic expansion of the insurance markets in Asia and Eastern Europe.
Our clients are currently preparing for the reform of the German insurance con tract law and the EU insurance mediation directive, and we are supporting them in doing so. Moreover, biometric evaluations, actuarial advice and med ical underwriting are playing an increasingly significant role. Our competence as an international reinsurer is also in great demand when it comes to de veloping innovative covers in term insurance (where preferred lives products are on the advance), hedging investment risks and providing long term care annuity insurance.
In the USA, our subsidiary Munich American Reassurance Company (MARC) increased its gross premiums slightly to US$ 1.7bn (1.6bn) in a contracting life reinsurance market, thus maintaining its position among the leading life re insurers. MARC expects to achieve further dynamic growth even if opportunities in traditional business remain limited in light of the continuing decline in the amount of business ceded by insurers. Its strategic focus is to create added value in the area of pure mortality covers and to expand our strong position in the field of disability and long term care products. Given favourable mortality results for the traditional business and the strong performance of disability and long term care covers, the operating result rose again appreciably to US$ 145.5m (54.7m). Despite these positive results, the overall result was negative due to the one-time impact on tax expenditure of US$ 144m resulting from the write-down of a deferred tax asset involving loss carry-forwards.
In addition to pursuing our growth initiatives launched in China and India, we are systematically stepping up our activities in Korea and Japan, Asia’s largest insurance and reinsurance markets. In 2007, we wrote reinsurance treaties with a premium volume of €46m in Korea, where our average annual growth over the past three years has amounted to around 121%. In Japan too, we still see potential that we are intent on developing.
On the African continent, our subsidiary Munich Reinsurance Company of Africa (MRoA) consistently adhered to its strategy of growth and diversification, and succeeded in increasing premiums in original currency by 8.6%. Including the effects of exchange-rate changes, however, premium income was down 4.8% to €79m due to the strength of the euro. Even if the basis is currently low, the African market offers above-average growth opportunities in the medium term.
The combined ratio rose to 98.4% (96.3%), mainly due to the result situation in the USA, where a client relationship (that has in the meantime been ter minated) performed poorly and the important segment of employer stoploss covers produced cyclically narrower margins.
In Germany, the health reform debate was finally concluded at the beginning of 2007. The division of the German health insurance market into statutory and private health insurance will be maintained. A key point of the health reform is the health fund. It will be introduced on 1 January 2009 and will affect statutory health insurance. The new financing model will give rise to stronger competition. Altogether, it looks as if the market will become more dynamic, not only in statutory health insurance but also – as a result of the law to strengthen competition – in the market for private cover. We see an increasing need for innovative reinsurance solutions that meet the new challenges of risk management, and expect that attractive growth opportunities will successively present themselves.
The Gulf states remain another highly promising growth region for health insurance. Munich Re has been active in this market for several years now, with managed care service companies that support our clients in risk management and the assumption of insurance risks. The specialist health primary insurer DAMAN, established by Munich Re in Abu Dhabi in 2005, commenced operations in mid-2006. It has been growing profitably and has in the meantime become a leading provider in the market. At the end of 2007, it had a portfolio of 900,000 (250,000) policyholders and €64m in premium income. We are the exclusive reinsurer and expect DAMAN to continue developing positively. It is likely that more Gulf states will privatise their health markets in future, giving a further boost to our health reinsurance business. In 2007, our premium volume in the Gulf states more than doubled to €120m (49m), contributing a share of 9.0% (3.7%) to the health segment’s premium volume.
A number of other markets, such as the United Kingdom, the Netherlands, and Italy, plus China and other Asian countries, form part of the health segment ’s overall picture. To limit the political and economic risks of our business, we are consciously aiming for a broad regional spread of our activities.
Result Our outstanding underwriting result and gratifying investment result enabled us to post an excellent operating profit of €3,068m (3,486m) and a consolidated result of €2,589m (2,134m). Favoured by the German business tax reform, expenditure for taxes on income fell to €287m (1,191m) in the financial year. The earnings capacity of our reinsurance business continues to be high, a fact that is reflected in the very good combined ratio of 96.4% (92.6%) and further underscored by the combined ratio of 91.4% (91.3%) adjusted for the effects of natural catastrophe losses. These totalled €673m (177m), representing 5.0 (1.3) percentage points of the combined ratio. In the first quarter of 2007, Winter Storm Kyrill gave rise to heavy losses particularly in Germany, but also in the United Kingdom, the Benelux countries, Austria, Poland, the Czech Republic, and to a lesser degree, Switzerland. Munich Re‘s total burden in reinsurance alone was €390m.
Extensive damage was also wreaked by a series of severe weather events in New South Wales, Australia, in June 2007. The main loss event, the Queen’s Birthday Storm, which raged from 8 to 10 June, was one of the costliest in Australia’s history, affecting our result to the tune of €61m. The floods in the United Kingdom, which resulted in heavy losses in June and July 2007, also had a negative impact, costing us a total of €57m.
Germany, Asia Pacific and Africa 106.0 94.2 90.6 96.7 88.0 e_09_Lagebericht_80-86 80e_09_Lagebericht_80-86 80 07.03.2008 16:49:19 Uhr07.03.2008 16:49:19 Uhr
Management report Business performance 0.1 (1.4) percentage points of the combined ratio were attributable to retrocession cover for the whole reinsurance group – business which is fully accounted for in the Special and Financial Risks Division.
In Corporate Underwriting/Global Clients, we registered a 7.1% increase in the combined ratio, but it still amounted to an excellent 95.2%. The difference is due to the below-average combined ratio of 88.1% in 2006 and the higher costs for natural catastrophes. Besides this, we have made provision for the whole Group for the D&O and professional indemnity losses that could result from the subprime loan crisis.
The decrease in our premium from Greater China largely resulted from proportional industrial business in the People’s Republic, where we adhered to our profit-focused underwriting policy in the face of a fall in the original rate level. The very positive result of €86m in this field of business endorses our maxim of profit before premium growth. In 2008, we have been able to increase premium volume in China at risk-adequate prices, benefiting from the strong local market growth.
Our Swiss subsidiary New Re, which in traditional reinsurance focuses on non-proportional covers and writes a considerable amount of natural catastrophe business, remained stable at a profitable level. New Re’s premium volume increased distinctly to Sfr 1,241m (1,007m), mainly due to life and health business. Its profit showed a similar development. The reduction in the reported profit for the year is attributable to an effect in the previous year, which had had a one-off positive impact.
Investments Sfr m 4,387 4,066 1 Financial statements in accordance with national accounting law.
We have redefined the strategy for our US business and decided to combine Global Clients and North America in one division reporting to a single Board member. This will enable us to manage our client accounts more efficiently. For further information on Munich Re America’s strategic orientation, we refer to the strategy section on page 40 ff. of this report.
– The reserves for workers’ compensation claims from the years 2001 and prior were strengthened by an amount of US$ 375m after discounting, owing to persistently high losses reported. Provisions for claims complexes based on class actions, e.g. construction defects, were also strengthened. By contrast, the other classes of business were characterised by a largely stable run-off for the years 2001 and before.
– The development of claims from the years 2002 and after was clearly positive, prompting us to reduce our ultimate-loss estimates for claims from the years 2002–2006 by US$ 500m. However, the reserves for accident years 2004 and after remained unchanged for liability classes with long settlement periods. Despite the continued favourable trend, the Board of Management has decided not to release any reserves, thereby adhering to its prudent reserving practice. Likewise, loss reserves for workers’ compensation business from accident years 2002 until 2006 have been largely left unchanged.
Special and financial risks business In marine reinsurance, where total premium income amounted to €1.2bn (1.0bn), by far the greatest volume of approximately €403m (318m) was generated by our Watkins Syndicate at Lloyd’s in London. Owing to the positive market environment, we were able to considerably expand our portfolio in the year under review. This, together with the favourable development of claims, led to a very satisfying underwriting result of approximately €115m (–81m).
Our clients in the alternative markets segment are large international corporations. This business is handled by our subsidiary Munich-American RiskPartners (MARP), which has offices in Munich and London.
Our new Special Enterprise Risks unit is currently in the start-up phase. Its target clients are companies that implement a quantitative risk management system and, with increased risk awareness, develop a growing demand for risk transfer solutions, e.g. for political risks, project financing risks, pronounced cyclicality of their original business, or protection of their supply chain.
To better manage the different sales channels and focus more strongly on a holistic client approach, ERGO established a Division for Sales on its Board of Management on 1 July 2007. This should enhance leverage of ERGO’s enormous client potential.
Combined ratio legal expenses insurance % 94.5 95.3 99.8 98.9 99.2
The Watkins Syndicate is the largest marine syndicate in Lloyd’s of London and one of the leading primary insurers in international marine business. The syndicate has a wide and efficient network: apart from its branch offices in the United Kingdom and Ireland (e.g. in Manchester, Leeds and Dublin), it also transacts business from its Hong Kong, Singapore and Dubai offices.
In the past financial year, our primary insurers’ business performance was highly satisfactory. In the first six months of the year, we were able to raise our profit guidance for 2007 from the €600–750m originally aimed at to around €900m, a figure we surpassed by a further 9.3%. The consolidated result for the period January to December 2007 was a very good €984m (1,045m). This favourable development was attributable not only to our positive underwriting but also to gains on the disposal of real estate and shares. Another factor that contributed to the gratifying increase was one-off income of €120m from the 2008 German Business Tax Reform Act. This amount already takes into account the allocation of €18m to the provision for deferred premium refunds. An adverse impact resulted from the windstorm losses of €52m caused by Winter Storm Kyrill in January 2007.
Life and health The consolidated result in life and health totalled €358m (319m).
As anticipated, the higher investment result was reflected in net expenses for claims and benefits. These expenses were also affected by price increases in healthcare and the strong expansion of health insurance business in Germany and other countries in recent years. Overall, net claims and benefits climbed by 3.1%.
Property-casualty In property-casualty insurance, we again posted a healthy consolidated result of €626m (726m).
Our primary insurance subsidiaries Europäische Reiseversicherungsgruppe and the Watkins Syndicate also made positive contributions to the result, accounting for €8.4m (4.3m) and £35m (36m) respectively.
As part of its expansion to the Asian growth markets, ERGO established a representative office in Mumbai on 3 May 2007, thereby underscoring its commitment to the dynamic Indian insurance market. On 30 October 2007, a joint venture in India was agreed on between ERGO and the Housing Development Finance Corporation (HDFC Ltd.). ERGO International AG acquired a 26% stake in HDFC General Insurance Ltd., Mumbai, the remainder being held by HDFC Ltd. The company, which has been renamed HDFC ERGO General Insurance Ltd., operates in non-life insurance.
In December 2007, the ERGO Insurance Group concluded an agreement with Daum Communications and LIG Insurance to purchase a 65% stake in South Korean specialty insurer Daum Direct Auto Insurance. Daum Direct has an exceptional competitive position in the South Korean direct motor insurance market, where it is the second-largest motor primary insurer, with a premium volume of around €200m in 2007 and a market share of over 15% in the growing direct market. The transaction is to be concluded in the first half of 2008.
– Outstanding investment result of €9.3bn – High gains on disposals from optimisation of real estate portfolio – Equities portfolio further diversified and profits taken
In the following, we report on the performance of the Group’s own invest ments, which derive almost entirely from our core business fields of reinsurance and primary insurance. In addition, we provide information on third-party business, where we manage the assets of non-Group institutional investors and private investors.
Significant developments and Compared with the previous year, Group investments fell slightly by €0.7bn to structure of asset classes €176.2bn; this is equivalent to a reduction of 0.4%. We earned a very good investment result of €9.3bn (9.0bn), an increase of 3.3% on the previous year. One of the main reasons for the improvement in the result was gains on the sale of a package of German real estate and to higher regular income from interest-bearing investments.
Despite temporary corrections, the stock markets developed positively over the course of 2007. We continued our strategy of further diversifying our portfolio of equities and equity funds, which disposals reduced by €1.6bn or 6.6%.
Our sale of a real-estate package comprising residential and commercial properties throughout Germany, which we began in the fourth quarter of 2006, was concluded in 2007. The carrying amount of our investment property was still €3.8bn (4.7bn) at the balance sheet date.
The Munich Re Group has only limited investments of below €340m in financial instruments (including credit derivatives) exposed to the US subprime mortgage markets. This is equivalent to around 0.2% of our overall investment portfolio. In determining this figure, we have used a very conservative definition which includes holdings that do not currently exhibit subprime exposure but whose contract terms do not explicitly exclude a collateral exchange involving subprime investments. Details of the losses incurred, which totalled €166m, are provided in the section “Investment result” on page 97 f.
Land and buildings, including buildings on third-party landn 452 585 649 766 2,500 3,188 94 114 58 67 3,753 4,720
Other securities held to maturity – – – – 192 242 8 10 – – 200 252
The majority of our investments are in the European area (95% in primary insurance and 60% in reinsurance). By way of currency matching, we base investments on the currency structure of our underwriting liabilities. The focus of ERGO’s business, and thus also of the technical provisions requiring investment coverage is on Germany and other European countries. In reinsurance, investments and technical provisions have a more international spread, our commitment to the US reinsurance market also being reflected by North America having a 34% share of regional investment allocation.
Real estate Our real estate investments are geared to generating an appropriate yield, which requires continually monitoring existing properties and funds with regard to their long-term profitability, and their location- and property-specific risks. Our main focus is on properties of stable value in attractive locations of major European cities. We also have investments in North and South America and Asia, with which we are diversifying our risks, and tapping additional earnings potential. With the sale of the real-estate package comprising residential and commercial properties throughout Germany in 2007, we reduced our historically evolved concentration of directly held property in Germany. We disposed of properties with a total value of €1.8bn, of which €1.6bn was attributable to investment property. In the course of the year, we realised capital gains of around €690m from this transaction, some €630m of which contributed to our investment result.
In the current financial year, our investments in loans, especially registered bonds and borrowers’ note loans, increased markedly by €6.0bn or 20.2% to €35.5bn (29.5bn). A large proportion of these investments were made by our life and health insurance companies.
The duration – i.e. the average capital commitment – of our bond portfolios was 6.0 years in the Munich Re Group at the reporting date.
Our conservative investment policy is reflected in our portfolio of fixedinterest investments, including short-term items: some 45% are government bonds or similarly secure instruments for which public institutions are liable. Around 30% are securities and debt instruments with top-quality collateralisation, mainly German pfandbriefs. Nearly 20% are corporate or bank bonds, or deposits with banks with a very good rating. Of the fixed-interest investments, only some 4% are structured credit products.
Our holdings in investments affected by the subprime crisis reduced to below €340m by the end of the financial year through write-downs and disposals. The securities insured by US bond insurers (monoliners), with a volume of around €320m at the balance sheet date, consist of municipal bonds (80%) and of corporate bonds and structured financing (20%) whose underlying credits are of good quality even without insurance.
Our portfolio of fixed-interest investments has a good rating structure. As at 31 December 2007, 96.0% of our fixed-interest securities available for sale were rated AAA to A.
In order to cover our obligations from underwriting business with appropriate investments, we match the maturity structure of our interest bearers with our liabilities. In view of the long time horizons in life and health insurance business, which is predominant in our primary insurance, long-term investments are to the fore, whereas the maturities of interest-bearing securities in reinsurance vary more widely.
At the balance sheet date, our equity-backing ratio, i.e. the proportion of investments in equities, equity funds and shareholdings to total investments at market values, stood at 13.8%, and thus below last year’s level of 14.6%. After taking account of hedging transactions and equity derivatives, this ratio amounted to 10.8% at the end of the year, compared with 14.1% at the end of 2006.
Investment result In the 2007 financial year, we generated a very good investment result of €9.3bn (9.0bn), an increase of 3.3% on the previous year. With a 5.2% return on investment in 2007, we again exceeded our target of 4.5% (based on the average investment portfolio at market values).
The improvement was significantly due to gains of approximately €630m, booked in the first six months of 2007, on the sale of a package of real estate situated in various parts of Germany. Another contributor was the increased income from interest-bearing investments, up 6.6% to €5,825m (5,463m), owing mainly to higher yields and greater investment in loans.
Substantial profits from the diversification of our equity portfolio led to a result of €3.0bn (2.7bn) from disposals.
In 2007, we made write-downs totalling €1.4bn (1.0bn) on our derivative financial instruments.
Other income/expenses – 628 – 556 – 594 –1,021 –1,504 e_11_Lagebericht_92-99 97e_11_Lagebericht_92-99 97 07.03.2008 16:48:43 Uhr07.03.2008 16:48:43 Uhr
Valuation reserves not recognised Our off-balance-sheet valuation reserves, i.e. the difference between the fair in the balance sheet value of our investments not accounted for at fair value and their carrying amount (including owner-occupied property), totalled €0.6bn (1.9bn) as at 31 December 2007. This 70% decline is largely attributable to the rise in interest rates. The net negative valuation reserves on our long-term investments in loans totalled €1,323m (216m) at the end of the year. 99% of the Group’s investments in loans are held by our primary insurers.
After recording a result of €53m in 2006, our asset management segment increased its profits by €7m in the year under review. Business with investors outside the Group accounted for approximately half of that figure.
Deposits retained on assumed reinsurance and other investments 456 649 –29.7
Expenses for the management of investments and other expenses 404 479 –15.7
MEAG provides retail and segregated funds for private and institutional investors, as well as holistic asset management. It largely uses the distribution channels of the ERGO Insurance Group companies for marketing retail funds in private-client business, where MEAG’s investment funds are offered as a supplement to conventional insurance products. When newly investing in MEAG investment funds, private investors’ primary concern is security. Client demand is increasing especially for money-market, bond, and capital-protected funds, where MEAG generally pursues a conservative investment strategy. Retailfund assets totalled €2.5bn (2.7bn) on 31 December. The approach of MEAG’S private investors was characterised by profit-taking on riskier equity investments. In line with developments across the investment industry, MEAG also recorded outflows from bond funds, which do not yield a significantly higher return than money-market products in the current interest-rate environment.
The capital structure of the Munich Re Group is essentially governed by its activity as an insurer and reinsurer. Investments on the assets side of the balance sheet serve mainly to cover technical provisions (73.8% of the balance sheet total). Equity (11.9% of the balance sheet total) and bonds classified as strategic debt (2.4%) are the most important sources of funds.
To optimise our capital position and reduce capital costs, we again used strategic debt in 2007 and returned equity to our shareholders in the form of share buy-backs and dividends. Strategic debt increased by €1,384m in 2007, mainly due to our subordinated bond issue with a volume of €1.5bn. A detailed analysis of the structuring of this type of funding is provided in the section on strategic debt on page 106 f.
In addition, there were contingent liabilities, which are described in the notes to the financial statements (see page 246). Off-balance-sheet financing does not play a significant role in the Munich Re Group.
The structure of our technical provisions and other liabilities is the basis for the Munich Re Group’s investment strategy, the main focus of which is assetliability management: the aim is to ensure that economic factors influence the value of our investments and that of our technical provisions and liabilities in the same way, thus cushioning the effect of capital market fluctuations. For this purpose, we mirror important features of the liabilities, such as maturity patterns, currency structures and inflation sensitivities, on the assets side of the balance sheet by purchasing investments with similar characteristics. If, for instance, there is a strong rise in inflation, our nominal outflows as a result of claims payments increase significantly. This applies in particular to lines of business with long payout patterns, e.g. liability, as inflation accumulates over a number of periods. To an increasing extent we are endeavouring in our assetliability management to structure our investment portfolio in such a way that inflows from investments increase in line with rising inflation rates.
Through active capital management, which is an important element of our Changing Gear growth programme, we ensure that the capital of the Munich Re Group is maintained at an appropriate level. The Group’s available capital must always be sufficient to cover the capital requirements determined both by our own internal risk model and by the requirements of supervisory authorities and rating agencies. We aim to ensure that our financial strength is such that it enables us to take advantage of measured opportunities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains at a reasonable level even in the wake of major loss events or substantial falls in the stock markets. At the same time, we also define an appropriate level of Group capital as one which does not exceed that required for our operations. Such a needs-based, risk-commensurate capital level makes a decisive contribution to financial discipline in all our business processes.
We derive our economic capital from IFRS equity inter alia by – adding off-balance-sheet valuation reserves assignable to reinsurance, asset management and property-casualty primary insurance; – adding the portion of embedded value not contained in IFRS equity for life reinsurance, life primary insurance and German primary health insurance; – appropriately revaluing the technical provisions; e_12_Lagebericht_100-110 101e_12_Lagebericht_100-110 101 07.03.2008 16:47:26 Uhr07.03.2008 16:47:26 Uhr
– Within the framework of the share buy-back programmes announced in November 2006 and May 2007, we bought back shares to the value of approximately €2.3bn by the balance sheet date, which we offset against retained earnings.
– As a result of the marked rise in the euro, particularly against the US dollar, the reserve for currency translation was reduced by €535m. In this reserve, we recognise the effects of changes in exchange rates arising from the translation into euros of our foreign subsidiaries’ assets and liabilities.
Valuation reserves not recognised in the balance sheet, including those apportionable to minority interests and 1 Adjusted pursuant to IAS 8.
As at the balance sheet date, 11,776 shares issued to employees were also subject to a restriction on disposal until 30 November 2008.
– The Annual General Meeting of 11 June 2003 also empowered the Board of Management in the event of a capital increase at any time up to 11 June 2008 from the capital authorised for this purpose, with the consent of the Supervisory Board, to attach one bearer warrant to each of the new shares to which the shareholders have a subscription right when the capital authorised for this purpose is issued. These warrants would entitle the bearer, on the basis of the warrant conditions then stipulated, to acquire registered Munich Re shares. Warrants may be issued for registered shares totalling up to €35m of the share capital; as a precautionary measure, capital of €35m was conditionally authorised under Article 4 para. 3 of the Articles of Association.
– Under Article 4 para. 1 of the Articles of Association, the Board of Management is authorised, with the consent of the Supervisory Board, to increase the Company‘s share capital at any time up to 25 May 2009 by an amount of up to €280m by issuing new shares against cash or non-cash contribution (Authorised Capital Increase 2004). In accordance with the above-mentioned provisions of the Articles of Association, it may exclude subscription rights.
The other strategic debt was incurred to finance our operating activities in the long term.
The interest expenses for strategic debt are shown separately in the consolidated income statement under “finance costs” and are explained in detail in the notes to the financial statements. As at 31 December 2007, our debt leverage was 17.6%, up 4.2 percentage points on the previous year.
The subordinated bonds are recognised in part as own funds by the German Federal Financial Supervisory Authority (BaFin). When this is considered in calculating the strategic debt, the latter is reduced to €2,135m and the debt leverage amounts to only 6.9%.
Management report Financial position e_12_Lagebericht_100-110 107e_12_Lagebericht_100-110 107 07.03.2008 16:47:27 Uhr07.03.2008 16:47:27 Uhr
Munich Re‘s financial strength is assigned the second-highest rating category and generally evaluated as very positive by each of the leading rating agencies. In the year under review, A. M. Best raised its outlook to stable, based on our consistently excellent operating results and our capitalisation. In addition, at the beginning of this year, A. M. Best increased the rating of our subsidiary Munich Re America Corporation and of the relevant subgroup subsidiaries from A to A+, citing as reasons the strong support from Munich Reinsurance Company, the improvement in results and capitalisation. Standard & Poor’s, Moody’s and Fitch reaffirmed their good ratings from the previous year. To maintain this high rating in the interest of business opportunities, we have to have more own funds than required by supervisory law or our own internal risk assessments.
Vorsorge Lebensversicherung AG A+ e_12_Lagebericht_100-110 108e_12_Lagebericht_100-110 108 07.03.2008 16:47:28 Uhr07.03.2008 16:47:28 Uhr
Munich Re America Corporation1 7.45%, US$ 500m Senior Notes 1996/2026 bbb+ A2 A–
The cash outflows for investment activities were determined by payments for the acquisition of investments. These exceeded the inflows from the sale/ maturity of investments by €4,791m. The inflows from the sale of consolidated companies include PTE ERGO Hestia. We received the sales price of €74m in cash and offset this against the cash of €4m held. In the financial year, we acquired the Bell & Clements Group. We paid €49m of the purchase price in cash and offset this in the cash flow statement against the cash of €28m held. The Munich Re Group additionally assumed a total of €10m in investments and €26m in technical provisions through the acquisition. In the third quarter, we increased our stake in the US company Cairnstone Inc. from 25% to 100%. We paid the purchase price of €18m in cash and offset this against the cash of €9m held. In the fourth quarter, we acquired the British company MSP Underwriting for €74m, through which the Munich Re Group assumed a total of €5m in investments. We also acquired Allfinanz Ltd. for €49m.
Reinsurance As reinsurers, we aspire to be the preferred partner in risk for our clients. Our operative business consequently provides companies wishing to cede insurance risks with the full range of underwriting products. In addition, they can benefit from our strengths that go beyond actual reinsurance cover: our financial strength, our knowledge, our solution-oriented approach, and real partnership with our clients.
Our solution-oriented approach to collaboration is also clearly illustrated by connect.munichre, our internet client portal, where we provide our cedants with round-the-clock assistance: useful knowledge, services, analysis and quotation tools from the property, liability and life segments. This supports primary insurers in their daily business and presents a direct and secure interface to Munich Re. With its swift, efficient and safe interactive features, connect.munichre supplements Munich Re’s range of services and rounds off personal client relationships. The portal is currently used by over 1,100 insurers globally.
The full spectrum of sales organisations in the ERGO Group ensures that our clients can contact us using the channel best suited for their needs. Our field staff attach great importance to consultancy, customer care and service, not only in their sales talks but also in settling claims with clients. Such situations show the value of a good insurer.
ERGO’s professional client management has been tested for client satisfaction and service by the German technical inspection agency TÜV and rated as “good”. The quality of its claims management is certified to DIN EN ISO 9001, for which regular on-the-spot checks are made in addition to the extensive audit and claims controlling that occurs.
As outlined in the general parameters section, insurance markets are subject to a wide variety of influences. The Munich Re Group concerns itself with these factors at an early stage so as to help shape them wherever possible and to adapt its products and services to the new circumstances or devise innovative solutions. Our more than 20 centres of competence play a special role here: they are active in many different fields, and the significance of their work sometimes goes far beyond the immediate world of insurance. Not only do they create the basis for identifying and highlighting new risks; they also help control them by making them insurable.
The Information Technology Topic Network designs new types of IT covers geared to creating business opportunities and leveraging new business potentials. A recent example is Munich Re’s work in developing first-party computer virus cover in response to the industry’s need to insure its own losses caused by IT viruses. Other centres of competence deal with the topics of customised portfolio solutions (for old loss portfolios), directors’ and officers’ liability, workers’ compensation, and the risks of the jewellery business and diamond trade (jewellers’ block).
In the divisions, novel solutions are developed by five innovation teams, i.e. interdisciplinary groups made up of highly qualified experts who work in close contact with the underwriting units to identify and tap new business opportunities. They help promote growth in the divisional units on three levels: by designing tailor-made solutions for our clients, developing new products or particular segment strategies, and introducing new distribution approaches. In this process, the account managers, with their direct access to the needs and requirements of our clients, remain the main source of new business ideas – the innovation teams take up these ideas and are the driving force behind their successful realisation. The focus is on analytical and actuarial methods and on strategic planning. These solutions provide our clients with a variety of benefits, including risk management analyses and support, optimised individual policy design, and new risk transfer solutions for risks on the boundary of insurability.
The Kyoto Multi Risk Policy, for instance, was developed for new risk constellations in emissions trading. Industrial enterprises are faced with the challenge of reducing CO2 emissions worldwide and are therefore investing an increasing amount of money and know-how in emerging countries. With its innovative concept, Munich Re partners clients in covering risks arising from new technologies, uncertain counterparties and a politically unstable environment. Our activities in the area of research and development in life reinsurance also include the observation and analysis of current market trends, e.g. the effects of Solvency II on the life reinsurance industry.
In primary insurance, we place the emphasis of our research and development on forecasting demographic trends and incorporating the results into product design. After all, these trends constitute important parameters for calculating policy durations and thus for structuring products. Besides this, demographic change is affecting social security systems and consequently influencing our clients’ need for private provision.
Our product development combines the scientific findings of the Intergenerational Compacts Research Centre at the Albert Ludwig University in Freiburg with our own knowledge and extensive experience with clients.
ERGO’s life insurers use their own mortality tables in order to have customised data available for their specifically structured portfolios. The health insurers make use of the German Association of Private Health Insurers’ mortality tables. Our actuaries work closely with the German Association of Actuaries to constantly extend and update their knowledge of client life expectancy.
Our staff provide the basis for our success with their competence, motivation and commitment. They embody the qualities with which Munich Re turns risk into value. That is why we invest consistently in further developing their skills.
Munich Re’s staff turnover rate has been consistently low for years – proof that we are an attractive employer and that our employees identify strongly with the Company. The rate for ERGO is 4.4%.
Initial and further training Initial and further training rank among our strategic tasks in our human resources work. Our staff must be highly qualified and motivated to ensure the continued success of our operations. Their knowledge edge is critical to designing solutions for new market developments at an early stage and to meeting the high-level requirements of our business. We ensure the necessary qualifications and skills through systematic personnel measures that take into account individual abilities and future requirements. Hence, we consistently offer a large number of internal seminars for personal and specialist training. In 2007, the number of participant days spent in training throughout Germany was 32,394. Expenses for training measures totalled €19,132,701.94.
International promotion of talent Throughout the reinsurance group, we systematically identify and prepare staff for future management tasks worldwide with our scheme for assessing and developing staff potential (POE). Highly talented and qualified staff are selected and groomed for management functions in Munich and for leading functions at business units abroad. As a result, we create career prospects for our staff internationally and can fill vacancies with particularly suitable employees.
This commitment on Munich Re’s part has also been acknowledged by independent parties: the World Wildlife Fund and the business magazine “Capital” voted Nikolaus von Bomhard Eco-Manager of the Year in November 2007, in recognition of Munich Re’s pioneering role in researching climate change and its commitment to reconciling profit and ecology.
In addition, the companies of the Munich Re Group are actively engaged in a whole variety of ways in exercising economic, ecological and social responsibility. Our new sustainability portal, which has been online since September 2007, documents how we put the principle of sustainability into practice. All the information can be obtained at www.sustainability.munichre.com/de.
Information management plays a core role at Munich Re. Great significance is therefore placed on the availability, confidentiality and integrity of data. To ensure the security of all its data, computers and networks, but also of all information not stored in IT systems, the Munich Re Group has efficient security organisations in place in insurance and reinsurance.
We attach great importance to the security training and awareness of all our staff and to improving Munich Re’s security culture. Regular external audits and benchmarkings against other groups in the industry have confirmed that Munich Re’s information security is at a high level. However, given that we see security as a process rather than a state, we are constantly refining our strategies and standards. This process is geared to the actual risks in order to support Munich Re’s business operations and improve its competitiveness. The recommended measures are carefully weighed up against the risk-minimising impact, also in terms of costs, and are duly incorporated into the security architecture.
Security management is being continually improved, also in the light of international standards and Solvency II developments – we are aiming for certification to ISO 27001 by 2009. Suitable security measures are in place for the management of potential operational risks. In order to safeguard the ERGO Group’s assets in the long term, IT Security Management provides support for strategic and operational projects in and outside Germany, e.g. in developing a security or risk-management system for foreign subsidiaries.
It is our conviction that good corporate governance creates lasting value. We therefore apply the highest standards to our operations and activities, complying with all the recommendations of the German Corporate Governance Code. Beyond this, we have our own Munich Re Code of Conduct specifying high-level ethical and legal requirements that must be met by employees. This information can be found on our website.
Corporate legal structure Munich Re is a joint-stock company (“Aktiengesellschaft”) within the meaning of the German Stock Companies Act. It has three governing bodies: the Board of Management, the Supervisory Board and the Annual General Meeting. Their functions and powers are derived from this Act and our Articles of Association. This means that the Articles of Association (which can be accessed on our website) are of considerable importance.
The Annual General Meeting is entitled to transfer to the Supervisory Board the authority to make amendments to the Articles of Association that affect only the wording (Section 179 para. 1 sentence 2 of the German Stock Companies Act). This is the case with Munich Re and has been regulated in Section 14 of the Articles of Association.
The Board of Management is responsible for managing the Company. In doing so, it must safeguard Company interests and endeavour to achieve a long-term increase in the value of the Company.
Munich Re’s Board of Management had nine members at the end of 2007. Since 1 January 2008, the number has decreased again to eight. Pursuant to Article 16 of the Articles of Association, the Board of Management must comprise a minimum of two persons; beyond this, the number of members is determined by the Supervisory Board. The Board of Management has had two committees since 1 January 2006 – one for Group operations and one for re insurance operations – in order to enhance the efficiency of its work. Rules of procedure issued by the Supervisory Board regulate the work of the Board of Management, in particular the allocation of responsibilities between the individual Board members, matters reserved for the full Board of Management, and the required majority for Board of Management resolutions.
Pursuant to Article 4 of the Articles of Association, Munich Re’s Board of Management is authorised to implement certain capital measures (Authorised Capital Increases 2004 and 2006, Contingent Capital Increase 2003 I and 2005).
The Board of Management and Supervisory Board cooperate closely to the benefit of the Company. The Board of Management coordinates the Company’s strategic approach with the Supervisory Board and discusses the current state of strategy implementation with it at regular intervals. It reports regularly to the Supervisory Board. Specific types of transaction, such as investments of substantial size, fundamentally require the Supervisory Board’s consent.
Supervisory Board The Supervisory Board monitors the Board of Management and gives counsel where appropriate. Certain transactions like major investments or capital measures require its approval, but it is not authorised to take management action. The Supervisory Board also appoints the external auditor of the financial statements. Remuneration of the members of the Supervisory Board is regulated in the Articles of Association, i.e. is determined by the shareholders.
Re’s Supervisory Board has 20 members. Half are elected representatives of the employees, and half representatives of the shareholders, elected by the Annual General Meeting. Supervisory Board resolutions on the nomination of candidates for election to the Supervisory Board at the Annual General Meeting only require the majority of votes cast by the Supervisory Board members representing the shareholders.
In 2007, the Supervisory Board again reviewed the efficiency of the Board of Management’s activities by way of an extensive survey. To this end, the Standing Committee of the Supervisory Board compiled a detailed questionnaire that was sent to all Supervisory Board members. The main focus was on the content and timing of reports from the Board of Management to the Supervisory Board. This was assessed as consistently positive and efficient, as was the work of the Supervisory Board and its committees in the 2007 financial year, notwithstanding a large number of proposals for improvement made in response to the survey.
Recommendations and proposals In November 2007, the Board of Management and the Supervisory Board of the German Corporate published the following declaration of conformity, in accordance with Section Governance Code 161 of the German Stock Companies Act: “Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München fulfils all the recommendations of the German Corporate Governance Code of 14 June 2007 (published on 20 July 2007) and will continue to do so in future. Since the last declaration of conformity in November 2006, Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München has fulfilled all the recommendations of the German Corporate Governance Code of 12 June 2006 (published on 24 July 2006).”
Structure of the remuneration system In conformity with the German Corporate Governance Code, we here explain for the Board of Management the principles of the remuneration system for Munich Re’s Board of Management and the structuring of the individual remuneration components.
Remuneration in kind and fringe benefits are granted according to function, and are commensurate with market conditions (DAX 30 companies). The benefits in question are individually taxable.
Annual bonus Consolidated result 0–150% Achievement of objectives Annually in Company result (fully achieved following year Divisional result = 100%) Individual objectives
Medium-term bonus Consolidated result 50–150% Achievement of objectives at In the fourth (fully achieved least 50% on average over year = 100%) three years
The medium-term bonus is based on performance over a three-year period. It is measured on the basis of the Group result category from the short-term compensation component. Payments are made only if the achievement rate is at least 50% on average for the three-year period.
This remuneration component, with a long-term perspective, is linked to the sustained appreciation of Munich Re’s share price. The long-term incentive plan is set up each year, and the participants receive a certain number of stock appreciation rights. These can only be exercised if, after a two-year vesting period, Munich Re’s share price has risen by at least 20% since inception of the plan and the shares have outperformed the EURO STOXX 50 at least twice at the end of a three-month period during the term of the plan. The exercise hurdles are exacting and in keeping with the German Corporate Governance Code.
In accordance with the recommendations of the German Corporate Governance Code, the monetary remuneration of the Board members thus comprises fixed and variable components, all of which are appropriate in themselves and as a whole. Criteria for this are in particular the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole and the financial situation, performance and future prospects of Munich Re, taking into account the relevant benchmarks.
A different arrangement applies to the remuneration structure of Mr. Phelan, who until 31 December 2007 was not only a member of the Board of Management but also the President, Chief Executive Officer and Chairman of the Board of Munich Re America Corporation, and therefore had special remuneration agreements, with the major portion of his income derived from the USA.
Pension entitlement The members of the Board of Management are members of a defined benefit plan under which they will receive a fixed pension whose amount depends on their basic remuneration and their years of service on the Board. The pension level starts at 30% and can reach a maximum of 60% of annual basic remuneration.
Vested benefi ts for occupational pension, disability pension and surviving dependants
– gross violation of duties – the Board member giving notice
– Older than 50 – More than ten years’ service with the
Entitlement to vested benefi ts – Leaving the Board before reaching the age of 60 – At least fi ve years’ service with the Company
– Reduced by 2% for each year or part thereof short of 65th birthday
– Reduced by 2% for each year or part thereof short of 65th birthday e_14_Lagebericht_119-130 125e_14_Lagebericht_119-130 125 07.03.2008 16:46:58 Uhr07.03.2008 16:46:58 Uhr
Occupational pensions and pensions for surviving dependants are reviewed for adjustment if salaries payable under pay-scale agreements in the insurance industry have increased by more than 12% (based on the average final salary of all pay-scale categories) since the pensions were last fixed or more than three years have passed since that date. The adjustment made will at least be in line with the increase in the cost of living according to the consumer price index for Germany. Vested benefits are not adjusted.
Insofar as members of the Board of Management are entitled to vested benefits under a company pension scheme as a result of their previous employment with the Company or one of its affiliates or with other companies that they previously worked for, such benefits are offset against the Company’s occupational pension payments.
Total remuneration of the The basis for reporting the remuneration of Board members is German Board of Management Accounting Standard No. 17 (DRS 17), according to which the amount shown for the annual bonus is the provision established for that bonus, since the performance on which the bonus is based has been completed by the balance sheet date of the financial year and the requisite Board resolution is already foreseeable. Under the above-mentioned standard, medium- and long-term bonuses of the members of the Board of Management must be recognised in the year of payment in future. The members of Munich Reinsurance Com pany’s Board of Management received remuneration totalling €17.0m (19.5m) for fulfilment of their duties in respect of the parent company and its subsidiaries in the financial year. The previous year’s figures have been adjusted in accordance with DRS 17. The reduction in remuneration is due to changes in the composition of the Board of Management. The total remuneration includes the compensation components that Mr. Phelan received for his functions at Munich Re America.
Entitlement ceases – for widow(er) on remarrying (only in the case of Board members appointed since 2006) – for orphans · on reaching the age of 18 · on reaching the age of 20 (only in the case of Board members appointed prior to 2006) · on reaching the age of 27 if the orphan is in full-time education or vocational training, is doing military or civilian service, or is unable to support himself or herself owing to a physical or mental disability
– For three months, previous monthly occupational pension – If Board member’s occupational pension is reduced owing to early retirement, widow(er)’s and orphan’s pensions are based on reduced occupational pension
– Offsettable against widow(er)’s pension · Income up to a maximum of 50%, insofar as such income exceeds 50% of widow(er)‘s pension
– Widow(er)’s and orphan’s pensions together may not exceed the occupational pension e_14_Lagebericht_119-130 126e_14_Lagebericht_119-130 126 07.03.2008 16:46:58 Uhr07.03.2008 16:46:58 Uhr
Remuneration of individual Board members (in accordance with Section 285 sentence 1 item 9a sentences 5–9 of the German Commercial Code and Section 314 para. 1 item 6a sentences 5–9 of the German Commercial Code)
6 Retired from the Board of Management on 31 December 2006; the remuneration in kind shown is for the previous year. 7 Has a rolling long-term incentive plan at Munich Re America. Amounts were paid out for Plan 2004–2006 in 2007 and for Plan 2003–2005 in 2006. 8 Remuneration in kind and fringe benefi ts include travel expenses from Princeton to Munich. 9 Retired from the Board of Management on 31 December 2007 and received a payment equivalent to the grant value in lieu of the stock appreciation rights.
Management report Corporate governance report 1 Owing to the good business performance in 2006 and 2007, provisions have been established for the maximum bonus amounts for the consolidated result.
Pension entitlements Personnel expenses of €1.5m (1.2m) were incurred in the financial year for the increase in the pension provisions for active members of the Board of Management. The following pension commitments result for the individual members of the Board of Management: Total remuneration of Payments to retired members of the Board of Management or their surviving former members of the dependants totalled €6.0m (5.2m). Board of Management
Pension commitments Personnel expenses of €0k (17k) were incurred for retired members of the Board of Management. As at 31 December 2007, the pension provisions and provisions for comparable benefits for the retired members of the Board of Management or their surviving dependants amounted to €0m (0m) after deduction of plan assets held by a separate entity (under a contractual trust agreement).
Total remuneration of the The current rules applicable to the remuneration of the Supervisory Board Supervisory Board provide for a fixed remuneration component of €45,000 and a variable resultrelated remuneration component. The Chairman of the Supervisory Board receives twice, and the Deputy Chairman one-and-a-half times, this fixed and variable remuneration.
2 Retired from the Board of Management on 28 February 2007; commitment for occupational pension on reaching the age of 60.
Reduction in pension commitments due to lower dollar exchange rate compared with previous year. 5 Retired from the Board of Management on 31 December 2006. 6 Retired from the Board of Management on 31 December 2006.
The result-related annual remuneration is based on the undiluted earnings per share from continuing operations, as shown in the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs): each Supervisory Board member receives €4,500 for each full euro by which earnings per share exceed €4, but a maximum of €36,000.
Advances and loans The members of the Supervisory Board and Board of Management did not receive any cash advances or loans in the year under review. Nor were there any notifiable transactions between Board members and the Munich Re Group. Furthermore, no payments were made or advantages extended to members of the Supervisory Board for services provided internally within the meaning of item 5.4.7 para. 3 of the German Corporate Governance Code.
Share trading and shares held by The Company has to be notified promptly of the acquisition or sale of Company members of the Board of shares or financial instruments based on these by members of its Board of Management and the Supervisory Management and Supervisory Board and by certain persons closely related Board to or connected with them. This notification must take place for acquisition and sales transactions equal to or exceeding €5,000 in a single calendar year. Under Section 10 para. 1 of the German Securities Prospectus Act, Munich Re is obliged to publish information of this kind on its website without delay as well as in an annual document.
All other members of the Supervisory Board (Hartmann, Prof. Dr. Markl, Mayrhuber, Prof. Van Miert, Prof. Dr. v. Pierer, Dr. Sommer, Emmert, Dr. Janßen, Michl, Müller, Dr. Schimetschek, Võ) each received total remuneration of €81,000.00 (fixed remuneration of €45,000.00 and resultrelated remuneration of €36,000.00) 3.
In the coming years, we will adhere to our principle of “profit before growth” in primary insurance and reinsurance. In other words, we will strive for growth in profits, not in premium income, and notwithstanding our previous successes, we will continue to make every effort to improve our business portfolio and the efficiency of our processes. Furthermore, we intend to and will expand our business, but not at the expense of sustained profitability.
Macroeconomic parameters are likely to be less positive in the further course of the year, which has implications for insurance demand and for expected returns on investments.
The economy in the United Kingdom will probably slow down appreciably.
Insurance industry If global economic dynamics slow down in 2008 as projected, growth in the global insurance industry is likely to be only moderate as a whole.
Despite the continued upswing in Germany, the economy is expected to provide only weak impulses for property-casualty insurance in 2008, a situation aggravated by the current stage of the insurance cycle. Nevertheless, the concept of private provision should come more strongly to the fore in the medium to long term, not only in Germany but also in many other industrial nations, in particular since demographic trends are increasingly pushing state social security systems to their limits. Private health insurance is likely to benefit from this environment, but the political risks remain.
Rates were down moderately on average, but profitability remained adequate on the whole. We anticipate a tendency for the market to become more difficult. Particularly in an environment of increasing competition, it is in the interests of end-clients that primary insurers and reinsurers make sure that prices, terms and conditions remain risk-adequate.
Also relevant are regulatory risks, with supervisory regulations undergoing revision worldwide and requirements changing for reporting, capitalisation and even the fundamental assessment of individual types of business.
Markets continue to be subject to the risk that unexpectedly intense competition – whether from new or established providers – may have a negative influence on price levels. Keeping a clear focus on profitability before growth and on the efficiency of management systems will remain critical to success.
In life reinsurance, premium income is set to decline somewhat in 2008, since we are reducing several large-volume reinsurance treaties as planned. For the coming years, however, we anticipate that fundamental growth impulses will derive from the restructuring of European insurance supervision (Solvency II) and the continuing privatisation trend in old-age and disability provision in advanced markets. Other developments, such as the dynamic growth of the life insurance markets in Asia and eastern Europe, should also contribute to the expansion of our new business.
In past years, we have laid the foundations in property-casualty reinsurance for the sustained profitability of our business by consistently adhering to riskadequate prices, terms and conditions – even in phases with a fortuitously low incidence of major losses. This is the only way we can cope with potential peak burdens that can occur at any time. Consequently, the renewals at 1 January 2008 (which involved approximately two-thirds of our property-casualty treaty business, i.e. without facultative reinsurance) were satisfying overall.
The development of reinsurance terms of trade varied considerably, depending on the class of business and region concerned. The average price erosion in renewed business amounted to 2.8%. Altogether, the renewals at 1 January 2008 resulted in a 4% decline in premium income (to €8.1bn) out of a total premium volume from renewal business of around €8.5bn, also owing to the planned reduction of a major individual treaty relationship.
Following the substantial price increases for natural catastrophe risks in the US market in previous years, we suffered moderate reductions in price levels. The renewals of large property and liability treaties with our global clients proved very satisfying overall, with prices, terms and conditions remaining stable. Attractive agricultural business continued to show growth. By contrast, there were further price reductions in European industrial business, sections of aviation reinsurance, and German and French motor liability. We systematically refrained from writing business that did not meet our stringent requirements. Rates for the renewed portfolio were slightly lower overall, whilst profitability levels were still good.
For the forthcoming renewals on 1 April 2008 (Japan and Korea) and 1 July 2008 (parts of the US market, Australia and Latin America), we expect a similar development to that prevailing at the renewals at 1 January 2008.
If exchange rates develop steadily, our gross premiums in reinsurance should range between €21.5bn and €22.5bn. Without currency-related effects, we ex pect a more marked increase than in 2007. We estimate that positive de velopments in the growth markets will cushion the premium reductions associated with the shift from proportional to non-proportional forms of cover. In property-casualty reinsurance, we expect a combined ratio in the order of 98% of our net earned premiums based on a major-loss burden from natural catastrophes of 6.5% adjusted with regard to shifts in the portfolio. Over the market cycle, we reckon to achieve a combined ratio of 97% on average. Altogether, our assumption is a consolidated result in reinsurance of €2.7–2.9bn. This does not include ERGO’s special dividend, which will be elim inated at Group level.
Primary insurance We expect the growth variation in the segments to continue in the coming year, with a positive trend overall.
Asset management The investment environment in 2007 was characterised by volatile interest rates and rising share prices. Since last year’s mid-year peak in interest rates, yields on long-term fixed-interest securities have been declining. Particularly in the credit crisis, yields on government bonds benefited from having top credit ratings. Starting very flat, the yield curve became markedly steeper in the USA and the eurozone in the second half of the year.
Current yield levels have largely taken the economic slowdown into account. We assume that the yields on long-term bonds relevant for our bond portfolio will increase moderately by the end of 2008.
The US dollar has lost considerable ground in foreign exchange markets since 2006. We expect that it will strengthen in the course of the year and potentially increase in value in the medium term.
In 2007, we consistently pursued our strategy of reducing the historically evolved concentration of our investments in the financial services sector and will continue to actively diversify our investment risks in future, too.
Overall, our goal for the financial year 2008 is a return on risk-adjusted capital (RORAC) of at least 15%. On the basis of our capitalisation at the turn of the year 2007/2008, this is equivalent to a consolidated profit for the year in the range of €3.0–3.4bn and a return on equity of between 11.5% and 13%. These goals are ambitious yet achievable. Our shareholders will continue to participate in Munich Re’s success. After the share buy-back programme already concluded in January 2008, we plan to repurchase shares for at least a further €3bn by the end of 2010. Reducing the number of shares issued and improving our profit, we aim to boost our earnings per share by an average of 10% an nually to €18 by 2010, proceeding from a normalised basis defined in May 2007. With the envisaged consolidated result for 2008, we are well on track to achieve this goal. In addition, in 2009, we intend to pay our shareholders a dividend of at least 25% of the IFRS consolidated result for the financial year 2008, but at least €1bn. The dividend per share in 2009 will at least equal this year’s amount of €5.50. We thereby intend to permanently strengthen the confidence in Munich Re shares and send out a clear signal that we are adhering to our disciplined, profit-oriented corporate approach.
The selective acceptance of risks by our primary insurers and reinsurers is at the core of our business model.
Compliance of our risk early-warning system with legal requirements is regularly examined independently, both by internal audit units of the individual Group companies and by the external auditor as part of the annual audits. Whilst we are in a position to adequately assess risk situations, the growing complexity and dynamism of the environment in which we operate means that there are, naturally, limits.
– protect the reputation of the Munich Re Group; – ensure the highest degree of confidence in meeting policyholders’ claims; and – enable Munich Re to protect and sustainably generate shareholder value.
In the Munich Re Group, Integrated Risk Management is centrally responsible for preparing Board decisions relating to risk management and for identifying, evaluating, steering, monitoring and communicating risks on the asset and liability sides. It is supported in this role by the decentralised risk management units. The Group Chief Risk Officer is a permanent member of the Board of Management’s Group Committee and Strategy Committee, and takes part in all meetings of the Board of Management Committees that deal with risk issues. He is also represented on the ERGO Risk Management Committee, and the CROs of Munich Re America, ERGO and MEAG have a dotted-line relationship to the Group CRO. The main responsibility of Integrated Risk Management is to set standards and develop methods and tools as a basis for consistent Group-wide risk manage ment. The decentralised risk management units throughout the Group operationalise these in a manner suitable to their business needs and take account of legal requirements when necessary.
We manage business portfolios by assigning return expectations, derived from the size of the risks assumed, to individual activities. Our internal risk model, the Munich Re Capital Model, plays a central role here. We use it to analyse how certain risk scenarios affect the results of the segments life and health, property-casualty and the investments of the reinsurance and primary insurance groups. This framework allows us to take an objective view of the risks, tailored to the long-term nature of that business.
We determine our required economic capital using a robust market-consistent economic capital model, the Munich Re Capital Model. It is calibrated to enable us to absorb two successive annual losses of a size only to be expected every 100 years, thus ensuring that we meet our obligations. The model is built using a series of modules for each of our business segments. For example, for our scenarios of natural hazards worldwide, we utilise the expertise of our geoscience teams, who together with our Corporate Underwriting unit draw on internal and external information to develop models for representing our global exposures to hurricanes, winter storms, typhoons, earthquakes, flood and other natural perils. The modules are aggregated using a conservative measure of the dependence of the risks in the portfolio. We limit our exposure to the risks evaluated using budgets that we assign to the individual scenarios. We also apply a series of stress tests to check the resilience of the implied “economic capital buffer” (i.e. excess of available financial resources over required risk capital). In the next step, the required risk capital is allocated to the individual divisional units on a proportional basis in line with the volatility of their business activities.
In the primary insurance group, the procedure is substantially influenced by other aspects, such as supervisory restrictions and policyholders’ participation in surplus. At the present time, for our primary insurance operations, required risk capital is therefore determined at a legal-entity level, taking these features into account and in accordance with our integrated risk management requirements. In reinsurance, where the majority of our business is written through Munich Reinsurance Company or one of its branches, we evaluate risk capital requirements at reinsurance-segment level. In this way, we evaluate the Munich Re Group’s risk capital with regard to the fungibility of risk and capital.
We are constantly refining the tools with which we monitor and manage risks. Our suite of tools for measuring risks is tailored to the business or operational segment we are monitoring. In each case, the lead risk measure is an economic risk measure designed to best reflect the risk in our portfolio. We also regularly compare these economic risk measures with both regulatory and rating-agency measures as part of our active capital management process. These comparisons are performed at many levels, including segment, legal entity, risk type, geographical and line of business. We also regularly perform outside-in benchmarking of our capital model results and participate in industry surveys to constantly challenge and continuously refine our risk measurement tools. We have recently gained valuable information from a comparison with the results of the Quantitative Impact Study 3 (QIS 3) carried out as part of the work at EU level to create a new, harmonised insurance supervisory system in the European Union (Solvency II). In our view, differences in relation to our internal model are mostly due to deficits in the QIS 3 framework, which does not yet adequately reflect economic realities. By means of this range of quality assurance measures, we ensure that the economic risks in our port folio are faithfully represented. To improve supervision of risks, we distinguish between market, credit, liquidity, insurance and operational risks.
Whilst we are in a position to adequately assess the known risks in our portfolio, the growing complexity and dynamism of the environment in which we operate means that we must also remain vigilant with respect to the detection and representation of new or emerging risks. We follow a multidisciplinary approach in this regard, using the experience and expertise of geoscientists, biologists, specialist underwriters, lawyers, economists, sociologists and actuaries. Climate change represents one of the greatest risks of change for the insurance industry, but it also opens up many business opportunities. Applying the knowledge of this topic we have accumulated over decades, we exploit these opportunities – through new insurance products for innovative energy technologies, for example, or through our Kyoto Multi Risk Policy.
We adopt a holistic risk management approach, the main objective of which is to analyse and control the interdependencies between risks on the asset and liability sides, and between strategic and operational risks. This entails considering economic parameters as well as the requirements and expectations of clients, shareholders, supervisory authorities and rating agencies.
The match can of course never be perfect – we call the risk of divergence the “base risk”, which by nature can be considerable as regards the development of the loss reserves. But with virtual portfolios, we can model quite well the reaction of the provisions to fluctuations in the main capital market factors (such as interest rates, exchange rates, inflation rates, commodity prices and share-index levels). When we come to structure our real investment portfolio, the modelled virtual portfolio therefore forms a “neutral” basis for additional risk-return considerations. Building on this, the Munich Re Group exploits its expertise in international financial markets to deliver an appropriate return for the risk taken by deviating from the neutral position. Such market risk is taken in a way that is commensurate with the risk-bearing capacities of the Munich Re Group, the skills and expertise of our asset managers, and the strategic level of tolerance for market risk set by the Board of Management. The asset managers may deviate from the neutral position within the limits defined by risk management. Compliance with these limits is constantly monitored by risk measurement and reporting systems. If limits are exceeded, the asset holders and other Group units are informed so that countermeasures can be taken.
The investment process for the Group’s investments is governed by uniform rules based on virtual portfolios and limits. Each company manages its investments itself according to these uniform rules.
Furthermore, for individual reinsurance products involving explicit market risks, such as interest-rate or currency risks, asset-liability management principles are applied at micro (e.g. treaty) level when the products are being designed and priced. This is especially important for life business and long-tail property-casualty business, where long time horizons are involved. The companies entrusted with our asset management, in particular MEAG, are given mandates by the insurance and reinsurance companies in the Munich Re Group, based on uniform parameters specified by the Group Committee.
Market risks are measured and limited using a Value-at-Risk (VaR) approach for the asset-liability mismatch risk, which we define as a deviation – measured in terms of VaR – from the neutral position. The asset-liability mismatch risk is therefore nil when the investment is identical with this neutral position. In this hypothetical case, however, the base risk is still present. We also use the risk measure VaR in our strategic investment planning to model the optimal investment portfolio according to our risk preference. This asset-liability mismatch risk approach measures the possible adverse changes in economic surplus resulting from changes in assets and the valuation of liabilities.
Changes in value of derivative financial instruments are accounted for at market price and are fully recognised in the income statement on the respective balance sheet dates, whereas countervailing changes in the value of the hedged portfolios are often only reflected in equity in the balance sheet, and in isolated cases even have no impact on the financial statements at all. Therefore large fluctuations in their prices may impact our income materially, even though they have no or different effects on our economic value and performance.
The market value of our real estate, including buildings on land owned by third parties, amounted to €7.5bn at 31 December 2007. In the year under review, impairment losses and depreciation on the overall portfolio totalled €272m, depreciation accounting for the major share.
Our internal risk model also takes account of a wide range of specific drivers that impact on our credit exposure. Credit risk emanating from the insurance and investment sides of the balance sheet are considered. On the insurance side we model trade credit, surety and bonding, credit enhancement, and political risks. We also take into consideration credit risks associated with claims on our retrocessionaires after allowing for any collateralisation. On the investment side, credit risks are measured and limited using the Credit-Valueat -Risk (CVaR) approach with a standard “asset value“ model. The main input parameters are our investment volume, the migration matrix between different rating classes, discounting curves and recovery rates. The correlated rating class migrations and defaults of the respective bond issuers are modelled using a Monte Carlo simulation. Revaluation of our investments under these rating scenarios ultimately leads to a future profit and loss distribution. Hence, we can then adequately capitalise for this risk and manage our portfolio with respect to its expected and unexpected loss.
In order to aggregate the credit risks emanating from the insurance and investment sides, we utilise an in-house counterparty exposure monitoring system. We restrict default risks by limiting our total exposure in respect of individual debtors. To ensure exposures across both the primary insurance and the reinsurance segment are taken into account, the Group Committee of the Board defines and monitors these limits. Moreover, we consider a whole range of individual attributes, including the issuer’s individual rating, its capitalisation as a basis for covering the liability, the quality of the collateralisation and of the respective issue, as well as the industry sector concerned.
This allows us to control the exposure on a single debtor and to steer towards a well-balanced credit risk portfolio. Furthermore, we are able to shift available capacities between the insurance and investment sides of the balance sheet. The credit crisis that emerged in 2007 from the US mortgage market also affected the Munich Re Group. It has made clear the value of effective credit risk management and endorsed our approach in this area. The economic impact on our investment portfolio is comparatively small, but developments have shown that there is still potential for improvement in our set-up, processes and model assumptions. A separate section is devoted to the credit crisis on page 153 f. of the risk report.
Munich Re’s investments were not affected by any significant defaults in 2007, although expenses resulted for the revaluation of our portfolio of credit derivatives.
Credit assessment is of central importance for the management of credit risks relating to fixed-interest securities. The main factor here is the quality of the issuer or the respective issue, which is primarily reflected – according to Munich Re Group’s investment principles – in the ratings of international rating agencies: 96.0% of our investments in fixed-interest securities at 31 December 2007 had a rating of A or better (according to Standard & Poor’s classification). The majority of fixed-interest securities in our portfolio have been issued by governments or banks with excellent ratings or top security, e.g. German government bonds, US Treasuries, or pfandbriefs.
The reinsurers and retrocessionaires participating in our external placements are approved by our Security Committee, a body comprising highly experienced staff from our operative and central divisions with in-depth knowledge of balance-sheet analysis, markets and lines of business, etc., which screens their creditworthiness regularly according to several criteria. One of the minimum criteria is a rating of A– or better from one of the major rating agencies, or equivalent such as collateralisation. Furthermore, concentrations of credit risks are avoided through a broad spread of our cessions.
As at 31 December 2007, our accounts receivable on ceded business were split between the following ratings (based on those of Standard & Poor’s): Ratings of accounts receivable €m
Without external rating 80.1 e_16_Lagebericht_139-156 147e_16_Lagebericht_139-156 147 07.03.2008 16:46:31 Uhr07.03.2008 16:46:31 Uhr
The interaction of risks of change and risk concentrations may lead to considerable loss potential. This not only involves regional concentrations but can also occur within a class of business or across several classes owing to events like natural catastrophes, pandemics or terrorist attacks. Our Integrated Risk Management Division is responsible for identifying, analysing, monitoring and coordinating cross-segment and cross-balance-sheet accumulations or concentrations. It works closely with the experts in each segment to advise the Board of Management and other units on the likely impacts of such accumulations on our Group-wide exposures.
Accumulation risks arising from natural catastrophes (nat cat) are modelled and monitored centrally by Corporate Underwriting, relying on geoscientific as well as on underwriting and risk-modelling expertise. In general, natural catastrophe scenarios are set up and monitored individually, once the Groupwide exposure – measured in terms of the 1-in-1,000-year probable maximum loss (PML) estimate – exceeds €500m. The exposure measurement processes can never be all-embracing, as we learned from Hurricane Katrina in 2005, where losses were significantly higher than we would have expected for a hurricane of comparable wind force.
In general, several external models and the respective internal model are run in parallel and differences in results are reviewed by geoscientists, senior underwriters and nat cat modelling experts from Corporate Underwriting in order to come up with the final model, which thus takes expertise from all relevant sources into account. Our models are always built to calculate the combined total of all expected losses in any one event, including secondary loss components like storm surge and/or altered economic parameters, such as demand surge.
In addition, exposures arising from other lines of business for which no stochastic models on nat cat have been developed so far (e.g. casualty and aviation) are assessed in close cooperation with the respective business units, using their expertise. The degree of robustness of these models and assessments influences the risk appetite per risk type. Thus, we have a greater preference for (well-quantifiable) natural catastrophe risks than for terrorism risks, which are extremely hard to model in terms of assumptions regarding intensity and frequency.
An example is the longevity risk, which plays an especially significant role in annuity insurance contracts. In primary insurance, the provisions for adverse deviation in our portfolio of annuity insurance policies have decreased in the past. If the longevity trend intensifies further compared with assumptions, additional amounts may have to be allocated to the provision for future policy benefits in the future, which would have a negative impact on the result. Lapse risks can be reduced in insurance and reinsurance by means of suitable product and contract design. We estimate the residual lapse risk by means of product-specific portfolio analyses and take this into account in our pricing.
The notes to the financial statements on page 235 ff. include a differentiated analysis of how the parameters determining the underwriting items of the balance sheet affect the risks in life insurance and reinsurance. This presentation is in compliance with IFRS 4 accounting requirements.
For our life reinsurance and primary life and health insurance business, our embedded value disclosure provides details of the sensitivities for the business in force and the new business written, e.g. in relation to changes in mortality/ morbidity, lapse rates, expenses, interest rates, and equity and property market value changes.
The most significant risk for reinsurance is the risk of future mortality being less favourable than that assumed in our valuation bases. For primary insurance, the most significant risk is that of a fall in interest rates for a prolonged period, although this risk has been substantially mitigated through the swaption transactions entered into by the ERGO life companies since 2005.
Operational risks Operational risks comprise the risks of losses as a result of inadequate pro cesses, technical failure, human error or external events. These include criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations or disagreements with business partners.
We minimise such risks through systematic application of specific risk management measures. It is our declared corporate aim, which we consistently pursue, to sensitise employees to possible risks and to establish an appropriate risk culture. This includes the willingness to learn from mistakes and to recognise and grasp these as opportunities for change and improvement.
To prevent infringements of regulations, Munich Re has appointed a Compliance Officer, who arranges for publication of the pertinent rules, draws up supplementary guidelines, and makes staff aware of the risks of violations. He ensures among other things that inside information is handled in conformity with the law. In addition, a Disclosure Committee headed by the Compliance Officer sees that disclosure requirements regarding price-sensitive information are complied with.
To prevent antitrust violations, staff are informed about the regulations and are expected to comply with them.
Legal risks may arise on the one hand from court decisions and legislation (changes in legal parameters) and on the other from legal disputes and arbitration proceedings in which we as an international insurance group are involved, especially in the area of claims settlement.
The following are examples of currently relevant legal risks: – In April of 2004, New York State Attorney General Eliot Spitzer started an investigation into the use of Placement or Market Service Agreements (PSAs) in the insurance industry. Several other US state regulators subsequently commenced similar probes into this matter, as have other regulators. We have received requests to provide information in connection with these investigations and are cooperating fully with the authorities. Entities of the Munich Re organisation, together with several other insurers and brokers, have been named defendants in several PSA-related class actions by US policyholders. Munich Re denies any wrongdoing and will defend itself vigorously.
– After the federal legislative procedure for the US Fairness in Asbestos Injury Resolution Act foundered in February 2006, several US states adopted le gislation initiatives (tort reform) which may have a positive effect on the settling of asbestos claims. Following revelations about questionable asbestos-related disease diagnoses and resultant lawsuits, various investigation committees are at work. Similar questionable practices that have come to light in silicosis lawsuits are also relevant for US asbestos claims. These developments indicate that the legal situation in the USA is moving in a positive direction for the insurance industry, since it will no longer be so easy to assert unjustified claims. However, it is too early to say whether and to what extent this will have implications for future loss development in the insurance industry.
On the insurance side, current indications are that the Munich Re Group is potentially exposed mainly via the liability classes D&O and professional indemnity (PI). Specifically, there is the prospect of liability arising out of alleged misconduct in the form of inadequate advice, mismanagement or negligence on the part of sales organisations, banks or other financial intermediaries. Even if courts ultimately do not award damages, any defence costs covered under insurance policies could be considerable. Since such lawsuits are typically very prolonged, it will take several years before there is final clarity regarding the extent of the losses. At the turn of the year 2007/2008, we had received (status: 31 December 2007) isolated provisional notifications from our liability reinsurance clients, which we have taken into account – also provisionally – through allocations to IBNR reserves.
Thus, for instance, the ongoing discussion about the reform of the social security systems in Germany harbours risks for the health insurers in the ERGO Insurance Group. We are therefore closely monitoring these developments by – among other means – being active at insurance-association level and making continual scenario calculations that simulate the effects of possible changes in basic parameters. We are also examining the implications of the most recent reforms for our product strategy in comprehensive and supplementary health insurance.
During the whole year under review, our available financial resources exceeded the risk-based capital requirements for the Group determined by our internal risk model. This was also illustrated by a series of stress tests applied to our economic measure of financial strength. The favourable result for the financial year 2007 further consolidated this position, giving us headroom to return at least €8bn to our shareholders from 2007 to the end of 2010 as part of our Changing Gear programme (see information on capital management, page 101).
More detail on our financial strength is provided in the “Financial position” section (see page 100).
Outlook As part of its Changing Gear programme, the Munich Re Group has identified a number of growth opportunities, which are being resolutely pursued. The Group’s risk management functions were involved in the development, assessment and prioritisation of these initiatives, and will continue to closely partner and critically analyse them in future. The risk management functions will also ensure that the resulting business fields are fully integrated into the existing risk management structures.
D. Ceded share of technical provisions (11) 5,626 6,593 – 967 –14.7
Thereof: Deferred tax assets relating to disposal groups (16) 3 16 –13 – 81.3
Thereof: Owner-occupied property held for sale (16) – 66 –66 –100.0 e_17_Abschluss_157-162.indd 158e_17_Abschluss_157-162.indd 158 07.03.2008 18:41:03 Uhr07.03.2008 18:41:03 Uhr
IV. Consolidated result attributable to Munich Re equity holders 3,854 3,425 429 12.5
III. Provision for outstanding claims (21) 44,564 47,076 – 2,512 – 5.3
Thereof: Deferred tax liabilities relating to disposal groups (16) 1 65 – 64 – 98.5
Consolidated financial statements Consolidated income statement 1 Adjusted pursuant to IAS 8.
Items Notes Prev. year1 Change €m €m €m €m €m %
Statement of recognised income and expense 1 Adjusted pursuant to IAS 8 2007 Prev. year1 €m €m
Actuarial gains and losses on defi ned benefi t plans 74 – 24
Thereof: Attributable to Munich Re equity holders 2,408 2,959 Attributable to minority interests 37 45
Changes in accordance with IAS 8 – 37 – 61 e_17_Abschluss_157-162.indd 161e_17_Abschluss_157-162.indd 161 07.03.2008 18:41:05 Uhr07.03.2008 18:41:05 Uhr
Consolidated financial statements Group statement of changes in equity 1 Adjusted pursuant to IAS 8.
Equity attributable to Munich Re equity holders Minority Total interests equity
Dividend – – – – – – – –707 –16 –723
Dividend – – – – – – – – 988 –14 –1,002
Retirement of own shares – – –1,500 1,500 – – – – – –
Change in deposits retained and accounts receivable and payable 4,491 1,967
Change from the acquisition, sale and maturities of other investments – 4,791 – 4,157
III. Cash fl ows from fi nancing activities – 911 – 2,496
Cash fl ows for the fi nancial year (I + II + III) 362 –106
Effect of exchange rate changes on cash – 29 – 59
Cash at the beginning of the fi nancial year 2,172 2,337
Cash at the end of the fi nancial year 2,505 2,172
I. Land and buildings, including buildings on third-party land 452 585 649 766
II. Investments in affi liated companies and associates 2,480 2,553 3,427 3,281
II. Provision for future policy benefi ts 14,668 16,706 748 738
Thereof: Provision for deferred premium refunds relating to disposal groups – – – –
Life and health Property-casualty 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1
Thereof: From insurance transactions with other segments 704 751 824 760 From insurance transactions with external third parties 6,595 6,914 13,400 13,791 1. Earned premiums 2. Investment result
Thereof: 4. Expenses for claims and benefi ts 5. Operating expenses 7. Result before impairment losses of goodwill 1,094 922 3,068 3,486 8. Impairment losses of goodwill 3 – – –
Africa, Near and Middle East 684 750 40 77 – – 724 827 1 After elimination of intra-Group reinsurance across segments. Presentation of the figures in the management report differs from this (cf. note on page 70).
Assets (A) Intangible assets 182 (B) Investments 182 (C) Investments for the benefit of life insurance policyholders who bear the investment risk 185 (D) Ceded share of technical provisions 185 (E) Receivables 186 (F) Cash at bank, cheques and cash in hand 186 (G) Deferred acquisition costs 186 (H) Deferred tax assets 186 (I) Other assets 186
(6) Other securities held to maturity 197 (7) Other securities available for sale 198 (8) Other securities held for trading 199 (9) Deposits retained on assumed reinsurance 202 (10) Other investments 202 (11) Ceded share of technical provisions 202 (12) Other receivables 202 (13) Deferred acquisition costs 203 (14) Deferred tax 203 (15) Other assets 204 (16) Non-current assets and disposal groups held for sale 205 e_19_AnhangI_171-181.indd 172e_19_AnhangI_171-181.indd 172 07.03.2008 18:41:28 Uhr07.03.2008 18:41:28 Uhr
(18) Subordinated liabilities 210 (19) Unearned premiums 210 (20) Provision for future policy benefits 211 (21) Provision for outstanding claims 212 (22) Other technical provisions 215 (23) Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 216 (24) Other accrued liabilities 217 (25) Bonds and notes issued 220 (26) Deposits retained on ceded business 221 (27) Current tax liabilities 221 (28) Other liabilities 221
(30) Investment result 224 (31) Other income 225 (32) Net expenses for claims and benefits 226 (33) Operating expenses 227 (34) Other expenses 227 (35) Finance costs 227 (36) Taxes on income 228
Declaration of conformity with the In November and December 2007 respectively, the Board of Management and German Corporate Governance Code Supervisory Board of Munich Reinsurance Company and the corresponding in accordance with Section 161 of the Boards of ERGO Versicherungsgruppe AG published, in each case, an updated German Stock Companies Act declaration of conformity with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act and made this declaration permanently available to shareholders on the internet.
Figures for previous years In accordance with IAS 8, changes in recognition and measurement necessitated the retrospective adjustment of the consolidated balance sheet as at 31 December 2006 and the consolidated income statement for the financial year 2006. Details are given in the section “Changes in accounting policies”. Otherwise, the previous-year figures have been calculated on the same basis as the figures for the financial year 2007.
In accordance with IAS 27, the consolidated financial statements include Munich Reinsurance Company (the parent) and all the entities in which Munich Re owns, directly or indirectly, more than half of the voting power or over which it has the factual ability to exercise control (subsidiaries). This applies analogously to the special funds held by Munich Re and its subsidiaries. The only exceptions are subsidiaries and special funds determined as being not material for assessing the Group’s financial position; insurance and reinsurance companies are consolidated regardless of their size.
As at 29 October 2007, we acquired a 100% shareholding in MSP Underwriting Ltd. (MSP), London, for a price of €74.1m. This price includes all the incidental acquisition expenses and other charges, such as fees for consulting services taxes incurred, and a five-year earn-out agreement estimated at €10.2m. MSP Underwriting focuses on international property business. MSP Underwriting Ltd. owns both the Lloyd’s managing agency Beaufort Underwriting Agency Limited (Beaufort), which controls the business of Lloyd’s Syndicate 318. Via Beaufort, Munich Re gains access to 47.3% of Syndicate 318’s business from 1 January 2008; portions of Syndicate 318’s business have been reinsured with the Munich Re Group since 2002. In the financial year 2007, Syndicate 318 earned gross premiums of around €190m.
On 8 May 2007, Munich Reinsurance Company acquired a majority shareholding of 100% in the Bell & Clements Group. Bell & Clements, which operates primarily as an underwriting manager in the USA and the UK, had already written business for the Munich Re Group in the past – mainly property business with primary insurers. Apart from the underwriting manager Bell & Clements Ltd. (London), the Bell & Clements Group also comprises a small primary insurer, Bell & Clements International Insurance Company Ltd. in Bermuda. The purchase price of €49.4m includes a three-year earn-out agreement with the seller, estimated at €5.5m, as well as incidental acquisition expenses, other costs such as consulting services and taxes incurred.
The group’s income and expenses for the months May to December have been recognised in the consolidated income statement. Altogether, the Bell & Clements Group contributed a nearly break-even result to the 2007 consolidated result; for the whole year, its result totalled –€1.3m. The group earned commissions of €41.8m in the financial year, of which €25.4m is recognised in the 2007 consolidated financial statements.
As at 12 November 2007, we acquired 100% of the share capital of Allfinanz Ltd., Dublin, for a price of €48.7m. This price includes all the incidental acquisition expenses and other charges, such as fees for consulting services and taxes incurred. Allfinanz is a leading provider of web-based business processing and underwriting automation software for the life insurance industry. Allfinanz software can significantly improve the sales processes of life insurance companies, as it allows them to issue policies to most clients in one efficient, automated process.
The following figures for Allfinanz have been recognised in the consolidated balance sheet as at the time of acquisition: €2.2m other assets and €1.2m other liabilities. The figures were taken from Allfinanz’s interim balance sheet as at 30 June 2007 prepared in accordance with local accounting rules. No IFRS financial statements were prepared for reasons of materiality. The calculation of the disclosures stipulated under IFRS 3.67(f) was impracticable, requiring an unreasonable amount of extra work.
Disclosure of the IFRS result and the IFRS premium income in accordance with IFRS 3.70 (i.e. as if the acquisition had been effected at the beginning of the financial year) is impracticable, since the preparation of IFRS financial statements for the full reporting period would have involved an unreasonable amount of extra work. Therefore, from the viewpoint of materiality, we have dispensed with calculating the required IFRS.
In connection with the acquisition of the shareholding in Cairnstone, other intangible assets of €5.6m and goodwill of €12.0m have been recognised. The amounts capitalised are based mainly on the exploitation of additional future business potential and the use of the sales, marketing and insurance knowhow of the Munich Re Group.
The group’s income and expenses for the fourth quarter have been recognised in the consolidated income statement. All in all, Cairnstone contributed a break-even result to the 2007 consolidated profit.
Germany Other countries Total 31 Dec. fi nancial year 77 159 236 1 In addition, 63 German and 1 non-German investment funds were included in the consolidated group.
In the case of shareholdings amounting to between 20% and 50% of the voting power, the entities in question are deemed to be associates. Where we hold less than 20% of the voting power, entities are classified as associates nevertheless if there is existence of significant influence on our part, mainly as a result of representation on the board of directors or equivalent governing body of the investee in accordance with IAS 28.7 (a). Investments in associates are valued at equity unless they are not material for assessing the Group’s financial position.
Germany Other countries Total 31 Dec. fi nancial year 27 35 62
Recognition and measurement The annual financial statements of the consolidated subsidiaries and special funds are subject to uniform accounting policies. For the annual financial statements of significant associates we have, in accordance with IAS 28.27, made appropriate adjustments to conform the accounting policies to those of the Munich Re Group. Valuations used in the financial statements of associates not classified as significant are maintained. In the course of preparing the consolidated financial statements, we have to use our judgement in applying accounting policies and to make estimates and assumptions that affect the year-end items shown in the consolidated balance sheet, the consolidated income statements and the disclosures on contingent assets and liabilities. Details are provided in recognition and measurement methods for the individual items.
d) In connection with the conversion of the consolidation system, goodwill has been adjusted by €30m for 2005 and by –€3m for 2006.
The consolidated balance sheets for financial years 2005 and 2006 are affected by the adjustments pursuant to IAS 8 in the following manner: Consolidated balance sheet 31.12.2005 Changes due to adjustments 31.12.2005 as originally pursuant to IAS 8 in 2005 recognised €m a) b) c) d)
A. V. Minority interests in equity 453 – –5 1 – 449
A. IV. Consolidated result attributable to Munich Re equity holders 3,440 – –15 – – 3,425
A. V. Minority interests in equity 483 –4 –1 – – 478
C. IV. Other technical provisions 10,835 83 11 – – 10,929
The effects on the consolidated income statement for the financial year 2006 are as follows: Consolidated income statement 2006 Changes due 2006 as originally to adjustments recognised pursuant to IAS 8 in 2006 €m b)
The following items were dealt with via an adjustment of retained earnings in the financial year 2007, since retrospective application for prior periods did not appear appropriate on cost-benefit grounds: a) Following a change in the notification procedure for a quota share treaty, it was established that additional provisions of €39m had to be posted.
c) On account of the changeover from the corridor method to recognition of actuarial losses directly in equity, pension provisions had to be raised by €5m at one Group company.
e) Provisions for disability benefits were released, reducing the provision for future policy benefits by €3m.
E. II. Other receivables – – – – – –1 –1
G. Deferred tax liabilities – – – 2 4 – – 2
Disclosure of tax liabilities and tax refund claims under separate balance sheet items as from the financial year 2007 improves the transparency of the financial statements. In addition, the expenses for deposits retained on ceded business, which were previously included in the investment result, are now shown under expenses for claims and benefits.
In January 2008, the IASB published changes to IFRS 2, Share-based Payment – Vesting Conditions and Cancellations, to IFRS 3, Business Combinations, and to IAS 27, Consolidated and Separate Financial Statements. IFRS 2 provides clarification with regard to exercise conditions and the premature termination of plans. The new rules are compulsory for accounting periods beginning on or after 1 January 2009. The revision of IFRS 3 and IAS 27 concerns in particular the balance-sheet presentation if not all the shares in a company are acquired, and is compulsory as from July 2009.
It is not yet possible to conclusively assess the effects of the first-time application of the revised standards.
In accordance with IFRS 3, goodwill from the first-time consolidation of subsidiaries is tested for impairment at least once annually, i.e. the carrying amount of goodwill is compared with the recoverable amount and, if this recoverable amount is lower, a write-down is made for impairment equivalent to the amount of the difference.
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 intangible 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”.
Land and buildings shown under investments comprise property used by third parties and are carried at cost. Maintenance expenses are recognised as an expense. Structural measures equivalent to 5% or more of the historical cost of a building are generally assessed with regard to whether they have to be capitalised. Buildings are depreciated on a straight-line basis in accordance with the component approach over 40 to 55 years, depending on the weighted useful life for their specific building class. If the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recoverable amount. Impairment losses are recognised as investment expense in the consolidated income statement, and reversals of impairment losses as investment income. Land and buildings classified as “held for sale” are recognised at the lower of book value or fair value less sales costs.
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.
Fixed-interest or non-fixed-interest securities available for sale that are not held for trading or recognised under loans are accounted for at fair value. If there are no stock market prices available, fair values are based on recognised valuation methods in line with the present value principle. Unrealised gains or losses are calculated taking into account interest accrued and, after deduction of deferred taxes and the amounts apportionable to policyholders by the life and health insurers on realisation (provision for deferred premium refunds), are recognised directly in equity.
Securities held for trading comprise all fixed-interest and non-fixed-interest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences; in addition, they include all derivative financial instruments (derivatives) with positive fair values which we have acquired for hedging purposes but which do not meet the strict requirements of IAS 39 for hedge accounting. Securities held for trading are accounted for at fair value at the balance sheet date. If there are no stock market prices available, fair values (particularly with derivatives) are based on recognised valuation methods. The Munich Re Group uses a range of valuation models for this purpose, details of which may be obtained from the following table: e_20_AnhangII_Akt_182-192.indd 183e_20_AnhangII_Akt_182-192.indd 183 07.03.2008 18:41:48 Uhr07.03.2008 18:41:48 Uhr
Equity forwards Theoretical price Money-market interest rate Present-value method Share price Dividend yield
Swaptions Theoretical price At-the-money volatility matrix and skew Black 76 Swap curve Money-market interest-rate curve
Interest-rate swaps Theoretical price Swap curve Present-value method Money-market interest-rate curve
In the case of all fixed-interest securities held to maturity or available for sale, as well as all non-fixed-interest securities, impairments in value – in contrast to temporary diminutions – are recognised as an expense in the income statement. IAS 39.59 contains a list of factors providing substantial objective evidence of impairment of such financial assets. In addition, IAS 39.61 states that for equity investments, a significant or prolonged decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. These rules are given more concrete form by means of internal guidelines. For equities quoted on the stock exchange, we assume a significant decline in fair value if the market value at the review date is at least 20% below the average purchase price or has been lower than this amount for at least six months. In the case of fixed-interest securities and loans, the main basis for establishing evidence of impairment is the rating of the issue, the rating of the issuer or creditor, and the market assessment.
The share of technical provisions for business ceded by us is determined from the respective technical provisions in accordance with the terms of the reinsurance agreements, cf. the notes on equity and liabilities item C. Appropriate allowance is made for credit risk.
Deferred acquisition costs comprise commissions and other variable costs directly connected with acquisition or renewal of insurance contracts. In life business and long-term health primary insurance, acquisition costs are capitalised and amortised over the duration of the contracts, either proportionally to the premium income (FAS 60) or proportionally to the respective contracts’ expected gross profit margins calculated for the relevant year of the contract term (FAS 97, 120). The allocation of individual contracts to the FASs concerned is shown in the notes on equity and liabilities item C. In determining the amount of amortisation, we take into account an actuarial interest rate and changes resulting from the disposal of contracts from the portfolio. In property -casualty business and short-term health primary insurance, the deferred acquisition costs are amortised on a straight-line basis over the average term of the policies, from one to five years. Deferred acquisition costs are regularly tested for impairment using a liability adequacy test as per IFRS 4; cf. notes on equity and liabilities item C.
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.
Own shares held by Munich Re at the balance sheet date have been deducted directly from retained earnings.
Minority interests are accounted for as part of equity in the balance sheet. These are the shares of third parties in the equity of subsidiaries that are not wholly owned directly or indirectly by the parent. Direct minority interests in special funds are recognised under “other liabilities”. The portion of net income attributable to minority interests is shown in the consolidated result.
The provision for outstanding claims is for payment obligations arising from insurance contracts in primary insurance and reinsurance at the balance sheet date. Part of the provision is for known claims for which individually calculated provisions are posted. Another part is for expenses for claims whose occurrence are not yet known (e.g. because they have not been reported yet or have not yet manifested themselves). A third class of provisions covers claims which are known but whose extent has turned out to be greater than originally foreseen. All these provisions include expenses for internal and external loss adjustment expenses. 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 parameters). 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, which we discount. For determining the provision for outstanding claims, the Munich Re Group uses a range of actuarial pro jec tion methods, including the chain ladder and the Bornhuetter-Ferguson method. In applying the statistical methods, we regard large exposures separately. 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 for the balance sheet date. By deducting the payments already made, we arrive at the provision for outstanding claims recognised in balance sheet.
Other provisions are established in the amount of the probable requirement; such amounts are not discounted if the interest-rate effect is insignificant.
Munich Re’s presentation currency is the euro (€). The balance sheets of foreign subsidiaries whose national currency is not the euro are translated in accordance with the functional currency principle using the year-end exchange rates, and their income statements using quarterly average exchange rates. Any exchange differences arising in the process are recognised in equity (“other reserves”). Foreign-currency transactions are essentially translated into the Group companies’ respective national currencies in accordance with IAS 21. In the case of reinsurance, the principle of currency matching also applies. This means that Group companies which write a significant portion of their business in foreign currency generally safeguard themselves against exchange losses by attempting to match assets and liabilities in the same currency. Where exchange gains or losses occur nevertheless in the translation of foreign-currency transactions into the national currencies of the consolidated companies, they are accounted for under “other income” and “other expenses” respectively. The following table shows the exchange rates of the most important currencies for our business: Currency translation rates
Balance sheet Income statement e_20_AnhangII_Akt_182-192.indd 192e_20_AnhangII_Akt_182-192.indd 192 07.03.2008 18:41:50 Uhr07.03.2008 18:41:50 Uhr
– 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). 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 constant growth rates for the subsequent years.
The goodwill from the acquisition of Munich Re America (carrying amount of €944m) and from the acquisition of shares in the ERGO Insurance Group (carrying amount of €1,754m) was allocated to the cash generating units “reinsurance property-casualty segment” and “ERGO” respectively. The recoverable amount of these units was determined on the basis of the value in use. During the financial year 2007, the impairment test did not give rise to any need for write-downs of goodwill for these cash-generating units.
Gross carrying amount at 31 Dec. fi nancial year 3,157 3,240 e_21_Anhang_A_1_193-199.indd 193e_21_Anhang_A_1_193-199.indd 193 07.03.2008 18:42:01 Uhr07.03.2008 18:42:01 Uhr
Detailed cash fl ow planning on the basis of 3 years 3 years fi nancial plans/forecasts
Gross carrying amount at 31 Dec. previous year 903 1,099 383 2,385 2,238
Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year 550 537 243 1,330 1,202
Carrying amount at 31 Dec. previous year 353 562 140 1,055 1,036
Carrying amount at 31 Dec. fi nancial year 348 537 257 1,142 1,055
Gross carrying amount at 31 Dec. fi nancial year 1,017 1,113 586 2,716 2,385 e_21_Anhang_A_1_193-199.indd 194e_21_Anhang_A_1_193-199.indd 194 07.03.2008 18:42:02 Uhr07.03.2008 18:42:02 Uhr
Of the carrying amount of €3,753m at 31 December in the financial year, €78m (1,164m) concerns owner-occupied property classified as “held for sale”; cf. (16) Non-current assets and disposal groups held for sale.
Development of investments in land and buildings, including buildings on third-party land €m 2007 Prev. year
Accumulated depreciation and accumulated impairment losses at 31 Dec. previous year 891 1,220
Accumulated depreciation and accumulated impairment losses at 31 Dec. fi nancial year 645 891
Breakdown of investments in affi liated companies and associates €m 31.12.2007 Prev. year
The fair value of investments in associates valued at equity amounted to €1,277m (1,408m) at the balance sheet date. In the financial year, shares of losses of associates amounting to €0.3m (–) were not recognised in the balance sheet. Altogether, the losses not recognised in the balance sheet total €0.3m (–). An overview of the most important shareholdings is provided on page 249 f.
Over four years and up to fi ve years 1,798 2,089
The rating categories are based on those of the leading international rating agencies. The carrying amount of the loans represents the maximum credit exposure at the balance sheet date. Virtually no credit risk exists in respect of the mortgage loans or the loans and advance payments on insurance policies.
Over one year and up to two years 39 56 39 58
Over two years and up to three years 38 40 39 41
Over three years and up to four years 47 39 46 40
Over four years and up to fi ve years 7 48 7 48
Investment funds 1 Adjustment of previous year’s figures due to reclassification of mortgage-backed securities from “other” to “corporate debt securities”.
Carrying amounts Amortised cost €m 31.12.2007 Prev. year 31.12.2007 Prev. year
Over one year and up to two years 10,595 7,120 10,616 7,040
Over three years and up to four years 6,598 6,580 6,631 6,583
(836m), non-fixed-interest securities totalling €15m (13m), and derivatives held for trading amounting to €543m (494m).
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 2007, the open positions amounted to €291m (272m), i.e. less than 0.1% (0.1%) of the balance sheet total.
Periods to maturity in years <1 1– 2 2 – 3 3 – 4 4 – 5 >5 31.12.2007 Prev. year
Total of all risks e_22_Anhang_200-206.indd 200e_22_Anhang_200-206.indd 200 07.03.2008 18:42:13 Uhr07.03.2008 18:42:13 Uhr
Interest-rate risks in life insurance have been hedged using swaptions. These options to receive a fixed-interest rate are shown in the category “interest-rate risks/over-the-counter”. At the reporting date, the fair values of the swaptions totalled €72m (160m), and the underlying notional principal amounts €19,977m (16,933m). The investment result from derivatives includes a loss of €95m (297m) from fluctuations in value of these options.
Although the derivatives in the Munich Re Group essentially serve to hedge against risks, only an amount of €95m (–18m) meets the requirements of IAS 39 for hedge accounting.
The change in fair value of the hedging instrument assignable to the ineffective portion of the hedging is negligible.
At the balance sheet date, there is an equity item of – (€14m) from cash flow hedges. The net fair value of the derivatives falling into this category amounted to –€1m (€15m) at the balance sheet date.
Periods to maturity and amount of the hedged cash fl ows at the balance sheet date €m year years years years years years 31.12.2007 Prev. year
This item includes deposits with banks totalling €4,833m (3,060m). The carrying amount of these deposits represents the maximum credit exposure at the balance sheet date.
Status at 31 Dec. previous year 1,811 916 5,071 500 8,298 8,222
Status at 31 Dec. fi nancial year 1,749 887 5,219 533 8,388 8,298 1 After elimination of intra-Group transactions across segments.
Over fi ve years and up to ten years 141 18
Of the carrying amount of €2,238m for owner-occupied property at 31 December in the financial year, – (€66m) concerns owner-occupied property classified as “held for sale”; cf. (16) Non-current assets and disposal groups held for sale.
The fair value of the property at the balance sheet date amounted to €2,534m (2,790m). The expenditures recognised in the carrying amount for assets in the course of construction totalled €15m (7m) for property and €13m (11m) for plant and equipment at the balance sheet date. Commitments to acquire property totalled €24m (1m) at the balance sheet date and commitments to acquire plant and equipment €6m (10m).
In addition, part of the investment property first classified as “held for sale” in the first quarter of 2007 is still recognised in the consolidated balance sheet at the reporting date with a carrying amount of €6m. Here, too, we expect ownership to be transferred in the first half of 2008. Subsequent valuation of these assets at the reporting date did not give rise to any recognised income or expense either.
Besides this, we decided in the fourth quarter of 2007 to sell our stake in MPE Hotel I L.L.C, New York, which is an indirect owner of real estate in the USA. The shares are being offered to potential investors. This shareholding, which is valued at equity, and the portion of the provision for deferred premium refunds relating to it, have been classified in a disposal group as “held for sale”. Neither the first-time valuation of the disposal group at the time of classification nor its subsequent valuation at the balance sheet date gave rise to any recognised income or expense. We expect to sell the shareholding in the financial year 2008.
Thereof: Provision for deferred premium refunds relating to disposal groups –172 –169
On 7 November 2006, Munich Re’s Board of Management decided on a share buy-back programme, thus availing itself of the authorisation granted by the Annual General Meeting on 19 April 2006, in accordance with Section 71 para. 1 item 8 of the German Stock Companies Act. In the period from 8 November 2006 to 22 February 2007, 8,040,818 Munich Re shares were acquired via the stock exchange. The shares were then retired in a simplified process as at 17 April 2007, without reducing the share capital, by adjusting the proportion of the Company’s share capital represented by each of the remaining no-par-value shares. On 4 May 2007, Munich Re’s Board of Management decided on a further share buy-back programme, thus availing itself of the authorisation granted by the Annual General Meeting on 26 April 2007, in accordance with Section 71 para. 1 item 8 of the German Stock Companies Act. The share buy-back was restricted to a total purchase price (excluding incidental expenses) of €2bn. There was also the possibility, within the framework of the authorisation granted by the Annual General Meeting on 26 April 2007, to buy back shares using derivatives. In the period from 10 May 2007 to 31 December 2007, including the exercise of put options (= 366,666 shares), a total of 11,730,186 shares were acquired at an average price of €132.41. A portion of the repurchased shares (3,650,745) were then retired in a simplified process as at 26 June 2007. The share buy-back was successfully concluded on 23 January 2008. Altogether, 15,135,611 shares were acquired at an average price of €131.96.
For the employee share programme set up by Munich Reinsurance Company in 2007, 12,000 shares were acquired at an average price of €130.44, of which 11,776 shares were purchased by staff at an average price of €98.70 per share. 224 shares remain in the portfolio.
Acquisition of shares for retirement (share buy-back programme, including exercise of put options) 17,734,943 2,036,061
Acquisition of shares to safeguard stock appreciation rights under long-term incentive plans 56,935 355,559
For the employee share programme set up by Europäische Reiseversicherung AG in 2007, 555 shares were acquired at an average price of €138.13 and purchased by staff at an average price of €98.70 per share. No shares remain in the portfolio.
For the employee share programme set up by MEAG MUNICH ERGO AssetManagement GmbH in 2007, 2,009 shares were purchased at an average price of €134.84, which staff acquired at a price of €98.70 each. No shares remain in the portfolio.
In addition, one subsidiary holds 1,556,358 shares to safeguard stock ap preci ation rights granted to the Board of Management and top Munich Re executives since 1999. In 2007, a total of 150,000 shares were acquired for these programmes at an average price of €137.90 and 57,220 shares were sold at an average price of €129.92.
The acquisition costs of all Munich Re shares in the possession of Group companies at the end of the financial year totalled €1,265,321,102.67.
The “other reserves” include –€1,161m (–626m) from currency translation and – (€14m) resulting from valuation of cash flow hedges. In addition, “other reserves” contains unrealised gains and losses distributed between the different items as follows: Minority interests €m 31.12.2007 Prev. year1