Valuation reserves not recognised in balance sheet2 €bn 2.3 0.6 1.9 2.6 3.2
The Munich Re Group Quarterly figuresMulti-year overviewGlobal presence of the Munich Re Group
Dr. Hans-Jürgen Schinzler Chairman of the Supervisory Board 8 Munich Re Group Annual Report 2008
Focal points of the meetings In 2008, the Supervisory Board held four regular meetings and one preparaof the full Supervisory Board tory meeting. There was virtually full attendance on every occasion, only four members having to absent themselves, once in each case. Two representatives of the German Federal Financial Supervisory Authority (BaFin) took part as guests at one of the meetings and the associated preliminary meeting.
Investor relations activities Our corporate strategy geared to sustained increase in value is accompanied and shareholder service by ongoing and open communication with all capital market participants. In the course of 2008, for example, our investor relations unit organised more than 30 roadshows – primarily in the USA and Europe – to present current topics relating to Munich Re, our financial performance and the progress of our Changing Gear programme. Management also held over 150 individual meetings with investors and analysts at our offices. Additionally, as in previous years, Munich Re participated in investor conferences held by various investment banks.
Our strategy shows its strength In the past financial year, thanks to our good capitalisation, we were able to move ahead with our strategy in a difficult market environment, the crisis even improving the opportunities for realising our objectives in individual cases. While we are not fully satisfied with the result for the year in absolute figures, we are in a much better position than many of our competitors. Our risk-based business management and discipline in realising our objectives enabled us to achieve a comparatively good performance.
We are driving forward the various initiatives in our three fields of business consistently and with due rigour, continuing to put profitability before premium volume, because that is the only way of creating sustained value for our shareholders.
The expected value of the overall loss in the collective model is one of the cornerstones of actuarial mathematics.
“With primary insurance and reinsurance under one roof, we can compensate better for negative developments in individual segments.” Jörg Schneider
Global Earthquake Model – A new standard In the last decade, over half a million people died as a result of earthquakes and tsunamis, mainly in developing countries. So far there has been no model that depicts earthquake exposure globally and uniformly. This is now set to change. The Global Earthquake Model (GEM) includes regions which previous approaches virtually ignored or failed to observe in suffi cient detail. It thus sets new standards in regional coverage and also in overall quality. A public-private partnership launched by the Global Science Forum of the OECD as a fi ve-year initiative combines the know-how of hundreds of earthquake experts from all over the world. As a founding member and sole sponsor from the reinsurance industry, Munich Re contributes its extensive specialist knowledge, providing a fi nancial perspective, and ensuring practical relevance. In the fi rst phase of the project, fundamental data is being compiled and existing software platforms tested for their suitability. Parallel to this, new data is being collected. Together with the experience gathered in the fi rst project phase, this data will fl ow into a global and comprehensive risk model with which loss scenarios can be described and expected losses estimated. The GEM provides an independent standard for calculating the earthquake risk, introducing prevention measures and improving insurability, particularly in new markets. As GEM is designed as an open-source/open-access model, the data and results will be available for use by anyone interested – companies, scientists or private individuals. Munich Re Board member Torsten Jeworrek on the project’s object ives: “This model offers a realistic opportunity to promote risk awareness and enhance loss prevention. Overall, a positive effect can be expected in the medium term for the worldwide insurability of earthquake risk.”
Munich Re is one of the pioneers of climate research. As far back as 1974, we set up what later became the Geo Risks Research Centre of Competence, whose activities are now concentrated in the Corporate Climate Centre (CCC). Our experts from all the relevant disciplines, such as meteorology, hydrology, geophysics and geography, constantly analyse climate change risks.
Stability and security are in demand again Without doubt, Torsten Oletzky would have preferred an easier start. Scarcely had he taken over as head of ERGO than he had to steer the primary insurer through a massive fi nancial market crisis. But the Chairman of the Board remains focused on his objectives: driving forward the international expansion of primary insurance in the Munich Re Group and establishing ERGO in the top league of international insurers.
This management report summarises the activities of our Group according to the business fields of reinsurance, primary insurance and asset management rather than on the basis of the Group’s legal or corporate structure or individual companies. Such segmentation is determined by how we manage our business internally. International Health (health reinsurance worldwide and health primary insurance outside Germany), which is still only a “virtual” field of business, has not yet reached a size that would justify separate presentation; for health reinsurance and Sterling Life Insurance Company (Sterling), the business written is therefore booked in the reinsurance segment life and health, and for health primary insurance and German business it is booked in the primary insurance segment life and health.
The Germany, Asia Pacific and Africa Division conducts property-casualty business with our German clients and with cedants in Africa, Asia, Australia and the Pacific Islands.
Therefore, while we aim to keep our combined ratio as low as possible, it is not our only target.
Dr. rer. nat. Torsten Jeworrek (Chairman of the Reinsurance Committee) Reinsurance Development Corporate Underwriting Accounting, Controlling and Central Reserving for Reinsurance Information Technology Global Business Architecture Geo Risks Research/Corporate Climate Centre
Marketing As reinsurers, we write our business predominantly in direct collaboration with the primary insurers, but also via brokers. This includes business offered to us by industrial clients through their captives or risk retention groups (alternative markets business).
The international financial crisis had a significant impact on our investment result for 2008, however, this being the main reason we fell short of our original targets. But with our consistent and integrated risk management approach, our strictly risk-return-oriented corporate management and balanced investment portfolio, we have thus far weathered the crisis comparatively well.
Life With a gross premium volume of €5,284m, income in life reinsurance decreased by 11.2% compared with the previous year (€5,953m). This is pri marily linked to the reduction of several high-volume treaties and to currency translation effects. However, 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, the need for asset protection, and the dynamic expansion of the insurance markets in Asia and Eastern Europe. Our clients also use life reinsurance in particular as a capital substitute, which opens up additional attractive business opportunities for us, especially in the present financial crisis. On the other hand, the current global recessionary trends are likely to have a negative impact on our clients’ business.
1 Excluding health insurance conducted like life insurance. 2 Adjusted pursuant to IAS 8.
Our primary insurance subsidiaries Europäische Reiseversicherung and the Watkins Syndicate contributed –€3.5m (8.4m) and £31m (35m) to the result respectively.
Distribution of investments by type 46_Lagebericht_e 9846_Lagebericht_e 98 10.03.2009 11:26:26 Uhr10.03.2009 11:26:26 Uhr
Our portfolio of fixed-interest securities in the “available for sale” category is accounted for at fair value and takes into consideration the development of risk spreads as well as current interest-rate trends. Any resulting changes in value are generally recognised in equity with no effect on profit or loss. Nevertheless, as with equity instruments, these fixed-interest securities are subject ed to an impairment test at every (quarterly) balance sheet date. If there is objective evidence for an impairment, e.g. the issuer encountering substantial financial difficulties, this must be recognised as an expense in the income statement. In themselves, the downgrading of the issuer’s credit rating or an interest-rate-induced decline in market value are insufficient grounds for an impairment, but may (depending on their severity) be a trigger for a more indepth examination of whether the criteria are met.
In the 2008 financial year, we generated a result of –€562m (2m) from investments for the benefit of life insurance policyholders who bear the investment risk. We have posted this figure in the investment result under “other income/ expenses”.
Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 2,874 2,178 – – – – 2,874 2,178 46_Lagebericht_e 10246_Lagebericht_e 102 10.03.2009 11:26:26 Uhr10.03.2009 11:26:26 Uhr
Our balanced investment policy is reflected in our portfolio of fixed-interest securities and loans, which includes short-term items at market value: a good 47% is in government bonds or similarly secure instruments for which public institutions are liable, an area in which we invested more strongly in the year under review. Additionally, around 26% of our investments are in securities and debt instruments with top-quality collateralisation, mainly German pfandbriefs. Since the start of the year, we have also cautiously expanded our portfolio of credit-exposed fixed-interest securities, particularly asset-backed securities, mortgage-backed securities and corporate bonds. We took advantage of the considerable widening of risk spreads in comparison with government bonds to restructure our portfolio accordingly and earn higher interest income, thus building up our portfolio of corporate bonds selectively as the year progressed. These accounted for approximately 8% at the reporting date.
Munich Re Group 46_Lagebericht_e 10746_Lagebericht_e 107 10.03.2009 11:26:26 Uhr10.03.2009 11:26:26 Uhr
The bonds and notes issued by our Group are rated as follows: A. M. Best Fitch Moody’s S&P
The percentage of trainees in the Munich Re Group in 2008 was 4.92%. In add ition, three candidates commenced the Master of Science course we have integrated into our training programme.
The legal parameters for the appointment and dismissal of members of the Board of Management are specified in Sections 30–33 of the German Co- Determination Act and Sections 84 and 85 of the German Stock Companies Act. Munich Re’s Articles of Association do not deviate from this. The Supervisory Board appoints the members of the Board of Management and may dismiss them at any time for good cause. On initial appointment, members of the Board of Management are usually given contracts for a term of between three and five years. Extensions of up to five years are possible and – in exceptional cases – members of the Board of Management may also be appointed by a court of law.
Basic remuneration Remuneration in kind/fringe benefits (company car, healthcare, security measures, insurances)
20% Appreciation in share price 0 –150% (cap at 150% of share price increase)
This compensation component is based on different categories of objectives. The targets and scaling for Group, corporate and divisional objectives are geared to particular indicators; individual objectives form the basis for the achievement of personal targets. The key indicator used for the Group object ive is “return on risk-adjusted capital – RORAC”, which is comprised of key figures from external accounting, and from other key portfolio and performance data. Information on the definition of RORAC is provided on page 59. We use the performance measures embodied in value-based management for the corporate and divisional objectives.
In primary insurance, too, the crisis-related negative factors will be counterbalanced in the medium term by positive aspects, especially in life and health business. The general public’s need for care and provision is rising and has to be financed privately as the gaps in cover under state social security systems in the majority of European countries are becoming more and more apparent. Furthermore, we expect that life and annuity insurance, as traditional forms of old-age provision backed with solid guarantees, will recapture a larger share of our clients’ expenditure on private provision, particularly because trust in banking products generally offering only inadequate guarantees has suffered considerably from the financial crisis. This will give rise to major opportunities for our life, health and personal accident insurers in the medium to long term, provided state intervention does not distort competition. For property-casualty insurance, we project that – given normal economic parameters – premium income will rise, mainly owing to strong growth in our international business and selective expansion in German commercial and industrial business. However, here too there are strong reservations in view of the currently unassessable impact of the severe recession.
A range of growth opportunities also present themselves in the field of healthcare, where the Munich Re Group covers the whole value chain through its integration of insurance and reinsurance. Our services, ranging from risk assessment and risk management to healthcare support, involve much more than just the assumption of risks. With our expertise, we are thus closer to the markets and can devise viable and sustainable solutions tailored to the needs of our clients. In the second quarter of 2009, we plan to merge our International Health operations into an independent organisational unit at Munich Re, which will enable us to leverage the many synergies even better.
Reinsurance is currently one of the few possibilities for primary insurers to overcome shortages in capital. We are therefore firmly convinced that there will be a further increase in the significance of reinsurance, and particularly in the importance of individual reinsurers’ security. For the forthcoming renewals on 1 April 2009 (Japan and Korea) and 1 July 2009 (parts of the US market, Australia and Latin America), we expect a positive trend.
If there were a recovery on the stock markets, our remaining hedging derivatives would have a negative effect on the result, whereas increases in the market value of shares are only reflected in equity. Where hedge accounting is applied to equity portfolios, changes in the value of the hedging derivatives and the shares are recognised in the income statement, where they largely offset each other.
In our fixed-interest investments, we control the related credit risk by selecting issuers of suitable quality and observing counterparty limits. We set very high standards for issuers, which are also reflected in our Group-wide investment principles. Investments in structured products are additionally limited according to their risk profile.
Market risks are established using a scenario-based simulation calculation. The risk category “market risks” can be broken down further into the subcategories “equity risks“, “interest-rate risks”, “property risks” and “currency risks”. The specific spread risk is included in the interest-rate risks.
Consolidated financial statements Consolidated balance sheet 1 Adjusted pursuant to IAS 8. For details, please see notes on recognition and measurement.
II. Investments in affi liated companies and associates (4) 1,198 1,168 30 2.6 1,303
Thereof: Deferred tax liabilities relating to disposal groups (16) – 1 –1 –100.0 65 60_Abschluss_e 17560_Abschluss_e 175 10.03.2009 11:25:00 Uhr10.03.2009 11:25:00 Uhr
Dividend – – – – – – – –1,124 –57 –1,181
Other information (40) Parent 267 (41) Related parties 267 (42) Personnel expenses 267 (43) Long-term incentive plans 267 (44) Remuneration report 270 (45) Employee share-ownership programmes 270 (46) Number of staff 271 (47) Auditor’s fees 271 (48) Contingent liabilities, other financial commitments 272
No other amended IFRSs needed to be observed in the financial year 2008. There was no significant impact on the Munich Re Group’s financial statements from the mandatory first-time application of the interpretations IFRIC 11, IFRS 2, Group and Treasury Share Transactions, and IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.
D. Ceded share of technical provisions 5,626 –8 5 – 5,623
Consolidated income statement 2007 Changes due to 2007 as originally adjustments pursuant recognised to IAS 8 2007 €m a) b)
G. Deferred tax liabilities –3 1 – –2 70_Konzernanhang_e 19870_Konzernanhang_e 198 13.03.2009 13:26:42 Uhr13.03.2009 13:26:42 Uhr
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 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, and the positive fair values of the derivative components of variable annuities. We also show here structured securities classified as recognised at fair value with impact on profit or loss. Such classification can only be made at the time of acquisition; a reclassification to this category in later periods is not possible.
We determine acquisition cost on the basis of the average purchase price. In the case of an impairment, a write-down is made to the fair value at the balance sheet date, i.e. generally the publicly quoted market price. If there is a further fall in the fair value of equity investments that have already been written down once, a further write-down recognised in the income statement is made again immediately, even if the impairment is only temporary. Impairments recognised in profit or loss may not be reversed through profit or loss.
The technical provisions are shown gross in our balance sheet, i.e. without deduction of the share apportionable to business ceded by us; cf. the explanatory remarks on assets item D. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements. Acquisition costs for insurance contracts are capitalised and amortised over the terms of the contracts, cf. notes on assets item G. We base the measurement of technical provisions on the standards FAS 60, FAS 97 and FAS 120. Credit insurance contracts are accounted for in accordance with the rules of IFRS 4.
We regard as “significant” within the meaning of IAS 36.134 amounts of 10% or more of the total Group goodwill. This concerns goodwill resulting from the acquisition of Munich Re America (carrying amount: €992m) and from the acquisition of shares in the ERGO Insurance Group (carrying amount: €1,754m). For the impairment test, these amounts have been 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 2008, the impairment test did not give rise to any need for write-downs of goodwill for these cash-generating units.
Accumulated depreciation and accumulated impairment losses at 31 Dec. fi nancial year 748 645
Over one year and up to two years 37 39 38 39
Currency risks Traded on the stock exchange Fair values – – – – – – – – Notional principal amounts 2 – – – – – 2 –
In the case of fair value hedges, the change in the fair value of the hedging instrument and the change in the fair value of the hedged instrument are generally recognised in profit or loss under the items “investment income” and “investment expenses” in the income statement. With Munich Reinsurance Company’s hedged subordinated bond, this information is shown under finance costs. In the Munich Re Group, hedging relationships in the form of fair value hedges are used to selectively and efficiently reduce currency risks of parts of the portfolio and to mitigate interest-rate and other market-price risks. The main types of transaction employed for hedging are currency forwards and options. The fair value of the derivatives used for this amounted to €683m (96m) at the balance sheet date. In 2008, the following changes in value were recognised in the consolidated income statement: €1,906m for the hedging instruments and –€1,858m for the relevant underlyings.
As the other investments mainly have a period to maturity of less than one year, the fair values largely correspond to the carrying amounts.
Life and health Property-casualty Life and health Property-casualty €m1 2008 Prev. year 2008 Prev. year 2008 Prev. year 2008 Prev. year 2008 Prev. year
Munich Reinsurance Company, Munich, 6.75%, until 2013, thereafter fl oating, €3,000m,
Over ten years and up to fi fteen years 5.1 6.5 4.6 5.4
The provision for premium refunds based on national regulations relates only to German primary insurance business. Where the provision for premium refunds is posted, a retrospective approach is usually taken, based on super visory or individual contract regulations. For life insurance companies and pension funds subject to supervision by the German Federal Financial Supervisory Authority, the supervisory rules in accordance with the German 1 After elimination of intra-Group transactions across segments.
Investments in affi liated companies –6 –14 1 –56 –10 –3 – –11 –6 17 –21 –67
Prev. Prev. Prev. Prev. Prev. Prev. €m1 2008 year2 2008 year 2008 year 2008 year 2008 year 2008 year2
Amortisation of acquired insurance portfolios 6 5 – – 25 22 – – 31 27
Deferred tax resulting from the occurrence or reversal of temporary differences 294 –119
Effects of changes in tax rates on deferred tax 5 –464
(36) Risks from insurance contracts in the life and health segment
The biometric assumptions used for measuring insurance contracts in our portfolios are regularly reviewed on the basis of updated portfolio information. Especially in primary insurance, this includes considering countryspecific reviews by supervisory authorities. We also take account of market standards when checking the adequacy of biometric actuarial assumptions and the trend assumptions included in them. This may result in a change in the provision for adverse deviation allowed for in the actuarial assumptions. The amount of the technical provisions or the deferred acquisition costs is not directly affected as long as there is provision for adverse deviation. In the view of the actuaries responsible, the biometric actuarial assumptions used by us are deemed sufficient. However, in long-term health insurance, we are proceeding on the assumption that there will be further advances in medical treatment, potentially giving rise to higher costs. For this business, it is generally possible to modify the actuarial assumptions by means of a premium adjustment to reflect the changes.
Covered by deposits retained on assumed reinsurance 5,206 6,170 75_Erlaeut_ArtAus_e 25575_Erlaeut_ArtAus_e 255 10.03.2009 11:23:39 Uhr10.03.2009 11:23:39 Uhr
Provisions for asbestos and environmental claims 31.12.2008 Prev. year €m1 Gross Net Gross Net 75_Erlaeut_ArtAus_e 26275_Erlaeut_ArtAus_e 262 10.03.2009 11:23:39 Uhr10.03.2009 11:23:39 Uhr
To support Hypo Real Estate (HRE), the German federal government adopted a rescue package in 2008, backed by the Deutsche Bundesbank and also the German financial services industry. In this rescue package, the financial institutions were obliged to participate through a reguarantee in covering a possible claim on the federal government under the guarantee for the Bundesbank ’s liquidity support and the government-guaranteed bond; cf. (7) Other securities available for sale. Of the total amount of €8.5bn for this reguarantee, liability for €111m is apportionable to companies of the Munich Re Group.
Later than one year and not later than fi ve years 196 175
Munich, 13 March 2009 80_VerbundUnter_e 27880_VerbundUnter_e 278 10.03.2009 11:23:09 Uhr10.03.2009 11:23:09 Uhr
Delta The delta or delta factor is a measure of the change in the option price relative to a change in the value of an underlying asset by one unit. If, for example, an option has a delta of 2, the option price rises by 2% if the value of the underlying asset increases by 1%.
Obligatory reinsurance With this reinsurance, the primary insurer is obliged to cede all risks specified in the contract to the reinsurer within a certain scope. The reinsurer accepts these risks without assessing them on a case-by-case basis. Although obligatory reinsurance agreements contain agreed periods of notice, they are generally concluded for an unlimited duration. These treaties between insurers and reinsurers may therefore run for long periods (cf. facultative reinsurance).
International Health 3, 6, 9, 19, 34 ff., 49, 79, 148 Investments 9, 18, 23, 53 ff., 92, 97 ff., 144, 151 ff., 157 ff.
Service for investors and analysts If you have general questions on Munich Re shares, please use our shareholder hotline: Tel.: 0 18 02/22 62 10 (Note for callers from Germany: 6 cents per call from a German fixed network, with varying prices from German mobile phone networks) E-mail: shareholder@munichre.com