Munich Re Group Annual Report 2016 crucial point for the decision to integrate the Munich Health units into our two largest fields of business was due to the changing demand from our clients. They are increasingly less likely to ask for separate reinsurance and primary insurance solutions, and seek a cross-divisional and integrated approach to life and health business. At the same time, digitalisation and the associated potential offered by data analysis opens up new possibilities for both fields, and these can be better exploited by being combined under one roof.
The Personnel Committee held five meetings in the period under review. It essentially prepared the resolutions on matters involving the Board of Management already mentioned in the report on the work of the full Supervisory Board. It also dealt with seats held by members of the Board of Management on supervisory, advisory and similar boards, and with Group-wide succession planning, especially with respect to Board-level appointments.
− The Supervisory Board should have at least sixteen independent members within the meaning of Section 5.4.2 of the German Corporate Governance Code, including at least eight shareholder representatives. No members of the Supervisory Board should have any relevant conflicts of interest.
The Supervisory Board is of the opinion that its composition meets the defined criteria.
Clement B. Booth Member since 27 April 2016 Member of the Board of Directors of Hyperion Insurance Group, United Kingdom
In order to ensure proximity to our clients, we are represented in many markets with local subsidiaries and branches. We write the main portion of our business via our Canadian branch and our subsidiary in the USA. We service the European markets from our operations in Germany, the United Kingdom, Spain and Italy. At the same time, we have a strong local presence in Australia and South Africa, and in all important growth markets in Asia and Latin America. Asian business is centrally managed by a dedicated branch in Singapore, which underlines the strategic importance of this region for life reinsurance.
Life Munich American Reassurance Company, Atlanta, Georgia Munich Re, Tokyo Munich Re, Toronto Munich Re, Auckland Munich Holdings of Australasia Pty. Ltd., Sydney Munich Re, London
Via ERGO, we offer products in all the main classes of insurance: life insurance, German health insurance, and in nearly all lines of property-casualty insurance, as well as travel insurance and legal protection insurance. With these products – in combination with the provision of assistance, other services and individual consultancy – we cover the needs of private and corporate clients. ERGO serves over 35 million (mainly private) clients in over 30 countries, with the focus on Europe and Asia. Up-to-date information on ERGO can be found at www.ergo-group.com.
Germany, Asia Pacific and Africa Great Lakes, Sydney Calliden Insurance Ltd., Sydney Great Lakes, Auckland Munich Re, Auckland Munich Re, Beijing2
Remuneration system for the Board of Management The remuneration system for the Board of Management focuses strongly on long-term objectives, and thus creates a pronounced incentive for sustainable corporate development. It complies with
Personal objectives Personal objectives per Board member Special focal points such as – Pricing and cycle management – Client management – Innovation initiatives Overall performance evaluation 20% Overall performance of individual Assessment by Supervisory Board taking Board members and of the Board of into account Section 87 of the Stock Management as a whole Corporation Act (AktG) and the German Corporate Governance Code
1 The objectives are weighted individually according to the responsibilities of the individual Board members. 2 Further information on economic earnings is provided on page 46. 3 The business-field objective for Munich Health and for ERGO is an “individual contribution to corporate success” for the Board member responsible.
Defined contribution plan Pension Present contribution value of rate for target Entitlement entitlement Financial total direct as at as at Personnel Name year remuneration 31 December 31 December expenses thereof for Munich Reinsurance Company 25.50 10,365 –9 286,875 thereof for Munich Reinsurance Company 25.50 2,261 –9 79,953
Remuneration in kind/fringe benefits 115,717 115,717 115,717 7,430 39,677 39,677 39,677 801
The provisions in place since the financial year 2014 provide for fixed remuneration only. Each member of the Supervisory Board receives annual remuneration of €90,000. The Chairman of the Supervisory Board receives annual remuneration of €180,000, and the Deputy Chairman annual remuneration of €135,000.
Contrasting aspects have to be evaluated when selecting suitable target figures. On the one hand, target figures should be simple and easy to understand for investors, staff, and the public. On the other hand, the often complex economic realities should be reflected as closely as possible in order to emphasise added value as the Group’s overriding guiding principle.
Insurance-related investments €bn 9.6 9.2 4.3 Net technical provisions €bn 202.2 198.5 1.9 made a pleasing contribution of €2.0bn (2.9bn) to this result; as in previous years, major losses once again remained below the volume to be expected. The profit in life reinsurance totalled €459m (345m), and benefited in particular from positive reserving effects, mainly in the USA. As anticipated in the Strategy Programme announced in June 2016, the ERGO field of business posted a slight loss of €40m (loss of €227m). For the last time before being disbanded as at 1 February 2017, the Munich Health field of business contributed a gratifying profit of €137m (88m).
The increase in net unrealised gains on other securities available for sale is due primarily to lower interest rates.
Growth in the United Kingdom largely stemmed from longevity business. The technical result was significantly up on the previous year’s level, thanks to a number of special effects such as the departure of ERGO Previdenza from the consolidated group. The reinsurance business written with the former subsidiary has been accounted for in the result of the life reinsurance segment starting in the third quarter of 2016.
Aggregate losses from natural catastrophes increased again in 2016, and amounted to €929m (149m). This figure is equivalent to 5.5% (0.9%) of net earned premiums, and below the level to be expected. With a cost to Munich Re of €404m, strong forest fires in the Canadian province of Alberta in May 2016 were by far the biggest loss of the year. In November, an earthquake in New Zealand caused losses totalling around €251m. Matthew, the first Atlantic hurricane in almost ten years to reach category 5 status, i.e. the highest category, cost us €232m. A series of earthquakes on the Japanese island of Kyushu in April impacted the result with about €78m. Further extensive losses (€62m) resulted from the heavy flooding in Louisiana in August.
In Canada, we are represented by the Munich Reinsurance Company of Canada and Temple Insurance Company in the area of non-life business. At €311m (330m), premium volume decreased because a major treaty with a client was discontinued as expected.
In reinsurance, negative currency translation effects from Canadian and US dollars and the reduction of our share in a large treaty in North America resulted in a decrease in gross premium volume of 16.1% to €3.6bn (4.3bn). Primary insurance saw a slight increase of 5.0% to €1.4bn (1.3bn). In particular, our companies in Belgium and Spain increased their premium income. If exchange rates had remained the same, Munich Health’s gross premiums would have decreased year on year by 9.4%.
New business Life International 2016 Prev. year Change €m €m % Regular premiums 130 146 –10.7 Single premiums 526 877 –40.0
The powers of the members of the Board of Management are defined in Sections 71 and 76–94 of the Stock Corporation Act (AktG). The Board of Management has the following powers to issue and buy back shares: − The Annual General Meeting of 27 April 2016 authorised the Company, pursuant to Section 71 (1) no. 8 of the Stock Corporation Act, to buy back shares until 26 April 2021 up to a total amount of 10% of the share capital. The shares acquired, plus other own shares in the possession of the Company or attributable to the Company in accordance with Section 71a ff. of the Stock Corporation Act, may at no time amount to more than 10% of the share capital. In accordance with the provisions of the authorisation, the shares may be acquired in various ways. The Company may buy back shares amounting to a maximum of 5% of the share capital using derivatives. The Board of Management is authorised to use shares thus acquired for all legally permissible purposes, in particular those specified in the authorisation, whilst excluding subscription rights. Among other things, the Board of Management is empowered under Section 71 (1) no. 8 of the Stock Corporation Act to retire the shares without requiring further approval from the Annual General Meeting. By resolution of 16 March 2016, the Board of Management decided to utilise this authorisation to acquire own shares. Around 4.2 million shares had been acquired by 31 December 2016 at a purchase price of ca. €667m.
In the 2016 financial year, Munich Re sold ERGO Italia and other companies through ERGO International AG. We have reduced the sales prices by the cash held by the companies sold.
Internal risk reporting provides the Board of Management with regular information on the risk situation, as regards the individual risk categories and the entire Group alike. This ensures that negative trends are identified in sufficient time for countermeasures to be taken. The purpose of our external risk reporting is to provide clients, shareholders and the supervisory authorities with a clear overview of the Group’s risk situation.
Munich Re Group Annual Report 2016 interface for delivery of data to the Group or subgroup. Authorisation procedures regulate access to accounting systems. Group Audit regularly audits data management in the accounting systems to ensure that it is being performed in a proper and orderly manner.
The identification, management and control of risks arising out of the accounting process is indispensable for the production of reliable annual financial statements at both consolidated and individual-company level. It is essential for all items in the accounts to be correctly recorded and measured appropriately, and for the information provided in the notes and the management report to be complete and correct. Financial accounting and reporting are subject to carefully defined materiality thresholds to ensure that the cost of the internal controls performed is proportionate to the benefits derived. Significance, risk experience and compliance with legal provisions and internal regulations are taken into account in determining the thresholds. Risks significant for financial reporting from a Group perspective are integrated into the ICS in accordance with uniform criteria. The ICS risk map is checked annually by the risk carriers, and updated and amended as necessary. By means of an accounting manual and regular circulation of information on changes required, Munich Re ensures that uniform rules are applied throughout the Group for the treatment, measurement and disclosure of all items in the balance sheet, income statement and other components of the financial statements.
The accounting process is to a large degree dependent on IT systems, which are subject to ongoing controls aimed at protecting against unauthorised access and guaranteeing the effectiveness and stability of the information and communication processes. A central IT solution drawing on general ledgers largely standardised throughout the Group is used to produce the consolidated financial statements. It is based on harmonised basic data, uniform processes and posting rules, and a standard
Reinsurance ERGO Diversification 31.12.2016 Prev. year 31.12.2016 Prev. year 31.12.2016 Prev. year €m €m €m €m €m €m
In the reinsurance field of business, the fair value of interest-sensitive investments as at 31 December 2016 was €76.9bn (76.9bn). Measured in terms of modified duration, the interest-rate sensitivity of those investments was 5.9 (5.4), while that of the liabilities was 4.6 (4.8). The change in the freely available financial resources in the event of a decrease in interest rates of one basis point would be approximately €2.6m (–2.9m). This means that the interest-rate sensitivity of the liabilities is largely hedged by investments.
Munich Re determines credit risks using a portfolio model, which is calibrated over a longer period (at least one full credit cycle), and which takes account of both changes in fair value caused by rating migrations and debtor default. The credit risk arising out of investments (including deposits retained on assumed reinsurance, government bonds and credit default swaps – CDSs) and reinsurers’ shares in technical provisions is calculated by individual debtor. We use historical capital-market data to determine the associated migration and default probabilities. The correlation effects between debtors are derived from the sectors and countries in which they operate, and sector and country correlations are based on the inter dependencies between the relevant stock indices. We use our own historical company loss experience to calibrate the credit risk arising out of receivables. For life and health primary insurance business, we also take account of the share of the mitigating effect on the credit risk resulting from policyholders’ participation in profits. We also c apitalise the credit risk for highly rated government bonds. Information on the ratings of the fixed-interest securities and loans can be found in the notes to the consolidated financial statements on page 134 f.
New business avenues will open up for Munich Re if key macroeconomic parameters develop better than expected. Stronger economic growth in the USA or Germany and a more rapid economic recovery in the eurozone or in major emerging markets would have a positive impact on the demand for insurance cover, and trigger higher premium volume in most classes of insurance. Such a development – and a less expansive monetary policy – could also lead to a normalisation of the bond markets and thus to a gradual increase in yields. This would have a negative impact in the short term on our investment result, but would be favourable to our insurance business and bring higher returns in the long run. At the same time, the pressure on our cedants from the current low-interest-rate environment opens up new business opportunities for our reinsurance activities. And there are long-term opportunities for expansion in our primary insurance and reinsurance business. Demand for insurance cover is on the rise, fuelled by an increasing accumulation of values, a heightened need for security, and an expanding middle class around the world. Increasingly complex industrial risks and catch-up potential for natural hazards insurance also offer opportunities for future growth. We are well positioned to support our clients thanks to our competence in developing product solutions and analysing and preventing risks.
The Group’s investment result (excluding insurance- related investments) remained nearly constant at €7.6bn. Regular investment income declined, not least because of yield attrition. Gains on the disposal of government bonds, covered bonds and equities more than offset losses from hedging derivatives and impairment losses. Considering the situation in the capital markets, this investment result represents a relatively high annualised return of 3.2% in relation to the average fair value of the portfolio. We thus exceeded our originally anticipated return on investment of “around 3%”.
Total premium income in 2017 in the ERGO field of business should be in the range of €18–19bn, with gross premiums written of €17–17.5bn, and therefore at levels comparable to last year. We project a consolidated result for 2017 of €150–200m for the ERGO field of business, much better than the low 2016 result, which was mainly caused by expenditure on the Strategy Programme.
In life reinsurance, large-volume treaties have a significant impact on the premium development of our business. One of these treaties was renewed last year, but only at a reduced volume. Negative currency translation effects compounded this trend. The prolonged low-interest-rate phase and sluggish economies in many of our key markets had some impact on our clients’ business and curbed demand for reinsurance. By contrast, in Europe, Asia and the USA our new business again developed very positively. The conclusion of a number of large new treaties will not be fully reflected in premium income until 2017.
Investment result €m 2016 Prev. year Regular income 3,134 3,411 Write-ups and write-downs 94 –1,479 Realised gains/losses on the disposal of investments 1,022 672 Other income/expenses –343 –276
Assets A Intangible assets 108 B Investments 109 C Insurance-related investments 111 D Ceded share of technical provisions 111 E Receivables 111 F Cash at banks, cheques and cash in hand 112 G Deferred acquisition costs 112 H Deferred tax assets 112 I Other assets 112 J Assets held for sale 112
Ceded share –1,546 –1,910 364 19.1 2. Income from technical interest (30) 6,490 6,713 –223 –3.3 3. Expenses for claims and benefits (31) Gross –39,167 –39,756 588 1.5 Ceded share 669 1,025 –356 –34.7
Income and expense recognised directly in equity 0 0 –44 0 256 347 –7 0 –9 544
For assets allocated to Level 3, we use valuation techniques not based on inputs observable in the market. This is only permissible insofar as no observable market data is available. The inputs used reflect Munich Re’s assumptions regarding the factors which market players would consider in their pricing. We use the best available information for this, including internal company data. The financial instruments allocated to this level of the fair value hierarchy largely comprise land and buildings, real estate funds, funds that mainly invest in theoretically valued instruments, investments in private equity, certain credit structures, and investments in subsidiaries, associates and joint ventures measured at fair value. Insurance-linked derivatives are also allocated to Level 3.
Current tax receivables are accounted for in accordance with local tax regulations and other receivables at amortised cost. The impairment test of our receivables is performed in a two-stage process, firstly at the level of individual items, and then on the basis of groups of similar receivables. The impairment is thus recognised as an expense. If, in a subsequent period, the reasons for the impairment cease to apply, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the original amortised cost.
The technical provisions are shown as gross figures in the balance sheet, i.e. before deduction of the ceded share; see the explanatory remarks on Assets – D Ceded share of technical provisions. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements. Acquisition costs for insurance contracts are recognised and amortised over the terms of the contracts; see note Assets – G Deferred acquisition costs. The measurement of technical provisions is based on US GAAP FAS 60 (life primary insurance without performance-related participation in surplus, health primary insurance and the bulk of reinsurance treaties), FAS 97 (life primary insurance based on the universal life model, unit-linked life insurance and life reinsurance for assumed business based on FAS 97) and FAS 120 (life primary insurance with performance-related participation in surplus). Credit insurance contracts are accounted for in accordance with the rules of IFRS 4.
B. Investments I. Land and buildings, including buildings on third-party land 278 281 1,683 1,699 2,200 2,081 154 155 110 93 20 9 4,444 4,317 II. Investments in affiliated companies, associates and joint ventures 36 7 735 667 299 261 54 54 420 173 168 116 1,711 1,278 Thereof: Associates and joint ventures accounted for using the equity method 29 0 701 635 262 226 23 22 389 137 161 105 1,565 1,125
Prev. year €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value 0 0 145 145 Investments in associates and joint ventures measured at fair value 0 0 8 8 Other securities available for sale
Carrying amount at 31 Dec. financial year 482 496 Accumulated depreciation and accumulated impairment losses at 31 Dec. financial year –195 –148 Gross carrying amount at 31 Dec. financial year 676 645
On 31 December 2016, a total of 4,151,604 Munich Reinsurance Company shares with a calculated nominal value of around €15.2m were held by Group companies. This represents around 2.6% of the share capital.
The acquisition costs of all Munich Re shares in the possession of Group companies at the end of the financial year totalled €666,624,932.72.
A total of €1,329m was distributed to Munich Reinsurance Company’s equity holders for the financial year 2015 in the form of a dividend of €8.25 per dividend-bearing share.
Number of shares 2016 Prev. year Status at 31 Dec. previous year 162,782,591 168,515,007 Additions
To determine the portion of the measurement differences allocable to the provision for deferred premium refunds, rates of between 50% and 92.5% after tax were used.
Some plans funded through payment of insurance premiums have previously been treated as defined contribution plans in accordance with IAS 19. However, because of the liability remaining with the Company due to the low-interest-rate phase, these plans will in future be recognised as performance-based plans. These changes are shown as “other changes” in “Change in the present value of the defined benefit obligations”, “Change in the fair value of plan assets for defined benefit plans” and “Change in the provision for defined benefit plans”.
Funded status of defined benefit plans €m 31.12.2016 Prev. year Obligations funded through provisions
In the Munich Health segment, the income from technical interest for primary insurance business is based on the interest on other technical provisions at the relevant national risk-free interest rate and, where applicable, on the interest allocated to the provision for future policy benefits. In the case of long-term reinsurance treaties, the interest corresponds to the contractually agreed allocations of interest. For short-term reinsurance business, the income from technical interest is calculated on the basis of the risk-free interest on technical provisions at the relevant national interest rate.
Other technical result –104 –113 Gross expenses for claims and benefits –39,167 –39,756
Other technical result –170 –225 Net expenses for claims and benefits –38,498 –38,731
1 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly. Comparability with the years up to and including 2010 is thus limited.