Pursuant to Article 16 of the Articles of Association, the Board of Management consists of at least two members; beyond this, the number of members is determined by the Supervisory Board. When appointing the Board of Management, the Supervisory Board pays due regard to diversity. In 2017, the Board of Management of Munich Reinsurance Company had nine members, two of whom were women.
In accordance with Section 5.4.1(2) of the German Corporate Governance Code, the Supervisory Board has set itself the following objectives concerning its composition and has defined requirements regarding the competencies of its members: − The main criteria for selecting future members of the Supervisory Board are the professional knowledge, personal abilities and experience (especially of an international nature), independence, commitment to sustained corporate profitability, and enterprise of the nominated persons.
Munich Re Group Annual Report 2017 15Corporate governance Corporate governance report www.munichre.com/en/compliance www.munichre.com/en/compliance
Reinsurance Development Corporate Underwriting Claims Accounting, Controlling and Central Reserving for Reinsurance Information Technology Geo Risks Research/Corporate Climate Centre (until 31 July 2017)
Marco Nörenberg Deputy Chairman Employee of ERGO Group AG Member since 22 April 2009, last re-elected 30 April 2014
Dr. iur. Maximilian Zimmerer Member of the Supervisory Board of Munich Reinsurance Company Member since 4 July 2017
Financial position 064 Analysis of our capital structure 064 Technical provisions 064 Restraints on disposal 064 Capital position 065 Information in accordance with Sections 315a(1) and 289a(1) of the German Commercial Code (HGB) and explanatory report of the Board of Management 065
Annual objectives, multi-year objectives, overall performance evaluation and investment in shares together formed a well-balanced and economic – i.e. strongly risk-based – incentive system, with great importance being attached to ensuring that the targets set for the members of the Board of Management did not have undesirable effects. During the one and three-year appraisal periods, no adjustments were made to the objectives and no guaranteed variable remuneration components were granted.
In evaluating the overall performance of the Board of Management as a whole and of its individual members, 1 The objectives were weighted individually according to the responsibilities of the individual Board members. 2 Further information on RORAC is provided on page 51. 3 Further information on economic earnings is provided on page 50.
Members of the Board of Management appointed for the first time after 1 January 2017 whose contracts are terminated by the Company without good cause have a contractual right to a severance payment. Such payments may not exceed the equivalent of two years’ total remuneration, and are limited to the remaining term of the Board member’s contract if this term is shorter. Total annual remuneration is calculated on the basis of basic annual remuneration and variable remuneration paid out for the prior full financial year before the contract was terminated; remuneration in kind, other fringe benefits and contributions to occupational retirement schemes are not taken into account. Payments received by a Board member during a period of notice and after termination of the appointment are offset against any severance payment. There will be no right to severance payments in the event of extraordinary termination of the Board member’s contract for good cause.
Munich Re Group Annual Report 2017 pension contributions made up to the date of leaving the Company – Section 2(5a) of the Company Pension Act. This entitlement is paid out as an annuity or a lump sum.
The level of the target overall direct remuneration for the individual members of the Board of Management is set by the full Supervisory Board, acting on recommendations from the Supervisory Board’s Personnel Committee (from 2018: the Remuneration Committee). Criteria for the appropriateness of remuneration are 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. Other criteria are the relevant comparative benchmarks for Board remuneration and the prevailing remuneration structure at Munich Reinsurance Company. The Supervisory Board takes account of the level of Board salaries in relation to the level of salaries paid to senior managers and to general staff members over a period of time, and also determines how senior managers and general staff (payscale and non-pay-scale employees) are to be classified for the purpose of this comparison. The consideration of what level of remuneration is appropriate also takes into account data from peer-group companies (including those in the DAX 30). The median remuneration of the DAX 30 companies is used as a reference for the overall remuneration amount of the Chairman of the Board of Management. New Board members are placed at a level which allows sufficient potential for development of the remuneration in the first three years.
Annual bonus/ Multi-year bonus/ Total amounts Name performance 1, 3 performance 2, 3 payable Set in for € € € Nikolaus von Bomhard4 (until 26 April 2017) 2017 2018 – – –
Basic remuneration 885,000 885,000 410,000 – Remuneration in kind/fringe benefits 36,179 37,801 29,940 – Total 921,179 922,801 439,940 – One-year variable remuneration
Board of Management and eight months as Chairman of the Board of Management. 3 Where shares held by Giuseppina Albo are still subject to minimum holding periods, these continue to apply despite her departure from the Company. 4 As regards the overall value of the shares in relation to basic remuneration, the basic remuneration that Markus Rieß received for his work at ERGO Group AG was also taken into consideration.
Share ownership of the members of the Board of Management Unlike previously, members of the Board of Management are no longer obliged to invest in Company shares under the new remuneration system. There are several reasons for this: The TSR used in the multi-year bonus reflects the performance of Munich Re’s shares, which ensures that the interests of the Board of Management are in line with those of our shareholders. From the Company’s point of view, the steadily increasing requirements under insider trading law regarding the purchase and sale of shares as well as the rising number of investigations – also in connection with share-based remuneration components – are compelling arguments against remuneration based on an obligation to purchase shares. The reputational damage that may ensue for a company is huge (even if the legal proceedings are terminated) and may also have a negative effect on shareholders.
Concluding remarks of the Supervisory Board In the Supervisory Board’s view, the remuneration system of the Board of Management applying with effect from 2018 is appropriate, sustainable and transparent. The remuneration paid is linked to the Company’s business strategy and results, and to the performance of Munich Re’s shares, taking into particular consideration the interests of both the Company and its shareholders. Besides this, the new remuneration system brings about the transparency requested by shareholders and their representatives with regard to the targets and achievement of objectives, and takes account of the criticism expressed about the previous remuneration system. The Supervisory Board therefore calls upon all shareholders to approve the new remuneration system.
Ann-Kristin Achleitner 2017 90,000 45,000 13,000 148,000 2016 90,000 33,750 11,000 134,750 Clement B. Booth 2017 90,000 – 6,000 96,000 2016 67,500 – 3,000 70,500 Frank Fassin 2017 90,000 – 5,000 95,000 35,000 – – 35,000
The framework for any business activity is our risk strategy, from which we derive various limitations and reporting thresholds. A key element is our economic capital resources, which we determine in accordance with the Solvency II supervisory regime. We observe a range of important additional conditions. They include national accounting regulations, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements.
Capital requirement mixture of accounting ratios and economic indicators. It relates the performance indicator customary in the capital markets (IFRS consolidated result) – which we adjust to eliminate the risk-free return after tax on additional available economic equity – to the necessary capital requirement.
Other securities at fair value through profit or loss 1,979 2,695 0 0 1,979 2,695
We write the majority of our business in non-euro currencies, with 38% of premium generated in Canadian dollars and 21% in US dollars. Exchange-rate fluctuations therefore have a significant impact on premium development. If exchange rates had remained unchanged, our premium income would have increased by 1.9%. Premium growth was mainly due to several large-volume treaties that were written in Australia, Asia and Canada. Demand for financially motivated reinsurance also remained high.
The investment result increased by €179m year on year, mainly due to an improved net balance of derivatives, in particular from equity derivatives.
Operating result €m –635 2,284 – Consolidated result €m –476 2,025 –
Premium income at Hartford Steam Boiler Group (HSB Group) amounted to €968m (993m). Here, we are expanding our product range of cover solutions for the Internet of Things (IoT), also by enhancing our know-how through specific acquisitions. American Modern posted premium income of €1,131m (1,215m).
In the specialty lines of business, the market environment continues to be characterised by intense competition.
In credit and bond reinsurance, premium income amounted to €634m – roughly the same level as in the previous year (€641m)1. The pressure on rates in traditional credit business was offset by profitable new business in specialty and niche segments.
Owing to the difficult market environment, premium income in direct industrial business, which we operate in our Corporate Insurance Partner unit, declined to €431m (529m). Our sales of innovative products and the selective expansion of our portfolio were unable to compensate for this effect. In the period under review, the result was impacted by losses from hurricanes.
The ERGO Group – which launched its comprehensive Strategy Programme in mid-2016 – is now more efficiently structured, is investing systematically in digitalisation, and is strengthening its international organisational structures. Following successful completion of its Strategy
At 82.0%, the combined ratio for property-casualty business was significantly better than last year’s (86.7%), and thus remained at a very good level.
Premiums showed year-on-year growth of 4.4% in supplementary health insurance and 2.2% in comprehensive health insurance, due in part to premium adjustments. Supplementary insurance not similar to life insurance grew substantially by 16.6%, partly owing to the good development of new business. Travel insurance, which we write in Germany and abroad, grew by 2.7%, also contributing to the overall rise in premium volume.
New business Life Germany 2017 Prev. year Change €m €m % Regular premiums 178 191 –6.6 Single premiums 429 511 –16.0
(reserve risk) and the risk of under-rating (premium risk). To achieve this, we use actuarial methods that are based on standard reserving procedures, but take into account the one-year time horizon. The calibration for these methodologies is based on our own historical loss and run-off data. Appropriate homogeneous segments of our property-casualty portfolio are used for the calculation of the reserve and premium risks. To aggregate the risk to whole-portfolio level, we apply correlations that take account of our own historical loss experience.
In addition, underwriting risks in life insurance in the ERGO field of business are strongly affected by the capital market environment, as they are dependent on the ability to earn the guaranteed interest rate.
In the reinsurance field of business, the market value of interest-sensitive investments as at 31 December was €66.6bn (74.6bn). Measured in terms of modified duration, the interest-rate sensitivity of those investments was 5.8 (5.8), while that of the liabilities was 4.2 (4.5). The change in the freely available financial resources in the event of a decrease in interest rates of one basis point would have been approximately €3.1m (2.5m). This means that the interest-rate sensitivity of the liabilities is largely hedged by investments.
Property risk The property risk rose slightly as a result of additions to our property portfolio and higher market values.
Operational risks are managed through our internal control system (ICS), which is an integrated system for managing operational risks that covers all risk dimensions and areas of the Group. It addresses Group management requirements, while complying with local regulations. Appropriate measures – up to and including larger projects – are used to correct identified weaknesses or mistakes.
Climate change represents one of the greatest long-term risks of change for the insurance industry. We expect climate change to lead to an increase in extreme weather events in the long term. Our risk-management competence built up over many years and our highly developed risk models allow us to better assess these risks of change and to develop new solutions for our primary insurance and reinsurance clients.
Premium volume written at 1 January 2018 increased by 19% to around €9.9bn. Thanks to our excellent client relationships and our sought-after expertise, we were able to tap into attractive business opportunities across all regions and classes of business. These involved the expansion of existing client relationships as well as new business, and included some very large transactions.
For 2018, we expect gross premiums written in life and health reinsurance to be in the region of €9.5–10.5bn. Owing to the termination of large-volume treaties and negative currency translation effects, the median is around €3.5bn below last year’s figure. The technical result plus the result from reinsurance treaties without sufficient risk transfer is expected to amount to at least €475m, significantly above the previous year’s figure. The result from reinsurance treaties without sufficient risk transfer is recognised under “other operating result” and thus forms part of the non-technical result.
Provided that major-loss experience is in line with expectations, our assumption for 2018 is that Munich Re will post a significantly increased technical result of €2.5–2.7bn.
Marine 2017 Prev. year Change % Gross premiums written €m 277 392 –29.3 Combined ratio % 73.1 111.5 Underwriting result before claims equalisation provision and similar provisions €m 73 –40 –
Year-on-year premium income remained almost constant. The combined technical result of these other classes of business deteriorated compared with the previous year, primarily due to higher major-loss expenditure.
In the 2017 financial year, Munich Reinsurance Company’s return on investment (including deposits retained on assumed reinsurance) totalled 3.9% (5.0%) on the basis of carrying amounts.
If, in a given financial year, loss ratios in individual classes of business are significantly in excess of the long-term average (which amounts to 15 years in most classes), the claims equalisation provision is reduced and the aboveaverage loss expenditure is largely offset. According to current calculations, it is expected that – given normal claims expenditure – higher amounts will have to be allocated to the claims equalisation provision in the 2018 financial year.
Notes to the consolidated balance sheet – Equity and liabilities 18 Fair value hierarchy of liabilities 142 19 Subordinated liabilities 144 20 Unearned premiums 144 21 Provision for future policy benefits 145 22 Provision for outstanding claims 145 23 Other technical provisions 148 24 Gross technical provisions for unit-linked life insurance 148 25 Other provisions 149 26 Bonds and notes issued 153 27 Deposits retained on ceded business 153 28 Other liabilities 153 29 Liabilities from financing activities 154
F. Cash at banks, cheques and cash in hand 3,625 3,353 272 8.1 G. Deferred acquisition costs (13) Gross 9,563 9,634 –71 –0.7 Ceded share –135 –95 –40 –42.0
III. Other reserves 5,183 6,628 –1,445 –21.8 IV. Consolidated result attributable to Munich Reinsurance Company equity holders 375 2,580 –2,205 –85.5 V. Non-controlling interests 186 269 –83 –30.8
The aim of the amendment to IAS 7 is to enable users of financial statements to better assess changes in liabilities from financing activities. This includes cash and non-cash transactions. To implement this requirement, a reconciliation of the development of these figures in the financial year is provided in the notes to the consolidated balance sheet – Equity and liabilities (29) Liabilities from financing activities.
IFRS 16 (01/2016), Leases, mainly involves a revision of the accounting rules for lessees. IFRS 16 introduces universal accounting rules, according to which leases must be reported on the lessee’s balance sheet. In future, lessees will be obliged to recognise the right of use of the underlying asset as a right-of-use asset in their balance sheets. The lessee must recognise a lease liability reflecting the obligation to pay leasing instalments. Accounting rules for the lessor remain largely unchanged.
In the case of loans, bank borrowing, liabilities from financial transactions, and bond and note liabilities not traded on an active market, we have decided on a case-bycase basis to which level of the fair value hierarchy to allocate the respective fair values.
Under retained earnings, we show the profits which consolidated companies have earned and retained since becoming part of Munich Re, and income and expenses resulting from changes in the consolidated group. In addition, the adjustment amount resulting from changes in accounting policies for earlier periods not included in the consolidated financial statements is recognised in the opening balance of the retained earnings for the earliest prior period reported. Retained earnings also include the effects from remeasurement of defined benefit plans. Own shares held by Group companies at the reporting date have been deducted directly from retained earnings.
Liabilities to be transferred together with disposal groups are recognised in this item; see Assets – J Assets held for sale.
Fire brigade tax and other expenses 17 12 13 13 28 23
Other Pricing method Parameters Pricing model Real estate Theoretical market price Interest-rate curve Present-value method or Market rents valuation Alternative direct investments Theoretical market price Interest-rate curve (among others) Present-value method or (e.g. infrastructure, forestry) Electricity price forecast and valuation inflation forecast Bank borrowing Theoretical market price Interest-rate curve Present-value method
The other investments allocated to Level 3 are mainly external fund units (in particular, private equity, real estate and funds that invest in a variety of assets that are subject to theoretical valuation) as well as relatively illiquid credit structures (especially commercial mortgage-backed securities and collateralised loan obligations). In the case of external fund units, market quotes are not available on a regular basis; rather, net asset values (NAVs) are provided by the asset managers. With regard to the latter, the quality of the
Gains (losses) recognised in the income statement –9 –5 0 2 Gains (losses) recognised in equity 13 3 0 –2
Transfer out of Level 3 –11 0 0 0 Changes in the fair value of derivatives 0 0 0 0 Carrying amount at 31 Dec. financial year 171 138 34 8 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year –10 –7 0 0
Reversed impairment losses with respect to associates and joint ventures amounted to €15m (39m). They are distributed between the following different Group segments: €14m (37m) is apportionable to propertycasualty reinsurance and €1m (2m) to ERGO Life and Health Germany.
Realised gains and losses €m 2017 Prev. year Gains on disposal 2,067 2,993
Disclosure of derivatives by balance sheet item €m 31.12.2017 Prev. year Qualifying for Fair value hedge accounting Balance sheet item No Investments, other securities, designated as at fair value through profit or loss 1,538 2,207Positive
Given that the vast majority of other receivables, i.e. a total of €10,497m (9,300m), have a period to maturity of less than one year, the fair values largely correspond to the carrying amounts.
Essentially the same actuarial assumptions have been used as in the previous year for measuring the provisions for future policy benefits for business in force. In the ERGO Life and Health Germany segment, there was an adjustment in 2017 to the assumptions regarding future lapses, expenses, and long-term interest-rate levels that are geared to the long-term regular return on investments. The provision for future policy benefits increased as a result of these adjustments.
Breakdown of other technical provisions €m 31.12.2017 Prev. year Provision for premium refunds based on national regulations 8,642 8,209 Provision for deferred premium refunds 9,709 10,155
For the financial year 2017, capital transfers of €81m (103m) to plan assets are expected.
Change in the reimbursement rights for defined benefit plans €m 2017 Prev. year Balance at 31 Dec. previous year 276 252 Changes in consolidated group 1 0 Interest income 5 5 Return excluding interest income –4 10 Contributions by the employer 20 18 Contributions by plan participants 0 0 Payments –7 –8 Transfer of assets –10 0 Other –1 0 Balance at 31 Dec. financial year 280 276
Pension obligations are measured using assumptions about future developments. The consolidated companies used the following actuarial assumptions (weighted-average values): Actuarial assumptions
Munich Re Group Annual Report 2017 29 Liabilities from financing activities
Provision for future policy benefits –12 –33 Provision for outstanding claims 646 –420 Provision for premium refunds –1 0
The result for land and buildings includes rental income of €427m (405m). The expenses for the management of investments include running costs and expenses for repair and maintenance of property totalling €79m (69m). We earned interest income of €1,929m (2,063m) on loans. Other securities available for sale produced regular income of €3,547m (3,755m), while derivatives generated €112m (114m). Interest expenses on non-derivative investments amounted to €12m (12m), administrative expenses to €380m (375m), and other expenses to €96m (86m).
Our companies based in Greece are subject to the capital controls introduced in 2015, and are required to go through the relevant approval processes when transferring assets.
Munich Re as lessee The operating leases mainly concern offices and business premises of the Group, IT infrastructure, and land. They include extension options as well as restrictions regarding the agreement of subleases. In the period under review, minimum lease payments of €91m (104m) and contingent lease payments of €10m (10m) were recognised as an expense.
Munich Re Trading LLC, Wilmington, Delaware 100.0000 Munich Re UK Services Limited, London 100.0000 Munich Re US Life Corporation, Minneapolis, Minnesota 100.0000 Munich Re Weather & Commodity Risk Holding Inc., Wilmington, Delaware 100.0000 Munich Reinsurance America Inc., Wilmington, Delaware 100.0000 Munich Reinsurance Company of Africa Ltd, Johannesburg 100.0000 Munich Reinsurance Company of Australasia Ltd, Sydney 100.0000 Munich Reinsurance Company of Canada, Toronto, Ontario 100.0000 MunichFinancialGroup GmbH, Munich 100.0000 Munichre New Zealand Service Ltd., Auckland 100.0000 N.M.U. (Holdings) Limited, Leeds 100.0000 New Reinsurance Company Ltd., Zurich 100.0000 nexible Versicherung AG, Nuremberg 100.0000 Nightingale Legal Services Ltd., Bristol 100.0000 NMU Group Limited, London 100.0000 Northern Marine Underwriters Limited, Leeds 100.0000 OIK Mediclin, Wiesbaden4 70.7073 Pan Estates LLC, Wilmington, Delaware 100.0000 Pegasos Holding GmbH, Munich 100.0000 Picus Silva Inc., Wilmington, Delaware 100.0000 Princeton Eagle West (Holding) Inc., Wilmington, Delaware 100.0000 Princeton Eagle West Insurance Company Ltd., Hamilton, Bermuda 100.0000 Private Aktiengesellschaft “Europäische Reiseversicherung”, Kiev 99.9999 Renaissance Hotel Realbesitz GmbH, Vienna 60.0000 Roanoke Group Inc., Schaumburg, Illinois 100.0000 Roanoke Insurance Group Inc., Schaumburg, Illinois 100.0000 Roanoke International Brokers Limited, London 100.0000 Scout Moor Group Limited, London 100.0000 Scout Moor Holdings (No.1) Limited, London 100.0000 Scout Moor Holdings (No.2) Limited, London 100.0000 Scout Moor Wind Farm (No.2) Limited, London 100.0000 Scout Moor Wind Farm Limited, London 100.0000 Silvanus Vermögensverwaltungsges. mbH, Munich3 100.0000 Solarpark Fusion 3 GmbH, Düsseldorf 100.0000 Solomon Associates Limited, Farnborough 100.0000 Sopockie Towarzystwo Ubezpieczeń Ergo Hestia Spółka Akcyjna, Sopot 100.0000 Sopockie Towarzystwo Ubezpieczeń na Życie Ergo Hestia Spółka Akcyjna, Sopot 100.0000 Specialty Insurance Services Corp., Amelia, Ohio 100.0000 SunEnergy & Partners S.r.l., Brixen 100.0000 Temple Insurance Company, Toronto, Ontario 100.0000 The Atlas Insurance Agency Inc., Amelia, Ohio 100.0000 The Boiler Inspection and Insurance Company of Canada, Toronto, Ontario 100.0000 The Hartford Steam Boiler Inspection and Insurance Company of Connecticut, Hartford, Connecticut 100.0000 The Hartford Steam Boiler Inspection and Insurance Company, Hartford, Connecticut 100.0000 The Midland Company, Cincinnati, Ohio 100.0000
Shareholdings exceeding 5% of the voting rights in large companies as defined in Section 271(1) of the German Commercial Code (HGB) Admiral Group Plc, Cardiff (equity: €115,924k; result for year: €171,275k) 10.2186 Extremus Versicherungs-Aktiengesellschaft, Cologne (equity: €64,740k; result for year: €300k) 16.0000 Saudi Enaya Cooperative Insurance Company, Jeddah (equity: €38,138k; result for year: –€6,096k) 15.0000 Wataniya Insurance Company, Jeddah (equity: €43,216k; result for year: €9,146k) 10.0000
− For selected Group entities, we carried out our own reserve calculations for certain segments based on our assessment of risk considerations. We determined a best estimate as well as an appropriate range based on statistical probabilities, and compared these with the Company’s calculations.
Estimation of the provision for outstanding claims is subject to uncertainty and judgement. Uncertainties in estimation arise in particular from the occurrence, amount and speed of settlement of large claims, longterm claims development (especially in third-party liability) and in relation to the estimation of special loss scenarios, such as provisions for asbestos and environmental claims. With major losses in particular – such as for the hurricane events – it can take a long time before all claims notifications are received from cedants. Where no adequate claims notifications are available, provisions for these major losses are estimated on the basis of internal analyses of market loss and the Company’s own losses on the basis of cover it has provided.
The Group’s deferred acquisition costs amount to €9,428m (net), and most of this refers to life and health business.