For many years, Munich Re has been awarded consistently excellent ratings by the leading rating agencies. despite the exceptional strains on results in the financial year 2011, the outlook for all Munich Re’s ratings remained stable at a high level.
Words of thanks to the Board of Management and employees the supervisory board wishes to thank all the members of the board of Management and staff for their great personal commitment and excellent work in a financial year that was as eventful as it was challenging.
how we view corporate governance corporate governance stands for a form of responsible company management and control geared to long­term creation of value. one of our aims in this context is to foster the confidence of investors, clients, employees and the general public. also of great significance for us are efficient practices on the board of Management and supervisory board, good collaboration between these bodies and with the group’s staff, and open and transparent corporate communications.
as a result of its international organisation, Munich re has to consider corporate gov­ ernance rules in different national legal systems. clearly, we observe not only the respective national standards but also internationally recognised best practices. in germany, where Munich reinsurance company has its headquarters, corporate gov­ ernance rules are laid down above all in the german stock companies act and the german corporate governance code. the german insurance control act standardises specific requirements for the business organisation of insurance companies and the “fit and proper” criteria for their board members. it also provides particular rules for insur­ ance companies’ remuneration systems. these rules formed the basis for the regula­ tion on remuneration schemes in the insurance sector (versvergv) issued by the german federal finance Ministry.
their main responsibilities are as follows: Standing Committee the standing committee prepares supervisory board meetings insofar as no other committee is responsible for doing so. it decides on matters of company business requiring the supervisory board’s approval unless the full supervisory board or another committee is responsible. it makes amendments to the articles of association that only affect the wording, and decides on whether and when guests may attend supervisory board meetings. besides this, it prepares the annual declaration of conformity with the german corporate governance code, in accordance with section 161 of the german stock companies act, and the supervisory board’s report on the company’s corporate governance in the annual report. every year, it reviews the efficiency of the supervisory board’s work and submits appropriate proposals to the full supervisory board where necessary. it also approves loan transactions of the company with senior managers and supervisory board members or parties related to them, as well as company contracts with members of the supervisory board. Members of the standing committee are hans­Jürgen schinzler (chairman), herbert bach, hans peter claußen, Wolfgang Mayrhuber and bernd pischetsrieder.
Principles for Responsible Investment in 2006, munich re became the first german company to sign the un principles for responsible investment (pri). there is a link to the pri via the corporate responsibility portal on our website, where we also report on how we implement these principles for sustainable investment.
Variable remuneration the variable remuneration component is geared to the overall performance of the group and defined organisational units and to the personal performance of the individ­ ual members of the board of Management. its amount depends on the degree to which annually set objectives for annual and multi­year performance are met.
the variable remuneration for annual performance is reviewed and decided on by the full supervisory board and then paid out in the year after the one­year period under consideration. payment is effected on condition that 50% of the net payout amount is invested in Munich reinsurance company shares that must be held for at least a four­ year period.
Munich re group annual report 2011 full and pro­rata calculation of the variable remuneration for annual and multi­year performance the basis for the full and pro­rata calculation of the variable remuneration is the first year. only the full “eligible” months in this year are taken into account (pro rata tem­ poris). in the case of retirement, occupational disability, death or premature departure from the company for other reasons, the rules for the full and pro­rata calculation apply.
as of 2009, newly appointed members of the board hence become members of a defined contribution plan. for this plan, the company provides the board members with a pension contribution, which in 2009 was related to basic remuneration, for each calendar year (contribution year) during the term of their contract. the pension contri­ bution is paid over to an external pension insurer. this insurer’s guaranteed interest rate is 2.25%. the insurance benefits that result from the contribution payments to the external insurer constitute the company’s pension commitment to the board member. for board members newly appointed as from 1 January 2009, a uniform pension contri­ bution rate has been set; the annual basic remuneration is multiplied by this rate to arrive at the pension contribution payable.
benefit amount: // for a period of six months, previous monthly basic remuneration (only for board members appointed prior to 2006) // under the defined contribution plan for new members as from 2009: annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum
benefit amount: // for a period of six months, previous monthly basic remuneration (only for board members appointed prior to 2006) // under the defined contribution plan for new members as from 2009: annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum at the date the pension benefit is claimed
Remuneration of individual Board members as per DRS 17 (revised 2010) (in accordance with Section 285 sentence 1 item 9a sentences 5–8 of the German Commercial Code and Section 314 para. 1 item 6a sentences 5–8 of the German Commercial Code)
Munich reinsurance company and ergo’s holding company, ergo Versicherungsgruppe ag, are under unified control within the meaning of the german stock companies act. the relevant statutory regulations and a group directive govern the distribution of responsibilities and competences for key decisions between group management and ergo.
the germany, asia pacific and africa Division conducts property-casualty business with our clients in germany, africa, asia, australia and the pacific islands.
in international business, ergo has been pursuing its expansionary path in the growth region of asia. in January 2011, ergo launched a joint venture for selling life insurance products with a local partner in the chinese province of shandong. in Vietnam, ergo entered the market for the first time by acquiring a 25% stake in global insurance company, a property-casualty insurer. Because the primary insurance group is increasingly focusing its international business on other markets, ergo has sold its portuguese subsidiaries Victoria-seguros s.a. and Victoria-seguros de Vida s.a.
Reinhard Pasch Member since 22 april 2009 employee of ergo Versicherungsgruppe ag
Economic parameters the year 2011 was dominated by the worsening of the sovereign debt crisis in the eurozone, the debate about the creditworthiness of the usa, and the natural and nuclear disaster in Japan. growth in the global economy slowed, and great uncertainty prevailed on the capital markets. Fears of defaults on government bonds from the periphery of the eurozone and concerns about a recession in the usa and europe led to a worldwide slump on the stock markets in summer. there was a flight by investors to the perceived safe havens of german and us government bonds, whose yields remained low.
Munich re group annual report 2011 insurance industry the effects of the financial market turbulence on the development of global premium in insurance and reinsurance were comparatively moderate. in a number of mature markets, demand for insurance was curbed by the weakness of the economy, but a slight increase in prices sustained premium growth in property-casualty insurance. as in the previous year, global non-life premium income showed a moderate inflation-adjusted rise overall, bolstered by the again very dynamic increase in demand for insurance cover in many emerging countries. however, a clear fall-off in the growth of life insurance premiums was observable in some of these markets in 2011.
Key figures gross premiums written €m 9,602 7,901 6,796 share of gross premiums written in reinsurance % 36.2 33.5 31.2 pleasing technical result of €367m despite reserve strengthening in australia growth of 21.5% in premium
at 97.8% (96.8%), the combined ratio for 2011 was slightly up on the previous year. the figure for germany amounted to 93.1%, 3.3 percentage points more than in the previous year due to numerous weather events involving heavy rainfall and severe storms that increased claims expenditure in the third quarter of 2011. in addition to this, we increased the reserves in casualty business owing to major losses and for risk provision. in international business, the combined ratio was 105.0% (107.8%). even though the absolute level remains unsatisfactory, an improvement is beginning to emerge. in add ition to a better result in poland, which had been heavily burdened by natural catastrophe losses in the previous year, the amelioration is also attributable to our consolidation measures in other markets. in turkey, for instance, we have significantly reduced the share of unprofitable motor business in our portfolio, whilst introducing a more differentiated rating structure and selectively raising prices. nevertheless, the market environment in motor insurance in particular remains very difficult both in turkey and south Korea.
the cornerstones of the business field comprise Munich Re’s worldwide health re insurance business and the health primary insurers outside germany. in the usa, this in cludes Windsor, acquired as at 1 January 2011, and our specialised health insurer sterling. Both companies operate under the Windsor health group brand.
Carrying Valuation €m Amortised cost amounts Fair values reserves3 netherlands – – – –
Allocation of eurozone government bonds and government-guaranteed securities measured at fair value to levels of the fair value hierarchy1 €m Level 1 Level 2 Level 3 Total other securities available for sale 24,288 3,123 – 27,411 other securities at fair value through profit or loss 74 – – 74 1 presentation based on economic view and not fully comparable with ifRs figures.
Write-ups/write-downs –1,625 –403 –1,122 –2,847 –1,032 other income/expenses –902 –353 –236 –1,304 –628
Meag Munich eRgo assetManagement gmbh (Meag) is the asset manager of Munich Re. in addition to its asset management function for the group, Meag also offers its expertise to private and institutional clients. assets under management for institutional clients outside the group rose to €8.5bn (8.1bn). the amount managed by Meag in private-client business via investment funds totalled €1.9bn (2.1bn). the assets managed by picc asset Management company ltd. (paMc), shanghai, 81% of which belongs to picc people’s insurance company of china, and 19% to Meag, climbed to €39.8bn (30.0bn).
management report // Financial position munich re group annual report 2011 shareholdings exceeding 10% of the voting rights
ergo counts on feedback from clients and consumers to constantly improve its range of products. since march 2011, visitors to ergo’s “client workshop” have been able to rate letters or product documentation online before these are used for the first time. in addition, ergo has set up a customer advisory board comprising 25 clients from all ergo’s german companies who discuss services, processes and products with management from the customer perspective and suggest changes. the first meeting took place in october 2011. in summer 2011, ergo appointed a customer advocate, whom clients can contact to represent their interests towards the insurer in the event of misunderstandings or conflicts.
Staff by region 49.6% (50.0%) north america 56.8% (60.9%) rest of europe 1.1% (1.2%) latin america and middle east 0.1% (0.1%) north america 0.7% (0.7%) asia and australasia 5.1% (4.9%) asia and australasia 2.8% (2.3%) asia and australasia 9.3% (5.4%) africa, near and middle east 34.1% (33.1%) rest of europe 30.3% (30.1%) north america 9.4% (9.2%) rest of europe
We continued introducing our globally defined hr standards throughout munich health’s international organisation in 2011, extending our performance and talent management process to all our units in north america (including Windsor) and our units in the middle east.
management report // other success Factors munich re group annual report 2011 offers microinsurance (especially in india) to indemnify loss of livestock, for example, or damage to harvesting machinery. the challenges of demographic change in the usa are being addressed by munich health through involvement in the health insurance sector for seniors. in this special segment, our subsidiary Windsor offers managed care products that can make a contribution to curbing the rising healthcare costs in the usa.
continuous reconciliation of risk criteria and business interests uniform worldwide system for managing risks appropriate internal controls for accounting risks
application of group-wide reserving rules guarantees a substantially consistent procedure. in addition, internal audits are carried out group-wide to verify compliance with these rules and the appropriateness of the reserves.
management report // risK report munich re group annual report 2011
We use a cross-balance-sheet counterparty limit system valid throughout the group to monitor and control our group-wide credit risks. the limits for each counterparty (a group of companies or country) are based on its financial situation as determined by the results of our fundamental analyses, ratings and market data and the risk appetite defined by the Board of management. the utilisation of limits is calculated on the basis of credit-equivalent exposure (cee). investments in structured products and securities lending activities are monitored separately (completely so in the first case, and largely so in the second) and controlled using volume limits. the resultant credit risk is reduced by means of group-wide rules for collateral management, for example for otc derivatives and catastrophe bonds issued.
currency risk the currency risk increased in relation to the end of the previous year, though compared with other market risk categories, it continues to play a relatively minor role.
in both our insurance and reinsurance business, we review the underwriting prices calculated by our valuation and pricing systems to ensure that they take adequate account of the current interest-rate environment. reinsurance business activities exposed to significant economic risks are reviewed and exposure limited where appropriate.
the renewals at 1 april 2012 (Japan and Korea) and 1 July 2012 (parts of the us market, australia and latin america) will involve the renegotiation of treaties with a premium volume (last year) of around €2.9bn, with a greater proportion of natural catastrophe business than the renewals in January. We project further price increases here, particularly in loss-affected regions. For other property business and in the casualty classes, we are proceeding on the assumption that prices will stabilise with a trend towards slight increases. a further continuation of the low-interest-rate phase would particularly favour a positive price trend. in the current year, however, we do not anticipate any broad-based hardening of the market.
unrealised gains and losses on investments Gains (losses) recognised in equity 1,942 1,370 included in the income statement –1,192 –1,240 change resulting from valuation at equity Gains (losses) recognised in equity 5 –8 included in the income statement – –
total recognised income and expense – – change in shareholdings in subsidiaries – – change in consolidated group – – dividend – – share buy-backs – – Retirement of own shares – – Status at 31.12.2011 588 6,800
the amendments to IAS 32 (rev. 12/2011), Offsetting Financial Assets and Financial Liabilities and IFRS 7 (rev. 12/2011), Disclosures – Offsetting Financial Assets and Financial Liabilities, clarify some issues in relation to the admissibility of offsetting financial assets and financial liabilities. they also require additional disclos ures in the notes to the financial statements. these additional disclosures comprise gross and net amounts related to offsetting as well as amounts for existing rights to offset that do not
since 17 october 2011, the business of adelfa and the photovoltaic plant contributed €0.4m to the consolidated earnings. during this period, income and expenses balanced each other out. if the business combination had taken place on 1 January 2011, the con­ solidated earnings would have increased by €3.3m. the change in the consolidated result cannot be accurately calculated owing to lack of data at the beginning of the year.
Consolidation principles the annual financial statements of the consolidated subsidiaries and special purpose entities are subject to uniform accounting policies. the balance sheet date of the con­ solidated companies is generally 31 december. some of the special funds have other balance sheet dates. these funds are consolidated on the basis of interim accounts as at 31 december.
Repurchase agreements and securities lending under repurchase agreements we, as the lender, acquire securities with the obligation to sell them back to the borrower at a later date. as the risks and rewards from the securities remain with the borrower, they are not posted as such in our accounts but are shown as a receivable from the borrower under “other investments, deposits with banks“. interest income from these transactions is recognised in the investment result.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 the provision for future policy benefits in long­term underwriting business is posted for the actuarially calculated value of obligations arising from policyholders’ guaran­ teed entitlements. as well as life insurance, this concerns portions of health and personal accident insurance, insofar as the business is conducted like life insurance . measurement is usually based on the prospective method, by determining the differ­ ence between the present values of future benefits and future premiums. the actuarial assumptions used for their calculation include, in particular, assumptions relating to mortality, disablement and morbidity, as well as assumptions regarding interest­rate development, lapses and costs. these are estimated on a realistic basis at the time the insurance contracts are concluded and they include adequate provision for adverse deviation to make allowance for the risks of change, error and random fluctuations.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 in the case of contracts as per fas 120, the provision for future policy benefits com­ prises the net level premium reserve and liabilities for terminal dividends. the net level premium reserve is calculated from the present value of guaranteed policy benefits (including acquired bonuses but excluding claims adjustment expenses) less the present value of future net level premiums. the net level premium is the net premium less the portion of the premium envisaged for covering claims adjustment expenses. the actuarial assumptions are generally the same as those used for premium calcula­ tion. the provision for terminal dividends is built up proportionally with a fixed share of the expected gross profit margins. the same method is used for this as for determining the amortisation of the deferred acquisition costs.
Segment reporting in accordance with the “management approach”, the segmentation of our business operations is based on the way in which munich Re is managed internally.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 not all the investments we hold to cover our technical provisions and other liabilities are managed separately by field of business. this means that for our reinsurance companies which conduct life, health and property-casualty reinsurance, we have to divide up investment results and investment portfolios that cannot be directly allocated to a particular segment. in those cases where, as reinsurers, we post technical provisions with our clients to collateralise our obligations, the original amounts of the resulting deposits retained and associated interest income are naturally allocated precisely to the respective segment. this also applies to the portfolios and investment income from reinsurance covers for variable annuities. for all other portfolios and investment income, we undertake what is inevitably an imprecise division based on an allocation key.
Development of investments in land and buildings, including buildings on third-party land €m 2011 Prev. year gross carrying amount at 31 dec. previous year 5,142 4,949 accumulated depreciation and accumulated impairment losses at 31 dec. previous year 895 863 carrying amount at 31 dec. previous year 4,247 4,086 currency translation differences –4 78 additions
a list of all our shareholdings can be found in the section “list of shareholdings as at 31 december 2011 in accordance with section 313 para. 2 of the german commercial code”.
information on the criteria for allocation to the individual levels of the fair value hierarchy can be found in the notes to assets items under B – investments: determining fair values.
transfer to/out of level 3 –216 189 – 18 changes in the market value of derivatives – – – – Carrying amount at 31 Dec. financial year 214 194 16 18 gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year –14 –3 – –
Other securities at fair value through profit or loss Total Designated as at fair value Held for trading through profit or loss €m 31.12.2011 Prev. year 31.12.2011 Prev. year 31.12.2011 Prev. year carrying amount at 31 dec. previous year 17 12 – – 1,856 2,821 gains (losses) recognised in the income statement 222 2 – – 200 –39 gains (losses) recognised in equity – – – – 36 204 transfer to/out of level 3 –10 12 – – –99 –1,916 change in the market value of derivates – –2 – – – –2 Carrying amount at 31 Dec. financial year 8 17 – – 2,066 1,856 gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 8 – – 2 –2 –58
Carrying amounts €m 31.12.2011 Prev. year up to one year 10,578 10,112 over one year and up to two years 50 29 over two years and up to three years 233 33 over three years and up to four years 84 26 over four years and up to five years 28 211 over five years and up to ten years 88 116 over ten years 231 49
the excess of deferred tax liabilities over deferred tax assets amounts to €2,296m (3,100m). the reduction of €804m (396m) was recognised as follows: –€367m (23m) without impact on profit or loss and €1,184m (373m) in earnings. the remaining change is due to obtaining or losing control and to currency translation.
Owner- Operating occupied and office €m property equipment Other 2011 Prev. year gross carrying amount at 31 dec. previous year 3,353 948 54 4,355 4,495 accumulated depreciation and accumulated impairment losses at 31 dec. previous year 942 664 25 1,631 1,670 carrying amount at 31 dec. previous year 2,411 284 29 2,724 2,825 additions disposals impairment losses reversed 8 – – 8 2 depreciation and impairment losses depreciation 56 108 6 170 157
the “other reserves” include –€223m (–610m) from currency translation and €4m (–2m) resulting from valuation of cash flow hedges. in addition, “other reserves” contain unrealised gains and losses distributed between the different items as follows: Composition of the capital authorised for capital increases €m 31.12.2011 authorised capital increase 2009 (until 21 april 2014) 280 authorised capital increase 2011 (until 19 april 2016) 10 Total 290
Composition of equity €m 31.12.2011 Prev. year issued capital 588 588 capital reserve 6,800 6,800 Retained earnings 11,588 10,735 other reserves 3,384 2,238 consolidated result attributable to munich Reinsurance company equity holders 702 2,422 non-controlling interests 247 245 Total equity 23,309 23,028
Reinsurance Life Property-casualty €m1 31.12.2011 Prev. year 31.12.2011 Prev. year status at 31 dec. previous year 52 113 5,600 4,883 change in consolidated group – – – –
Change in the reimbursement rights for defined benefit plans €m 2011 Prev. year status at 31 dec. previous year 126 117 expected return 6 5 actuarial gains/losses –1 1 capital transfer 14 8 paid pension benefits –2 –2 other – –3 Status at 31 Dec. financial year 143 126
27 // deposits retained on ceded business deposits retained on ceded business are collateral for technical provisions covering business ceded to reinsurers and retrocessionaires, and do not trigger any cash flows. as a rule, the changes in deposits retained on ceded business derive from the changes in the relevant technical provisions covering ceded business. deposits retained on ceded business thus do not have a fixed maturity date, their release generally being dependent on run-off of the corresponding provisions.
Ceded share claims and benefits paid 298 188 560 1,056 change in technical provisions provision for future policy benefits –38 –69 – – provision for outstanding claims –9 81 261 –299 provision for premium refunds – – – –
other technical result –29 –26 –35 –7 Expenses for claims and benefits – Ceded share 222 174 786 750
Net claims and benefits paid 6,937 6,186 3,905 3,713 3,171 3,053 change in technical provisions provision for future policy benefits –647 1,061 1,068 1,026 2 47 other technical result 256 255 –5 –5 –18 30 Net expenses for claims and benefits 7,136 8,239 5,847 5,795 3,422 3,343
Deposits retained on assumed reinsurance, and other investments 1 – 4 3 229 114 Investments for the benefit of life insurance policyholders who bear the investment risk – – – – –263 271 Expenses for the management of investments, other expenses 9 5 1 – 453 464
Write-downs of investments €m 2011 Prev. year land and buildings, including buildings on third-party land 145 120 investments in affiliated companies 22 13 investments in associates 6 6 other securities available for sale 1,721 283 other securities held for trading 2,610 1,776 other investments 12 3
Investment expenses by segment (before deduction of income from technical interest)1
Munich Health Asset management Total €m 2011 Prev. year 2011 Prev. year 2011 Prev. year losses on the disposal of investments 78 33 – – 4,194 2,094 management expenses, interest charges and other expenses 11 6 –1 – 1,043 710
the notes to the financial statements deal in detail with the various risks from insurance contracts and describe uncertainties in measuring them. in accordance with the requirements of ifRs 4, the effects of a change in the assumptions underlying the measurement of insurance contracts and/or in the market environment are also quantified. for risks from financial instruments, ifRs 7 stipulates that the disclosures must comprise information on the maximum credit risk exposure, the remaining terms, the rating, and a sensitivity analysis regarding the market risk. this information is also relevant for assessing the risk.
for the business (including variable annuities) at the balance sheet date, this results in the future expected technical payment balance shown in the table according to duration bands. as only the technical payment flows are considered, inflows from investment income and investments that become free are not included in the quantifications. taking into account the inflows from investments, whose cash flows are largely aligned with those of the liabilities through our asset-liability management, items in the future expectations are positive throughout, so that the liquidity risk of these insurance contracts is minimised accordingly.
further information on the liquidity risk is provided in the risk report on page 127.
Market risk – Exchange rates our asset-liability management gears the currency structure of our assets to that of our liabilities. as a substantial portion of our non-euro liabilities is in us dollars, around 56% of the investments’ sensitivity to exchange rates shown above stems from the us dollar. the pound sterling and the canadian dollar contribute a further 26%. in this analysis, an increase of 10% in the exchange rate means that the foreign currency appreciates by 10% against the euro.
Breakdown of number of staff 31.12.2011 Prev. year primary insurance 31,311 30,887 munich health 3,927 3,899 asset management 753 759
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 52 // events after the balance sheet date the accident involving cruise ship costa concordia is likely to result in a claims burden for us in the mid double-digit million euro range. Besides costs for the vessel under hull insurance, further losses may arise due to liability claims from passengers, salvage of the wreck, and potential environmental liability claims. therefore, it is not possible at this stage to put a final figure on the exact loss amount for munich Re.
11 no significant influence because, under the articles of association, statutes or other agreement, all key decisions regarding the company’s financial and operating policy are subject to a quorum which cannot be obtained by the majority shareholder without the non-controlling shareholders.
Universal life // contracts in life primary insurance where the amount of the premiums or benefits is not guaranteed or fixed, and the policyholder can vary the premium payments within certain limits.