© 2006 Münchener Rückversicherungs-Gesellschaft Central Division: Corporate Communications Königinstrasse 107 80802 München Germany
Consolidated financial statements and notes 136 Consolidated financial statements 138 Notes to the consolidated financial statements 152 Affiliated companies 208 Auditor’s report 211
All in all, I can say that I am pleased with the results achieved in the last two years. But I am not completely satisfied, let alone complacent. There is still too much to be done.
“Know-how and know-who – What matters is an excellent knowledge of the markets, the trust of our clients, outstanding professional skills, efficient capital management and a positive attitude to innovation.”
Stefan Heyd (until 31 December 2005) * 1945, lawyer, with Munich Re since 1975
“We need to have complete command of the risk value chain – from the assessment of risk via portfolio strategy and accumulation control to the protection of our balance sheet. This complexity is our greatest challenge and also our core competence.”
“We need employees whose skills and training not only keep pace with the risks as they develop but also anticipate them. It is the only way we can put our resources, in particular our capital, to optimal use.”
The Personnel Committee met four times in the year under review. It concerned itself with the Board of Management ’s remuneration, especially with the reorganisation of the compensation structure, with contract adjustments, and with the seats accepted by members of the Board of Management on external supervisory, advisory and similar boards. Besides this, it prepared the forthcoming appointments to the Board of Management and agreed on personal objectives with the Board of Management members.
Group portrait 126 years of experience in the professional handling of risk means knowing exactly where the opportunities for adding value exist.
Case 1_How to keep high risks insurable. Munich Re reacts to the increased exposures from hurricanes.
In addition, the care team supports patients in permanently altering their lifestyle, improving nutrition, doing more exercise, cutting out smoking and reducing stress, thus minimising risk factors.
The world may have got smaller but there are still differences between established and developing countries.
Of course the Munich Re Group and its investors stand to gain, and not only in reputation. daman, which the
Our involvement in daman demonstrates that management competence is key to our business success – both in primary insurance and in reinsurance. An integrated approach linking core competences and fields of business opens up new strategic and operational horizons: we are focusing on the business of risk and deploying our capacity effectively and flexibly, adapting it to each situation in order to maximise our share in the growth potential of the healthcare market.
Investor relations activities We attach great importance to open and intensive dialogue with investors and analysts. Participants in the international capital markets require quick and pertinent information for their investment decisions. Our investor relations team is a competent contact partner, always ready to meet their needs. Besides the analysts’ conference that takes place every year when our annual results are published, we staged an Investors’ Day for the first time last year, on 27 June, which serves as an example of our intensive communication with the capital market. In London, before an international audience, the Board of Management explained Munich Re’s risk management in detail.
You can order the two publications at www.munichre.com/mr-publications (order numbers 302-04451 and 302-04437).
Our combined ratio, a much-heeded performance indicator in non-life insurance, was satisfactory only in primary insurance. Calculated as the ratio of the sum of net expenses for claims and benefits plus net operating expenses to net earned premiums, it corresponds to the sum of the loss ratio and the expense ratio. Put simply, a combined ratio of 100% means that premium income was exactly sufficient to cover claims and costs. Net expenses for claims and benefits mainly include paid claims, change in claims provisions, and other underwriting expenses. Net operating expenses chiefly comprise commission plus personnel and non-personnel expenses for the acquisition and ongoing administration of insurance contracts. The combined ratio in reinsurance includes the health segment as well as property-casualty business. In 2005, net expenses for claims and benefits of €12,189m (11,063m) and net operating expenses of €4,229m (4,354m) compare with net earned premiums of €14,862m (15,583m). The reinsurance combined ratio thus amounts to 110.5% (98.9%), a very high figure largely due to the hurricane losses.
Dr. jur. Dr. h. c. Albrecht Schmidt Chairman of the Supervisory Board of Bayerische Hypo- und Vereinsbank ag (until 27 November 2005)
Supervisory Board2 Seats held on supervisory Membership of comparable bodies boards of other German of German and foreign business companies enterprises
Dr. jur. Hans-Jürgen Schinzler Deutsche Telekom ag – Chairman metro ag
Prof. Karel Van Miert rwe ag Agfa-Gevaert nv, Mortsel Anglo American plc, London De Persgroep, Asse Royal Philips Electronics nv, Amsterdam Solvay s. a., Brussels Vivendi Universal s. a., Paris
Dr. jur. Dr. h. c. Albrecht Schmidt Siemens ag Thyssen’sche Handelsgesellschaft m. b. H.
Whilst some price erosion was initially observable in property insurance, the high losses in the third quarter again underlined the need for appropriate pricing and conditions.
The still relatively robust global economy was generally helpful for most insurance markets.
The situation of private health insurance continues to be a subject of political debate. The new German government’s coalition agreement does not contain any decision on the concepts of flat-rate health contributions or ”citizens’
An eu directive of 9 December 2002 on insurance mediation was supposed to have been translated into national law by 15 January 2005. In Germany, there is so far only a draft bill that takes into account parts of the eu directive. It is foreseeable that professional requirements for insurance agents will be made more stringent and that an authorisation procedure will apply. In addition, agents will have to be entered in a central public register. In order to protect consumers, the directive states there should be rules requiring that clients be given appropriate consultation which is documented. This will also result in changes for around 400,000 insurance agents in Germany.
Premium As in the previous year, we earned about 54% of our Group premium income from reinsurance and 46% from primary insurance.
In Germany, our premium income totalled €1.5bn (1.7bn), the decline being primarily linked to the scheduled reduction of a reinsurance treaty with a large premium volume over the course of three years. Given the difficult economic environment, demand on the life primary insurance market stagnated and new business remained just under the level of 2004. The new fiscal parameters applying to endowment insurance lead us to expect that the trend towards private and company pension products will continue. The strong fall in new business with endowment insurance products had an adverse impact on premium income in reinsurance. The high level of demand for disability covers remained unchanged, which was pleasing as we are the market leader in reinsuring these policies. The reinsurance of life annuities is still not prevalent in Germany.
Re is well prepared for this development. Although we withdrew from unprofitable treaties, premium in the year under review declined only slightly to €1.3bn (1.4bn), due to the acquisition of good new business.
Following an internal analysis of the still outstanding losses of our reinsurance subsidiary American Re, the Munich Re Group allocated an additional us$ 1.6bn to its claims reserves after corporate retrocessions. Moreover, we strengthened American Re’s capital base by carrying out extensive recapitalisation measures (see page 79). Since we had already made general provisions for ibnr losses at Group level, the additional reserving at American Re did not affect the consolidated result as much as it did American Re’s local result.
Profit impact for Munich Re Group after tax 750 *The figures above are net of statutory workers’ compensation discount in accordance with us gaap.
We maintained our traditional leading market position. The favourable claims experience among industrial risks in the years 2003 and 2004 did not repeat itself in 2005. Property insurance suffered a series of major losses.
The result of the division Europe 2 and Latin America was influenced by the hurricane losses in the Caribbean. The storms had a major impact on treaties that cover this region and on our international facultative business, written via London. The combined ratio deteriorated to 100.1% (98.5%), despite the good performance of basic business. Our premium income in the year under review fell by 3.6% to €2.8bn (2.9bn), largely due to the non-renewal of business. The prices in our core markets, where we maintain a leading position, remained largely stable.
In the Greater China Region, we participated fully for the first time – as planned – in the economy’s dynamic growth. This is, on the one hand, the logical consequence of being the first foreign reinsurer to be granted a licence to open a branch in China and, on the other hand, the result of the exponential rise in primary insurers’ demand for reinsurance services. Our premium growth in Taiwan largely stems from motor and marine reinsurance, where we tapped new business opportunities. Owing to the cyclical slump in original rates and in line with our rigorous underwriting policy, we reduced our participation in property lines (a sector that is important for Taiwan). In Hong Kong, the result was again very satisfactory. We are the leading foreign reinsurer in this dynamic region, both in terms of result and premium income. Our premium volume in the Greater China region is €499m (200m).
In the Middle East and North Africa, we benefited from high economic growth in individual countries. Premium income climbed by 33.3% to €84m (63m). Moreover, we exploited interesting business opportunities that arose as a result of market openings in Saudi Arabia, Libya and Syria. Despite the harder competition, business performance was in line with our expectations. This also applies to the countries of northern Africa, where insurance penetration is still very low.
We consolidated our portfolio in workers’ compensation reinsurance. Premium volume was therefore down but the result was positive. With a view to realising business potentials, we actively supported reform processes at international level, in particular with regard to adjusting national legal parameters for workers’ compensation insurance.
Our retrocession programme, which we redefine every year, is an important instrument of our risk and capital management. Based on principles drawn up in integrated risk management, the Corporate Retrocessions Department manages and optimises the retrocession cover for the whole reinsurance group. This cover employs traditional reinsurance solutions and capital market products and centres on protection against major losses from natural catastrophes. In 2005, the retrocession programme proved very effective and contributed significantly to the Group’s result. Altogether, retrocession cover for 2005 reduced the combined ratio for the reinsurance segments by 1.4 (–1.6) percentage points.
Gross premiums in the health segment in €bn Status: 31 December 2005
Premium In life insurance, there was a substantial overall decline in new business in 2005 following a record year in 2004, and Karlsruher did not escape this trend. In the first nine months of the year, total new business premiums in relation to the overall term of insurance dropped by 20.6% to €1.14bn compared with the same period last year. Karlsruher’s development was thus better than that of the insurance industry as a whole.
With the formation of meag in 1999 and the related concentration of asset management within the Group, we created the basis for optimising the management of our Group’s investments. In 2005, we further consolidated the Munich Re Group’s asset management activities under meag: with effect from 21 June 2005 mracm (Munich Re Asia Capital Management Ltd.) was renamed meag Hong Kong Ltd., whilst as from 15 July 2005 mrcm (Munich Re Capital Management Corp.) became meag New York Corporation. We will continue the bundling of our asset management operations in 2006 by merging the real estate activities of ergo Trust GmbH and meag under the roof of meag in Munich. Our motivation is to take greater advantage of the opportunities offered by the international real estate markets for meeting the Munich Re Group’s investment requirements and to systematically expand institutional third-party business.
Asset-liability management The structure of our underwriting provisions and other liabilities is the basis for the Munich Re Group’s investment strategy. The main focus of this strategy is asset-liability management, which is geared to ensuring that economic factors influence the value of our investments and the value of the underwriting reserves and liabilities in the same way. This stabilises our position with regard to capital market fluctuations. For this purpose, we reflect important features of the liabilities, such as maturity patterns, currency structures and inflation sensitivities, on the assets side of the balance sheet. If, for instance, there is a strong rise in inflation, our nominal outflows as a result of claims payments increase significantly. This applies in particular to lines of business with long payout patterns, e.g. liability, as multi-period inflation rates accumulate here. To an increasing extent, we are endeavouring in our asset-liability management to structure our investment portfolio in such a way that inflows from investments increase in line with rising inflation rates.
Group equity In the year under review, our equity increased by €4.0bn or 19.4% to €24.7bn (for details see page 177 ff. of the notes to the financial statements).
Last but not least, Knowledge Management provides the methodological and institutional foundations for the constant updating and exchange of knowledge within the Munich Re Group. In over 50 operative topic networks, staff from 20 countries work with our most important natural resource for a successful future: our knowledge, of which ever greater demands are being made in a rapidly changing environment. Our experts expand our knowhow, package it, and act as contacts for colleagues and clients alike.
These measures will make a major contribution to reducing it costs and to modernising ergo’s it platforms. Although they require high investment, they will enhance our competitiveness in the long term.
In compliance with the law and the company’s Articles of Association, Munich Re’s Supervisory Board has a total of 20 members. Half of these are elected representatives of the employees. The other ten members are elected by the Annual General Meeting.
Whether the stock appreciation rights can be exercised and, if so, when, is not certain at the time they are granted. The exercising and proceeds depend on the development of the share price and the exercise price and date. The amount of income is limited. Up to now, it has only been possible
Pension entitlement Basic remuneration, Fixed Insured event – number of years on the Board or retirement
A different arrangement applies to the remuneration structure of Mr. Phelan, who is not only a member of the Board of Management but also the President, Chief Executive Officer and Chairman of the Board of American Re Corporation, and therefore has special remuneration agreements, with the major portion of his income derived from the USA.
As a matter of general principle, our economists constantly study and monitor the economic and political situation of our main markets and inform the Board of Management without delay about relevant developments so that, if necessary, suitable risk minimisation measures can be taken. Possible scenarios are also discussed and coordinated with our asset management company meag to enable us to react promptly and appropriately at any time on the investment side as well.
I. Land and buildings. including buildings on third-party land (3) 5,798 9,046 –3,248 –35.9
F. Cash with banks, cheques and cash in hand 2,337 2,027 310 15.3
Munich Re Group Annual Report 2005 Consolidated financial statements_Consolidated cash flow statement
Life and health Property-casualy 31.12.2005 Prev. year 31.12.2005 Prev. year €m €m €m €m
First-time application of other new or amended ifrs has had no material impact.
The measurement of the provision for future policy benefits depends on the type of contract, being based either on fas 60 (for life primary insurance without performancerelated participation in surplus, health primary insurance and the bulk of reinsurance in the life and health segment), on fas 97 (life primary insurance contracts with limited premium payment, life primary insurance on the universal life model, unit-linked life insurance and life reinsurance for assumed policies based on fas 97) or on fas 120 (life primary insurance with performance-related participation in surplus).
Liabilities The liabilities shown under this item – notes and debentures, accounts payable, deposits retained on ceded business and other liabilities – are recognised at the settlement value, except for the option components of the exchangeable bonds of Munich Reinsurance Company and ergo International ag. The value of the option components is determined as the difference between the market price of the exchangeable bonds and the value of the bond components calculated on the basis of current market yields. Direct minority interests in special funds are measured at fair value.
Fair values – 1 – – 1 –2 – –1 Swaps
Interest-rate risks in life primary insurance and life reinsurance have been hedged using swaptions. These options to receive a fixed interest rate are shown in the category “interest-rate risks/over-the-counter/options”. If interest rates fall, the value of these options increases; if interest rates rise, the options lose value. The maximum loss is restricted to the acquisition costs. At the reporting date, the fair values of the swaptions amounted to €652m (111m). Underlying notional principal amounts totalled €15,639m (2,620m). The investment result from derivatives includes a gain of €82m (63m) from fluctuations in value of these options. In the category “other risks”, we mainly recognise weather derivatives.
Reductions – Acquisition of shares to issue to employees 15,942 10,000
To safeguard conversion rights or subscription rights from convertible bonds or bonds with warrants (Contingent Capital Increase 2005) 100
Unearned premiums in the life and health segment in primary insurance and reinsurance mainly concern health insurance contracts.
The expected timing of payments from the provision for outstanding claims naturally involves considerable uncertainties. We nevertheless expect a payout pattern for the currently posted reserves that will not fundamentally change compared with past development. In particular, we are proceeding on the assumption that – as in the past – between 20% and 25% of the provision for outstanding claims will become due for payment within 12 months.
Provision for benefit cases 2,267 1,802 1,232 1,235 *After elimination of intra-Group transactions across segments.
Changes in the consolidated group result mainly from the sale of the Karlsruher Insurance Group and Nieuwe Hollandse Lloyd Verzekeringsgroep n.v.
Net provision for the year concerned and previous years, plus payments already made from the original
All figures in €m Gross Net Gross Net *The previous year’s figures have been adjusted to take account of currency translation differences.
– Thereof resulting from unrealised gains and losses on investments (recognised directly in equity) – – – – 4,082 3,384 – – 4,082 3,384
Munich Reinsurance Company, Munich 1.0%, €1,150m, Bonds Exchangeable into Allianz ag Shares 2000/2005 – 1,223
Life and health Property-casualty Life and health Property-casualty Prev. Prev. Prev. Prev. Prev. Prev.
Investments for the benefits of life insurance policyholders who bear the investment risk – – – – 170 53 – – – – 170 53
(32) Other expenses In addition to foreign currency exchange losses of €511m (589m), the other expenses mainly include expenses for services rendered of €278m (183m), interest and similar expenses of €144m (196m), other write-downs amounting to €70m (209m), and other tax of €32m (37m). They also contain, for the first-time, expenses of €101m for owneroccupied land and buildings, some of which are also leased out.
In reinsurance, except in a very few cases, the transfer of market risks is ruled out through suitable treaty design. Therefore changes in the capital market parameters with regard to insurance contracts do not have any significant effects on equity or the consolidated income statement.
Intrinsic value 2005 for one right – – – – €33.53 €26.90 €27.45
Sopockie Towarzystwo Ubezpieczeniowe Ergo Hestia Spolka Akcyjna, Sopot 94.69% 171,104 5,551 europäische Reiseversicherung Aktiengesellschaft, Munich 100.00% 94,259 8,801
The following is a translation of the auditor’s opinion in respect of the original German consolidated financial statements and Group management report: We have audited the consolidated financial statements prepared by the Münchener RückversicherungsGesellschaft Aktiengesellschaft in München, Munich, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the consolidated financial statements, together with the Group management report for the business year from 1 January 2005 to 31 December 2005. The preparation of the consolidated financial statements and the Group management report in accordance with ifrs, as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315a para.1 of the German Commercial Code (hgb), are the responsibility of the parent company’s management. Our responsibility is to express an opinion on the consolidated financial statements and on the Group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with Section 317 of the German Commercial Code and German generally accepted standards for the audit of financial statements promulgated by the German Institute of Certified Accountants (idw). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the Group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the Group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and Group management report.
Herbert Loy Dr. Frederik Boetius Wirtschaftsprüfer Wirtschaftsprüfer (Certified public accountant) (Certified public accountant)
The response to the exhibition's plea for a risk-taking culture was very good: over 32,000 people came to Haus der Kunst to see it. And what opportunity will you grasp today?
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