19 July 2012 Munich Re again transfers US hurricane and European wind­ storm risks with a total volume of €100m to the capital market.
The stocks of European insurers performed better than the stock market as a whole
We write our business directly with primary insurers and also via brokers. In addition to traditional reinsurance business, we participate in insurance pools, public­private part­ nerships, and business in specialist niche segments, also as a primary insurer. Through our operating field Risk Solutions, we offer our clients in industrial and major­project business a wide range of specialised products, customised insurance solutions and services, which we manage from within our reinsurance organisation. These clients thus have direct access to the expertise and capacity of a leading global risk carrier.
The Supervisory Board is of the opinion that currently all 20 of its members are to be regarded as independent within the meaning of item 5.4.2 of the German Cor porate Gov­ ernance Code. The Supervisory Board is not aware of any business or personal relationship between a member and the Company, its governing bodies, a controlling shareholder or an entity affiliated with such a shareholder, as a result of which a major and not only temporary conflict of interest could arise. The Supervisory Board assumes that the members elected in accordance with the Act on the Co­ Determination of Employees in Cross­Border Mergers and the co­determination agreement are inde­ pendent as a matter of principle.
Europe and Latin America Bell & Clements (London) Ltd., London Munich Re do Brasil Resseguradora S.A., São Paulo3
In order to also give more emphasis in external communication to Munich Re’s value orientation – as implemented through our internal management tools – we take as our Group target the return on risk-adjusted capital (RORAC) after tax. We derive this riskbased performance measure by placing the consolidated result in relation to the necessary economic risk capital, the amount of which we determine using our internal risk model. We thus take into account the economic standards currently underlying (at least to some extent) the requirements of supervisory authorities and rating agencies – standards that are set to play a role in future. The connection to the IFRS consolidated result is consequently preserved.
In addition to these purely financial performance factors, non-financial performance measures like innovation, speed of processes, staff-training level and client satisfaction play a part. In the long term, a firm can only be successful if it operates sustainably and takes account of such future-oriented qualitative factors. On the basis of a comprehensive understanding of value creation with short-term and long-term, financial and nonfinancial parameters, we closely link strategy and operative planning by defining our strategies in structured overviews or “scorecards”, from which we derive initiatives, performance measures and responsibilities. The scorecards have four perspectives: “financial ”, “market and client”, “process” and “employee”. We promote an entrepreneurial culture among our staff through the clear allocation of responsibility and accountability, recognising wherever possible how much the individual, unit or field of business contributes to increasing long-term value. Our incentive systems for staff, executives and Board support this orientation: in general, the higher the hierarchical level, the more strongly remuneration is based on performance.
Hans Peter Claußen (Deputy Chairman) Member since 22 April 2009 Employee of D.A.S. Allgemeine Rechtsschutz Versicherungs-AG
COMMERZBANK AG ERGO Versicherungsgruppe AG2 (Chairman) Munich Health Holding AG2 (Chairman)
Dr. oec. publ. Wolfgang Strassl – Apollo Munich Health Insurance Company Ltd., India
METRO AG (until 23 May 2012) Tetra-Laval International S.A. Group, Switzerland
Christian Fuhrmann – Munich Re Holding Company (UK) Ltd., United Kingdom2
Category of objective Share1 Assessment basis Parameters Collective contribution 75% to corporate success Business field objectives (three-year average) Reinsurance Value-based economic performance indicators: − Property-casualty reinsurance Value added2 − Life reinsurance Value added by new business 3
Weighting of remuneration components In the case of 100% achievement of objectives (annual performance and multi-year performance ), the weightings of the individual components in terms of total remuneration for 2012 were as follows: basic remuneration around 30% and variable remuneration around 70%, of which 30% was based on annual performance and 70% on multi-year performance. Annual objectives, multi-year objectives and investment in shares together form 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 do not have undesirable effects. No guaranteed variable salary components are granted.
The Company result bonus gives employees a share in corporate success. The key indicator used for the Company result bonus is RORAC. The targets correspond to the Group objective for the variable remuneration of members of the Board of Management. Depending on the degree to which the RORAC target is met, an aggregate amount is calculated that can be distributed between all staff as a bonus. The higher the management level, the higher the share of the Company result bonus. The way this bonus works ensures that the performance of Munich Re as a whole is systematically reflected in the remuneration of all staff and that the bonus amount bears a reasonable relationship to overall corporate performance.
Monetary policy in the major industrialised countries remained very expansive. The US Federal Reserve and the Japanese central bank maintained key interest rates in the range of 0% to 0.25% and 0% to 0.1% respectively, while the Bank of England adhered to a rate of 0.5%. The European Central Bank lowered its reference interest rate from 1.0% to 0.75% at the start of July. In addition, the aforementioned central banks resolved further measures, chief among them being the purchase of bonds to stimulate the economy and stabilise the financial markets.
Performance in our life reinsurance segment was pleasing. Property-casualty reinsurance produced an excellent consolidated result.
Reinsurance property-casualty 2,561 169 >1,000.0 Primary insurance life 164 67 144.8 Primary insurance health 87 23 278.3 Primary insurance property-casualty –4 65 – Munich Health –92 36 – Asset management – 18 –100.0 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.
In the past financial year, Market Consistent Embedded Value (MCEV) rose to €10,616m (9,992m) in life reinsurance. In addition to the generally positive effects of the capital markets, total MCEV earnings of €1,172m (1,513m) again profited from strong operating MCEV earnings of €939m (1,109m). Total MCEV earnings also reflect high value added by new business of €573m (643m), especially from sustainable new regular business in a number of markets and from a series of individual transactions. There was a lower volume of individual transactions than in the record year 2011, which explains the year-on-year decline in the value added by new business.
Premium In property-casualty reinsurance, we posted a rise in premium income of 3.0% to €17.1bn (16.6bn) in 2012. Approximately 14% of the portfolio is written in euros and 86% in foreign currency, of which 45 percentage points is in US dollars and 16 percentage points in pounds sterling. Compared with the previous year, the development of the euro against other currencies had a positive effect of €1,031m on our premium income. At unchanged exchange rates, premium volume would have declined by 3.2%.
The overall burden from major losses was appreciably below the previous year’s figure, given the lower loss expenditure of €1,799m (5,048m) for natural catastrophes – after retrocession and before tax.
Munich Re Group Annual Report 2012 interest-rate levels. Total MCEV earnings amounted to €1,115m (–3,115m). Operating earnings, which exclude a large share of the effects from developments in the capital markets, totalled –€684m (771m). The value added by new business rose to €42m (–13m).
Since spring 2012, ERGO has been working hard on setting up ERGO China Life Insurance Company Ltd., a joint venture with Shandong State-owned Assets Investment Holding Company, a strong local partner.
In international business, we recorded a significantly improved combined ratio of 99.8% (104.5%) for the past financial year. In Poland, which had been heavily burdened by natural catastrophe losses in 2010, this figure was again at a very good level of 95.2% (99.9%). There was a further improvement in our results in Turkey, where, thanks to our consolidation measures, the combined ratio of 122.3% was significantly down on the previous year (131.6%), but nonetheless remained at a high level.
In primary insurance, the combined ratio was an unsatisfactory 102.8% (99.7%). The deterioration is due to US Medicare business, a consequence of high expenditure for pure cost reimbursement products but also of increased burdens from managed care business offered by Windsor. We posted provisions of €42m for anticipated losses from this business in 2013. In the meantime, extensive and fundamental measures have been taken at WHG to significantly improve the result situation. The rest of Munich Health’s primary insurance business developed very positively. Despite the difficult macroeconomic situation, we able to further improve the result in Spain by expanding group insurance. We also slightly improved on the previous year’s result in Belgium.
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 23,047 2,660 – 25,707 Other securities at fair value through profit or loss 65 – – 65 1 Presentation based on approximation and not fully comparable with IFRS figures.
Fixed-interest portfolio by economic category1 48% (48%) Government bonds2 Thereof: 7% (7 %) inflation-linked bonds 28% (28%) Pfandbriefs/Covered bonds 10% (10%) Corporate bonds 4% (4%) Cash positions/other 4% (3 %) Structured products (credit structures) 3% (4%) Bank bonds 3% (3%) Policy and mortgage loans
Besides this, we are protecting ourselves against rapid inflation in an environment of continuing low interest rates. Inflation-linked bonds with a volume of €6.8bn (6.1bn) and inflation-linked swaps for a notional amount of €5.2bn (4.0bn), real assets like shares, property and commodities, and investments in renewable energies and infrastructure also have a positive diversification effect on the overall portfolio.
Owing to the overweight of investments in highly rated government bonds and covered bonds, with simultaneously lower interest rates, regular income fell slightly compared with the previous year. Our comparatively long duration enabled us to mitigate the effect of low interest rates on current interest income.
We derive our economic capital from IFRS equity by means of various adjustments. We return surplus capital to equity holders mainly through attractive dividends, within the scope permitted by Munich Reinsurance Company’s revenue reserves as determined under German commercial law, and provided this does not impair our strategic flexibility or overall capital strength. Alongside dividend payments, we still generally consider share buy-backs an important instrument of active capital management, even if we have currently discontinued these in view of the current environment and the opportunities for profitable organic expansion of our business. Including dividend payouts and the share buy-backs from 2006 to 2012, we have been able to return over €13bn to our shareholders since 2006.
Direct Indirect % holding holding Warren E. Buffett, USA 0.053 10.191 Berkshire Hathaway Inc., Omaha, USA 10.191 OBH LLC, Omaha, USA 10.191 National Indemnity Company, Omaha, USA 10.191
We explain the results produced by our internal risk model on page 125ff.
The significant risks in the accounting process arise out of the requirement to show and value all items correctly in the various components of the financial statements and guarantee the completeness and accuracy of the information in the notes to the financial statements. To do so, it is necessary to implement new legal requirements on time, which also involves constant additions to the Group Accounting Manual and the chart of accounts. The accounting process is to a large degree dependent on IT systems, which must be protected against unauthorised access and are subject to ongoing controls to guarantee the effectiveness and stability of the information and communication flows. We also ensure that reporting to the Supervisory Board is properly carried out.
Disclosures on derivative financial instruments are provided on page 204 ff. and sensitivity analyses of market-price risks in financial instruments on page 264 f.
We also show the diversification effects we achieve through both our broad spread across the different risk categories (underwriting, market and credit) and our combination of primary insurance and reinsurance business. At the same time, we recognise by means of tail dependencies that the various risks are not independent of each other. This gives rise to a smaller diversification effect than if independence is assumed.
Tax risks As a reaction to the financial market and sovereign debt crisis, a trend towards increased corporation tax burdens is apparent Europe-wide. In Germany, discussions are centring around the introduction of a financial transaction tax, capital tax, and the abolition of the tax-exempt status for dividends and gains on disposal from free-float shareholdings. Which of these ideas will actually be realised is not yet clear. Additional annual tax burdens in the lower three-digit million range cannot be ruled out.
Munich Re Group Annual Report 2012 more light on the qualitative requirements of insurance companies and supervisory authorities laid down in Solvency II’s Pillar 2. However, these measures have yet to be adopted.
Other legal developments On 1 March 2011, the European Court of Justice issued a fundamental ruling on sex discrimination in insurance, which repealed with effect from 21 December 2012 a European regulation allowing member states to permit differentiation between males and females for the purpose of calculating insurance benefits and premiums. This applies even if consideration of gender is based on accurate actuarial and statistical risk data. The relevant legislation in member states, including Germany, must be amended to comply with the ruling, which leads to significant changes in the calculation of insurance benefits and premiums. Application of the recommendations of the German Association of Actuaries (DAV) sufficiently limits or eliminates the risks.
Additional opportunities exist in attractive niches. Crop failure insurance, for example, is seeing strong growth based on public-private partnerships, since the provision of food to a growing world population and the consequences of climate change are increasing farmers’ need to protect themselves against financial risks. A market leader in this area, Munich Re has built up competence and established sustainable insurance concepts together with supervisory authorities and primary insurers. Munich Re is also carving out attractive niches in industrial insurance business, in areas where we can put our reinsurance business know-how to use, e.g. in connection with power generation and sophisticated large-scale engineering projects.
In reinsurance, we expect growth as a result of our clients’ increasing numbers of insureds and a rise in demand for non-traditional reinsurance solutions (e.g. capital substitute solutions).
Allocation to retained earnings – – –408 – – – – 408 – –
Income and expense recognised directly in equity – – –340 – 2,343 –69 –8 – 15 1,941
In accordance with the rules of IFRS 4, underwriting items are recognised and meas­ ured on the basis of US GAAP (United States Generally Accepted Accounting Principles) at first­time adoption of IFRS 4 on 1 January 2005.
IAS 28 (rev. 05/2011), Investments in Associates and Joint Ventures, specifically includes amendments following from the publication of IFRS 11 and IFRS 12. Among other things, the standard integrates the balance sheet recognition of joint ventures and circumstances previously governed by SIC 13, Jointly Controlled Entities – Non­ Monetary Contributions by Venturers. Furthermore, investments in associates or joint ventures held by open­ended investment funds or for unit­linked insurance, for ex ample, are no longer excluded from the standard’s scope of application. Rather, there is now an option to measure these at fair value with impact on profit or loss. The amendments do not have any major implications for Munich Re.
Cash flows arising from losing control €m 2012 Prev. year Total consideration for losing control 39 534 Non­cash consideration for losing control – – Cash consideration for losing control 39 534 Cash over which control was lost –4 –36
Cash at bank, cheques and cash in hand – – 4 10
Other assets are generally carried at amortised cost. The owner­occupied property recognised under other assets is accounted for as outlined under the notes on B Invest­ ments – Land and buildings. Plant and equipment is amortised mainly on a straight­line basis, the underlying useful lives ranging between 1 and 50 years. Where required, impairment losses are recognised or reversed for the Group’s owner­occupied property. These impairment losses or impairment losses reversed are distributed between the functional areas.
The measurement of the provisions for future policy benefits depends on the type of contract, being based either on FAS 60 (life primary insurance without performance­ related participation in surplus, health primary insurance and the bulk of reinsurance treaties), on FAS 97 (life primary insurance on the universal life model, unit­linked life insurance and life reinsurance for assumed policies based on FAS 97) or on FAS 120 (life primary insurance with performance­related participation in surplus).
Deferred tax obligations are shown under equity and liabilities item G.
From the first quarter of 2012, our segment reporting under IFRS 8 no longer has a consolidation column. It thus reflects internal management criteria more closely and provides for greater transparency with regard to the result contributions of the individual segments. The previous year’s figures have been adjusted accordingly.
V. Deposits retained on assumed reinsurance 7,240 7,784 1,181 1,196 147 165 1 1 4 4 394 280 – – 8,967 9,430
Thereof: Attributable to Munich Reinsurance Company equity holders 495 335 2,561 173 165 69 87 23 –18 49 –95 35 – 18 3,195 702 Attributable to non-controlling interests – –1 – –4 –1 –2 – – 14 16 3 1 – – 16 10 1 Previous year’s figures adjusted pursuant to IAS 8; see “Changes in accounting policies and other adjustments”.
Carrying amount at 31 Dec. financial year 1,046 403 1,754 173 – 3,376 Accumulated impairment losses at 31 Dec. financial year – 51 – 381 156 588 Gross carrying amount at 31 Dec. financial year 1,046 454 1,754 554 156 3,964
Carrying amount at 31 Dec. financial year 447 533 130 158 230 209 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year 864 826 220 184 659 605 Gross carrying amount at 31 Dec. financial year 1,311 1,359 350 342 889 814 8006 B
Assets pledged as security and other restrictions on title amount to – (€5m). Commitments to acquire other intangible assets total €3m (4m). Costs of €4m (20m) for research and development incurred in connection with software projects were not cap italised but recognised as expenses.
Development of investments in land and buildings, including buildings on third-party land €m 2012 Prev. year Gross carrying amount at 31 Dec. previous year 4,903 5,142 Accumulated depreciation and accumulated impairment losses at 31 Dec. previous year 1,014 895 Carrying amount at 31 Dec. previous year 3,889 4,247 Currency translation differences 9 –4 Additions
Carrying amounts €m 31.12.2012 Prev. year Up to one year 1,252 2,011 Over one year and up to two years 1,985 1,361 Over two years and up to three years 2,980 2,118 Over three years and up to four years 2,015 3,015 Over four years and up to five years 2,550 2,194 Over five years and up to ten years 13,034 13,394 Over ten years 30,602 29,167
Investments for the benefit of life insurance policyholders who bear the investment risk 5,958 – – 5,958
Munich Re Group Annual Report 2012 8 Other securities available for sale
Total of all risks Fair values 17 126 141 144 343 680 1,451 689
These mainly comprise owner-occupied property totalling €2,391m (2,385m), plant and equipment of €273m (294m), advance payments on insurance amounting to €393m (437m), derivatives totalling €309m (261m), miscellaneous deferred items of €130m (129m), and recoveries from policyholders totalling €23m (25m). Some €15m (18m) of the owner-occupied property involves finance leases.
The fair value of the subordinated bond issued by Munich Reinsurance Company in June 2007 is hedged in respect of the risk-free interest rate by means of an interest-rate swap. The hedged changes in value of the subordinated liabilities and of the interestrate swap are shown in the net finance costs with impact on profit or loss in each case.
Munich Health Total €m 31.12.2012 Prev. year 31.12.2012 Prev. year Status at 31 Dec. previous year 443 443 8,391 7,879 Currency translation effects –1 –13 61 101 Change in consolidated group – – –98 –27
Munich Re Group Annual Report 2012 21 Provision for future policy benefits
Carrying amounts €m 31.12.2012 Prev. year Up to one year 7,739 7,801 Over one year and up to two years 53 47 Over two years and up to three years 47 73 Over three years and up to four years 85 36 Over four years and up to five years 60 136 Over five years and up to ten years 556 730 Over ten years 597 440
The following table presents the reconciliation from the beginning balances to the ending balances for other liabilities allocated to Level 3.
Munich Health Total €m 2012 Prev. year 2012 Prev. year Income from technical interest 52 43 6,918 5,797
Other securities available for sale 205 1,721 Other securities held for trading 1,747 2,610 Other investments 25 12
The income from changes in tax rates and tax legislation primarily relates to the UK.
Other market risks and embedded derivatives In reinsurance, other market risks are generally ruled out through suitable treaty design. Some reinsurance contracts contain derivative components of variable annuities. These are measured separately and their changes in value are recognised in the investment result. The valuation of these embedded derivatives is sensitive to share prices, exchange rates and interest rates, but these sensitivities are nearly fully compensated for by the fact that such derivatives are for the most part directly matched by financial derivatives for hedging purposes.
If an adjustment is required, we recognise any deficit as an expense in the consolidated income statement.
Reinsurance Primary insurance Total €m 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year
Every year from 1999 to 2010, Munich Reinsurance Company set up long-term incentive plans, each with a term of seven years. From 1999 to 2009, the members of the Board of Management and senior management in Munich, and the top executives in Munich Re’s international organisation were participants in the scheme. In 2010, this share-price-related remuneration plan was only provided for senior management members and selected top executives in the international organisation.
Each stock appreciation right entitles the holder to draw in cash the difference between the Munich Re share price at the time when the right is exercised and the initial share price. The stock appreciation rights may only be exercised after a two-year vesting period and then only if the share price is at least 20% higher than the initial price. In addition, Munich Re shares must have outperformed the EURO STOXX 50 twice at the end of a three-month period during the term of the plan. The gross amount that may be obtained from the exercising of the stock appreciation rights is limited to an increase of 150% of the initial share price.
Scenario analysis Type of analysis used to investigate how certain key figures (market values or carrying amounts) change in the event that predefined market developments occur. Scenario analyses usually take the form of average if­then analyses.
Annual General Meeting 10 ff., 24, 28, 101 ff., 134, 148 Asset­liability management (ALM) 37, 41, 101, 121, 262 ff. Audit Committee 21 ff., 119 Auditor’s report 25, 286