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1 2011 Group Annual Report

2 Management Report Overview of ERGO Insurance Group 2011 Change previous year (%) Total premium income 20,270 20, Gross premiums written 18,639 18, Expenses for claims and benefits (gross) 17,490 18, Investment result 4,116 5, Operating result 806 1, Consolidated result Investments 117, , Technical provisions (net) 113, , Equity 3,827 3, Full-time representatives 19,087 22, Salaried employees 31,311 32, ERGO is one of the major insurance groups in Germany and Europe. We have a presence in more than 30 countries worldwide, but the focus of our activities is on the European and Asian regions. ERGO offers a broad range in insurance, pension provision and services, and is one of the leading insurers across all segments in its home market of Germany. 50,000 people work for our Group, either as salaried employees or as full-time self-employed sales partners. In 2011, premiums amounted to 20 billion and insurance benefits for our customers accounted for 17.5 billion. Our customers determine the way we operate. ERGO is strictly geared towards the wishes and needs of its customers, and intends to improve this still further by pursuing a close dialogue with them. We are implementing our claim To insure is to understand by providing advice and products which meet the needs of our customers as well as understanding and picking up on customers personal concerns. This is enhanced by a clear and understandable communication, innovative services and swift support in the event of damage or loss. Our customers can choose which form of contact with ERGO suits them best, as we have the right sales channel for every customer: Self-employed insurance sales partners, staff working in direct sales, as well as insurance brokers and strong cooperation partners both in Germany and abroad respond to the needs of private and corporate customers alike. We maintain partnerships with the major European bank UniCredit Group and other banks, both in Germany as well as in various European countries. ERGO is part of Munich Re, one of the leading global reinsurers and risk carriers. Within Munich Re, ERGO is the specialist for primary insurance, i. e. for insuring private and corporate customers directly, both in Germany and abroad. The group s investments of 202 billion, of which 117 billion is accounted for by ERGO, are managed primarily by the joint asset management and fund company MEAG.

3 ERGO Insurance Group Group Annual Report

4 Contents 3 Letter by the Chairman of the Board of Management 6 Report of the Supervisory Board Management Report 10 The ERGO Insurance Group 14 The ERGO Insurance Group Governing bodies 16 Parameters 19 Business performance 23 Assets and financial position 27 Other success factors 31 Risk report 42 Prospects Consolidated Financial Statements 48 Consolidated income statement for the financial year Statement of recognised income and expense 50 Changes in Group equity 52 Consolidated cash flow statement for the financial year Principles of presentation and consolidation 72 Notes on the type and extent of risks stemming from insurance contracts and financial instruments 84 Notes on the balance sheet assets 103 Notes on the balance sheet equity and liabilities 118 Notes on the consolidated income statement 128 Other information 132 List of shareholdings in accordance with Section 313 para. 2 of the German Commercial Code (HGB) 144 Auditor s report

5 ERGO Insurance Group 3 Letter by the Chairman of the Board of Management Dear Readers, Behind us lies a year in which our stability has been well and truly put to the test. The turmoil on the capital markets has shown unprecedented severity, and there is no end in sight yet. We are all experiencing the risk of insolvency on the part of some EU States. Currencies which have hitherto been steadfast and economic areas which have seen years of success are being called into question. We are currently faced with unknown challenges. In such uncertain times, we are focussing on what is tried and tested: broad diversification of our investments and disciplined risk management. This has enabled us to limit the effects of the financial crisis even though our result reflects them. Our investment result of 4.1 billion (against 5.2 billion in the previous year) suffered a clear setback, with write-downs on Greek government bonds making their mark. Against this backdrop, the profit originally targeted for 2011 ( 450 to 550 million) was not possible. However, in view of the dramatic upheavals on the capital markets, we were satisfied with the stable result of 349 million. Dr. Torsten Oletzky Chairman of the Board of Management ERGO Versicherungsgruppe AG By contrast, operations continued in a pleasingly stable fashion. Our total premium income was up slightly by 0.7% to 20.3 billion. Strong growth was seen for health, travel and direct insurance, and our German property-casualty business was able to continue its moderate but steady growth of the previous years. As regards life insurance, both at home and abroad, we like many of our competitors recorded smaller single premiums. In terms of international non-life business, we focussed last year more on consolidation of results rather than growth. You can read more about the development of our Company over the year in the management report on pages Alongside the difficult situation on capital markets, ERGO faced other challenges in 2011 which required our attention. It emerged that, in 2007, our multi-level sales organisation HMI had organised an evening with prostitutes for a group of sales representatives; this was a case of completely unacceptable misconduct which has embarrassed us all at ERGO. I can only apologise for it again. This incident in Budapest certainly made waves.

6 ERGO Insurance Group Letter by the Chairman of the Board of Management 4 It drew attention to ERGO in both Germany and beyond. None of us wants to experience the like again. We have done our utmost to ensure that this is the case. Together with our sales partners, we have drawn up a Code of Conduct for independent sales representatives and have introduced new rules on the organisation of incentive trips. We are doing even more to improve the quality of advice given by our sales partners than before. This includes having them assessed by external mystery shoppers. Last but not least, we have transferred responsibility for compliance in the Company to a dedicated unit. Its head reports directly to me. Following the reports on the HMI incentive trip, we were confronted with further accusations. We examined each of them in depth immediately and left no stone unturned. In so doing, we also called on the support of PricewaterhouseCoopers as a neutral third party. Our aim was to set things straight as quickly as possible and rectify mistakes. This all put a strain on our relatively young brand in Germany. Now one thing is on the top of the list: we must win back trust. We are therefore working all the harder to deliver on our promise To insure is to understand in order to make it clear that, for ERGO, the customer takes centre stage. One of our most important goals is to become much more understandable to our customers, and we have made significant progress in this area. By the end of 2011, we had revised almost 20 million printed items on the basis of our plain-language standard. In a pilot project in the area of liability insurance, we also revised the relevant insurance terms. Above all, we scaled them down so that the customer is able to identify the important parts more quickly. Further products with terms drafted in plain language followed at the beginning of But for us clarity is not just about what is written down. If somebody does not understand us, they can call a toll-free telephone number. We reward useful proposals to improve comprehensibility with a bonus. Close collaboration with our customers is very important to us, and we have established fixed channels to that end: our new Customer Advisory Board and the ERGO Customer Workshop on the Internet. Only through dialogue can we meet our goal of constantly improving what we offer. We have also developed new solutions for special needs, e. g. dental supplementary insurance, which even pays when the treatment has already begun. However, one of the most visible signs of our strong customer orientation is without doubt the new ERGO Customer Advocate. He represents customers interests within the Company in terms of designing the process and in the event of conflicts. If anybody feels they have been wrongly treated, the ERGO Customer Advocate will seek an acceptable solution together with the person concerned. As you can see, last year we resolutely stuck to the approach adopted in despite all the odds. In 2012, too, we will concentrate on keeping our promise to our customers was a demanding and somewhat emotional year which placed great demands on us. However, it also revealed our strengths. ERGO remained on the right track. We owe this not least to the ability and commitment of our staff, and I sincerely thank them for this.

7 ERGO Insurance Group Letter by the Chairman of the Board of Management 5 My special thanks this year go to our sales partners. They have successfully withstood the headwind of the negative reports. With their competent advice, our customers can continue to be convinced of the quality of our products and services. We were always sure about the strength of our sales team in 2011 it proved its worth with distinction. We will continue to develop our consulting expertise in To this end, we are relying on a comprehensive approach and on the opinion of our customers. In the course of 2012 we will give them the opportunity to assess sales partners after having received advice. New legal rules are also placing requirements on us. These include the preparation of unisex tariffs, which have to be in place from the end of 2012, as well as Solvency II. In collaboration with the German Federal Financial Supervisory Authority (BaFin), we are finalising our internal risk model developed in conjunction with our parent company Munich Re. This has put us in a very good position when compared with our competitors. Last but not least, we will continue this year to deal with the turmoil on the capital markets; we are not expecting calm waters in the short term. For us all, the long-term effects of these upheavals can still not be predicted. We are above all keeping a close eye on how interest rates develop given the long-term pledges we have made to our customers. This is true even though we are well equipped for a scenario where interest rates remain low for a number of years. We will remain vigilant. We have set ourselves ambitious goals as regards both the further development of our business model and financially. We will keep the primary goal of putting our promise To insure is to understand into effect firmly in our sights. We want people to obtain the insurance protection and service best suited to their needs. I hope you will support and accompany us on this path.

8 ERGO Insurance Group 6 Report of the Supervisory Board In the 2011 financial year the Supervisory Board undertook the controlling and advisory functions incumbent upon it with due care in accordance with legislation and the Company s Articles of Association. Based on detailed and extensive written and verbal reports provided on a regular basis by the Board of Management, the Supervisory Board stood by the Board of Management in an advisory capacity and monitored the Board s management of activities during the 2011 financial year. The Board of Management briefed us regularly concerning corporate planning, business development, strategic progress and the current situation of the Company. We were closely involved in all important matters concerning the Company and discussed this in detail based on the reports submitted by the Board of Management. Dr. Nikolaus von Bomhard Chairman of the Supervisory Board of ERGO Versicherungsgruppe AG There were three scheduled Supervisory Board meetings and two extraordinary ones held in the reporting year. Virtually all members of the Supervisory Board attended the scheduled meetings. The various committees also met and the respective chairmen regularly reported in detail on their work. The Board of Management also informed us of matters of major importance or urgency outside of Supervisory Board meetings. Furthermore, as the chairman of the Supervisory Board, I was in constant contact with the chairman of the Board of Management and talked through with him ERGO s strategy, risk and capital management as well as current business developments. Main issues During the balance sheet meeting held on 18 March 2011 the Supervisory Board was given a detailed review of the financial statement as well as being informed of ERGO s business strategy. In addition, it received the report by the Chief Risk Officer on ERGO s risk situation and risk strategy. During an extraordinary meeting on 8 June 2011 the Supervisory Board addressed in depth the findings of the enquiry into the circumstances behind an incentive trip to Budapest in 2007 by some HMI insurance agents. The Board of Management reported on measures which had been adopted in order to prevent such incidents from happening again in the future. The Supervisory Board explicitly backed these measures. At a meeting held on 2 August 2011, the Board of Management reported on the results of an enquiry concerning further accusations made in the press concerning the HMI sales organisation and the use of incorrect Riester application forms back in At an extraordinary meeting on 2 September 2011, the Supervisory Board appointed a successor to the Board of Management to replace the board member responsible for sales who was to step down at the end of the year. Finally, at the meeting held on 6 December 2011, the Supervisory Board talked about the development and risk exposure of ERGO s investments, the strategy in the health segment, the result of investigative measures on sales activities regarding company pension schemes, as well as measures adopted by the Board of Management on the future focus of the HMI sales organisation.

9 ERGO Insurance Group Report of the Supervisory Board 7 The Supervisory Board audit committee discussed at length the topics of the incentive trip to Budapest, the use of incorrect Riester application forms as well as sales activities concerning company pension schemes at three of the meetings. In a joint decision with the Board of Management it commissioned the Group Audit unit of Munich Re and the accounting firm PricewaterhouseCoopers (PwC) to assist with and endorse the work conducted by the ERGO Group Internal Audit in investigating these cases. Moreover, the Supervisory Board discussed ways of improving the efficiency of the Supervisory Board s activity. It also discussed in detail the results of the ERGO brand campaign as well as the beacon projects set up by the Board of Management in this respect. The Supervisory Board took receipt of the personnel report. In addition, the Board of Management briefed us on major aspects of the forthcoming introduction of Solvency II. Finally, we debated on ERGO s development in international business which was reported on by the Board of Management, focusing on the situation of the foreign companies in Turkey, South Korea and Portugal in particular. Alongside decisions on appointments to the Board of Management, we dealt extensively with the matter of remuneration of its members. In this respect, the plenum took a decision on bonus payments for the Board of Management for. In addition, we discussed and took the necessary decisions regarding the parameters of variable remuneration for the members of the Board of Management as well as the individual goals for 2012 and the system of goals as a whole. Corporate governance and compliance ERGO s Supervisory Board attaches great importance to good corporate governance. As in previous years, we reviewed the efficiency of our activity, and came to the conclusion that the work of the Supervisory Board is well organised and efficiently planned. In relation to the Budapest trip incident, the Supervisory Board also considered the proposals on extending ERGO s system of compliance and reinforcing it even further. The Supervisory Board welcomed the fact that compliance is to be withdrawn from the legal department and transferred to its own unit under the responsibility of the chairman of the Management Board as from 1 January The Supervisory Board also affirmed the decision taken by the Board of Management to concentrate more on sales aspects in the compliance management system. Company and Group financial statements KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschafts prüfungs gesell schaft Steuerberatungsgesellschaft, Munich, audited the annual financial statements prepared by the Board of Management, including the management report, and the consolidated financial statements, including the Group management report, for the 2011 financial year, and awarded them an unqualified auditor s opinion. At a meeting held on 13 March 2012, the Supervisory Board s audit committee discussed these documents at length, having examined them in advance. We then discussed in detail the annual financial statements and the consolidated financial statements, the management report and the Group management report along with the reports by the external auditor at the balance sheet meeting, during which the representatives of the auditing company were also present and made a statement. We had no objections. We approved the annual financial statement and the consolidated financial statements for 2011 which are thereby endorsed.

10 ERGO Insurance Group Report of the Supervisory Board 8 We also examined the report prepared by the Board of Management regarding relations to affiliated companies as well as the corresponding audit report compiled by the external auditor and have no reservations. The external auditor gave the report prepared by the Board of Management on the relations to affiliated companies the following auditor s opinion: After having duly audited and appraised the documents, we hereby certify that 1. the facts stated in the report are correct, 2. the Company did not render unduly high remuneration for any transaction recorded in the report. We share this judgement. On the basis of our own examination, we have no objections to raise concerning the declaration made by the Board of Management at the end of the report on the relations to affiliated companies. Changes to the Supervisory Board Dr. Alan Hippe resigned from office with effect from 31 May During an extraordinary general meeting Mr Bernd Otten was voted as his successor. In addition, Dr. Karin Dorrepaal stepped down from the Supervisory Board at the end of In a further extraordinary general meeting, Dr. Christine Bortenlänger was appointed to the Supervisory Board with effect from 1 January We wish to thank Dr. Dorrepaal and Dr. Hippe for their successful contribution and dedication to our Board. Changes to the Board of Management Mr Jürgen Vetter, a member of the Board of Management responsible for sales, resigned from the Board at the end of We would like to thank Mr Vetter for his concerted efforts and long-term success in many responsible posts throughout our Company. He was replaced by Dr. Rolf Wiswesser, who was appointed to the Board of Management on 1 November He took on overall responsibility for sales with effect from 1 January Our gratitude to the Board of Management and staff The Supervisory Board would like to thank the members of the Board of Management and all Company employees as well as the staff of all companies within the ERGO Insurance Group for their huge personal commitment and for the successes achieved in the reporting year. Düsseldorf, 20 March 2012 On behalf of the Supervisory Board Dr. Nikolaus von Bomhard, Chairman

11 ERGO Insurance Group Management Report

12 ERGO Insurance Group 10 Management Report The ERGO Insurance Group ERGO is one of the major insurance groups in Germany and Europe. We have a presence in more than 30 countries worldwide, but the focus of our activities is on the European and Asian regions. ERGO offers a broad range in insurance, pension provision and services and is one of the leading insurers across all segments in its home market of Germany. 50,000 people work for our Group, either as salaried employees or as full-time self-employed sales partners. In 2011, premiums amounted to 20 billion and insurance benefits for our customers accounted for 17.5 billion. Our customers can choose which form of contact with ERGO suits them best, since we have the right sales channel for every customer: Self-employed insurance sales partners, staff working in direct sales, as well as insurance brokers and strong cooperation partners both in Germany and abroad respond to the needs of private and corporate customers alike. We maintain sales partnerships with the major European bank UniCredit Group and other banks, both in Germany as well as in various European countries. ERGO is part Munich Re, one of the leading global reinsurers and risk carriers. Within Munich Re, ERGO is the specialist for primary insurance, i. e. for insuring private and corporate customers directly, both in Germany and abroad. The group s investments of 202 billion, of which 117 billion is accounted for by ERGO, are managed primarily by the joint asset management and fund company MEAG. As an integral part of Munich Re, ERGO is integrated into the core processes of Munich Re in terms of regulatory and corporate law, e. g. group strategy and corporate policy, capital and finance planning, risk management, controlling, reporting and accounting, or in general regarding significant legal transactions and measures. As a result of a group directive which regulates responsibilities and competences between the group executive management of Munich Re and ERGO in decisions of primary importance, a uniform management approach prevails in the sense of the German Stock Companies Act (AktG). This consolidated management report summarises the business activities of our Group. There is a general overview of ERGO s performance on pages 19 22, which includes information on the following divisions: Life (Germany), Health, Property-casualty (Germany), Direct Insurance, Travel Insurance and International. Our brand strategy In our home market of Germany, we offer life and non-life products under the ERGO brand. This strategy is supplemented by our special insurers DKV for health insurance, D. A. S. for legal protection and ERV for travel insurance. We are primarily represented on the international market by the ERGO brand and are actively giving the brand a higher profile. In line with this strategy, we renamed our subsidiary in Greece ERGO General Insurance Company S. A. during the reporting period. Our brand strategy communicates a clear promise to our customers: To insure is to understand. This promise represents a consistent approach that takes customers requirements into account in all areas of business. It consists of needs-based advice which understands and picks up on the customers concerns along with clear and easyto-understand communication, innovative services and swift support in the event of loss or damage. At the same time, we are fervently working towards fulfilling our customers expectations and are inviting them to give constructive feedback using a variety of channels. To achieve these aims, we have set up an online Customer Workshop. The newly formed ERGO Customer Advisory Board convened for the first time in the reporting period. Its 25 members were chosen to represent a cross-section of the German customer base. The Customer Advisory Board is to meet twice a year and has been created in order to ensure that customer interests are taken into account throughout the company. In its first meeting, the Customer Advisory Board discussed the topics of customer service, products and customer communication.

13 ERGO Insurance Group Management Report The ERGO Insurance Group 11 The Customer Advisory Board is headed by the ERGO Customer Advocate, who, along with his colleagues, represents customers interests in the company. The ERGO Customer Advocate also takes on the role of mediator in cases where customers feel that they have not been treated fairly and are not getting anywhere. The ERGO Customer Advocate works towards identifying areas where change needs to be implemented in processes, products and services. This aims to instigate change but consistently and in line with customer requirements. Our management style and objectives Our Company is managed strictly with the customer, service and profitability in mind. The focus here is on integrated management of the segments and their administrative processes, a modern risk management comprising asset-liability management as well as valuebased and risk-based management of all business activities. Our activities include various business models, providing all types of life, annuity and health cover and virtually all aspects of non-life insurance, as well as legal protection cover. The International devision is managed separately. Management responsibility for the international specialist insurers rests with the segment Munich Health, a part of Munich Re. In order to reproduce this management strategy from a company law point of view, the international subsidiaries of DKV in Belgium, Luxembourg, Norway and Spain were sold to Munich Health Holding AG at the end of Value-based management Our objective is to analyse risks from every conceivable angle and to assess and diversify them, thereby creating lasting value for shareholders, customers and staff. The guiding principle of our entrepreneurial thinking and activity is to increase the value of our company on a lasting basis which also includes our active capital management. The main features of our approach in practice are the consistent application of value-based management systems, which we constantly refine. The framework for any business activity is our risk strategy, from which we derive a detailed network of limitations and reporting thresholds. Besides value-based parameters, we observe a range of significant additional conditions in managing our business. They include rules of local accounting systems, tax aspects, liquidity requirements and regulatory parameters. Our value-based management is characterised by the following aspects: We assess business activities not only according to their earnings potential but also relative to the extent of the risks assumed which is decisive in measuring added value as well. This is why we have implemented high quality standards for underwriting, pricing, cumulative controls and claims management. Only the risk-return relationship reveals how beneficial an activity is from the shareholder point of view. With value-based performance indicators we ensure the economic view and the necessary comparability of alternative initiatives and prioritise these. We clearly assign responsibilities and make the levers for adding value transparent to both management and staff. We closely link strategic and operative planning. Non-life insurance: combined ratio and value added In non-life insurance and other segments that are primarily characterised by short-term business transactions, there are essentially two variables: combined ratio and value added. The combined ratio describes the percentage relationship between the sum of expenses for claims and benefits to customers (net) and operating expenses (net) to premiums earned (net). This corresponds to the sum from the claims ratio and the expense ratio.

14 ERGO Insurance Group Management Report The ERGO Insurance Group 12 The special circumstances of the particular type of insurance must be taken into account when calculating the combined ratio. The composition of the portfolio is of major importance, as well as the degree to which the claims burden varies over time. The time period between receiving the premiums and when the claims payments are made is of key significance. The longer this time period, the longer the length of time in which the premiums earned can be invested on the capital market. High combined ratios in lines of business with comparatively late claims notification and long claims settlement processes (e. g. liability insurance) regularly go hand in hand with higher results from investments, which in turn cover the provisions for claims. These earnings are not reflected in the combined ratio. For this reason, while we aim to keep the combined ratio as low as possible, it is, however, not a sufficiently significant variable when considered on its own. The economic value creation is of greater significance, which cannot be evaluated properly using the combined ratio alone. We track this value internally using the highly significant variable of value added. Value added is characterised by the fact that value creation is not evaluated on the basis of current and forecast gains alone but also by taking into account the amount of risks taken. The value added is calculated as the difference between adjusted results and cost of capital. The adjusted results are made up of the technical result as derived from the income statement, the investment result as well as other non-technical income. In each case, value-based adjustments are made. Life and Health: embedded value The products of life insurance and health insurance business are characterised by their long-term nature and the distribution of results over the duration of the policies. For valuing such long-term portfolios whose performance cannot be reasonably measured on the basis of a single year, we follow the Principles of Market Consistent Embedded Value (MCEV), the current version of which was published by the European Insurance CFO Forum in October MCEV comprises a company s equity and the value of in-force covered business. The latter is the present value of future profits from the insurance portfolio and related investments calculated using financial and actuarial methods, taking into consideration the fair value of the financial options and guarantees and the explicitly determined costs of capital. MCEV relates to the portfolio existing at the valuation date. This constitutes more than 94% of our life insurance and long-term health insurance business. By contrast, MCEV does not include the value of future new business. However, the evaluation is made on the basis of the assumption that operating activities will continue. Options and guarantees especially for the policyholders are explicitly valued using stochastic simulations. MCEV reflects the present value of all cash flows for all important currency regions on the basis of the so-called swap rates and the implicit volatilities at the valuation date of 31 December Assets that are traded on the capital markets are valued on the basis of the market values observed at the valuation date. This kind of adjusted result is compared with the requisite cost of capital. This is basically derived from the risk capital based in our internal model. As far as non-life insurance is concerned, value is added to the extent that, measured on the basis of one calendar year, the adjusted result exceeds the cost of equity.

15 ERGO Insurance Group Management Report The ERGO Insurance Group 13 The development of the insurance portfolio is modelled by applying the current expectations of biometrics, lapses and costs. The participation of policyholders in bonuses is modelled according to the current planning and in line with the statutory regulations, and these are included in the valuation. For the respective individual companies, tax rates and calculations used are based on national regulations; tax losses carried forward are also included in the calculation. Withholding taxes on dividends paid by Group companies are disregarded. The cost of capital includes taxes and costs of investment management as well as not explicitly modelled risks of business and, for health insurance, the participation of policyholders in bonuses. The change in MCEV within one year excluding effects of exchange rate fluctuations, acquisition or sale of companies, dividends and capital injections is shown as the total embedded value earnings. If this is adjusted by also including the influences of changes in fiscal and capital market parameters, the term is known as the embedded value operating earnings, which are a measure of the operative business performance for one year. Non-financial controlling variables In addition to these purely financial factors, non-financial performance indicators like innovation, speed of processes, staff-training level as well as customer satisfaction, sales service and productivity play a part. In the long term, a company can only be successful if it operates sustainably and takes account of future-oriented qualitative factors as well. This is why our strategic management focuses on the five target groups, namely customers, sales partners, staff, society and investors. We promote an entrepreneurial culture among our staff through the clear allocation of responsibility and accountability, recognising how much the individual, unit or field of business contributes to increasing value. Our incentive systems for staff, executives and the Board of Management support the clear orientation towards value creation. The higher a staff member or executive is positioned in the management hierarchy, the more strongly their remuneration is based on performance. Managing investments Our management of investments is strongly geared to the structure of the liabilities on our balance sheet and the duration profile. A benchmark portfolio is developed that reflects our own risk-bearing capacity and other investor preferences on the basis of long-term expectations of capital market yields. Our asset manager MEAG trades this strategic benchmark portfolio for concrete asset management, only deviating from this course within carefully defined limits and keeping in line with its market assessment. The target return, i. e. the expected income from the benchmark portfolio, is compared with the return from the actual portfolio. MEAG s performance is measured in terms of the excess return it achieves compared to the benchmark portfolio, taking into consideration the risk incurred.

16 ERGO Insurance Group 14 Management Report The ERGO Insurance Group Governing bodies Supervisory Board Dr. Nikolaus von Bomhard, Chairman Chairman of the Board of Münchener Rückversicherungs-Gesellschaft AG Michael David, Deputy Chairman Employee of ERGO Dr. Christine Bortenlänger, since 1 January 2012 Member of the Board of Management of Bayerischen Börse AG and Member of the Executive Board of Börse München Hans-Peter Claußen Employee of ERGO Dr. Karin Dorrepaal, until 31 December 2011 Senior Vice President of Corporate Strategy & Acquisitions Department, Royal DSM N. V. Ralph Eisenhauer Executive Employee of ERGO Frank Fassin District Chairman for NRW of ver.di NRW Prof. Dr. Nadine Gatzert Professor for insurance economics at the Friedrich-Alexander University in Erlangen-Nuremberg Ira Gloe-Semler Associated union of workers secretary ver.di Dr. Heiner Hasford Former Board member of Münchener Rückversicherungs-Gesellschaft AG Dieter Herzog Employee of ERGO Dr. Alan Hippe, from 1 January until 31 May 2011 Member of the Corporate Executive Committee of F. Hoffmann-La Roche Ltd. Dr. Lothar Meyer Former Chairman of the Board of Management of ERGO Versicherungsgruppe AG Dr. Markus Miele Managing Partner of Miele & Cie. KG Silvia Müller Employee of ERGO Marco Nörenberg Employee of ERGO Bernd Otten, since 15 July 2011 Head of Corporate Office of Münchener Rückversicherungs-Gesellschaft AG Prof. Dr. Bernd Raffelhüschen Director of the Institute for Public Finance at the Albert-Ludwigs-University in Freiburg Richard Sommer Head of the Federal Group Insurance of ver.di Dr. Theodor Weimer Spokesman of the Board of Management of UniCredit Bank AG Heinz Wink IT-Employee Prof. Dr. Klaus L. Wübbenhorst Managing Partner of WB Consult GmbH

17 ERGO Insurance Group Management Report The ERGO Insurance Group Governing bodies 15 Audit Committee Dr. Heiner Hasford Heinz Wink Dr. Theodor Weimer Board Committee Dr. Nikolaus von Bomhard Hans-Peter Claußen Dr. Markus Miele Nomination Committee Dr. Nikolaus von Bomhard Dr. Lothar Meyer Dr. Markus Miele Standing Committee Dr. Nikolaus von Bomhard Michael David Dr. Lothar Meyer Dr. Markus Miele Marco Nörenberg Conference Committee Dr. Nikolaus von Bomhard Michael David Dr. Heiner Hasford Richard Sommer Board of Management Dr. Torsten Oletzky, Chairman Group Development Communications Legal Affairs, Compliance Internal Auditing Dr. Bettina Anders Customer Service, Company Organisation and IT Dr. Daniel von Borries Finances and Investments Life Insurance Germany MEAG/ERGO-Interface Christian Diedrich Non-Life Insurance (Property-Casualty, Legal Protection) Germany Dr. Christoph Jurecka, since 1 February 2011 Accounting, Taxes, Planning and Controlling, Risk Management Dr. Jochen Messemer International Operations (except for Health Insurance) Dr. Clemens Muth Health Insurance Germany and Abroad Dr. Rolf Ulrich, until 31 January 2011 Accounting, Taxes, Planning and Controlling, Risk Management Jürgen Vetter, until 31 December 2011 Sales Germany, Competence Centre Bank Sales Germany and International, Strategic Marketing, Brand Management Dr. Rolf Wiswesser, since 1 November 2011 Sales Germany, Competence Centre Bank Sales Germany and International, Strategic Marketing, Brand Management Dr. Ulf Mainzer, Labour Director Domestic Human Resources as well as Comprehensive Questions of Principle General Services, Facility and Materials Management/Purchasing and Logistics Germany

18 ERGO Insurance Group 16 Management Report Parameters Our business environment is defined by a number of long-term global trends. Demographic changes are giving rise to fundamental shifts in large parts of the world and are creating enormous challenges for social welfare and healthcare systems, especially in industrialised countries. The increasing life expectancy and falling birth rates are placing an enormous burden on pay-as-you-go social welfare systems. Europeans will therefore only be able to maintain their old-age provision and first-class medical care in the medium term if they take out additional private cover. This presents a great opportunity to the private insurance industry. Developing and emerging countries have not only seen rapid population growth but also a swifter rise in prosperity among broad sections of the population. As a result, the Asian economies in particular are growing in importance globally. By contrast, the economic and geopolitical weight of industrialised countries is declining in relative terms. Worldwide economic integration, technical progress and digitalisation are speeding up the global network of capital flows and supply chains and are increasing the complexity of the world economy. Against this backdrop, we are observing a rising number of major events which are having an impact on the insurance industry. Insured losses are rising disproportionately to economic activity. We believe that climate change is contributing to this, alongside advancing urbanisation and a concentration of assets in exposed regions. This gives rise to new potential and cumulative risks which are making it essential that underwriting practice be constantly developed. Companies like ERGO, which are among the leaders in terms of risk management, are able to take advantage of the opportunities arising from this global trend. With our pronounced risk awareness, we are able to hold our ground even in a complex and volatile environment. General economic trend As expected, the recovery of the world economy weakened in Global growth differences are widening. While economic growth stagnated at the beginning of the year in the United States and mainly in the second half of the year in the eurozone, most emerging and developing countries recorded high growth rates, even though they were somewhat lower than in the previous year. The government debt crisis in the peripheral countries of the eurozone again came to a head, threatening to expand into a banking crisis, and unsettled companies and consumers. There was little buoyancy in the economy of the eurozone. Growth in Germany was above average for the eurozone but lost momentum towards the end of the year due to a worsening of international parameters. German price-adjusted GDP rose by 3.0% in 2011 (provisional estimate of the Federal Bureau of Statistics of 11 January 2012). The trend on the German labour market remained positive. The unemployment rate fell over the year from 7.9% in January to 6.6% in December, with an average of 7.1% across the year. Consumer price inflation in Germany rose in 2011 as a result of high prices for raw materials, with an average across the year of 2.3%. Capital market trends Fluctuations in international share markets again increased significantly, particularly in the second half of The main reason for this was the escalation of the government debt crisis in the eurozone and the fear of a slump in world growth. Both the Euro Stoxx 50 price index ( 17.1%) and the DAX performance index ( 14.7%) were well down over the year.

19 ERGO Insurance Group Management Report Parameters 17 While the European Central Bank (ECB) initially launched a cycle of raising interest rates because of much higher inflation, increasing the base rate in both April and June, by August it was already being forced to change track in the face of the escalating government debt crisis and again bought up government bonds of the peripheral euro countries. In November, it then did a U-turn on interest rates, reducing the base rate first to 1.25% and then in December to 1.0%. Despite growing inflationary pressure, the US reserve bank held firm to its policy of low interest rates at the beginning of the year. When the economic conditions then deteriorated, the Federal Reserve went as far as to announce that, in the prevailing climate, it intended to keep its base rate on hold at % until the middle of It also decided to increase the average residual term of its government bond purchases in order to keep longterm interest rates low. Given the high demand for forms of investment deemed secure, returns on ten-year German government bonds fell over the year from 3.0% to 1.8%, and returns on US govern ment bonds likewise fell in the same period from 3.3% to 1.9%. The trend in the insurance industry The overall economic trend has a strong effect on the development of premiums in the insurance industry, especially for property-casualty insurance. In the case of life and health insurance, additional important factors are the influence of capital markets and changes in the legal and tax framework. This means that the European insurance markets operate according to very different parameters. In line with the focal point of our business, the sections below go into more detail concerning trends on our home market of Germany. In 2011, premiums there fell by 1.2% overall (provisional estimate of the German Insurance Association, the GDV, from November 2011). Market figures are based on gross figures determined according to the German Commercial Code (HGB), so they are not necessarily comparable with figures calculated according to IFRS or net of reinsurance. Life insurance in 2011 Against the backdrop of continuing difficult conditions on capital markets, security and reliability take priority for customers. Nevertheless, premium income on the German life insurance market (including pension and retirement funds) fell by 4.2% to 86.6 billion (90.4 bn) according to the provisional figures of the German Insurance Association. This was above all due to the fact that life insurers concluded significantly less single-premium business. Overall, there was therefore also a decline in new business despite higher ongoing premiums. Payments to life insurance customers rose appreciably to 81.0 billion (72.9 bn). There was particularly high demand for classical annuity insurance in the 2011 financial year. State-subsidised products also continued to fare well. Supplementary insurance against the financial impact of occupational disability and the need for long-term nursing care also recorded a marked increase in business. New company pension scheme business fell in Direct insurance and reinsurance were unable to repeat the high level of new business seen in the previous year, and new single premium business fell significantly. By contrast, pension and retirement funds recorded good growth. Private health insurance in 2011 The Act on the financing of the statutory health insurance scheme ( GKV-Finanzierungsgesetz ) again abolished the three-year waiting period for employees wishing to transfer from the statutory health insurance scheme to a private health insurance scheme with effect from 31 December. This led market-wide to an increase in new business for comprehensive insurance. An increase was also recorded for supplementary insurance cover. According to initial provisional forecasts, private health insurance achieved premium growth of 4.9% to a total of 34.9 billion (33.3 bn) in Insurance benefits, including loss adjustment expenses, are expected to have risen by around 5.5% to 23.1 billion (21.9 bn). This growth rate for health insurance was thus well above the general rise in prices.

20 ERGO Insurance Group Management Report Parameters 18 Property-casualty insurance in 2011 Property-casualty insurance benefited from the favourable economic conditions in Germany and recorded premium growth of 2.7% to 56.7 billion (55.2 bn). All segments demonstrated growth, albeit only slightly in some cases. In motor insurance (+ 3.5%), this pointed to an end to the cycle of falling prices. Opportunities to adjust premiums existed for private property insurance (+ 1.8%), general liability insurance (+ 2.5%) and legal protection insurance (+ 2.0%). The positive economic trend impacted on transport and aviation insurance (+ 6.0%). Market growth for accident insurance (+ 1.0%) was due above all to single premium business. However, claims rose considerably on the previous year as well. The combined ratio, at around 98%, is likely to be on par with last year. The reasons for this are the long period of frost at the beginning of the year and storm s and hailstorms during the summer. An overall technical profit of 0.8 billion (0.9 bn) was achieved. Market figures are taken from the provisional data of the German Insurance Association from November 2011.

21 ERGO Insurance Group 19 Management Report Business performance The 2011 financial year brought many challenges for the ERGO Insurance Group. First and foremost, there was the government debt crisis in the eurozone. This gave rise to considerable turbulence on the capital markets and has pushed interest rates, particularly those on German govern ment bonds, to all-time lows. Against this backdrop, we have proved our stability in terms of both premiums and our result. Given the circumstances, the consolidated result of 349 million (355 m) is very satisfactory, even if we had set our sights higher. The return on equity was 9.5% (8.8%). The investment result reflected events on the capital markets and, at 4.1 billion (5.2 bn), was significantly lower than in the previous year. High write-downs on Greek government bonds were offset by profits from the international health insurance companies sold to Munich Re and a real-estate investment in Singapore as well as write-ups to our interest rate hedges to protect against the long-lasting period of low interest rates. Figures for long-term business in the life and health insurance segments were put under considerable strain in the reporting year. This was mainly due to the sharp drop in interest rates on top-rated fixed-interest securities. In view of the critical situation on the capital markets, alltime lows were reached and volatility was high. The strain caused by the bonds of European peripheral states should also be mentioned. We also calibrated our models, which we are otherwise constantly developing, very conservatively. The embedded value (MCEV) calculated in strict compliance with market-consistent methods, i. e. without applying interest surcharges such as illiquidity premiums, fell at the end of the year to 875 million (4,108 m). The value of the guarantees we give to our customers in the context of life insurance rose considerably under these conditions. This also impacted on total MCEV earnings, which stood at 2,977 million ( 724 m). The value of new business was only 37 million (141 m). Premium income Total premium income stood at 20.3 billion (20.1 bn) in the reporting year and had therefore risen slightly by 0.7%. Gross premiums written in accordance with IFRS were up by 1.0% to 18.6 billion (18.5 bn). This does not include savings premiums from unit-linked life-insurance policies or capitalisation products. For domestic business, total premium income stood at 14.6 billion (14.4 bn) (+1.0%), while gross premiums written in accordance with IFRS were billion (13.26 bn) (+0.2%). Our international business saw moderate growth, with gross premiums written in accordance with IFRS amounting to 5.4 billion (5.2 bn) (+3.0%) and total premium income at 5.7 billion (5.7 bn). This apparent overall stability hides various trends in the business divisions of life (Germany), health, propertycasualty (Germany), direct insurance, travel insurance and international. For German life insurance, we recorded a 3.2% drop in total premium income, while gross premiums written were also down by 5.7%. This was due above all to much lower oneoff premiums. As a result of the interest-rate situation, we conducted this business on less attractive terms and thus wrote much less business, but this was true for the entire German market. ERGO Insurance Group 2011 Change % Total premium income 20,270 20, Gross premiums written 18,639 18, Investment result 4,116 5, Net insurance benefits 1 16,823 17, Net operating expenses 3,814 3, Consolidated result Incl. policyholders profit participation