Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006 Notes_Assets
The net investment result comprises regular income, income from
write-ups, gains and losses on the disposal of investments, other
income, write-downs of investments, management expenses, interest
charges and other expenses. Regular income and expenses from
investments measured at fair value without impact on profit or loss
are calculated in accordance with the effective interest method, i.e.
any premiums or discounts are deducted from or added to the acquisition
costs, with impact on profit or loss, until maturity.
Impairment
Regularly, at each balance sheet date, we assess whether there is any
substantial objective evidence of impairment in a financial asset or
group of financial assets.
In the case of all fixed-interest securities held to maturity or available
for sale, as well as all non-fixed-interest securities, impairments
in value – in contrast to temporary diminutions – are recognised as
an expense in the income statement. IAS 39.59 contains a list of factors
providing substantial objective evidence of impairment of such
financial assets. In addition, IAS 39.61 states that for equity investments,
a significant or prolonged decline in the fair value of the
investment below its acquisition cost is objective evidence of impairment.
These rules are given more concrete form by means of
appropriate internal guidelines.
Acquisition cost is determined on the basis of the average company
purchase prices. In the case of an impairment, a write-down is
made to the fair value at the balance sheet date, i.e. generally the
publicly quoted market price. If there is a further fall in the fair value
of equity investments that have already been written down once, a
further write-down recognised in the income statement is made
again immediately, even if the impairment is only temporary. Impairments
recognised in profit or loss may not be reversed through profit
or loss.
In the impairment test for financial assets carried at amortised
cost, we first asses whether objective evidence of impairment exists
for items that are individually significant. If this is not the case, and
also in the case of individually insignificant items, the impairment
test is carried out collectively on the basis of groups of similar financial
assets. Assets that are individually assessed for impairment are
not included in the collective assessment. The amount of the probable
loss is measured as the difference between the carrying amount
of the asset or group of assets and the present value of estimated
future cash flows. The carrying amount is reduced by this amount,
which is recognised as an expense. If, in a subsequent period, the
reasons for the impairment cease to apply, the impairment is
reversed, with impact on the income statement. The resultant carrying
amount may not exceed the original amortised cost.
C Investments for the benefit of life insurance policyholders who
bear the investment risk
These are investments for policyholders under unit-linked life insurances.
They are measured at fair value. Unrealised gains or losses
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from changes in fair value are included in the investment result.
These are matched by corresponding changes in the technical provisions
(equity and liabilities item D), which are taken into account in
the underwriting result.
D Ceded share of technical provisions
The share of technical provisions for business ceded by us is determined
from the respective technical provisions in accordance with
the terms of the reinsurance agreements, cf. the notes on equity and
liabilities item C. Appropriate allowance is made for credit risk.
E Receivables
Receivables on primary insurance business, accounts receivable on
reinsurance and other receivables are accounted for at face value.
Adjustments of value are made if there is objective evidence of
impairment, cf. assets item B (Impairment)
F Cash at bank, cheques and cash in hand
Cash and cheques are accounted for at their face value.
G Deferred acquisition costs
Deferred acquisition costs comprise commissions and other variable
costs directly connected with acquisition or renewal of insurance
contracts.
In life business and health primary insurance, acquisition costs
are capitalised and amortised over the duration of the contracts,
either proportionally to the premium income (FAS 60) or proportionally
to the respective contracts’ expected gross profit margins calculated
for the relevant year of the contract term (FAS 97, 120). The
allocation of individual contracts to the FASs concerned is shown in
the notes on equity and liabilities item C. In determining the amount
of amortisation, we take into account an actuarial interest rate and
changes resulting from the disposal of contracts from the portfolio.
In property-casualty business and health reinsurance, the deferred
acquisition costs are amortised on a straight-line basis over the average
term of the policies, from one to five years. Deferred acquisition
costs are regularly tested for impairment using a liability adequacy
test as per IFRS 4; cf. notes on equity and liabilities item C.
H Deferred tax assets
Under IAS 12, deferred tax assets must be recognised in cases where
asset items have to be valued lower, or liability items higher, in the
consolidated balance sheet than in the tax accounts of the Group
company concerned and these differences will be eliminated at a
later date with a corresponding effect on taxable income (temporary
differences). Also included are tax assets deriving from tax loss
carry-forwards. We take into account the tax rates of the countries
concerned and the company’s respective tax situation; in some
cases, for purposes of simplification, we use uniform tax rates for
individual circumstances or subsidiaries. Where unrealised losses on