Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006 Notes_Notes to the consolidated balance sheet – Assets
Interest-rate risks in life primary insurance have been hedged using
swaptions. These options to receive a fixed-interest rate are shown in
the category “interest-rate risks/over-the-counter”. At the reporting
date, the fair values of the swaptions totalled €160m (652m), and the
underlying notional principal amounts €16,933m (15,639m). The
investment result from derivatives includes a loss of €297m (–82m)
from fluctuations in value of these options.
Although the derivatives in the Munich Re Group essentially
serve to hedge against risks, only an amount of –€18m (60m) meets
the requirements of IAS 39 for hedge accounting.
IAS 39 distinguishes between fair value hedges and cash flow
hedges.
Fair value hedges
In the case of fair value hedges, the change in the fair value of the
hedging instrument and the change in the fair value of the hedged
instrument are recognised in profit or loss under the items “investment
income” and “investment expenses” in the income statement.
In the Munich Re Group, hedging relationships in the form of fair
value hedges are used to selectively and efficiently reduce currency
risks of parts of the portfolio and to mitigate other market-price risks.
Periods to maturity and amount of the hedged cash flows at the balance sheet date
The main types of transaction employed for hedging are currency
forwards and options. The fair value of the derivatives used for this
amounted to –€33m (19m) at the balance sheet date. In 2006, the following
changes in value were recognised in the consolidated income
statement: –€33m for the hedging instruments and €36m for the
relevant underlyings.
Cash flow hedges
Cash flow hedges play a role in countering fluctuations that may be
caused, for example, by variable interest payments. In the Munich Re
Group, cash flow hedges are used chiefly to hedge against interestrate
risks, with interest-rate swaps the main instruments employed.
Changes in the fair value of the hedging instrument are recognised
directly in equity for this purpose. Only when the actual cash inflow
or outflow takes place, as a result of the hedged circumstance, is the
relevant equity item reversed with recognition in profit or loss.
At the balance sheet date, there is an equity item of €14m (6m)
from cash flow hedges. The net fair value of the derivatives falling
into this category amounted to €15m (41m) at the balance sheet date.
< 1 1–2 2–3 3–4 4–5 > 5
All figures in €m
Notional principal amounts
year years years years years years 31.12.2006 Prev. year
of hedged transactions 10 171 135 – – 250 566 712
(9) Deposits retained on assumed reinsurance
Deposits retained on assumed reinsurance serve directly as collateral
for technical provisions covering business assumed from cedants in
reinsurance. The counterparty risk is therefore limited. The amount
of and changes in deposits retained on assumed reinsurance in the
balance sheet year generally derive from the values for the changes
in the related technical provisions for the reinsured business.
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