Remuneration report

Structure of the remuneration system for the Board of Management

In conformity with the German Corporate Governance Code, we here explain the principles of the remuneration system for Munich Re’s Board of Management and the structuring of the individual remuneration components.

Until now, the structure and system governing the Board of Management’s remuneration has been determined by the Supervisory Board’s Personnel Committee, whose three members comprise the Chairman of the Supervisory Board, another of the shareholder representatives and one of the employee representatives. Regular reviews of the remuneration structure have been conducted by the full Supervisory Board.

In accordance with the German Corporate Governance Code, in future the remuneration system for the Board of Management, along with the key elements of relevant contracts, will be determined by the full Supervisory Board. The Supervisory Board’s Personnel Committee will prepare the draft resolutions for submission to the full Supervisory Board, which will review the remuneration system at least every three years unless earlier reviews become necessary in individual cases.

Fixed components

Basic remuneration

The fixed annual basic remuneration is paid in the form of a monthly salary.

Remuneration in kind/fringe benefits

Remuneration in kind and fringe benefits are granted according to function, and are commensurate with market conditions (DAX 30 companies). Income tax on the benefits in question is paid individually for each member of the Board of Management, with the Company bearing the amount due.

Variable components

Short-term compensation component – Annual bonus

This compensation component is based on different categories of objectives. The targets and scaling for Group, corporate and divisional objectives are geared to particular indicators; individual objectives form the basis for the achievement of personal targets. The key indicator used for the Group object ive is “return on risk-adjusted capital – RORAC”, which is comprised of key figures from external accounting, and from other key portfolio and performance data. Information on the definition of RORAC is provided here. We use the performance measures embodied in value-based management for the corporate and divisional objectives.

The processes defined to specify objectives and assess their achievement also involve the external auditor, who subjects the envisaged financial objectives to a predefined review procedure regarding their consistency and assessability, which includes analysing the calculation of the individual results achieved. The outcome of this review and any potentially controversial aspects are rendered transparent for the Supervisory Board’s Personnel Committee.

Medium- and long-term compensation component – Medium-term bonus

The medium-term bonus is based on performance over a three-year period and is measured on the basis of the Group result category from the short-term compensation component. Payments are made only if the achievement rate is at least 50% on average for the three-year period. The most recent three-year planning period expired on 31 December 2008.

A medium-term bonus has again been set up for the 2009 financial year, although its structure differs significantly from the previous three-year bonus plans. Whilst the new mid-term incentive plan is also geared to performance over a three-year period, it is set up afresh each year. It is intended to promote the mid- and long-term increase in the Munich Re Group’s value in terms of internal value creation (value-based success factors) and improving the Munich Re share’s total shareholder return (TSR).

Share-price-based compensation component – Long-term incentive plan

This remuneration component, with a long-term perspective, is linked to the sustained appreciation of Munich Re’s share price. The long-term incentive plan is set up each year, and the participants receive a certain number of stock appreciation rights. These can only be exercised if, after a two-year vesting period, Munich Re’s share price has risen by at least 20% since inception of the plan and the shares have outperformed the EURO STOXX 50 at least twice at the end of a three-month period during the term of the plan. The exercise hurdles are exacting and in keeping with the German Corporate Governance Code.

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, stock appreciation rights have only been exercised under the plans set up in 1999 and 2003 to 2005. Further information on the long-term incentive plans can be found here of the notes to the consolidated financial statements.

Weighting of remuneration components

In the case of 100% achievement of objectives (annual bonus, medium-term bonus) and based on the imputed value of the share-price-linked compensation (long-term incentive plan) at the granting date, the weightings of the individual components in terms of total remuneration are as follows: basic remuneration approx. 25%, annual bonus approx. 35%, medium-term bonus approx. 20%, and long-term incentive plan approx. 20%. Annual bonus, mediumterm bonus and long-term incentive plan together form a well-balanced and economic, i.e. strongly risk-based incentive system, ensuring that the targets set for the members of the Board of Management do not have undesirable effects.

In accordance with the recommendations of the German Corporate Governance Code, the monetary remuneration of the Board members thus comprises fixed and variable components.

The total remuneration is set at an appropriate level by the Supervisory Board’s Personnel Committee and reviewed at regular intervals, also taking into consideration data from peer-group companies. Criteria for the appropriateness of compensation are in particular the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole and the financial situation, performance and future prospects of Munich Re. New Board members are generally placed at a level which allows sufficient potential for development in the first three years.

Continued payment of remuneration in the case of incapacity to work

In the case of temporary incapacity to work due to illness or for other cause beyond the Board member’s control, the remuneration will be paid until the end of the contract of employment. The Company may terminate the contract prematurely if the Board member is incapacitated for a period of longer than 12 months and it is probable that he will be permanently unable to fully perform the duties conferred on him (permanent incapacity to work). In this event, the Board member will receive a disability pension.

Other remuneration

In the case of seats held on other boards, remuneration for board memberships must be paid over to the Company or is deducted in the course of regular compensation computation. Excepted from this is remuneration for memberships explicitly recognised by the Company as personal. No such memberships exist at present. In the event of a change of control, the members of the Board of Management have no contractual entitlement to payments. As far as the share-price-based remuneration is concerned, the conditions merely provide for special exercise options in the event of a change of control. Details of this are provided in the notes to the consolidated financial statements under position (43).