Report of the Supervisory Board

Ladies and gentlemen,

2011 was an extraordinary year in many respects: Munich Re had to absorb the highest losses from natural catastrophes in its history – and this at a time when the financial markets found themselves in an extremely difficult situation. In this challenging environment, the Supervisory Board fulfilled with due care all the tasks and duties incumbent upon it under the law, the Articles of Association and the rules of procedure. We closely monitored the work of the Board of Management, providing regular advice on its running of the Company, and subjecting its conduct of the business to critical review and supervision. Inspection measures in accordance with Section 111 para. 2 sentence 1 of the German Stock Companies Act were at no time required.

Collaboration between Supervisory Board and Board of Management

The collaboration between the Supervisory Board and the Board of Management was constructive and characterised by a spirit of mutual trust. The Board of Management met its reporting obligations towards the Supervisory Board in full. In total, six ordinary meetings of the Supervisory Board took place, with the Board of Management participating in meetings where the topics discussed did not require its absence. This afforded the Supervisory Board an intensive exchange with the Board of Management and gave us a good insight into the competitive position, strategic considerations, corporate planning and the Group’s development. The Board of Management kept us constantly informed both orally and in writing about all important business transactions. The Supervisory Board was directly involved in all decisions of fundamental significance to the Company. We reviewed and – where necessary – questioned the information supplied by the Board of Management.

Between the meetings, the Board of Management reported to us on an ad-hoc basis concerning important matters in the Group – for example the effects of the earthquake in Japan on the business, the incidents at ERGO /HMI reported in the press and the necessary corrective measures, and the initial loss estimates for Hurricane Irene and the floods in Thailand.

Beyond this, as Chairman of the Supervisory Board, I was in regular contact with the Chairman of the Board of Management, particularly in connection with issues of strategy, corporate risk management and current business performance. The Chairman of the Board of Management informed me promptly of significant events and developments in the Group. Between the meetings, Jörg Schneider, member of the Board of Management responsible for Group reporting, provided timely updates on key events and developments to Henning Kagermann, Chairman of the Audit Committee. In addition, the shareholder representatives and employee representatives frequently availed themselves of opportunities prior to the Supervisory Board meetings to discuss important topics separately with the Chairman of the Board of Management.

Focal points of the meetings of the full Supervisory Board

At five of the six meetings, we obtained detailed reports on Munich Re’s performance. Together with the Board of Management, we concerned ourselves with the strategic risks and opportunities of the individual fields of business and gave detailed consideration to the effects of the exceptional accumulation of very severe natural catastrophes and the continuing global financial crisis on the Group’s assets and results. In addition to obtaining regular reports on the development of the Group’s investments, at one of our meetings we received a presentation by MEAG’s Managing Director on how asset management is organised at Munich Re, and on MEAG’s tasks and role. The incidents at ERGO reported in the press, their investigation and the changes necessary in this context were also a focus of our consultations. Furthermore, we engaged in discussions with the Board of Management on economic risk capital requirements and risk-bearing capacity, on the effects of pending reforms to key parameters such as those deriving from the new European supervisory system, Solvency II, and the IFRS accounting revisions, and on the highly specific issue of the systemic relevance of insurers.

At our first meeting in 2011, we dealt with the Company and Group financial statements for the financial year 2010 and prepared the motions for resolution by the 2011 Annual General Meeting. Besides taking the decision to extend the appointments of three members of the Board of Management, we also reached a resolution on the evaluation of individual objectives for annual performance in 2010. In addition, we established the individual objectives for the Board members’ variable remuneration components for 2011, and took reports on compliance and anti-fraud management. Finally, we appointed the external auditors for the 2011 financial year.

At our meeting in April, we concerned ourselves with matters relating exclusively to the Board of Management. We assessed the extent to which the Board of Management had achieved its financial objectives, and determined the amount of bonus payments for the members of the Board of Management based on their annual performance in 2010. As usual, at another meeting immediately prior to the Annual General Meeting, the Board of Management gave us an account of business performance thus far in the year under review.

At its meeting in July, the Supervisory Board received reports on topics including the Group’s prospects in German life primary insurance business. We also discussed the main focuses of human resources work in the Group. In the same session, the Board of Management gave us an account of the structure of the compensation systems in the Group, thus fulfilling its annual obligation pursuant to Section 3 para. 5 of the German regulation on the supervisory law requirements for remuneration schemes in the insurance sector (VersVergV).

In October, the agenda included issues of corporate governance, an in-depth report on the development and status of ERGO International, and discussion of the positioning of Munich Re (non-life reinsurance) in Greater China.

At its last meeting in December, routinely attended by two representatives of the German Federal Financial Supervisory Authority (BaFin) as guests, the Supervisory Board dealt with the Board of Management’s remuneration from 2012 onwards. We decided on the weightings of the individual target categories and measurement bases for annual and multi-year performance for the financial objectives in connection with the variable remuneration for 2012. The Chief Risk Officer gave his assessment of the risk situation and the Group’s risk-bearing capacity and discussed the Group’s risk strategy in detail with us. We also concerned ourselves with the Group planning for 2012 to 2014 presented by the Board of Management, in connection with which we also considered deviations in business performance from the planning for the year under review. A presentation on Munich Health gave us an impression of the development of this business field, and we looked into the current challenges in health primary insurance in Germany.

Work of the committees

The Supervisory Board has a total of five committees in place that enable us to perform our tasks efficiently and deal with complex issues more intensively in smaller bodies. The committees’ main tasks include preparing resolutions to be taken by the full Supervisory Board and topics for its agenda. Details regarding the responsibilities of the respective committees are available in the corporate governance report on page 26 f. The composition of each committee is shown on page 30 f. At all meetings of the full Supervisory Board, the committee chairmen submitted detailed reports on the topics dealt with by the committees and the results of these consultations.

The Personnel Committee met six times in 2011. It prepared the proposals to be submitted to the full Supervisory Board regarding the individual variable remuneration targets for the members of the Board of Management in the year under review. Moreover, it adopted proposals to the Supervisory Board regarding the extension of three Board members’ contracts, the assessment of the individual and financial objectives of the members of the Board of Management, and the bonus payments from the 2010 annual performance. The committee obtained comprehensive reports on the fringe benefits and remuneration in kind for the Board of Management as disclosed in the 2010 Annual Report, and on the status of succession planning for the Board of Management. The Personnel Committee approved the acceptance of several seats on supervisory, advisory and similar boards by members of the Board of Management. At the end of the reporting period, the committee very closely considered the proposal submitted to the full Supervisory Board regarding the Board of Management’s remuneration from 2012 onwards. It also prepared submissions to the full Board on the weightings of the individual target categories and measurement bases for the financial objectives in connection with the variable remuneration for 2012.

At its four meetings in 2011, the Standing Committee devoted itself mainly to the preparation of Supervisory Board meetings and to topics of corporate governance. The report on the share register was another regular item on the agenda.

The Audit Committee held seven meetings in the period under review. At two meetings, it discussed in detail the Company and Group financial statements, the Company and Group management report, the auditor’s report and the Board of Management’s proposal for the appropriation of the net retained profits for the financial year 2010. At one of these two meetings, the external auditor answered questions. In addition, the Audit Committee considered the 2011 quarterly reports and the 2011 half-year financial report, which it reviewed in the presence of the auditor.

The Head of Group Audit routinely provided information on the result of the 2010 audits and the audit planning for 2011. As usual, the Compliance Officer also reported to the committee. In fact, the Audit Committee dealt regularly with compliance topics, following in particular the events at ERGO, their investigation and the measures subsequently resolved; at an extraordinary meeting, the Audit Committee received an indepth report on these matters from the Chairman of the Board of Management and additionally – at another meeting – from the PwC representative tasked with performing the external review as well as the Chairman of ERGO’s Board of Management. In this context, the committee also conferred about the Group’s compliance system, ultimately specifying more precisely the tasks and monitoring functions it has to perform in respect of matters involving Group subsidiaries, in particular with regard to the delimitation of these tasks from those of the subsidiaries’ own bodies, especially where ERGO is concerned. The development of the embedded values in life reinsurance business and in life and health primary insurance business was a periodic item of discussion. Furthermore, the Audit Committee obtained detailed information from Munich Re’s Head of Information Technology on IT security.

The Audit Committee looked into the impact of the financial crisis on Munich Re again in the financial year ended. Asset management was thus a recurring topic of thorough debates at the meetings. The committee regularly monitored the Group’s risk situation; alongside quarterly written reports, it also received verbal updates from the Chief Risk Officer, with whom the members of the Audit Committee gave detailed consideration to developments in risk management and the risk strategy.

The committee reviewed and monitored the auditor’s independence. In this context, the Audit Committee took delivery of reports from the auditor on its auditing and nonaudit-related services. Likewise, the Audit Committee prepared for the full Supervisory Board the appointment of the external auditor for the financial year 2011, determined the main points of the audits, and set the auditor’s fees. Following a resolution by the full Supervisory Board, the Chairman of the Audit Committee commissioned the audit for the financial year 2011. Furthermore, it commissioned the external auditor with a review of the half-year financial report 2011. The good close cooperation with the external auditor was of notable benefit to the Audit Committee in its tasks and duties.

At the beginning of 2011, the Nomination Committee concluded the discussions it had begun in the previous year about a successor to Thomas Wellauer, who left the Supervisory Board as at 30 September 2010. The committee agreed to propose Annika Falkengren, President and CEO of Skandinaviska Enskilda Banken AB (publ), as a candidate to the shareholders.

The Conference Committee as per item 7.5 of the rules of procedure for the Supervisory Board did not need to be convened in the financial year ended.

Corporate governance and declaration of conformity

The efficiency audit of the Supervisory Board’s work, this time conducted on a non-formal basis, concluded that the measures to improve efficiency implemented in the previous year, which had been identified in an extensive study, had proven successful, and that the work of the Supervisory Board is considered to be efficient and appropriate overall.

A “first” in 2011 was an internal information event offered by Munich Re for all members of the Supervisory Board. As warranted by concrete circumstances, this was devoted to various aspects of the topic “natural catastrophes”, and was attended by the majority of the members of the Supervisory Board, as recommended in item 5.4.1 of the German Corporate Governance Code.

In November 2011, the Board of Management and Supervisory Board submitted their compulsory annual declaration of conformity with all the recommendations of the German Corporate Governance Code as per Section 161 of the German Stock Companies Act and their intention to continue complying with it in future. Further information on corporate governance in general is available in the joint report of the Board of Management and Supervisory Board on page 26 ff.

Changes on the Supervisory Board

On 20 April 2011, the Annual General Meeting of Shareholders elected Annika Falkengren, President and CEO of Skandinaviska Enskilda Banken AB (publ), to the Supervisory Board to succeed Thomas Wellauer. Annika Falkengren’s appointment brings another exceptionally qualified and internationally experienced figure to the Supervisory Board.

Company and Group financial statements

KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft duly audited the following documents and gave them an unqualified auditor’s opinion: the Company and Group management reports and financial statements as at 31 December 2011. The respective reports and the Board of Management’s proposal for appropriation of the net retained profits were subsequently submitted directly to the members of the Supervisory Board. At its meeting on 1 February 2012, the Audit Committee had already had the opportunity to confer in detail about the preliminary year-end figures as at 31 December 2011. On 11 March 2012, it prepared the Supervisory Board’s resolution on the adoption of the Company financial statements and the approval of the Group financial statements. To this end, the Audit Committee examined the Company and Group financial statements, the management reports and the Board of Management’s proposal for appropriation of the net retained profits. It discussed these at length with the auditor present at the meeting and gave detailed consideration to the auditor’s reports. The Chairman of the Audit Committee briefed the full Supervisory Board about the outcome of its consultations at the balance sheet meeting on 12 March 2012.

The full Supervisory Board also checked the Company and Group financial statements and management reports and the proposal of the Board of Management for appropriation of the net retained profits. On the basis of its own examination and having heard the auditor’s report, the Supervisory Board had no objections and agreed to the outcome of the external audit. It approved the Company and Group financial statements on 12 March 2011. The financial statements were thus adopted. Having carefully weighed all the relevant aspects, the Supervisory Board agreed with the proposal of the Board of Management for appropriation of the net retained profits.

Words of thanks to the Board of Management and employees

The Supervisory Board wishes to thank all the members of the Board of Management and staff for their great personal commitment and excellent work in a financial year that was as eventful as it was challenging.

Munich, 12 March 2012

For the Supervisory Board

Hans-Jürgen Schinzler
Chairman

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