Long-term incentive plans

Every year since 1 July 1999, Munich Reinsurance Company has set up longterm incentive plans, each with a term of seven years. Entitled to participate in these share-price-related remuneration plans are members of the Board of Management, senior management in Munich, and top executives in Munich Re’s international organisation. Participants receive a certain number of stock appreciation rights.

The relevant initial share price for the stock appreciation rights is calculated from the average of closing prices for Munich Re shares in Frankfurt Xetra trading over the last three months prior to plan commencement. The initial price for the 2007 long-term incentive plan is €134.07 (108.87). As a result of Munich Reinsurance Company’s capital increase in the financial year 2003, the initial share prices for the stock appreciation rights issued up to then and the number of stock appreciation rights already granted were adjusted in accordance with the conditions. In the year under review, a total of 341,737 (443,609) stock appreciation rights were granted, 91,919 (150,687) of these to Board of Management members. The future obligations arising from the long-term incentive plans are covered by Munich Re shares.

The personnel expenses and income incurred for the stock appreciation rights are determined on the basis of the change in the fair value of the underlying options. The fair value recognises not only the intrinsic value (difference between current share price and initial share price of the stock appreciation rights) but also the possibility of growth in value up to the date of forfeiture or expiry of the rights and is determined on the basis of recognised valuation models, taking into account the exercise conditions. At each balance sheet date, the fair value is calculated and reserved; this amount is recognised in full. In the year under review, related provisions of €55.8m (63.2m) had to be posted for the reinsurers in the Munich Re Group. The personnel expenses/income recognised in the income statement corresponds to the change in the provision in the year under review, taking into consideration any rights exercised. In 2007, this resulted in expenses of €3.9m (22.2m). The weighted average share price for the stock appreciation rights exercised in 2007 was €134.25 for plan year 2003, €131.51 for plan year 2004, and €135.26 for plan year 2005. The intrinsic value of the exercisable stock appreciation rights amounted to €31.6m at the balance sheet date.

Since 1 July 2002, ERGO Versicherungsgruppe AG and some of its subsidiaries, as well as Europäische Reiseversicherung AG and MEAG MUNICH ERGO AssetManagement GmbH, have also set up long-term incentive plans at yearly intervals and with terms of seven years each. The persons entitled to participate – Board of Management members, managing directors and, in individual cases, also top executives – are granted a defined number of stock appreciation rights in respect of Munich Re shares. The design of the plans is identical to that of Munich Re’s long-term incentive plans and they are accounted for in the same way. In the year under review, a total of 121,821 (173,682) stock appreciation rights were granted, 93,988 (131,040) of these to Board of Management members. The future obligations arising from the long-term incentive plans are covered by Munich Re shares or appropriate financing instruments. In the year under review, related provisions of €18.1m (20.4m) had to be posted for the primary insurers and asset managers in the Munich Re Group. The personnel income/expenses recognised in the income statement corresponds to the change in the provision in the year under review, taking into consideration any rights exercised. In 2007, this resulted in income of €0.8m (–6.4m). The weighted average share price for the stock appreciation rights exercised in 2007 was €134.20 for plan year 2003, €132.89 for plan year 2004, and €135.19 for the plan year 2005. The intrinsic value of the exercisable stock appreciation rights amounted to €9.5m at the balance sheet date.

Each stock appreciation right entitles the holder to draw in cash the difference between the Munich Re share price at the time when the right is exercised and the initial share price. The stock appreciation rights may only be exercised after a two-year vesting period and then only if the share price is at least 20% higher than the initial price. In addition, Munich Re shares must have outperformed the EURO STOXX 50 twice at the end of a three-month period during the term of the plan. The gross amount that may be obtained from the exercising of the stock appreciation rights is limited to an increase of 150% of the initial share price.

When the stock appreciation rights are exercised, the cash payment is made (in the respective national currency) by the company that granted the rights. Stock appreciation rights not exercised on the last trading day of the plan term are exercised on the participant’s behalf insofar as the prerequisites for this are met. If the prerequisites are not met, the stock appreciation rights are forfeited. If another company acquires control of Munich Re or the company’s group of shareholders changes significantly due to a merger or comparable transaction or intended business combination (“change in control”), all plan participants from the Munich Re Group may exercise their stock appreciation rights within 60 days after the change in control becomes effective, even if the prerequisites for exercising the rights are not yet met at that juncture.