For us, “innovation” means devising a solution that is needed and new for the market. As reinsurers, we thus develop vital new earnings potentials. This does not happen of its own accord, but as a result of initiative, selfcriticism, creativity, entrepreneurial thinking and dialogue with our clients.
Dr. Bernd Kosub, developer of primus, Munich Re’s risk management system for human resources.
With our Group profit of €1.8bn, we did not quite reach our very ambitious target of €2bn. This is mainly due to the hvb Group’s special writedown, which only became known this January and impacted our income statement to the tune of €240m.
Whereas in the past we have focused on continuity in our dividend payments, in future the amount distributed will depend more strongly on the result for the year and on our capital resources and requirements. This means the dividend will fluctuate more strongly than in the past.
– We manage risks in both the primary insurance and the reinsurance sectors on this basis.
Implementation of our strategy From this strategic foundation, we derive concrete business -policy principles and initiatives for their realisation. The various strategies are set out in balanced scorecards. Such a scorecard exists firstly for the Munich Re Group as a whole. From this, scorecards are derived for primary insurance and reinsurance, and then cascaded downwards – in the case of the reinsurance group, for example, for the individual divisions, divisional units and departments. In these scorecards, we record in concrete terms who in the Group, in what position, instigates, carries out and is accountable for particular actions or initiatives, in order to generate the required added value. In so doing, we focus on the following aspects: Planning and setting of objectives 1) Actuarial implementation of the divisions ’ return on equity targets in riskcommensurate premium factors binding for all underwriters 2) Client segmentation to allocate capacity according to short- and longterm strategic result expectations
Meeting the individual requirements of our clients – Quality: We offer our clients individual, tailor-made solutions to which high standards are applied. – Market proximity and international presence: We are close to clients and the market, allowing us to identify at any early stage any changes in the social, economic and legal environment or among our cedants, to translate these changes into business measures, and thus to add value for our clients.
Any investment of capital in the Group must, from the investor’s point of view, offer at least the return of an alternative risk-commensurate investment (opportunity costs).
With numerous subsidiaries and affiliated companies in 11 countries, as well as a network of strategic cooperation agreements, Europäische Reiseversicherung is an effective international alliance. Its most important product is travel cancellation insurance. europäische is innovative in new sales channels such as the internet and in new types of insurance benefit. For example, its new Corporate Travel Insurance (cti) provides all-round travel protection for international business trips.
2004 became the year with the highest loss total in the north Pacific in recent decades, Tokage being the tenth cyclone to sweep over Japan.
The experts are agreed on the causes of this development: one of the main impacts of global climate change is that the oceans are becoming warmer. As a consequence, the area of water with the critical surface temperature of 26 to 27°c is also increasing – one of the conditions for a tropical cyclone. The result: a larger number of severe windstorms which, in turn, also produce higher claims amounts. Hurricane Andrew in 1992 is still the highest insurance loss ever caused by a single hurricane in the USA (us$ 17bn). Until recently, Hurricane Hugo in 1989 was listed as the second-highest (at us$ 4.5bn), but insured losses in the year under review for each and every one of the four large hurricanes were either equivalent to or even higher than the “hundred-year storm” Hugo.
As last season’s windstorm season demonstrated, natural hazard events can cause gigantic losses within a very short period. It is beyond dispute among climate experts that climate change will lead to more natural catastrophes and meteorological anomalies. The resultant losses could push the limits of the insurance industry’s capacity to assume these risks. New, innovative instruments are therefore becoming increasingly important for the industry.
The demands being made on insurance companies’ capitalisation are continually mounting, whilst the risks to which insurers are exposed are being looked at in an increasingly differentiated way. It is therefore becoming more and more important to actively manage these risks and the capital employed. An attractive option in this context is retrospective reinsurance. In contrast to conventional reinsurance, it provides protection not for future risk periods but for periods that have already expired. For it is a feature of insurance that although coverage has expired, the ultimate claims amount often remains unknown for a long time – possibly for decades in the case of liability business. Retrospective reinsurance offers the prospect of sharing the run-off risk with the reinsurer or even ceding it completely, freeing up capital for other investments.
Creating the platform for optimum care A special contribution to healthcare management is made by our subsidiary Mercur Assistance. As the first point of contact, it offers a 24/7 information and advisory service by phone, e-mail or internet to patients at home and abroad who need help in locating a doctor or answering medical questions. It takes on and bundles tasks that health insurers cannot provide on such a broad scale, thus helping to start things moving in the right direction right from the beginning of treatment. Mercur Assistance organised extensive support, for example, in 2002 after the attack on the synagogue on Djerba (Tunisia), or after a bus accident involving a German-Swiss travel group in Mexico in 2004, and not least following the terrible flood disaster in South Asia (see box). In the process, it has proved its ability to competently manage and coordinate help internationally in emergency situations.
Injured people far from home required special help: rapid medical care, treatment to stabilise their conditions, repatriation and, finally, hospitalisation as near to home as possible.
Last year dkv, which has been represented in China since 1998, participated in establishing the picc Health Insurance Company of China Limited. It is the first private health-only insurer, as it was hitherto customary in China to combine life and health insurance. dkv’s stake is 19%, the maximum share a foreign company is allowed to hold in Chinese enterprises. Partners in the joint venture are picc (51%), which is the largest Chinese insurance company with a premium income of us$ 6bn, and three Chinese investors, each holding a share of 10%. picc has a very attractive and well-established brand and a market-wide sales network.
Altogether, it can be said that private and companybased life insurance will continue to grow in importance as part of the overall concept of old-age provision. With a view to long-term and secure retirement provision, many investors see no real alternative to the mixture offered by life insurance – cover for the main biometric risks (such as death, longevity or disability), guaranteed interest plus additional profit sharing.
Munich Re Group Annual Report 2004 05_Corporate responsibility Supervisory Board committees
so that we can offer insurance solutions that keep pace with technological progress. Another important objective is to make partnerships with clients and investors even more transparent, thus strengthening trust.
With the global economy slowing down in the second half of the year, growth in the eurozone also decelerated, a trend that could not be prevented by the gradual recovery in domestic demand. Altogether, gdp in the eurozone improved by 2% according to preliminary official estimates, a substantial rise compared with the 0.5% increase of the previous year. Nevertheless, growth once again lagged behind that in the USA.
Capital markets Despite the favourable development of the economy, prices on the international stock markets only maintained the upward trend of 2003 in a weakened form. The good corporate profits in the USA and the eurozone contrasted with higher commodity prices. Important European indices achieved a slight rise in 2004, in particular thanks to a strong performance from mid-August on. At the end of the year, the euro stoxx 50 closed 7%, the dax 7% and the ftse 100 8% up on the previous year.
In Japan, property-casualty business was affected by exceptionally high losses from natural catastrophes (particularly typhoons) in summer and autumn 2004. Overall, Japanese insurers continued to benefit from an improved situation on the domestic capital markets.
The greatest increases in premium income last year were again recorded in the emerging markets, which profited not only from the generally stronger overall economic situation but also from a growing awareness of the need for insurance. China in particular achieved further significant increases in premium income.
At €17,526m (17,640m), premium in primary insurance remained fairly constant. Allowing for the changes in the consolidation group from the acquisition or sale of companies, growth was 0.4%. Changes in exchange rates do not play a significant role in primary insurance.
In our home market, Germany, our premium income totalled €1,687m (1,800m). We benefited from, among other things, the positive new business development among our clients, which was largely due to the change in the fiscal treatment of life insurance products. Besides this, the demand for disability and annuity covers continues to be high. Munich Re is the market leader in the reinsurance of these products. The reinsurance of life annuities, on the other hand, is not yet very widespread on the German market.
Property-casualty Risk-commensurate underwriting strengthens profitability Natural catastrophes impact result with around €715m Nevertheless, combined ratio of not more than 98.9%
Munich Re Group Annual Report 2004 06_Financial report Europe 2 and Latin America
Capital market solutions In this field, Munich Re operates as an alternative risk carrier and potential risk provider, the products being supplements to traditional reinsurance. Through our subsidiary Munich American Capital Markets, we are active in this segment, too, transferring risks both to and from the capital markets (see pages 65 f.). The targeted expansion of this field of business underlines our strategy of also doing business as a global risk carrier in this highly innovative segment.
Result The investment result increased from €4,209m to €4,587m in the year under review. Net expenses for claims and benefits decreased to €15,214m (15,888m). This was mainly attributable to appreciably lower allocations to the provision for premium refunds over the year, namely €1,035m (2,158m), of which €468m (1,282m) was apportionable to the provision for deferred premium refunds.
and homeowners’ insurance. Commercial and industrial property insurance, which we write very selectively, also increased.
In reinsurance, we calculate the biometric risk on the basis of “best estimates”, which are derived from portfolio data and include appropriate assumptions regarding future development. In both life insurance and life reinsurance, we also consider market standards in calculating the biometric risk.
The following are examples of currently relevant legal risks: – Last April, New York Attorney General Eliot Spitzer started an investigation into the use of Placement or Market Service Agreements in the insurance industry. Several other us state regulators subsequently commenced similar probes into this matter. Entities of the Munich Re organisation have received requests to provide information in connection with these investigations and are cooperating fully with the authorities. Entities of the Munich Re organisation, together with several other insurers and brokers, have been named defendants in several psa-related class actions by us policyholders. Munich Re will defend itself vigorously.
Revenue Own shares Unrealised Reserve Valuation reserves held gains and from result from before losses currency cash flow deduction translation hedges of own All figures in €m shares
Change in consolidated group – – –58 – –294 – – – –352
Application of International Accounting Standards (ias) and International Financial Reporting Standards (ifrs) Munich Re’s consolidated financial statements have been prepared in euros (€) in accordance with the standards of the International Accounting Standards Board (iasb) as “exempting” consolidated financial statements in line with Section 292 a of the German Commercial Code. The financial statements comply with the eu directives to which we are subject.
H Shareholders’ equity The item issued capital and capital reserve contains the amounts that the shareholders of the parent company have paid in on shares. The capital reserve is reduced by the externally generated costs directly connected with equity capital measures, after taking into account tax effects. Under revenue reserves, we show the profits which consolidated companies and special funds have earned and retained since becoming part of the Munich Re Group, and income and expenses resulting from consolidation measures. In addition, the adjustment amount resulting from changes in accounting policies for earlier periods not recognised in the consolidated financial statements is included in the opening balance of the revenue reserves and other reserves for the earliest prior period presented. Unrealised gains and losses resulting from the valuation of securities available for sale at fair value are included in the other reserves; the differences resulting from the currency translation of foreign subsidiaries’ figures are also shown in the other reserves. Besides this, write-ups on equity investments available for sale are also recognised in this balance sheet item.
Gross amount capitalised at 31.12. previous year 847 1,036 294 2,177 1,940
Accumulated depreciation at 31.12. previous year 388 205 212 805 604
The fair value of real estate at the balance sheet date totals €11,497m (11,630m). The fair value is determined as follows: For directly held real estate, the capitalised earn-
All figures in €m 31.12.2004 Prev. year 31.12.2004 Prev. year 31.12.2004 Prev. year
Status at 31.12. business year 2,717 3,004 b) Provision for deferred premium refunds (gross) Status at 1.1. business year 3,790 3,290
Life and health Property-casualty Life and health Property-casualty 2004 Prev. 2004 Prev. 2004 Prev. 2004 Prev. 2004 Prev. 2004 Prev.
The effective tax burden is the ratio between the taxes on income shown and the result before taxes on income (but after “other tax”). In the previous year there was tax relief of 136%. In the current business year the ratio shows tax burden of 27%.
All remaining members who joined the Supervisory Board on 26 May 2004 (Emmert, Dr. Janßen, Müller, Dr. Schimetschek, Seefried) each received total remuneration of €42,633.20 (fixed remuneration of €14,959.02 and dividend-related remuneration3 of €27,674,18). All remaining members who left the Supervisory Board upon conclusion of the agm on 26 May 2004 (Burgmayr, Köppen, Wegmann) each received total remuneration of €28,616.80 (fixed remuneration of €10,040.98 and dividend-related remuneration3 of €18,575.82).
1In €, plus turnover tax in each case, in accordance with Article 15 para. 5 of the Articles of Association. 2In the case of members of the Audit Committee, the amount includes attendance fees in accordance with Article 15 para. 3 of the Articles of Association. 3Payment after adoption of the dividend proposed by the Supervisory Board and Board of Management (€2.00) at the 2005 Annual General Meeting. 3After capping in accordance with Article 15 para. 4 of the Articles of Association.3
Dr. jur. Hans-Jürgen Schinzler Bayerische Hypo- und Vereinsbank ag Chairman (from 26 May 2004) Deutsche Telekom ag metro ag
John Phelan – American Re Corporation, Wilmington, Delaware*, Chairman) American Re-Insurance Company, Princeton*, (Chairman) Munich Reinsurance Company of Canada, Toronto*
Earnings per share A ratio calculated by dividing the consolidated result by the average number of shares issued. “Diluted earnings per share” includes exercised and still to be exercised subscription rights in the Group result for the year and the number of shares. Such subscription rights arise from the issue of bonds with conversion rights and from warrants for the acquisition of shares.
Return on equity (RoE) Indicator for measuring an enterprise’s financial performance. It is calculated by dividing the result for the period by the average shareholders ’ equity employed.
Third party administrator (tpa) An independent corporate entity (third party) that administers benefits and claims for risk carriers and self-insured schemes. A tpa does not typically assume risk.
Munich Re Group Annual Report 2004 07_General information Classes of business