Further business issues can be found in our section separators – Yesterday, tomorrow, today.
The first quarter, with a more favourable market situation in reinsurance and only few natural catastrophes, brought encouraging results. These reflected the enormous efforts of our staff to improve our business. But by the summer – following the change of management at American Re – a very thorough analysis had led us to a bitter conclusion: we would have to strengthen the loss reserves of our American subsidiary by us$ 2bn, notably for asbestos-related and environmental claims dating back many years as well as for losses from us liability and workers’ compensation business arising out of the more recent past. In addition, we took the precaution of increasing our provisions for the World Trade Center loss by a further us$ 500m.
Munich Re shares 01Munich Re Group Annual Report 2002 the stock market year 2002: Downward trend worldwide
There was intensive trading in Munich Re shares in 2002: the average turnover on all German stock exchanges rose by nearly 42% compared with the previous year. Altogether, the free share capital was turned over approximately 2.3 times, our free float being 61.95%.
Ongoing investor relations work is particularly important in difficult times, when analysts’ and investors’ demand for information is especially high. The foremost objectives of our investor relations activities are to provide these target groups with prompt and detailed information and to be accessible at all times, thus enabling the capital market to make an appropriate assessment of our current business situation and our future prospects.
Most of our investor relations information is also published on the internet. We will be glad to send you our quarterly reports and other Munich Re publications on request. You can find our address on page 255.
For institutional investors, we also placed two natural catastrophe bonds in December 2000 with a total value of us$ 300m. Their three-year term began on 1 January 2002 and ends on 31 December 2003.
More on the subject of climate >> FLOOD p. 78 CLIMATE CHANGE p. 81 THE ENVIRONMENT p. 119
The Deutsche Museum and Munich Re wanted to take a less sensationalist approach than the media frequently do – more subtle and objective. Incidentally, together with the Deutsche Museum, we have developed an exhibit that shows the global distribution of weather- or climate-related loss events. Every visitor, whether from the us or Australia, can find their country and zoom in on it as if they were using a magnifying glass. We convey here that the effects of climate change are perceptible in every country, that they are a global problem.
International locations Our primary insurance subsidiaries operate at over 30 locations in Europe; the reinsurance group is present worldwide in 60 countries.
03 John Phelan (from 1 April 2002) North America 04 Christian Kluge Europe 1 (until 30 June 2002 together with Dr. jur. Hans-Wilmar von Stockhausen) Corporate Communications
The Life and Health division underwrites our life and health reinsurance business worldwide. It reflects the structure of many of our cedants, which conduct these two classes of business separately from property-casualty insurance, often through independent companies.
The Karlsruher Insurance Group consists of five companies that operate in life insurance and in all classes of property-casualty insurance. It mainly offers personal lines insurance and products for small and medium-sized firms.
THE BIRTH OF INNOVATION FROM INNOVATION More and more data is exposed to destruction and misuse. The researcher’s task is to develop a way of saving data so that it is secure for an unlimited length of time. Initial research indicates that huge amounts can be stored on bacteria which are resistant to all types of current attack, including a nuclear strike. Is this the end of the risk story? By no means, just a new beginning.
Management of the company has been radically streamlined, providing the basis for swifter, proactive decision-making processes. A new three-member Executive Committee, chaired by Phelan, establishes the company’s strategic priorities and actively manages the operations to support them. Foremost among these is the achievement of consistent and optimal profitability in its core businesses in the us, where American Re is one of the top reinsurers with a strong presence in multiple distribution channels.
In addition to the organisational changes implemented during 2002, Munich Re added us$ 1.4bn of capital to American Re in September 2002 to maintain its financial strength. These actions followed a us$ 2.0bn addition to American Re’s loss reserves, in-depth analyses by Munich Re having confirmed American Re’s actuarial calculations. The steps taken will enable American Re to write and fully realise the earnings potential of new business in the improving us insurance and reinsurance market.
Asbestos Business issues 2002 04Munich Re Group Annual Report 2002 asbestos: Reserves bolstered
In many other countries, employers are also liable in the case of negligence. The claims burdens resulting for liability insurers in these jurisdictions differ. In the uk and Ireland, employers’ liability in connection with asbestos has been extensive since the 1970s. The Netherlands did not experience this trend until the late 1980s, and France until the mid-1990s. Such application of employers’ liability was confirmed by the French supreme court in spring 2002, thus reversing the rule/exception relationship that had traditionally obtained in France: until this judgement, limited social-law liability had been the rule and unlimited civil-law liability the exception.
The current discussion about terrorism cover raises additional doubts about unlimited cover. Under the German statutory order on compulsory motor vehicle insurance, terrorism cannot be explicitly excluded from motor cover in Germany. This means that the insurance industry could also be liable for an unlimited amount in cases where, for example, stolen vehicles are used to mount a terrorist attack.
The Board of Management also kept us briefed about the Munich Re Group’s value-based management, its fields of application and its limits. The Supervisory Board also considered on several occasions the challenges and opportunities arising for the Munich Re Group from the trends in state social security systems in industrialised countries.
The Annual General Meeting on 17 July 2002 adopted a number of amendments to the Articles of Association. In preparation for this, the Supervisory Board discussed in particular the authorisation to buy back shares and to issue warrants and/or bonds with warrants, as well as granting a new authorisation to increase the Company’s share capital.
The Standing Committee met three times in 2002. Its work included matters for which the Supervisory Board’s approval was required under the internal rules of procedure. The Personnel Committee also met three times in order to deal with personnel matters involving members of the Board of Management. No meeting of the Conference Committee was required.
On 6 December, at its last meeting in 2002, Dr. Rolf-E. Breuer and Dr. Henning Schulte-Noelle stepped down from the Supervisory Board. As their successors, the Registration Court appointed Professor Dr. Hubert Markl and Mr. Wolfgang Mayrhuber members of the Supervisory Board. These appointments are scheduled to be ratified by the Annual General Meeting on 11 June 2003.
Munich Re’s Supervisory Board has 20 members. Its task is to monitor and advise the Board of Management in running the Company. To this end, the Chairman of the Supervisory Board regularly discusses with the Board of Management, and in particular the Chairman of the Board of Management, the Company’s business performance and risk management. In order to comply with the German Code of Corporate Governance, we last year set an age limit for members of the Supervisory Board in its rules of procedure: they should generally not be older than 70. To increase the efficiency of its work, the Supervisory Board had already established three committees several years ago; a fourth one was added last year – the Audit Committee.
The Conference Committee, which is prescribed by the German Co-Determination Act, makes personnel proposals to Supervisory Board if the requisite two-thirds majority is not achieved in the first vote when it comes to appointing or dismissing members of the Board of Management.
Christian Kluge Karlsruher Versicherung ag (Chairman) Karlsruher Lebensversicherung ag – Mercur Assistance ag Holding (Chairman)
Member of the Board of Management, responsible for Accounting, Controlling, Taxes and IT
At no time in the last 60 years have share prices fallen in three consecutive years. After a prolonged weak phase, the market suddenly nosedived in autumn 2002. In only seven weeks up to 9 October the euro stoxx 50 fell by 25%. Financial stocks actually lost a third of their value in this period.
The situation in Europe did not help to stimulate the global economy either. Euroland lagged well behind the us, with growth of 0.8%.
In property-casualty insurance, premium income grew more strongly than gdp in nearly all markets in 2002 – not least as a result of rate increases: insurers and reinsurers alike managed to achieve substantial improvements in prices and conditions.
As far as reinsurance was concerned, the following factors led to a distinct reduction in capacity during the period under review: the massive burden on the insurance industry from major losses like that of 11 September 2001, the substantial destruction of capital in the worldwide bear market, the closing down of even well-known and old-established insurers and reinsurers, and a wave of reserve strengthening. By contrast, the effects of newly-established capacity – for example in Bermuda – have so far been barely noticeable.
For the reporting on individual fields of business, the following principle applies: figures that derive from business within a segment are eliminated, whereas figures that derive from business with companies from other segments (e.g. intra-Group reinsurance cessions from primary insurers to reinsurers)
The Group result for 2002 was heavily influenced by the following factors: – The shareholding transactions with Allianz ag, for which the stage had been set in the previous years, were completed successfully in the first half-year, resulting in a profit of €4.7bn.
– In the second quarter, we strengthened the loss reserves of our us subsidiary American Re by us$ 2bn, in order to draw a line under the series of long-tail losses from our us business (see page 71).
The factors outlined on page 137 played a crucial part in shaping the profit for the year of €3,149m (–52m).
In order to further increase our competitiveness, we last year again made organisational and structural changes, established new subsidiaries and further improved our products. A few of the important occurrences during the year are outlined below.
In the year under review, the Munich Re Group‘s primary insurance segment, particularly ergo, once again maintained its high pace of growth. However, as in reinsurance, the result was adversely affected by high writedowns on investments, losses on disposals and falling interest rates, leading to a net loss for the year of €959m (+561m). The Group‘s life insurers have in the meantime – like their domestic and foreign competitors – reduced policyholders‘ bonuses for 2003, thereby taking an important step towards adjusting these payments to reflect lower market interest rates. Despite this unavoidable measure, the products sold by our life insurers are still the most popular form of provision for old age among insurance clients, with an attractive return.
In 2002 we increased our premium income from primary insurance by 5.6% (9.0%) to €16.6bn (15.7bn); it thus contributed 41% (43%) to Group premium as a whole. The good growth in new business impressively underscored our primary insurers‘ marketing strength, which is built on well-established products, attractive brands and a range of effective distribution channels.
06 Financial report MANAGEMENT REPORT Primary insurance Munich Re Group Annual Report 2002 ergo Insurance Group
The us continues to be the motor of the world economy in 2003. According to current forecasts, economic growth there is again expected to be greater than in Europe this year. However, it is not yet fully clear from the indicators whether the sharp drop in share prices for the third year in a row will have a further adverse effect on us consumer confidence and demand, and thus an even stronger impact on the real economy.
A change in share prices of ±10% (±20%) and a corresponding shift in the interest rate curve of ±100 (±200) basis points (bp) produce the following theoretical changes in market value at the balance sheet date: Change in share prices Change in market value of investments sensitive to share prices
We use derivative financial instruments for three principal reasons: hedging parts of the portfolio, optimising earnings, and implementing planned purchases and sales. Our Group companies act as end-users of derivatives; there is little trading in these instruments with a view to profit-making. Particular care is paid to limiting risks, choosing top-quality business partners and strictly monitoring adherence to instructions. The volumes are shown on pages 205 ff.
F. Cash with banks, cheques and cash in hand 2,735 1,866 869 46.6
Change from the acquisition and sale of investments for unit-linked life insurance –45 –109
Real estate is carried at cost. Maintenance expenses and repairs are recognised as an expense. Subsequent expenditure that increases the value of real estate is capitalised if it extends the useful life. The capitalised costs of buildings are amortised over 100 years at most, in accordance with their useful lives. If the recoverable amount of land and buildings falls below its carrying amount and the diminution in value is likely to be permanent, the carrying amount is reduced to the recoverable amount. Any impairment loss is recognised as an investment expense in the income statement, and any increases in value as investment income.
Over five years and up to ten years 259 291 271 293
Change in the consolidated group – – 171 – – 171
Change in other underwriting provisions – Provision for future policy benefits 215 836 34 41 3,034 4,005 27 27 3,310 4,909
The tax-free income is made up of tax-free gains on the sales of shareholdings in joint-stock companies, tax-free dividend income and other tax-free income. The non-deductible expenses mainly include writedowns on non-fixed-interest securities available for sale. In addition, they contain non-deductible amortisation of goodwill and other non-deductible expenses.
Profit for the year €m 51.0 18.2 * Financial statements in accordance with IAS.
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 at the start of the plan. In addition, Munich Re shares must have outperformed the dax 30 (Plan 1999) or the euro stoxx 50 (Plan 2000, Plan 2001 and Plan 2002) 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.
In the business year 2002 Munich Re launched an employee share-ownership programme to supersede the degef – Münchener-Rück: Mitarbeiterfonds 100 (now meag mm-Fonds 100), which had been in existence since 1980. For this purpose, a total of 10,000 shares were purchased at an average share price of €185.35. Under the programme, Munich Re non-senior-executive staff were offered up to seven shares on a salary-dependent basis at a price of €88.38 per share. A total of 1,748 staff availed themselves of this offer and acquired 8,441 shares. The remaining shares were not sold.
Commitments under rental, work and service contracts amounted to €280m. Of the leasing obligations from rental leasing arrangements totalling €615m, €118m was due not later than one year, €288m due later than one year and not later than five years, and €209m due later than five years. Investment obligations totalled €463m. These figures represent undiscounted nominal amounts.
As members of pools and through stakes in Protektor Lebensversicherungs-ag, several Group companies are committed – to the extent of their proportional shares – to assuming the payment obligations of other members if the latter are not able to meet these obligations.
RY –17,397 SE 18,065 victoria Internacional de Portugal sgps s.a., Lisbon *** RY –– SE 32,650 victoria General Insurance Company s.a., Thessaloniki
RY –11,538 SE 1,285,602 65.2%***** dkv Deutsche K versicherung Ak schaft, Berlin/Kö
Glossary We attach importance to using language that is easily understandable. However, we could not do without certain technical terms in our report. These are explained in the glossary.
Munich Reinsurance Company of Australasia Limited (mra) Munich Re House 143 Macquarie Street Sydney nsw 2000 P.O. Box H35 Australia Square Sydney nsw 1215
Range of services going beyond the traditional scope of insurance and cost reimbursement. The idea of assistance services is to help claimants quickly and unbureaucratically in the event of a loss occurrence, taking care of the necessary arrangements to remedy the situation.
Derivative financial instruments where the holder is entitled – but not obliged – to buy (a call option) or sell (a put option) the underlying asset at a predetermined price within a certain period. The writer of the option is obliged to transfer or buy the asset and receives a premium for granting the option to the purchaser otc derivatives Derivative financial instruments which are not standardised and are traded not on an exchange but directly between two counterparties via over-thecounter (otc) transactions.
The possibility of negative budget variance inherent in any economic activity. In insurance, it is also understood to mean the possibility of a loss being caused by an insured peril. In addition, insured objects or persons are frequently referred to as risks.