Thanks to modern it systems at meag, we have been able to opt for early application of the new ifrs accounting standards ias 32 and 39. These standards improve the rules for writedowns on equities by recognising changes in value promptly and thus providing for greater clarity (see page 156).
The quality of our portfolio in reinsurance has been greatly enhanced in the last two years. During the recent renewals for 2004, we succeeded in increasing prices by another 5%. At the same time we significantly improved treaty conditions, which have a crucial influence on the risk profile. Where we were unable to achieve our objectives, we terminated our participations. Including the planned reduction in large quota share treaties, our business volume decreased by over €1bn. Premium income for 2004 in non-life reinsurance will only increase to a limited extent again, if at all, whereas premium in the life segment keeps on growing at a stable double-digit rate. I am sure that the high quality of our portfolio in terms of prices and conditions has laid the foundations for a sustained positive result trend that will continue to give you and me considerable satisfaction.
brings: That’s right. However, one major problem is caused by the increasing number of restrictions and exclusions. What we ultimately need is cover for all relevant risks and we are ready to pay a reasonable price for this. But that is not always possible. An example: in the field of natural perils the coverage offered by the worldwide insurance and reinsurance market is too limited. The sublimit introduced for earthquake in some regions is too low for us and leaves too much risk on our balance sheet.
Share performance January 2003 to March 2004 (1 January 2003 = 100, status: 25 March 2004, source: Datastream)
Our free float, which is important for the weighting of Munich Re shares in various share price indices, has grown significantly from around 45% in 1999 to its current level of 80.6%.
On the basis of a price of €96.12 per share on 30 December 2003, the value of the portfolio amounts to €230,880.24, equivalent to an increase of 57.34%. According to the internal rate of return method, this works out an average annual return of 5.18% per year.
marc surminski: According to the most recent figures, Munich Re is the world’s largest reinsurer in terms of premium income. Is that a ranking worth fighting for?
– On the assets and liabilities sides of the balance sheet, and in the relationship between them, we strive for an optimised portfolio and value-based capital allocation. Internal risk models support decision-making. If a risk-commensurate return on capital cannot be achieved in the medium term, disinvestments will be made in order to continually optimise our underwriting activities and increase their yield.
In this way, we create the basis for better identifying those fields of business which add value for Munich Re and for optimising the use of our resources.
oppenheimer: This leads to another point. Sustainability is dominated by large multinational companies. Which aspects do you see coming along with that phenomenon?
Rudolf Ficker (until 31 December 2003) Former Member of the Board of Management of Munich Reinsurance Company
In our division Europe 1, we handle the property-casualty business from our clients in Germany, Switzerland and Austria, Eastern Europe, Greece, and Turkey.
SUBSIDIARIES/BRANCHES Munich American Reassurance Company Munich Reinsurance Company Canada Branch (Life) Munich Reinsurance Company UK Life Branch
gebhardt: Life insurance used to be considered separately from other products. Nowadays you find your products in keen competition with other forms of investment. Has there been any convergence?
SARS: The risk of infections sars and bse are just two examples of new infectious diseases that may endanger both people and the economy.
stebut:That’s fine, but I don’t think it’s enough to say: “You must be more active.” Companies also need to invest more in up-and-coming female staff – right from the start – so that they have the relevant potential for management positions.
At the end of 2003, Dr. Hans-Jürgen Schinzler retired from the Board of Management, on which he had served as a member since 1981 and as Chairman since 1 March 1993. With entrepreneurial vision, he formed Munich Re into a leading global reinsurance group. We thank him for his impressive achievements and his great personal dedication.
Rudolf Ficker retired from the Supervisory Board on 31 December 2003. Dr. Schinzler was appointed by the Registration Court on 2 January 2004 to take his place. We thank Mr. Ficker, who successfully served the Company in various functions for over half a century, for making his wealth of experience available to the Supervisory Board during the last six years.
Munich Re Finance B.V., 6.75%, €3.0bn, Subordinated Bonds 2003/2023 a+ A+ A2 A–
The Federal German parliament has committed itself to covering 50% of all German energy requirements with renewable forms of energy by the year 2050. This has led to a boom in the use of these energy sources. As the technologies involved are virgin territory for many of our clients, and even for manufacturers and operators of such systems, we endeavour right at the development stage to establish the risks and opportunities and evaluate these for insurance cover. This service is highly valued throughout the market. It underscores our current leading role as risk carrier in the field of wind power, geothermic energy and biomass/biogas.
dullemond: We are in full agreement that insurance capital requirements must be risk-based. In my view, the company, or the executives of an insurance entity are the first to know their business and we should stimulate or encourage companies to deepen their knowledge of the risks and the way they quantify and manage them. The role of the regulator then, is to “get comfortable” with the methods and the results produced by these models. However, sometimes (e.g. where the company does not have the necessary resources to build an internal model), regulators need a compromise solution that out of necessity must be more factor-based. The challenge for us then is to tailor those factorbased approaches so that they do not represent a “lowest common denominator” compromise.
In the emerging markets, economic activity accelerated over the course of the year, especially in Asia, fuelled to a significant extent by growth in exports and – after the sars epidemic had abated – by strong domestic demand. China again showed the highest growth rate in the region, with 9.1%. Latin America benefited from the economic upswing in the USA, Argentina seeing a return to positive growth after the financial crisis, and Brazil offering signs of economic revival at the end of the year. Growth in the European emerging markets remained robust, despite the weakness of the economy in the eurozone. In Poland, momentum accelerated as a result of strong expansion in exports compared with the disappointing previous year. Among the countries that will be joining the European Union in May 2004, those from the Baltic States achieved the highest growth. With a growth rate of 7.3%, Russia profited from the still high level of energy prices. Turkey continued its economic recovery from the financial crisis it experienced in 2001.
On the currency markets, the value of the euro increased markedly against the US dollar over the year and in November surpassed its previous all-time high of us$ 1.19.
Result for the year –434 288 250 1,750 1,133 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
All figures in €m 31.12.2003 31.12.2003 31.12.2003 Prev. year Prev. year Prev. year
In Canada, Munich Reinsurance Company Canada Branch (Life) achieved exceptionally strong organic growth of more than 60%. Risk experience was again very positive. The Branch further extended its position as leading provider in the market.
In our Centre of Competence for Biosciences, doctors, agricultural scientists, biochemists and human geneticists analyse the flood of information on progress in genetic engineering and the implications of this progress for our business and for our clients. For example, our specialists seek answers to the questions of how genetically modified plants may influence loss potential in agricultural insurance or to what extent and in what areas of application genetic testing may be used in healthcare worldwide. We use statistics and risk scenarios to help health insurers, pension insurers, life insurers, liability insurers and agricultural insurers develop new products and coverage concepts.
The half-income method introduced in Germany in connection with the business tax reform in 2001, with its disregarding of gains and losses on shareholdings, produced completely system-adverse results for life and health insurers. In combination with the tax-deductible amounts for policyholders’ bonuses, it led in good capital market situations to tax losses, whereas when the stock markets slumped, the result in the commercial balance sheet – already substantially reduced by writedowns and losses on disposals – was burdened by disproportionately high tax expenses. As a consequence of the new arrangements for life and health insurers adopted at short notice in December 2003, this systemadverse taxation situation has been ended as from 2004. At the same time, companies have been granted an option to apply the new rules – limited to 80% of the income and expenses concerned – uniformly for the years 2001 to 2003 (so-called “block option”). Under the new rules, the current tax to be paid is reduced. However, in our consolidated financial statements prepared in accordance with ias, deferred taxes now have to be posted again to take account of the valuation differences between the local company financial statements and ias. This gives rise to a high tax burden of €637m for the life and health insurers, which is out of all reasonable proportion to the result.
In property-casualty insurance, premium income grew by 5.0% (5.4%) to €5.1bn (4.8bn). Here, too, new business developed positively, not only in virtually all classes of the profitable segment of personal lines business but also in our very selectively written commercial and industrial property business.
Premium ergo’s gross premium income rose by 5.4% (6.1%) in the year under review. All classes of business and distribution channels contributed to this healthy growth, but especially life insurance.
Profit for the year €m 5.0 –4.5 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
In the past business year, meag was able to win new mandates from significant corporate pension schemes in the highly competitive market for company pensions and thus establish itself further in this especially promising field of business.
In the investment sector, we follow a number of principles: we only make investments from which we can expect an appropriate return under normal circumstances, at the same time giving due regard to a high degree of security. We reduce currency risks to a very great extent by matching our expected liabilities with assets in the same or similar currencies. Besides this, we always keep sufficient liquid funds available in order to meet our payment obligations at all times. Altogether, we endeavour in our asset-liability management to strike a good balance between earnings opportunities and acceptable risk. How we counter the various investments risks is described in depth in the risk report starting on page 135.
Even higher percentage growth was achieved in institutional business. Here, too, the idea of using all the Munich Re Group’s distribution channels for asset management services as well has proved to be a good one and positive for the bottom line. At the end of 2003 the assets of institutional investors managed by meag amounted to €1.7bn – twice as much as one year before.
Risk factors for the world economy in 2004 continue to be geopolitical uncertainties and, in particular, the risk of major terrorist attacks, as the bomb attacks of 11 March in Madrid made clear. There is also the risk that economic growth in the USA will slacken again in the course of the year, which could have negative economic consequences for other parts of the world. In the eurozone, and especially in Germany, further appreciation in the euro may adversely affect exports.
Owing to the comparatively weak economic development in Germany, the economy as a whole will probably provide few impulses for demand in property-casualty insurance.
All in all, without making allowance for the effects of changes in exchange rates, Group premium for the current business year is likely to total around €40.0bn (40.4bn), which would be 1.1% less than in 2003.
In life insurance and reinsurance the biometric risk, the lapse risk and the interest-guarantee risk are especially relevant. The calculation of underwriting provisions in primary insurance is based on “biometric” calculation tables, i.e. on assumptions with regard to mortality and disablement. These assumptions are checked by the supervisory authorities and by institutes of actuaries every few years, depending on the specific national regulations. The checking of mortality and the appropriateness of trend assumptions may lead to a need for additional reserving (e.g. if actual life expectancy has not been sufficiently taken into account) or alternatively to the reversal of reserves that have been posted. In reinsurance, we calculate the biometric risk on the basis of “best estimates”; these 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. Lapse risks can be restricted in insurance and reinsurance by means of suitable product and contract design. The residual lapse risk is estimated by means of product-specific portfolio analyses and taken into account in the pricing.
Market-price risks in investments are measured and limited using the value-at-risk approach. This approach is also employed in our strategic investment planning to model the optimum investment portfolio according to our risk preference. Using stress tests, sensitivity analyses and duration analyses, we also simulate market fluctuations and devise appropriate strategies for countering them where necessary. Currency risks are only run to a very small extent in the Munich Re Group, since we practise a policy of currency matching. This means that for all important currency liabilities in our underwriting business, appropriate matching items are established in our assets.
Besides this, on account of our activities as a Group with global operations, there is a risk of our being involved in legal disputes and arbitration proceedings, especially in the context of claims settlement.
– Various legal proceedings are still going on in connection with the attack on the World Trade Center of 11 September 2001. These include the “Silverstein” case pending in New York regarding the question of whether the attack qualified as one or two loss events under insurance policies and reinsurance agreements. It is probable that the judgement will be appealed against, which makes a final court decision in 2004 unlikely. In addition, there are still various unsettled disputes concerning business interruption losses from this claims complex, and a certain loss potential continues to exist for liability as well. The latter should, however, be reduced by the relatively widespread acceptance of payments from the federal Victim Compensation Fund. The above-mentioned risks are already taken into account in the provisions posted so far by the Munich Re Group.
As internationally operating insurers and reinsurers, we are dependent on economic and political parameters in the individual markets as well as on the macroeconomic and geopolitical situation. The development of the economy not only affects our actual insurance business but also influences capital market trends. Thus, for example, a continuation of the general economic downturn can lead to payment defaults and credit-rating downgradings among our debtors, which may require writedowns.
D. Ceded share of underwriting provisions (18–21) 8,038 10,230 –2,192 –21.4
II. Investments in affiliated enterprises and associated enterprises 3,247 4,643 4,011 6,216
Africa, Near and * After elimination of intra-Group transactions across segments.
Europäische Reiseversicherung ag also acquired 1,000 Munich Re shares at a price of €99.25 per share in 2003 to safeguard future obligations from the long-term incentive plan it set up at 1 July 2003.
These are mainly minority interests in the ergo Insurance Group and the Karlsruher Insurance Group.
The table illustrates how the estimate of the respective balance sheet provision has changed in the course of time – owing partly to payments made and partly to the re-estimate of the outstanding payments. The net run-off result reflects the difference between the current and original estimate. It is often materially affected by changes in exchange rates. The fluctuations in the value of important foreign currencies for us (mainly the US dollar and the pound sterling) against the euro led to significant changes in the provisions. On the other hand, there have been corresponding changes in the value of investments as a consequence of our consistent currency matching policy. In particular, the strengthening of reserves in our US business at American Re has had a negative impact on the results.
Since the mid-eighties industrial insurers writing business worldwide have found themselves being confronted with losses from policies taken out decades before. In particular, these include claims under product liability policies in the USA involving asbestos-related injuries which manifest themselves after a long latency period.
Munich Reinsurance Company, Munich 1.0%, €1,150m, Bonds Exchangeable into Allianz ag Shares 2000/2005 1,166 1,111
Deferred tax resulting from the occurrence or reversal of loss carry-forwards –316 –1,210
ergo Assicurazioni s. p. a., Milan 92.74% 46,622 3,665 ergo Previdenza s. p. a., Milan 65.24% 225,816 3,687 ergo Vida Seguros y Reaseguros, Sociedad Anónima, Saragossa 92.74% 11,145 –16,119
Financial services and asset management, consolidated subsidiaries ergo Trust GmbH, Düsseldorf *** 92.74% 22,234 0 meag munich ergo AssetManagement GmbH, Munich 97.09% 60,371 16,888 meag munich ergo Kapitalanlagegesellschaft mbH, Munich *** 97.09% 14,165 0
Other shareholdings in listed companies bhs tabletop ag, Selb 28.91% 19,076 –4,130 bhw Holding ag, Hamelin**** 9.24% 1,282,589 –238,894
Dr. jur. Jörg Schneider meag munich ergo Kapitalanlage- American Re Corporation, Wilmington, gesellschaft mbH Delaware*
In proportional reinsurance, the sum insured written by the primary insurer is divided proportionally between the primary insurer and the reinsurer, and the reinsurer is allocated a corresponding share of the premiums and claims.
Provision for claims that have already been incurred at the balance sheet date but have either not yet been reported or not yet been fully settled.
Provisions for premium refunds are made for obligations involving bonuses and rebates – especially in life and health insurance – which are not yet payable at the balance sheet date. The amount posted is based on supervisory or contractual regulations. They also include the policyholders’ share of accumulated valuation differences between ias/ifrs and German Commercial Code (provision for deferred premium refunds).
Capital increase in which shareholders obtain a subscription right – proportionate to their stake in the existing share capital – for newly issued shares. The subscription right serves to protect the interests of the existing shareholders and may be sold separately if it is not used to subscribe for new shares. Subscription rights are traded and listed separately on the stock exchange.