E d it o ri a l d e a d li n e
BOARD OF MANAGEMENT Letter to shareholders Members of the Board of Management
SUPERVISORY BOARD Report of the Supervisory Board Members of the Supervisory Board
Munich Re Group Report for the 120th year of business 1st January 1999 to 31st December 1999
We propose to distribute twice as much in dividends to you as last year, our share price has again risen substantially in 1999, our asset management company was launched on schedule, the millennium changeover has passed without significant losses – and yet we are still not satisfied with what we have achieved: the improvement in our Group result, which we were still expecting as late as November, has been wiped out by high losses in reinsurance.
The capital markets have a very eventful year behind them: developments on the stock markets were far from uniform and yields on long-term bonds increased appreciably. This presented our portfolio managers and analysts with considerable challenges. They mastered them well and were able to improve the investment result by more than 12%.
– We intend to develop our new subsidiary MEAG into one of the best asset management companies. We plan to further optimize the income from our own investments and gradually expand business with private and institutional investors.
In order to achieve these ambitious goals, we will need a certain amount of good fortune. But above all we will require enthusiastic and dedicated staff committed to furthering Munich Re’s cause – everywhere and at all times. I am glad to say that we already have such staff. I thank each one of them, also on behalf of my colleagues, for their hard work over the past year and wish all of us renewed success in the current year.
Ladies and gentlemen, we are striving to make the value of your company more transparent for you. The changeover to International Accounting Standards, beginning with this annual report, is another step along this path. And, of course, we are doing our utmost to further enhance the value of your company. We are excellently positioned for this, and have the necessary resources, in all areas of our Group. Thank you for your continued confidence.
Nordic Countries Netherlands Asset Management/ Real Estate and Equities (until 31st March 2000)
Credit and Bonding Asset Management/ Loans and Securities (until 31st March 2000)
The Board of Management kept us regularly informed during the year under review about the Holocaust issue. The Supervisory Board and Board of Management take this troubling subject very seriously. As a reinsurer, the Munich Reinsurance Company has never issued insurance policies to individuals and thus did not do so to victims of the Holocaust. Like the primary insurers in the Group, however, it has joined the Foundation Initiative of German Enterprises “Remembrance, Responsibility and Future” and, in expectation of full and lasting relief from legal and administrative action, has made a substantial contribution to this solidarity fund.
The Supervisory Board has examined the company financial statements, the consolidated financial statements, the management reports and the proposal of the Board of Management for appropriation of the balance sheet profit and agrees with the auditor’s conclusions.
At the balance sheet meeting of the Supervisory Board we approved the annual financial statements drawn up by the Board of Management; they are thus adopted. We agree to the Board of Management’s proposal for the appropriation of the balance sheet profit, which provides for a dividend of €0.95 per share.
As at 30th June 1999 Dr. Fedor Nierhaus retired from the Board of Management. In his many years of service he represented the company’s interests with skill and conviction. We thank him for his dedicated work on behalf of Munich Re.
Mr. Clement Booth (45), who had worked for the Munich Re organization in South Africa in senior positions since 1986, has been a member of the Board of Management since 1st January 1999. With effect from 1st January 2000 we appointed Dr. Nikolaus Bomhard (43) a member of the Board of Management. He has been with the company for many years, his most recent position being head of Munich Re’s business unit in São Paulo. With effect from 1st April 2000 we also appointed Dr. jur. Jörg Schneider (41) to the Board of Management. He joined the company in 1988 and was most recently head of the Group section of the Asset Management Division. On being appointed to the Board of Management, Dr. Schneider gave up his seat on the Supervisory Board as at 31st March 2000. Mr. Klaus Peter Biebrach was appointed his successor as one of the staff representatives on the Supervisory Board.
The Supervisory Board wishes to thank all the staff of the individual Group companies for their hard work and commitment. With their dedication and enthusiasm, they play a crucial part in the continuing success of the Munich Re Group.
CHAIRMAN Ulrich Hartmann Chairman of the Board of Management of VEBA AG
DEPUTY CHAIRMAN Dr. jur. Henning Schulte-Noelle Chairman of the Board of Management of Allianz AG
Klaus Peter Biebrach (from 12th April 2000) Employee of the Munich Reinsurance Company
Prof. Dr. rer. nat. Henning Kagermann (from 22nd July 1999) Co-Chairman of the Executive Board and Chief Executive Officer of SAP AG
Gertraud Köppen (from 22nd July 1999) Employee of the Munich Reinsurance Company
Dr. jur. Jörg Schneider (from 22nd July 1999 until 31st March 2000) Employee of the Munich Reinsurance Company
Josef Süßl (from 22nd July 1999) Employee of the Munich Reinsurance Company
Dr. rer. pol. Alfons Titzrath (from 22nd July 1999) Chairman of the Supervisory Board of Dresdner Bank AG
Together, the three fields of business add up to consistent value orientation for the Munich Re Group as a risk carrier and provider of financial services. The capital markets have responded favourably to this concept. Thus in the last two years the number of Munich Re registered shareholders quadrupled to 65,000. With an average annual increase in value of 19.5% over a ten-year period, our shares number among the most attractive stocks on the German equity market and in the international insurance industry.
As a Group we aspire to be one of the leading risk carriers and providers of financial services.
Increasing value for our shareholders is our overriding objective. Our criteria for this are not short-term successes: rather, we aim at achieving sustainable added value in our Group through the best possible blend of reinsurance, primary insurance and asset management.
The primary insurers in the Munich Re Group also offer their clients a high degree of security and service: ERGO, with its subsidiaries VICTORIA, Hamburg-Mannheimer, DKV and D.A.S., Karlsruher and Europäische Reiseversicherung serve more than 15 million private clients. Having a strong footing in primary insurance has been, and will continue to be, an important part of our Group strategy.
Last year we strengthened this communication further, a move that met with a very positive response from the investment sector. Our investor relations team conducted more than 100 detailed discussions with financial analysts and institutional investors in Munich in 1999; and for the first time such interviews also took place in financial centres outside Germany.
Besides this, of course, you can obtain information on the current stock market prices from the daily papers or from Reuters and Bloomberg: Reuters Bloomberg WKN
Munich Re registered shares MUVGn MUV2 843 002 Munich Re warrants 843 009 MUVA 843 009
Since 1996 Munich Re has been represented in the German share index DAX 30, which contains the 30 largest and most actively traded German stocks. On 20th September 1999 Munich Re’s registered shares additionally became the only German equities to be included in both STOXX 50 indices (Euro STOXX 50 and STOXX 50 Index). Our presence in these indices increases the importance of Munich Re stock for our shareholders.
Munich Re shares represent an attractive investment with an aboveaverage return for the long-term investor. In the ten-year period from 1990 to 1999 their price rose by 19.5% on average each year, as opposed to a 16.8% average annual increase in the DAX. Munich Re shares continue to be among the winners within the insurance sector as well. This is shown by a comparison with the Morgan Stanley insurance index, whose average annual increase in the same period was around 13.3%.
The price of Munich Re shares fluctuated considerably in 1999. Despite the rising interest rate and the uncertainties surrounding the millennium changeover, however, our shares performed positively as a whole; their price increased by 22%. This means that although we did not achieve the same growth as the DAX 30, we clearly bettered the average performance of insurance stocks.
Status: 11th May 2000 Munich Re registered shares German share index (DAX) Morgan Stanley insurance index
We considerably streamlined our share structure in 1999: since 1st December 1999 we have had only one type of share listed on the stock exchange – the registered share. Nearly all the holders of our bearer shares took up our offer to exchange their stock for registered shares. The resolution to convert bearer shares to registered shares, adopted by the AGM on 22nd July 1999, was entered in the commercial register on 15th February 2000. The conversion of the few remaining bearer shares into unrestrictedly transferable non-listed registered shares will be completed by mid-June 2000; an exchange of these shares for listed registered shares is still possible. We would be delighted if all the shareholders concerned take advantage of this opportunity. Our objective of having a single category of transparent and highly liquid shares has thus been achieved.
By reinvesting dividends to purchase further shares and making use of opération blanche (i.e. reinvesting the proceeds of subscription rights), a German shareholder would have been able to add a total of 479 no-parvalue shares and 17 warrants to the deposit.
765Performance of a specimen deposit as from 30th December 1990 in € ’000
Records on the stock markets, an upturn in the economy, the advent of Euroland.
For the year 2000 we anticipate a further upturn in the world economy. In Europe a single economic area is evolving which offers us many opportunities both on the capital markets and in insurance business. The Germany market continues to be very important for us; and here, too, the prospects are favourable.
Following the turbulence on the financial markets of the previous year, the world economy stabilized again in 1999. It grew in real terms by around 3.3% (1998: 2.5%), i.e. considerably more strongly than the experts had predicted at the beginning of the year.
The strength of economic growth in China and India (around 7% in each case) was undiminished, although the People’s Republic again suffered from deflationary tendencies (overall decline in prices: 1%).
The engine of growth for the world economy in 1999 continued to be the United States (4.2%). The US economy has now enjoyed its longest-ever period of growth in peacetime. In the second half of 1999 the US Federal Reserve felt compelled on no less than three occasions to reverse the previous year’s reductions in interest rates induced by the Asian crisis.
Real growth in the largest non-Asian emerging markets in 1999 was also greater than predicted by the IMF.
Just as on the bond markets (yield on 10-year German government bonds: 5.25% after 3.9% in December 1998), deflation worries on the equity markets evaporated and the indices reached new all-time highs. These record levels were not due to the performance of the broad mass of stocks, however. The majority of shares – particularly medium and small cap stocks – achieved barely any advances in price in the past two years.
The insurance markets throughout the world reflected what was happening in the economy, although we experienced a continued downward trend in original premium rates.
The insurance industry experienced high growth rates in Eastern Europe (Poland: real growth of 11%) but also in Asia. In China there was again a double-digit increase in premium income. Here and in a few other emerging markets we expect additional positive impulses for the insurance industry in the medium to long term from the market liberalization which is on the horizon.
The structural trend towards sustained low inflation rates should continue in the year 2000, given sufficiently forward-looking monetary policy. However, the big rise in the price of oil in 1999 will have at least a short-term adverse effect.
On the currency markets the depreciation of the euro against the dollar is unlikely to continue – there is more likely to be a reversal of the trend. This is mainly based on the assumption of better relative development of the European economic area compared with the USA. In addition, the euro will be supported by the persistently high trade deficit of the USA, which tends to inherently weaken the US dollar.
For the insurance industry, we expect an increase in demand that will essentially follow economic development. Life insurance remains the main contributor to growth in industrialized countries with demographic problems. High growth rates in the non-life sector can be expected primarily in the emerging markets, especially in Eastern Europe and Asia. In Germany life insurance will probably show only moderate growth of around 3% after the surge of 1999. For health insurance we are reckoning with premium growth of 5%, while property-casualty insurance should show an increase of a good half per cent after the lean years 1997–99.
In the business year 1999 the Munich Re Group succeeded in increasing its premium income to €27.4bn.
Our reinsurers held or even extended their top international position in many sectors. The primary insurers were able to continue their dynamic development. And earnings in asset management also show double-digit growth.
Standard & Poor’s, 17th March 2000 – unsurpassed global business position – overwhelming capital strength – extremely strong financial flexibility and liquidity
We have prepared the consolidated financial statements for 1999 in accordance with IAS for the first time and have adjusted the previous year’s figures accordingly. On page 102f. of this report we show what effects this changeover has with reference to the figures for the business year 1998; in addition, we have summarized the main differences between IAS and German Commercial Code accounting on page 126 f.
Gross premiums increased in 1999 by €1.9bn or 7.5% to €27.4bn. Of this growth, €335m was attributable to changes in exchange rates and €32m to new subsidiaries; adjusted by these factors, premium growth amounted to €1.6bn or 6.1%.
Owing to the unsatisfactory situation in reinsurance, the result before tax, amortization of goodwill and minority interests in earnings fell to
At €1,133m (1,200m) the consolidated profit for the year was only slightly down on the very good result of the previous year. Earnings per share in accordance with IAS total €6.45 (7.11), with €1.70 of this attributable to the lowering of the corporation tax rate.
Hailstorms, earthquakes, windstorms – when natural catastrophes come in such numbers as in the past year, Munich Re is involved to a particularly great extent as the global market leader. Thanks to growth in life reinsurance, our reinsurers were able to considerably increase their premium income, but claims costs for natural catastrophe losses were three times higher than in 1998.
The reinsurers in the Group were able to increase their gross premiums by 8.6% altogether to €15.4bn (14.1bn); this represents 51% of Group premium income. At unchanged currency parities the growth would have been 5.8%.
We recorded expansion above all in life, health, liability and personal accident business, whereas premium income in the engineering classes of business declined.
Especially in the case of the Munich Reinsurance Company, American Re and New Re, claims expenditure increased dramatically. Despite the markedly improved investment result and the fact that the parent company’s tax expenses were very much lower due to the reduced corporation tax rate, the reinsurers’ post-tax profit for the year rose only slightly to 05 MANAGEMENT REPORT / REINSURANCE
As we see it, life insurance offers substantial opportunities for growth, even though individual markets are currently having to cope with fierce competition, continuing consolidation processes and low interest rates. Given the mounting difficulties of state social insurance systems, ageing populations need to increase private provision for old age and for disability and long-term care – this offers growth prospects for insurers and reinsurers. In the coming business year we expect a further increase in premium and another satisfying result.
Our health business recorded a leap in premium income of no less than 62.8% in 1999. This was partly due to premium increases implemented by primary insurers in remedial markets and partly due to our taking advantage of new business opportunities in existing and growth markets. Although the remedial measures introduced in the two previous years started to bear fruit, the result is still negative.
For 2000 we expect health insurance to carry on growing. Our ongoing remedial measures have involved giving up some business that did not meet our profitability expectations, but there have also been substantial premium increases in important markets. We hope for a further improvement in the result.
PROPERTY-CASUALTY There was premium growth of 4.4% in property-casualty business, mainly attributable to liability insurance. Claims costs, however, soared in comparison with the previous year. There are two reasons for this: the exceptional number of natural catastrophes, which particularly affected fire insurance, and the claims burdens in our US liability business. On the other hand, we are pleased to report that in property business we have so far been spared losses from the millennium changeover.
In liability business our premium income grew by 8.1%; we succeeded in maintaining and in some cases even extending our leading position in industrial and professional liability business in our main markets.
We continue to see liability as a class of business with growth potential. All around the world there is an upturn in the demand for highly specialized reinsurance products to cover complex risks; owing to the trend towards non-proportional covers, however, this demand is not fully reflected in the development of premium income.
For the current business year we anticipate a slight fall in premium. We are proceeding on the assumption that the result will improve, despite the tight market situation.
The marked premium growth of 14.0% in personal accident comes mainly from foreign business. The result was better than in the previous year, even though we incurred substantial claims costs in our workers’ compensation business abroad.
For the year 2000 a decline in premium income is likely, partly because the privatization of workers’ compensation insurance in New Zealand which was carried out in 1998 has meanwhile been reversed. The result will probably be more favourable.
Loss ratio 83.7 105.7 Expense ratio 31.7 30.7 Combined ratio 115.4 136.4
Premium in motor business grew by 3.5%. This growth is solely attributable to our foreign portfolio. In Germany, our gross premium income declined, partly because our clients raised their retentions in 1999, i.e. ceded less business to us, and partly because original premiums were further eroded by the keen competition. This and the increased claims expenditure led to a further deterioration in the result.
In the current business year a trend towards higher rates is emerging in important markets; this is being accompanied by a pleasing amount of new business. All in all, we are therefore hoping for premium growth again and also for an upturn in our result.
In the current business year we expect there to be premium growth, which will come mainly from space insurance (more launches, higher rates), but no major change in the result.
The exceptionally negative result is due to the many large losses from natural catastrophes in what was an unprecedented accumulation of such events for the insurance industry: – Sydney hailstorm April – Earthquake in Turkey August – Earthquake in Taiwan September – Hurricane Floyd in the Bahamas and in the USA September – Typhoon Bart in Japan September – Winter storm Anatol in Denmark December – Winter storm Lothar in France, Germany and
Loss ratio 78.9 83.5 Expense ratio 26.8 24.4 Combined ratio 105.7 107.9
Loss ratio 77.2 101.8 Expense ratio 28.8 34.0 Combined ratio 106.0 135.8
The downward trend in original rates will continue in the current business year; for this reason both premium income and result will deteriorate.
In the business sector other classes of business premium income was up 6.1%. We achieved significant growth in the agricultural lines of business (hail, crop, livestock). We regard these lines as an attractive field of business for the future that offers us further opportunities for development. In credit insurance we also succeeded in expanding our premium volume.
The December gales in Germany and the increased hailstorm losses in the USA and Mexico meant that the overall result for “other classes” slipped into the red, even though credit business again recorded a satisfying profit.
In the current business year we expect total premium income from these classes of business to reach the same level as last year and, barring major windstorm events in Germany, a good result.
As a reinsurer, Munich Re is present throughout the world: we work together with insurance companies in around 150 countries. Germany remains our most important market, but 70% of our reinsurance premium income comes from abroad.
Fanned by liberalization measures in both highly developed and growth markets, competition among primary insurers has intensified further. In many markets the price for insurance cover is no longer commercially justifiable. Only in individual cases are increases in original rates becoming evident as pointers to a turnaround.
Although the general parameters in the year under review were largely unfavourable, there was ample reinsurance capacity available worldwide in most classes of property-casualty business. The urgently necessary improvements in prices and conditions for reinsurance cover could thus only be achieved sporadically. However, there are now many indications of a fall in the reinsurance capacity being offered in important markets and a gradual rise in the rate level.
Asia and Australasia 972 886 9.7 Africa, Near and Middle East 505 501 0.8
In the current business year we expect an increase in premium income as a whole and – if the claims costs for natural catastrophes return to within the “normal” range – a markedly better result.
In the current year our premium income should grow further and the result should be satisfactory.
We expect that despite the intense competition we will manage to increase our premium income in the year 2000. The result should also be considerably better than last year.
We took advantage of the opportunities for growth on the Iberian peninsula and were able to expand our market share, as well as improve the overall result. We should succeed in repeating both of these feats in the current business year.
Munich Reinsurance Company of Canada is the leading reinsurer in the Canadian non-life market. As the primary insurers in this highly competitive market are ceding less and less business in reinsurance, our subsidiary ’s premium volume fell in 1999; the result was considerably better than in the previous year, in which the ice storm in Ontario and Quebec gave rise to very high claims costs.
We are reckoning with a further increase in our gross premium income in the current year and a distinctly better result.
Japan is recovering only very slowly from a serious recession; demand for reinsurance is stagnating. Our growth in 1999 is purely ascribable to the rise in the value of the yen. Despite a typhoon loss (Bart) of over €75m, the result was still satisfactory.
Our premium increase here is also mainly due to changes in exchange rates. Our result was adversely affected by the earthquake in Taiwan in September 1999, which cost us €100m.
Our subsidiary Munich Reinsurance Company of Australasia achieved strong premium growth, albeit of a largely one-off nature: it resulted primarily from the privatization of workers’ compensation insurance in New Zealand, which has since been reversed following a change of government.
Gross premiums A$ m 401 336 Net premiums A$ m 104 98 Loss ratio non-life % 144.9 112.8 Expense ratio non-life % 20.5 24.7 Profit for the year A$ m –19.7 –0.3
Gross premiums Rm 1,301 1,304 Net premiums Rm 554 527 Loss ratio non-life % 75.4 86.2 Expense ratio non-life % 35.8 31.8 Profit for the year Rm 58.1 29.2 Investments Rm 1,734 1,323
Our business region Latin America achieved an increase of 9.5% in premium income to €380m (347m); particularly in life and health business we succeeded in expanding our business considerably. But the result was much worse than in the previous year, partly because the rate level in property insurance was generally inadequate and partly owing to an accumulation of natural catastrophe losses: earthquakes in Colombia and Mexico, floods in Mexico and Venezuela and a hurricane in the Caribbean.
In the meantime prices for the reinsurance of natural catastrophe covers have risen. We therefore expect slight growth in our premiums in the current business year, despite the unrelenting competition. We see growth potential in the agricultural lines and in life and health business. In order to utilize the opportunities in life reinsurance even better, we opened an office in Santiago de Chile in the year under review. This new unit offers extensive service to the whole South American market.
The decisive factor for the result in the current business year will be the extent to which our business is affected by claims costs from natural catastrophes.
Providing security for private insurance clients is a dynamic growth market. Demographic change and people’s growing awareness of the need to make provision mean that demand is continually rising.
Primary insurance Gross premiums for 1999 in €bn (by class of business)
Gross premiums €bn 13.5 12.7 Operating result €m 943 831 Investments €bn 97.5 87.9 Net underwriting provisions €bn 82.9 76.2
LIFE AND HEALTH 73% of our premium income in primary insurance derives from life and health business, where we recorded premium growth of 7.2% in 1999.
Premiums climbed by 9.8% to €6.2bn (5.7bn) in 1999; our foreign subsidiaries contributed €0.3bn (0.3bn) to this. Expenses for claims and benefits rose by 6.8%. On account of the satisfyingly large amount of new business, the expense ratio shows a slight increase.
In health insurance the Group was able to strengthen its position as market leader in Germany and Europe. Premium income was up 3.1% to €3.6bn (3.5bn), with €0.4bn (0.4bn) of this coming from abroad. At €3.6bn, expenses for claims and benefits – including expenses for premium refunds – was nearly the same as in the previous year.
The following information refers to our subsidiaries’ individual or consolidated financial statements for the year.
Gross premiums DM bn 23.3 22.2 Net premiums DM bn 20.3 19.6 Profit for the year DM mi 913 642 Investments DM bn 166.3 149.4 * Consolidated financial statements in accordance with IAS.
Shareholders’ equity totalled DM 10.1bn (8.3bn) or 22% more than in the previous year.
In 1999 ERGO was able to extend its position in the rest of Europe – its activities included the acquisition of Compensa Life and a stake in Compensa P & C, which gave it direct access to the Polish market. In the Netherlands it acquired ELVIA Life and a health insurer. ERGO is thus represented in 17 countries in Europe besides Germany; its foreign subsidiaries contributed premium income of DM 2.3bn (2.0bn) and a profit for the year of DM 92m (54m). ERGO intends to expand its foreign business further.
The two big writers of life insurance in this group, Hamburg-Mannheimer Leben and VICTORIA Leben, both received excellent ratings from Standard & Poor’s and Moody’s for their financial strength (AA pi and Aa 2), which puts them in the top bracket of German life insurers.
Premiums in health insurance climbed by 3.1% to DM 7.0bn (6.8bn).
Karlsruher consists of five insurance companies that operate in all lines of life insurance and property-casualty business, though not in health insurance. The regional focus of this group lies in southwest Germany, but it sells its products throughout Germany via various distribution channels. The parent company is the life insurer Karlsruher Lebensversicherung. Its most important subsidiary, Karlsruher Versicherung, writes property-casualty business.
Karlsruher Versicherung wrote gross premiums of DM 358m (356m) and earned a profit for the year of DM 6.6m (12.5m).
The number of staff employed by Karlsruher in its group in 1999 totalled
A restructured field service, intensive cooperation with bank partners, the establishment of an innovative broker distribution channel and the reorientation of its office operations will provide a solid basis for Karlsruher ’s future development.
As part of the planned restructuring of shareholdings with Allianz, Munich Re’s stake in Karlsruher Leben will increase to around 90% (currently 54%).
* Value of the Munich Re Group’s investments (in €) at 31st December 1998.
April 1999 also saw the establishment of MEAG MUNICH ERGO AssetManagment GmbH as a joint-venture subsidiary of Munich Re and ERGO. MEAG combines not only the investments but also the exceptional know-how of our Group; in addition, MEAG manages 50 funds for private and institutional investors.
With the formation of MEAG we have significantly strengthened our Group’s financial base and thus the security we offer in our reinsurance and primary insurance. At the same time we have created new growth opportunities in business with third parties. Thus we intend to win private insurance clients of the ERGO Group to a greater extent for new products in the asset management sector as well.
JAN. FEB. MAR. APR. MAY JUN. JUL. AUG. SEP. OCT. NOV. DEC.
Germany, UK, USA: development of bond yields in 1999 10-year German government bonds (benchmark)
The stock markets were characterized by exceptionally divergent developments in the past year: although the indices of the major stock markets reached new all-time highs, these record increases were attributable to only a relatively small number of highly capitalized stocks from the technology, telecommunications and financial sectors. The majority of shares – especially medium and small cap stocks – recorded hardly any advances in price as a whole.
In 1999 we again bought and sold shareholdings in other companies. We pursued two main purposes here: on the one hand to establish long-term partnerships and on the other to obtain an attractive return on the capital invested. With our wholly-owned subsidiary Münchener Rück Beteiligungen AG, we have created an infrastructure that gives us more flexibility in handling these shareholdings.
In the area of real estate we sold various items. At the same time we launched and partially realized new projects and acquisitions. At our headquarters in Munich we also began projects to convert and expand office buildings in own use.
The combination of our asset management activities in MEAG allows our experts to specialize even more and hence to analyse individual investment sectors more thoroughly. In 1999, for instance, we were already able to significantly enhance our buy-side research capacity, i.e. our own in-house activities.
Mortgage loans and other loans 8,670 5.7 7,475 5.5 16.0 Shares and investment fund
Our profit on investments rose by 12.5% to €9.5bn (8.5bn). Regular income increased to €8.5bn (7.4bn) and realized capital gains to €1.7bn (1.6bn). Writedowns on investments amounted to €176m (199m); these mainly involved real estate.
The unrealized gains included in shareholders’ equity show a change of
In 1999 we were able to make new investments in fixed-interest securities with higher yields than in the previous year. For the next two years we expect yields in western industrialized countries to fluctuate more or less around the current level; first, however, a slight upward trend should predominate. Against this background, we have continued to pursue our investment policy oriented towards stocks and real assets, and have expanded our portfolio of shares and investment fund certificates further. We have taken advantage of fluctuations on the world’s stock markets to establish new positions and to realize capital gains on highly valued capital markets.
In the current business year, at unchanged currency parities, gross premiums should increase by 3 to 4%. Our premium income will very probably grow more strongly in primary insurance than in reinsurance, unlike last year. The reason for this is American Re’s non-renewal of inadequately priced business with a premium volume of more than US$ 500m. In primary insurance, on the other hand, there will be an addition of around €200m in premium from the acquisition of Alte Leipziger’s business in Central and Eastern Europe.
The considerable funds that will flow to Munich Re from these transactions in the coming years will be invested in the further expansion of our business.
How do reinsurers and insurers make their living? Both do so from assuming risk – it is the core of their business.
In an increasingly complex environment, our professional risk management provides security for our clients on the one hand and earnings and appreciation in value for our shareholders on the other. In keeping with the nature of our business, we also carry high underwriting risks if these are sufficiently transparent and their assumption is worthwhile for us and hence for our shareholders.
The normal market risks are important for the insurers and reinsurers in the Group, of course, such as the appearance of new competitors or the launching of new products. But of special significance are the underwriting risks, the risks in the investment sector and the currency risk.
– Effective planning and controlling instruments and suitable structures for ensuring that we have sufficient early warning of all important developments for the Group, can initiate the requisite measures in good time and can monitor them appropriately
In the investment sector we are exposed above all to interest rate risks, equity risks and credit risks. How do we counter these? In the main by means of
Munich Re attaches very great importance to information security. Within the framework of a global security concept, extensive mechanisms ensure the availability and integrity of the systems and programs. We have built up a global security organization and always employ the latest security technologies such as firewalls and antivirus measures. The millennium changeover went smoothly for all systems.
We began our preparations for the euro at a very early stage. Conversion to the euro has proceeded without any problems, both internally and in business transactions with our clients.
Munich Re and also VICTORIA Leben continue to face Holocaust suits in the USA. In addition, as a result of special Holocaust legislation, Munich Re and its subsidiaries are subject to far-reaching reporting requirements and administrative action by insurance regulatory bodies in various states of the USA; in individual cases we have had to appeal against measures in the courts in order to avert the concrete threat of business disadvantages for US subsidiaries of Munich Re. We are confident that the further efforts of the Foundation Initiative of German Enterprises will, in the pending talks on the agreement between the US and German governments, help to find solutions that achieve full and lasting relief from legal and administrative action.
Our most important resource is the knowledge, skills and commitment of our more than 30,000 staff. We support them in constantly developing new and convincing solutions for our clients.
By such means, the value of our Group grows – to the benefit of our shareholders, our clients and our staff.
Significant changes are taking place in the area of human resources at our reinsurance and primary insurance companies. For instance, 1999 saw VICTORIA, Hamburg-Mannheimer and D.A.S. merging their claims management resources in property insurance. In September, ITERGO was set up to combine the activities of the ERGO companies in the field of information technology; it will employ around 1,300 staff. MEAG, the joint-venture asset management company of Munich Re and ERGO, commenced operations in the year under review.
– We have further improved our trainee programme for promising graduates.
In our reinsurance group we introduced a long-term incentive plan for the Board of Management and around 80 top executives in Germany and our international organization in the year under review, linking their compensation to the performance of Munich Re’s share price. The plan provides for the issuing of stock appreciation rights, which can be exercised within a seven-year period if two preconditions are met: Munich Re’s share price must have risen by at least 20% compared to the price at the start of the plan and it must have repeatedly outperformed the DAX 30 over an extended period.
ERGO has developed a modern three-tier pension plan, designed to advance the integration of its group companies in this area as well: its components are a defined contribution plan (for retirement pensions, disability pensions and pensions for surviving dependants), a direct pension commitment and insurance.
As we are expanding our business in all sectors, we will be creating new jobs in the current year as well. We expect a great deal of our staff – today and in the future. And our staff – present and future – expect a great deal of us. We want to be, indeed have to be, an attractive and competitive employer wherever we operate in the world. This is what we are constantly working at.
Early on we focused our attention on two questions: What are the consequences of the increasing globalization of reinsurance business for information technology, and how can we create the greatest possible added value with our IT resources? Our answers: global standardization of our infrastructure, development of IT centres of competence, and uniform data structures and processes.
In the reinsurance group we have been working intensively for years to realize a standardized IT infrastructure throughout our worldwide organization. What have we achieved so far?
Our international IT organization ensures that our universal know-how and our capacity are utilized as efficiently as possible. The standardized infrastructure also enables us to decentralize IT projects that are of strategic importance for the whole Group and to entrust them to subsidiaries. Such a centre of competence is located at Munich Reinsurance Company of Canada, for instance: our staff in Toronto are responsible for FOCUS, a system that supports the planning process of the entire reinsurance group.
In the next few business years the emphasis of our work will be on harmonizing reinsurance portfolio management and our accounting systems Group-wide. With the help of uniform data structures and processes, we will be able to make available data needed for decision-making much more quickly and efficiently, both for internal and external purposes. These projects will be complemented by a uniform approach to document management and enhanced integration of the systems used.
The knowledge of our staff is a crucial success factor for Munich Re. Our objective of creating lasting value can only be achieved by systematically growing our “intellectual capital” and employing it even more efficiently. In order to be able to offer our clients around the world the best products and service, we have to make available worldwide the know-how of every staff member in a way that enriches the fund of knowledge and experience of the whole Munich Re.
In an environment that is changing more and more rapidly, this presupposes a corporate culture in which values such as client proximity, willingness to learn, openness and ability to change play a central role. Of increasing importance alongside this is systematic knowledge management, which supports the implementation of such values in day-to-day business.
– In our Group-wide intranet, MRWEB, we have created a communication platform that allows all staff easy access to our worldwide professional expertise.
The Internet and its potential applications are substantially altering the playing field in the insurance industry as well. As an additional marketplace, for example, the Net offers many new business opportunities and is likely to be a crucial success factor in the future.
The particular challenge in the next stages of e-commerce will be to integrate the new distribution forms in a multi-channel strategy and, especially on the basis of Web technology, to launch completely new business models. This is why ERGO has entered into a strategic partnership with Deutsche Telekom, the biggest European Internet provider, with the aim of creating an innovative financial services marketplace on the Net.
For our shareholders, increasing value means an attractive Munich Re share performance. For our clients in insurance and reinsurance, it guarantees – in the form of a strong capital base for the Munich Re Group – the security which is so essential in our business. And for our staff it provides long-term, secure and interesting jobs.
Our planning and controlling process takes account of the old principle that all business is local. It gives the individual operational units and subsidiaries the greatest possible decision-making authority in their markets and fields of business. At the same time it ensures that
Increasing our corporate value is the central benchmark for our decisions. With this in mind, our range of instruments is continually being adapted. Thus we are currently expanding our performance measurement tools, based on premium and result targets, so that they show even better and more transparently where and to what extent added value is created in the Group: – Consequently, following the conversion of our external reporting to International Accounting Standards, our internal reporting is now being converted to this basis as well, thus ensuring that all our reporting follows largely the same principles.
– We are constantly monitoring the equity capital allocated to the individual areas of our business on the basis of risk criteria. We use our own risk models for this, but also draw on models used by the international rating agencies.
Added value is created wherever the return achieved on the equity capital allocated to the area in question is higher than the cost of capital for our shareholders, i.e. the opportunity cost. As reinsurance in particular requires longer periods to achieve a risk balance – as 1999 all too clearly showed – we also measure the achievement of our targets in terms of multi-year averages.
We are refining our instruments and adjusting them to the particular circumstances of our further evolving Group. This is accompanied by a growth in our ability as the Munich Re Group to utilize our strategic options flexibly and in line with the principle of value maximization.
For the near future we plan to supplement our reporting on the individual fields of business with information on their value contributions. In the medium term, our value-based management will be underpinned by a specific dynamic risk model – “dynamic financial analysis”.
Preparations are well underway for Munich Re to become the first German reinsurer to complete an officially recognized environmental audit, which it intends to do by the end of 2000. There are good reasons for this.
We want to examine not only our own office buildings from the ecological point of view but also the real estate we lease to third parties, with the aim of making it environmentally sounder. This will also help to enhance the attractiveness of the property and safeguard or increase its long-term value.
In our office operations we will monitor even more closely the cycle of equipment and materials we use, from acquisition to disposal. Our aim will be to recycle goods like computers to an increased extent and to plan and organize for this already at the acquisition stage. This will reduce not only our waste but also the ever-increasing costs of waste disposal.
In future we do not want to restrict ourselves solely to ecological measures in connection with our business operations. The preparations for the environmental audit led us in 1999 to set up a new Environmental Unit. As with our Geoscience Research Group, whose experts have long been handling questions from our clients and the public regarding natural catastrophes and climate change, we intend to broaden and make available our competence in the area of environmental protection and sustainable development. Our conviction is that only with sound knowledge, covering the complex interrelationships of global environmental risks and sustainability, can we anticipate the consequences for the insurance industry and help to solve current and future problems. As a leading international reinsurer, we feel we have a responsibility to our shareholders, our clients and the public to do this.
Thus we want to concern ourselves more with the manifold risks in environmental liability. Especially in the international context, long-term corporate liabilities are often opaque. Consequently, environmental liability law cannot always fulfil its preventive function, which presupposes that liability situations are properly perceived and taken into account at the right stage.
We want to make our contribution to clarifying complex liability situations, thereby optimizing entrepreneurial risk decisions.
We also see the environmental audit as an investment in the competence of our staff. This is illustrated by the examples above. But beyond these special issues, we want to anchor the idea of responsibility for environmental protection and sustainable development even more firmly in the minds of our employees. We therefore plan to integrate this topic to an increasing extent in our training measures at all levels.
For 1999 we have prepared our consolidated financial statements in accordance with International Accounting Standards (IAS) for the first time.
The changeover to International Accounting Standards has fundamentally altered our consolidated financial statements: – Classification and valuation of the items in the balance sheet and income statement follow internationally recognized principles. This will make our financial statements easier to read for foreign readers, above all investors and analysts. For purposes of comparison, we have included a list in the notes on page 126f. detailing the main differences between IAS and German Commercial Code accounting.
Profit for the year HGB 612 Amortization of goodwill –110 Investment result 711 Change in claims equalization provision 276 Change in other underwriting provisions –191 Tax –46 Minority interests –180 Miscellaneous 128
– Shareholders’ equity Shareholders’ equity is now shown less minority interests, as is customary in many countries.
Despite the significant increase in shareholders’ equity, there continue to be high valuation reserves. These result from the fact that the fair values of our shareholdings in important associated enterprises are considerably higher than the proportionate share of their net asset value at which they are included in the IAS financial statements.
F. Cash with banks, cheques and cash in hand 487 581
ITEMS Notes €m Prev. year €m 5. Net expenses for claims and benefits (28) 25,241 22,735 9. Operating result before tax 1,701 2,171 11. Minority interests in earnings (16) 185 180 12. Profit for the year 1,133 1,200
Adjustment for investment income/expenses without impact on cash flow 100 85
Acquisition of real estate –667 –309 Sale of real estate 294 287
Acquisition of investments held to maturity –45 –163 Maturities of investments held to maturity 222 35
II. Investments in affiliated enterprises and associated enterprises 4,074 3,546 5,194 4,518
C. Investments for the benefit of life insurance policyholders who bear the investment risk 0 0 – –
Life and health Property-casualty 1999 Prev. year 1999 Prev. year €m €m €m €m
Life and health Property-casualty 1999 Prev. year 1999 Prev. year 1999 Prev. year 1999 Prev. year 1999 Prev. year €m €m €m €m €m €m €m €m €m €m
1999 Prev. year 1999 Prev. year 1999 Prev. year €m €m €m €m €m €m
Latin America * After elimination of intra-Group transactions across segments. Presentation of the figures in the management report differs from this (cf. note on page 39).
The consolidated financial statements have been prepared in accordance with International Accounting Standards adopted up to and including 31st December 1999 whose application was obligatory for the business year. In addition, we have observed the following Standards whose application was not compulsory for the business year: IAS 10 (revised) Events after the Balance Sheet Date IAS 16 (revised) Property, Plant and Equipment IAS 22 (revised) Business Combinations IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and
We have calculated the previous year’s figures on the same basis as the figures for the business year 1999. The only exception is the translation of foreign currency items in the case of the parent company, for which average exchange rates have been used in the income statement since 1999 (previously: exchange rates on reporting date).
Our Swiss subsidiary, New Re, also changed its accounting practice in 1998, altering the accounting of its underwriting business so that, instead of being deferred for one year, it covers the past year in the same way as the general accounts. The changeover year 1998 thus contains underwriting income and expenses for 1997 and 1998.
The aggregate shareholders’ equity of the non-consolidated subsidiaries amounted to less than 0.5% of the Group’s shareholders’ equity at 31st December 1999, and their aggregate profit for the year to 0.4% of the consolidated profit for the year. The enterprises involved are mainly service and management companies.
We generally consolidate subsidiaries as soon as the Group holds the majority of the voting shares. In order to determine the equity capital at the time of acquisition, we include the assets and liabilities of the subsidiary according to uniform Group accounting and valuation methods.
The equity capital apportionable to the Group is netted against the acquisition costs of the shares. If the acquisition costs are greater, the difference is allocated to the individual assets or liabilities until their value corresponds to their fair value; any residual amount is capitalized as goodwill and amortized on a straight-line basis.
In accordance with IAS 28, associated enterprises are all enterprises which are not subsidiaries and in which Group companies hold between 20 and 50% of the voting rights – regardless of whether a significant influence is actually exercised on the financial and operating decisions of the enterprise.
Other intangible assets are valued at the acquisition cost less straightline depreciation. The useful life assumed for software is three to five years and for insurance portfolios up to 15 years. We have not capitalized internally generated software, as this did not meet the definition of an intangible asset (IAS 38).
Real estate is carried at cost. Maintenance expenses and repairs are recognized as an expense. Subsequent expenditure that increases the value of real estate is capitalized if it extends the useful life. The capitalized costs of buildings are amortized 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 recognized as an investment expense in the income statement, and any increases in value as investment income.
Loans are stated at amortized cost. Writedowns for impairments are made in cases where the repayment of a loan can no longer be expected.
Fixed-interest securities held to maturity are – like loans – stated at amortized cost. The main investments shown here are registered bonds and promissory notes.
Securities held for trading comprise all fixed-interest and non-fixedinterest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences; in addition, they include all derivative financial instruments that we have not acquired for hedging purposes. Securities held for trading are stated at the market value at the balance sheet date; all unrealized gains or losses from this valuation are included in the investment result.
C. Investments for the benefit of life insurance policyholders who bear the investment risk
Deferred acquisition costs comprise commissions and other variable costs directly connected with acquisition or renewal of insurance policies.
In reinsurance and property-casualty insurance, the deferred acquisition costs are capitalized and amortized on a straight-line basis over the average term of the policies, from one to five years.
Unearned premiums are accrued premiums already written for future risk periods. For primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases.
Shareholders’ equity is substantially higher under IAS than under German Commercial Code accounting because large portions of the investment portfolio are valued at market; results fluctuate more strongly than under German Commercial Code accounting, because there are no claims equalization provisions to provide a “smoothing” effect. The most important differences between IAS and the German Commercial Code as regards the Munich Re Group are as follows: – Under IAS, goodwill is amortized over a maximum period of 20 years with impact on earnings; in our German Commercial Code accounting, we offset goodwill against the revenue reserves without impacting earnings.
– A large portion of the investments are valued at market under IAS; under the German Commercial Code they are valued at the lower of cost or market.
– The provision for premium refunds is markedly higher than under the German Commercial Code, because it also includes policyholders ’ latent share of unrealized gains resulting from the valuation of investments at market.
– Writedowns on investments are lower than under German Commercial Code accounting, because they may only be recorded if the diminution in value is likely to be permanent.
– Gains on the disposal of investments are lower and the losses on disposal higher under IAS, since disposal proceeds are now set against higher carrying amounts than in German Commercial Code accounting (lower of cost or market).
Depreciation of software is apportioned in the income statement between the investment result, expenses for claims and benefits, and operating expenses. Amortization of purchased insurance portfolios is shown under “Other expenses”.
Carrying amount 1.1.1999 6,534 Additions 518 Changes in consolidated group 117 Disposals 186 Write-ups 20 Depreciation – Amortization 72 – Writedowns for impairments 30
The fair value of investments in associated enterprises, which are generally valued at equity, amounts to €27,258m (29,390m) at the balance sheet date.
Mortgage loans 6,644 6,430 Loans and advance payments on insurance policies 574 586 Other loans 1,452 459
Up to one year 461 460 Over one year and up to 5 years 3,026 2,399 Over 5 years and up to 10 years 4,409 3,878
AAA 84 AA 7 A 12 BBB 4 Lower 0 No rating 1,383
All figures in €m 31.12.1999 Prev. year 31.12.1999 Prev. year 31.12.1999 Prev. year
Contractual period to maturity of fixed-interest securities Carrying amounts Amortized cost
Up to one year 5,165 5,135 5,073 4,920 Over one year and up to 5 years 21,325 19,415 20,468 18,385 Over 5 years and up to 10 years 21,860 25,743 21,608 22,686
AAA 36,111 AA 10,383 A 2,608 BBB 446 Lower 71 No rating 2,091
The other securities held for trading include fixed-interest securities totalling €91m (98m) and non-fixed-interest securities totalling €100m (78m).
The market value of open positions totalled €90m at the balance sheet date, i.e. less than 1% of the balance sheet total.
Receivables with a remaining term of up to one year total €7,533m (6,095m); receivables with a remaining term of over one year total €523m (2m).
We have used interest rates of between 3 and 8% for calculating the deferred acquisition costs.
These mainly comprise property, plant and equipment and inventories totalling €250m (233m).
On 25th January 1999 we carried out a 1:2 stock split for the registered shares, which had been fully paid up to DM 10 as at 31st December 1998. In accordance with the AGM resolutions of 5th November 1998, we converted the registered shares – together with the 3,000,000 bearer shares with a par value of DM 5 each – into no-par-value shares, each representing a rounded-off portion of €2.56 of the share capital.
The registered shares resulting from the split are entitled to dividend as from 1st January 1999. As a result of the stock split, the number of registered shares doubled to 170,919,680.
On 17th February 1999 we issued 3,000,000 new restrictedly transferable registered shares and offered these to the holders of bearer shares for subscription at a ratio of 1:1 for a price of €126.29 each, on the condition that they converted their bearer shares into registered shares. For each converted bearer share, they received one old registered share and – on exercising their subscription right – one new registered share entitled to dividend from 1st January 1999.
As a result of the above rights issue, the share capital increased to €380.4m.
By 31st December 1999 a total of 2,985,379 bearer shares had been converted into registered shares. The exercising of Munich Re 1998/2002 warrants in the course of the business year resulted in the issue of 96 more registered shares at an exercise price of €163.61 each. A very high percentage of the bearer shares were converted into registered shares, enabling us to delist the bearer shares as at 30th November 1999. This means that since 1st December 1999 Munich Re has been represented on the stock exchanges by registered shares only. We have thus achieved an important goal in the restructuring of our share capital.
The AGM of 22nd July 1999 had resolved to increase the share capital by €0.6m to €452.9m out of the capital reserve without the issue of new shares. This rounded the portion of the share capital attributable to each no-par-value share to exactly €2.56.
To safeguard subscription rights from exercise of warrants 1998/2002 4.4 To safeguard subscription rights in rights issue from capital authorized for this purpose 15.4 To safeguard conversion rights or subscription rights from convertible bonds or bonds with warrants 15.4
The capital authorized for capital increases remains the same as in the previous year: All figures in €m 31.12.1999
Allocation to revenue reserves – – 563 – –563 0 Changes in the consolidated group – – 70 12 0 82 Unrealized gains and losses from valuation at equity – – – 1,035 – 1,035 Unrealized gains and losses on other investments – – – 209 – 209 Profit for the year – – – – 1,200 1,200 Dividends – – 0 – –78 –78 Other changes – – –21 –1 0 –22
Allocation to revenue reserves – – 1,128 – –1,128 0 Changes in the consolidated group – – 22 –378 0 –356 Unrealized gains and losses from valuation at equity – – – 419 – 419 Unrealized gains and losses on other
Profit for the year – – – – 1,133 1,133 Dividends – – 0 – –81 –81 Other changes – – –4 –6 0 –10
Total –20 225 €26m (–€12m) of this is apportionable to changes in exchange rates and –€346m (28m) to changes in the consolidated group.
Unrealized gains and losses 643 565 Consolidated profit 185 180 Other equity components 1,297 1,467
– Life and health 79 63 – Property-casualty 3,018 2,777 Primary insurers 1,327 1,197 – Life and health 699 580 – Property-casualty 628 617 * After elimination of intra-Group transactions across segments.
The distribution of the net provision for future policy benefits between the different Group segments is as follows: All figures in €m* 31.12.1999 Prev. year
In calculating the provision for future policy benefits, interest rates of between 3 and 8% have been used: 07 CONSOLIDATED FINANCIAL STATEMENTS 1999
(20) Other underwriting provisions 31.12.1999 31.12.1999 31.12.1999 Prev. year Prev. year Prev. year
The net provision for premium refunds is distributed between the segments of the Group as follows: All figures in €m* 31.12.1999 Prev. year
– Life and health 22 14 – Property-casualty 1,230 1,200 Primary insurers 69 51 – Life and health 11 11 – Property-casualty 58 40 * After elimination of intra-Group transactions across segments.
The other accrued liabilities comprise provisions for post-employment benefits, tax provisions and miscellaneous other provisions.
Provisions for post-employment benefits 949 871 Tax provisions 995 841 Other provisions 983 647
Expenses for defined contribution plans in the year under review total €16m (14m).
Under defined benefit plans the staff member is promised a particular level of retirement benefit either by the company or by a pension fund. The company's contributions needed to finance this are not fixed in advance.
The recognition of actuarial gains and losses as from 1st January 1999 is based on the corridor method set out in items 92 and 93 sentence 1 of IAS 19 (revised 1998).
The provision for defined benefit plans changed as follows in the business year: All figures in €m 1999 Prev. year
Changes in exchange rates 14 0 Expenses (see below) 91 109 Payments –27 –22
The expenses booked in the year under review are made up as follows: All figures in €m 1999 Prev. year
Deposits retained on ceded business 4,869 4,182 Accounts payable on primary insurance business 4,771 3,962 Accounts payable on reinsurance business 2,479 2,017 Amounts owed to banks 967 757 Miscellaneous liabilities 1,239 1,042 €117m (87m) is apportionable to tax liabilities, €28m (33m) to liabilities for social security, and €10m (30m) to liabilities for interest and rent.
Change in unearned premiums * After elimination of intra-Group transactions across segments.
Result from: Real estate 551 598 Investments in affiliated enterprises 8 60 Investments in associated enterprises 981 650 Mortgage loans and other loans 497 610 Other securities held to maturity 103 23 Other securities available for sale – Fixed-interest 3,325 3,506 – Non-fixed-interest 3,624 2,575 Other securities held for trading – Fixed-interest 10 –16 – Non-fixed-interest 34 23 Other investments 730 744 Expenses for the management of investments, other 07 CONSOLIDATED FINANCIAL STATEMENTS 1999
All figures in €m* 1999 Pr. year 1999 Pr. year 1999 Pr. year 1999 Pr. year 1999 Pr. year 1999 Pr. year
Management expenses, interest charges and other * After elimination of intra-Group transactions across segments.
All figures in €m* 1999 Prev. year 1999 Prev. year 1999 Prev. year
Change in the provisions for outstanding claims 2,152 824 772 –91 1,380 915
Change in other provisions Provision for future policy benefits 31 – 1 – 30 –
Provision for future policy benefits 3,077 2,904 21 –17 3,056 2,921
Change in other provisions Provision for future policy benefits 14 2 – – 14 2 * After elimination of intra-Group transactions across segments.
Change in deferred acquisition costs 44 –10 –83 –53 –148 – –20 –1 –207 –64
In addition to foreign currency exchange losses of €75m (70m), the other expenses mainly include expenses for services rendered of €154m (89m), interest and similar expenses of €380m (373m), and writedowns of €224m (138m).
The following table shows the relationship between the notional tax on earnings derived from the profit for the year and the tax on earnings shown. The German tax on earnings is based on the corporation tax rate for retained earnings applicable in Germany since 1999, the solidarity surcharge and the trade tax rate. The change in the tax rate is recognized in earnings.
Result before tax on earnings (after other tax) 1,678 Theoretical tax rate in % 45
Business relationships with related enterprises, i.e. unconsolidated affiliated companies, are not significant in extent and mainly include service activities.
Wages and salaries 1,639 1,304 Social security contributions and employee assistance 289 264 Expenses for employees’ pensions 142 129
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 start of the plan. In addition, Munich Re shares must have outperformed the DAX 30 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.
As at 31st December 1999 a total of 110,840 stock appreciation rights had been granted, 46,371 of these to members of the Board of Management. The expenses incurred for the stock appreciation rights have been determined on the basis of the change in the Munich Re share price. The Munich Re share price at commencement of the plan, i.e. the initial share price, was fixed at €182.60. In the year under review an amount of €1.9m was set aside pro rata temporis for the stock appreciation rights.
The total emoluments of the Board of Management of the Munich Reinsurance Company for fulfilment of its duties in respect of the parent company and the subsidiaries totalled €8.0m (5.6m*). 40% of this was made up of variable compensation components. Payments to retired members of the Board of Management or their surviving dependants amounted to
Taking into account the proposal for the appropriation of the profit, the emoluments of Supervisory Board totalled €0.9m (0.5m). This sum includes €0.4m (0.4m) dependent on the dividend paid to the shareholders.
* Previous year only comparable to a limited extent owing to parent company’s short business year.
Reinsurance companies 5,291 4,964 Primary insurance companies 27,910 27,316 Asset management 44 –
New shares issued in 1999 and those created in 1999 by the exercise of warrants are included pro rata temporis from the respective date of delivery. Taking into account the 1:2 split of the registered shares at the beginning of 1999, the weighted average number of the shares for 1999 was 175,793,668 (168,883,779). This gives an earnings per share figure of €6.45 (7.11). €1.70 of this is attributable to the aforementioned reduction of the corporation tax rate to 40% (45%) in Germany.
For the diluted earnings per share, the number of shares is increased by the weighted average of potential shares that would have a diluting effect. Outstanding warrants are additionally included pro rata temporis up to the time they are exercised. At an average share price of €195.44 and a warrant exercise price of €163.61, this results in a dilution of 285,409 (687,143) shares. The diluted earnings per share, the calculation of which was based on 176,079,077 (169,570,922) shares, thus amount to
The auditor’s opinion is worded as follows: We have audited the consolidated financial statements, consisting of the balance sheet, the income statement and the statements of changes in shareholders’ equity and cash flows as well as the notes to the financial statements, prepared by the Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München for the business year from 1st January 1999 to 31st December 1999. The preparation and the content of the consolidated financial statements are the responsibility of the Company’s Board of Management. Our responsibility is to express an opinion on whether the consolidated financial statements are in accordance with International Accounting Standards (IAS) based on our audit.
with German accounting law. We conducted our audit of the consistency of the group accounting with the 7th EU Directive, required for the exemption from the duty for consolidated accounting pursuant to commercial law, on the basis of the interpretation of the Directive by the European Commission’s Contact Committee on Accounting Directives.
Great Lakes Reinsurance (UK) PLC Upper Ground Floor 1, Minster Court Mincing Lane, London EC3R 7AA
Further addresses may be obtained from the 1999 annual report of ERGO Versicherungsgruppe AG.
Bayerische Hypo- und Vereinsbank Aktiengesellschaft, Munich IKB Deutsche Industriebank AG, Düsseldorf/Berlin Heidelberger Druckmaschinen Aktiengesellschaft, Heidelberg MAN Aktiengesellschaft, Munich
BHS tabletop AG, Selb Forst Ebnath Aktiengesellschaft, Ebnath *** Some of these selected participations are held indirectly. They are calculated proportionally in each case.
*** The amounts are taken from the individual companies’ financial statements. They have been translated using the exchange rates applicable on 31.12.1999.
ASR Verzekeringsgroep N. V., Rotterdam 10.4104 1,241,089 213,367 Generali Lloyd Aktiengesellschaft, Munich 12.2100 120,683 –3,122 Mecklenburgische Leben Versicherungs-Aktiengesellschaft, Hanover 12.5000 3,242 444 Nürnberger Beteiligungs-Aktiengesellschaft, Nuremburg 7.5000 350,421 16,009 **** Result for the year after profit-transfer.
Affiliated enterprises In the consolidated financial statements of the Munich Reinsurance Company (parent company) all companies are deemed affiliated enterprises in which the Munich Reinsurance company holds the majority of the voting rights either directly or indirectly (subsidiary companies).
Associated enterprises Enterprises on whose financial and operating decisions a significant (but not a controlling) influence can be exercised, regardless of whether this influence is actually exercised or not. A significant influence is presumed if the proportion of voting rights lies between 20 and 50%.
At amortized cost Under this accounting principle the difference between the acquisition cost and redemption value (of an investment) is added to or subtracted from the original cost figure over the period until maturity and credited or charged to income over the same period. Writedowns are made for impairment or uncollectability.
Consolidation Combining the items from the individual financial statements of the companies belonging to the Group into one consolidated financial statement, in which items involving intra-Group transactions are eliminated.
Contingent liabilities Possible obligations whose existence will be confirmed by the occurrence or non-occurrence of an uncertain future event and which are therefore not shown as liabilities in the balance sheet. They must, however, be included in the notes to the financial statements (example: guarantee obligations).
Deferred acquisition costs Costs incurred for the acquisition or the renewal of insurance policies (e.g. commission, cost of processing applications) are capitalized and amortized over the term of the contracts.
Futures Standardized contracts to trade a financial instrument on a money market, capital market, precious-metals market or currency market at a specific price and on a specific future date. Frequently, rather than actually delivering the underlying financial instrument on that date, the difference between closing market value and the exercise price is settled in cash.
Hedging Protecting against undesirable developments in prices by means of special financial contracts, especially derivative financial instruments. Depending on the risk to be hedged, a distinction is made between two basic types: fair value hedges safeguard assets or liabilities against the risk of changes in value; cash flow hedges reduce the risk of fluctuations in future cash flows.
Other securities held for trading Securities held for trading comprise temporarily held investments purchased with the intention of obtaining the highest possible return from short-term fluctuations in the market price. They are accounted for at their market value at the balance sheet date. Changes in market value are recognized in the income statement.
Other securities available for sale Securities that will neither be held to maturity nor are assignable to the “held for trading” category. These securities are accounted for at market value. Changes in value are reflected in shareholders’ equity without impact on earnings.
Premiums Premiums written means all premium income that has become payable in the business year. The portion of this premium income that constitutes payment for insurance cover in the business year is referred to as earned premiums.
Primary insurers Insurance companies that assume risks in return for an insurance premium and have a direct contractual relationship with the holder of the insurance policy (private individual, firm or organization).
Accounting policies 118ff. Addresses 152f. Affiliated enterprises 121, 154f. Africa, Near and Middle East 57
Capital measures 22, 134ff. Cash flow statement 108f. Classes of business 44ff., 62f. Consolidated group 119 Contingent liabilities 146 Currency markets 30, 33 Currency translation 118, 126
International Accounting Standards (IAS) 102 Investments 74f. Investor relations 20, 162
Marine, aviation, space 47 Market capitalization 21 Millennium changeover 46 Minority interests 135
Objectives 3 Other classes of business 48 Overall economic development 28ff.
Segment reporting 44ff., 110ff. Shareholders 20 Shareholders’ equity 134f. Shares 20ff., 134 Specimen deposit 22 Staff 88f., 146 Stock markets 31, 72f. Supervisory Board 12
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Picture credits: Jo Magrean/Susanne Bransch, Hamburg, title page Peter Kaspar, Munich, pp. 2/5 Susie Knoll, Munich, pp. 6/7 Peter Kaspar, Munich, pp. 8/11 Büro X, Hamburg, pp. 14/17 Henning Bock/Susanne Bransch, Hamburg, pp. 24/27 Jo Magrean/Susanne Bransch, Hamburg, pp. 34/37 Howard B. Bluestein, New York, pp. 40/43
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