Müller-Naumann, Munich pp. 23, 49 Karsten de Riese, Bairawies, pp. 9, 24, 50, 76 PicturePress, p. 32
Shares of premium income from reinsurance and primary insurance, broken down by life and health and property-casualty*
10. Operating result before taxes on income* 2,604 338 434* 1,037* 795*
Advancing innovation Progress is accompanied by risks – everywhere, at all times. Munich Re’s task is to identify and evaluate these risks and turn them into viable insurance concepts. That is the key to profitable growth. We have therefore launched an innovation offensive. Our initiatives bring movement into the market: be it our involvement in India, our refinement of loss reserve calculations, or our human resources risk management. In this way, we generate successful business and also show social responsibility by partnering technological progress, as in the case of insurance for geological risk. Behind these endeavours are competent and motivated staff, who demonstrate their skills in old and new fields with energy and ideas – advancing innovation.
Accuracy Benefit Consistent Courage Creativity Curiosity Dialogue Employees Entrepreneurial spirit Experts Fascinating Improvement Initiative Innovation Openness Opportunities Partnership Practical relevance Pioneer Profitable Prognosis Progress Reliability Responsibility Risk Solutions Trust Vision Will
In a nutshell: Premium calculations, value-based management and risk management – all of these require mathematics.
I can still vividly recall how our mathematics teacher, frustrated by our lack of enthusiasm, came out with this incredible sentence that was more than provocative for us pupils: “Everything can be modelled with figures, even your antipathy to mathematics.“
Innovation for profitable growth “In advanced modernity, the social production of wealth is systematically accompanied by the social production of risks.” This opening sentence from Ulrich Beck’s “Risk Society”* is one of the foundations of Munich Re’s business. Progress is not possible without innovation, and this cannot be had without certain risks. Rendering these imponderables calculable for investors and thus making innovation more likely – this is Munich Re’s contribution to progress. We have come a long way with this approach: with virtues like entrepreneurial spirit, openness, curiosity and the declared will to find innovative solutions to problems. More? To follow.
Munich Re practises joined-up thinking to an extent unmatched by most other companies, can draw on a wealth of knowledge, and has the world’s leading risk models: an excellent starting position for profitable growth, which we aim to achieve above all through sustainable innovations.
The message is clear: We want to meet the needs of our clients even more flexibly, to differentiate ourselves clearly from our competitors and thus forge long-term ties with our clients.
Innovation – Part of Munich Re for over 100 years At the beginning of the industrial era, the question arose of how the risks that inevitably accompanied progress could be limited and distributed in such a way that they would not hinder the modernisation process. What needed to be tamed above all were the unusually powerful and dangerous forces of steam engines and boilers. As far back as 1859, the Boiler Assurance Company was set up, with the aim not only of preventing accidents by means of inspections but also of offering insurance cover for property damage and bodily injury. Thus began the history of engineering insurance, which in the wake of industrialisation also spread from the UK and the USA to Germany.
Accuracy Benefit Consistent Courage Creativity Curiosity Dialogue Employees Entrepreneurial spirit Experts Fascinating Improvement Initiative Innovation Openness Opportunities Partnership Pioneer Practical relevance Profitable Prognosis Progress Reliability Responsibility Risk Solutions Trust Vision Will
A pioneer in growth markets If you want to open up opportunities in new fields of business, you have to do adopt a pioneering approach. This requires courage, the willingness to run a certain amount of risk, perseverance and above all a clear vision. Such as when Munich Re helps to create parameters for the insurance of risks in new markets. For the fact is, we do not want to start doing business until there is a reasonable framework that makes the underlying risks controllable. A strategy that prepares the ground for our business. This gives rise to major opportunities and competitive advantages. For as a pioneer, Munich Re grows with the developing market, gaining experience and building up trust, relationships and partnerships right from the start – with investment that remains within manageable bounds. As in India.
Dr. Nayan Shah, Partner and Executive Manager of Paramount Health Care Management, Mumbai
Profiting from flourishing markets – The example of India One billion people, an economic system that is in the process of opening up, a flourishing national economy and one of the most important growth markets – that, too, is India. Owing to the demographic trends, the strongly expanding middle class and the low insurance penetration, growth potential is especially great in health insurance. However, we can and will only carry risk when we enter a market if the parameters allow control of the related risks and thus profitable business. Our involvement is therefore geared to building up the first nationwide administration and management services in India for health insurance. That is something the insurance companies cannot fully achieve themselves because in some cases their knowhow and technical tools are not extensive enough or because their business volume does not make it worthwhile.
Paramount has become a hallmark of quality, and significant efforts are being made to further improve standards in the market. It will enjoy an above-average share of India’s growing insurance market and will be able to transfer its experience to other fields of business: in the case of medical examination services, for example, or in risk assessment for health and life insurance, in emergency medical assistance for travellers (in cooperation with Munich Re’s subsidiaries Mercur Assistance and Euroalarm) and in business process outsourcing, initially for our own Group companies – a new, innovative field of business that we can extend to external clients as well.
New energy Climate change and its dramatic effects can no longer be denied. Munich Re considers it has a duty to play an active part in creating ecologically oriented, innovative solutions. This serves our business and helps preserve the environment for coming generations as well. Creativity is now called for, sound prognoses and international dialogue with experts – on the subject of renewable energy, for example, which has inherent economic potential as well as being ecologically significant. How deep Munich Re’s knowledge goes is shown by the insurance for geological risk we provided for geothermal drilling, thus paving the way for future-oriented projects and accepting social responsibility.
Accuracy Benefit Consistent Courage Creativity Curiosity Dialogue Employees Entrepreneurial spirit Experts Fascinating Growth Improvement Initiative Innovation Openness Opportunities Partnership Pioneer Practical relevance Profitable Prognosis Progress Reliability Responsibility Risks Solutions Trust Vision Will
Questions to Prof. Dr. Fritz Vahrenholt, Chairman of the Board of Management of REpower Systems ag, a leading manufacturer of wind power plants, and member of the German Council for Sustainable Development.
Enjoying their work – Munich Re experts handling insurance for geological risk: Dr. Thomas Amoldt, Senior Consultant and Thomas Friedrich, Underwriter.
Insurance for geological risk – A chance for geothermal power One of the biggest hopes among renewable energies is geothermal power, i.e. heat from beneath the earth’s surface, which in contrast to wind or solar power has the ability to provide base load capacity to meet demand around the clock. Munich Re devoted a great deal of attention to this subject last year. It all started when the mayor of Unterhaching, a municipality on the outskirts of Munich, approached us about a project for drilling for thermal water there in order to generate power in a geothermal power plant. The drilling work – to a depth of over 3,000 metres – was expected to cost €5m, but the outcome was uncertain: a classic entrepreneurial risk. What with the geological and technical imponderables involved, investors are reluctant to put money into such geothermal projects. The problem is that very few comparable projects have started so far, so there is little data available for modelling and calculating risks. Our specialists – above all geologists and drilling engineers – studied the paperwork and, on the basis of external engineering opinions and their own expertise, assessed the risk. The result: Munich Re came up with a solution in the form of insurance for geological risk, the first private-sector insurance of this kind in Europe. Thanks to our extensive knowledge and our scientific resources, we were able to define a risk-adequate and competitive premium. The insurance covers the risk of project failure, i.e. the production of less than 65 litres per second, or partial success, the production of more than 65 but less than 100 litres per second. In addition, the insurance gave backing for so-called stimulation measures that might be necessary in order to influence the outcome positively if the initial drilling is unsuccessful. In other words, insurance for geological risk covers the loss that is incurred if, despite stimulation measures, the drilling yields such poor results that the production of thermal water would not be worthwhile. The maximum possible loss is calculated as the costs of drilling plus the costs of stimulation measures.
Dr. Schneidawind, how do human resources and risk management go together? Are employees a risk for you? Schneidawind: No, on the contrary. It’s not our employees that are a risk, not our human resources, but the potential lack of them. What we are talking about is the risk of not having staff for important positions, or at least not the right staff.
How did you come to link human resources and risk management?
Does that mean you have human resources risks at Munich Re under control? Schneidawind: If we look at the positive attitude of our staff towards our firm, then we can at least say that we’re not doing too badly. 98% of our employees are proud to work for Munich Re. And the 12,000 applications we receive each year point to the fact that we are considered an attractive employer. Thus our risk of “not having staff” is relatively low. But that need not always remain so. We will therefore be refining our risk management in the area of human resources and, as the next step, will subject our system to a stress test like those used elsewhere, mainly in the financial sector.
Munich Re’s human resources risk management Our risk management system primus in the human resources sector identifies, measures and controls personnel risks on the basis of the four generally acknowledged individual risks: – Risk of shortages: The company lacks the necessary knowledge carriers and high performers.
– Risk of insufficient adaptation: Employees’ skills and qualifications do not keep pace with the company’s development.
Take the risk of shortages, for example. If a company has a positive image, this helps to prevent shortages in human resources from occurring in the first place. Indicators of an employer’s attractiveness include the number of unsolicited applications, the number of applications in response to a job advert and staff turnover. All three indicators can easily be quantified and already give an indication of whether a company’s risk of personnel shortages is on the high or low side.
Munich Re – 125 years 28 01 Munich Re shares 34 03 Group profile The Board of Management 50 The Supervisory Board 52 The Munich Re Group 53 – Reinsurance 54 – Primary insurance 57 – Asset management 59 04 Business issues 2004 Hurricanes and typhoons 62 Eastern Europe 64 Capital market solutions 65 Customised portfolio solutions 67 Healthcare management 68 dkv in China 71 Life insurance 72 05 Corporate responsibility Report of the Supervisory Board 76 Supervisory Board committees 79 Corporate governance 80 Rating 82 Sustainability as an opportunity 83 Sustainable investment 83 Staff 85 Social commitment 86 Environment 88 06 Financial report Management report 93 – Key parameters 93 – Business performance 96 – Prospects 130 – Risk report 133 Consolidated balance sheet 144 Consolidated income statement 146 Change in shareholders’ equity 147 Consolidated cash flow statement 148 Segment reporting 150 Notes to the consolidated financial statements 158 Affiliated enterprises 195 Auditor’s report 198 Seats held on other boards 199 07 General information Glossary 203 Index of key terms 209 Important addresses 210 Classes of business 212 Multi-year overview Quarterly figures Important dates
Then and now Munich Re shares: From flotation to sustainability index _ Page 35 Business model in 1880 and 2005 _ Page 43 From reinsurer to Munich Re Group _ Page 49 Natural hazards: From San Francisco to climate change _ Page 61 Social pioneering over the years _ Page 75 From the first to the best annual result _ Page 91 125 years Advancing innovation
Dr. Nikolaus von Bomhard Chairman of Munich Re’s Board of Management
In addition to the heavy losses from natural catastrophes, which I wrote about in my letter for the third quarter, burdens from us business also affected our result. Our subsidiary American Re added us$ 180m to its reserves for asbestos-related claims, which are still being reported for periods going back many years. It made a further increase of us$ 302m to reserves for losses stemming in particular from us liability business. In this segment, we have already taken fundamental business policy decisions to ensure that we achieve longterm profitability. These include the decision for marp, an American Re subsidiary, to give up directly written us liability and professional indemnity business for large clients.
We have steadfastly adhered to this policy in the successful renewals of treaties at 1 January 2005. I therefore expect that in the current year we will again record a very satisfactory reinsurance result.
In 2004, primary insurance – in the form of ergo – also made a positive contribution to the Group result. I am particularly pleased that in the past year ergo was able to earn its cost of capital, an objective we originally did not envisage meeting until 2005.
The third focal point that I mentioned at the outset is integrated risk management. Here we concentrated last year on asset-liability and active capital management. We made substantial progress in our efforts to relieve our balance sheet of risks that do not conform to our business model strategy. Put plainly, we have significantly reduced our equity exposure, especially our investments in the German and European financial sector. We have thus appreciably diminished the concentration risk, even if there is certainly still scope for further “derisking“ measures.
Ladies and gentlemen, we have produced a very good result for the business year 2004. We regard this – especially in reinsurance – not as the chance result of a particular market situation, but as the fruit of consistent and hard work. We are naturally continuing this work, given that the related challenges will remain with us in the coming years. Our programme for the next few years can be subsumed under three – admittedly rather abstract – headings: – Active diversification of risks – Focus on controlling “risk“ as the underlying object of our business – Optimising management quality and our vbm methods and tools
In our case, “diversification of risks“ is more than the customary spreading of risks in insurance and reinsurance. For us, it is immaterial whether the risks we deal with derive formally from insurance or reinsurance: we approach the risks holistically. The borders between the two segments are becoming increasingly blurred. It is also a significant competitive advantage that we cover the whole value chain in the insurance industry and can exploit synergies in our risk management that profit all parts of the Group. Here we differ clearly from our main competitors, a fact that is plainly evident, for example, in life or health insurance. As social security systems are being restructured in many countries, we see great potential for insurance and reinsurance in these business segments.
To differentiate ourselves even more clearly from the competition and at the same time to achieve profitable growth, we intend to make even greater use of our distinctive risk competence in systematically offering the markets innovative concepts for risk management. The active search for new risks that need managing is a core part of our business model. Dotted throughout Munich Re’s history are examples of how we have achieved a competitive edge through innovation and initiative. I want us to continue this tradition, drawing on our old strengths. For one thing is clear: the player that is quicker in identifying, technically modelling and assuming new risks from clients, at an adequate price and at the right conditions, has a decisive competitive lead and sets standards in the markets.
1913 – All under one roof A total of 350 employees work in six different buildings. Thieme finds this unacceptable. A construction site is purchased on Königinstrasse. Architects Bieber and Hollweck design the Main Building. Staff officially move in on 20 March 1913. Miss Hirsch and Miss Fiedler are hired to operate the switchboard. They are the first women to be employed by Munich Re – 33 years after its foundation.
1885 – Social innovations Working at Munich Re has always been something special. Salaries are high. A Christmas bonus is introduced in 1885. A company pension scheme is established at Munich Re in 1891. From the mid-1890s, the company adopts “English working hours” from 9 a.m. to 4 p.m. Free lunches are served from 1897 on. In 1898, a programme for procuring housing for families is initiated. And as of 1905, all employees are entitled to paid holidays.
1907 – A great idea is sparked Hungarian timber merchant Max von Engel is standing on the station platform in Lucerne. There are huge piles of baggage heaped up next to the train. Sparks fly from the steam engine and land on the suitcases. What if the suitcases caught fire? Who would indemnify the loss? Engel is struck by an idea: it would be good to be able to insure one’s baggage at the check-in counter. The idea does not catch on at first. Until Engel meets Thieme. On 9 May 1907 they found Europäische Reiseversicherungs-a.g.
1888 – Initial public offering On 21 March 1888, Munich Re’s shares are introduced on the stock exchange at a flotation price of 700 marks. In 1895, Munich Re’s capital is increased from 4.8 million to 10 million marks and in 1898 to 20 million marks. On 2 January 1890, Munich Re’s shares are traded at 990 marks, ten years later at 2,435 marks.
2002 – The flood 2002 sees record values for windstorms, precipitation and floods. The most prominent event of the year is the flood in August. The heaviest flooding in Europe in centuries, possibly even since the millennium floods in August 1342, occurs on the Danube, Elbe, Vltava, and their tributaries. It causes economic losses throughout Europe of some €18.5bn, €3bn of which is insured.
1922 – The first change of management Carl Thieme transfers to the Supervisory Board in 1922; his successor as Chairman of the Board of Management is Wilhelm Kisskalt. He steers the company through difficult, changing times until 1937. In 1938, Dr. Kurt Schmitt takes the helm and manages the Company until 1945. From 1945 until his premature death in 1950, Dr. Eberhard von Reininghaus takes on the arduous task of helping to heal the wounds left by the war.
1939 – Working during the Second World War Business proves increasingly difficult from 1939 onwards. Foreign business is largely transacted via Union Zürich, a Munich Re subsidiary. The war also leaves its mark within the Company. Paper consumption is rationalised; after work, typewriters and calculators have to be carried into the air-raid shelter. In 1943, Accounting is transferred to Schliersee. All staff return to Munich in 1946, where they are accommodated in emergency quarters.
1889 – Carl Thieme establishes a primary insurance company In September 1889, Carl Thieme and Wilhelm von Finck found an accident and liability insurance company. Its name: Allianz Versicherungs-Aktiengesellschaft. By 1914, Allianz ascends to the rank of largest German property insurer. Only recently, at 31 December 2003, as a consequence of the two companies’ strategic realignment, is the general agreement between them terminated. The good business relationship is maintained.
1974 – Looking nature in the eye Since the number of natural catastrophes is rising strongly, Munich Re establishes the Joint Office for Natural Hazards. Under the name Geo Risks Research, it soon becomes an indispensable resource for politicians, scientists, idustrialists and insurers worldwide. The World Map of Natural Hazards and the knowledge database nathan, both developed by Geo Risks Research, remain unique sources of information to this day. On 15 June 2004, Geo Risks Research celebrates its 30th birthday.
At 8.45 a.m., a Boeing 767 carrying 92 passengers and 90,000 litres of kerosene crashes into the World Trade Center’s North Tower. At 9.03 a.m., another plane hits the South Tower. About 3,000 people are killed, and 150,000 lose their workplace. The insured loss is estimated at around us$ 40–60bn. Munich Re anticipates a burden of us$ 2.6bn. 9/11 is by far the largest loss in Munich Re’s history.
Excellent management requires stable foundations, which include administration systems that provide reliable and versatile data resources for making decisions. In this area, we will be taking a huge step in our reinsurance operations by implementing our global administration system. This will create a joint platform with full data consistency throughout the reinsurance group and a “universal” solution for risk assessment, administration and accounting, thus significantly facilitating the analysis and controlling of our business.
I would like to conclude, ladies and gentlemen, with a far from everyday topic: on 19 April 2005, Munich Re will be 125 years old. This is a special event not many companies are privileged to celebrate. I would like this anniversary to send out a clear signal. Despite its age, Munich Re has remained young, full of energy and fit to take on the competition. Although there have been a few downs as well as ups in the many years of its existence, Munich Re’s history is a success story. Our Company can claim an impressive record; it has brought great benefit – to its shareholders, clients and employees, and not least to the economy and society as a whole, both at home and abroad. Many generations have contributed to this success. Our task today is to continue bearing the torch, maintaining the importance and strengths of Munich Re in the future through our entrepreneurial and professional skills, through initiative and innovation – and thus consistently earning the profits that you, our shareholders, expect.
Closer integration of ergo Munich Re involves ergo more closely in significant Group processes, especially strategic issues and risk management. There is now “unified control” within the meaning of the German Stock Companies Act.
Munich Re shares dax 30 Morgan Stanley insurance index (msci) in €
Long-term performance of Munich Re shares On 1 July 1988, the date on which the German share price index dax was launched, a shareholder buying a portfolio of 100 Munich Re registered shares with a par value of dm 100 each (= €51.13) at a share price of dm 1,450.00 (= €741.37) would have had to invest a total of €74,137.32 (excluding transaction costs). After the two stock splits in August 1997 and January 1999, this investment would today comprise a portfolio of 2,000 no-par-value shares.
Based on a price of €90.45 per share on 31 December 2004, the value of the portfolio amounts to €271,983.15, equivalent to an increase of 266.86%. According to the internal rate-of-return method, this works out at an average annual return of 8.22% per year, compared with an average annual return for the dax of 8.18% over the same period.
Higher dividend Given the record result in 2004, the dividend proposal of the Board of Management and Supervisory Board at the Annual General Meeting on 28 April 2005 will be payment of an increased dividend of €2.00 per share (75 cents higher than last year). We will thus distribute a record amount of €457m (286m) to shareholders.
Free float over 80% At the end of 2004, the number of Munich Re shareholders totalled 178,000. Around 172,000 of these were private investors, whose proportion of our share capital decreased from around 12% to just under 11% in the year under review, although gratifyingly this is still a good 50% higher than the level at the end of 2002. Munich Re’s largest shareholders are HypoVereinsbank, with a stake of almost 10%, and Allianz, with 9.4%, these holdings having been reduced to under 10% by March 2004 from 13.2% and 12.4% respectively. Currently, there are no other shareholders with a stake of more than 5% of Munich Re’s share capital. At the end of 2004, around 50% of the shares were held by foreign investors.
Weighting of Munich Re shares in various indices Status: 31 December 2004
Our investor relations work again received recognition from external specialists last year. The business magazine “Capital” examined the investor relations activities of companies in the euro stoxx 50, and awarded Munich Re first place amongst the insurers.
Other capital market instruments of the Munich Re Group The subordinated bonds we issued last year have performed well. At the end of 2004, the euro tranche was listed at 116.1% and the pound sterling bond at 116.0%.
Type Subordinated Subordinated Exchangeable Exchangeable Exchangeable Senior notes bonds bonds bonds bonds bonds
Base value – – Allianz ag Sanofi-Aventis s. a. e.on ag –
Volume €3.0bn £0.3bn €1.2bn €0.3bn €0.3bn US$ 0.5bn *First possible redemption dates are 21 June 2013 and 21 June 2018 respectively.
Strategy Whether integrated risk management, vbm or strict profit orientation – we have taken the necessary steps to ensure that we turn risk into value.
Carl Thieme had the vision of an independent reinsurer that spread risks internationally over many lines of business and attached great importance to partnership, both externally and internally. We still remain true to our principles 125 years later: “Turning risk into value” is how we word our vision today.
Turning risk into value We are focused on managing risks, diversifying them and steering our Group efficiently and effectively.
Whether a risk is written in insurance or reinsurance is not material for risk management, given that the borderline between the two is becoming increasingly blurred anyway. We can react flexibly and innovatively to the challenges of the future on the basis of our extensive risk know-how across the fields of business. Thus positioned, our objective is to generate the growth necessary for sustained success in the area where more value can be created in the market environment concerned.
Our business as an insurer and reinsurer is the professional handling of risk. We utilise advantages obtained from the diversification of risks and, through management of the selected and calculated risks that we assume, provide for a balance over time, regions and classes of insurance. We create value by using our broad knowledge and sophisticated underwriting techniques to make risks from many different spheres of private and economic life manageable – for our clients and for us. We are only successful in the long run if what we do is worthwhile both for our shareholders and for our clients. Consequently, our business model is “turning risk into value”.
Cornerstones of our strategy Three strategic statements form the foundation of our business activities and determine our success: – We utilise the diversification of risks as the essential driver for creating value.
Achieving sustained profitable growth and value creation for our investors – A strictly profit-based approach in the design of products and in underwriting: We aim for long-term profitability in both reinsurance and primary insurance. We reject growth geared solely to volume and intended merely to achieve or defend places in the rankings, regardless of profitability.
– Value-based management: We set clear financial objectives and ensure the requisite earnings orientation. The central performance measure for value-based management is the enhancement of corporate value.
Monitoring 4) Regular information through rsm and the restrictive process that requires a decision from the respective management level in the case of quantitative and qualitative deviations. This enables managers to optimise the portfolio during the renewals.
Such prices and conditions are crucial, as they are essential for earning sustainable profits and establishing successful and reliable business relationships. To ensure riskadequate prices and conditions, we have developed the following underwriting and controlling process:
Our staff, who find the best solutions with their knowledge of risk and the capital markets and their capacity for innovation – Knowledge and expertise: We distinguish ourselves from our competitors through our knowledge edge. To this end, we build on the know-how of our staff throughout the world, their experience, and their specialist and intercultural knowledge.
Pronounced performance culture that motivates staff – Quality performance: We achieve optimum performance by setting clear objectives for our staff at all levels. – Management: We give feedback openly, learn from mistakes, and reward success.
Progress in 2004 and outlook A successful strategy must measure up in terms of results. We have geared our activities clearly to the goal of profitability and have reduced the risks in the investment sector. These initiatives had a strikingly positive impact on our results in 2004. – In reinsurance, we consistently pursued our policy of charging risk-adequate prices and are firmly on track in terms of earnings.
– 2004 produced the best result in Munich Re’s history. With these results, we have gained considerably more room for manoeuvre in developing the Munich Re Group, which we intend to utilise in the coming years in the longterm interests of our shareholders.
We compare the adjusted result with the cost of equity that we need to earn. The basis for determining the cost of equity is the necessary operating equity, which is derived from the risk-based capital, the solvency capital and the ifrs equity capital.
The risk-based capital quantifies the risk of the individual units’ business, enabling us to compare risks from nonlife and life, from investments, and from reinsurance and primary insurance. It is based on Munich Re’s risk tolerance and is calculated using an internally developed risk model.
However, in order to significantly increase its corporate value, the Munich Re Group has set itself a target rate for the return on necessary operating equity that is markedly higher than the opportunity costs. We only achieve our objective if this target rate is achieved on a sustained basis.
Consequently, value is only added if the adjusted result exceeds the cost of equity.
In life primary insurance and reinsurance and in health primary insurance, we manage the business using embedded -value-based indicators to take account of the longterm nature of the business and the distribution of results over the duration of the policies. By setting a minimum return requirement, we ensure that here, too, an adequate return is earned on the capital employed.
In the long term, a firm can only be successful if it operates sustainably and takes account of non-financial performance factors as well. Value-based management is a holistic management system with which managers at all levels of the Group can steer their units in such a way that lasting value is created which also meets the expectations of external investors.
Group profile The borders between insurance and reinsurance are fluid. We are in a position to carry risks regardless of where they occur and, as the Munich Re Group, to benefit from this diversification.
Munich Re was the first reinsurer to acquire holdings in primary insurers and also to set up its own primary insurance company. Today we are one of the world’s leading risk carriers, with operations in reinsurance and primary insurance. We are using our capacity for innovation to ensure we remain the “preferred partner in risk” in the future.
01 Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management)
Klaus Peter Biebrach (until 26 May 2004) Employee of Munich Reinsurance Company
Dr. rer. nat. Jürgen Schimetschek (from 26 May 2004) Employee of Munich Reinsurance Company
Dr. rer. nat. Dipl.-Chemiker Klaus Schumann (until 26 May 2004) Employee of Munich Reinsurance Company
Munich Re Group: Risk management is our business Reinsurance + primary insurance + asset management = Munich Re Group
When Munich Re was founded in 1880, in the heyday of industrialisation, it was one of the first reinsurance companies that did not itself conduct primary insurance. Reinsurers are risk managers – they assume parts of the risks covered by primary insurers. Reinsurance and primary insurance are thus two elements that complement each other.
That is why, soon after its establishment, Munich Re expanded its activities to foreign countries. Starting in 1886, it set up offices in other European countries, and opened its first branch in the USA in 1899. Since then, it has numbered among the largest reinsurers in the world: today, 5,000 insurance companies in around 160 countries rely on its expertise and financial strength.
Of the gross premiums totalling €22.4bn written in 2004, around 66% came from property-casualty and 34% from life and health business. Munich Re offers a full range of products – from traditional forms of risk transfer to alternative, individual coverage concepts of financial reinsurance.
Structure of the reinsurance group Our reinsurance business is organised in seven operative divisions, six of which service our property-casualty business and special lines, and one of which deals with life and health reinsurance. Full responsibility for the respective client accounts always lies in one pair of hands. The operative divisions are also responsible for our business units abroad, including our subsidiaries.
Our division Europe 2 and Latin America services clients from northern, western and southern Europe, as well as from Latin America.
The North America division is responsible for our subsidiary American Re-Insurance Company and for Munich Reinsurance Company of Canada.
Munich, Athens, Moscow, Warsaw Beijing, Hong Kong, Kolkata, Kuala Lumpur, Seoul, Shanghai, Singapore, Taipei, Tokyo
Subsidiaries/Branches: Munich Reinsurance Company of Africa Munich Reinsurance Company Australian Branch Munich Reinsurance Company New Zealand Branch Munich Reinsurance Company China Branch Munich Reinsurance Company Singapore Branch Munich Reinsurance Company Hong Kong Branch Munich Reinsurance Company Malaysia Branch Munich Reinsurance Company Korea Branch
Subsidiaries/Branches: New Reinsurance Company Great Lakes Reinsurance (uk) plc Munich American Capital Markets Munich-American RiskPartners Nova Group
Subsidiaries/Branches: Munich Reinsurance Company of Canada American Re-Insurance Company Temple Insurance Company
Special and Financial Risks (sfr) is responsible for the special classes of credit, aviation and space, enterprise risks and contingency risks, and for alternative markets business. Besides this, it develops and implements division -specific innovation projects and coordinates the overarching work of the innovation teams in the non-life divisions. Via Munich American Capital Markets (macm), we structure and offer the transfer of insurance risks to the capital market (see page 65). In addition, sfr also attends to our own reinsurance (retrocession).
Awards The Munich Re Group received a number of awards in 2004. We are delighted to gain such recognition, and thank all of our staff who contributed to this success.
meag – Second place among the “small companies” in the over-ten-years performance class (Standard & Poor’s Fund Awards 2004) – Top ratings for meag EuroInvest from the international fund rating agencies feri Trust, Morningstar and Standard & Poor’s – More than 50% of the rated retail funds have been given four or five stars (volume-weighted according to Standard & Poor’s at 31 December 2004)
Subsidiaries in Czech Republic,Denmark, France, Italy, Poland, Sweden, Spain and the UK, and participating interests in Austria, Hungary and the Slovak Republic
The ergo Insurance Group was created in 1997 by merging the long-established German companies victoria, Hamburg-Mannheimer, dkv and d.a.s. In 2002, they were joined by KarstadtQuelle Versicherungen.
Mercur Assistance offers 24-hour assistance services worldwide in the field of medicine and mobility.
Asset management: We are partners for investment meag munich ergo AssetManagement GmbH (meag) is one of the major asset managers in the European financial sector. It was set up by Munich Re and ergo in 1999 to bundle the two groups’ investment activities and the management of their real estate. Virtually the entire asset management of the Munich Re Group is concentrated in meag. Altogether, it had around €142bn under management at the end of 2004.
Business issues 2004 Carrying risks – our business for 125 years. With our competence and innovative capacity, we actively work for successful solutions: be it in the dynamically growing markets of eastern Europe and China, through our involvement in healthcare management, or in our response to climate change.
Charley, Frances, Ivan, Jeanne, Songda and Tokage – names that belie the fact that they are natural forces which last year claimed the lives of many people and caused enormous damage. The economic losses from the 2004 windstorm season in the Atlantic and Pacific totalled approximately us$ 50bn, of which us$ 20–35bn will be borne by the insurance industry.
Windstorm record in Florida Hurricane Charley alone, which cut across Florida on 13 and 14 August 2004 and reached maximum gust speeds of over 280 km/h, was responsible for estimated economic losses of us$ 20bn, of which around us$ 7.5bn was insured. At the end of August and beginning of September, Frances raged over the Caribbean and Florida, causing insurance losses of us$ 4.5bn. Just a few days later, Ivan and Jeanne hit the same region, wreaking havoc that will cost the insurance industry us$ 9bn and us$ 4–5bn respectively. Florida registered a record number of storms in 2004. Since 1886, there had been only three years in which the state was struck by three hurricanes. Last year there were four.
Munich Re Group Annual Report 2004 04_Business issues 2004 Hurricanes and typhoons
Tropical cyclone When tropical cyclones attain hurricane force (force 12 on the Beaufort Scale, i.e. 118 km/h) in the Atlantic and northeast Pacific, they are referred to as hurricanes; in the Indian Ocean, the area around Australia and the south Pacific, they are called cyclones; in the northwest Pacific, they are referred to as typhoons. If they do not reach hurricane force, i.e. if they range from 62 to 117 km/h (8–11 on the Beaufort Scale), they are referred to as tropical storms.
Our solutions allow weather-sensitive companies such as power suppliers, organisers of events and manufacturers of drinks, clothing and air-conditioning systems to stabilise their results. We tailor our products to the customers’ requirements in a number of ways: in the form of traditional, customised reinsurance covers, or as capital market products available from our subsidiary Munich American Capital Markets, which transfers insurance risks to the capital market (see page 66). We are thus in a position to provide our clients with a solution that best suits their needs and limits both their risks and ours.
Attracted by what they imagined to be excellent growth prospects, a whole range of companies began courting the countries of central and eastern Europe at the beginning of the 1990s. But the policy of many international groups in extending their business all too rapidly to the former Warsaw Pact countries has not always paid dividends. Quite a few investments have failed to bear fruit, owing to an undifferentiated view of the very heterogeneous countries and state of development of the individual markets.
Great development potential It is true that, with growth rates of 3 to 7%, the economies of central and eastern Europe are considerably more dynamic than the 15 western and southern member states of the European Union, with around 2%. But even under optimum conditions, most of them will require many years to reach the average per capita gdp of other EU states. Their insurance markets already offer great development potential. In the year 2003, the new eu members states of Poland, the Czech Republic, Hungary, Slovenia, the Slovak Republic, Latvia, Lithuania and Estonia generated a premium volume of over us$ 15.5bn, compared with us$ 930.8bn in the 15 states of the old eu in the same period. The markets are characterised by keen competition, partly fuelled by numerous foreign investors. In Hungary, for instance, 84% of insurance business is in foreign hands. In Poland, the Czech Republic and Slovakia, on the other hand, the former state monopoly insurers still hold a strong position. The three Baltic states are developing well economically, with foreign insurance companies – especially from their Scandinavian neighbours – strongly represented.
Russia occupies a special place among the eastern European economies. For reasons of size alone – 17 million square kilometres spread over seven time zones, with a population of some 147 million (equivalent to nearly a third of the population of the EU) – the country offers enormous insurance potential. At present, insurance activities there are concentrated mainly on Moscow and St. Petersburg.
The challenge for us is to exploit the opportunities presented by the dynamic growth of the central and eastern European economies. Particularly in the new member states of the European Union, the conditions for this have basically been created. As legal parameters become more similar and liberalisation advances, the markets are increasingly opening up for western companies. Non-life insurance is currently more significant than life insurance, the former’s share amounting to 64% in 2003 (compared with 42% in the old eu members states) and primarily driven by motor insurance. In collaboration with our business partners, we create individual solutions for the rapidly growing markets and for the demands arising from the privatisation process.
The international capital markets are assuming growing significance in this context. Innovative financial market products are extremely well suited for diversification purposes and are ideal supplements to traditional underwriting and asset management techniques.
Weather derivatives are financial instruments for hedging against the vagaries of the weather. Meteorological research institutes estimate that around 80% of the turnover and profitability of all economic activities are dependent – either directly or indirectly – on the weather. In winter, energy consumption increases because of heating needs, whereas in summer it rises due to greater use of airconditioning and cooling systems. But above all, crop yields in agriculture are subject to substantial weather-related fluctuations. In the case of such risks, hedging via weather derivatives like weather options may be considered. The purchaser of a weather option pays a premium for the right to receive a compensation payment if, for example, the temperature falls below or exceeds a certain threshold stipulated in the option.
Capital market solutions: Innovative tools for risk hedging In certain cases, the demand for risk protection exceeds the capacity provided by insurers. At the same time, investors on the international capital markets are constantly seeking new forms of investment. Our subsidiary Munich American Capital Markets (macm) fills the gap, linking the rising demand for insurance with innovative capital market products.
The key to successful operations in eastern Europe is knowing the local situation and clients well. We build up contacts via established representatives and thus achieve stable growth of our business. The dominance of former state insurance companies makes it difficult to write profitable business on a large scale. We therefore cooperate closely with regional insurers. Our branches in Moscow and Warsaw give us proximity to the markets and resultant regional competence. They allow us to carefully select partners with whom we want to develop our business long term. We can thus exploit the opportunities that present themselves in eastern Europe and participate profitably in the steady evolution of these markets.
macm protection for energy company Munich Re has bundled its capital market activities for risk transfer and hedging in its subsidiary Munich American Capital Markets (macm), through which we assume risks from our clients and place them on the capital market. Last year, for instance, we helped protect an American energy company against its high dependency on the weather. This company’s earnings deteriorated substantially in warm winters. For this risk, mamc developed an index-linked product for the capital market. One parameter for this was the number of particularly warm days during the heating period. Our experts discovered that the relationship between energy consumption and temperature is not linear. And so a differentiated structure emerged, which allows the company’s risk to be limited depending on the course of the winter.
But weather and natural catastrophes are only one of the many fields of business in which mamc operates. Innovative solutions are in ever greater demand elsewhere, too. An example is the search for alternative financing possibilities for research and development costs in the pharmaceuticals industry, or in all areas where it is necessary to protect future income – in the leisure industry, among toll-road operators, or in the film sector.
Film productions nowadays frequently cost us$ 100m or more. As the production costs rise, so does the entrepreneurial risk: if the film is not successful, the studio can find itself in serious difficulty. mamc has provided cover for a whole package of films from one us film studio. For this film portfolio, it developed a model that made it possible to evaluate the portfolio performance and the earnings prospects. In this way, a sound decision-making basis could be established for the risk that a slate of films does not produce the expected income. The solution is transparent for both the company and investors – possible losses are clearly defined.
In Germany, we have come up with an innovative solution for company semi-retirement schemes. Since 1 July 2004, companies have been legally obliged to provide suitable protection for their employees’ working-hour accounts. We combine traditional insurance elements with modern capital market instruments and use derivatives to hedge against price movements, all in all an economic and efficient alternative for protecting semi-retirement credit.
Customised portfolio solutions: Growth market “retrospective reinsurance” When insurers and industrial firms actively manage the run-off of their claims portfolios, they improve their risk and capital situation.
In principle, it functions just as simply as conventional reinsurance: the primary insurer cedes risk to the reinsurer against payment of a premium. At present, the run-off risk for claims portfolios is usually regarded as a factor that cannot be influenced. Few companies actively manage the reserving risk; most concentrate on adequate administration of their claims portfolios and keeping an eye on runoff performance.
Healthcare management: Working hard for better health Healthcare in many countries is ailing. Everywhere cost-saving is on the agenda. Counter to the general trend of cuts, we are successfully pursuing initiatives for improved healthcare management with more service – for better health at economically viable conditions.
Potential demand in continental Europe Insurers in the Anglo-Saxon markets currently use the product much more frequently than insurers in continental Europe. But in these countries, too, the potential for companies to simultaneously optimise their risk and financial situation is enormous. By removing risks from their books, they release capital and management resources that may be better allocated to other areas and improve important solvency and balance-sheet ratios.
Standards for treatment developed We achieve similar successes through the work of our specialists at ArztPartner almeda, a subsidiary of dkv. They develop disease management programmes for selected medical diagnoses, based on information from health insurers and patients. The primary focus here is on chronic conditions such as cardiac insufficiency, diabetes mellitus, asthma and coronary heart disease. In line with a triedand -tested standard, patients with such diagnoses are accompanied throughout the course of their illness, with consultation and involvement of all the parties concerned. This substantially enhances quality and efficiency for patients and health insurers. By using such a programme, it has proved possible to reduce expense for patients suffering from cardiac insufficiency by around 30% per case.
A special service called “Best Care” is available from dkv. This guarantees that insureds suffering from one of 25 serious conditions can be treated without delay by top specialists in Germany. dkv organises the contact between patient and specialist, and provides for swift therapy and rehabilitation. A scientific advisory board, comprising renowned doctors from the relevant disciplines, supports the work of the Best Care network. In this way, dkv improves medical and post-operative treatment for its insureds.
Our cooperation with Best Doctors Inc. is also all about ensuring the best possible healthcare for our clients. Via a database with around 50,000 physicians worldwide, this organisation offers patients the chance to have a diagnosis checked by one of the recognised specialists on its register. Our us subsidiary American Re has integrated this service into its products, above all in the field of workers’ compensation, and as a result has been able to significantly improve traditional treatment management and case management, making them more cost-effective. Unnecessary operations are avoided and patients are cured more quickly. Hence it proved possible to save the eye of one patient, for instance. A doctor wanted to remove her left eye because of a malignant tumour. Through Best Doctors, however, the young woman found a doctor for alternative treatment. Best Doctors not only provide access to better forms of therapy; they also help to reduce costs for acute treatment. On average, expenses for acute care in the first year have decreased by around 27%. Besides this, the cooperation with Best Doctors has helped to prevent cases of long-term disability among insureds as well. The reserves for lifetime benefits from workers’ compensation insurance alone have fallen on average by more than us$ 190,000 per patient. In the biggest case to date, it was possible to reduce the reserves by as much as us$ 2.2m. A man who had been struck by lightning was first thought to be clinically dead but in the meantime he has been fully restored to health and has returned to his job without any residual disability. Our Canadian subsidiary Munich Reinsurance Company Canada Branch (Life) offers clients the services of Best Doctors as an add-on to its critical illness products.
Extensive service and assistance management for tsunami victims Swift and well-coordinated professional help is more crucial than ever in the wake of disasters like the tsunami at the end of 2004. After the earthquake off Sumatra and the devastation caused by the gigantic waves that followed, Mercur Assistance quickly took on the task of managing the medical care and repatriation of injured tourists. As an experienced service provider for insurance companies and their insureds in emergency situations, our subsidiary worked tirelessly behind the scenes, initiating, organising and coordinating a whole range of assistance measures.
Within a very short time, Mercur Assistance organised and coordinated this for around 200 tourists, acting centrally for all assistance providers of the German Insurance Association (gdv). Soon after the first news of the tsunami on 26 December 2004, the Mercur Assistance team started preparing itself for the foreseeable catastrophe. Extra shifts worked round the clock in Mercur’s crisis centre. After consultations with the Foreign Office in Berlin, a German air force Airbus ambulance (MedEvac) was chartered and flown to Phuket to provide for the care and repatriation of insureds. Severely injured patients were transferred to special hospitals in Bangkok, while for the less seriously injured, flights back home were organised with travel operators. European partner organisations also arranged for injured tourists from Scandinavia, Belgium, Austria and Switzerland to be repatriated through Mercur. In a huge effort extending over one-and-a-half weeks, the Mercur Assistance team handled more than 200 cases, with all the people involved receiving medical attention of some kind and the necessary information being forwarded to the claims staff at the respective insurance companies.
In 2003, the approximately 1.3 billion inhabitants of the “Middle Kingdom” generated a gdp of almost us$ 1.4 trillion. The People’s Republic of China is thus one of the most important markets of the future. It is the sixth largest economy in the world – with growth rates far above the average: in 2003, real growth in gdp totalled 9.1%.
Given the evident business potential, companies all over the world are investing in China. Although the markets are in part still subject to restrictive rules and regulations, global groups of companies are already jockeying for position to ensure successful long-term involvement in the People’s Republic.
The Act is based on the philosophy of a “three-layer model” comprising a basic pension, additional funded supplementary pensions and other provision for retirement. The basic pension consists of lifetime pension payments that may not commence before the age of 60 and cannot be capitalised, inherited, transferred, used as collateral, or sold to third parties. This includes public pension insurance and the new private basic pension.
Funded supplementary pensions include products whose requirements are similar to those of the basic pension, such as all forms of company pension and the German “Riester” pension. Contributions are not taxable up to the respective maximum limit and, in the case of company pensions, are partly exempt from social insurance contributions; the pension itself and admissible partial capitalisations are taxed.
In the third layer, which includes endowment insurance and annuity insurance, the premiums are paid out of taxed income. Furthermore, interest earnings are taxable at the benefit stage in the case of lump-sum benefits. At first glance, this appears to represent a marked deterioration in the fiscal parameters for life insurance in Germany. But it is worth taking a closer look. In the case of annuity insurance, investment income earned in the accumulation period is tax-free if the policyholder chooses an annuity rather than a lump-sum payment; at the same time the taxable income content of the pension payment is reduced, so that altogether annuity insurance is in a better position than before. Endowment insurance also remains in a preferential position: if the capital is paid out after the age of 60 and the policy has run for at least 12 years, only half the earnings are taxable.
Private provision closes the gaps. The primary insurers in the Munich Re Group offer extensive consultancy and individual solutions.
Corporate responsibility Our Group has long been active in the field of sustainable development. Our Geo Risks unit is 30 years old. We are not letting up in our efforts – either in corporate governance or in developing stringent sustainability management.
Report of the Supervisory Board p. 76 Supervisory Board committees p. 79 Corporate governance p. 80 Rating p. 82 Sustainability as an opportunity p. 83 Sustainable investment p. 83 Staff p. 85 Social commitment p. 86 Environment p. 88
Our founder, Carl Thieme, was generally considered to be one of the most progressive employers of his time in terms of socio-political thinking: Christmas bonuses were introduced in 1885, “English working hours” from 9 a.m. to 4 p.m. in1890, and a pension fund in 1891. Paid leave for every member of staff dates back to 1905. Whether yesterday or today: Working for Munich Re is something special.
The Supervisory Board closely monitored Munich Re’s business development in the year under review, giving detailed attention to the Company’s situation. We performed the duties incumbent on us by law and under the Articles of Association, advising the Board of Management and continually assuring ourselves of the fit and proper management of the Company. The Board of Management informed us promptly, comprehensively and regularly about all important business transactions. We were involved in all decisions of fundamental significance. The Chairman of the Supervisory Board kept in regular contact with the Chairman of the Board of Management in between the official meetings and obtained ongoing information on the business position.
The Board of Management reported in detail at the meetings about the quarterly financial statements and on the outlook for the 2004 results. On the basis of these reports, the Supervisory Board regularly discussed, in particular, the development of results in the Munich Re Group’s individual business segments. In addition, we debated at length the business policy and planning for 2005 and 2006, as well as the measures for securing and expanding profitability in primary insurance and reinsurance. We had the new Chairman of the Board of Management give us a detailed picture of the Company’s strategy. In addition, the Supervisory Board carefully examined the Company’s risk situation and risk management, as well as the changes in supervisory requirements for reinsurance. The Board of Management kept us abreast of developments at the main subsidiaries, especially American Re, and the two major it projects in the primary insurance and reinsurance groups. Other subjects of discussion were the personnel report of the Board of Management and a comparison with competitors of the Munich Re Group. The Supervisory Board also considered such topical issues as the effects of the German Investor Protection Enhancement Act and developments in connection with the investigations of New York State Attorney General Spitzer in the USA. The Board of Management briefed us about the restructuring measures at ergo, the capital measure involving victoria Leben and Munich Re’s assumption of unified control in respect of ergo.
Munich Re Group Annual Report 2004 05_Corporate responsibility Report of the Supervisory Board
The Personnel Committee met three times in the year under review. It dealt in particular with the compensation of the members of the Board of Management, and with the latter’s acceptance of seats on supervisory, advisory and similar boards.
Annual financial statements kpmg Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft audited the following documents and gave them an unqualified auditor’s opinion: Munich Reinsurance Company’s financial statements and consolidated financial statements as at 31 December 2004, plus the management reports for the Company and the Group. The auditor’s reports were promptly given to all the members of the Supervisory Board. The Audit Committee examined the company and consolidated financial statements, the management reports and the auditor’s reports in advance and discussed them in detail with the auditor at the Audit Committee meeting on 13 March 2005 in order to prepare for the resolution by the full Supervisory Board. The Audit Committee presented the results of its discussion to the full Supervisory Board the following day.
On 9 December 2004, the Board of Management and the Supervisory Board published a declaration of compliance in accordance with Section 161 of the German Stock Companies Act and made it permanently accessible to shareholders on the Company’s website. The declaration of compliance is also included in the section on corporate governance on page 81.
At its constituent meeting following the agm, the Supervisory Board elected Dr. Hans-Jürgen Schinzler as its new Chairman. Mr. Hartmann, who had been Chairman since December 1996, was no longer available for this office. We thank Mr. Hartmann very much for his dedicated and discerning work over many years and are glad that he will continue to serve Munich Re on this body.
The Supervisory Board wishes to thank the Board of Management and all staff for their hard work and commitment in the year under review, which played a decisive part in enabling Munich Re in 2004 to record the best result in its history.
Prof. Dr. Henning Kagermann Dr. Hans-Jürgen Schinzler (from 26 May 2004)
The corporate governance issue that dominated public debate in Germany this year was undoubtedly the individualised disclosure of compensation paid to management boards. The subject is a controversial one. Munich Re has carefully weighed up the arguments for and against individualised disclosure. In so doing, we have found it disquieting how far the important topic of corporate governance has been reduced to this one aspect. In our view, whether a company has “good” or “bad” corporate governance does not depend on whether it discloses its individual board members’ remuneration or not.
Last year, too, the Supervisory Board reviewed the efficiency of its activities in terms of good corporate governance, in particular the question of whether the measures decided on by the Supervisory Board in the previous year to improve its efficiency had been effectively implemented. The main points of emphasis therefore, as in the previous year, were the form, content and timing of reports from the Board of Management to the Supervisory Board, and the flow of information between the committees and the full Supervisory Board. In all areas, the Supervisory Board found that there had been improvements, sometimes substantial ones. Where this was not yet the case to the desired extent, it decided on further refinements. Thus, for example, it has asked the Board of Management to extend its reporting to the Supervisory Board on certain topics.
The publication of the consolidated financial statements for the business year 2004 is scheduled to take place within the 90-day deadline. In line with previous announcements, since the second quarter of 2004 the interim reports have been made publicly accessible within the 45-day deadline recommended by the German Code of Corporate Governance.
– Item 4.2.4 sentence 2 For the business year 2003, the remuneration of the members of Munich Re’s Board of Management was shown in detail for the whole Board in the notes to the consolidated financial statements, broken down according to fixed compensation, performance-related components and components with long-term incentive effect, although not individualised as recommended by the German Code of Corporate Governance. For the business year 2004, too, the Board of Management’s remuneration will be published in detail for the whole Board but not individualised.”
On our website, we provide detailed information on the Board of Management and the Supervisory Board. This includes information on the duties and composition of the four committees of the Supervisory Board (see also page 79), on the powers of the Annual General Meeting and how to participate in it, and on other topics of corporate governance.
Munich Re’s financial strength is traditionally given top ratings by the leading rating agencies. Following the downgradings that took place throughout the industry in the previous year, the ratings of the Munich Re Group stabilised in 2004 at a high level in comparison with our competitors. The rating agencies A.M.Best, Moody’s and Fitch put Munich Re in their second-best category for financial strength, and Standard & Poor’s in their third-best. Across the board, the rating agencies attest to our very strong market position, outstanding expertise and good capitalisation.
Reinsurance group The ratings for our subsidiaries on 28 February 2005 at a glance: A.M.Best Moody’s S&P
Munich Re Finance b.v., 7.625%, £300m, Subordinated Bonds 2003/2028 a+ A+ A2 A–
American Re Corporation, 7.45%, us$ 500m, Senior Notes 1996/2026 bbb A3 BBB
As a consequence of its economic strength, its global operations and its knowledge of risks worldwide, Munich Re bears a special responsibility for sustainable development. Our involvement combines ecological and social interests with our long-term economic objectives as one of the world’s leading risk carriers. We therefore decided last year to expand our traditionally high degree of commitment in this area.
Sustainable investment: Double return As leading sustainability indices show, Munich Re is among the top firms in this area. For us, socially responsible investment (sri) is not merely a passing fashion but a part of our risk prevention.
Climate change as a risk factor Up to now large loss events have not played a recognisable role on the capital markets. Climate change, however, could also become a significant risk factor in asset management, depending on how clearly the effects manifest themselves and how clients, shareholders, and the media and society at large come to terms with this phenomenon. Risk perception, public debate and investors’ subjective criteria are also important factors. We constantly monitor climate developments and take into account their consequences in our investment activities.
Sustainable all round: Munich Re invests sustainably and its shares are a sustainable investment. Why is that so important to us? As a reinsurer we are professional handlers of risk. We evaluate and manage risks, but above all we engage in risk prevention. This includes keeping a close eye on long-term trends worldwide. For they have a direct impact on our risk portfolio and affect us as a major institutional investor and listed company. An example: hurricanes not only result in claims burdens for insurance and reinsurance; in the short term at least, they can also lead to price losses in the investment sector. Our own stock price can suffer as a consequence of claims payments and falls in share prices.
Thus, back in 2001, we already included the criteria of sustainability in the objectives for our investments, along with return, security and liquidity. Through mandates for our asset management company meag, we also stipulate that 80% of our investments in shares and corporate bonds are to be made according to sustainability criteria. This applies to the whole Munich Re Group. Furthermore, in November 2003, meag presented its first retail sustainability fund. The internationally oriented “meag Nachhaltigkeit” fund invests solely in companies whose operations are in conformity with the principles of social and ecological sustainability. These companies are on the one hand established firms that meet all the strict sustainability criteria. On the other hand, they are innovators – small or mediumsized firms with especially good growth potential operating in such fields as water treatment or renewable energy.
Number of sustainability investment retail funds in Europe 1980–1984 1985–1989 1990–1994 1995–1999 2000–2001 2002–2003 2003–2004
We also broadened our area of training. In the area of asset management, for instance, we now train young people for qualifications in real-estate and residential administration as well. Beyond this, Munich Re has helped to create a new sandwich course at the University of the Federal Armed Forces in Munich: the course in business studies includes two years’ practical training that concludes with a qualification in insurance from the Chamber of Industry and Commerce. We thus support moves to meet the growing demand for more practical relevance in university education, welcoming and closely partnering current developments in connection with higher education reform, such as the introduction of bachelor’s and master’s degrees.
Encounters and dialogue Learning together and exchanging views – that is the idea behind the “Schliersee discussions”, to which we invite senior and junior management staff from Munich Re and companies in our primary insurance group each year.
Companies are part of the society in which they operate. We accept the responsibility that this involves, supporting people and institutions committed to helping others, and initiating new projects ourselves.
A further component in networking staff of Munich Re and ergo on a personal level is the ergo Summer Academy. It is an institutionalised opportunity for executives and highpotential staff at the ergo companies to discuss current strategic issues with Board members of ergo and its subsidiaries. Staff from our reinsurance units are invited as well.
Clear structure in primary insurance The restructuring of our primary insurance business last year also led to marked changes at all levels. All companies are now organised according to the market segments life, health and property-casualty. Not only have competencies and responsibilities been reassigned at Board and seniorexecutive level; structures have also been optimised at the level of department head and group leader. Each position was carefully examined – over 1,000 jobs in all – and, where necessary, restructured and refilled.
Our commitment to social issues focuses above all on three areas. We support research and teaching, help people in difficult life situations and promote the cultural enrichment of our society.
People with serious illnesses are also dependent on the help of others. Cancer is still one of the scourges of our society. Since 1996 our subsidiary Munich Reinsurance Company of Canada has been sponsoring breast cancer research and the provision of education and information on this insidious disease.
Practical help through our staff is also the guiding principle of the Dr. Hans-Jürgen Schinzler Foundation, set up last year. Founded from within our company, its objective is to encourage the voluntary work of our staff. It is intended to be a platform for those who help others through private initiative. The foundation is geared to making it easier for them to get in contact with like-minded individuals and to provide mutual support.
Environment: Environmental protection firmly anchored in our business For Munich Re, environmental protection and sustainability are inseparable parts of its business operations. We therefore take account of ecological aspects both in our products and in our internal operating processes. In 2004, one of the main causes we championed in associations and in public was climate protection.
As a service provider, Munich Re puts relatively little strain on the environment. Nevertheless, our business is directly affected by environmental changes, such as the growing number and intensity of weather-related natural catastrophes. We therefore engage in issues of ecology in many ways, using our knowledge to depict environmental risks and advise our primary insurance clients, for example. A particular focal point is our commitment to climate protection.
Munich Re’s specialist knowledge in great demand. We are a member of numerous organisations and associations that concern themselves with global climate change. Especially important to us is our involvement in the Financial Initiative of the United Nations Environment Programme (unep fi). Since December 2003, one of our experts has been head of the Climate Change Working Group. This unep fi working group aims to sensitise the financial sector to the issues of climate change. One of its core activities is the publication of ceo briefings on topical issues of climate change, which inform corporate leaders about such matters as emissions trading and renewable energies. For the cop 10 climate conference in Buenos Aires in December 2004, at which Munich Re was represented by several specialists, the Climate Change Working Group published a paper on “Clean Development Mechanism”. This concerns the process of allowing industrialised countries to count emission reductions they achieve through climate protection projects in developing countries as part of their own reduction targets.
With new energy for climate protection At the first International Conference for Renewable Energies (renewables 2004), held in Bonn last June, Munich Re played an active part with its expert knowledge regarding such topics as risk circumstances and relevance for insurance. We made clear in papers, discussions, presentations and our press activities why we support the expansion of renewable energies. These contribute towards reducing emissions of climate-changing greenhouse gases and combating the causes of losses from weather-related extreme events. We see the promotion of renewable energies as a measure of active risk prevention that ultimately also serves to protect our own portfolio. Over decades, we have been observing the dramatic increase in weather-related loss events, such as windstorms, hailstorms and floods, around the world. There will have to be a substantial change in the make-up of the world’s energy supply in the foreseeable future. A world population that is continuing to grow will need more energy, but fossil resources are limited and too much strain is already being put on the atmosphere.
More detailed information on environmental protection and sustainability can be found in our publication “Perspectives”.
The eu has committed all its member states to promote the generation of power from renewable sources. By the year 2010, their share of “renewables” in the production of electricity is to be doubled from its 1997 level. This will require great efforts on the part of industry, with partnership from the insurance sector in covering the risks. In Bonn, Munich Re showed representatives from trade and industry, leading politicians and a whole range of interest groups that it is playing its part with innovative insurance solutions. We also published a brochure for the Bonn conference, comparing the opportunities and risks of alternative and conventional power supply facilities.
Heat and electricity from hot water Renewable energy can be generated by other means than solar, wind or hydraulic power. Experts see considerable potential in geothermal power, i.e. deriving energy from hot water deep below the earth’s surface. But the drilling that needs to be performed for this is expensive and economically risky, since it is not certain whether the resources discovered will be sufficient and no loan guarantees are provided by the state for such projects. Munich Re has provided an innovative insurance product for a geothermal drilling project in Unterhaching near Munich, which would otherwise not have been possible. In assessing the risks, Munich Re and its clients benefited from our specialist knowledge in other areas, such as oil drilling. This is a good example of Munich Re also contributing to sustainability with its insurance products (cf. page 14).
Climate protection in operational practice Energy performance certificates for buildings will not become compulsory until 2006. They are one of the many tools required worldwide to reduce emissions of greenhouse gases. Munich Re had such certificates issued for two of its buildings already in 2004. “South 1” and the office complex “Am Münchner Tor” are pilot projects with model character. Their certificates show how much energy is assessed as required for heating, electricity, ventilation and other facilities. The Fraunhofer Institute for Building Physics in Stuttgart was the certifier, officially confirming the efficiency of our energy concept for both buildings.
Primary insurers and environmental protection The primary insurers of the ergo Group are also keen to avoid negative impacts on the environment and have therefore taken an active stance on environmental protection for many years. victoria, for instance, was the first European insurance company to have its environmental management system audited and certified according to emas. In 2004, victoria’s offices in Düsseldorf, Berlin, Hamburg and Leipzig also received certificates for their environmental management, and the victoria administrative offices in Mannheim were audited and certified for the first time. More information may be found in victoria’s “Umwelterklärung 2003” (Environmental Statement 2003). www.victoria.de victoria also helps promote renewable energies. In the past year, it provided support to the engineering insurance section in the Renewable Energy Project Group at the German Insurance Association (gdv). It contributes to climate protection not only through its own energy-saving office buildings but also through publications. Together with the North Rhine-Westphalia energy agency, it brought out a consumer brochure in 2004. This guide to “energy-conscious behaviour and comfortable living” is designed to help make homeowners aware of ecological construction methods and ways of saving energy.
Financial report Our hard work has been rewarded. Thanks to our strict underwriting policy and the dedication of our staff, we have succeeded in publishing the best result in our history.
Consolidated financial statements Consolidated balance sheet 144 Consolidated income statement 146 Change in Group shareholders’ equity 147 Consolidated cash flow statement 148 Segment reporting 150
Notes to the consolidated financial statements Application of International Accounting Standards (ias) and International Financial Reporting Standards (ifrs) 158 Declaration of compliance with the German Code of Corporate Governance as per Section 161 of the German Stock Companies Act 158 Main differences between ifrs and German Commercial Code 158 Figures for previous years 159 Consolidation 159 Recognition and measurement 160
Assets (A) Intangible assets 161 (B) Investments 161 (C) Investments for the benefit of life insurance policyholders who bear the investment risk 162 (D) Ceded share of underwriting provisions 162 (E) Receivables 162 (F) Cash with banks, cheques and cash in hand 162 (G) Deferred acquisition costs 162 (H) Deferred tax assets 162 (I) Other assets 162
Equity and liabilities (A) Shareholders’ equity 163 (B) Minority interests 163 (C) Subordinated liabilities 163 (D) Gross underwriting provisions 163 (E) Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders 164 (F) Other accrued liabilities 164 (G) Liabilities 165 (H) Deferred tax liabilities 165 (I) Other liabilities 165
(27) Investment result 184 (28) Other income 185 (29) Net expenses for claims and benefits 186 (30) Net operating expenses 186 (31) Other expenses 187 (32) Taxes on income 187
The overall economic situation for the insurance industry improved significantly last year. Monetary and fiscal stimuli supported the positive trend in the world economy. However, global growth in the second half of the year lost some of its vigour, one of the reasons being the strong rise in the prices of important commodities.
In the USA, the economic upswing accelerated, thanks to an expansive monetary and fiscal policy. Especially consumer spending but also corporate investment contributed to the strong real growth in gdp, which totalled 4.4% according to initial estimates. In the second half of 2004, however, economic expansion slowed appreciably. This was attributable to a weakening of the impulses from government spending, rising short-term interest rates, high energy prices, and an only marginal improvement in the us labour market.
Japan grew by 2.6% in real terms in 2004, following 1.4% in the previous year. At the beginning of 2004, exports provided for strong growth, but in the course of the year real gdp growth slowed again. Consumer prices showed a downward trend.
In the eurozone, economic development was robust, particularly in the first half of the year. Worldwide economic growth boosted exports, whereas domestic demand made only a limited contribution to growth. But there were noticeable differences between the member states. In France and Spain, for instance, private consumption rose considerably as compared with the other countries in the eurozone.
According to provisional estimates, gdp in the United Kingdom grew by 3.1% in real terms, buoyed by strong consumer demand and corporate investment.
In Germany, the generally relatively robust economy was sustained by the export industry in the first two quarters of 2004. As exports declined, growth slowed appreciably. gdp for the year as a whole was 1.6% higher than in the previous year, a fact that was partly attributable to the higher number of working days. Despite the economic recovery, unemployment remained stubbornly high. At the end of the year, 4.5 million people were out of work and the unemployment rate averaged 10.5%. The important reform measures taken in 2004, such as the Hartz iv reforms, had not yet brought about any noticeable improvement.
Owing to high demand and geopolitical uncertainties, the oil price climbed steeply during the year, rising beyond us$ 50 per barrel (Brent) in October. By the end of the year, prices had levelled out again. Given the strong economic expansion and rising commodity prices, inflation rates were up worldwide in 2004. For the first time since mid-2000, the us Federal Reserve therefore raised interest rates, increasing them in five stages of 25 basis points each to 2.25%. The European Central Bank, by contrast, retained its key interest rate at 2.00%.
The year was turbulent for the us dollar too. Following a marginal appreciation in the first few months of the year, it lost considerable ground against the euro in the fourth quarter, not least because of the USA’s twin deficit involving both the current and fiscal account. The us dollar also weakened against many Asian currencies. At us$ 1.36/€, the euro reached an all-time high against the us currency on 30 December. The year-end exchange rate of the Japanese yen was ¥103/us$, about 4% higher than its closing rate in the previous year.
Insurance industry The reinsurance markets remained focused on risk-adequate prices for reinsurance covers. In the renewals at the beginning of the year and at 1 April and 1 July, almost all market players showed that they continued to give priority to selective and profit-oriented underwriting.
There were further price improvements in liability insurance, especially for major industrial risks and in special lines of business such as directors’ and officers’ liability and professional liability. Although the signs are that rates for reinsurance cover in most other business segments passed their cyclical peak in 2004, prices did stabilise at a risk-adequate level.
Good technical results and the capital markets’ tendency to move sideways were a key feature in improving capitalisation in the insurance industry. However, in autumn 2004, a number of extremely strong windstorms in the North Atlantic (notably hurricanes Charley, Frances, Ivan and Jeanne) and in the Pacific led to major insurance losses. By contrast, the insured losses arising from the tsunami triggered by the earthquake off Indonesia were limited compared with the human cost of this terrible catastrophe, because insurance penetration on the coasts affected is generally low.
Development of the us$/€ exchange rate from January to December 2004
Important insurance markets The global economic upswing was beneficial to premium growth in most insurance markets in 2004.
With insurance rates remaining largely stable and strong economic growth, non-life premium income in the USA continued to rise. The more favourable conditions enabled insurers to improve their technical results, a fact that was reflected in higher profitability. The industry was able to successfully withstand the losses caused by the hurricanes in the third quarter, not least thanks to the support of reinsurers.
The total number of staff remained virtually constant compared with the previous year. Staff numbers increased slightly by 2.6% and 3.4% in reinsurance and asset management respectively. The decrease of 1.9% at the primary insurance companies is attributable to cost-saving programmes. For the most part, the employees concerned either found new jobs in the Group or took advantage of other options such as semi-retirement, sabbaticals and the conversion of special payments into free time.
In reinsurance we were hit in the second half of the year by an unprecedented series of severe natural catastrophes involving claims expenditure of more than €700m overall. The tsunami triggered by an earthquake off Sumatra on 26 December caused immeasurable human suffering in the coastal regions affected. However, our burden from this tragic event was far exceeded by the claims costs incurred for the cyclones that raged over the Atlantic and Pacific in late summer and in autumn. 2004 demonstrated with terrible clarity that despite all the technical progress made, the vulnerability to devastating natural disasters has substantially increased, on the one hand because of disquieting climatic developments and on the other because human settlements are spreading further and further into exposed zones. This makes it all the more important to strengthen and concentrate efforts worldwide towards achieving sustainable and ecologically sound development.
In primary insurance, our Group companies are successfully back on track. The fiscal changes affecting life insurance policies in Germany from the beginning of 2005 fuelled new business in 2004. victoria Leben was given a capital injection of €500m from Group funds, which will allow it to further enhance its level of security. Over and beyond this, we used the last year to realign our organisation. At the beginning of 2005, a new management structure was introduced in the ergo Insurance Group, which provides for central and uniform Group-wide accountability in the individual business segments.
For the reporting on individual fields of business, the following principle applies: volumes and results that come from business within a segment are eliminated, whereas figures that derive from business with companies from other segments (e.g. intra-Group reinsurance cessions from primary insurers to reinsurers) are included in the data. Where the information relates to national accounting law, this is mentioned specifically. As from year-end 2004, “other tax” is included in “other expenses”. The item designations and the previous year’s figures have been adjusted accordingly throughout our reporting.
Africa, Near and Middle East 5.2% Asia and Australia 5.1% Rest of Europe 11.7% North America 27.7%
Valuation reserves The difference between the fair value of our assets and their balance sheet value developed very positively as a whole:
Equity capital and financing We continually monitor the capitalisation of the Munich Re Group and the insurance companies belonging to it with due regard to the requirements of insurance supervisory authorities and the criteria of the leading rating agencies. An important role is played by our internal risk model (see page 44 ff.), which we use to determine the capital require-
In reinsurance, premium income fell by 9.7% to €22,397m (24,795m) because of the volume-curbing effect of a strong euro and our strictly risk-adequate underwriting policy. The strong demand for private-provision products gave rise to robust growth in the life and health segment.
ments of individual business units, taking into account fluctuations in results and risk exposure.
In the year under review, our shareholders’ equity increased by €1,297m (4,951m) (for details see page 147). The valuation reserves for assets not accounted for at fair value are given on page 98.
Valuation reserves not recognised in the balance sheet, including those apportionable to minority interests and policyholders (before tax) 3.2 1.8 1.1 16.4 21.9
Gross premiums written in property-casualty €m 14,857 17,919 18,884 16,296 13,624
In 2004, we adhered to our strictly profit-oriented underwriting policy. In property reinsurance, prices stabilised at a risk-adequate level, whilst in liability business they even continued to rise in some areas. All in all, we again improved the risk profile of our portfolio.
The first part-decision regarding the terrorist attack on the World Trade Center was in line with our expectations. In accordance with the applicable treaty conditions, it presupposed one loss event rather than two. In a second part-decision, however, the jurors based their verdict on divergent treaty conditions and determined that the attack constituted two events. Since in establishing our reserves for the consequences of the terrorist attack we had made sufficient provision for claims not yet reported or not reported enough, we do not need to strengthen our reserves further.
Result Our two reinsurance segments property-casualty and life and health accounted for €1,661m (1,632m) of the Group profit. The segment result is thus 1.8% higher than in the previous year, although compared to 2003 our burden from natural catastrophes was much greater. At €2,381m (2,711m), the result before amortisation of goodwill fell short of the previous year’s level.
– Another important distinguishing feature relates to the time-lag between premium being received and claims being paid. The longer these periods are, the longer the premiums received can be invested in the capital market. High combined ratios in classes of business in which claims settlement takes a long time (e.g. liability) therefore also generally entail higher returns from investments with which the loss reserves are covered. These returns are not reflected in the combined ratio.
When interpreting the combined ratio, the particular circumstances of a class of business must be taken into account, the composition of the portfolio being of particular significance. The following factors (among others) are important: – The more the claims burden fluctuates over time, the greater is the risk and the higher must be the rates needed to cover the risk; the lower, then, are the loss ratios in good years and also the average loss ratios that provide the reinsurer with an adequate return for assuming the risk. This is particularly true in the case of exposure to natural catastrophes, which may occur rarely, but are often very severe when they do.
Munich Re Group Annual Report 2004 06_Financial report Reinsurance / Life and health
Premium Premium income fell by 9.7% to €22,397m (24,795m). Around 2.8 percentage points of the decrease were attributable to changes in exchange rates. Our reporting currency, the euro, rose against most other important currencies in the past business year. The development in the exchange rates of the us dollar and pound sterling have a particularly significant influence on our business. The premium written in these two currencies accounts for about €11bn or 49%; 34% of our premium was transacted in euros, the remainder in other currencies. These proportions are more or less equivalent to our premium breakdown by country: about 33% derives from the eurozone, 22% from the USA and 21% from the UK. Treaties in the other regions are largely written in local currencies or in us dollars.
About 34% of our total premium income was attributable to life and health reinsurance and 66% to the propertycasualty segment. Whilst our selective underwriting policy adversely affected premium income particularly in property -casualty insurance, we grew substantially in the life and health segment, despite our high-level profitability requirements. This growth was largely due to the strong demand for private-provision products worldwide.
Life and health Life reinsurance again showing strong growth in premium income and result Premiums and result in health reinsurance slightly above last year’s level
Life The growth in life reinsurance is essentially attributable to two developments: on the one hand to demographic trends and the continuing tendency to transfer cover formerly provided by social security systems to the private insurance industry and on the other hand to the possibility for our clients to adjust their equity capital requirements through reinsurance.
In life reinsurance, premiums climbed by 12.0% to €6,119m. The increase stemmed for the most part from large treaties covering mortality and morbidity risks in the USA, Canada and the UK. We were able to strengthen our leading position in these countries. The very satisfactory bottom-line result reflects our solid pricing approach and prudent selection of risks.
Our life subsidiary in the USA, Munich American Reassurance Company (marc), continued to show solid organic growth. With premium income totalling us$ 1,287m (1,136m), marc maintained its position as a leading provider. As the market consolidated, the business opportunities available to it increased. The annual result of us$ 35.1m (35.7m) thus reached the planned level.
With Munich Reinsurance Company Canada Branch (Life), whose gross premiums totalled €1,335m (954m), we remained the dominant life reinsurer in Canada. Owing to the still strong organic growth of more than 40%, we were able to expand our very high market share further. This success can be attributed to our outstanding ability to design unique products in a highly regulated environment. In connection with the Canadian market’s consolidation, we were able to assist our clients in achieving their strategic goals by using innovative reinsurance solutions.
In our core markets in the rest of Europe, i.e. the Netherlands, France, Italy and Spain, and in the major Asian markets Japan and Korea, premium income and results developed favourably. We were able to maintain and in part strengthen our position in these markets. This was also confirmed by the Flaspöhler study, a European client survey on the quality of reinsurers: Munich Re was nominated the best life reinsurer overall (see page 56).
In the Asian markets China and India, where we see significant growth potential, we are now represented by fully operational and strong local offices. Although current premium volumes are still limited, we see ourselves well positioned to benefit from business opportunities. These will arise from the need of established primary insurers for product innovations and the demand from foreign primary insurers for the in-depth market knowledge of a reinsurer. We are currently trying to obtain a branch licence in India for all classes of insurance.
Health The global healthcare market with its segments “financial security”, “health services” and “benefits” will provide significant growth opportunities for health reinsurance in coming years. Our core field of business, in which we as reinsurers provide financial cover for medical care, offers particularly good opportunities. Two main factors are stimulating visibly higher demand: the rising importance of healthcare in general and a trend towards greater liberalisation and privatisation of healthcare systems. The USA remains the largest market for this, but strong growth impulses are also being generated by markets outside the USA and Europe. As the world’s leading provider with an approach that integrates reinsurance products and services, Munich Re is well prepared for these developments (see page 68 ff.).
Although we had significantly restructured our portfolio in 2003 and terminated a number of unprofitable accounts, premiums in the year under review remained largely stable at €1,421m (1,415m) thanks to attractive new business.
In the year under review, business with our major clients in the United Kingdom again made a positive contribution to our result. This trend is likely to continue in coming years. The UK’s share of overall business was around
In Germany, the number of claims involving exceptionally high costs is rising, a trend that is mainly attributable to cost-intensive treatments using state-of-the-art medical technology. A significant share of overall costs incurred is thus spent on a small number of policyholders. Health insurers’ demand for reinsurance solutions for such costly claims has therefore increased. This enabled us to record slightly higher premiums and also a better result in the year just ended, and we expect a positive trend in future in this very important market for us. Premium volume in the year under review totalled €249m (247m).
China currently holds a minor share of less than 1% of the Group’s overall health insurance business, but it is still considered one of the most promising markets for the future. Tangible proof of this trend is provided by the specialised health insurance companies that have recently been established. Also, China is opening its market further to foreign investors and pursuing its privatisation programme. The reinsurance licence we obtained in 2003 is also a key component for consolidating our position in health reinsurance business in the Chinese market.
Beyond this, a number of other markets are also responsible for the good overall picture in the health segment. All in all, contributions to our premium and result are regionally diversified, so that our risk is broadly spread.
Two topics dominated property-casualty reinsurance in the past year: the development of prices and conditions and the severe natural catastrophes in America and Asia.
The breakdown of gross premiums by property-casualty division presents the following picture: Gross premiums by class of insurance
We continued to be very restrictive about granting terrorism covers. We participate in terrorism pools where possible and conducive to the limitation of our liability. In particularly exposed regions, we have incorporated exclusions or liability limits for epidemics in our treaties. We increasingly wrote large industrial risks on a facultative basis. The improvements in conditions and limitations of liability introduced in previous years were maintained. Altogether, these measures have substantially improved the risk exposure of our portfolio, although they often do not make themselves felt until a catastrophe strikes, when they minimise losses.
Responsible for: Germany, Austria, Switzerland, eastern Europe, Greece, Turkey 2004 2003 2002 2001
We write eastern European business from Munich, with the support of our offices in Warsaw and Moscow. The individual countries and regions of eastern Europe are very heterogeneous and development therefore varied. Poland and the Czech Republic continue to be the two markets in which premium income is highest. Russia, with its tremendous growth opportunities, is also a very interesting market for us (see page 64 f.).
Eastern Europe as a whole has huge growth potential, as industrial plants are being privatised and modernised, the prosperity of a growing percentage of the population is rising, insurance penetration is low and the countries’ infrastructures still require some updating.
In our core markets, we continue to hold a leading position. Prices in the markets relevant to us were generally stable. However, the development in the exchange rates of the us dollar and pound sterling had a negative influence on our premium income. Altogether, premiums fell by 10.0% to €2,873m (3,193m). Claims expenditure rose noticeably over 2003. The higher combined ratio of 98.5% (96.6%) was attributable not only to a gas explosion on an industrial estate in Belgium but in particular also to the hurricanes in the Caribbean and the need for increased reserves for motor liability business. Hence the overall result did not fully come up to expectations.
Responsible for: Northern, western and southern Europe; Latin America 2004 2003 2002 2001
Northern Europe is for the most part a saturated market. We were therefore not able to make up for the decline in premium triggered by the termination of individual, unprofitable treaties with sufficiently attractive new business. Hence, our premium volume fell by 14.0% to €222m (258m). Thanks to the low claims burden and our profitoriented business policy, the result was nevertheless clearly in the black.
We were not quite able to maintain our gratifyingly high premium level in Spain, where premium volume totalled €408m (429m). Scheduled individual reductions in treaty participations were in part offset by new business and higher prices for business in force. Given the business potential and our outstanding market position, we still see opportunities for growth.
Portugal is also an attractive market for us. With premiums of €54m (49m), we recorded growth of 10.2% in 2004. Moreover, we continued to make good progress in restructuring covers with exposure to earthquake.
In Latin America, the economy in individual countries improved appreciably. Original rates fell further on most insurance markets. Nevertheless, we largely managed to keep prices at a risk-commensurate level, thanks to the extensive services provided by our local representative offices. All in all, premiums declined by 12.0% to €316m (359m), with developments varying in the individual countries. Many treaties in this region are written in us dollars, which had a lowering effect on our premium income translated into euros. The hurricanes in the Caribbean impacted us with around €166m before taxes on income.
Asia, Australasia, Africa High losses caused by cyclones Decline in premium partly due to exchange rates
Compared with the previous year, premium fell by 9.9% to €1,510m (1,676m). This decrease can largely be put down to the strength of the euro against the local currencies and the us dollar. Japan and Australia, with a total share of more than 50% of premium income, are the division’s largest markets.
Responsible for: Middle East, Africa, Asia, Australasia, Greater China, Southeast Asia 2004 2003 2002 2001
In Australia and New Zealand, we are represented in non-life and life business by our subsidiary Munich Reinsurance Company of Australasia (mra), which is the leader in both markets. The progressive concentration of the non-life market and several years of favourable claims experience have led to higher retentions. Therefore, we did not record premium growth in the property-casualty segment. Business in life and health reinsurance is also experiencing a phase of consolidation, since the primary insurance market is stagnating. Pressure on prices in the primary insurance and reinsurance market rose distinctly.
China was gratifying thanks to lower costs for major losses. In Southeast Asia, we also made steady and pleasing progress with the consolidation of our portfolio as regards both premium income and result. The tsunami losses at the end of the year did not significantly impact the satisfactory overall result.
In Africa our subsidiary, Munich Reinsurance Company of Africa (mroa), covers the entire geographical area south of the Sahara and operates in 45 countries. We continue to regard ourselves as the leading reinsurer in the main market of South Africa and in the remaining African markets.
In 2004, premiums on the African continent were down by 21.0% to r 2,394m (3.032m) as a result of our systematically applied risk-adequate underwriting policy. A major loss in engineering business had a negative impact on the result but, apart from this, business performance was very pleasing.
The picture for Greater China is as follows: in 2003, Munich Re became the first foreign reinsurer to obtain a licence for various lines of property-casualty business for the whole People’s Republic of China.
Premium in the countries of North Africa and the Near and Middle East maintained approximately the previous year’s level.
The result allowed us to earn the required margins. With a view to limiting our liability accumulations from natural hazards, we agreed event limits under proportional reinsurance treaties with our clients in Jordan and Lebanon.
Although premiums on the Israeli market fell appreciably, above all in property-casualty insurance, we were largely able to keep our prices stable. Where this was not possible, we withdrew from the business in question. As a consequence, and because of changes in exchange rates, premium income was down by about 20%.
The increasing unrest in the region does not directly affect our business, as we grant terrorism covers only selectively and to a limited extent. These covers, which are reviewed by Munich Re specialists, are based on a clearly defined scope of cover and provide low liability limits against payment of extra premiums.
In 2004, the gross premiums written by the division amounted to €3,178m (3,987m), a decrease of 20.3% on the previous year. This decline is for the most part due to the expected premium reduction in us dollars at American Re; mroc on the other hand increased its premium in original currency.
The division’s combined ratio deteriorated by 20.2 percentage points to 119.3%. The hurricanes in the Atlantic (see also page 62 f.) affected only American Re, having no impact on mroc’s results. Furthermore, claims provisions for previous years were strengthened by us$ 482m.
North America Canadian units meet objectives Tropical cyclones and reserve strengthening affect American Re’s result
In the year under review, American Re’s gross written premiums of us$ 4,206m were 8.8% down on 2003, in line with expectations. We consistently withdrew from treaties that did not meet our strict underwriting and premium requirements. Over and above this, higher client retentions and the ongoing run-off of international and credit enhancement business, which we stopped writing in 2003, had a lowering effect on premium volume.
In just a six-week period in September and October 2004, four severe storms made landfall in the state of Florida. American Re’s losses from these storms before taxes on income came to us$ 202m. The burden would have been greater were it not for the stringent acceptance policy with which we measure and control accumulation risks in property-casualty insurance.
At the initiative of the Board of Management, a team of experts from Munich and Princeton examined in detail the factors influencing us liability business. The outcome of the analysis clearly shows that its segments need to be treated in a differentiated manner with regard to their profitability, despite their many common parameters, and that a correspondingly selective approach must be taken in writing the business. Our current underwriting, reserving and claims settlement guidelines reflect the findings of this study in their application to us business.
With a profit for the year of Can$ 47.5m (4.8m) and a combined ratio of 96.5% (111.8%), Munich Reinsurance Company of Canada (mroc) performed very well and achieved its objectives for 2004.
At us$ 78.9m (262.1m), the annual result under ifrs was lower than planned, not only because of the hurricanes. Long-tail losses from previous years also had a negative influence. For asbestos-related claims, further reserves of us$ 180m were posted. Moreover, in the course of the year, the reserves for liability and workers’ compensation business written in the years 1997 to 2001 proved to be inadequate and had to be strengthened by us$ 302m. Long-tail claims reported by under treaties involving this period of market-wide losses again exceeded previous expectations.
In spite of the hurricanes in the Carribbean, we reduced our combined ratio by 4.0 percentage points to 94.0%.
Lloyd’s/us business As we continued to focus on profitable business in this market, we again remediated and improved the quality of our portfolio. Premium income was reduced in partial segments, and we recorded a positive result.
Workers’ compensation In the year under review, we succeeded in reducing underwriting losses from business in force. Back in 1998, we set up a centre of competence for this difficult business. This bundles our expertise in a central unit and enjoys international recognition. Besides writing profitable new business, the centre of competence also released a number of publications on specific issues of workers’ compensation insurance in 2004. And for the second time we staged an international symposium that mainly served as a forum for exchanging views and comparing workers’ compensation systems in the private sector.
Customised portfolio solutions In this highly specialised segment, we offer our clients worldwide tailor-made reinsurance solutions for claims portfolios (see also page 67). We continue to see attractive business opportunities in this area in the long term.
Munich Re Group Annual Report 2004 06_Financial report Corporate Underwriting/Global Clients / Special and Financial Risks
In our Geo Risks Research Centre of Competence, more than 20 experts from all pertinent disciplines investigate natural hazards worldwide, in particular the striking increase in losses arising from weather-related natural catastrophes. The record number of hurricanes in Florida and typhoons in Japan in the business year under review
Special and Financial Risks Strong position expanded in new and attractive markets Aviation and space continue to grow
are a current example. Another important topic is the tsunami in South Asia in December 2004, one of the greatest natural catastrophes in human memory; the potential exposure of other regions to such events is also being investigated. Our experts analyse the causes and effects of catastrophes, assess the results with respect to our underwriting policy, and offer our clients comprehensive service.
The calculation of loss reserves using suitable actuarial methods is of essential importance for reinsurers. Not only do we apply such methods; we are also continually refining them. In 2004, the German Association of Actuaries awarded one of our experts the Gauß Prize for developing an innovative reserving method (see page 3 ff.).
Responsible for: Aviation and space, credit and bonding, entreprise and contingency risks, retrocession, Munich-American RiskPartners, New Re Geneva, Great Lakes UK, Munich American Capital Markets 2004 2003 2002 2001
Aviation and space With premiums of approximately €850m, aviation and space is the largest business field in the division. The rise in gross premiums written is partly due to the fact that Munich Re increased its share in Global Aerospace Underwriting Managers Ltd., the world’s largest underwriter of aviation risks. We thus further extended our leading position in aviation and space business.
Given the favourable claims experience, rates in the main segment (airline insurance) fell by about 10% on average. For business written by us, however, prices continued to be adequate. Thanks to our adherence to risk-adequate prices and conditions, we achieved another highly satisfactory result.
Credit and bonding In this field of business, we insure default risks related to the sale of goods and services. Business was adversely affected by the fact that the economy in our most important market, Europe, was very sluggish and the number of insolvencies increased. Hence, at €574m (620m) premiums did not reach last year’s level. Given our strictly profitoriented underwriting policy, however, the result again showed a considerable improvement compared with the previous year.
Alternative markets The alternative markets business segment is handled by our subsidiary Munich-American RiskPartners, which has offices in Munich and London. Our clients are large industrial firms that generally offer their business either direct or via captives, i.e. insurance companies belonging to an industrial group. In the year under review, we were able to write new business at risk-commensurate prices, but premium income shrank nonetheless, as we turned down more business due to the effects of ever greater competition, in particular in the energy sector, and to increasingly inadequate conditions.
Retrocession Our own reinsurance protection is an important instrument of our risk and capital management. The Special and Financial Risks Division manages and optimises the retrocession cover for the whole reinsurance group. This cover centres on protection against major losses from natural catastrophes.
Investments Sfr m 2,876 2,607 *Financial statements according to national accounting law.
New Re In the year under review, Munich Re’s subsidiary in Switzerland pushed ahead with the strategic reorientation it had begun in the previous year. This realignment focused on writing non-proportional reinsurance in Europe. Although premium thereby declined as planned by 13.9% to Sfr 630m (732m), the impact on the result was nevertheless positive. The profit for the year rose to Sfr 85.9m.
Our primary insurers are well on the way to recovering their former strength. The negative exceptional effects of recent years have been almost fully absorbed, and underwriting business performed distinctly better than in 2003.
Development of premium income in the individual classes of business varied. All in all, gross premiums written decreased marginally by 0.6% to €17,526m (17,640m).
In 2004, the life insurers recorded premium income of €7,787m (8,011m) – a modest decrease of 2.8%. The reasons for this were lower single premiums and a higher number of normal policy expiries. In German new business, the forthcoming amendments to the fiscal treatment of endow-
Gross premiums in the life segment in €bn property-casualty business. Overall, gross premiums written in primary insurance fell by 0.6% to €17,526m (17,640m). This represents a share of 46% (44%) of the Munich Re Group’s total premium.
On account of disinvestments abroad (see page 122), our health insurers’ premiums of €4,537m were 0.2% down on the previous year. Adjusted for these sales of consolidated companies, premiums climbed. In Germany, new business was expanded appreciably, with double-digit growth rates. Widening gaps in public health insurance coverage boosted business with supplementary benefits covers.
In property-casualty insurance, including legal expenses insurance, our premiums grew by 2.4% to €5,202m. Personal lines business expanded especially in liability
Operations, two new areas of responsibility have been created on the ergo Board of Management with Group-wide scope. These comprise “Customer Service, Company Organisation and it” and “Human Resources and General Services”. The proven multi-brand and multi-channel distribution strategies have been retained.
The new funds were used to further strengthen the capital base of victoria Leben. In 2003, the company had already used valuation reserves to reduce the hidden negative valuation differences resulting from the decline in prices on the stock exchanges. In addition, it had strengthened its reserves in accordance with German accounting law to allow for the introduction of new mortality tables. Furthermore, premium calculation and policyholder bonuses were adapted to the altered market-interest landscape to prevent the reserves from being burdened further and to increase profitability.
This capital injection will allow victoria Leben, as a safe and reliable partner for old-age provision, to actively take advantage of the opportunities provided by a changing marketplace and to benefit from its great strength in the company pensions sector.
The investment result of €4,283m (4,330m) nearly reached the previous year’s level. The combined ratio amounted to an outstanding 90.1% (89.7%) in propertycasualty business and fell further to 98.9% (99.2%) in legal expenses insurance.
These rose significantly, given that the structure of new business has changed towards longer-term annuity insurance business with annual premiums. The performance of company pension business remained satisfactory.
Munich Re Group Annual Report 2004 06_Financial report Karlsruher Insurance Group
Marketing The Karlsruher Insurance Group markets its products via an exclusive Germany-wide sales organisation and via brokers. Another supporting pillar of its marketing is its close cooperation with banks that sell life insurance products through their branches. In the year under review, this cooperation, which focuses on southwestern Germany, was again extremely successful and contributed significantly to the group’s success.
The performance of the Karlsruher Insurance Group’s investments benefited from the stable performance of the capital markets. The investment result improved by 20.6% to €579m (480m).
Europäische Reiseversicherung Significant improvement in group result europäische involved in crisis management following tsunami in Asia
Marketing Europäische Reiseversicherung is the market leader in travel insurance business in Germany, its most important market, where it cooperates with over 17,000 partners in the tourist industry, including major groups as well as individual travel agents. The group headed by Europäische Reiseversicherung, the European Travel Insurance Group, is represented in all the main European countries through its international network of subsidiaries and affiliated enterprises. It accompanies its marketing partners in their expansion throughout Europe.
In order to be able to react to frequent changes in travel behaviour, europäische sells products specially tailored to low-cost travel, city trips, package tours, study tours and cruises.
Premium Although in 2004 the travel industry was not affected by exceptional events like the respiratory disease sars and the war in Iraq, premium development in Germany was strongly curbed by the Germans’ reluctance to travel. Nevertheless, europäische successfully adhered to its agency remediation programme, through which it integrates its sales partners more strongly in its sales and result management. Over a period of up to five years, the economic developments at its agencies can be analysed and corresponding measures taken to improve sales and results in the event of adverse trends.
By stepping up its activities in Poland and the UK, europäische was able to increase its share of premium from foreign business to about 47% (44%). The group’s gross premiums totalled €316m (305m).
Marketing Operating within Lloyd’s of London, the Watkins Syndicate is a primary insurer specialising in international marine business.
For Munich Re, the market leader in global marine business, the syndicate is an integral part of our corporate strategy and helps us maintain close contact with Lloyd’s, which remains the world’s most important marine market.
In addition to its presence at Lloyd’s, the syndicate has developed a wide and efficient distribution network through its branch offices in Hong Kong and Singapore as well as through its subsidiaries Northern Marine Underwriters Ltd. and Groves John & Westrup Ltd., specialising in marine cargo and pleasure craft hull insurance.
This solid business strategy is reflected in the results: despite the devastating hurricanes in Florida and the Caribbean – a region with a high concentration of insured marine risks – the syndicate recorded an annual result of £33m (23m) and a combined ratio of 83.5% (87.2%).
Premium The favourable market cycle in past years was systematically used to achieve selective growth. Gross premium volume, which in 1997 totalled £63m, was increased to
Thanks to this development, the company has secured an outstanding position among the market leaders in its special field. To consolidate this position, the syndicate has in recent years improved its risk profile through diversification into other markets, complementing traditional Lloyd’s business with a balanced portfolio with broad market penetration and less volatility.
The decrease in gross premiums written in the year under review was attributable in particular to the weaker dollar and targeted selection of risks.
Result for the year* £m 33 23 10 –23 *Financial statements according to national accounting law.
In this section, we report on the performance of our Group’s own investments, which derive almost entirely from our core business fields of reinsurance and insurance. Besides this, we provide information on third-party business, where we manage the assets of institutional investors not belonging to the Group and those of private investors.
The vast majority of the Munich Re Group’s investments are managed by meag munich ergo AssetManagement GmbH, a 100% subsidiary of Munich Re and ergo. As at 31 December 2004, investments amounted to €142.2bn (131.3bn). The Group’s other investments are managed by Munich Re Capital Management, Munich Re Asia Capital Management, ergo Trust GmbH and the Munich Re Group insurance companies.
Investment principles In the investment sector, we follow a number of principles. We only make investments in assets from which we expect an appropriate return, at the same time attaching great importance to security. We reduce currency risks to a great extent by matching our expected liabilities with assets in the same or correlated currencies. Besides this, we always keep sufficiently 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 risks. How we counter the various investment risks is described in detail in the risk report on page 133.
Munich Re’s investment strategy also takes account of sustainability criteria. One of the goals we have set ourselves is to ensure that 80% of our equities and corporate bonds are included in recognised sustainability indices.
Performance and structure of investments As at 31 December 2004, the Munich Re Group’s investments amounted to €178.1bn (171.9bn), up 3.6% on the previous year. The growth was due primarily to capital gains on existing securities items and to the pleasing performance of our underwriting business.
Investments in affiliated and associated enterprises 3,883 2.2 4,353 2.5 –10.8
The derivatives in our portfolio at the end of the year are largely employed to protect equity investments against losses in market value and to hedge our regular income against falling interest rates.
Real estate Our investment strategy is geared to optimising the return and risk profile of our real estate investments. We continually monitor existing items with regard to their long-term profitability and potential future exposure to risks. Our aim is to generate a real estate investment result that is largely predictable and can be planned.
We are continually rejuvenating the portfolio in order to spread opportunities and risks appropriately. To provide for a greater regional diversification, we are selling directly held property in Germany and investing instead in top-class real estate primarily located in major European cities. In some cases we also invest in Asia and the USA to give the portfolio a more international spread.
A detailed report on the development of the capital markets can be found in the section “Key parameters” on page 94.
Our investment result in the year under review totalled €8.0bn (7.1bn), an increase of 12.8% over the previous year.
The investment result for the business year includes writedowns of about €217m for impairments of real estate. Given the persistently tight economic situation in the real estate sector, we revalued our buildings, above all in Germany. Owing to the positive trend on the equities markets, we had to make writedowns of only €0.4bn (0.8bn) on our securities available for sale. Other income and expenses includes a profit contribution of –€337m from the at-equity valuation of HypoVereinsbank ag.
Expenses for the management of investments and other expenses 524 544 –3.7
In institutional third-party business, meag surpassed its targets in the year under review. As at 31 December 2004, it had assets under management of €2.3bn for institutional investors outside the Munich Re Group. The relations with existing clients from the core target group of insurers and pensions funds were expanded and intensified. Tailor-made solutions are a critical success factor for these clients in particular. Consulting services – for instance with regard to investment strategy or risk management – are gaining importance among institutional investors. Here, meag has secured a good position for itself early on. In addition, associations and industrial enterprises with great business potential have been won as clients. meag thus continues to market the competence it has developed for the Munich Re Group to third-party clients.
There is a growing tendency among some capital market players to sue companies in connection with statements they publish on future development, a trend that involves considerable loss potential for the companies concerned and for their other shareholders. This practice inevitably affects transparency, as many companies are reticent about the information they give on future business performance and disclose only what is required by law.
For this reason we, too, wish to emphasise the following: predictions about the forthcoming development of our Group are based primarily on planning figures, forecasts and expectations. Consequently, the following assessment of the Munich Re Group’s development merely reflects our incomplete assumptions and subjective views. It follows that we cannot accept any responsibility or liability for the event that they are not realised either in part or in full.
For information on the risks emanating from our business, please consult page 133 ff.
Overview Macroeconomic parameters and the situation on the capital markets are not quite as bright as in 2004. A largely stable pricing level for reinsurance covers characterised the renewals at the turn of the year. It is in the common interests of end-clients, primary insurers and reinsurers to continue focusing on risk-adequate prices and conditions. In primary insurance in Germany, marketing will concentrate on the changes in the fiscal treatment of life insurance products (see page 72). The debates on a reform of the German healthcare system are continuing.
Low investment returns will require profitable underwriting in reinsurance and primary insurance also in 2005, as well as moderate bonuses for life insurance policyholders. Our actions will be determined not only by adequate prices and conditions but also by the further integration of the various modules of our risk management and the introduction of an enhanced process and system landscape.
In the eurozone, the outlook for export industries has clouded compared to one year ago. This should be compensated for by a gradual improvement in domestic demand.
Decelerating global growth will probably also make itself felt in most emerging markets in 2005. The exportoriented Asian markets in particular could suffer if economic growth weakens in the USA and slows down in China as expected. The economies in Latin America are likely to see some cooling down, too. For central and eastern Europe, we anticipate that there will be continued solid growth.
In property insurance, prices for natural hazard covers in regions affected by losses rose again in some cases. In other property covers, developments remained basically stable, as expected, although claims-free treaties were again subject to pressure on prices. In liability, personal accident and marine insurance, prices were also largely unchanged, whereas in aviation, they fell marginally as anticipated but were still at a risk-adequate level.
Against this background, we anticipate a premium volume of about €22.1bn in reinsurance, which would represent a marginal decline of approximately 1.4%. Provided there are no exceptional developments as regards natural catastrophes and major losses, we aim for a combined ratio of 97%, which – with normal investment returns – would allow us to post a very good reinsurance result in 2005 as well.
The property-casualty business of our subsidiary Munich Reinsurance Company of Australasia (mra) has been transferred to our Australian and New Zealand branch with effect from 1 January 2005. Organisationally, New Zealand will continue to be serviced by our Australian unit. This reorganisation has optimised our capital structure. For life insurance business, the legal status of a subsidiary (mra) will be retained, as this is prescribed by the local regulatory authority.
We will rigorously pursue the measures taken to increase profitability. A combined ratio of 95% is our goal in primary insurance.
Result and premium All in all, we expect Group premium income in reinsurance and primary insurance to total €38.5bn, disregarding the effects of changes in exchange rates. This would amount to growth of approximately 1.0%. With our Group result, we aim to achieve a return of 12% after taxes on income, based on our average shareholders’ equity, including minority interests, at the beginning of the year (€20.7bn) and at year-end. We intend to let our shareholders participate in this result by pursuing a dividend policy geared even more strongly than before to our earnings situation and capitalisation, naturally taking into account the requirements of financial supervision and the rating agencies.
Following a short description of the functions, organisation and important tools of risk monitoring and risk control – based on German Accounting Standard drs 5–20 – we focus in this report on the main risks and important risk management measures. At the end of the report, we evaluate the risk position of the Munich Re Group as a whole.
Functions, organisation and important tools of risk monitoring and control We adopt a holistic approach, solidly based on our internal risk model. The main objective is to analyse, regulate and control the interdependencies between risks on the asset and liability sides, and strategic and operational risks. This means considering endogenic and exogenic economic parameters as well as the requirements and expectations of our clients, our shareholders, the supervisory authorities and the rating agencies.
Main strategic risks Strategic risks arise if our strategy is not compatible with market or client requirements and expectations or with economic parameters, these disparities not being recognised, and our objectives and initiatives not taking sufficient account of such a development. In our strategic planning process, we carefully analyse the strategic risks, which are evaluated in individual projects (e.g. investment or marketentry projects) using scenarios (correlations, effects,
Main underwriting risks One of the risks relevant for insurance business is the risk of change. By this we mean that changing risk parameters and unforeseen factors may result in unexpectedly large claims. Often the risk of change coincides with the risk of random fluctuations, making it more difficult to identify and quantify the risk potential. To take an example: the exceptional hurricane season in 2004 coincides with a trend towards greater frequency of severe weather catastrophes due to global warming. Furthermore, we are witnessing an increasing regional concentration of insured values, especially in highly exposed regions. Only extensive know-how, well-maintained data resources and selective underwriting based on this information can produce risk-adequate prices and conditions in these circumstances. Our Geo Risks Research unit obtains the necessary findings used in underwriting from current geoscientific research, far-reaching proprietary loss analyses and models, and benchmarking of our models against external calculations. The effects of the risk of change influence both our premium calculations and our reserves. Through selective underwriting, clientfocused claims handling and state-of-the-art reserving methods, we endeavour to minimise risks resulting from the risk of change.
Lapse risks can be reduced in insurance and reinsurance by means of suitable product and contract design. The residual lapse risk is estimated by means of productspecific portfolio analyses and taken into account in the pricing.
As far as the interest-guarantee risk in primary insurance is concerned, the guaranteed actuarial interest rate applicable at the time a policy is effected is used in calculating the actuarial reserve for that policy. The life insurers in the Munich Re Group have a substantial portfolio of policies with guaranteed minimum interest rates, both in Germany and abroad. These include annuity and endowment policies. In order to earn the guaranteed minimum interest rate, we are particularly dependent on investment returns. As a rule, the investments have a shorter duration than the insurance commitments, which means there is a reinvestment risk. For premiums yet to be received, the new investment of these amounts involves a certain amount of risk as well. Should capital market interest rates fall to a very low level for a prolonged period, our life, health and personal accident insurers might not be able to earn the required guaranteed interest rate.In reinsurance, we exclude the interest-guarantee risk in many cases by means of suitable treaty design. Furthermore, as a matter of principle, we use prudent assumptions regarding the probable interest rate when fixing the actuarial interest rate in the calculation of premiums and reserves.
All our companies have appropriate intra-Group and external reinsurance and retrocession cover. The core component of Munich Re’s retrocession is an accumulation excess-of-loss cover, which provides protection against losses from natural catastrophes. The dimensions of this cover are based on analyses of our accumulation budgets in those parts of the world exposed to natural catastrophes. The cover is placed on the international reinsurance market.
We only choose business partners for our externally placed reinsurance and retrocessions that have been accepted by our Security Committee, which examines the security of potential retrocessionaires and reinsurers on the basis of a range of criteria. The minimum requirement for participating in one of our retrocession or reinsurance treaties is a rating of a– from s&p or a.m.Best.
Risks from defaults on receivables from underwriting business 6.9% of our receivables on underwriting business at the balance sheet date were outstanding for more than 90 days. The average default rate of the last three years amounts to 3.8%. As at 31 December 2004, nearly 81% of our accounts receivable on ceded business were from companies with an investment-grade rating from s&p (aaa to bbb).
Main investment risks The market value of our fixed-interest securities as at 31 December 2004 totalled €103.2bn, representing 56.8% of the market value of the Munich Re Group’s investments as a whole. These securities thus make up the largest portion of our investments available for sale and investments held to maturity.
Fixed-interest investments are exposed to an interestrate risk. Falling interest rates result in increases in the market value of fixed-interest securities, and rising interest rates to reductions in their market value. In order to match investments even more closely with the liabilities to be covered, the primary insurers in the Munich Re Group gave preference in 2004 to securities with longer terms. Looked at only in relation to the portfolio of fixed-interest securities, this increases the risk of losses in market value, but these reductions would be balanced by similar changes in value, at least to some extent, among the underwriting liabilities.
With a view to optimising our investment portfolio from the earnings and risk standpoint, companies of the Munich Re Group hold investments in real estate, which are subject to market price risks. The market value of our real estate, including buildings on land owned by third parties, amounted to €10.7bn at 31 December 2004. The risk of losses in value manifested itself in the year under review in the case of various properties (including amortisation, we had to make writedowns of €555m that were recognised in income).
The following sensitivity analyses for market-price risks serve to estimate potential changes in the value of investments under hypothetically possible market scenarios. The basis for the review are the other-than-trading holdings of the Munich Re Group at 31 December 2004.
Credit assessment is of central importance for the management of credit risks relating to fixed-interest securities. The main factor here is the quality of the issuer or the respective issue, as primarily reflected – according to the investment principles of the Munich Re Group – in the ratings of international rating agencies: 94.0% of our investments in fixed-interest securities at 31 December 2004 had a rating of a or better (according to Standard & Poor’s rating classification). The majority of fixed-interest securities in our portfolio have been issued by governments or banks with excellent ratings or top security, e.g. German government bonds, us Treasuries, or mortgage-backed bonds.
Investment principles and risk controlling In the investment sector, the Munich Re Group is guided by the following principles: only investments are to be made from which an appropriate return can be expected and which offer a high degree of security, as reflected in highquality ratings of the relevant issuers and counterparties, for example. Also important is sufficient liquidity at all times to cover obligations from underwriting business and a targeted diversification in terms of region and type of investment.
Credit derivatives are only employed in our investment portfolio for hedging credit risks. The notional principal amounts of open positions had a volume of €10m at 31 December 2004, with a fair value of –€1m. Regular watchlists with critical cases are prepared in order to monitor individual issuers. Thus, as in previous years, Munich Re’s investments were only affected to a very slight extent by defaults.
The liquidity risks of companies in the Munich Re Group are managed by the individual insurers and reinsurers themselves. Detailed liquidity planning ensures that the Group companies are able to make the necessary payments at all times. This planning concept, which has been in place for many years, has proved its worth after large natural catastrophes and also in connection with the losses resulting from the attack on the World Trade Center.
Main operational risks Operational risks are risks whose origins lie in processes, people, technology or external events and which could lead to unexpected losses. These include criminal acts, inadequate controls, organisational deficiencies (e.g. inadequate reporting) or events that may result in claims for damages from third parties.
In asset management, insurance and reinsurance, these risks are identified and limited by decentralised security organisations that liaise closely. We are working constantly on improving these measures and adjusting them to take account of the latest knowledge and state of the art. Our security regulations embrace not only the technical design of hardware and software systems but also functional security structures and organisational measures, including training staff in the proper handling of systems and data. We organise training programmes for this purpose, as well as issuing directives on information security and data protection with which all staff have to comply.
The ergo-wide reorganisation project vektor has created the organisational foundations for a uniform groupwide management organisation geared to classes of insurance. When distributions of tasks, allocations of functions and processes are changed, this may cause short-term “friction losses”, but these should be manageable, given that we have prepared ourselves thoroughly for the systematic implementation of the new structure and given close advance consideration to potential risks.
Risks in the human resources sector The companies in the Munich Re Group have binding rules setting out minimum standards of corporate integrity for conduct within the companies themselves, their business transactions and other relationships with external parties. These standards, tailored to the special features of each company, also serve to prevent conflicts of interest for staff, in order to ensure that we use only fair and legal means of competition. The clear separation of management and control functions limits the risk of internal and external regulations being breached.
The main human resources risks are shortages of qualified personnel, insufficient adaptation, demotivation and loss of staff. We identify these risks by means of appropriate indicators and metrics. With targeted personnel marketing measures, potential assessment schemes and systematic succession planning, we counter the risk of shortages in qualified staff. Individual development planning and suitable training offers enable our staff to adapt to current market requirements. Modern management tools and adequate monetary and non-monetary incentives ensure high motivation. Our human resources tools as a whole serve to strengthen our staff’s ties with the Group and consequently to safeguard our business knowledge (see also page 85).
By implementing systematic asset-liability management, we aim to holistically optimise our portfolio in terms of underwriting and investment and to make accumulations between underwriting risks and investment risks more transparent.
Summary of the risk position We see ourselves on course for sustained profitability and evaluate the Munich Re Group’s risk situation as controlled and viable. We have identified a need for action in certain areas and have initiated the necessary measures.
II. Investments in affiliated enterprises and associated enterprises (4) 3,883 4,353 –470 –10.8
C. Investments for the benefit of life insurance policyholders who bear the investment risk 1,319 1,009 310 30.7
D. Ceded share of underwriting provisions (18–21) 6,964 8,038 –1,074 –13.4
F. Cash with banks, cheques and cash in hand 2,027 1,884 143 7.6
E. Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders 1,328 958 370 38.6
Total income (2–4) 45,691 45,959 –268 –0.6 5. Net expenses for claims and benefits (29) 31,636 32,487 –851 –2.6
Total expenses (5–7) 42,743 43,988 * –1,245 –2.8 8. Result before amortisation of goodwill 2,948 1,971 * 977 49.6 10. Operating result before taxes on income * 2,604 1,284 * 1,320 102.8 12. Minority interests in earnings (16) 59 –34 93 –
Change resulting from valuation at equity – – –778 – –54 – – – –832
Unrealised gains and losses on other securities – – – – 4,052 – – – 4,052
Consolidated result – – – – – – – –887 –887
Other changes – – –8 –14 – – 10 – –12
Allocation to revenue reserves – – –720 – – – – 720 –
Consolidated result – – – – – – – 1,833 1,833
Other changes – – –20 – – – – – –20
Change from the acquisition and sale of investments for unit-linked life insurance –252 –248
Cash flows for the business year (I + II + III) 153 –823
Our reporting on the Group cash flow is based on ias 7 and the principles of German Accounting Standard No. 2 (drs 2) issued by the German Standards Board (dsr) for the presentation of cash flow statements. This has been supplemented by the requirements of drs 2–20, which applies specifically to insurance companies.
In accordance with the recommendations of the dsr for insurance companies, we have applied the indirect presentation method. The “cash fund” within the meaning of the German Accounting Standard is limited to cash and cash equivalents shown under balance sheet item F “cash with banks, cheques and cash in hand”.
Munich Re Group Annual Report 2004 06_Financial report Consolidated cash flow statement
Life and health Property-casualty 31.12.2004 Prev. year 31.12.2004 Prev. year €m €m €m €m
II. Investments in affiliated enterprises and associated enterprises 3,449 3,247 3,842 4,011
IV. Other securities 1. Held to maturity – – – –
Life and health Property-casualty 31.12.2004 Prev. year 31.12.2004 Prev. year 31.12.2004 Prev. year 31.12.2004 Prev. year 31.12.2004 Prev. year €m €m €m €m €m €m €m €m €m €m
Total equity and liabilities 214,791 209,384 *Group shareholders’ equity and minority interests.
Gross premiums written* Reinsurers Primary insurers Total 2004 Prev. year 2004 Prev. year 2004 Prev. year €m €m €m €m €m €m
Latin America *After elimination of intra-Group reinsurance across segments. Presentation of the figures in the management report differs from this (cf. note on page 96).
The consolidated financial statements have been prepared in accordance with all ias/ifrs whose application was obligatory for the business years, as well as with all the interpretations (sic 1–33) by the International Financial Reporting Interpretations Committee (ifric). In addition, we applied the new provisions for the accounting of financial instruments adopted in December 2003 (ias 32 and 39) already as at 31 December 2003. Both standards were applied retrospectively, the consolidated financial statements for 2003 being presented as if the accounting and valuation methods of ias 32 (rev. 2003) and ias 39 (rev. 2003) had always been in use. We have also observed the German accounting standards (drs) adopted by the drsc (German Accounting Standards Committee) provided they do not contradict the applicable ifrs.
Declaration of compliance with the German Code of Corporate Governance in accordance with Section 161 of the German Stock Companies Act In December 2004, the Board of Management and the Supervisory Board of Munich Reinsurance Company and the ergo Insurance Group published an updated declaration of compliance as per Section 161 of the German Stock Companies Act and made this declaration permanently available to shareholders on the internet.
Main differences between ifrs and German Commercial Code Exemption from consolidated accounting pursuant to commercial law, in accordance with Section 292 a of the German Commercial Code, requires a description of the main differences between ifrs and German Commercial Code accounting, valuation and consolidation methods.
Shareholders’ equity is substantially higher under ifrs than under German Commercial Code accounting because large portions of the investment portfolio are measured at market value; results fluctuate more strongly than under German Commercial Code accounting, because there are no claims equalisation provisions to provide a “smoothing ” effect. The most important differences between ifrs and the German Commercial Code as regards the Munich Re Group are as follows: – Under ifrs, goodwill is amortised over a maximum period of 20 years with impact on earnings. Goodwill resulting from business combinations agreed to on or after 31 March 2004 is not amortised. In German Commercial Code accounting, there is the option to offset goodwill against the revenue reserves.
– The group of associated enterprises valued at equity is considerably larger in ifrs financial statements, because it is no longer relevant whether a significant influence is actually exercised or not. The consolidated profit includes a corresponding portion of the net profit of the enterprises concerned rather than just the dividend distributions.
– The provisions for future policy benefits tend to be higher because, unlike in German Commercial Code accounting, there is no zillmerisation, but capitalisation of the acquisition costs. Besides this, under ifrs, reserves for terminal bonuses in life insurance are shown as part of the provisions for future policy benefits, whereas under the German Commercial Code the terminal bonus fund is part of the provision for premium refunds. A mitigating effect, however, results from cases in which the provisions for future policy benefits have to be discounted with a higher actuarial interest rate under ifrs than under the German Commercial Code.
Munich Re Group Annual Report 2004 06_Financial report Notes to the consolidated financial statements
Figures for previous years We have calculated the previous-year figures on the same basis as the figures for the business year 2004.
Consolidation Consolidated group In accordance with ias 27, the consolidated financial statements include Munich Reinsurance Company (the parent company) and all the enterprises in which Munich Re owns, directly or indirectly, the majority of the voting shares or over which it has the factual ability to exercise control (subsidiaries). This applies analogously to the special funds held by Munich Re and its subsidiaries. The only exceptions are subsidiaries and special funds which are determined as being not material for assessing the Group’s financial position; insurance and reinsurance companies are consolidated regardless of their size. An overview of the group of consolidated companies and other important shareholdings is provided on page 195.
We generally consolidate subsidiaries and special funds as soon as the Group holds the majority of the voting shares or has the factual ability to exercise control. In order to determine the equity capital at the time of acquisition, we recognised the assets and liabilities of the subsidiary or special fund at fair value. The equity capital apportionable to the Group is netted against the acquisition costs of the shares (purchase accounting). Any residual amount is capitalised as goodwill and amortised on a straight-line basis. In accordance with ifrs 3, goodwill resulting from business combinations agreed to on or after 31 March 2004 is not amortised, but is tested and written down for impairment if necessary.
Consolidated subsidiaries* Germany Other Total countries *In addition, 87 German and 13 non-German investment funds were included in the consolidated group.
The application of the recognition, measurement and disclosure methods follows the principle that a method once chosen should be applied consistently. We recognise the effects of changes in accounting policies in accordance with ias 8.
In addition, other intangible assets include the fair values of acquired life insurance portfolios (pvfp: present value of future profits). These are amortised in accordance with the realisation of the profits underlying the pvfp calculation.
The unamortised balance of intangible assets is reviewed at each balance sheet date and writedowns made for impairments if required.
Loans are stated at amortised cost, i.e. any premiums or discounts are deducted or added to the acquisition costs according to the effective interest method, with impact on the income statement, until the redemption amount becomes payable. Writedowns for impairments are made in cases where the repayment of a loan can no longer be expected. This item includes promissory notes and registered bonds.
Securities available for sale are stated at fair value, with interest deferrals being made as with loans. Unrealised gains or losses are not included in the income statement; rather, after deduction of deferred taxes and the amounts apportionable to policyholders by the life and health insurers on realisation, they are reflected in shareholders’ equity (provision for deferred premium refunds). This item also includes registered bonds and promissory notes.
Deposits retained on assumed reinsurance are claims which the reinsurers have on their clients for cash deposits that have been retained under the terms of reinsurance agreements; they are accounted for at face value. Appropriate allowance is made for credit risks.
Receivables Receivables on primary insurance business, accounts receivable on reinsurance and other receivables are stated at face value; adjustments of value are made where necessary.
In life primary insurance, the deferred acquisition costs are also capitalised and amortised over the terms of the policies either proportionally to the premium income (fas 60) or proportionally to the expected profit margins (fas 97, 120), with the amount of amortisation depending on the gross margins of the respective products calculated for the relevant year of the policy term.
The acquisition costs in health insurance are amortised proportionally to the premium income over the total average policy term, in accordance with fas 60. The amortisation amount is determined on the basis of the assumptions used for calculating the provision for future policy benefits.
Munich Re Group Annual Report 2004 06_Financial report Assets / Equity and liabilities
Deferred tax assets Under ias 12, deferred tax assets must be accounted for in cases where asset items have to be valued lower, or liabilities items higher, in the consolidated balance sheet than in the tax balance sheet of the Group company concerned and these differences will even themselves out again with effect on taxable income (temporary differences). Also included are tax assets deriving from tax loss carry-forwards. We take into account the tax rates of the countries concerned and the company’s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries.
Deferred tax assets are adjusted in value if a realisation of the corresponding receivable is no longer probable.
In accordance with ias 32 (rev. 2003), own shares held by Munich Re at the balance sheet date have been deducted directly from shareholders’ equity.
Minority interests This item contains the shares of third parties in the shareholders ’ equity of subsidiaries and special funds that are not wholly owned directly or indirectly by the parent company.
Gross underwriting provisions The underwriting provisions are shown gross in our balance sheet, i.e. without deduction of the share apportionable to business ceded by us; cf. the explanatory remarks on the relevant assets item. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements.
Provisions for future policy benefits are generally calculated using actuarial methods from the present value of the future benefits payable to policyholders less the present value of the premiums still to be paid by the policyholders; the calculation is based in particular on assumptions relating to mortality, morbidity and interest rate development. The actuarial bases used include an adequate safety margin to take account of the risks of change, error and random fluctuations. They correspond to the actuarial bases employed for the premium calculation and are adjusted if the original safety margins are no longer considered sufficient.
The underwriting provisions are regularly subjected to a liability adequacy test. Provisions for future policy benefits are adjusted, or provisions for anticipated underwriting losses posted, if a portfolio’s future premiums and proportional investment income will probably not be sufficient to cover the expected claims and costs.
Other accrued liabilities These primarily include provisions for post-employment benefits. The companies in the Munich Re Group generally give commitments to their staff in the form of defined contribution plans or defined benefit plans. The type and amount of the pension obligations are determined by the conditions of the respective pension plan. In general, they are based on the length of service and salary of the staff member.
If pension obligations are covered by assets held by a legally separate entity (e.g. a fund or a contractual trust agreement in the form of a two-way trust) – assets that may only be used to cover the pension commitments given and are not accessible to creditors – the pension obligations are shown less the amount of these plan assets. If the fair value of the plan assets exceeds the related outsourced pension obligations, this repayment claim is shown under “other receivables”.
The consolidated companies used the following actuarial assumptions (weighted average values) for calculating their pension obligations: F
E Actuarial gains or losses from pension obligations and plan assets result from the deviation of actual risk experience from estimated risk experience. They are recognised by means of the corridor method laid down in ias 19. According to this, actuarial gains or losses are recognised in the income statement if they exceed the higher of the following amounts at the beginning of the business year: 10% of the present value of the vested benefits or 10% of the present value of the plan assets.
Liabilities The liabilities shown under this item – notes and debentures, accounts payable, deposits retained on ceded business and other liabilities – are stated at the settlement value, except for the option components of the exchangeable bonds of Munich Reinsurance Company and ergo International ag. The value of the option components is determined as the difference between the market price of the exchangeable bonds and the value of the bond components calculated on the basis of current market yields.
Deferred tax liabilities Under ias 12, deferred tax liabilities must be accounted for if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax balance sheet of the reporting company and these differences will even themselves out again with impact on taxable income (temporary differences); cf. the remarks on deferred tax assets.
The following table shows the exchange rates of the most important currencies for our business (exchange rate for €1 in each case): Balance sheet Income statement
The amortisation of €344m includes impairments of €122m resulting mainly from writedowns on goodwill made in the ergo Insurance Group.
Accumulated depreciation at 31.12. business year 497 371 231 1,099 805
The remaining other intangible assets include rights equivalent to real property amounting to €1m (4m).
In the business year 2004, real estate occupied by Munich Reinsurance Company was reallocated to the item “other assets”.
Real estate pledged as security and other restrictions on title amount to €688m (1,152m). The expenses for investments under construction total €71m (68m) at the balance sheet date. Commitments to acquire real estate amount to €124m (221m).
Over three years and up to four years 66 94 71 99
Over five years and up to ten years 166 227 177 233
Disposal proceeds in the business year were as follows: All figures in €m 2004 Prev. year
Contractual period to maturity of fixed-interest securities Carrying amounts Amortised cost All figures in €m 31.12.2004 Prev. year 31.12.2004 Prev. year
Over one year and up to two years 6,895 10,817 6,795 10,576
Over four years and up to five years 9,021 8,677 8,687 8,483
Derivatives are used at the individual Group companies within the framework of individual supervisory regulations and additional company directives. They are used to optimise investment earnings, with the main focus being on hedging investment portfolios against unfavourable market developments.
Up to 3 3–6 6–12 1–2 2–3 3–4 4–5 Over 5 Total All figures in €m months months months years years years years years
– Futures –3 – – – – – – – –3
– Other – –1 – – – – – –49 –50
The fair values shown in the following table are either listed prices or values at the balance sheet date determined using recognised calculation models.
Fair value hedges are used to reduce the market-price risk of current investments. Such fair value hedges are employed within the Group for the selected and efficient hedging of parts of the portfolio against interest-rate risks. The fair value of the derivatives used here amounted to –€2m at the balance sheet date.
The products used for hedging can be divided into cash flow hedges and fair value hedges.
The corresponding notional principal amounts, which show the scope of the underlying assets, had a volume of €8,244m. The following table shows the notional principal
Equity/index transactions amounts, broken down by product type and period to maturity: is mainly concentrated on the management of interest-rate and currency risks. The fair value of these derivatives at the balance sheet date amounted to €27m.
The following table gives the periods to maturity of cash flow hedges at the balance sheet date:
(11) Receivables and liabilities in respect of affiliated and associated enterprises
(12) Deferred acquisition costs We have used interest rates of between 3% and 8% for calculating the deferred acquisition costs, in the same way as in the previous year.
– Property-casualty 453 414 *After elimination of intra-Group transactions across segments.
fair value of the real estate at the balance sheet date amounted to €760m. Further information is provided under Note 3.
2,739 shares remained in the portfolio of ergo Versicherungsgruppe ag from the ergo Insurance Group’s employee share programme in the business year 2002. In the business year 2004, companies of the ergo Group acquired 1,651 shares at a price of €96.30 each and a further 60,712 shares at a price of €90.03 each to cover future commitments from the long-term incentive plans launched at 1 July in 2004 and 2003. Together with the remaining Munich Re shares acquired to safeguard the stock appreciation rights granted in 2002 and 2003, the ergo Group has a total portfolio of 251,921 shares.
The acquisition costs of all Munich Re shares in the possession of Group companies at the end of the business year totalled €157,519,934.32.
The capital authorised for capital increases is thus as follows: The contingent capital is as follows: All figures in €m 31.12.2004
The following table shows the distribution of net unearned premiums between the different Group segments: All figures in €m* 31.12.2004 Prev. year
– Property-casualty 1,183 1,083 *After elimination of intra-Group transactions across segments.
Munich Re Finance b.v., Amsterdam, 7.625%, £300m, Bonds 2003/2028 420 421
The provisions for future policy benefits are determined on the basis of prudent assumptions regarding expected mortality and morbidity. In particular, the measurement of the provisions for annuity insurances takes into account the future trend with regard to life expectancy in accordance with accounting regulations.
– Property-casualty 160 132 *After elimination of intra-Group transactions across segments.
Munich Re Group Annual Report 2004 06_Financial report Notes to the consolidated balance sheet – Equity and liabilities
The table below shows the provisions for outstanding claims in property-casualty business for the primary insurers and reinsurers for the last ten years. This covers virtually 100% of the total claims provisions of the Group. What the table considers is not the run-off of the provisions for individual accident years, but the run-off of the provision posted at each balance sheet date, which contains the provisions for the respective current accident year and for all previous accident years. The figures for the years 1997 and earlier were determined on the basis of the relevant national accounting regulations; the figures for the years 1998 to the present have been based on International Financial Reporting Standards.
31.12.2004 31.12.2004 31.12.2004 Prev. year Prev. year Prev, year All figures in €m Gross Ceded Net Gross Ceded Net
Provisions for asbestos and environmental claims 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. There are also potential claims burdens under employers’ liability policies, especially in some European countries. In addition, we have posted provisions for claims under old general liability policies which provided cover against environmental liability claims under us law.
Altogether, at the present time we believe our provisions for these claims complexes to be adequate.
Nevertheless, further loss burdens – particularly from asbestos-related claims – cannot be ruled out. In view of the unpredictable nature of court decisions in the markets concerned, it continues to be difficult to make reliable estimates of future development.
A total of €232m (313m) was credited directly to life insurance policyholders in the business year.
The following table shows the distribution of the net other provisions between the segments of the Group: Al figures in €m 31.12.2004 Prev. year
Defined contribution plans Expenses for defined contribution plans in the year under review totalled €29m (27m).
Capital transfer of Munich Reinsurance Company to CTA model – –334
The expenses booked in the year under review are made up as follows: All figures in €m 2004 Prev. year
Also included here are the derivative components of the exchangeable bonds of ergo International ag and Munich Reinsurance Company totalling €16m. Further information on this is provided in Note 23.
The exchangeable bonds of ergo International ag and Munich Reinsurance Company contain embedded derivatives in the form of conversion options. In accordance with ias 39 they have each been separated into a derivative component and a liabilities component. Only the liabilities components are shown under “notes and debentures”, whilst the derivative components amounting to €16m are included in “other liabilities”.
Munich Reinsurance Company, Munich 1.0%, €1,150m, Bonds Exchangeable into Allianz ag Shares 2000/2005 1,223 1,166
The real estate result includes rental income of €663m, (769m). The expenses for the management of investments include running costs and expenses for repair and maintenance of real estate totalling €121m (174m).
All figures Life and health Property-casualty Life and health Property-casualty in €m* 2004 Prev. year 2004 Prev. year 2004 Prev. year 2004 Prev. year 2004 Prev. year
(28) Other income In addition to foreign currency exchange gains of €400m (440m), the other income mainly includes income from services rendered of €283m (306m), interest and similar income of €111m (145m), and income from the reversal/ reduction of miscellaneous provisions and adjustments of values for receivables.
Change in other underwriting provisions – Provision for future policy benefits 656 748 18 4 2,432 1,443 23 27 3,129 2,222
– Change in provisions for outstanding claims –175 64 –677 –691 –5 –11 37 41 –820 –597
Change in other underwriting provisions – Provisions for future policy benefits –308 75 – –8 134 115 – – –174 182
Total expenses for claims and benefits 5,274 4,522 9,650 10,789 13,855 14,481 2,857 2,695 31,636 32,487 *After elimination of intra-Group transactions across segments.
Life and health Property-casualty Life and health Property-casualty 2004 Prev. 2004 Prev. 2004 Prev. 2004 Prev. 2004 Prev.
– Change in deferred acquisition costs (gross) –230 –110 22 –18 –281 –549 –16 –12 –505 –689 *After elimination of intra-Group transactions across segments.
Taxes on income are made up as follows: The current and deferred taxes on income mainly result from the following: The current tax is derived from the tax results of the business year, to which the local tax rates of the respective subsidiaries are applied. Deferred tax is also calculated using the respective local tax rates. Sometimes for simplicity ’s sake we use uniform tax rates for individual circumstances or subsidiaries. Changes in tax rates and tax legislation that have already been adopted by the government at the balance sheet date are generally taken into account.
Deferred tax resulting from the occurrence or reversal of loss carry-forwards 165 –316
Effects of changes in tax rates on deferred tax –107 392
“Tax-free income” is made up of tax-free gains on the sales of shareholdings in joint-stock companies, tax-free dividend income and other tax-free income. The nondeductible expenses mainly include writedowns on nonfixed -interest securities available for sale. In addition, they contain non-deductible amortisation of goodwill and other non-deductible expenses.
The item “municipal trade earnings tax” includes the differences between the trade-tax rate applied by the respective Group companies and the Group mixed tradetax rate.
(33) Parent company The parent company of the Munich Re Group is Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (Munich Reinsurance Company Joint-Stock Company in Munich), Königinstrasse 107, 80802 München. Its registered seat is Munich, Federal Republic of Germany. In addition to its function as a reinsurer, the parent company also fulfils the function of holding company for the Group.
The fair value of the all stock appreciation rights at the balance sheet date amounted to €11.7m (4.6m) for the Group’s reinsurers. This figure takes into account not only the intrinsic value but also the possibility of value growth up to the data of expiry of the rights and is determined with reference to the exercise conditions on the basis of recognised pricing models.
The personnel expenses and income incurred for the stock appreciation rights are determined on the basis of the change in Munich Re’s share price. At each balance sheet date, the intrinsic value is calculated and reserved as the difference between Munich Re’s share price and the initial share price for the stock appreciation rights; during the two-year vesting period, the amount to be reserved is recognised pro rata temporis. The personnel expenses recognised therefore correspond to the change in the provision in the year under review, taking into account any rights exercised.
Incentive Incentive Incentive Incentive Incentive Incentive Plan 1999 Plan 2000 Plan 2001 Plan 2002 Plan 2003 Plan 2004
Number of rights on 31 December 1999 110,840 – – – – –
Number of rights on 31 December 2002 78,668 80,261 109,301 132,466 – –
Number of rights on 31 December 2003 78,981 77,855 107,428 135,200 439,581 –
Number of rights on 31 December 2004 78,981 77,417 106,828 134,452 437,227 456,336
As at 1 July in the years 2002 to 2004 , the ergo Insurance Group and some of its subsidiaries, as well as Europäische Reiseversicherung ag, Karlsruher Lebensversicherung Aktiengesellschaft and Karlsruher Versicherung Aktiengesellschaft, set up long-term incentive plans. These plans, also with a term of seven years, provide for Board of Management members and in individual cases also top executives to be granted a defined number of stock appreciation rights in respect of Munich Re shares. The design of the plans is identical to that of Munich Re’s longterm incentive plans and accounted for in the same way.
In the year under review a total of 155,839 (181,579) stock appreciation rights were granted, 132,653 (156,656) of these to Board of Management members. To cover future obligations arising from these rights, the companies participating in the long-term incentive plan purchased Munich Re shares to some extent.
(38) Compensation and loans for Board members The compensation 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 €18.2m (13.8m). This includes the compensation components that Mr. Phelan received for his work as President, Chief Executive Officer and Chairman of the Board of American Re Corporation. Taken into account for the first time in the disclosure are the provisions for the long-term incentive plan and the provisions/expenses of subsidiaries for variable compensation components of the parent company ’s Board of Management. The previous year’s figures have been adjusted for comparative purposes.
Additional personnel expenses for valuation of stock appreciation rights at fair value6 1,622 –407 1 Higher expenses for 2003 are due to anniversary payments.
2 Higher expenses for 2004 are due to the invoicing of Mr. Phelan’s travel expenses for 2003 and 2004. 3 Bonus payment for 2002 lower than estimated and reserved bonus payment.
4 Bonus payment for 2003 higher than estimated and reserved bonus payment. 5 Higher provision due to good business results in 2004.
6 Additional notional personnel expenses in the year under review for all stock appreciation rights granted as from the long-term incentive plan 1999.
Munich Re Group Annual Report 2004 06_Financial report Other information the exercise conditions of the long-term incentive plans. In accordance with the plan conditions, there were no payments made under the medium-term incentive plan in the business year.
The average level of provision for the pension entitlements of the members of the Board of Management amounts to 38% of the basic remuneration.
Basic remuneration made up 31% of overall compensation in 2004, and remuneration in kind and fringe bene-
The variable compensation includes allocations to provisions for the payments probable on the basis of current estimates. Whether these reserved amounts will actually be paid out to the Board members, and if so how high the sums will be, is not yet certain and will depend on the degree to which individual objectives are achieved and on
For retired members of the Board of Management or their surviving dependants, the present value of pension commitments amounts to €58m (55m). The aforementioned group of persons is included in the contractual trust agreement set up in the previous year.
Management did not receive any advances or loans in the year under review.
Basic remuneration, remuneration Function, responsibility, Fixed Contractual Monthly in kind/fringe benefits (company car, risk-based capital, length provisions healthcare, security measures, of service on the Board insurances, special remittances)
Medium-term incentive plan 50% annual result 70–100% Achievement of object- In fourth year 50% achievement of 70–100% ives at least 70% on personal objectives average over three years
Long-term incentive plan Appreciation in share 0–150% > End of vesting period As from third year of plan (stock appreciation rights; price (two years) until end of plan term: seven years) > 20% share price increase > Munich Re shares have outperformed euro stoxx 50 twice at the end of three-month period during the term of the plan
Pension entitlement Basic remuneration, Fixed amount Insured event or – number of years on retirement the Board
In the case of 100% achievement of objectives (annual bonus, medium-term incentive plan) and a 35% share price increase (long-term incentive plan), the weightings of the individual components are as follows: basic remuneration approx. 33%, annual bonus approx. 29%, medium-term incentive plan approx. 14%, and long-term incentive plan
For valuing the stock appreciation rights from the longterm incentive plan, an imputed value at the granting date has been used, arrived at by financial mathematics. Whether the stock appreciation rights can be exercised, and if so when, is not certain at the time they are granted. The exercising and proceeds depend on the development of the share price and the exercise price and date. Up to now it has only been possible to exercise stock appreciation rights under the plan set up as at 1 July 1999.
The compensation components of the annual bonus and medium-term incentive plan are based on different categories of objectives. For the portions dependent on the annual result, an objective is agreed on for the whole Munich Re Group; for the achievement of personal objectives, division financial targets and individual objectives form the basis. The targets and scaling for Group and division objectives are geared to particular indicators. In the case of the Group objective, these are key indicators of external accounting; in the case of division objectives, they are performance measures of value-based management.
Annual bonus, medium-term incentive plan and longterm incentive plan together form a well-balanced incentive system.
In the case of seats held on other boards, compensation for board memberships not classified as personal memberships must be paid over to the Company or is deducted in the course of regular compensation computation.
Compensation for seats held on other boards is paid over to the Company or deducted in the course of regular compensation computation, unless these board memberships are classified as purely personal memberships.
In accordance with the recommendations of the Code of Corporate Governance, the total compensation of the Board members thus comprises fixed and variable components, all of which are appropriate in themselves and as a whole. Criteria for the appropriateness of compensation are in particular the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole and the financial situation, performance and future prospects of Munich Re, taking into account the relevant benchmarks for Board remuneration.
(40) Share trading and shares held by members of the Board of Management and the Supervisory Board No acquisition or sales transactions notifiable under Section 15a of the German Securities Trading Act had occurred up to the end of the business year 2004. The total number of Munich Re shares held by all members of the Board of Management and Supervisory Board amount to less than 1% of the shares issued by the Company.
The remaining periods for leasing obligations from rental leasing arrangements are as follows: All figures in €m 31.12.2004 Prev. year
Beyond this, there were other financial commitments of €40m (12m) and obligations from guarantees totalling €227m (162m). In connection with a sale of shares, a liability towards the purchaser totalling a maximum of £2m has been assumed. There were contingent liabilities of €105m (125m) from a leasing transaction with real estate.
As the German life insurers in our Group participate in Protector Lebensversicherungs-ag, they are committed to assuming its payment obligations to the extent of their market share totalling 13%.
Hamburg-Mannheimer n. v./s. a., Brussels 93.67% 9,172 –1,405 dkv belgium s. a., Brussels 93.67% 29,354 –2,510 dkv Deutsche Krankenversicherung Aktiengesellschaft, Cologne *** 93.67% 465,267 0 dkv Luxembourg s. a., Luxembourg 70.25% 12,960 889 dkv Seguros y Reaseguros, Sociedad Anónima Española, Saragossa 93.67% 50,029 4,532
Union Medica La Fuencisla, s. a., Compania de Seguros, Saragossa 93.67% 6,161 429 globale Krankenversicherungs-Akltiengesellschaft, Cologne 93.67% 8,674 219 d. a. s. Deutscher Automobil Schutz Allgemeine Rechtsschutz-Versicherungs-Aktiengesellschaft, Munich *** 93.67% 209,113 61 d. a. s. Deutscher Automobil Schutz Versicherungs-Aktiengesellschaft, Munich *** 93.67% 38,959 176 d. a. s. Nederlandse Rechtsbijstand Verzekeringmaatschappij n. v., Amsterdam 49.86% 24,590 5,205 d. a. s. Österreichische Allgemeine Rechtsschutz-Versicherungs-Aktiengesellschaft, Vienna 93.65% 27,361 4,286 d a s Legal Expenses Insurance Company Limited, Bristol 93.67 % 55,131 2,148
Bloemers Holding b. v., Rotterdam 22.73% 13,759 2,842 d. a. s. Difesa Automobilistica Sinistri, S. p. A. di Assicurazione. Verona 46,83% 7,443 1,635
Financial services and asset management, consolidated subsidiaries ergo Trust GmbH, Düsseldorf 93.67% 22,234 382 meag munich ergo AssetManagement GmbH, Munich 97.47% 85,685 21,531 meag munich ergo Kapitalanlagegesellschaft mbH, Munich *** 97.47% 19,665 0
Österreichische Volksbanken-ag, Vienna 10.00% 723,307 38,957 wmf Württembergische Metallwarenfabrik Aktiengesellschaft, Geislingen/Steige 11.33% 191,462 10,780 **** 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 December 2004.
In our opinion, the consolidated financial statements give a true and fair view of the net assets, financial position, results of operations and cash flows of the Group for the business year in accordance with International Financial Reporting Standards.
Supervisory Board Seats held on supervisory Membership of comparable boards of other German bodies of German and foreign companies business enterprises
Ulrich Hartmann Deutsche Bank ag Henkel kgaa Chairman (until 26 May 2004) Deutsche Lufthansa ag arcelor, Luxembourg e.on ag (Chairman) Hochtief ag ikb Deutsche Industriebank ag (Chairman)
Prof. Dr. rer. nat. DaimlerChrysler Services ag Henning Kagermann Deutsche Bank ag
Dr. e. h. Dipl.-Ing. Dresdner Bank ag Tetra-Laval Group, Pully Bernd Pischetsrieder metro ag Scania ab, Södertälje* (Chairman)
Dr. jur. Dr. h. c. Albrecht Schmidt Bayerische Hypo- und Vereinsbank ag (Chairman) Thyssen’sche Handelsgesellschaft m. b. H. Siemens ag
Georg Daschner – Münchener Rück Italia S. p. A., Milan* (Chairman)
Europäische Reiseversicherung ag (Chairman) man ag Nürnberger Beteiligungs-ag victoria Lebensversicherung ag*
Dr. rer. nat. Torsten Jeworrek – Munich American Capital Markets Inc., Delaware*, (Chairman) New Reinsurance Company, Geneva* (Chairman)
Christian Kluge Karlsruher Lebensversicherung ag – Karlsruher Versicherung ag (Chairman) Mercur Assistance ag Holding (Chairman)
Munich Re Group Annual Report 2004 06_Financial report Seats held on other boards
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).
Asset management Management of an investment portfolio on the basis of risk and return considerations. It covers both the preparation and implementation of investment decisions regarding assets and the management of � special funds.
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%. Investments in associated enterprises are valued according to the � equity method.
Cedant Client of a reinsurance company (see also � primary insurers).
Compliance guidelines Rules for handling insider information. As a general rule, insider information may not be used for own investment transactions, for transactions conducted by a bank or for recommendation to others. Therefore, as part of the compliance procedure, business transactions are checked to make sure they are not based on insider information.
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.
Corporate governance Corporate governance refers to the legal and factual framework for managing and monitoring companies. Corporate governance rules serve to provide transparency and thus strengthen confidence in responsible management and control geared to the creation of value.
Deferred tax assets/liabilities Deferred taxes derive from temporary differences between accounting on the basis of International Accounting Standards and national tax law. If in the consolidated financial statements asset items are valued lower, or liabilities higher, than in the tax balance sheet of the Group company concerned, the resulting future tax relief must be recognised as a deferred tax asset. Deferred tax assets are also posted for tax loss carry-forwards. If the accounting differences between the consolidated financial statements and tax balance sheet will lead to future tax burdens, these must be recognised as deferred tax liabilities. Deferred tax assets are reversed if a realisation of the corresponding receivable is not probable.
Derivative financial instruments Financial instruments whose increase or fall in value is based on and determined by the change in the amount of an underlying value (a particular interest rate, security price, exchange rate, price index, etc.). The main derivatives are futures, forwards, swaps and options.
Directors’ and officers’ liability insurance Insurance of liabilities arising from the performance of professional or official company duties.
Duration Duration refers to the average term of an interest-sensitive investment (or � portfolio) and is a measure of the risk of its sensitivity to changes in interest rates.
Equity method Investments in � associated enterprises have to be valued in the consolidated financial statements using the equity method. The “at equity” value corresponds to the Group’s proportionate share of the shareholders’ equity of the enterprise concerned.
Factor-based risk approach Simplified capital model based on applying a series of “factors” (or capital charges) to volumes such as premiums, reserves or asset values. The model provides only a crude proxy for the risk-based capital requirements.
Financial reinsurance Forms of reinsurance in which the transfer of underwriting risk from the insurer to the reinsurer is significantly restricted, being replaced by financing mechanisms. In view of the accounting regulations in many markets, it is no longer a customary form of reinsurance. � Finite risk reinsurance
Goodwill Any excess of the purchase price of a subsidiary over the acquirer’s interest in the fair value of the net assets as at the acquisition date. Goodwill is amortised over its useful life. Goodwill resulting from business combinations agreed to on or after 31 March 2004 is not amortised, but is tested and written down for impairment if necessary.
Gross/net The terms gross and net mean before and after deduction of the portion attributable to business ceded in reinsurance. Instead of “net”, the term “for own account” is sometimes used.
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.
International Accounting Standards Board (iasb) An international body of 14 accounting experts responsible for issuing � ias/ifrs. The iasb’s objective is to achieve uniformity in the accounting principles that are used by businesses and other organisations for financial reporting around the world.
This mainly involves investments for policyholders under � unitlinked life insurances. It also includes investments under indexlinked life insurance policies whose performance depends on share or currency indices. Obligations arising from this type of contract are mainly shown under the balance sheet item “underwriting provisions for life insurance policies where the investment risk is borne by the policyholders”.
Loss reserve Reserve for the coverage of losses that have occurred but have not yet been settled.
Minority interests in shareholders’ equity and earnings That part of the shareholders’ equity and earnings of subsidiaries that is apportionable to shareholders outside the Group.
Net operating expenses Commission, personnel costs and general expenses for the acquisition and ongoing administration of insurance contracts, less any commission reimbursed by reinsurers, including profit commission, plus expenses from amortisation of � pvfp.
Obligatory reinsurance Although obligatory reinsurance agreements contain agreed periods of notice, they are generally concluded for an unlimited duration. These treaties between insurers and reinsurers may therefore run for long periods. (cf. � facultative reinsurance).
Operating result Operation profit/loss on the enterprise’s ordinary activities, before minority interests in earnings and taxes on income.
Other securities held to maturity Fixed-interest securities which the company has the intention and ability to hold to maturity. They are valued at � amortised cost.
Provision for future policy benefits Underwriting provision calculated using actuarial methods to cover future benefits to which policyholders are entitled, especially in life, health and personal accident insurance. It amounts to the balance of the present value of future obligations less the present value of future premiums.
Provision for premium refunds 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).
Recoverable amount The recoverable amount of an asset is the higher of net sales price (i.e. sales price less sales costs) and the utility value (i.e. present value of the future cash flows). The recoverable amount plays a part especially in connection with impairments in the value of real estate, where a writedown has to be made if the recoverable amount is lower than the carrying amount.
Risk controlling Ongoing monitoring and control of risks and measures, including methodological development and risk analysis/reporting, by a neutral, independent unit that also proposes and initiates additional measures.
Risk management Ongoing, systematic and continual identification, analysis, evaluation and control of potential risks that may jeopardise the assets, liabilities, financial position and results of a company in the mediumto long-term. The aim is to safeguard the existence of the company and its objectives against disruptive influences by means of suitable measures, and to increase corporate value.
Scenario analysis Used to investigate how certain key figures (market values or book values) change in the event that predefined market developments occur. Scenario analyses usually take the form of average if-then analyses.
Special funds Investment funds with a maximum of 30 unit-holders that are not natural persons. As the fund owners pursue specific objectives with their investments, investment policy is geared to individual requirements.
Structured products In the case of structured products, a � derivative financial instrument (e.g. an � option) is combined with a non-derivative instrument (e.g. a bond). Structure products are also referred to as hybrid products.
Underwriters Members of an insurance or reinsurance company that act on behalf of their employer to negotiate, accept or reject the terms of a (re)insurance contract.
Underwriting result Balance of income and expenses apportionable to the (re)insurance business.
Unearned premiums The portion of premium income in the business year that is attributable to periods after the balance sheet date is accounted for as unearned premiums in the underwriting provisions.
us Generally Accepted Accounting Principles (us gaap) The principles of us accounting that are stipulated as compulsory for listed companies in the us. The individual accounting standards are referred to as � Financial Accounting Standards (fas).
Value-based management The concept of value-based management is geared to increasing the value of a company on a long-term basis. Value is only created long term if a company regularly earns a profit that exceeds the costs of the equity capital invested.
Corporate governance 77, 80 f. Corporate Underwriting/Global Clients 56, 114 f. cps 67 f.
Health management 68 ff. Human resources risk management 19 ff. hvb Group 24, 58
Mercur Assistance 58, 70 Münchener Rück Italia (mri) 55, 109 Munich American Capital Markets (macm) 55 f., 63, 65 f. Munich American Reassurance Company 55, 104 Munich-American RiskPartners (marp) 55, 116 Munich Reinsurance Company Canada Branch (Life) 55, 69 Munich Reinsurance Company of Africa (mroa) 55, 87, 111
Munich Reinsurance Company of Australasia (mra) 55, 111 Munich Reinsurance Company of Canada (mroc) 55, 87, 113
Paramount Health Care Management 12 f., 33 Primary insurance ic*, 53, 57 f., 119 ff., 132 Property-casualty insurance ic*, 25, 105 f., 119 f., 122 f. Provision for old age 72 f., 121
Switzerland New Reinsurance Company Rue de l’Athénée 6–8 1211 Genève 3
USA American Re-Insurance Company 555 College Road East Princeton, NJ 08543
Australia Munich Reinsurance Company of Australasia Limited (MRA) Munich Re House 143 Macquarie Street Sydney NSW 2000 Australia P.O. Box H35 Australia Square Sydney NSW 1215 Australia
Hamburg-Mannheimer Versicherungs-ag Hamburg-Mannheimer Sachversicherungs-ag Hamburg-Mannheimer Pensionskasse ag Überseering 45 22297 Hamburg
Asset management meag munich ergo AssetManagement GmbH Oskar-von-Miller-Ring 18 80333 München www.meag.com ergo Trust GmbH Victoriaplatz 2 40198 Düsseldorf
Our operations encompass all aspects of risk assumption in primary insurance and reinsurance. We are one of the world’s largest reinsurers and the second-largest primary insurer in Germany.
Valuation reserves not recognised in balance sheet** €bn 3.2 1.8 1.1 16.4 21.9 **Adjusted after reallocation of “other tax” to “other expenses”. **Including amounts apportionable to minority interests.
Munich Re’s market capitalisation at 31 December €bn 20.8 22.1 20.4 54.0 67.2 **Taking into account the capital increase in November 2003.
Life and health 12.5% Property-casualty 41.2% Life and health 33.1% Property-casualty 13.2%
© 2005 Münchener Rückversicherungs-Gesellschaft Central Division: Corporate Communications Königinstrasse 107 80802 München Germany