Result before amortisation of goodwill €m 2,012 11 –415 2,615 1,821
Valuation reserves not recognised in balance ** Adjusted owing to first-time application of ias 39 (rev. 2003). ** Including amounts apportionable to minority interests.
Reinsurance, primary insurance and asset management complement each other in our Group to form a strong blend of financial services. We are one of the world’s largest reinsurers and the second-largest primary insurer in Germany.
Asset management: Our subsidiary meag manages our assets and offers investment products for private clients and institutional investors.
Large and very large losses (gross) €m 1,078 1,886 4,749 1,150 1,807 * Before elimination of intra-Group transactions across segments.
Discussing issues openly, taking and implementing clear decisions, and ensuring quality – that’s the way to make our future profitable.
Downgradings in our rating were one of the consequences of the unparalleled bear market on the stock exchanges. Our clients continue to place their confidence in Munich Re. We know what they expect from us (see page 70).
We were the first foreign reinsurer to obtain a reinsurance licence in China, enabling us to operate as a reinsurer without restrictions and transact business in the domestic currency. We took a decisive step forward in October when we opened a branch in Beijing (see page 51).
The summer of 2003 was an event calculated to occur on average every 450 years. Climate change is continually showing new facets, causing those affected and decisionmakers to think about new solutions like multi-peril crop insurance (see page 54).
We apply this guiding principle not only in our operational ecology but also in our reinsurance business and investments (see page 79).
In 2003, the scene was set for a change at the head of Munich Re. Our new Chairman of the Board of Management, Dr. Nikolaus von Bomhard, has been at the helm since 1 January 2004. He is carrying on the motto of his predecessor Dr. Hans-Jürgen Schinzler – “profitability before growth” – clearly pursuing and reinforcing the message (see page 20).
We had set ourselves a combined ratio target of below 100% in both primary insurance and reinsurance. With 96.4% in primary insurance and 96.7% in reinsurance, we more than met our objective, mainly as a result of our insistence on risk-commensurate prices and conditions (see pages 96 and 117).
Torsten Jeworrek and Hans Brings on questions of pricing Nikolaus von Bomhard with Arno and Marc Surminski on Munich Re’s future Thomas Kabisch and Peter Oppenheimer on sustainable investments Bernhard Schareck and Henning Gebhardt on the situation in life insurance Nina von Stebut and Renate Schmidt on women and careers Charlie Shamieh and Wil Dullemond on risk models
Letter to shareholders 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003
Management report >> Business parameters >> Business performance >> Prospects >> Risk report
Classes of business Multi-year overview Quarterly figures Important dates 05__Corporate responsibility 06__Financial report 07__General information
There is no question about it: the business year 2003 was a disappointment for both you and me. What made it such a difficult year for Munich Re?
All in all – and this is the good news – with the financial statements for 2003 we have drawn a line under three difficult years.
How do I envisage Munich Re’s future? My main objective is to fulfil, on a sustained basis, the expectations that you rightly have with regard to return on equity and hence on your investment. In order to achieve this, we have set ourselves ambitious targets that ensure we have only value-producing business on our books. For 2004 we aim to record a profit of €2bn after tax. That is a challenging objective, but is does not require any fundamental strategic realignment. Rather, we have to consistently implement our existing strategy and adhere to our high standards in the quality of our business, without any ifs and buts.
Our primary insurers have also taken important steps in the last few months to get back on track as regards earnings. Structures, processes and products have been thoroughly analysed with the aim of increasing profitability. A new management structure in the ergo Group will improve corporate management, simplify decision-making and unify back-office processes for the group companies. This will further enhance group mentality. Starting in 2002, the companies of the ergo Group launched a cost-reduction programme designed to save €300m a year by 2005. Given these developments, I am convinced that our primary insurers will already turn a profit again in the current business year. Then their strengths will really make themselves felt again: we are among the top providers in German life insurance, where we remain convinced of the potential for longterm profitability. In Europe, we are the market leader in private health insurance. And in property-casualty insurance, the quality of our business is reflected in another very good combined ratio of 96.4%.
We have further refined our internal risk model. As a consequence, we have markedly reduced our equity exposure and – as announced – especially our investment in the German financial sector. We have completely sold our stake in Hypo Real Estate Holding, and cut back our shareholding in Allianz to around 12%. We have reduced our substantial shareholding in HypoVereinsbank ag to approximately 18% by not participating in its capital increase. The marketing cooperation between the hvb Group and ergo, of course, remains unaffected by this.
Ladies and gentlemen, I am convinced that Munich Re is on course for a profitable future – to the benefit of us all. You can count on my resolve.
brings: At a very high level we look at our combined risk portfolio and secure it in such a way that the balance sheet is not hit to an extent that Unilever cannot afford. Our concern is to buy only insurance where the financial impact of risk outweighs our risk appetite. During 2003 we modelled our exposures into a loss forecast, thereby taking account not only of the history but also of all the recent changes in our company that would have an effect into the future. This model then had the capability to calculate the optimal programme structure that showed the lowest cost of risk combined with a volatility within the boundaries set by the Board. Unilever is a financially strong company, so in those regions where we need insurance, it is important for us that the products offered by the insurance industry are the ones we want. That is unfortunately not always the case.
jeworrek: I see your point. In this respect we on the one hand need to accept the limits of insurability for certain risks. On the other hand it is a fact that for large risks a technically correct price is often difficult to get. For Munich Re it is essential to provide coverage only if the correct technical price is achievable, i.e. we will not be able to follow cycles in the future when prices are not justifiable. Munich Re has created sophisticated pricing models to find out what the price for the overall risks needs to be. This means that the price we charge is based on the assessment of the information we get, i.e. the more information we get and the more transparent Unilever’s risk situation is to us, the better the price for the coverage can be.
brings: I do understand that we have to provide adequate information in order for you to offer the right product at the right price. In our system we were not able to provide information because of our supply-chain structure, which has changed dramatically over the last couple of years. Production is organised in regional sourcing units that sell to local sales units, etc. Due to this complexity it took about two years to get the right business interruption exposure information in the appropriate form. We advised all underwriters and they understood the position.
Owing to their complex structure, globally operating groups have very special insurance needs. Outstanding know-how is required to understand and evaluate their risk situation. Hans Brings, Head of Corporate Insurance for the Dutch group Unilever, spoke with Munich Re Board member Torsten Jeworrek about risk management, transparency and the role of insurers.
dr. torsten jeworrek on risk control in our company. I see that as my number-one responsibility. Our risk-control programme is very extensive and managed centrally by my team. The main elements are risk self-assessments regularly performed by all locations, engineering surveys wherever needed (our preferred providers do around 200 per year), discussions with local management on recommendations both from the selfassessments and from the surveys and advice on new projects. Because of the success of these programmes we see our company as a relatively low risk. However, for the rare occasion that something big does happen, Unilever wants companies like Munich Re that are ready to stick by us and are able to pay if a large claim occurs.
jeworrek: With regard to certain risks like natural perils, the insurance industry is faced with accumulation problems. To manage the available capital efficiently, quality risk management must prevent risks which have a high correlation from becoming too dominant in the overall portfolio. The worldwide exposure of these risks exceeds the limit of the available capital of the insurance industry. For other correlated risks like it viruses or terrorism, the industry is even faced with the limits of what is insurable. Such risks are difficult or even impossible to insure, as they cannot be modelled. Nevertheless with regard to newly emerging risks, I think the private insurance industry has an obligation to find solutions to make them insurable. By fulfilling this task, the insurance industry is providing a service to society and supporting industrial progress and new developments.
Shares of many German financial service providers performed worse than the market as a whole in the first quarter. This also had an impact on Munich Re shares, which came under massive pressure, especially in March.
As Munich Re shares began from a very low level in the second quarter of 2003, they clearly outstripped the dax in the following period. In April, we issued two subordinated bonds, whose success supported the recovery. However, our shares were unable to make up for the initial losses: altogether, they recorded a negative performance for 2003.
Throughout the summer, discussions regarding Munich Re’s capital situation placed a strain on our share price. Whilst the capital increase in November caused it to rise appreciably at first, by the end of the year it had lost some of the ground it had gained and consolidated itself at the October level.
The average daily turnover of Munich Re shares rose by 134% compared with the previous year. Altogether, the free share capital was turned over approximately 3.6 times.
In April 2003, via its 100% subsidiary Munich Re Finance b. v., Munich Re issued subordinated bonds in two tranches which met with very high demand. The press and the capital markets rated the successful placement of this very large issue as a clear expression of confidence in the Munich Re Group. Subordinated bonds are counted as equity capital by the leading rating agencies up to a certain point and are recognised by the German Federal Financial Supervisory Authority as own funds in the calculation of solvency. The main part of the issue, the euro tranche, had a volume of €3bn, an amount unprecedented in the euro subordinated bonds market. A pound sterling bond with a volume of £300m was placed at the same time. At the end of 2003, the euro tranche was listed at 111.09% and the pound sterling bond at 115.77%.
Munich Re shares have been represented in important national and international share price indices for many years. And since 2001 they have also been included in the Dow Jones Sustainability and the ftse4good index family. These sustainability indices only accept companies that fulfil certain ecological and social criteria and are among the best in their sector. Our inclusion in these indices underscores how intent we are on promoting sustainable development.
Allianz’s stake decreased during the business year 2003 from 22.4% to 12.4%, and by 2 March 2004 had fallen to 9.4%. To reduce our reciprocal shareholdings, Allianz had redeemed its miles bonds (issued in 2000) by repaying the holders in Munich Re shares and had only participated to a limited extent in Munich Re’s capital increase of November
Munich Re shares are continually monitored by over 50 analysts. At the end of the year, 21 of these gave our shares a positive rating (2002: 23), 19 a neutral one (2002: 17), and 8 a negative one (2002: 11).
The 116th Annual General Meeting of Shareholders on 11 June 2003 was again attended by over 4,000 at the icm – International Congress Center Munich; compared with the previous year, the attendance rate rose from 53.7% to 57.5% of the share capital. The proposals of the Board of Management and Supervisory Board on the individual agenda items were adopted by the shareholders with very clear majorities.
At the end of 1994, with the share price at dm 2,870.00 (= €1,467.41), a portfolio of 100 Munich Re registered shares with a par value of dm 100 (= €51.13) required a total investment of €146,760.77 (excluding transaction costs). After the two stock splits in August 1997 and January 1999, this investment today amounts to a portfolio of 2,000 no-par-value shares.
“What I want is for us to be the first choice – for our clients, investors and staff.”
bomhard: Restoring confidence would have been my most important pledge: strengthening self-confidence within the Group in what we are good at and regaining the confidence of external parties, be they shareholders, analysts or the general public.
bomhard: It’s unfair always to be pointing the finger at the primary insurers in our Group.
Don’t forget: there was plenty of room for improvement in reinsurance – just think of the underwriting results of the last few years. The fact that our primary insurance group’s result is not satisfactory does not worry me provided that it is soon operating profitably again. Give us a little more time and our strategy will prevail.
Especially with a new Chairman of the Board, questions abound. Insurance journalists Arno Surminski and Dr. Marc Surminski had the opportunity to interview Dr. Nikolaus von Bomhard in Munich and address a variety of topics, including Munich Re’s corporate structure, the situation of its primary insurance group, corporate identity and questions of management.
bomhard: Our staff’s corporate identity has changed in the recent past towards an attitude of “we are a completely normal company; we have to prove ourselves, just like others do”. This new attitude is producing ways of thinking and acting that will help the company progress. I consider that healthy.
bomhard: All staff have to know how and where they add value for our Group as partners in enterprise. They should be inquisitive, innovative and look beyond their own immediate horizons, trying to keep the big picture in view. They should thus be constantly readjusting, while at the same time preserving Munich Re’s inner values.
marc surminski: With you as Chairman, a “reinsurance man” has now taken over the helm. Is that a signal that Munich Re is setting a new course in terms of earnings from underwriting business, with less dependency on investments?
bomhard: Absolutely right. My job is clearly to manage insurance risks in such a way that they produce growth in value that gives us a decisive edge on the competition. At the same time, I attach great importance to an investment policy that matches our commitments on the liabilities side of the balance sheet.
bomhard: Not any more. On the contrary, we are considering how much business we can dispense with in a certain market phase without undermining the overall structure of our figures. Many reinsurers today have business on their balance sheets that is not really reinsurance in the strict sense, so a comparison between reinsurers in terms of size has little meaning. In other words, being first in the rankings is not a key issue. What I want is for us to be the first choice – for our clients, investors and staff.
marc surminski: We have had a harder market for a couple of years now, and your combined ratios are worse than those of your competitors.
bomhard: That’s no longer the case! It is difficult anyway to determine how success in reinsurance should be measured. In my view, the combined ratio is not an ideal yardstick. Let me explain why. To make a proper comparison, you need to know the precise composition of the portfolio you are considering. It makes more sense to look at a company’s ratios along the time axis, provided the portfolio remains comparable. In Munich Re’s case, there is a clear fall in this ratio. Compared with companies that have similar business in their portfolio, we are now in a better position.
bomhard: In ten years’ time I see it as the reinsurer with the largest profit and the best reputation. We manage risks more efficiently than others because we know more about risks and how to handle them. We are more innovative than the competition, we shape important developments in our industry. The same applies to primary insurance. Those wishing to invest in the insurance industry simply can’t ignore us. This is what a market leader must aspire to and what we owe our shareholders.
We aim for market leadership in those areas where we see opportunities for profitable business development. In so doing, we build on our strengths: – our technical skills in underwriting business, such as the identification and modelling of risks, and the pricing of covers; – our knowledge and our competence, which we are systematically expanding with regard to topics of the future like climate change and biosciences, and which we use in our business; – our capacity for innovation, which supports us in translating changes in our economic, social and legal environment, for example, into appropriate business measures at an early stage and in utilising the resultant opportunities for our clients and for us; – our financial strength; – our global network in reinsurance and the franchise strength of our primary insurers.
The reinsurers and primary insurers in our Group have strong brands and leading market positions. We count on the know-how our of staff throughout the world, their experience, and their specialist and intercultural knowledge. In order to be the ”preferred partner in risk”, we offer our clients the best possible service and security. For us, risk-commensurate prices are the decisive key to success.
The demand for insurance services is rising worldwide. As a consequence of technological developments, new risks are continually emerging. Altered risk profiles – due to climate change, for example, or the growing concentration of values – result in new requirements for insurance. Demographic trends and the crisis in social security systems are major challenges and opportunities for private insurance, for in the long run there is no getting round the fact that more personal provision on a funded basis will be essential.
The extreme volatility of share prices over the last few years, with their dramatic consequences for insurers’ market capitalisations, investments and ratings, underlines the high demands placed on corporate risk management systems, especially in the current environment of historically low interest rates.
Against this background, the reinsurers and primary insurers in the Group are aiming to achieve a return on equity of 12% after tax. Our strategic guidelines on the way to meeting this objective are: – Profitability takes precedence over growth. Our product design and our underwriting are geared to long-term sustainable profitability in both reinsurance and primary insurance. This commitment to consistent earnings orientation rules out volume-oriented growth aimed at achieving or defending certain positions in the rankings. Value-based management, which sets clear financial objectives, provides the requisite framework.
Partnership with hvb Annual premium of €320m €400m polices written via hvb
– With strong business pillars in reinsurance and primary insurance, supported by our own Group asset management, we carry, manage and finance risks along the whole value-added chain of the insurance industry.
– We aspire to be the most profitable among the five largest reinsurers. We therefore analyse the business opportunities that present themselves on the basis of whether they offer risk-adequate prices and conditions, and decide with the help of our value-based management tools which of the opportunities to utilise.
– Owing to the global market presence of the reinsurance group, we can strongly diversify the risks we accept. This is a competitive advantage when it comes to earning riskadequate margins across the reinsurance cycle.
– We aim for organic, result-oriented growth in order to consolidate and, where appropriate, also improve our market position. Here, too, profitability is the determining yardstick.
– We continue to expand our strengths: competence, quality and capacity for innovation. With this in mind, we are moving ahead with our programme of knowledge management. In selected topic areas, we are extending our lead in quality and opinion leadership.
– We are working hard worldwide to optimise and accelerate our operational procedures as well as our administration and processing systems.
The insurance market has always experienced fluctuations in capacity, rates and results. In order to make ourselves as independent of cyclical market movements as possible, we focus hard at all times on achieving risk-commensurate prices and conditions based on our calculations of the technically required level.
Risk-commensurate prices and conditions are the deciding factor for us, as only these will enable us to earn sustainable profits and to build up successful and reliable business relationships.
The following factors enable us, as the world’s leading reinsurer, to define and implement risk-commensurate prices and conditions: – Joined-up thinking, e.g. in the modelling of risks – Understanding the influence of macro- and microeconomic factors – Know-how and experience, globally and in the individual markets – Ability to develop pricing tools which adequately reflect the exposure of the risks covered – A value-based management system – Disciplined underwriting – Stringent risk management
– The primary insurers in our group aim for profitable growth in the core fields of insurance and private provision and in asset management. In the German primary insurance market, they aim to profitably extend their excellent position especially in personal lines business and insurances of the person (life, health and personal accident).
– Their business operations are focused on Europe, where strategic core markets are defined. In Southern and Eastern European markets with growth potential, business is to be strengthened through organic, profit-oriented growth, and also through selective acquisitions where appropriate.
– In order to achieve their profitability objectives, the primary insurers are taking steps in all areas, functions and processes to enhance efficiency and cut costs.
Personal lines and insurances of the person as a proportion of overall business
Asset management: Adjustment of equity exposure and reduction of concentration risk
Strategic asset allocation is based mainly on the assessment of the market, our risk tolerance, and liquidity requirements. As part of the risk management process, the proportion of investments in equities in particular is continually adjusted to requirements. A result of this strategy is that we have reduced our shareholding in Allianz and sold our stake in Hypo Real Estate, thereby further mitigating the concentration risks.
kabisch: For an asset manager, sustainability means ensuring a level of constant positive growth rather than following too risky growth paths. Sustainability also focuses on the ability to initiate change, the will to structure our future and to bear responsibility toward our stakeholders. It is really a major challenge to all of us to integrate sustainability criteria into our daily work.
kabisch: In my opinion social responsibility is a by-product of financial success. A prosperous company has more capacity to protect its reputation, to be responsive to stakeholders and to invest in environmental protection. Sustainability reduces legal risks and litigation costs. These are the reasons why we believe in an outperformance if we consider sustainability aspects in our investment decisions.
kabisch: We do not invest in tobacco, alcohol, gambling, armaments and firearms. By the way, we also consider sustainability when investing our Group’s assets: about 80% of the equity and corporate bond holdings are represented in one of the leading sustainability indices. We are pretty far advanced in the field of sustainability. Our shares are included in the two main sustainability indices: the Dow Jones Sustainability World Index and ftse4good Index.
oppenheimer: One important thing which has to be addressed when making investment decisions is that sustainability is a long-term concept. This must be balanced with the short-term expectations from the capital markets. A longer-than-usual time horizon needs to be addressed when investing in sustainable companies. In this respect, do you consider smaller companies with long-term growth perspectives which are not yet in the benchmark?
oppenheimer: Yes, I would. I think it is pretty similar now, because companies that dominate the main indexes are actually global by definition. One thing that may vary is the pressure that comes from investors. For example, in the US there is a measurable drive from pension funds. They have strengthened their ethical criteria. It is beginning to become quite important in the UK as well.
kabisch: Do you think that quality and sustainability aspects belong together?
Organisational Design and Development 05 Stefan Heyd * 1945, lawyer, with Munich Re since 1975
Information Technology 07 Christian Kluge * 1941, chartered marine insurer, with Munich Re since 1964
Corporate Communications 08 John P. Phelan * 1947, underwriter, with Munich Re since 1973
Internal Auditing 10 Dr. phil. Detlef Schneidawind * 1944, lawyer, graduate in business management, with Munich Re since 1973
Human Resources 11 Dr. jur. Jörg Schneider * 1958, business graduate, lawyer, with Munich Re since 1988
12 Karl Wittmann * 1945, chartered insurer, with Munich Re since 1961
Prof. Dr. rer. nat. Hubert Markl Former President of the Max Planck Society
The Munich Re Group is one of the leading risk carriers and financial services providers. Over 40,000 staff in 60 countries vouch for the outstanding quality of its service. Its business extends across the whole value-added chain in insurance and reinsurance. It also operates in the field of asset management.
The reinsurance market is, by nature, internationally oriented, since many large and catastrophe risks can only be borne in economic terms if they are spread globally. For perils such as windstorm or earthquake, reinsurers can only achieve the required balance of risks if their portfolios are global in composition.
Among other things, we reinsure the risks of oil rigs, satellites and natural catastrophes, and those arising from the use of genetic engineering and information technology or from corporate management.
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 each client account lies in one pair of hands. The operative divisions are also responsible for our business locations abroad and for our subsidiaries doing business there.
The division Life and Health underwrites our life and health reinsurance business worldwide. It reflects the structure of many of our clients, which conduct these two classes of business separately from property-casualty insurance, often through independent companies.
Beijing, Hong Kong, Kuala Lumpur, Mumbai, Shanghai, Seoul, Singapore, Taipei, Tokyo
SUBSIDIARIES/BRANCHES Munich Reinsurance Company of Australasia Ltd. Munich Reinsurance Company of Africa Ltd. Munich Reinsurance Company China Munich Reinsurance Company Singapore Branch Munich Reinsurance Company Hong Kong Branch Munich Reinsurance Company Malaysia Branch Munich Reinsurance Company Korea Branch
SUBSIDIARIES/BRANCHESS Munich Reinsurance Company of Canada American Re-Insurance Company Temple Insurance Company
SUBSIDIARIES/BRANCHES New Reinsurance Company Great Lakes Reinsurance (UK) plc Munich American Capital Markets Munich-American RiskPartners Nova Group
The division Corporate Underwriting/Global Clients handles our accounts with major international insurance groups (hence “Global Clients”) and writes business worldwide in selected special classes such as agriculture and workers’ compensation insurance. Its most important markets are the UK, Germany and the USA. In addition to this, it performs the important function of corporate underwriting for the reinsurance group in non-life business: its staff clarify fundamental, cross-divisional issues of underwriting policy and quality assurance, integrate actuarial methods in our business processes and set standards for claims management and reserving.
Special and Financial Risks (sfr) is responsible for the special classes of credit, aviation and space, entrepreneurial and special risks, and for Munich-American RiskPartners (marp). In addition, it coordinates overarching innovation projects in the non-life divisions, such as the establishment of new distribution channels. sfr develops and implements such projects for specific divisional topics as well, and functions as an interface between the capital market and the insurance market. sfr is also responsible for the purchase of Group reinsurance (retrocession).
d.a.s. subsidiaries and branches in Austria, Belgium, Czech Republic, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Poland, Slovakia, Spain, Switzerland, and the UK
Subsidiaries in Czech Republic, Denmark, France, Italy, Poland, Sweden, Spain and the UK, and participating interests in Austria, Hungary and Slovakia
Primary insurance: We offer security for private clients and for small and medium-sized businesses
* Only ergo companies with a premium volume of more than €50m are listed by name.
ergo’s marketing is built on the interplay of different distribution channels: apart from its own strong sales organisations, its exclusive Germany-wide partnership with the hvb Group plays an important part. ergo also has a joint venture with KarstadtQuelle ag for the sale of insurance products.
With numerous subsidiaries and affiliated companies in 11 countries, as well as a network of strategic cooperation agreements, Europäische Reiseversicherung represents an effective international alliance that takes account of the further internationalisation of the travel industry. Its most important product is travel cancellation insurance.
meag and hvb Wealth Management Holding each hold 50% of the shares in the joint venture fsb FondsServiceBank GmbH, which manages investment accounts and provides a wide range of services to partners, intermediaries and institutional investors.
Asset management: We are partners for investment meag munich ergo AssetManagement GmbH is the investment management centre of the Munich Re Group. At the end of 2003, it had around €135bn of assets under management, making it one of the major asset managers in the European financial sector.
“I do not regard the fight for fiscal promotion of life insurance as lost yet.”
gebhardt: Dr. Schareck, has the life insurance industry solved the problems connected with the capital market? What are the consequences for your industry of the German government’s plans to tax life insurance payments at the benefit stage?
schareck: First of all, it’s true that the life insurance industry has gone through a difficult time – but not a crisis. Insurance clients have not lost a single euro as a result of the stock market slump. Our industry is working hard on topics like the taxation of life insurance. Things are looking up again, and I do not regard the fight for fiscal promotion of life insurance as lost yet. The government has an obligation to create and maintain tax incentives for making private provision. Anything else would be short-sighted.
gebhardt: Stock market slump, economic slowdown and the government’s taxation plans have certainly had an impact on the insurance industry. But the fundamental problem in our view is one of asset-liability management: the balance between the assets and the liabilities sides of the balance sheet.
“Is the life insurance industry undergoing a crisis?” – This question and the main factors of influence such as taxation, cost structure and transparency were discussed by Dr. Bernhard Schareck, President of the German Insurance Association and Henning Gebhardt, Senior Fund Manager Equities at dws Germany, in Karlsruhe.
schareck: Asset-liability management can be improved. But you shouldn’t forget one thing in your criticism: generally, such models have horizons of 18 or 24 months. Insurers, on the other hand, offer contracts and guarantees for periods of 60 years or more.
schareck:You’re right. This may be down to a problem of communication in our industry. We have to make it much clearer to our clients that life insurers are also dependent on the current capital market situation for the returns they earn. The fact is that capital market slumps mean a reduction in policyholders’ bonuses in life and annuity insurance.
schareck: One trend is for clients and rating institutions to base comparisons solely on interest rates and returns. In so doing, they ignore an important aspect – that we also cover biometric risks. This fundamental benefit of our products first has to be paid for. We should emphasise this more strongly in future and be even more responsive to clients’ needs and the capital market situation.
gebhardt:The basic problem that we analysts see, of course, is that in some cases insurers’ profitability is rather weak because the returns they earn from their products have declined. We would like cost structures to be changed.
gebhardt: Many clients are clearly not aware of what they can expect from their life insurance company – which payments are guaranteed and which are merely prospective. Have companies neglected their duty to inform clients properly?
schareck:Transparency must be improved. Take marketing, for example. From 2005 at the latest, clear rules will apply here: anyone selling insurance policies must write a report containing details of the information given to the buyer, including the promised return. In the event of a dispute, these notes can then be referred to. And on the investment side, new rules will improve safety standards in the field of risk analysis and risk prevention.
The high standards we apply to everything we do are one of Munich Re’s distinguishing features: whether it be our business performance, our financial strength, our relations with partners, our competence and our opinion leadership on current issues, our capacity for innovation or our breadth of vision.
Good service is a Munich Re hallmark. It includes answering questions like: “What would happen if Alzheimer’s were curable?” or “How do you manage natural hazards?”
Service in reinsurance – what this frequently means is acquiring, using and passing on knowledge: in seminars, through publications and via discussions with clients in the market. Service and knowledge are embodied by our centres of competences like Geo Risks Research, which studies the global distribution of loss potentials from natural hazards, especially the marked trend towards more catastrophe losses. Our staff analyse the causes, such as concentration of values, vulnerability and climate change, and evaluate the results. Clients often avail themselves of the wide spectrum of resultant services: through expert reports, statistics, accumulation studies, publications and presentations.
Another example is our Centre of Competence for Biosciences, where our scientists and insurance experts work hand in hand to provide clients with the latest findings and information on genetic engineering. They address questions like: What happens if genetically modified organisms are involuntarily released? What would it mean for health insurance if Alzheimer’s were curable? What would be the consequences for life insurance if people lived to an average age of 90? Staff from this centre of competence initiate discussion rounds and take part as speakers in courses, workshops and seminars for our clients.
The first seminar event documented in our company’s chronicles took place in 1953. Back then, we laid the foundations for what has become a wide-ranging programme of ongoing dialogue and partnership – both important Munich Re constants. We were therefore proud to celebrate a 50th anniversary in 2003 under the motto “50 years of knowledge dialogue”. Munich Re seminars are a central component of our client service. Over 40 seminars and similar events, with well over 1,000 participants from 71 nations, took place at Munich Re in 2003. Seminar topics ranged from “Basics of reinsurance” and “Management of natural hazards” to “Loss prevention in burglary insurance” and “Claims handling in disability insurance”. In response to client requests and changes in market situations, we devise new seminars and revise or update existing ones. This was the case, for example, with one of our two scholarship programmes, the Alois Alzheimer Scholarship. Like the Dr. Horst K. Jannott Scholarship, this is geared to up-and-coming managers from the international insurance industry. With its varied programme, it covers all the main topic areas from insurance and reinsurance. Besides helping to foster the development of our international clients’ future managers, we attach importance to inviting experts and cedants to our traditional client and market events, such as the International Liability Forum or the primary insurers’ annual Reinsurance Managers Meeting. Our main aim here is to offer a platform for information and dialogue.
We provide our clients with service in electronic form as well – with mira, Munich Re Internet Risk Assessor, in life and health business, for example. mira is an internet platform for underwriters. On over 10,000 webpages, it offers up-to-date information on risk assessment for areas such as medicine, occupations, financial situation, foreign countries and travel. This supplies our clients with an improved basis for their decision-taking prior to issuing policies.
We have listed all our publications in a 175page catalogue (see page 223 for the ordering address).
The Chinese and Indian economies are growing rapidly. They need more insurance and reinsurance capacity every year to cover their risks. Munich Re began its involvement with the national markets at an early stage, thus securing a promising competitive position.
In 2002, Munich Re became the first foreign reinsurer worldwide to obtain a licence from the China Insurance Regulatory Commission to open a branch in the People’s Republic. In October 2003, we opened our Beijing Branch. The licence gives us access to the whole composite insurance market. We can thus operate as a reinsurer without restrictions – including transacting business in the domestic currency – and this at a time when the Chinese insurance market is recording double-digit growth rates, reflecting the dynamic development of the economy as a whole. The demand for the widest possible range of products is high, from all forms of risk management and risk cover to asset-liability management.
The Indian insurance market is also growing in importance. For foreign companies, however, it still offers a rather restrictive environment. We intend to strengthen our involvement in India, especially by reinforcing our representative offices, which have been in operation since 1997. In addition, we are preparing to set up a service company that will further expand and intensify the services we offer. It will initially focus on life reinsurance.
In spring 2003, a new disease triggered fear and panic around the world: sars – Severe Acute Respiratory Syndrome. The symptoms were high fever, a sore throat, severe coughing and shortness of breath. sars is an example of an infectious epidemic: a sudden, unexpected large-scale manifestation of an initially locally contained, infectious disease which spreads rapidly and with great virulence.
The sars virus was probably brought to Hong Kong by an infected doctor from the southern Chinese province of Guangdong. From Hong Kong it then spread virtually all over the world. The epidemic broke out back in November 2002 and its first wave ended around mid-June 2003. According to statistics of the World Health Organization (who), around 8,445 people contracted sars worldwide, 812 of whom died. Worst hit was the People’s Republic of China, with 5,327 cases and 348 deaths, and Hong Kong (1,755 and 298 respectively). Apart from the threat to health, sars had a huge impact on the economy. Tourism practically collapsed, economic activity flagged and stock prices in Asia fell. The Asian Development Bank estimated that the consequences for the gdp of the economies in East and Southeastern Asia alone totalled us$ 18bn, representing a good us$ 2m per sars patient.
Europäische Reiseversicherung’s new product Corporate Travel Insurance offers business travellers a combination of insurance, service and assistance. A 24-hour emergency team is available to provide help in any situation, even with unusual measures: when sars was spreading through China, beds were provisionally reserved in specialist clinics.
Serious as sars was, the media dramatised its effects and fuelled fears of a global epidemic. Yet even though the danger from sars was ultimately overrated, the significance of infectious diseases as a whole generally tends to be underestimated. In the last 30 years, scientists have discovered 20 new infectious diseases, including the cattle epidemic bse. On top of this, already known viruses, which were thought to have been contained, have begun to spread again, e.g. cholera from southern India to China. In countries like Brazil, Zaire and Vietnam, the plague has re-emerged.
Infectious diseases on the advance 17 million people die from infectious diseases each year. The viruses that cause them are transmitted in very different ways. Particularly dangerous are those which cross species barriers. The human immune system is not equipped to fight off viruses from, say, cats.
who prognoses warn of an increase in infectious diseases in the next few years. They could spread quickly, given that both the world’s population and the number of travellers are growing. Environmental pollution and climate change are likely to considerably exacerbate the problem. This gives rise to new questions and problems for insurance companies. They have to take into account that vaccinations and hygiene measures against infectious diseases offer less protection than experts had assumed for many years. It is also difficult to estimate the risks of epidemics, since the speed and methods of transmission differ from virus to virus. Other aspects to be considered are that the people who contract a disease react differently and that methods of treatment vary.
Epidemics can result in losses affecting various classes of insurance: from cancellation of events, business interruption and third-party liability to increased sickness and mortality involving medical personnel, especially in health, life and workers’ compensation insurance.
Our experts keep a close eye on potential risks and devise suitable measures to control and contain them. Epidemics like sars transcend borders, but the risks for the insurance industry depend very much on the local markets. Cover for business interruption, for instance, usually presupposes insured material damage. In some Anglo-Saxon insurance markets like the UK, the USA and Hong Kong, however, covers exist in which insurance protection is given without material damage, so sars may also be a risk in property insurance.
Too hot, too little rain: the extreme summer of 2003 gave rise to major crop losses for farmers in many regions of Europe, especially France. In Germany alone, the overall loss is estimated at more than €1bn. Since drought insurance is not available in Germany or most of the other EU states, the cost for the insurance industry was low. However, the drought of 2003 has fuelled debate throughout the EU on whether a state-backed multi-peril crop insurance should be introduced, based on the US model.
(at the ends of the bell curve); normal values occur frequently (in the middle of the curve).The example of summer temperatures in Central
Percentage decline in yield of various crops in 2003 compared to the five-year average
Counting only the main types of crop – wheat, barley, rye and maize – the loss to farmers in Germany adds up to around €700m, and in the EU to €3bn (see below). The most badly hit was France, where yields fell by around €1.3bn, especially due to the extreme losses in the main crops, wheat and maize.
In Germany and other EU states, insurers and reinsurers are working closely together with farmers and agricultural associations to devise a cover against crop losses due to natural hazards. Munich Re’s agricultural department is supporting this development work with its global experience of such systems, through technical contributions on expert committees, and in public relations activities.
For all those born before 2 January 1961, the law provides for protection of legitimate expectation, i.e. their cover for occupational disability remains intact. Nevertheless, the envisaged “pension for reduced earning capacity in the case of occupational disability” amounts to only half the full pension for reduced earning capacity. In other words, this group is also in a considerably worse position with regard to state disability pensions as a result of the pension reform.
Particularly exposed are people at the beginning of their working lives, since they can only claim benefits if they have paid compulsory contributions to state pension insurance for at least three years before any reduction in earning capacity. The self-employed and freelancers also have only small entitlements under state social security and are therefore more dependent on private provision.
Yet even those who receive a full pension for reduction in earning capacity face potential financial difficulties: the pension amounts to only a little more than a third of the recipient’s last gross earnings on average. As a rule, they will not be able to maintain their standard of living with this pension – unless they have savings to draw on or have made private provision. This is why the demand for disability insurance in Germany rose sharply after the last change in the law in 2001 and continues to be high. State benefits have also been cut in other European countries, resulting in a similar increase in the significance of private disability insurance. The primary insurers in the Munich Re Group offer products in this field to meet the need for coverage as social security is reformed. In Germany, they have a share of over 10% in this growth market.
Private disability insurance protects against a sudden drop the policyholder ’s standard of living. The primary insurers in the Munich Re Group offer extensive consultancy and individually tailored products.
In 2003, the Munich Re Group received a number of awards. We are delighted about such recognition, and thank all of our staff who contributed to this success.
– Best Bond Group Germany (Lipper Fund Awards 2003) – First place for meag EuroRent in the five-year performance class
(Standard & Poor’s Fund Awards 2003 in the European bonds category) – Around 70% of the retail funds were given four or five stars
stebut:You’re saying that men can learn from us? The important point for me is that women today are often just as well-qualified as men, sometimes even better. Despite this, we find time and time again that women with the same qualifications as men earn less for doing the same jobs.
schmidt: I was a data processor back in the sixties and seventies, an absolute novelty for a woman. I was proud of what I earned, considerably more than all my female friends, but it was still much less than my male colleagues. Women are often too modest; a man fights for his salary, a woman is often embarrassed about it. We have to overcome this.
“There is a need for some rethinking in companies. Women should not be regarded from the beginning just as potential mothers.” renate schmidt
The study shows that women in such positions are very highly rated by their staff, both male and female, especially in those areas which are not considered “classically female”, such as strategic orientation. Getting women into management positions is therefore of economic benefit for a company and, in the long term, certainly for society as well. We know the demographic trends and we know that in future we will need many more qualified staff. That means we have to integrate more women.
schmidt: ... despite the danger of losing them. It’s good if they can remain integrated during a family phase – I mean, if the periods of parental leave are not too long, if working times can be offered that are family-friendly and above all involve the men, too. Munich Re should encourage its male management staff to take parental leave and work part time as well. That would set an example and bring the careers of men and women closer together. Naturally, there is also the fear among men that women will disrupt their networks which have functioned so well. We women have so far made much too little use of such networks.
stebut:That brings us to a structural question – as long as women remain the exception in management positions, there is little chance of these things happening. We need role models so that women can also build up networks throughout companies. To achieve this, a deliberate effort must be made to increase the proportion of women in management positions. We need concrete measures, and also a certain amount of pressure from the highest company level.
Corporate responsibility We see corporate governance as an ongoing process and have taken further steps to enhance our responsible company management and control. __ >> page 68 The rating agencies continue to attest to Munich Re’s high degree of financial flexibility and welcome our long-term strategy. __ >> page 70 The skills, creativity and dedication our staff are the foundation for our Group’s success. __ >> page 72 Social commitment is an inseparable part of our corporate culture. That is why we give our support to social, medical and cultural projects. __>> page 76 Environment and climate protection are among our core competencies, concerned with addressing the development of significant risks. That is why we seek dialogue on these topics and pass on our know-how. __ >> page 79
The Supervisory Board concerned itself intensively with the Company’s situation in the past year. We performed the duties incumbent on us by law and under the Articles of Association and monitored the Board of Management in its running of the Company. The Board of Management informed us promptly, extensively and regularly about all important business transactions. We were involved in all decisions of fundamental significance and held two extraordinary meetings for important measures to be taken. As Chairman of the Supervisory Board, I kept in close contact with the Chairman of the Board of Management between the official meetings and obtained ongoing information about the Company’s position.
In the business year 2003, six meetings of the Supervisory Board took place, attended by all the members in virtually every case.
On 28 April 2003, at its balance sheet meeting, the Supervisory Board approved the company financial statements and consolidated financial statements for 2002. Also at this meeting, a decision was taken on the successor to the Chairman of the Board of Management, who was retiring on 31 December 2003.
At our last meeting of the year, on 5 December, the Board of Management briefed us in detail about the result of the first three quarters of 2003, the outlook for the 2003 annual financial statements, and the updated planning for 2004. We additionally discussed the efficiency of the Supervisory Board’s work and the wording of the declaration of compliance by the Board of Management and Supervisory Board.
The Standing Committee, which met six times, considered in particular the Company’s capital measures – the issue of the two hybrid bonds and the capital increase. It also discussed the further implementation of the German Code of Corporate Governance. In this connection it prepared proposals to improve the efficiency of the Supervisory Board’s work and submitted these to the full Supervisory Board.
The Audit Committee met for the first time on 27 April 2003, and subsequently a further three times. Its first meeting dealt mainly with the company financial statements and the consolidated financial statements. In accordance with the newly organised responsibilities, it made preparations for the appointment of the external auditor, which has to be decided on by the Supervisory Board as a whole, and obtained the auditor’s declaration of independence. Further main points of emphasis were the quarterly financial statements and risk management, which included taking a close look at the most important commercial and financial risks that exist for our group of companies. At three of the meetings, the auditors were present for part of the time and reported in detail on their audit work.
The Supervisory Board closely considered the company financial statements, the consolidated financial statements, the management reports and the proposal of the Board of Management for the appropriation of the balance sheet profit. On the basis of the Audit Committee’s prior examination and our own examination, we approved the company and consolidated financial statements. At our balance sheet meeting on 14 April 2004, we adopted the annual financial statements drawn up by the Board of Management. We agree to the Board of Management’s proposal for the appropriation of the balance sheet profit, which provides for a dividend of €1.25 per share.
The Supervisory Board also devoted substantial attention to corporate governance requirements. In this context we examined the efficiency of the Supervisory Board’s work, as envisaged in the German Code of Corporate Governance. Factors addressed included the information that the Supervisory Board receives from the Board of Management to prepare its meetings, and the flow of information between the committees and the full Supervisory Board.
On 5 December 2003, the Board of Management and the Supervisory Board published an updated 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 and other information on corporate governance is printed on page 68 of this annual report.
Also with effect from 1 October 2003, Georg Daschner was appointed to the Board of Management. He has been with Munich Re since 1965, latterly as the head of Munich Re’s branch in Spain. Mr. Daschner succeeds Dr. von Bomhard as the head of Europe 2/Latin America, being jointly responsible for that division with Dr. von Bomhard until the end of the year.
The Supervisory Board wishes to thank the Board of Management and all the staff for their hard work and commitment in the year under review.
With its global operations, the Munich Re Group has to consider corporate governance rules in different national legal systems. It goes without saying that we observe both the respective national standards and internationally recognised best practices. In Germany, corporate governance rules are to be found in statutory provisions and also in the German Code of Corporate Governance, which came into force in 2002. The Code contains the main legal rules that must be observed by listed German companies; in addition it includes – in the form of recommendations and proposals – nationally and international recognised standards of good and responsible management.
In July 2003, the new version of the German Code of Corporate Governance of 21 May came into force. Additions mainly concerned some rules of detail relating to variable compensation components of the Board of Management, the presentation of the compensation system on companies’ websites, and an individualised breakdown of compensation in the annual report. Munich Re’s Board of Management and Supervisory Board have resolved to follow the Code’s new recommendations with only one exception. The Company will not be providing an individualised breakdown of the Board of Management’s compensation in the annual report. Fixed remuneration, performance-related components and components with a long-term incentive function are, however, published for the whole Board.
On 5 December 2003, the Board of Management and the Supervisory Board published the following declaration of compliance, in accordance with Section 161 of the German Stock Companies Act: “On 6 December 2002, the Board of Management and Supervisory Board of Munich Re published their first declaration of compliance as per Section 161 of the German Stock Companies Act. Since making this declaration, Munich Re has fulfilled the recommendations of the German Code of Corporate Governance (the Code) in the version of 7 November 2002, or will fulfil the recommendations of the Code in the version of 21 May 2003, with the following exceptions: Item 5.4.5 para. 1 sentence 3 of the Code recommends that separate remuneration be paid for the chairmanship and membership of Supervisory Board committees. At Munich Re’s Annual General Meeting on 11 June 2003, Article 15 of the Articles of Association was amended in this respect with effect from the business year 2003. The amendment to the Articles of Association was entered in the Commercial Register on 22 July 2003. Thus, since then, Munich Re has complied with the recommendation in item 5.4.5 para. 1 sentence 3 of the Code.
We see the capital measures we have taken, in conjunction with the enhanced profitability of our Group, as providing a good basis for an increase in our rating again.
The ratings for our subsidiaries on 26 March 2004 at a glance: Primary insurance group
The notes and debentures issued by our Group are rated as follows: Notes and debentures
ergo International AG, 0.75%, €345m, Exchangeable Bonds 2001/2006 (Aventis) AA– A–
Be it performance-related compensation or family-oriented personnel policy: we invest in our staff and thus in the future of our Group.
Number of staff in the Munich Re Group constant overall 41,431 staff were employed with the Munich Re Group on 31 December 2003, 6,445 of these in reinsurance, 34,360 in primary insurance and 626 in asset management.
The almost unchanged total number of staff compared with the previous year conceals a few shifts within the Munich Re Group. The growth of 10.4% in reinsurance staff is primarily due to the consolidation of our subsidiary MedNet. In primary insurance and asset management, on the other hand, there was a slight decrease at nearly all the companies, an exception being a marked increase at ergo International. The ergo companies launched a programme for increasing efficiency in 2003, a major part of which involves reducing personnel expenses. ergo plans to cut back personnel capacity among its German desk staff by a good 4% in 2004. It is giving priority to achieving this in a socially acceptable way through semi-retirement contracts, for example, and natural fluctuation. There are also various offers designed to encourage staff to reduce their working time, including trial part-time work, sabbaticals and the conversion of bonuses into free time.
A fundamental conviction of our human resources policy is that good performance should be rewarded. Performance-related salary components are important elements of a coherent compensation system. The Munich Re Group has meanwhile introduced such components for all senior executive staff.
Training is important to us because – it means that qualified staff can be drawn from our own ranks; – it provides us with staff who have learned insurance business from the ground up and are also familiar with the corporate culture and corporate objectives of our Group companies; – we thus fulfil our responsibility towards the economy and society as a whole.
Cooperation across national and cultural boundaries has always been one of the hallmarks of our Group. The Munich Re Group’s personnel policy supports this process by making systematic use of international human resources. Besides concrete offers to employ staff globally where they can best use and develop their qualifications, this requires close collaboration between the units responsible for human resources. Within the reinsurance group, we have therefore formed a worldwide network of human resources specialists that provides a healthy balance between international consistency and special regional features in our personnel policy. Thanks to these principles, we should be even more successful in future in utilising the human resources potential of our Group and offering our staff interesting perspectives.
Every year Munich Re is one of the top addresses for applications from highly qualified experts. Interesting vacancies recurrently arise for specialists from a wide range of fields. We also offer well-qualified young people of various disciplines places on our graduatetrainee programme. Job openings are published on our human resources pages on the internet.
ergo’s common job database www.ergo.de/karriere gives users access to advertised job openings from all the career pages of the ergo companies’ websites. This keeps staff informed of career opportunities and promotes staff exchanges between the ergo companies.
At this point we would like to cordially thank all the staff of the Munich Re Group for their commitment and loyalty in 2003. It is their hard work, skill and dedication that ensure the quality of our service and our further progress.
“Victorianer helfen” (Victorians help) is the name of a charity that the staff of victoria set up in 1990. Thousands of them donate a few cents from their salary and commission each month. The company then adds half as much again to the employees’ donations. As victoria staff run the projects on a voluntary basis, all proceeds can be passed on in full to those in need. Besides supporting many individual measures, such as children’s hospices and kindergartens, the money also helps finance larger projects like the “Friedensdorf International” in Oberhausen, which looks after war victims from various nations and provides them with medical care.
Promoting health dkv is especially involved in the area of healthcare. It supported the touring exhibition “bodytravel. Reise in den Körper”, which opened in 2002 and ended in Munich in spring 2003. The exhibition was a highpoint of the partnership between ergo subsidiary dkv and the German Hygiene Museum in Dresden. dkv is the museum’s main sponsor, with around half a million euros per year, and also supports it with funds for advertising and special campaigns.
In addition, together with the German Hygiene Museum, it awards the annual media prize “Im Zentrum der Mensch” (People in the centre), which it did for the fifth time in 2003. The prize is worth €12,000, making it one of the major awards for science journalists. It recognises outstanding German-language journalism that succeeds in making expert knowledge understandable for normal readers and thereby promotes awareness of healthy living.
Munich Reinsurance Company of Africa is dedicated to helping its local communities in a “Corporate Social Involvement Programme”. Within this programme, for instance, it supports the Montessori pre-school Henley on Klip, which gives children with problematic social backgrounds a basis for educational development so that they can go on to attend normal schools. Munich Reinsurance Company of Africa is the main sponsor of this nursery school. It supports the school not only financially but also in an advisory capacity and through participation in school bodies. Thanks to its help, it proved possible to open a new branch of the school in 2003.
Munich Re again sponsored talented young people in 2003 through its financial support for the Gustav Mahler Jugendorchester, helping the best young musicians in Europe on their way to becoming world-class artists. In 2003, Munich Re was the main sponsor of the Easter tour, which took the youth orchestra to Japan for the first time: conducted by Pierre Boulez, it gave four concerts, in Tokyo, Nagoya and Osaka. The Japanese emperor and his wife even came to hear the orchestra in Tokyo.
The orchestra, founded in 1986, fosters the development of highly talented young musicians from all over Europe, giving them the chance to play together and gain valuable experience with great conductors.
As a service provider, Munich Re itself puts relatively little strain on the environment. This means that the issue of sustainable development presents quite different challenges for us than it does for an industrial firm. We see it as one of our main tasks to actively pass on our know-how and to seek and cultivate dialogue with our clients, the public and politicians, our aim being to help positively influence risk behaviour. On the capital market, the transparent presentation of our operations has resulted in our shares being included since 2001 in the best-known sustainability share indices, the Dow Jones Sustainability World and the ftse4good.
We are integrating aspects of sustainable development successively and on a broad scale into our business operations. This applies both to ecology in our internal operations and to classes of our reinsurance business and our capital allocation. We are using the tools of our environmental management system based on emas (European Eco-Management and Audit Scheme) to constantly improve in all segments. Particular focal points of our environmental commitment are sensitising our staff to the relevant issues, determining the compatibility of our environmental objectives with other corporate objectives, and exerting a positive influence. The concepts we arrive at are being implemented step by step in our everyday operations. The underlying principle is: “As little regulation as necessary, as much individual responsibility as possible.” In December 2003 we submitted ourselves for the second time at our headquarters in Munich to an audit by an independent accredited environmental verifier and had Munich Re certified for the first time in accordance with the international standard for environmental management systems iso 14.001. As a result, we have simultaneously created the basis for introducing our environmental management system at our business units in other countries, including those outside Europe.
01__Munich Re shares 02__Strategy 03__Group profile Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
Our environmental magazine “Perspectives” provides more detailed information on Munich Re’s environmental management system and our concrete activities in the area of environmental protection and sustainable development (see page 223 for the ordering address).
We see it as our duty, as a professional risk partner, to support these technological developments and to actively shape solutions for the insurance industry. By so doing, we want to play a part in facilitating the development of future markets for renewable energy. Important for such progress, in our view, is constructive dialogue with our partners. In May 2003, we therefore invited our clients in the German market to attend a conference with leading experts from the fields of technology and insurance. These experts discussed with those present – around 50 representatives from primary insurance companies – innovative projects, current technical developments and practical experience with operation and losses.
Besides this, Munich Re has made its specialist knowledge available to the Renewable Energy Project Group of engineering insurers at the German Insurance Association. This group published its concluding report in March 2003, providing a comprehensive overview of the state of the art and technical hazard potential of alternative energy plants.
“Prevention is better than cure” is the guiding principle of the ergo Group when its comes to environmental protection. victoria is therefore systematically expanding its involvement, according to plan. In 1998 it became the first insurance company in Europe to be audited in line with the strict requirements of the emas regulation and to be awarded the EU seal of quality for operational environmental management. victoria Lebensversicherung ag was also awarded the emas certificate in 2002, followed by victoria Krankenversicherung ag in 2003.
Last year, victoria completed the conversion of its head offices in Düsseldorf. Upgrading to the very latest process control system and extensive energy management has substantially reduced heating energy requirements. Ecological concerns were consistently taken into account in modernising the existing buildings.
“Munich Re has publicly advocated the suitability of frameworks that go to the heart of an insurer’s underlying risks.”
shamieh: Munich Re has publicly advocated the suitability of frameworks that go to the heart of an insurer’s and reinsurer’s underlying risks in preference to generic, factor-based approaches to risk and solvency regulation. Does the iais also embrace a more targeted, proactive and risk-based approach?
dullemond: The iais is fully aware of this issue – we are in a process of trying to define a common understanding of what is capital and how we should measure capital according to risk. And of course, you can’t ignore the diversification effect in that process. However, the precise way in which we do this is still under discussion. We have to be careful to ensure that smaller insurers and reinsurers do not see this as creating a non-level playing field.
charlie shamieh dullemond: There are some regulators who are hesitant about internal models and to convince them of their appropriateness, one really needs to couple their use with a set of principles that should be fulfilled before their results can be admitted. For example, we would need to be convinced that the model is being run from an independent risk management unit that has no business interests. One can also imagine a regulatory framework that admits the results of these internal models in a “going concern” situation coupled with a more factor-based (safety-net) approach for determining minimum solvency requirements in a “run-off” situation.
shamieh: The differences between local accounting standards in the insurance sector makes comparability of solvency levels across jurisdictions perhaps a more challenging task than in any other sector. Realistically speaking, how long do you think it will be before these issues can be satisfactorily resolved to aid the iais in its mandate to set international standards?
dullemond: The answer to this question should be seen in the context that the iais is still a young organisation and the idea of developing a common view on accounting principles in insurance for supervisory purposes was not an issue we have tackled directly up until now. We would certainly like to see the work of the iasb develop in a way that aids comparability between jurisdictions for both general purpose and supervisory accounting requirements. In the meantime we think we can still make some good progress on the principles for setting capital requirements with the possibility in the future of a global standard for capital requirements.
Consolidated balance sheet 144 Consolidated income statement 146 Consolidated cash flow statement 147 Segment reporting 148 >> Assets 148 >> Equity and liabilities 150 >> Income statement 152 >> Investments 154 >> Gross premiums written 155
Application of International Accounting Standards (ias) and International Financial Reporting Standards (ifrs) 156
Declaration of compliance with the German Code of Corporate Governance as per Section 161 of the German Stock Companies Act 158
(A) Intangible assets 163 (B) Investments 163 (C) Investments for the benefit of life insurance policyholders who bear the investment risk 164 (D) Ceded share of underwriting provisions 165 (E) Receivables 165 (F) Cash with banks, cheques and cash in hand 165 (G) Deferred acquisition costs 165 (H) Deferred tax assets 165 (I) Other assets 165
(A) Shareholders’ equity 166 (B) Minority interests 166 (C) Subordinated liabilities 166 (D) Gross underwriting provisions 166 (E) Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders 168 (F) Other accrued liabilities 168 (G) Liabilities 169 (H) Deferred tax liabilities 169
(6) Other securities, held to maturity 173 (7) Other securities, available for sale 174 (8) Other securities, held for trading 176 (9) Miscellaneous other investments 179
(11) Receivables and liabilities in respect of affiliated enterprises and participating interests 179 (12) Deferred acquisition costs 179 (13) Deferred tax 180 (14) Other assets 180
Macroeconomic parameters continued to be not very favourable for the insurance industry in 2003. To begin with, in the period prior to the war in Iraq, the global economic environment was characterised again by weak growth. Only from the second quarter onwards did the economy as a whole start to pick up again. On the capital markets, important European share price indices fell in the spring to recent-year lows.
In the USA, economic growth was adversely affected initially by rising energy prices, as well as by investor and consumer reluctance. Driven by a strongly expansive monetary and fiscal policy, however, economic activity began to revive from spring onwards. In particular, private consumption rose strongly as a result of tax reduction programmes, and there was also high public spending on defence. Altogether, real growth in gdp for 2003 amounted to 3.1%, compared with 2.2% in 2002.
In Japan, rising exports and strong investment contributed to real gdp growth of around 2.7% in 2003. Nevertheless, the country still found itself in deflationary waters.
Prior to the war in Iraq, oil prices rose to us$ 37 per barrel. Over the course of the year, they fell again somewhat, but stayed at a high level. Not least for this reason, inflation rates in most industrial nations remained at virtually the same level as in the previous year, whilst core rates of inflation (excluding energy and food prices) fell further.
In view of the still weak economic data and continuing concerns about deflationary trends, the US Federal Reserve cut its discount rate by a further 25 basis points in June. The European Central Bank also lowered its key interest rates by 25 and 50 basis points in March and June respectively. After reducing its key interest rates in February and July, the Bank of England became the first major international central bank to raise them again – by 25 basis points in November 2003, followed by a further 25 basis points in February 2004.
Yields on ten-year US and German government bonds fell markedly in the first few months of the year owing to weak economic data and the debate concerning deflationary trends. In June, the yield on US government bonds sank as low as 3.1% and that on German government bonds to under 3.5%. But in the subsequent months, there was a significant trend reversal, with the yield on US and German government bonds rising to 4.3% by the end of the year. Nevertheless, the yields still remained well below the level of past decades. It is against this background that the further reduction in German life insurers’ policyholder bonuses for the year 2004 must be seen.
On the reinsurance markets, the trend towards risk-commensurate prices and conditions continued throughout 2003. The renewals at the beginning of the year, at 1 April and at 1 July were marked by further improvements in this respect. The upward trend in prices was especially pronounced in liability insurance. There were just a few lines of business where price reductions were observable. One of these was aviation insurance.
With only a few exceptions, traditional market players and also relatively young companies showed discipline in their underwriting. The lessons of exaggerated competition for market share at the expense of profitability have been learnt. A factor that encouraged the maintenance of market discipline was the strain put on individual companies’ capitalisation by the reserve strengthening that was necessary, especially for business written in the USA in the late nineties.
jan. febr. march apr. may june july aug. sept. oct. nov. dec.
Improved prices and conditions were also a feature of the European insurance and reinsurance markets. Against this background, some markets recorded premium growth in primary insurance far in excess of overall economic growth. In France, for example, provisional figures show that gross premium income increased by 7.5% in property-casualty insurance, 11% in health and personal accident insurance, and 9% in life insurance. Premium volume in Switzerland grew by around 5% in non-life business, whilst declining by 4% in life.
Despite the weak development of the economy as a whole, the German insurance industry achieved nominal growth of 3.9% in gross premiums in 2003. To begin with, life insurers in particular continued to suffer from the poorly performing capital markets. Gross premium income in life insurance rose somewhat less than in the previous year, at a rate of 3.5%. The sale of “Riester” pension products was again disappointing. In private health insurance, gross premiums showed nominal growth of 7%. Owing to the drastic increase in the earnings ceiling for compulsory public health insurance at the beginning of 2003, the number of new clients insuring themselves privately in the first half of the year was well below the previous year’s level. Gross premium income in property-casualty insurance was up by 2.8%. For the first time in five years, the combined ratio was well under 100%.
Insurers in Japan benefited from an improved capital market situation. Just as in Australia, the trend towards risk-adequate prices and conditions continued.
The year began well, with negotiations for the renewal of our reinsurance treaties at 1 January 2003 proving very successful. Nevertheless, the business year 2003 posed major challenges for the Munich Re Group. The after-effects of the negative performance of the major stock exchanges over several years directly impacted the results of the first three quarters with very high writedowns and losses on the disposal of equities when the financial instruments were valued on the basis of ias 39 (rev. 2000). These burdens have been reduced by the earlier retrospective first application of ias 39 (rev. 2003) adopted by the iasb on 17 December 2003. This contrasted, however, with a higher negative result from the valuation of our stake in HypoVereinsbank ag. With these losses, the effects of the weak stock markets up to the end of March 2003 have now been absorbed.
At €2,012m, the result of our underwriting business showed a substantial improvement compared with the previous year’s figure* of €11m. However, large writedowns on shares and goodwill, the losses on our investments in associated enterprises, and the high tax burdens resulted in a bottom-line loss of €434m.
The Group result for 2003 was heavily influenced by the following factors: – We made writedowns of €849m (5,901m) on our securities available for sale. – Losses on the disposal of securities amounted to €1,624m (2,703m); they mainly arose from the sale of shares.
* In the following reporting, all previous year’s figures have been adjusted owing to the first-time application of ias 39 (rev. 2003).
– The sale of our stake in Hypo Real Estate Holding, following its spin-off from HypoVereinsbank, gave rise to a loss that burdened our result for the fourth quarter with €258m. At the same time, however, this transaction reduced the hidden negative valuation differences on our remaining interest in Bayerische Hypo- und Vereinsbank ag (hvb) and our exposure in the German banking sector. The hvb Group made good progress in its 2003 Programme for the Future. Nevertheless, owing to extensive writedowns, it posted a loss of €2.6bn for the year. Our participation in the HypoVereinsbank Group had an impact of €763m on our result.
Unrecognised valuation reserves 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
In 2003, we wrote gross premiums of €40.4bn (40.0bn), or 1.0 (10.8%) more than in 2002. The fact that this growth was relatively modest compared with the previous year is mainly due to the significant rise in value of the euro against the US dollar and other currencies, such as the British pound and Asian currencies, as well as to our selective underwriting policy. Adjusted to eliminate the effect of changes in exchange rates, premium income increased by 7.6% in 2003. This growth was almost exclusively organic.
Valuation reserves not recognised in balance sheet, including those apportionable to minority interests
– The shareholders’ equity of our subsidiaries from other currency regions was translated into euros at lower exchange rates, which had a curbing effect on our Group shareholders ’ equity.
The issue of two subordinated bonds in mid-April 2003, with a total volume of €3.4bn, also significantly strengthened our capital base. The placements were very successful: greatly oversubscribed, the bonds were issued each with the interest rates at the lower end of the initial spreads indicated.
In the year under review, the liquidity of Munich Re and its subsidiaries was always assured. Our cash flow from operating activities amounted to €1.8bn (3.3bn) in net terms. The settlement of World Trade Center claims by our clients is progressing more slowly than expected, which means our payments are not having to be made as early as planned.
The addresses of the most important business units can be found on page 223 of this report.
As reinsurers, we write our business predominantly in direct collaboration with the primary insurers. However, the proportion of business that comes to us via brokers is steadily increasing. This includes business offered to us by industrial clients through their captives or by risk retention groups (alternative market business), which we accept via MunichAmerican RiskPartners (marp).
On 31 December 2003, the reinsurance group had 6,445 (5,836) staff, 52.2% (49.7%) of whom were employed outside Germany (see page 72).
Group profit for the year 1,632 2,336 –52 1,321 1,093 * Adjusted owing to first-time application of ias 39 (rev. 2003).
When interpreting the combined ratio, the particular circumstances of a class of business, e.g. the composition of the actual portfolio, must be taken into account. The following factors (among others) are important: – The more the claims burden fluctuates over time, the greater the risk is and so the higher the rates needed to cover the risk must be. Greater fluctuations in the claims burden also require lower loss ratios in good years and lower average loss ratios, in order to guarantee the reinsurer a reasonable consideration 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.
Premium income rose by 3.5% compared with the previous year, reaching €5,461m. We were able to defend or even improve our top positions in the important markets of Germany, Canada, the UK and the USA. The growth was solely organic, with our units in the UK and North America in particular writing attractive new business. The result was affected by several one-off factors, but may be rated as still satisfactory overall.
We expect the reinsurance markets in Eastern Europe to continue developing positively. In 2003, we successfully pursued the expansion of our business in these markets as planned.
The global healthcare market – consisting of the segments “financial cover”, “services” and “benefits” – still promises significant growth in the next few years. Particularly the area of private financial cover for healthcare – our core field of business – is an attractive market. The USA accounts for the largest volume, whereas the biggest growth is expected in markets outside the USA and Europe. As a leading global provider with integrated reinsurance and service concepts, we are well prepared for this. We have optimised our organisational structure and for years have been consistently expanding our expertise.
New treaties in the UK and the USA with large premium volumes more than compensated for losses in premium due to our systematic withdrawal from unprofitable business. Our premium income rose substantially compared with the previous year, impressively continuing the past growth trend.
We were again able to improve the result compared with 2002. This is also reflected in the combined ratio of 97.8% (104.4%), the main reasons being the positive contributions of newly written business with large premium volumes and the good development of the business in force, especially as a consequence of successful remedial measures at American Re.
In the UK, we were able to develop client accounts with large premium volumes. From the portfolio in force, we expect a continuing positive contribution to results in the coming years.
We are also reckoning with substantial growth potential in India. However, the opening and liberalisation of this market is proceeding relatively slowly. Since most of the business opportunities there are not yet profitable, we are currently being very selective. In the coming years, we expected business prospects to improve. So as to be properly prepared for this trend, we have already set up a service company for the management of healthcare.
Premium income in our non-life reinsurance fell by €965m or 5.1% in 2003. Although we implemented price increases, acquired attractive new business and raised our shares in existing treaties, our selective underwriting policy and negative currency translation effects made themselves felt.
In industrial property insurance, competition became keener again towards the end of 2003 and put distinct pressure on prices and conditions in some instances. Despite this, we generally succeeded in keeping prices and conditions at an attractive level. The reason for competition becoming keener in industrial property insurance is the success of remedial measures that is becoming apparent. In addition, there were new reinsurers, especially companies domiciled in Bermuda. Altogether, this has only partially replenished the reinsurance capacity that shrank in the last three years. Some of the new market players have focused particularly on reinsurance against natural catastrophes. Still, nowhere has the influx of capacity had a serious effect on the high degree of underwriting discipline prevailing, which is essential in view of the greater risks.
In liability insurance we were able to keep prices and conditions at a level commensurate with our technical requirements. Only in industrial liability insurance, especially that for pharmaceutical risks, do we consider the rating level still to be inadequate. Interest in industrial property and liability insurance has visibly increased among various providers, including established companies domiciled in Bermuda. Nevertheless, despite isolated setbacks, we again managed to raise prices for this market segment as a whole in both insurance and reinsurance in 2003.
Price reductions, albeit for the most part still at a risk-commensurate level, took place in aviation insurance. Prices for the insurance of offshore risks fell towards the end of 2003 to a level we no longer regard as risk-adequate, so that we have already cut back our underwriting in this business segment. In marine and credit insurance, prices proved largely stable, although in marine they only just reached a sufficient level from our point of view.
Munich Re’s downgradings by various rating agencies last year did not result in any significant loss of business. We were able to maintain our market position.
Europe 1 2003 was a successful year for the division in all the markets and regions it services. Its combined ratio fell compared with 2002 by 21.2 percentage points to 96.5%.
The decrease in premium income is solely due to the loss of the business of Victoria Re, which in the previous year had been fully consolidated in the Europe 1 Division. After the termination of victoria Re’s operations, other divisions with the relevant regional responsibility now handle the business. We also terminated treaties for profitability reasons, but were able to more than make up for this lost premium by acquiring business from new clients.
Premium volume rose by 8.2% to €3.2bn (3.0bn). The division’s success is reflected in its combined ratio, which reached almost the same good level as in the previous year. Non-traditional reinsurance solutions are being marketed to an increasing extent in some sectors. For 2004, we expect the phase of risk-commensurate prices and conditions to continue.
In France, we increased our premium income by 45.9% to €188m and extended our position in the French market. We obtained the technically necessary prices in all sectors. The level of rates remained stable.
Reinsurance capacity in Italy has shrunk, partly owing to the withdrawal of competitors. The consolidation process in primary insurance has continued. Primary insurers are basing the selection of their reinsurers more and more on quality. Our subsidiary in Italy, Münchener Rück Italia (mri), benefited from this trend in the past business year and reaffirmed its leading market position through successful renewals with important clients. Including life and health reinsurance business, mri’s premium income grew by 3.5% to €648m. It was unable to repeat the very good result of the previous year, which had been favoured by one-off factors.
In the Netherlands, we were able to retain our leading market position despite the keener competition due to new reinsurers entering the market. Notwithstanding a very selective underwriting policy and lower demand for reinsurance from some large cedants, our premium income stayed at the previous year’s level. The result developed very satisfactorily.
We strengthened our position as the leading reinsurer in Spain. Greater demand, significant new business and higher shares in treaties with important clients boosted premium volume to €429m, a rise of 46.3% on the previous year. The risk-commensurate terms and conditions led to an appreciable improvement in the result.
In Portugal, we succeeded in adjusting the conditions for earthquake-exposed business to meet our requirements. Premium income grew by 22.9% to €49m. The result was significantly better than in the previous year.
Development in many countries of Latin America was affected by difficult economic and political conditions. Original rates in the insurance markets slid downwards in some markets. In our business, however, we were able to achieve prices commensurate with technical requirements. Owing to unfavourable currency influences, premium income decreased by 9.9% to €359m. Hurricane Fabian, which hit the Caribbean and Bermuda in September, gave rise to claims costs of €14m. The overall result still showed a marked improvement.
In contrast to business in other branches of the economy, such as tourism or civil aviation, the reinsurance written by our division for this region was scarcely affected by the consequences of the respiratory disease sars (see page 52 f.). Altogether, the division’s premium volume was up by 3.5% to €1,676m. Without the negative currency influences from the strong euro, growth would have been 9 percentage points higher.
Owing to the growing importance of the Indian market, we are preparing to establish a service company to supplement the representative office we have had there since 1997. It will initially focus on life reinsurance (see page 51).
In Australia and New Zealand, we are primarily represented by our subsidiary Munich Reinsurance Company of Australasia (mra), which is the largest reinsurer in both markets. The consolidation process of recent years in the primary insurance sector continued in the year under review. Despite strong competition, mra was able to further expand its shares in profitable reinsurance treaties.
Investments Rm 2,817 2,968 * Consolidated financial statements in accordance with ias.
In Israel, we successfully defended the price level achieved in 2002, and in several sectors, especially liability insurance, we managed to implement price increases. Although we terminated participations in some insufficiently rated treaties, our premium income from this market rose by 1.1% to €137m, consolidating our position as market leader. We succeeded in improving the result.
Last year, we reported on the extensive restructuring and realignment of American Re. As a result of these measures, the company was well positioned to fully capitalise on improved market conditions during the year under review and to create the basis for a successful future: an underwriting organisation with an excellent market position focused on producing profitable business in all segments. American Re’s objective in 2003 was to generate attractive pre-tax earnings, while improving the quality of its portfolio and strengthening its balance sheet. This objective was achieved.
The company recorded a pre-tax profit of us$ 504m in 2003. Premium volume decreased by 8.3% to us$ 4,611m, as the company withdrew from business segments that were not core to its reinsurance business, did not renew business that failed to meet its profitability goals, and declined business not in accordance with its underwriting and pricing guidelines. The strong euro also affected premium growth. As a result of recent developments in the area of general liability (including professional liability) and workers’ compensation insurance, it was necessary to strengthen loss provisions by us$ 368m.
American Re’s combined ratio also improved: owing to the appreciably lower claims costs, the loss ratio in particular fell – despite the subsequent reserving – from 279.6% in the previous year to 102.6% in the year under review. One of the reasons for this decrease was the relatively low claims burden from natural catastrophes and other major losses in 2003.
The generally positive picture for the year under review was rounded off by American Re being named “Best Overall Reinsurer” in the 2003 survey of US cedants conducted by the Flaspohler Research Group.
American Re’s British subsidiary transferred loss reserves and assets with a volume of over €400m to Munich Reinsurance Company’s branch in the UK.
Munich Reinsurance Company’s Canadian branch, which wrote property-casualty business in the Canadian market, was closed with effect from 31 December 2003. All assets and liabilities were transferred to Munich Reinsurance Company of Canada (mroc). This step is designed to optimise our Group structure and make better use of the capital employed.
Responsible for: Globally operating clients, agricultural rsiks, workers’ compensation business, loss portfolios, Lloyd’s/US business 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
This division’s premium growth is greatly dependent on the business of our global clients. Owing to currency influences, premium volume fell by 3.1% to €4,552m.
Despite the disastrous drought in large parts of Europe (see page 54 ff.), we achieved a good result for 2003, with rising premium volume. Two factors were decisive here: virtually the only peril currently insured against in Europe is hail; on the other hand, experience in federal-supported multi-peril crop insurance in the USA – from which around 80% of our total premium derives – was positive.
In the year under review, we were able to further reduce underwriting losses from business in force in markets where we have increasingly taken remedial measures in the past few years. As social security systems are reformed and privatised, we hope to acquire substantial volumes of business with corresponding earnings capacity in the medium term. We have built up an internationally recognised centre of competence for this difficult business.
Responsible for: Aviation and space, credit and bonding, enterprise and contingency risks, retrocession, Munich-American RiskPartners, New Re Geneva, Great Lakes UK, Munich American Capital Markets
In this highly specialised segment, we offer our clients tailor-made financing solutions for the run-off of loss portfolios. We continue to see attractive business opportunities in this area long term.
In our Geo Risks Research Centre of Competence, more than 20 experts from all the pertinent disciplines investigate natural hazards worldwide, in particular the striking increase in catastrophe losses. They analyse the causes and effects, assess the results with respect to our underwriting policy, and offer our clients a comprehensive service regarding these topics.
We enhanced our leading market position in this sector by increasing our share in Global Aerospace, and in the international insurance pool for aviation and space risks managed by that company, from 9% to 25%.
For our subsidiary in Switzerland, New Re in Geneva, 2003 was a year of successful strategic reorientation. We have focused on the underwriting of non-proportional European business and have optimised management tools and processes. As a consequence of these important strategic measures and the planned termination of unattractive business, but also owing to currency influences, premium income decreased by 44.9% to Sfr 732m. After a series of underwriting losses, we were able to record a positive result – a further significant success in our remedial approach, which we are determined to pursue. The most important markets remain the UK, France, Germany and Switzerland.
Profit for the year –1,091 –939 561 624 347 * Adjusted owing to first-time application of ias 39 (rev. 2003).
At 96.4% (99.9%), the combined ratio is distinctly better than in the previous year and once again below 100%. It is particularly gratifying that the improvement is due to both a lower loss ratio and a reduced expense ratio. There were no exceptionally large losses from natural hazard events in 2003.
Expenses for claims and benefits in the life and health segment showed a substantial rise, mainly due to an increase in expenses for policyholders’ dividends. In the previous year, the high writedowns on shares had markedly reduced the provision for deferred policyholders ’ dividends, with impact on the income statement. Claims and benefits in health insurance rose by 4.7% and thus less strongly than premium income. This mainly reflects two factors in German business: through the introduction of a completely flat-rate payment system in hospitals, general claims costs for hospital treatment showed a marked increase; on the other hand, successes in claims management meant that in other areas expenditure fell or showed only a moderate rise.
The investment result amounted to €4,209m (–292m). It was adversely affected above all by the negative result of investments in associated enterprises amounting to €700m (514m). The operating result before tax was –€334m (–895m).
For the reasons mentioned on page 113, the relationship between the tax expenses of €789m (88m) and the pre-tax result is incomprehensible at first glance. Thus, although the overall result of the underwriting business is good, we recorded a loss for the year of –€1,091m (–939m) in primary insurance.
Life insurance played a major part in the good premium development, with premium income growing to €8.0bn (7.5bn) or by 6.6% (5.6%) in the year under review. This growth shows that our primary insurers are very well positioned in the private and company pensions sector, an important market for the future. Life insurance continues to be the most popular product for making private provision.
Premium income in primary insurance rose by 6.3% (5.6%) to €17.6bn (16.6bn). This represents a share of 44% (41%) of the Munich Re Group’s total premium. The strong growth in new business impressively underscores our primary insurers’ marketing strength, which is built on well-established brands, attractive products and a range of effective distribution channels.
Result €m –1,431 –1,212 655 * Adjusted owing to first-time application of ias 39 (rev. 2003).
ergo’s investment result improved markedly compared with 2002 to €4,330m (–1,011m).
Profit for the year €m –1,431 –1,212 * Adjusted owing to first-time application of ias 39 (rev. 2003).
Gross premium written by ergo in life insurance increased by 7.9% (6.9%). The driving forces here were good new business production, despite the still distinctly slow take-up of “Riester” pension products, and index-linked increases for business in force.
Gross premium income in health insurance was up by 7.3% (5.7%). Growth was largely due to premium increases for business in force, which were necessary on a larger scale for the first time in years in order to take account of cost development. New business in Germany suffered from the continuous debate about healthcare reform.
Profit for the year €m 1.0 17.9 * Adjusted owing to first-time application of ias 39 (rev. 2003).
At the end of 2003, the Karlsruher Group employed a total of 3,724 (4,034) people. 1,659 (1,790) of these were desk staff and 2,065 (2,244) field staff.
At €1.3bn (1.3bn), gross premiums written remained at the same level as in the previous year.
Karlsruher Versicherung AG was able to record gross premiums written of €247m (251m), thus almost maintaining the previous year’s level, despite extensive remedial measures involving a portion of its motor insurance plans.
Europäische Reiseversicherung is the market leader in travel insurance business in Germany, its most important market, where it works with over 17,000 partners in the tourist industry, including major groups as well as individual travel agents.
In 2003, Europäische Reiseversicherung employed a total of 703 (704) staff.
The claims situation with regard to cancellations by customers and their effects on travel cancellation insurance has improved again. The combined ratio amounted to 93.9% (101.5%).
Premium sars (see page 52 f.) and the war in Iraq created a lull on the travel market in 2003. Initially, Europäische Reiseversicherung’s premium fell sharply. Gross premiums amounted to €305m. New products for business travellers and special target groups will not make themselves fully felt in the figures until 2004.
In Germany, Europäische Reiseversicherung shared the fate of many tour operators who, for the second year in succession, recorded marked reductions in sales.
The growth was due primarily to inflows from Munich Reinsurance Company’s subordinated bonds issues and the capital increase, to capital gains on existing securities, and to the pleasing performance of our underwriting business.
We have invested the funds from the subordinated bonds issued in April (a total of €3.4bn) in accordance with our repayment obligations. The funds from the capital increase (€3.9bn) have been invested largely in line with our existing asset allocation in shares and bonds but not in participating interests.
Investments for unit-linked life insurance 1,009 0.6 703 0.5 43.5 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
Our long-term strategy is geared to successively rejuvenating the portfolio and appropriately spreading opportunities and risks. We are doing this by selling directly held property in Germany and investing in top-class real estate located primarily in major European cities but also in some cases in Asia and the USA. We adhered to this principle in 2003 in order to further improve the return and risk profile of our real estate as an asset class.
The markets in which we invested were selected according to macroeconomic and realestate industry criteria. This included taking into account the size of the market and its liquidity in order to be flexible for possible restructurings in our investment portfolio. We are participating primarily in specialised real estate funds and taking advantage of the currently favourable relationship between returns and interest on financing with outside capital.
Additions to real estate amounted to €1,187m and disposals to €746m in 2003. The properties sold were primarily mixed residential/commercial items that had reached the end of their useful service life.
Another important measure for diversifying our overall investment portfolio has been the further global reduction of our historically based concentration of shareholdings in the banking and insurance sector.
As at 31 December 2003 we had reduced our interest in Allianz to 12.2%. We achieved this by not exercising some of our subscription rights in Allianz’s capital increase in April and by selling shares with due regard to the effect on the stock market.
The primary insurance companies in the Munich Re Group are concentrating above all on continuing to achieve a risk-adequate net return on investments. In order to earn sufficient regular income for this, the companies have invested in securities with longer terms to maturity and correspondingly higher coupon rates. This means that the average period to maturity of the bond portfolio has increased. Hedging transactions have also been concluded to protect the portfolio against falling interest rates.
Equities and investment certificates that are shown at fair value in the balance sheet appreciated by €3.9bn. We are adhering to our strategy of diversifying our equity portfolio more strongly in order to reduce its sensitivity to price fluctuations. To optimise the geographical diversification of our portfolio and exploit earnings opportunities, we cut back on our investment in European equities in favour of Japanese stocks.
As part of the fine-tuning of our equity exposure, we hedged parts of the portfolio using derivative financial instruments, thus limiting price losses due to high volatility on the stock markets.
In the business year 2003, we made writedowns of €1.7bn (6.4bn), including €0.8bn (5.9bn) alone on our securities portfolio because of the exceptionally poor performance of the stock markets.
The other income/expenses include –€836m from the at-equity valuation of HypoVereinsbank ag.
The concentration of asset management creates the basis for optimising our investment result. At the same time we also make available the resources that exist for the Munich Re Group’s asset management to partners outside the Group, thus tapping additional sources of earnings. Assets managed for third parties by meag and ergoTrust in the Munich Re Group totalled €11.7bn (10.5bn) as at 31 December 2003.
In the USA, the impulses of fiscal and monetary policy should further stimulate private consumption in particular, but it remains questionable whether the upswing can continue with this momentum in the second half of the year or whether existing macroeconomic imbalances, such as the high US current account deficit, will come more strongly to the fore again.
Especially in Germany, pent-up demand for private old-age provision remains high. It remains to be seen whether the planned simplification of the “Riester” pension can trigger a mood swing in favour of funded pensions. An adverse factor for life insurance in 2004 is likely to be the necessary reduction of policyholders’ bonuses and the lowering of the guaranteed interest rate, whereas the change in fiscal parameters announced for 2005 should stimulate new business production in 2004.
On the reinsurance markets, writing business at risk-commensurate prices and conditions should again be a focal issue. The ability to determine such prices and conditions and achieve them across the reinsurance cycle will be one of the central success factors in competition between market players.
For this reason we, too, wish to emphasise the following: predictions about the future 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 assumptions and expectations. We do not accept any responsibility or liability for cases in which they are not realised either in part or in full.
We expect our life reinsurance business to again achieve embedded value operating earnings of over 10%.
In life and health primary insurance, we must rigorously pursue the measures initiated – which we indeed intend to – before we can return to a convincing level of profitability in our results.
Proceeding from an already strong market position, we do not expect any premium growth for 2004 in reinsurance. A strong euro will have an additional dampening effect. We subordinate growth to consistent profit orientation and only renew business if it satisfies our return requirements.
The selective acceptance of financial risks from reinsurance, primary insurance and asset management is at the centre of the Munich Re Group’s business model. As part of our permeating and systematic risk management, our reinsurance and primary insurance companies continually identify and analyse their risks and examine what claims burdens they are able and willing to carry, and base their acceptance policy, reinsurance and retrocessions on this. On the asset management side, we aim to optimise the investment structure by using models based on portfolio theory and by considering the requirements of asset-liability management. Our planning also takes into account events whose occurrence appears less probable through simulations of pre-defined catastrophe scenarios.
Management of individual risks lies within the competence and responsibility of the executives in the Munich Re Group in their function as risk managers. They are responsible for controlling the risk situation in their respective units, and it is their job to check and continually monitor whether the risk policy measures taken are sufficient to effectively reduce the risk potential. There is clear separation of risk management and risk controlling, and the related responsibilities are well defined. The risk management system and its further development are examined independently by internal auditing units at the individual Group companies and by the external auditor as part of the annual audit of the financial statements.
We endeavour to apply our capital model to all risks from our business, i.e. to quantify and thus make them calculable using methods based on probability theory. This is designed to achieve an optimum diversification of the risk portfolio, geared to the best possible utilisation of the risk capital employed. In this way, a balanced portfolio can be built up even for large risks from the business accepted, and a high degree of security can be maintained. After all, one of the main benefits of the capital model is that the potential financial repercussions of a risk can be weighed against the costs of avoiding it. This enables us to make carefully considered economic decisions about different degrees of risk tolerance.
The size and internationality of the Munich Re Group make a broad diversification of underwriting risks possible. In reinsurance, for example, we achieve a geographical balance of risks over various continents. In primary insurance, we are expanding in Europe and thereby providing for an increased risk spread. We create a further diversification effect through our simultaneous involvement in reinsurance and primary insurance and through the underwriting of very different types of risk within these two fields of business. Life and health insurance business, for example, correlates to only a small extent with the more volatile classes of property-casualty insurance.
For us, closely gearing our operations to the principles of value-based management is an essential element of responsible risk prevention. In both insurance and reinsurance, capital is only to be made available at conditions that promise an appropriate return. After several years in which rates were far too low, terms of trade in the reinsurance market have largely returned to risk-commensurate levels. It is now important to maintain this situation in the longer term.
Excluding natural ** Thereof World Trade Center and reserve strengthening at American Re: 22.4%. ** Thereof World Trade Center and reserve strengthening at American Re: 15.9%.
In the Munich Re Group, underwriting guidelines and limits clearly regulate responsibility and accountability for the whole process of acquiring and concluding insurance and reinsurance contracts. We regularly check compliance with these guidelines and closely observe developments in the global and local markets, reacting where necessary with appropriate measures that are translated without delay into corresponding underwriting guidelines if required. Our reinsurance agreements generally provide for clear liability limits, since unlimited covers are not calculable in either insurance or reinsurance. We support all efforts to get unlimited covers abolished where these are still market practice or even compulsory.
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 such guaranteed minimum interest rates, both in Germany and abroad. These include annuity and endowment policies. In order to earn the minimum interest rate, we are to a large degree dependent on investment returns. As a rule, the investments have a shorter duration than the insurance commitments. This means there is a reinvestment risk. For premiums yet to be received, the new investment of these amounts involves a certain amount of risk. Should capital market interest rates remain at a low level for a prolonged period, our life, health and personal accident insurers might not be able to earn the required guaranteed interest rate.
Our combined ratios, which are important to us in monitoring the premium/claims risk in property-casualty (re)insurance, have developed as follows over the last ten years:
We are currently working hard on introducing accumulation budgets for other hazards in reinsurance. In 2003, for example, we launched a monitoring system for aggregated Group receivables from investments involving our retrocessionaires and exposures in connection with credit reinsurance. This enables us to identify and avoid accumulations involving individual business partners and issuers at an early stage.
An excellent tool for risk prevention in the insurance sector, and thus for risk controlling, is careful reserving to ensure that sufficient funds are available to cover future claims. Hence we generally establish provisions for uncertain liabilities using actuarial methods. Claims provisions for all classes of business and at all companies are regularly checked by means of internal reviews and audits to make sure they are sufficient. These analyses draw on the expertise and experience of a wide range of specialists, such as actuaries, scientists of various disciplines, underwriters and accounting experts. Whenever possible, external statistics and documents (e.g. certified biometric calculation bases in life and health insurance) are also referred to and, where necessary, appropriate adjustments are made to ssthe provisions posted.
Risks from defaults on receivables from underwriting business 5.7% 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 3.5%. As at 31 December 2003, accounts receivable on ceded business totalled €251m (626m), of which around 60% (75%) was from companies with an investment-grade rating (aaa to bbb).
The market value of our equity investments, including participating interests, amounted to €26.4bn as at 31 December 2003. We aim to spread equity risks through systematic diversification in different sectors and regions; in the year under review, companies in the Munich Re Group also made greater use of derivative financial instruments for hedging purposes. Munich Re’s portfolio continues to include historically evolved large shareholdings in Bayerische Hypo- und Vereinsbank ag and the Allianz Group. In recent transactions, we have consistently pursued our aim of reducing the resultant overweight in the banking and insurance sector by cutting back our investments in the Allianz Group and selling our Hypo Real Estate shares. These measures are geared to achieving another decrease in concentration risks and optimising our portfolio structure from the risk and earnings point of view.
The investments of Group companies that write a substantial part of their business in foreign currencies are subject to currency risks from changes in exchange rates.
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 2003.
If such scenarios occur, the effects on the result for the year and the Group shareholders’ equity would be reduced by policyholder participation and tax consequences.
In the investment sector, the Munich Re Group consistently follows a number of principles: it only makes investments from which it can expect an appropriate return, and it ensures that they offer a high degree of security, as reflected in high-quality ratings of the relevant issuers and counterparties, for example. Also important for the Munich Re Group is sufficient liquidity at all times to cover its obligations from underwriting business, and a targeted diversification in terms of region and type of investment.
The changes in share price assumed in these scenarios, ±10% and ±20% respectively, and a corresponding shift in the interest rate curve of ±100 and ±200 basis points (bp) respectively, would produce the following changes in market value: Munich Re Group Annual Report 2003
The investment process for the Group’s own investments takes place at the individualcompany level, with asset-liability management forming the basis for the investment strategy, i.e. the companies consider requirements relating to underwriting, supervisory regulations, accounting, tax, liquidity and currencies. Moreover, in reinsurance for individual products involving explicit financial risks, such as interest-rate or currency risks, assetliability management is carried out at micro level when the product is being designed. This is especially the case with long-tail business, owing to the high interest-rate risk.
Derivative financial instruments are only used for hedging parts of the portfolio, optimising earnings, and implementing planned purchases and sales. Our Group companies act as end-users of derivatives; in addition, they engage in limited trading in these instruments with a view to profit-making. Particular care is paid to restricting risks, choosing top-quality business partners and strictly monitoring adherence to specifications in mandates and investment guidelines. The volumes involved are shown on page 177 f.
Appropriate liquidity planning is extremely important to counter the liquidity risk – the risk of not being able to make necessary payments. This applies particularly to the reinsurance companies, which may be confronted with large claims as a result of major losses.
The liquidity risks of Group companies are managed by the individual insurers and reinsurers themselves. Detailed liquidity planning ensures that the Munich Re 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.
We minimise such risks, which may be connected with any corporate activity, our staff or the use of technical systems, through a wide range of specific risk management measures (e.g. the gloria project aims at creating a comprehensive and consistent data basis). Beyond this, it is our declared corporate aim to sensitise employees to possible risks and thereby to establish an appropriate risk culture. This includes the chance and the willingness to learn from mistakes and to recognise and grasp opportunities for change and improvement. We organise seminars and information events geared to promoting this attitude, support open communication on risk management and give thorough consideration to constructive criticism and feedback.
Munich Re’s global business and Group-wide risk management require a networking of our business units and systems worldwide. The consequence of this is a growing dependency on electronic communications technology, whose complexity is continually increasing. The value of the processed information is also growing. Thus, the organisational and technical measures needed to protect the confidentiality, availability and integrity of these data and systems are acquiring ever-greater importance. In addition, we are exposed to the generally known it risks such as breakdowns and outages, disruptions due to viruses, attacks by hackers and theft of data, including possible misuse by our own staff.
The dependence of our global business operations on central it systems also requires that, in the event of failure or outage of computer centres, the most important systems can be quickly restored. At the Munich Reinsurance Company, an enhanced contingency and disaster recovery concept has come into effect since the end of January 2004, when the it Division moved into its new premises at “Münchner Tor”. This concept makes it possible to limit the restart time for all relevant core systems to a maximum of 48 hours across all locations. We have distributed all the relevant electronically stored business data and the requisite it infrastructure between two locations.
Major projects aimed at standardising different it systems are currently being realised in our primary insurance and reinsurance business. The aim of our gloria project is to unify the reinsurance group’s it and process landscape on the basis of an sap standard product. The launch of this software platform is scheduled for 2005. The convergence of the it systems used by the individual ergo companies is being enhanced by an ongoing project named esprit. In the year under review, the successful technical software migration took place at one of ergo’s subsidiaries. This involved temporary disruptions in client-related processes, but measures were immediately implemented to remedy the problem, which stabilised the situation. Once the project has been completed, we expect a significant increase in productivity.
The companies in the Munich Re Group have binding standards of corporate integrity governing 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 criminal acts. Risks that may arise from insufficiently qualified personnel and “head monopolies” are tackled by means of suitable personnel development measures and management tools, including succession planning.
The following are examples of currently relevant legal risks: – In primary insurance, there are the discussions in Germany about possibly taxing endowment policies at the benefits stage and about an amendment of the insurance supervision law that would involve a change in requirements relating to asset coverage. In health insurance, a reform of the German state health insurance system is being debated. The possible implementation of a proposal for compulsory health insurance for all citizens would reduce private comprehensive health insurance business significantly or even fully eliminate it. Private health insurance companies would be restricted to the area of extended insurance coverage. This would wipe out a substantial share of current new business volume. We are keeping a close eye on all these developments and actively participating in the debates through work in associations and similar bodies.
– In the USA, Congress is considering the Fairness in Asbestos Injury Resolution Act 2003. The bill, which envisages the formation of a privately financed fund to compensate asbestos victims, is currently awaiting approval by the Senate. If the current draft became law, the insurance industry in the USA would – according to information provided by the Reinsurance Association of America – have to contribute an estimated nominal amount of us$ 46bn (discounted: us$ 30.4bn) towards setting up and maintaining this fund. At the same time, the US Court of Asbestos Claims, a court entirely dedicated to hearing asbestos-related claims for damages, would be established. What individual financial consequences this proposed legislation will have for the Munich Re Group is not precisely quantifiable at present. We take it that our existing provisions for asbestos-related claims will be the yardstick for the Munich Re Group’s involvement.
As a result of our business worldwide, we are subject to a large number of supervisory regulations in the different countries.
On account of our global operations as a financial services provider, we are confronted daily with many risks that might affect our financial position and results. In our assessment, there are no risks that could seriously jeopardise our Group; we see the Munich Re Group’s situation with regard to risks as controlled and viable.
ASSETS Notes Prev. year Change €m €m €m €m €m %
F. Cash with banks, cheques and cash in hand 1,884 2,735 –851 –31.1
II. Provision for future policy benefits (19) 98,134 96,088 2,046 2.1
Munich Re Group Annual Report 2003 * Adjusted owing to first-time application of ias 39 (rev. 2003).
Change in deposits retained and accounts receivable and payable –1,921 –650
Change from the acquisition and sale of consolidated enterprises –88 –531
Change from the acquisition and sale of investments for unit-linked life insurance –248 –45
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.
01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
In accordance with the recommendations of the dsr, we have made the primary segmentation between the fields of reinsurance, primary insurance (each broken down into life and health and property-casualty) and asset management.
The individual fields of business are shown after consolidation of internal transactions within the individual field but before consolidation across segments. These are shown separately in the “consolidation column”.
Life and health Property-casualty 31.12.2003 Prev. year 31.12.2003 Prev. year €m €m €m €m
Life and health Property-casualty 31.12.2003 Prev. year 31.12.2003 Prev. year 31.12.2003 Prev. year 31.12.2003 Prev. year 31.12.2003 Prev. year €m €m €m €m €m €m €m €m €m €m
Total equity and liabilities 209,384 196,441 * Group shareholders’ equity and minority interests.
Life and health Property-casualty 2003 Prev. year 2003 Prev. year 2003 Prev. year 2003 Prev. year 2003 Prev. year
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 93).
ias/ifrs currently do not contain any standards governing the accounting and valuation of transactions specific to the insurance industry; the relevant items are therefore accounted for and valued in accordance with us gaap (Generally Accepted Accounting Principles for the United States).
The consolidated financial statements have been prepared in accordance with International Accounting Standards whose application was obligatory for the business years, as well as with all the interpretations of ias (sic 1-33) by the International Financial Reporting Interpretations Committee (ifric). In addition, we have applied the new provisions for the accounting of financial instruments adopted in December 2003 (ias 32 and 39) already as at 31 December 2003. We have also observed the German accounting standards (drs) adopted by the drsc (German Accounting Standards Committee) provided they do not contradict the applicable ias.
In its consolidated financial statements as at 31 December 2003, Munich Re is for the first time applying the new standards adopted by the iasb on 17 December 2003, i.e. ias 32 (rev. 2003), Financial Instruments: Disclosure and Presentation, and ias 39 (rev. 2003), Financial Instruments: Recognition and Measurement. The Company is thus availing itself of the option provided for in ias 32.96/ias 39.103 (rev. 2003) to apply the revised standards for periods before 1 January 2005, after which their application becomes compulsory. The earlier application of the new accounting policies of ias 39 (rev. 2003) accords with the earlier first-time application of ias 39 (rev. 2000), implemented in Munich Re’s consolidated financial statements as at 31 December 2000, also before it became compulsory – in that case for periods beginning on or after 1 January 2001. Our decision thus ultimately stems from the principle of accounting consistency.
– The revised ias 36.69 (rev. 2003) states that impairment losses recognised in profit or loss for an equity investment available for sale may not be reversed through profit or loss, but must be recognised in equity without impact on the income statement. This provision replaces ias 39.119 (rev. 2000), which expressly stipulates a reversal through profit and loss if an event occurs that increases the fair value of the investment again; in the business year 2002, this gave rise to income of €49m for Munich Re from write-ups; for 2003, considerably larger write-ups would have been made.
The restatement required for the business years prior to January 2002, adjusted to eliminate tax effects and the provision for deferred premium refunds, amounts to €1,055m and is recognised in the opening balance of revenue reserves and other reserves in Munich Re’s consolidated financial statements as at 31 December 2002. The first-time application of ias 39 (rev. 2003) then leads to a deterioration in the consolidated result for the business year 2002 of €793m and to an improvement in the consolidated result for the business year 2003 of €453m. The development of shareholders’ equity is affected as follows:
Revenue Own Unrealised Reserve Valuation profit holders’ reserve shares gains and from result equity before held losses currency from cash deduction translation flow of own hedges
Declaration of compliance with the German Code of Corporate Governance in accordance with Section 161 of the German Stock Companies Act
On 5 December 2003, the Board of Management and the Supervisory Board 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 Company’s website.
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 ias and German Commercial Code accounting, valuation and consolidation methods.
Shareholders’ equity is substantially higher under ias than under German Commercial Code accounting because large portions of the investment portfolio are valued at market; results fluctuate more strongly than under German Commercial Code accounting, because there are no claims equalisation provisions to provide a “smoothing” effect. The most important differences between ias and the German Commercial Code as regards the Munich Re Group are as follows: – Under ias, goodwill is amortised over a maximum period of 20 years with impact on earnings; in German Commercial Code accounting, there is the option to offset goodwill against the revenue reserves.
– As is internationally customary, the ceded share of underwriting provisions is shown on the assets side of the balance sheet.
– Provisions for terrorism risks do not constitute liabilities to third parties under ias either and are therefore not admissible. They are also reversed.
– Premiums tend to be lower under ias. In the case of products which are mainly of an investment character (e.g. financing treaties, unit-linked life insurance) only that portion of the premium used to cover the risk insured and associated costs is treated as premium income. In ias financial statements there are no “premiums from the provision for policyholders’ dividends”.
The changes among our non-consolidated subsidiaries in the business year were as follows: Germany Other Total Non-consolidated subsidiaries countries
Germany Other Total Consolidated subsidiaries* countries * In addition, 89 German and 14 non-German investment funds were included in the consolidated group.
Minority interests are shown separately in the balance sheet and the income statement. They represent the amounts apportionable to other shareholders outside the Group from the shareholders’ equity and profits for the year of the subsidiaries and special funds concerned.
Further details of selected associated enterprises are shown on page 208 ff.
These are mainly investments for policyholders under unit-linked life insurances. They are accounted for at market value; unrealised gains and losses are matched by corresponding changes in the underwriting provisions (equity and liabilities item e).
In life primary insurance, the deferred acquisition costs are also capitalised and amortised over the terms of the policies; the amount of amortisation depends 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. The amortisation amount is determined on the basis of the assumptions used for calculating the provision for future policy benefits.
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.
The item issued capital and capital reserve contains the amounts that the shareholders of the parent company have paid in on shares. The capital reserve is reduced by the externally generated costs directly connected with equity capital measures, after taking into account tax effects. Under revenue reserves, we show the profits which consolidated companies and special funds have earned and retained since becoming part of the Munich Re Group, and income and expenses resulting from consolidation measures. In addition, the adjustment amount resulting from changes in accounting policies for earlier periods not included in the consolidated financial statements is included in the opening balance of the revenue reserves and other reserves for the earliest prior period presented. Unrealised gains and losses resulting from the valuation of securities available for sale at fair value are included in the other reserves; the differences resulting from the currency translation of foreign subsidiaries’ figures are also shown in the other reserves. Besides this, writeups on equity investments available for sale are also recognised in this balance sheet item.
In accordance with sic 16, own shares held by Munich Re at the balance sheet date have been deducted directly from shareholders’ equity.
If policyholders participate in surplus, but not by way of the contribution principle, or they are promised fixed benefits without participation in surplus, then safety loadings are included in the calculation of the provision for future policy benefits that are based on the circumstances at the conclusion of the policy (fas 60). Here, too, the acquisition costs are capitalised and amortised over the terms of the policies (on the basis of the premium income).
This applies particularly in reinsurance, where a considerable time may elapse between the occurrence of an insured loss, its reporting by the primary insurer and payment of the reinsurer’s share. The amounts posted are the realistically estimated future amounts to be paid; they are calculated on the basis of past experience and assumptions about future developments (e.g. social, economic or technological parameters) and partly using actuarial methods. The future payment obligations are generally not discounted; exceptions are some actuarially calculated provisions for annuities in motor, personal accident and liability insurance.
Provisions for premium refunds are made for obligations involving bonuses and rebates in life and health insurance that are not yet payable at the balance sheet date; the amount posted is based on supervisory or contractual regulations. The item “other underwriting provisions” also includes amounts apportionable to policyholders from the accumulated valuation differences between ias and German Commercial Code in the amount of the expected future participation quota (provision for deferred premium refunds). If in this context unrealised gains and losses are recognised directly in equity (see securities available for sale), the resultant provision for deferred premium refunds is also posted without impact on profit or loss.
Provisions for anticipated underwriting losses are posted if the future premiums and proportional investment income in a portfolio will probably not be sufficient to cover the expected claims and costs.
Under defined contribution plans the companies pay fixed contributions to an insurer or a pension fund. This fully covers the companies’ obligations.
If pension obligations are covered by assets held by a legally separate entity (fund) – 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.
Pension obligations are valued in accordance with ias 19 (Employee Benefits) using the projected unit credit method and based on actuarial studies. The valuation includes not only the pension entitlements and current pensions known on the balance sheet date but also their expected future development. The interest rate at which the pension obligations are discounted is based on the yields for long-term high-quality bonds (e.g. government bonds).
Group companies that write a significant portion of their business in foreign currency generally safeguard themselves against exchange losses by attempting to match assets and liabilities in the same currency. Where exchange gains or losses occur nevertheless in the translation of foreign-currency transactions into the local currencies of the consolidated companies, they are generally accounted for under “other income” and “other expenses ” respectively.
Gross amount capitalised at 31.12. business year 847 1,036 294 2,177 1,940
The goodwill results mainly from the acquisition of American Re in November 1996 and from the acquisition of the additional shares in the ergo Insurance Group in 2001 and 2002.
The amortisation of €687m includes impairments of €317m resulting mainly from writedowns on goodwill from the acquisition of primary insurance companies in Italy.
The remaining “other intangible assets” include rights equivalent to real property amounting to €4m (4m).
Land and buildings used by Group companies for their own activities are valued at
The fair value of investments in associated enterprises, which are mostly valued at equity, amounts to €4,596m (8,758m) at the balance sheet date.
Over one year and up to two years 109 112 115 120
Over two years and up to three years 93 105 98 112
Over four years and up to five years 87 124 92 133
Over five years and up to ten years 227 259 233 271
– Investment funds * Adjusted owing to first-time application of ias 39 (rev. 2003).
All figures in €m 31.12.2003 Prev. year bbb and lower 78 87
Measurement at fair value results in valuation reserves of €6,889m (3,249m) in comparison with amortised costs. After deduction of provisions for deferred premium refunds, deferred taxes, minority interests and consolidation effects, we have allocated unrealised gains and losses of €4,431m (1,223m) to shareholders’ equity (other reserves).
Disposal proceeds in the business year were as follows: All figures in €m 2003 Prev. year
The first-time application of ias 39 (rev. 2003) does not affect the realised gains and losses on the disposal of fixed-interest securities.
By contrast, the application of the revised standards leads to an increase of €425m for realised gains on the disposal of fixed-interest securities available for sale and a reduction of €413m for realised losses in the business year 2002, and to adjustments of €346m for realised gains and €688m for realised losses in the business year 2003.
(8) Other securities, held for trading The securities held for trading include fixed-interest securities totalling €307m (296m) and non-fixed-interest securities and derivatives totalling €241m (156m).
Derivative financial instruments Derivative financial instruments (derivatives) are financial instruments whose fair value is derived from one or more underlying assets.
The risk of default is practically non-existent in the case of products traded on the stock exchange. Over-the-counter products, on the other hand, harbour a theoretical risk in the amount of the replacement costs. Therefore, in the Munich Re Group, only top-quality counterparties are selected for such transactions.
All figures in €m months months months years years years years years otc products Fair values
– Futures –2 – – – –2 – – – –4
– Other –1 – – – – – – – –1
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 otc products Nominal values
The following table gives the periods to maturity of cash flow hedges at the balance sheet date: 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.
All figures in €m months months months years years years years years
Carrying amount at 1.1. business year 1,678 1,113 4,203 407 7,401 7,069
In November 2003, in partial utilisation of the capital approved for such measures under Article 4 paragraph 1 of the Articles of Association (Authorised Capital Increase 2002), the share capital was increased by €130,337,141.76 from €457,388,254.72 to €587,725,396.48 through the issue of 50,912,946 registered non-transferable no-par-value shares.
By resolution of the Annual General Meeting on 17 July 2002, Munich Re was authorised to buy back shares amounting to a maximum of 10% of the share capital up to 17 January 2004. This authorisation was cancelled by the Annual General Meeting on 11 June 2003 and replaced by a new one, authorising the Board of Management to buy back shares amounting to a maximum of 10% of the share capital up to 11 December 2004.
The contingent capital is as follows: All figures in €m 31.12.2003
To safeguard conversion rights or subscription rights from convertible bonds or bonds with warrants (Contingent Capital Increase 2003 II) 100
Issued Capital Revenue reserve Other reserves Consoli- Total capital reserve dated share-
– Non-fixed-interest securities – – –1,055 – 1,055 – – – –
Translation differences – – –975 – –6 – – 51 –930
Allocation to revenue reserves – – 80 – – – – –80 –
Change in the consolidated group – – –95 – –9 – – – –104
Change resulting from valuation at equity – – – – –1,888 – – – –1,888
Other changes – – 55 –40 – – – – 15
– Non-fixed-interest securities – – – – –1 – – 1 –
Acquisition of own shares – – – – – – – –223 –223
– Associated enterprises – – – – 101 – – –101 –
– Non-fixed-interest securities – – – – –554 – – 554 –
Other equity components 455 561 * Adjusted owing to first-time application of ias 39 (rev. 2003).
The first-time application of ias 39 (rev. 2003) results in the following adjustment amounts for unrealised gains and losses on associated enterprises and non-fixed-interest securities available for sale:
The distribution of the net provision for future policy benefits between the different Group segments is as follows: All figures in €m* 31.12.2003 Prev. year
The following table shows the distribution of net unearned premiums between the different Group segments: All figures in €m* 31.12.2003 Prev. year
The following table shows the distribution of the net provision for outstanding claims between the different segments of the Group: All figures in €m* 31.12.2003 Prev. year
Net run-off result of claims provisions 165 375 579 333 1,145 –2,200 –3,483 –4,165 –2,588 1,165 –
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.
31.12.2003 31.12.2003 31.12.2003 Prev. year Prev. year Prev. year All figures in €m Gross Ceded Net Gross Ceded Net
The following table shows the distribution of the net other provisions between the segments of the Group: All figures in €m* 31.12.2003 Prev. year
– Property-casualty 63 54 * After elimination of intra-Group transactions across segments.
The application of the revised accounting policies of ias 39 (rev. 2003) produces the following adjustments of the changes resulting from unrealised gains and losses on investments in the provision for deferred premium refunds: –€136m for the business year 2002 and –€997m for the business year 2003. In addition, the following adjustments have to be made to the changes resulting from revaluation: €136m for the business year 2002 and €997m for the business year 2003. The aforementioned two effects cancel each other out, so that neither the amount of the provision for deferred premium refunds (gross) nor the amount of the net provision for premium refunds needs to be adjusted.
There are reinsurances for pension entitlements amounting to €58m (repayment claims).
The financing status of the defined benefit plans is as follows: The expenses booked in the year under review are made up as follows: The expenses are shown in the income statement mainly under “operating expenses” and “expenses for claims and benefits”.
Early-retirement benefits/semi-retirement 105 56 15 14 3 135 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
With effect from 28 July 2003 Munich Re set up a contractual trust agreement in the form of a two-way trust for its pension obligations for employees. In this connection a one-off amount of €334m was irrevocably transferred to the pension trustee, who manages the assets for Munich Re in accordance with its instructions within the framework of a mandate agreement with meag. These assets may not be used for any other purpose than covering the pension obligations, and access of creditors to the assets is excluded. The consequences of this transaction are a reduction in the balance sheet amount and in the future pension expenses. To finance the commitments, it was necessary to transfer assets in the amount of the present value of the pension commitments. In this process, however, account had to be taken of the difference between the actuarial interest rate relevant for the valuation of the obligations and the rate of return achievable with the assets. Therefore the present value of the pension obligations was calculated with an actuarial interest rate equivalent to the expected rate of return on the investments at the time the assets were transferred.
As at 31 December 2003 the fair value of the transferred assets exceeded the outsourced pension obligations by a total of €58m. The repayment claim arising from this overallocation has been shown under “other receivables”.
Life and health Property-casualty Life and health Property-casualty management 2003 Pr. year 2003 Pr. year 2003 Pr. year 2003 Pr. year 2003 Pr. year 2003 Pr. year (adjust- (adjust- (adjust- (adjust- (adjust- (adjust-
All figures in €m* 2003 Pr. year 2003 Pr. year 2003 Pr. year 2003 Pr. year 2003 Pr. year 2003 Pr. year
Investment income Income from write-ups –20 – –81 – –275 – –14 – – – –390 –
The adjustment amounts resulting from the first-time application of ias 39 (rev. 2003) are summarised in the following table:
All figures in €m* 2003 Prev. year 2003 Prev. year 2003 Prev. year 2003 Prev. year 2003 Prev. year (adjust- (adjusted )** ed)**
Change in other underwriting provisions – Provisions for future policy benefits 748 241 4 39 1,443 3,260 27 25 2,222 3,565
– Change in provisions for outstanding claims 64 120 –691 56 –11 –87 41 126 –597 215
Change in other underwriting provisions – Provisions for future policy benefits 75 26 –8 5 115 226 – –2 182 255
Change in other underwriting provisions – Provision for future policy benefits 673 215 12 34 1,328 3,034 27 27 2,040 3,310
Total expenses for claims and ** After elimination of intra-Group transactions across segments.
– Change in deferred acquisition costs (gross) –110 –267 –18 –151 –549 –74 –12 –46 –689 –538 * After elimination of intra-Group transactions across segments.
In addition to foreign currency exchange losses of €727m (669m), the other expenses mainly include expenses for services rendered of €238m (380m), interest and similar expenses of €562m (485m), and writedowns of €84m (124m).
Deferred tax resulting from the occurrence or reversal of temporary differences 993 126
Effects of changes in tax rates on deferred tax 392 –5
The so-called “Korb ii” law has revised the taxation of life and health insurance companies. This change removes the system-adverse effects of the business taxation reform on life and health insurance companies. Under the new legislation, income and expenses of such companies in connection with shareholdings are subject to tax again as from the business year 2004. In addition, the companies are granted an option to apply the new rules – limited to 80% of the income and expenses concerned – for the years 2001 to 2003 (so-called “block option”). Some of the companies in our Group have availed themselves of this option and some have not.
Individual Group units generated tax losses in the current period and the previous period. On the basis of future tax result planning, a utilisation of the tax loss carry-forwards before their expiry is to be reckoned with, so that deferred tax assets have been posted for these.
The first-time application of ias 39 (rev. 2003) results in the following changes in the amount of deferred taxes: Adjustment
Deferred tax resulting from the occurrence or reversal of temporary differences 101
Deferred tax resulting from the occurrence or reversal of loss carry-forwards –
The following table shows the reconciliation between the expected tax on earnings and the tax on earnings actually shown. The expected tax expenses are calculated by multiplying the operating result before tax on earnings (but after “other tax”) by the Group tax rate. The Group tax rate amounts to 40%. This takes into account corporation tax including solidarity surcharge, and a mixed trade-tax rate. In the previous year, the expected average Group tax rate was 35%.
The first-time application of the revised ias 39 (rev. 2003) produces changes in the tax effect of non-deductible business expenses amounting to €290m for the business year 2002 and to –€73m for the business year 2003.
“Tax-free income” is made up of tax-free gains on the sales of shareholdings in joint-stock companies, tax-free dividend income and other tax-free income. The non-deductible expenses mainly include writedowns on non-fixed-interest securities available for sale. In addition, they contain non-deductible amortisation of goodwill and other non-deductible expenses.
The parent company of the Munich Re Group is Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (Munich Reinsurance Company Joint-Stock Company in Munich). It is entered in the commercial register with the address Königinstrasse 107, 80802 München. In addition to its function as a reinsurer, the company also fulfils the function of holding company for the Group.
In accordance with the reduction of reciprocal shareholdings of Munich Reinsurance Company and Allianz ag, announced in the previous year, Munich Reinsurance Company still held only approx. 12.2% of Allianz’s share capital as at 31 December 2003 (previous year: around 19.3%). The Allianz Group, for its part, held a share of around 12.5% of Munich Reinsurance Company’s voting capital at the balance sheet date (previous year: approx. 23.5%). As a consequence of this, together with the termination on 23 October 2003 of the Principles of Cooperation Agreement with effect from the end of the year, Allianz ag no longer qualifies as a related party of Munich Reinsurance Company.
Relations between Munich Re and HypoVereinsbank are also given documented form in a general agreement. This agreement deals in particular with cooperation activities. On the basis of individual cooperation agreements, companies of the Munich Re Group sell selected HypoVereinsbank products. Similarly, staff of various of companies of the hvb Group market insurance products of victoria, in which the other ergo companies participate via reinsurance or coinsurance. The cooperation agreements between companies of the Munich Re Group and the companies of the hvb Group are concluded at market conditions.
The following personnel expenses are included in the operating expenses, in the expenses for claims and benefits and in the investment result: (36) Long-term incentive plans
Incentive Incentive Incentive Incentive Incentive Plan 1999 Plan 2000 Plan 2001 Plan 2002 Plan 2003
New initial share price after 2003 capital increase €173.67 €303.72 €304.80 €247.64 €82.02
Number of rights on 31 December 1999 110,840 – – – –
Number of rights on 31 December 2000 119,885 74,636 – – –
Number of rights on 31 December 2001 85,645 80,582 109,474 – –
Number of rights on 31 December 2003 78,981 77,855 107,428 135,200 439,581
In the year under review a total of 459,398 (132,736) stock appreciation rights were granted, 139,698 (39,631) of these to members of the Board of Management. The expenses incurred for the stock appreciation rights have been determined on the basis of the change in Munich Re’s share price.
The emoluments of the Board of Management of Munich Reinsurance Company for fulfilment of its duties in respect of the parent company and the subsidiaries totalled €12.1m (11.5m). Of this, €7.4m (6.2m) is apportionable to fixed components, €4.7m (5.1m) to variable components, and €0 (0.2m) to the exercise of stock appreciation rights under the Long-Term Incentive Plan 1999. Payments to retired members of the Board of Management or their surviving dependants amounted to €3.3m (3.5m).
A total of €49m (38m) was set aside for pension commitments towards retired members of the Board of Management or their surviving dependants.
The members of the Board of Management receive compensation comprising – a fixed annual basic remuneration; – a variable annual bonus, in which the annual result and the achievement of personal objectives are each weighted 50%; a dividend bonus was paid for the business year 2002 for the last time; – a variable three-year bonus, based on the performance over a three-year period, in which the annual results and the achievement of personal objectives are again each weighted 50%. Payment is made in the fourth year and presupposes that the degree to which objectives have been achieved, which is the yardstick for measuring the annual bonus in respect of the annual result and the personal objectives, has been assessed as above average in each of the three preceding years. Payments under this three-year bonus can be made to the Board members for the first time in 2006.
Compensation for board memberships with affiliated or associated enterprises of the Munich Re Group must be paid over to the Company or is offset against other remuneration components, unless the memberships are classified as personal memberships.
No acquisition or sales transactions notifiable under Section 15 a of the German Securities Trading Act had occurred up to the end of the business year 2003. 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.
Beyond this, there were other financial commitments of €12m and obligations from guarantees totalling €162m. There were contingent liabilities of €125m from a leasing transaction with real estate.
Commitments under rental, work and service contracts amounted to €154m. Leasing obligations from rental leasing arrangements totalled €590m. Investment obligations amounted to €488m. These figures represent undiscounted nominal amounts.
The number of staff employed by the Group at year-end totalled 30,233 (31,063) in Germany and 11,208 (10,333) in other countries.
When publishing its provisional figures on 26 February 2004, HypoVereinsbank ag announced a reduction of its shareholding in Munich Reinsurance Company to below 10%.
Besides this, HypoVereinsbank ag announced that it would be carrying out a capital increase with a nominal volume of €643m, in which the shareholders would be offered 214,410,440 new shares at a price of at least €14. HypoVereinsbank ag will raise at least €3bn from this 2 for 5 rights issue. By resolution of their Boards of Management, the Munich Re Group companies will not participate in HypoVereinsbank ag’s capital increase in order to cut back its investment in the German financial services sector further. The Munich Re Group’s stake in HypoVereinsbank ag’s share capital will thus be diluted by approx. 7.4 percentage points to around 18.3%.
Primary insurance, consolidated subsidiaries ergo Versicherungsgruppe ag, Düsseldorf 92.74% 1,934,516 247,521 victoria Krankenversicherung Aktiengesellschaft, Düsseldorf *** 92.74% 59,647 0 victoria Lebensversicherung Aktiengesellschaft, Düsseldorf *** 92.74% 238,642 0 victoria meridional Compañía Anónima de Seguros y Reaseguros, s. a., Madrid 92.74% 15,700 –2,365 victoria Versicherung Aktiengesellschaft, Düsseldorf *** 92.74% 528,413 0 victoria-Seguros de Vida, s. a., Lisbon 92.74% 13,993 –809 victoria-Seguros s. a., Lisbon 92.74% 7,434 –66 victoria General Insurance Company s. a., Thessaloniki 92.26% 16,227 –3,038 victoria Life Insurance Company s. a., Thessaloniki 92.26% 6,203 –127 victoria-volksbanken Versicherungsaktiengesellschaft, Vienna 69.21% 40,528 919
Middle Sea Valetta Life Assurance Co. Ltd., Floriana 10.00% 40,897 1,150
Company % share Share- Result for of capital holders’ the year equity €’000** €’000**
Österreichische Volksbanken-ag, Vienna 10.00% 723,307 38,957 rwe ag, Essen**** 5.36% 8,924,000 1,050,000 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.
****They have been translated using the exchange rates applicable on 31 December 2003.
Our audit, which also extends to the group management report for the business year from 1 January 2003 to 31 December 2003, has not led to any reservations. In our opinion, altogether the group management report provides a suitable understanding of the Group’s position and suitably presents the risks of future development. In addition, we confirm that the consolidated financial statements and group management report for the business year from 1 January 2002 to 31 December 2002 satisfy the conditions required for the Company’s exemption from its duty to prepare consolidated financial statements and group management report in accordance with German accounting law.
Ulrich Hartmann Deutsche Bank ag Henkel kgag Deutsche Lufthansa ag Arcelor s.a., Luxembourg e.on ag (Chairman) Hochtief ag ikb Deutsche Industriebank ag (Chairman)
Prof. Karel Van Miert rwe ag Agfa-Gevaert nv, Mortsel Fraport ag Anglo American plc, London
De Persgroep, Asse dhv Holding bv, Amersfoort Royal Philips Electronics nv, Amsterdam Solvay s.a., Brussels Wolters Kluwer nv, Amsterdam
Dr. jur. Dr.-Ing. E. h. Heinrich v. Pierer Bayer ag Siemens ag Österreich, Vienna* (Chairman) Hochtief ag Volkswagen ag
SUPERVISORY BOARD SEATS HELD on supervisory MEMBERSHIP of comparable boards of other German bodies of German and foreign companies business enterprises
Clement Booth (until 30 September 2003) Allgemeine Kredit Coface acord, Pearl River, New York inreon Ltd., London Munich American Capital Markets Inc.,
Georg Daschner (from 1 October 2003) – Münchener Rück Italia S.p. A., Milan* (Chairman)
Dr. jur. Heiner Hasford Commerzbank ag American Re Corporation, Wilmington, d.a.s. Deutscher Automobil Schutz Delaware*
Agrarversicherung ag * Own group company within the meaning of Section 18 of the German Stock Companies Act.
Dr. rer. nat. Torsten Jeworrek – Great Lakes Reinsurance (uk) plc, London* (from 1 October 2003) (Chairman)
Jeddah * Own group company within the meaning of Section 18 of the German Stock Companies Act.
BOARD OF MANAGEMENT SEATS HELD on supervisory MEMBERSHIP of comparable boards of other German bodies of German and foreign companies business enterprises
Utilising the capacity of the capital markets to cover insurance risks. An example is the securitisation of natural catastrophes risks that can no longer be borne in full by the insurance and reinsurance industry.
Enterprises on whose financial and operating decisions a significant (but not 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.
Under this accounting principle the difference between the acquisition cost and redemption value (of an investment) is added to or subtracted from the original cost figure over the period until maturity and credited or charged to income over the same period. Writedowns are made for impairment or uncollectibility.
Strategy-implementation tool in which strategic objectives and initiatives (financial and non-financial) are set out in a table and linked with one another. Short-term milestones help in monitoring the achievement of objectives.
Use of statistical methods to capture and process data in the fields of biology, medicine, agriculture, etc.
Client of a reinsurance company (see also � primary insurers ).
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.
Possible obligations whose existence will be confirmed by the occurrence or non-occurrence of an uncertain future event and which are therefore not shown as liabilities in the balance sheet. They must, however, be included in the notes to the financial statements (example: guarantee obligations ).
Costs incurred for the acquisition or the renewal of insurance policies (e.g. commission, cost of processing applications ) which are capitalised and amortised over the term of the contracts.
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.
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.
A ratio calculated by dividing the consolidated profit by the average number of shares issued. “Diluted earnings per share” includes exercised and still to be exercised subscription rights in the Group result for the year and the number of shares. Such subscription rights arise from the issue of bonds with conversion rights and from warrants for the acquisition of shares.
Exchangeable bonds are a special form of corporate bond which, besides entitling holders to repayment of the face amount and regular interest, give them the option to convert the bond into shares. The conversion right is for shares in a company which is not the bond issuer.
The reinsurer assumes a share of selected individual risks. The primary insurer can offer an individual risk in reinsurance, which the reinsurer for its part can either accept or decline (cf. � obligatory reinsurance).
The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s-length transaction. Where there is an active market, the fair value of an asset is its current � market value. Alternatively, the fair value may be determined on the basis of recognised valuation methods.
The sum of organisational and technical improvements in business processes that serve to accelerate publication of a company’s quarterly and annual financial statements.
US accounting regulations that give detailed rulings on individual accounting questions and which must be complied with by listed companies that prepare accounts in accordance with us gaap.
Form of reinsurance in which the risk transfer from insurer to reinsurer is combined with a risk financing function. The focus here is on business-management and accounting aspects. The desired objectives are achieved by, among other things, the assumption of a limited amount of risk by the reinsurer, result-sharing with the insurer, multi-year contracts and the consideration of the time value of money.
Contracts to trade at a specified price on a specified future date. In contrast to � futures, forwards tend to be individually designed derivative financial instruments.
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.
Standards formulated by the � iasb with the intention of achieving internationally comparable preparation and presentation of financial statements. Since 2002 the standards adopted by the iasb have been referred to as “International Financial Reporting Standards (ifrs)”. Until existing standards are renamed, they continue to be referred to as “International Accounting Standards (ias)”.
Measurement of the -> fair value of companies. The starting point is the proportional equity capital of the company to be valued, plus the valuation reserves.
Securities that will neither be held to maturity nor are assignable to the “held for trading” category. These securities are accounted for at market value. Changes in value are reflected in shareholders’ equity without impact on earnings.
Fixed-interest securities which the company has the intention and ability to hold to maturity. They are valued at � amortised cost.
In life and health insurance, policyholders are entitled by law and contractually to an appropriate share of the surplus earned by their insurers. The amount of this bonus is fixed anew each year. As a rule, in life insurance these bonuses increase the benefit payable on maturity of the policy or on occurrence of the insured event; in health insurance, they are allocated by way of premium refunds.
Collection of investments belonging to an investor or held by a financial organisation. They primarily comprise securities, but may also include real estate. In the case of investment funds, portfolio refers to the composition of investment instruments in the fund (equities, bonds, derivatives, etc.). In the case of insurers and reinsurers, portfolio usually means all the risks assumed in insurance and reinsurance respectively.
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.
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.
That part of the risk assumed which the insurer/reinsurer does not reinsure/retrocede, i.e. retains net for own account.
Reinsurer that provides retrocession cover for other reinsurers (a reinsurer of reinsurers). Retrocession enables the reinsurer to lay off part of its risk to other insurance companies.
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.
Surplus recorded in the balance sheet of US insurance companies on the basis of the statutory accounting regulations used by US state supervisory authorities and rating agencies.
A special form of � scenario analysis. The aim is to make a quantitative statement on the loss potential of portfolios in the event of extreme market fluctuations.
In the event of liquidation, dissolution or insolvency of the loan debtor or in the event of debt composition proceedings or other processes to avoid insolvency being taken against the loan debtor, the claims of holders of subordinated bonds are satisfied after the claims of all other non-subordinated creditors. In other words, payments on subordinated bonds are not made until claims of third parties against the bond debtor arising from non-subordinated liabilities have been fully satisfied.
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).
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.
Annual General Meeting 18 Asbestos 140 Asia, Australasia, Africa 40, 105 Asset-liability management 29, 122, 137
Capital market instruments 16, 19 Capital markets 88, 128 connect.munichre 50 Corporate Underwriting/Global Clients 40, 108 Credit insurance 111 Customised portfolio solutions 109
Declaration of compliance 69 Derivative financial instruments 124, 135, 137 Disability 57 Dividend 17
Policyholders’ bonuses 113 Primary insurance ic*, 28, 41, 113 Property-casualty insurance 39, 100 Provisions 134
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
Munich Reinsurance Company of Africa Limited (MRoA) Munich Re Centre 47 Empire Road, Parktown Johannesburg 2193, P.O. Box 6636 Johannesburg 2000
KarstadtQuelle Lebensversicherung ag KarstadtQuelle Versicherung ag KarstadtQuelle Krankenversicherung ag Nürnberger Strasse 91–95 90758 Fürth
Net expenses for claims and benefits 32,487 31,265 34,162 29,770 25,241