Munich Re is guided by the principle of sustainability, even and particularly in these difficult times for our Group. We take what might be termed a holistic view of sustainable activity, one that embraces economic performance as well as cultural, social and, of course, ecological aspects. In all these areas we aspire to create growing and lasting value. To this end, we draw on experience from the past, combine it with prospective analysis, and actively shape our future now. Yesterday, tomorrow, today.
Net expenses for claims and benefits 31,129 34,162 29,770 25,241 22,735
* The first consolidated financial statements in accordance with ias were prepared for the business ** Taking into account the stock split in January 1999.
Asset management: Our subsidiary meag offers investment products for private clients and institutional investors.
Munich Re’s market capitalisation at 31 December €bn 20.4 54.0 –62.7
Munich Re Group >> Page 71 >> Page 145 >> Page 59 >> Page 252 >> Page 69 >> Page 78>> Page 120 >> Page 114 >> Page 83
Key changes have been made at American Re. With a new management and organisational structure, plus stronger capitalisation, it is in a much better position today than one year ago.
The biggest natural catastrophe loss event for us in 2002 was the summer flooding, which cost nearly €500m.
We received special recognition for our investor relations work, for meag’s EuroRent fund, and for our role as an employer. External specialists acknowledged our work with awards. Our clients also gave us excellent marks in a survey conducted by Flaspöhler Research.
To enable us to exploit further synergies in the Group and to concentrate our core competences in reinsurance, victoria Re ceased underwriting at the end of the year and transferred its business to Munich Re.
Developments on the international capital markets last year were dramatic – with serious repercussions for our investments, our share price and our rating.
>> Page 59 ergo and hbv – A good partnership ergo and HypoVereinsbank work together in insurance and banking business. Last year their partnership started to bear fruit. >> Page 83 extremus against terror Munich Re was co-initiator, founder member and provider of capital for extremus ag, a specialist German insurer for terrorism risks. The company offers German industry a new opportunity to insure itself against terrorism. >> Page 252
Business issues 2002 >> Pensions >> American Re >> Asbestos >> Cyberrisks >> esprit and gloria >> Flood >> Unlimited cover >> Climate change >> Partnership between ergo and hvb >> Health insurance >> Terrorism
Yesterday, tomorrow, today >> Cycle management Page 16 >> Knowledge management Page 32 >> Climate Exhibition Page 44 >> Nanotechnology Page 66
Report of the Supervisory Board Corporate governance Other seats held by Board members Rating Staff Social commitment The environment
Multi-year overview Quarterly figures Important dates 05 Partnership 06 Risk 07 Security >> Risk management Page 128 >> Flaspöhler survey Page 96 >> extremus ag Page 252
Munich Re stands for professional risk handling. In our 123-year history we have coped with extreme fluctuations in claims experience on many occasions and have thus gathered valuable experience in dealing with the volatility of reinsurance business. After the almost apocalyptic events in New York in September 2001, which led to one of the worst underwriting results in Munich Re’s history, a harder year seemed barely conceivable. Yet despite a markedly better result for the year, 2002 was again particularly testing for Munich Re, albeit for other reasons.
Ladies and gentlemen, we should not delude ourselves. The insurance industry, and especially Munich Re, is currently going through extraordinarily difficult times. Nonetheless, I am confident we will successfully master the challenges that our Group faces. Our clients and the capital markets rightly put their trust in the highly qualified and motivated staff of our Group to cope with the difficulties and to utilise the opportunities that dealing with a crisis often presents. I would like to illustrate this with a few examples from the past 12 months: – Our new, client-focused structure has proved successful in the market and is being rewarded. This is evidenced by the excellent results we achieved in a survey of clients conducted by the well-known American market research institution Flaspöhler, which we present to you in more detail on page 96.
But this is not enough, either for you or for us. One thing is clear as far as I am concerned: what is required at the moment is not hectic activity, but prudence, professionalism and perseverance – qualities that have always been the hallmark of Munich Re and are essential for creating lasting value. In our strategy, profitability is given clear precedence over growth. We will gear all our business to this principle, without any taboos, even with respect to things we may have rightly regarded as particularly worthwhile for many years. The fact is that times have changed. Thus, for instance, we have agreed with Allianz to reduce our reciprocal shareholdings to around 15%. The first step for this was taken in March 2003.
What does our consistent focus on profitability mean in concrete terms? Given the disastrous trends on the capital markets and the low level of interest rates, we cannot expect high investment returns at present. Therefore, we must earn our profits above all from our underwriting business – and this is precisely what we will do. In reinsurance, we have geared our prices and conditions to achieving a combined ratio of under 100% in the current year. In primary insurance, we are continuing to concentrate on insurances of the person and personal lines business, specifically in Europe. Here we are striving to continually reduce costs in order to improve the underwriting results of our subsidiaries. I can assure you, ladies and gentlemen, that we are well on the way to meeting these objectives. Besides this, of course, we want to earn stable returns on our investments again.
In the medium term our objective is to re-strengthen our capital base from profits. How far we can realise this aim, however, mainly depends on economic developments and what happens on the capital markets. Political decisions can also have substantial repercussions and often affect the insurance industry directly. Thus, for example, there have recently been moves in Germany towards making the long-overdue structural adjustments to statutory health insurance. Our subsidiaries that specialise in insurances of the person are ready to play their part in providing solutions where private insurance models are required to supplement and support state security systems, as with the “Riester” pensions.
This is the last time I shall be writing to you in this context as Chairman of the Board of Management. As we announced on 28 April 2003, at its meeting on that date the Supervisory Board appointed Dr. Nikolaus von Bomhard as my successor with effect from 1 January 2004, thus following the unanimous proposal of the Board of Management. Dr. von Bomhard stands for both continuity and the future, fully in keeping with Munich Re’s tradition.
Over 100 years ago, Victor Hugo said: “The future has many names. For the weak it is the unattainable. For the fearful it is the unknown. For the bold it is opportunity.” With our more than 40,000 dedicated and loyal employees, we are approaching the future resolutely and with confidence. We will exploit the opportunities it holds for Munich Re to the benefit of you, our shareholders, and our Group. The stage for this has been set.
FOR THREE HUNDRED YEARS THE MOST SENSITIVE MARKET IN THE WORLD
If there is one market that stands for dynamic movement, it is the stock exchange: sensitive to every piece of data but also reacting to rumours; mostly rational but sometimes hysterical, breaking out in euphoria or lapsing into depression. Munich Re is an important player in this market and although heavily affected by the crisis on the financial markets, it still remains a Group with very solid financing.
Cycle management is a crucial factor in realising our objective of creating lasting value. By consistently focusing on risk-commensurate prices, cycle management safeguards not only the quality of our business but also the risk protection for our clients.
In a cycle, a process regularly repeats itself. Why does Munich Re need “cycle management”?
It’s based on the knowledge we have as a leading global reinsurer. We know the individual markets and can estimate their market cycles. We analyse global and also macroeconomic factors to form a cycle perspective and then decide on our cycle strategy. We implement this strategy individually: in client accounts, in regions and in classes of insurance.
If cycle management is pursued consistently, it means you write more business in periods with higher prices – and vice versa. By taking account of the requirements of our own systems for internal management and risk modelling and then implementing our pricing founded on these, we ensure that we obtain the earnings required for our business on a sustained basis, independent of cycles.
Stylised reinsurance cycle >> The diagram clearly shows the ups and down in rates.
Big losses Munich Re shares lost 62.6% in value in 2002.
Stable dividend We intend to pay a dividend of €1.25 for the third year in succession.
Negative records and extreme price fluctuations dominated the stock markets in 2002. Munich Re shares were also a victim. Over the course of the year they suffered one of the biggest prices losses in their history.
Numerous events and trends had an adverse effect on the stock markets in 2002 and damaged investor confidence: accounting scandals and profit warnings, corporate crises and major insolvencies, terrorist attacks and the threat of war.
For the third year in succession, the dax 30’s performance was negative, this time even setting a new record. With an annual loss in value of 43.9%, it closed the year at 2,893 points, with none of the current dax 30 stocks managing to register a positive performance in 2002.
Munich Re shares caught up in the vortex of the capital markets
Besides the weakness of the economy and the general market trend, the following factors adversely affected our share price: the flood losses, the strengthening of reserves at American Re and for the WTC loss, the fear of war in Iraq, and the losses in value of our portfolio of equities and shareholdings, especially those in Allianz and HypoVereinsbank.
The importance of Munich Re shares is also reflected by the fact that they are included in many national and international share price indices. Since 2001 they have also been present in the Dow Jones Sustainability Index and the ftse4good. These sustainability indices only accept companies that fulfil certain ecological and social criteria.
Munich Re shares are no-par-value registered shares. They are traded on all the German stock exchanges and are also included in Xetra trading.
Munich Re’s most important shareholder is Allianz, with a stake of just under 20% (reduction from 24.77%), followed by HypoVereinsbank with 13.2%. Our free float has risen to 66.8%, chiefly owing to the shares sold by Deutsche Bank and Allianz. The number of shareholders has grown to over 135,000.
* Taking into account the capital increase in January 1999. ** Proposal for AGM on 11 June 2003.
Munich Re’s operations take account of the interests of its shareholders in many ways. We have introduced a value-based management system. We take corporate governance seriously and comply with recognised standards of responsible corporate management (see page 103). As an incentive for increasing Munich Re’s market value, we have launched long-term incentive plans that grant the Group’s top executives stock appreciation rights, whose value is dependent on Munich Re’s share price. Details of the plan can be found on page 231.
The attendance rate at our last Annual General Meeting on 17 July 2002 amounted to 53.7% of the share capital, with over 4,000 participants present at the icm – International Congress Centre in Munich. Shareholders who were unable to attend in person had the opportunity, for the first time, to follow the entire Annual General Meeting live on the internet. They could also exercise their voting rights online through proxies nominated by Munich Re, with the option of changing their instructions right up until the end of the general debate.
At the end of 1993, with the share price at DM 3,795.00 (= €1,940.35), a portfolio of 100 Munich Re registered shares with a par value of DM 100 (= €51.13) required a total investment of €194,035.27 (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.
On the basis of a price of €114.00 per share on 30 December 2002, the value of the portfolio amounts to €282,720.00, equivalent to an increase of 45.7%. According to the internal rate of return method, this works out at an average annual return of 4.3% per year.
Performance of a specimen deposit as from 30 December 1993 in €’000
The exercise period for the Munich Re warrants 1998/2002, which were issued with new shares in the 1998 capital increase, expired on 3 June 2002. The result of this capital measure speaks for itself: the exercise rate for the warrants amounted to 99.86%, thus putting them on a par with their successful predecessor, the warrants 1994/98.
Our bonds exchangeable into Allianz shares were issued in May 2000 with an annual coupon payment of 1.00% on the face value. Investors are entitled to convert each of their exchangeable bonds into Allianz shares, making the investment a combination of bond and call option. The bonds’ volume totals €1.15bn or around 1% of Allianz’s share capital. At the end of the year they stood at 101.81%. Their term ends on 9 June 2005 with a redemption rate of approximately 108.6%.
In autumn 2002, for the first time, all non-senior-executive staff of the parent company were given the chance to acquire employee shares at preferential conditions (see page 115).
KNOWLEDGE IS THE KEY The amount of knowledge in molecular biology and genetic engineering doubles every two years. Nanotechnology, the next major technological revolution, will open up a scientific field comparable to that of space technology, electronics and genetic engineering. Not only will it lead to an explosion of knowledge, but its processing will take on a technological life of its own, even extending to the implantation of knowledge in people. The question is: How can the greatest possible benefit be derived from the technical availability of knowledge? As Confucius said: “The essence of knowledge is, once having it, to apply it.”
USING KNOWLEDGE SUSTAINABLY Knowledge management safeguards our most valuable resource and helps us to use it efficiently. This benefits our client relationships and thus serves our main objective of achieving lasting increase in value.
Knowledge is continually growing. How does Munich Re deal with this?
ongoing process, designed to keep pace with the proliferation of information. We also have to solve very practical problems such as “How can the Group retain the knowledge of experts who retire after 30 years with Munich Re?”
The central element of our knowledge management is a system of global expert networks – what we refer to as “knowledge networks” – for the insurance fields of property, casualty, marine and claims, with over 500 experts involved altogether. Additionally, at the division level, we have introduced “divisional knowledge management”. This mainly takes the form of exchanging data specific to the division concerned, its markets and its clients.
Dedicated partner We want to be the preferred partner for our shareholders, clients and staff.
Advancing together We utilise the rich opportunities for synergies in our Group.
In the development of our corporate strategy, we take into account various future scenarios and make the necessary adjustments. The prime objective of our strategic initiatives is to stregthen our profitability.
Strategy 02Munich Re Group Annual Report 2002 strategy: We create value through an approach geared to sustainability
We aspire to be the preferred partner for our shareholders, clients and staff. Above all, we strive to earn the best possible return for our shareholders. The commercial success necessary for this can only be achieved by offering our clients top quality and security. These two essentials are provided by our staff, whose dedication and expertise we recognise and value.
Scorecar d with clear str ategy, initiative s and responsi bilities
Our operations are governed by the following strategic guidelines: 1 Long-term profitability takes precedence over short-term growth. We want to grow, but not at any price. We are not interested in writing business merely to achieve a certain place in the rankings.
3 We are consolidating and extending our market position and concentrating on our strengths. In both reinsurance and primary insurance, this may sometimes include withdrawing from individual markets where terms of trade are not appropriate.
meag received a number of awards in 2002: – In Standard and Poor’s Fund Awards 2002, MEAG’s funds achieved first place in their category in Germany.
– As an investment company, MEAG came third in the “small companies” category in Standard and Poor’s Fund Awards. Reuters subsidiary Lipper rated it “Best Bond Group Germany 2002”.
WE CAN’T JUST LOOK AWAY AND CARRY ON AS BEFORE Whether global climate change is man-made, and if so to what extent, is still being debated, despite significant indicators. But this state of inconclusiveness should not be used as a pretext to just carry on as before. For if what is already emerging as possible really materialises, it will be too late to have any real chance of doing anything about it.
The earth’s spheres >> Illuminated globes show subsystems of the earth: lithosphere, biosphere, hydrosphere, kryosphere, solar radiation, and atmosphere.
That’s why you can find very new types of presentation in the exhibition, as well as more traditional exhibits. In a creatively designed “climate game”, for example, visitors can slip into the role of a chief executive or a politician who makes decisions that affect the climate. The computer simulation shows how today’s decisions can influence tomorrow’s climate. For example, a “politician” who does not think of people’s material well-being when taking environmental action is not re-elected and loses the game. Acting blindly is punished, while far-sighted action is rewarded.
In the Munich Re Group, reinsurance, primary insurance and asset management complement each other to make a strong, all-round financial services provider. The knowledge and dedication of over 40,000 staff in 60 countries vouch for the outstanding quality of our service.
Since 1880 Munich Re has embodied competence in handling risks. 5,000 insurance companies in around 150 countries rely on our expertise and financial strength. We assume a part of their risk and find individual solutions for the whole spectrum of risk management. We cover risks worldwide, from air fleets and oil platforms to satellites and natural catastrophes. There is virtually nothing that we do not reinsure.
Primary insurance: We offer security for private clients and for small and medium-sized business
Our primary insurers are the ergo Insurance Group, with its well-known brands victoria, Hamburg-Mannheimer, dkv and d. a. s., the travel insurance group Europäische Reiseversicherung, and the Karlsruher Insurance Group. They have always concentrated on business with private clients and small and medium-sized businesses. By far their most important market is Germany.
05 Dr. phil. Detlef Schneidawind Life and Health Human Resources 06 Dr. jur. Hans-Jürgen Schinzler (Chairman of the Board of Management) Executive Offices Press Internal Auditing 07 Clement Booth Special and Financial Risks Investor Relations Strategic Planning 08 Dr. jur. Jörg Schneider Accounting Controlling Taxes Information Technology 09 Dr. jur. Heiner Hasford Finance General Services Organisational Design and Development 10 Stefan Heyd Corporate Underwriting/Global Clients (until 30 June 2002 together with Dr. jur. Wolf Otto Bauer)
03 Group profile The Supervisory Board Munich Re Group Annual Report 2002
The Supervisory Board chairman Ulrich Hartmann Chairman of the Board of Management of e.on ag deputy chairman Herbert Bach Employee of the Munich Reinsurance Company deputy chairman Dr. jur. Henning Schulte-Noelle (until 6 December 2002) Chairman of the Board of Management of Allianz ag
Prof. Dr. rer. nat. Hubert Markl (from 13 December 2002) Professor of Biology at the University of Constance
Wolfgang Mayrhuber (from 13 December 2002) Deputy Chairman of the Board of Management of Deutsche Lufthansa ag
The Supervisory Board Group profile 03Munich Re Group Annual Report 2002
Prof. Karel Van Miert (from 17 July 2002) Professor at the University of Nyenrode
Dr. rer. nat. Dipl.-Chem. Klaus Schumann Employee of the Munich Reinsurance Company
Dr. rer. pol. Alfons Titzrath (until 17 July 2002) Former Chairman of the Supervisory Board of Dresdner Bank ag
03 Group profile Structure of the Munich Re Group Munich Re Group Annual Report 2002
Organisation of our reinsurance business, which we manage from our headquarters in Munich, was restructured in 2001. The previous 15 organisational units were replaced by seven new operative divisions. Six of these service our reinsurance business in property-casualty lines and one is responsible for life
In our division Europe 1, we handle property-casualty business from our clients in Germany, Switzerland, Austria, Eastern Europe, Greece and Turkey.
Our division Europe 2 and Latin America services clients from northern, western and southern Europe, as well as from Latin American.
The North America division is responsible for our subsidiary American ReInsurance Company and the Munich Re Canada Group.
Our division Asia, Australasia, Africa writes business with clients in three continents and the Pacific Islands, an area with a wide range of very different insurance markets.
The division Corporate Underwriting/Global Clients handles accounts with major international insurance groups (hence “Global Clients”) and writes business worldwide in selected special classes such as agriculture and workers’ compensation reinsurance. Parallel to this, it performs the important function of corporate underwriting for the reinsurance group in non-life business. Its staff clarify fundamental 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 deals with the special classes of credit, aviation and space reinsurance. In addition, it develops innovative fields of business and products, such as those at the interface between the capital market and the insurance market. It also establishes new distribution channels and is responsible for our own reinsurance (retrocession).
Primary insurance structure Group profile 03Munich Re Group Annual Report 2002
Our primary insurers comprise the ergo Insurance Group, with its well-known brands victoria, Hamburg-Mannheimer, dkv and d. a. s.; the Karlsruher Insurance Group; and Europäische Reiseversicherung.
meag Securities Management and meag Real Estate Management are responsible for direct investment in securities and the Munich Re Group’s real estate portfolio. meag munich ergo Kapitalanlagegesellschaft manages retail and special funds, whilst meag munich ergo Real Estate Investment handles openend real estate funds. ergo Trust designs, markets and manages financial services products.
What makes the atmosphere at Munich Re special is difficult to describe, but easier to experience – in the course of an open day, for example.
In a survey commissioned by the German magazine “Capital” on the quality of employers in Germany, 90% of the Munich Re staff questioned said they were proud and happy to work for us. Why? It surely has a great deal to with the factors we attach importance to at Munich Re: valued staff, quality in small things as well as big, the manner in which we conduct our business, openness in dealing with one another, and even the atmosphere of our buildings. But before we try to put into words what can really only be felt and experienced, let us simply look at what happened when we held our open day at our offices in Munich last October.
The open atmosphere, the informal spirit of dialogue, the perfect organisation in the background – all these things made the open day a good example of Munich Re’s distinctive corporate culture.
SUSTAINABLY FOR INNOVATION Together with scientists and safety engineers, Munich Re has analysed and evaluated the main problems and issues of nanotechnology, and condensed the results into a product-safety and crisis-management system. As far as the state of the art and a look into the future will allow, we want to minimise the risks involved in handling products manufactured with nanotechnology. Our intention is to stimulate discussion on a social, ethical and political level and to solve the problems by working together with all the groups involved.
In this section we present topics that were of particular relevance for Munich
Re’s business in the past year. Although the range is broad, the topics have a number of points in common: – They demonstrate that we take seriously our claim of acting sustainably in our business.
– They prove that, time and again, we have to carefully weigh up big opportunities against the size of the risks involved.
– In each case, we are well on the way to long-term profitability, our main strategic objective.
Pensions Business issues 2002 04Munich Re Group Annual Report 2002 pensions: Providing for the future
With its consulting company People & Pensions, ergo provides additional advisory and support services. It has already succeeded in winning as clients several major firms and trade association organisations.
American Re Business issues 2002 04Munich Re Group Annual Report 2002 american re: All set for new opportunities
Representing 40% of the global market, the us is the largest reinsurance market in the world. Following a year of significant change, Munich Re’s us subsidiary American Re is well positioned to take advantage of the improved dynamics in that market and to do so profitably.
2002 was also a year of drastic cost-saving measures for American Re. In particular, the withdrawal from international business and the closure of its international branch offices, together with the internal restructuring of us operations, led to a reduction of more than 20% of American Re’s workforce.
Asbestos was used in virtually all branches of industry in the second half of the 20th century. Contact with the material can lead to asbestosis, mesothelioma, lung cancer or other diseases as long as ten to 50 years later (the “latency period”).
The Munich Re Group has posted net provisions of €1.36bn for asbestos-related claims. In the years prior to 1975, it accepted practically no us liability business in the portfolio it wrote from Munich, subsequently participating mainly in “layer” covers for large industrial firms whose insurance policies have largely been paid out or reserved already. After 1985 Munich Re and American Re excluded asbestos from their covers in the us market.
American Re has net reserves of us$ 665m for asbestos-related claims. Of this figure, us$ 280m comes from the reserve strengthening in 2002, which took into account the following development: to begin with, lawsuits were mainly directed against us manufacturers of asbestos, whereas now there is a growing trend towards people suing any companies that processed products containing the material. With the above-mentioned net reserves, American Re has also made adequate provision.
In Europe it is employers’ liability – rather than product or environmental liability – which is primarily involved in asbestos cases. This liability varies greatly from country to country. In Germany, for example, employees only have a claim if their employer has caused them harm intentionally. German workers’ compensation insurers have adopted a clear stance: they play an active role not only in preventing but also in compensating asbestos-related occupational diseases.
Munich Re has been monitoring and publishing information on the development of the legal and factual situation in individual countries for many years. Our claims burdens depend on various factors: – on liability law, whose role in compensating asbestos-related diseases varies from country to country, even within the eu; – on the involvement of the respective national liability insurers in these liabilities; – on the particular structure of our reinsurance participations.
Whether it is the unpredictability of computer viruses or the targeted attacks of cyberterrorism – internet risks are confronting the insurance industry with completely new issues. Our centre of competence for it risks seeks practicable solutions.
Although the internet certainly offers a multitude of opportunities, it also harbours many risks. Since the end of the 1990s, there has been an exponential increase in the number of computer viruses. In the past year alone, no fewer than 40,000 viruses occurred at Munich Re, compared with under 200 in 1998. But other dangers lurk in net – the danger of cyberterrorism, for example, the threat of deliberate attacks by hackers. If the firm targeted has insufficient protection, hackers can manipulate data, spy on its activities, download confidential client files such as addresses and credit card details, and use this information to harm clients or the firm itself. In addition to the material damage inflicted, the company may often suffer a loss of image, which can be far more serious.
In the meantime many firms have recognised the dangers and are investing heavily in risk-reducing measures. Firewalls, virus scanners and encryption techniques are just three examples of the precautions that are necessary for working safely with computers and the internet. Whereas security systems used to be updated every six months, such updating now has to take place daily. But there is still no such thing as 100% security. Faced with the residual risk, firms approach the insurance industry for cover against any type of damage to their computer systems, e.g. a virus infection of their computer networks and the business interruption that may result, or the loss of purchased and self-generated programs.
04 Business issues 2002 Cyberrisks Munich Re Group Annual Report 2002
Unpredictable it risks it risks constitute a whole new risk potential. The spread of computer viruses and the possible failure of external networks involves an extremely high accumulation risk. As a rule, a computer virus will not affect just one policyholder; in fact, it may hit all the policies in an insurer’s or reinsurer’s portfolio. The traditional, locally restricted accumulation concept for natural hazards such as windstorm or earthquake cannot be applied to it risks, given that computer viruses can spread very quickly all around the globe. Nor is it possible to calculate the frequency or cost of such events on the basis of mathematical laws or empirical values. Owing to this lack of transparency as regards loss potential, Munich Re has not written any covers for computer viruses or other it accumulation risks in property insurance since 2001.
The companies in the Munich Re Group are being provided with uniform data processing systems: the software platform esprit for ergo, and gloria for the reinsurance companies.
The esprit team comprises members of all the ergo companies. They ensure that the system meets the requirements of a composite insurer and at the same time remains flexible for the special needs of the individual insurers in the ergo Group.
The software will be changing in reinsurance as well. With the new platform gloria (Global Reinsurance Application) it will become more uniform, and isolated systems will disappear. Whether in Munich, Princeton or elsewhere, staff can look forward to working with the new system from 2005 onwards. Data resources, software and functions will be the same for all, whilst at the same time taking account of regional circumstances.
For insurers, flood disasters like those of summer 2002 are natural catastrophes with particularly high accumulation potential. They present special underwriting problems: insurers and reinsurers have to assess where their maximum exposure may be for certain events and what liability they then are prepared to accept. Incorrect estimates may result in an insurer’s financial reserves being overstretched. When insuring objects in areas prone to flooding, evaluating the risks is especially difficult. Houses in the same district or even in the same street can be highly exposed or relatively safe, the difference being only a few metres in elevation. The zoning system for flood, backwater and heavy rain (zürs) developed by the German Insurance Association is an attempt to assess risks better, with the necessary degree of detail.
Not only are the liabilities problematic but so are the prices for insurance cover. The price is based on the probable maximum loss and how often it may occur on average within a certain period. Owing to global warming, torrential rain with subsequent flooding is likely to occur more frequently than it used to. Climate change (see page 81) may lead to extreme weather conditions and thus to an increase in large losses. Insurers have to react to this loss potential with premium loadings.
On top of this, there is another underwriting problem: people who think their houses are not situated in hazard zones will not take out insurance against floods (in spite of the fact, largely unknown, that around 50% of all flood losses are caused by local downpours). Flood insurance for highly exposed risks is therefore very expensive, or insurers decline such risks altogether. This situation is not satisfactory for either policyholders or insurers.
The dangers of flooding can be curbed by risk management. In particular, public authorities should not permit building in areas prone to flooding. Furthermore, dykes must be checked and overhauled, polders and natural water meadows designated as flood retention areas. This costs money and restricts land use, but the benefits are immediate. Parallel to this, measures are necessary that will have a positive influence on the climate in the long term, e.g. reducing carbon dioxide emissions.
Recent disasters have demonstrated all too clearly the immense loss potential of motor liability insurance. In March 1999, for example, a single lorry that caught fire triggered an inferno in the Mont Blanc Tunnel, claiming the lives of 39 people and causing property damage running into billions. It took three years of repairs before the tunnel could be reopened.
This loss event powerfully illustrates that motor liability insurance without any limits constitutes an incalculable risk for insurers and reinsurers. It is not possible to establish a price for this insurance cover that is commensurate with the risk, as neither insurers nor reinsurers have unlimited equity capital at their disposal. If the worst comes to the worst, the promise of unlimited cover is therefore undeliverable. The loss potential in motor liability insurance being what it is today, an insurance company’s existence could certainly be threatened by the financial consequences of unlimited cover.
We are working on the assumption that from 2004 onwards retrocession capacity will no longer be available for unlimited motor covers. Particularly against the background of current developments on the financial markets and the associated losses in equity capital, it will be impossible for reinsurers to bear such a risk on their own.
All this has led us to put an end to unlimited motor third-party liability coverage. In all countries where unlimited cover is not prescribed by law, Munich Re is no longer providing it as from 2003. And our long-term aim is to eliminate unlimited covers from our portfolio entirely.
Climate change Business issues 2002 04Munich Re Group Annual Report 2002 climate change: A challenge for our business
A Munich Re project group has been exploring precautionary measures to counter tomorrow’s risks in good time.
In February 2003, Munich Re’s Board of Management gave the go-ahead for implementing the recommendations drawn up by our project team “Challenge of Climate Change”. This team had looked into how climate change could affect reinsurance business and investment in the long term, and what new business opportunities might arise in connection with the international agreement on climate protection. The aim of the project was to incorporate climate projections into business decisions, in order to ensure continued success in our underwriting and investment operations.
Climate change concerns our insurance and reinsurance business directly as a consequence of the increasing number of expected claims. We therefore produced forecasts of the total annual claims burden and considered possible changes in the insurance sector.
In the long term, the consequences of climate change may also affect the cultivation of crop plants, for example, and lead to a shift in vegetation zones. However, the risk analyses carried out in our agricultural unit have so far not indicated any effects for the areas covered by our underwriting. Furthermore, improved methods of cultivation and advances in breeding could offset any possible negative impact. The trend towards rising yields per hectare is therefore likely to continue. In any case, the insurance products in our agricultural business, as in the other lines of insurance, are designed to allow for the risk of change, i.e. we continually adapt the conditions of insurance (rates, deductibles, sums insured) to changing climatic and local conditions. But the growing number of extreme weather events harbours a significant risk potential for producers and the insurance industry. Here suitable agricultural insurance systems must be designed in which the state plays a part as regards regulation and financing.
Deutsche Museum, containing many articles by experts on the climate. It can be ordered via the museum shop at www.deutschesmuseum -shop.com.
Once the Kyoto Protocol comes into force, emissions trading – the buying and selling of permits to emit a limited quantity of greenhouse gases – will also affect insurance to some extent. We are examining and assessing the degree to which we will have to adapt existing insurance covers, but also where the potentials for new products lie. We will take further steps in this area at an early stage, depending on how the emissions trading market develops.
Notwithstanding events on the capital markets, the partnership between the ergo Insurance Group and HypoVereinsbank has developed into a success story for both sides – with a lasting sequel. The staff in both groups are highly motivated to help sell each other’s products, whilst at the same time meeting the needs of their respective clientele.
Today, staff of the HypoVereinsbank sell insurance products of the ergo Group, and insurance agents of ergo’s sales force offer HypoVereinsbank products – a partnership of great mutual benefit. Munich Re, by increasing its stakes in HypoVereinsbank and the ergo Insurance Group at the beginning of 2002, established the platform for this far-reaching, exclusive partnership. Central to the cooperation are the individual clients, with their needs in the area of insurance, private provision and asset management. As a result of the partnership, they are now being offered the services they want from a single source – with expert consulting and good service. ergo subsidiary victoria had already been working together with HypoVereinsbank for many years, so the sale of insurance products was a tried and tested process in some areas of the bank. It has now been extended to the whole of the sales network.
The result of the cooperation has far exceeded expectations. By the end of 2002, clients had bought more than 150,000 insurance policies via HypoVereinsbank outlets, with an annual policy premium of nearly €300m. The sales concept functions especially well in cases where insurance and banking products are closely linked, such as arrangements involving real estate loans and life insurance. Annuity insurances with single-premium payment have also been in demand over the bank counters.
Health insurance Business issues 2002 04Munich Re Group Annual Report 2002 health insurance: An ailing system
State healthcare systems are suffering from demographic trends. Private health insurance can provide solutions.
04 Business issues 2002 Health insurance Munich Re Group Annual Report 2002
Terrorism Business issues 2002 04Munich Re Group Annual Report 2002 terrorism: It has destroyed the calculation basis as well
The terrorist attack of 11 September 2001 gave rise to a previously inconceivable loss. Its dimensions had not been foreseen even by risk experts, and it strongly affected the balance sheets of many international insurers. We have now posted reserves of us$ 2.6bn for the Munich Re Group (covering all classes of business). The amount also includes reserves for possible claims that have not yet been reported to us, especially from the business interruption and liability sides.
The renewals of treaty business in reinsurance and also of policies in primary insurance in 2002 generally brought the risk carriers substantially better terms of trade. And not only with regard to prices: we were also able to greatly reduce exposure to terrorism risks in our portfolio.
Right from the beginning, Munich Re advocated working together with other representatives of the insurance industry to end the lack of cover for terrorism risks by involving the state to an appropriate degree. Since September 2002 extremus ag has been able to offer terrorism cover for property and business interruption policies in Germany upwards of a sum insured of €25m (see page 252). Also in 2002, a terrorism insurance pool was set up in France. Called gareat, its structure is similar to that of extremus. Austria and Finland have each formed a pool for terrorism cover as well. In Spain, on the other hand, certain categories of these risks are covered by the state.
The us has made other arrangements: since November 2002 the Terrorism Risk Insurance Act of 2002 has been in force. This legislation on terrorism insurance introduced a state programme of liability and obliges insurers to provide coverage against terrorism to the extent provided for in the Act. The programme pays out if an insurer has provided coverage for terrorism and an act of terrorism is deemed to have caused the loss. Insurers’ deductibles are
Terrorism Business issues 2002 04Munich Re Group Annual Report 2002 considerable, however. In addition, the programme only applies to international terrorism that causes losses in the us, i.e. not to acts of terrorism committed by us citizens in the us. The programme provides insurers with coverage for terrorism risks up to a total limit of us$ 100bn free of charge, though clients have to pay. The intent of the us administration here is to ensure that insurers can carry the risk again themselves as from 2005, which is when the programme expires.
THE CORE OF OUR BUSINESS Three main features characterise the Munich Re Group: firstly, financial strength and security; secondly, knowledge and everything that goes with it – competence, know-how, experience; and thirdly, emphasis on partnership, especially with clients. The concept of partnership between reinsurer and cedant is undergoing changes, on both sides. Solutions need to be found that ensure reliability and predictability in the relationship whilst strengthening flexibility and openness.
RELIABLE PARTNERSHIP IS A LASTING VALUE If sociologists are to be believed, classic partnerships have been replaced by numerous new types of relationship. Calling a relationship a “life phase” is an indication of this trend. In our client relationships, too, we are witnessing a tangible shift towards partnerships that focus on a joint project or the joint solution of a certain problem. Our objective is to accomplish this change with our clients whilst maintaining the “old” values that have always been Munich Re’s hallmark: reliability and dependability.
Opportunism is gaining ground. There is a trend for relationships, including those of a business nature, to be geared primarily to the achievement of (usually short-term) common goals. Central to these relationships is the joint project, which determines the intensity of the partnership. Precisely in this world of increasingly utilitarian relationships, “soft” values like sympathy, trust and reliability become immensely important. For Munich Re this has always been the case – and will continue to be so.
It mainly investigated how satisfied primary insurers were with their reinsurers. But it also examined what criteria insurers use to select their reinsurers and how they rate security, professional expertise, capacity, service, flexibility, speed and professionalism. We came out top with our clients as regards intelligence, transparency and technical ability. We also did very well in terms of flexibility. Generally speaking, all the clients were less satisfied with the degree of client focus in the reinsurance industry. That’s a very subjective criterion, of course, but we take it very seriously.
How does the way we deal with clients measure up to the goal of acting sustainably?
We are a reliable and trustworthy partner that still has an eye for the long-term client relationship. But we also have our own goals and objectives that we must achieve. Here we consider not just one year but longer periods. If we can’t meet our result objectives in the medium term, we may arrive at a point in negotiations with cedants where we have to end a long partnership in order to ensure the profitability of our business.
Environment Our commitment to environmental protection is rooted in responsibility for our business and for the generations to come.
At the four meetings of the Supervisory Board, the Board of Management gave in-depth reports on business performance. These reports focused on Munich Re’s activities in the us and in particular on the substantial expenditure to increase American Re’s loss provisions. American Re was given a capital injection to consolidate and extend its position in the us reinsurance market. The Board of Management reported to us in detail about the claims burdens resulting from the terrorist attack on the World Trade Center of 11 September 2001, as well as on the losses in the value of investments following the exceptional capital market weakness and the resultant reduction in equity capital.
Another topic of our discussions was the further improvement of corporate governance within Munich Re. After a thorough discussion and on the recommendation of a working group that we had set up, the Supervisory Board changed a number of the internal rules of procedure of the Supervisory Board and Board of Management and established an Audit Committee. In addition, the content and timing of the regular and extraordinary reports of the Board of Management to the Supervisory Board were specified. Munich Re complies with virtually all the recommendations of the German Code of Corporate Governance, thus conforming with high international standards in this area as well. Supplementing the declaration of compliance published in December 2002, a detailed report on Munich Re’s corporate governance is provided on pages 103 ff. of this annual report.
Report of the Supervisory Board Corporate responsibility 05Munich Re Group Annual Report 2002
Annual financial statements kpmg Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft audited the following documents and gave them an unqualified auditor’s opinion: the Munich Reinsurance Company’s bookkeeping, its company financial statements and the consolidated financial statements as at 31 December 2002, plus the management reports for the Company and the Group. The auditor’s reports were promptly given to all the members of the Supervisory Board. The Audit Committee examined the company and consolidated financial statements, the management reports and the auditor’s reports and discussed them in detail with the auditor at the Audit Committee meeting on 27 April 2003 in order to prepare for the examination of the audit by the full Supervisory Board. The results of the Audit Committee’s discussion were then presented to the full Supervisory Board at its meeting on 28 April 2003.
The Supervisory Board checked the company financial statements, the consolidated financial statements, the management reports and the proposal of the Board of Management for appropriation of the balance sheet profit. This examination did not result in any adverse findings.
With effect from 1 April 2002 we appointed Mr. John Phelan to the Board of Management. He had worked for Munich Reinsurance Company of Canada (mroc) for many years, latterly as President and Director. Since 9 March 2002 he has been President, Chief Executive Officer and Chairman of the Board of American Re Corporation (arc).
At the end of 2003, Dr. Hans-Jürgen Schinzler will leave Munich Re’s Board of Management. At today’s meeting of the Supervisory Board we appointed Dr. Nikolaus von Bomhard to succeed him as Chairman of the Board of Management with effect from 1 January 2004.
Dr. Alfons Titzrath gave up his seat on the Supervisory Board at the end of the Annual General Meeting on 17 July 2002. The shareholders voted for Professor Karel Van Miert to succeed him.
May we take this opportunity to again convey to the members who have left the Supervisory Board our sincere appreciation for their many years of valuable work.
“Corporate governance” stands for a form of responsible company management and control which is geared to long-term creation of value. With its global operations, Munich Re has to consider corporate governance rules in different parts of the world. Of particular importance to us are the observance of shareholders’ interests, efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies, and corporate communications that are open and transparent.
Munich Re’s Board of Management and Supervisory Board have resolved to follow the Code’s recommendations and proposals with only a few exceptions. This decision was an easy one, given that Munich Re has met most of the requirements for many years. Significant parts of the Code have been present in German legislation for some time, especially in stock-company, co-determination and capital-market law; further provisions are contained in Munich Re’s Articles of Association and internal rules of procedure.
Here we would like to single out a few aspects that Munich Re considers important for corporate governance.
Munich Re’s Board of Management has executive responsibility for running the Company and Group. In so doing, it must observe corporate interests and the appreciation of lasting corporate value. The Supervisory Board and the Board of Management consult closely about the Company’s strategic development. The Board of Management informs the Supervisory Board regularly, promptly and extensively about all relevant questions of strategy and strategy implementation, about corporate planning, business performance, the risk situation and risk management. It also explains any deviations in business performance from plans and objectives. In this connection, explicit rules were laid down last year for the Board of Management’s reporting to the Supervisory Board. The Board of Management must obtain the Supervisory Board’s approval for important business transactions, as required by stock-company law and the Code. In addition, in 2002 we agreed an appropriate deductible for our Board members’ d&o cover (directors’ and officers’ liability insurance).
The Standing Committee decides on matters requiring the Supervisory Board’s approval insofar as the full Supervisory Board or another committee is not responsible. It prepares Supervisory Board meetings and decides on amendments to the Articles of Association that only affect the wording. In addition, it attends to the Supervisory Board’s annual declaration of compliance with the German Code of Corporate Governance, in accordance with Section 161 of the German Stock Companies Act, and the Supervisory Board’s statement in the annual report about the Company’s corporate governance (see p. 101). Last year, it was also decided that this committee would annually review the efficiency of the Supervisory Board’s work and submit appropriate proposals to the full Supervisory Board where necessary.
In accordance with the German Code of Corporate Governance, the Supervisory Board established an Audit Committee in 2002. It prepares Supervisory Board resolutions on the adoption of the annual Company financial statements and approval of the Group financial statements, and discusses the quarterly reports. The committee also examines the Company’s risk management. Furthermore, it initiates the decision on the appointment of the external auditor and monitors the latter’s independence. It appoints the external auditor, determines the focal point of the audit and agrees on the auditor’s fee.
Every shareholder may vote at Munich Re’s Annual General Meeting, with one vote per share, provided the shares have been registered for the meeting beforehand and are entered in the Company’s register of shareholders.
The Board of Management facilitates shareholders’ participation in the Annual General Meeting by means of electronic communications. Shareholders who cannot attend personally can have their voting rights exercised by a proxy. We thus anticipated one of the requirements of the German Code of Corporate Governance by several years. Munich Re appoints the proxies, who can also be reached during the Annual General Meeting. They exercise the voting rights solely in accordance with the instructions they receive from the shareholders. The latter may also authorise and instruct the proxies via the internet. Furthermore, shareholders have the option to follow the whole Annual General Meeting live on the internet and, if they have authorised a proxy, to change their voting instructions right up until the end of the general debate.
After the Annual General Meeting, we publish the resolutions immediately on the internet in German and English.
Since 2002 members of the Board of Management and Supervisory Board, and their close relatives, have had to disclose any shares they acquire or sell in Munich Re or in a listed subsidiary. This rule applies insofar as the acquisition is not part of the Board member’s remuneration and the transactions exceed an equivalent value of €25,000 within a period of 30 days. We publish such information without delay on our website.
In our financial calendar (see back cover flap) and on the internet, we publish the dates of the most important regular publications and events for the next business year.
On 6 December 2002 Munich Re’s Board of Management and Supervisory Board published their first declaration of compliance with the recommendations of the Government Commission German Code of Corporate Governance, as per Section 161 of the German Stock Companies Act.
Dr. jur. Henning Schulte-Noelle basf ag Assurances Générales de France (until 6 December 2002) e.on ag s. a., Paris*
Dr. jur. Rolf-E. Breuer Bertelsmann ag Compagnie de Saint-Gobain s. a., (until 6 December 2002) Deutsche Börse ag (Chairman) Paris
05 Corporate responsibility Other seats held by Board members Munich Re Group Annual Report 2002 * Own group company within the meaning of Section 18 of the German Stock Companies Act.
Wolfgang Mayrhuber Eurowings Luftverkehrs ag heico Corporation, Miami (from 13 December 2002) rwe Systems ag
Prof. Karel Van Miert rwe ag Agfa-Gevaert nv, Mortsel (from 17 July 2002) Fraport ag Anglo American plc, London
Hon.-Prof. Dr. techn. h.c. Dr.-Ing. h.c. F. Porsche ag Porsche Holding GmbH, Salzburg Dipl.-Ing. eth Porsche Ges.m.b.H., Salzburg Ferdinand Piëch (from 16 April 2002) Scania ab, Södertälje* (Chairman)
Dr. jur. Dr. h.c. Albrecht Schmidt Bayerische Börse ag (Chairman) Bank Austria Creditanstalt, Vienna* Bayerische Hypo- und (Chairman) Vereinsbank ag (Chairman) Siemens ag hvb Real Estate Bank ag* (Chairman)
Board of Management Seats held on Membership of comparable supervisory boards of bodies of German and other German companies foreign business enterprises
Dr. jur. Hans-Jürgen Schinzler Bayerische Hypo- und Vereinsbank ag Aventis s. a., Schiltigheim Chairman ergo Versicherungsgruppe ag (Chairman)
Dr. jur. Nikolaus von Bomhard – Münchener Rück Italia s.p.a., Milan*
(Chairman) bhs tabletop ag man Nutzfahrzeuge ag Nürnberger Beteiligungs-ag victoria Lebensversicherung ag victoria Versicherung ag wmf Württembergische Metallwarenfabrik ag
Stefan Heyd Allianz Versicherungs-ag – extremus Versicherungs-ag Kraft Versicherungs-ag Münchener und Magdeburger Agrarversicherung ag
Dr. jur. Jörg Schneider Forst Ebnath ag (Chairman) American Re Corporation, meag munich ergo Kapital- Wilmington, Delaware*
For many years the leading rating agencies have given our financial strength top ratings. In 2002, Munich Re was able to defend its good position in the industry, even though we had to accept a few downgradings.
Besides our capital strength, however, the ratings also take into account the marked progress we have made in other areas, improving both our operating result and our monitoring and management tools.
The ratings for our subsidiaries on 10 April at a glance: A.M. Best S&P Moody’s
Primary insurance group victoria Lebensversicherung Aktiengesellschaft AA– Aa3 victoria Versicherung Aktiengesellschaft AA– Hamburg-Mannheimer VersicherungsAktien -Gesellschaft AA– Aa3 Hamburg-Mannheimer Sachversicherungs-ag AA– dkv Deutsche Krankenversicherung Aktiengesellschaft AA–
Munich Re Finance B.V., 6.75%, €3.0bn Subordinated Bonds 2003/2023 aa A A2 AAAA–
American Re Corporation, 7.45%, US$ 500m Senior Notes 1996/2026 a+ BBB+ A3
Employees are a company’s intellectual capital. In keeping with its tradition, Munich Re therefore offered its staff new impulses and incentives in 2002.
In contrast to many other companies in the insurance and financial sector, Munich Re created further new jobs last year. As at 31 December 2002, a total of 41,396 staff worked for companies in the Munich Re Group, over 3,000 more than one year previously.
Our primary insurers employed 34,924 staff in 2002, or 9.6% more than in the previous year. 31,789 of these worked for ergo.
Last year the Munich Reinsurance Company participated for the first time in the Europe-wide study “Great Place to Work”, which evaluates the attractiveness of employers. It was performed by the firm psychonomics ag in collaboration with the German magazine “Capital”. We can be proud of the results, which made us the highest-placed financial services provider in Germany and put us first among the participating dax companies. According to the study, 97% of the staff questioned at Munich Re said that their company was a very good employer, and 90% were proud to be able to tell others that they worked for Munich Re. The response to the study endorses the objectives of our human resources policy.
In 2002, all staff of Munich Re and ergo had the chance to acquire Munich Re shares at preferential conditions. The employee share programme is designed to help promote personal saving and at the same time to enhance the feeling of partnership in enterprise among staff and identification with the company they work for. It is thus an important component of our fringe benefits.
We wish to cordially thank all the staff of the Munich Re Group for their commitment and loyalty in 2002. It is their hard work, skill and dedication that ensures the quality of our services.
As a major international enterprise, the Munich Re Group carries a responsibility towards society. This is linked to the obligation and the desire to serve the communities in which the individual units of our Group operate.
Given that people and their well-being are a central issue for us, health education and healthcare feature prominently in the causes we support. Our American subsidiary American Re supports the charity “Komen Race for the Cure”, set up in 1982 and dedicated to the prevention, research and treatment of breast cancer. Over the course of the year, the organisation stages relay races in over 100 cities in the us as well as in Germany and Italy to raise funds and to draw attention to the disease. American Re also sponsors the breast cancer campaign “Spirit of Life”, organised by the charitable institution City of Hope, which, just outside Los Angeles, runs one of the world’s leading research and treatment centres for cancer, aids, diabetes and other serious illnesses.
Our primary insurance subsidiary dkv has found a fitting partner in the German Hygiene Museum (dhm) in Dresden. dkv supports the dhm in exhibitions and special events, and awards a media prize each year together with the museum. The highpoint of the partnership in 2002, dkv’s 75th anniversary year, was the touring exhibition “bodytravel”, which after opening in Dresden, has been on show in nine German cities.
Without question, one of the most important topics in our reinsurance business is natural catastrophes. In connection with this, Munich Re helped prepare and sponsored the International Conference on Disaster Management & Insurance in India in 2002. Internationally renowned experts from various scientific disciplines discussed what preventive measures could be taken against the effects of earthquakes, especially in major cities. Parallel to this, an Indian Earthquake Safety Initiative was established. Munich Re’s involvement here complements its participation in numerous national and international institutions concerned with topics relevant to Munich Re’s business. These include the United Nations, the Intergovernmental Panel on Climate Change, the German Society for Earthquake Engineering and the Wind Engineering Society.
Apart from our social commitment in fields that are closely linked to Munich Re’s business, we are also active as sponsors in the area of social services. We were delighted at the special recognition accorded last year to one of the foundations we support, the “Nicolaidis Stiftung gGmbH – Hilfe für verwitwete Mütter und Väter”: Germany’s Family Minister Renate Schmidt awarded it the government “start social” prize. The foundation’s main objective is to help young widowed mothers and fathers in coping with their loss and to systematically develop a nationwide network.
05 Corporate responsibility Social commitment Munich Re Group Annual Report 2002
Some of our activities are aimed at promoting professional training. Thus, for example, we sponsor the internet portal of the German Mathematicians Association. As the employer of over 700 mathematicians, we feel we have an obligation to promote dialogue on mathematical topics. After all, the quantitative analysis of existing risks, and the assessment of new ones, are based to a very significant extent on mathematical methods and models.
The Hamburg-Mannheimer foundation “Jugend und Zukunft” backs youth welfare projects designed to give young people perspectives for the future. Training programmes help and accompany socially deprived youngsters in preparing for working life.
Ever since the days of our company founder, Carl Thieme, sponsoring contemporary art has been an important part of Munich Re’s cultural commitment. In Munich, for instance, we support a number of museums, including the new Pinakothek der Moderne, opened in 2002. The latter is one of the world’s largest museums of art, architecture, graphics and design of the 20th and 21st centuries.
Das Gustav Mahler Jugendorchester unter Pierre Boulez: Klassik, Talent, Tradition. Die Münchener Rück unterstützt die besten jungen Musiker Europas auf dem
The Gustav Mahler Jugendorchester with Pierre Boulez: classical music, talent and tradition. Munich Re supports Europe’s best young musicians on their way to the world’s stage.
Environmental protection and sustainability are core issues for Munich Re. Besides modern environmental management, communication of present and future environmental risks is assigned a key role.
05 Corporate responsibility The environment Munich Re Group Annual Report 2002
In 2002, members of our Geo Risks Research Centre of Competence gave presentations in 2002 at climate conferences, congresses and workshops, 86 externally and 27 internally. Topics included “Nature hits back – Natural catastrophes and climate change, trends and options”, “Loss potentials from natural catastrophes and global loss trends”, “Economic risks of global climate change from the viewpoint of an international reinsurer” and “Climate change: Warming to disaster?” In addition, Geo Risks Research published numerous papers and other material on natural catastrophes.
The exhibition is the result of a partnership between the Deutsche Museum and Munich Re. We are supporting the event not only financially but also professionally with the special expertise, statistics and information we have accumulated over many decades around the globe (see page 44). One of the beneficial results is that we have been able to intensify contact with important scientific and research institutions.
The ergo Group gears its operations to the fundamental principle of “Prevention is better than cure” in order to avoid or reduce losses and negative impacts on the environment. victoria has been heavily committed to environmental protection for some 15 years now. It has introduced a broad-based environmental management system, which was audited for the first time in 1998 by external environmental experts, in line with the strict requirements of the emas Regulation, making victoria the first European insurance company to be audited in this way. Since January 2001 it has also complied with the globally applicable standard iso 14001. And in 2002 it received further recognition: as victoria had implemented the emas Regulation in exemplary fashion, it became the only German company to receive the 1st emas Award from the Environment and Development Department of the European Commission.
RISK ANALYSIS: UNINSURABLE? Chernobyl gave the term “industrial risk society” a particular resonance in the 1980s, which has lasted to this day. The disaster was not covered by insurance, owing to the hermetic separation of economic systems in the Soviet Union. After Chernobyl the spotlight focused on the situation of nuclear power plants in general – leading to substantial improvements in safety standards. An insurance solution in the Soviet Union successor states is still not in place, however …
THE NEW RISKS ARE BECOMING SMALLER AND SMALLER Genetic engineering involves controlling miniscule, highly complex molecular structures. Nanotechnology works with even smaller units. Both technologies open up vistas of fascinating new applications, but they also harbour huge risk potentials. Tomorrow’s risk management faces major challenges.
Last year you said that Munich Re’s risk systems had passed the test in connection with the events of 11 September. Does that also apply to the slump on the capital markets in 2002?
Purely in financial terms, the stock market crash of 2002 was an even sterner test for the Munich Re Group. The tools for safeguarding our investments against losses were not always sufficient to cope with the duration of the price falls and especially with their dimensions.
Strong growth Our Group premium income rose by 10.8% to €40bn.
MANAGEMENT REPORT Business parameters Financial report 06Munich Re Group Annual Report 2002
In Germany, the annual average growth of 0.2% in real terms was again weak. Deferred structural reforms and an unpredictable economic policy, which increasingly led to uncertainties, left their mark. The indices of producer and consumer confidence took a downward turn, signalling a recession. Insolvency figures shot up and, at the end of the year, unemployment stood at 4.2 million, the highest December figure since 1997.
06 Financial report MANAGEMENT REPORT Business parameters Munich Re Group Annual Report 2002 gdp in Japan grew by 0.3% in real terms. The deflationary trends that have existed since the mid-1990s continued unchanged. In 2002, the price level according to the consumer price index fell back to that of 1995.
Thanks to very robust domestic demand, Australia‘s real growth of 3.8% was significantly higher than that of the global economy. Canada‘s economy also recorded strong growth of 3.4%.
By contrast, the situation in Latin America worsened. In Argentina, the crisis persisted, with economic output declining by a double-digit percentage. Political tensions in Venezuela are rendering the country increasingly unstable. In Brazil, the economic situation was shaped until October by the inminent presidential elections.
Because of the growing geopolitical risks, the price of oil rose in September, despite the sluggish economic trend, and then again in December, to over us$ 30 per barrel. Not until March did the market calm down again. Although raw materials generally became more expensive, inflation rates in the industrialised countries continued to be relatively low. In Euroland, however, the increase in prices still exceeded the European Central Bank‘s target value of 2%.
After an initial recovery, carried by the hope that the world economy would quickly improve, the stock markets experienced a massive downturn in the spring. At first, with the accounting scandals, the factors responsible for this slump seemed to be specifically American. Gradually though, the classic explanation patterns emerged: uncertainties about the upswing in economy and therefore about companies‘ earnings prospects. The ongoing threat of terrorism and the risk of war in Iraq also led to an increasing loss of confidence among investors. In the second and third quarters, share prices consequently fell to such an extent that they quickly found themselves beneath the level of the September 2001 lows. In the course of the year, the s&p 500 declined by 23.4% and the euro stoxx 50 by 37.3%. This made 2002 one of the blackest years in history for the stock markets. Exhibiting especially great volatility, they recorded their third annual decline in a row.
In most markets, results in life insurance were affected by the weakness of the capital markets. In Germany and elsewhere, many life offices had to reduce their policyholders‘ bonuses. The development of the capital markets led to new business opportunities in life reinsurance, as reductions in equity capital led primary insurers to cede more business to reinsurers.
Nevertheless, rates in some markets and for some sectors have yet to reach a level commensurate with the growing risks, and this is particularly true of several areas in liability insurance. Munich Re will therefore press for further improvements here.
The market parameters for private and company pensions in Germany were dominated by pension reform (see page 69). Insurers quickly translated the statutory requirements of the so-called “Riester” pension into eligible products, but the number of policies actually concluded remained largely below expectations.
German life insurers are also being affected by the continuing weakness of the capital markets, and this could lead to problems for some companies. The life insurance sector has itself come up with a solution to deal with critical individual cases: the rescue company Protektor, in which all German life insurers are involved, has been set up for the unlikely event that a company is threatened by insolvency, thus ensuring that all insureds remain protected even in the current difficult environment.
In the property-casualty classes of business, improved prices and conditions characterised the reinsurance market in 2002 both in Germany and in most other European countries. Competition, which had previously been overheated in several sectors, eased. This was partly due to the withdrawal of a number of large and medium-sized market players. Reduced capacities have further enhanced the trend towards more risk-adequate prices and conditions.
Growth in the different insurance markets – measured by the rate of increase in premium volume – was again stronger in emerging markets than in established markets. This was due to the greater dynamism of the economies and the rising level of insurance penetration there.
Substantial growth in premium was also to be seen in some of the other emerging insurance markets in Asia. Central and Eastern European insurance markets continued to catch up overall in 2002, both in life and in non-life business.
MANAGEMENT REPORT Business performance Financial report 06Munich Re Group Annual Report 2002
Following large share price losses on all the important stock markets, our result objectives had to be considerably revised downwards over the course of the year. The bottom line was a profit of €1,081m.
– We also increased our reserves by us$ 500m for losses from the 11 September 2001 attack on the World Trade Center (wtc).
– We had to take account of the weak state of the capital markets with writedowns of €5.7bn on our security portfolios.
– Losses on the disposal of investments rose to €3.9bn (2.5bn), mainly due to the sale of shares.
The large and very large losses we recorded in reinsurance came to €1,886m (4,749m), including the strengthening of our reserves for the wtc loss. Of this, natural catastrophes – especially the severe floods in Germany, the Czech Republic, Austria and Italy in August 2002 (see page 78) – accounted for €588m (213m).
As at 31 December 2002, there were bonds from previous years with a face value of €2,205m (2,474m) in circulation; of these €1,720m (1,640m) was apportionable to exchangeable bonds, which we use as an instrument for implementing planned sales.
In the year under review, the liquidity of Munich Re and its subsidiaries was always assured. Our cash flow from operating activities amounted to €3.3bn (8.7bn) in net terms. Settlement of wtc claims by primary insurers is progressing more slowly than expected, which means that our payments are not having to be made as early as planned.
How we safeguard our liquidity and hedge against foreign currency risks is described in the risk report (see pages 168, 170).
Despite the reduction in its shareholders‘ equity and valuation reserves, the Munich Re Group is still one of the financially strongest insurance groups in the world, and is also seen by the leading rating agencies and our clients as such. Even though some agencies have downgraded Munich Re‘s rating, this has not had any adverse effect on our business to date. The current ratings of the Munich Re Group and its subsidiaries may be found on page 111 f. of this report and also on our website. www.munichre.com/ir-d
The Munich Re Group companies operate in all classes of reinsurance and offer a full range of products – from traditional reinsurance to alternative risk financing and risk transfer structures (see page 47).
Responsibility for the Group‘s global reinsurance business at the parent company, the Munich Reinsurance Company, is divided between seven divisions: Life and Health; Europe 1; Europe 2 and Latin America; Asia, Australasia, Africa; North America; Corporate Underwriting/Global Clients; Special and Financial Risks (see page 55).
As reinsurers, we write our business predominantly in direct collaboration with our clients, the primary insurers, but also through brokers. Business offered to us by industrial clients through their captives or by risk retention groups (alternative market business) is accepted via Munich-American RiskPartners (marp).
On 31 December 2002 the reinsurance group had 5,836 (5,872) staff, 49.7% of whom were employed outside Germany (see page 234).
Of the reinsurance treaties up for renewal at 1 January 2002, we terminated almost one fifth – measured in terms of premium volume – because appropriate improvements in prices and conditions were not possible. At the same time, we not only achieved appreciably better terms of trade for the renewed business, but also acquired attractive new business. Our clients‘ significantly heightened awareness of the necessity and value of reinsurance with top security continued to benefit us in the renewal of treaties at 1 April and 1 July 2002.
All divisions therefore managed to increase their premium income significantly in the year under review.
Growth in life and health reinsurance is being fuelled by demographic trends and the difficult situation of state social security systems. This benefited not only primary insurers but also Munich Re‘s reinsurers. A large portion of our growth was due to new business, but we also increased our shares in existing reinsurance treaties.
In Germany, one of the main issues for us in the year under review was the introduction of state-subsidised private pensions (for more on this, see page 69 of this report).
The growth in our property-casualty reinsurance reflects the appreciable increases in premiums for existing covers; in many markets, however, we also managed to acquire attractive new business, despite keen competition. Thus the reduction in volume resulting from the termination of unattractive business was more than compensated for overall.
Our combined ratio nevertheless only fell to 122.4% (135.1%). This ratio, and with it the income statement for the business year, were significantly impacted by the strengthening of the loss reserves for our us business.
Until the middle of the year, our claims burden from large and very large losses had been considerably lower than the long-term average. Then, in July and August, there was a succession of bad weather events in Central Europe and Asia, with heavy rainfall and in some cases extensive flooding. We have so far paid out around €500m for the resultant flood losses. In the second half of the year, Windstorm Jeanett caused damage over wide areas of Europe and Hurricane Isidore did likewise in Mexico, altogether costing us around €100m. Besides this, we were affected by two satellite losses totalling around €60.9m which were reported to us in the fourth quarter.
Special and Financial Risks‘ combined ratio has also been impacted by the reinsurance group‘s retrocessions, which are shown there in full. The combined ratios of the individual classes of insurance are given on page 237.
Overall, the results achieved by our reinsurers have developed as follows: Reinsurance underwriting result
Given the good prospects in the us market in particular, we increased American Re‘s capitalisation by us$ 1.4bn at the end of September. Following the previous large increases in its loss reserves and also far-reaching organisational and personnel measures, American Re is much better positioned than it was a year ago. It now concentrates entirely on the important us market, where it is one of the leading operators. You can find out more on page 71.
In our Centre of Competence for Biosciences, doctors, agricultural scientists, biochemists and human geneticists analyse developments in genetic engineering and their impact on our business and our clients. For example, our specialists seek answers to the questions of how rising life expectancy affects health insurers‘ costs or how costs can be saved in healthcare by means of consistent prevention measures. We use statistics and risk scenarios to help health insurers, pension insurers, life insurers, liability insurers and agricultural insurers develop new products and coverage concepts.
We maintain close contact with scientific institutions around the world and with domestic and foreign media, in order to contribute our point of view to public debate. Our experts are highly sought-after. A special event in this context is the Climate Exhibition at the internationally renowned Deutsche Museum in Munich, for which Munich Re is the exclusive partner. You can read more about this on page 44.
Our primary insurance operations include first and foremost the ergo Insurance Group, as well as the Karlsruher Insurance Group and Europäische Reiseversicherung (see page 57). By far their most important market is Germany, where they earn around 81% (80%) of their premium income. Their foreign premium income derives mainly from Italy, the Netherlands, Spain/Portugal, Belgium, Poland and Austria.
This dynamic trend was primarily attributable to life insurance, where premium income was up by 5.6% (9.9%) to €7.5bn (7.1bn). The strong growth in new business particularly reflects our life insurers‘ good market position with respect to private and company pensions in Germany. The ergo companies and the Karlsruher Insurance Group offer a wide range of products covering the whole range of old-age provision (see page 69).
For 2003 our primary insurers have reduced their policyholder’ bonuses from
Overall, the results recorded by our primary insurers have developed as follows: Primary insurance underwriting result
Marketing, employees ergo‘s marketing is based on a multi-channel strategy, with its own strong sales forces, direct mailing and brokers. Its partnership with HypoVereinsbank also plays an important part – ergo‘s sales forces offer their clients products of the hvb Group, and companies of the hvb Group offer ergo company insurance products nationwide. This cooperation, which generated sales of nearly 152,000 insurance policies and annual policy premium of €292m in 2002, contributed to ergo‘s pleasing growth (see page 83).
At the end of 2002 the ergo Insurance Group employed 25,815 (22,156) desk staff and 5,974 (6,402) salaried field staff. The increase in desk staff reflects the continuing amount of good new business written by ergo, but also the acquisition of KarstadtQuelle Versicherungen.
In life insurance, ergo achieved notable sales of personal and company pensions, increasing its premium income by 6.9% (12.0%). Despite the generally slow take-up of “Riester” pension products over the past year, which had to do with the complexity of these policies and the public debate about the possible need for a “reform of the reform”, ergo life insurers sold 530,000 such policies in all, giving them a market share of around 18% of products certified as complying with the pension reform requirements.
In health insurance, ergo last year acquired 80,500 new clients in Germany for its core business: comprehensive insurance for medical costs. Gross premiums were up by 5.7% (4.6%).
In 2002, the ergo Insurance Group launched two new corporate pension schemes: victoria Pensionskasse ag and Hamburg-Mannheimer Pensionskasse ag, thereby further strengthening its position in the company pensions sector. To take account of the different clients involved, the pension schemes have been set up with different methods of marketing. Both take advantage of the ergo network, however, and are supported by the same technical platform, thus providing cost benefits for providers and clients alike.
06 Financial report MANAGEMENT REPORT Primary insurance Munich Re Group Annual Report 2002
The distribution structure of the Karlsruher Insurance Group is based on a main sales organisation present throughout Germany, collaboration with brokers, and a distribution network of partners. Life insurance is also sold through the branches of cooperative banks, mainly in southern Germany. Sales via brokers are growing in importance.
At the end of 2002 the Karlsruher Group employed a total of 4,034 (4,152) people. 1,790 (1,777) of these were desk staff and 2,244 (2,375) field staff.
As a whole, the development of the Karlsruher Group was satisfactory in the past year, despite the negative influences on its business. At €1.35bn, the total gross premiums written remained at the same level as in the previous year.
Owing to a decrease in single-premium business of 15.5% (+ 3.8%) Karlsruher Lebensversicherung ag showed a decline in gross premium of 1.5% to €1.04bn (1.05bn). By contrast, new business with regular premiums developed much better than the market average of 4.8% in 2002, rising by 12.3% (23.5%).
Europäische Reiseversicherung is the market leader in its class of business in Germany, its most important market, where it works with over 17,000 partners in the tourist industry – these include major groups as well as individual travel agents.
In 2002, a total of 704 (653) staff were employed in the Europäische Group.
The overall situation in the travel industry failed to recover from the previous year‘s downturn, with the trend in bookings remaining muted throughout 2002. Partly because of the fifa World Cup in Japan and Korea, the tourist season developed into a “late booker” year. Altogether, the Europäische Group‘s gross premiums fell by around 0.6%.
The Europäische Group also felt the pressure and turbulences of the capital markets. Despite an investment result that was about €8.0m lower than in the previous year, the Group succeeded in reducing its operating loss by around www.reiseversicherung.de
In this section, we report both on the performance of our Group‘s own investments, which derive almost entirely from our core business fields of reinsurance and insurance, and on the third-party business that is being built up.
Retail and special funds for private investors and institutional investors are offered by meag direct. Its important partners are Munich Re and the ergo Insurance Group, with its network of 24,000 agents.
At the end of the year under review, meag and its subsidiaries employed 617 (550) people.
We have reported in detail about the poor performance of the capital markets in the year under review in the section “Business parameters 2002”. The unparalleled slump on the stock markets had a very negative impact on our result, our investment portfolio and our shareholders‘ equity.
At 31 December 2002, the Munich Re Group‘s investments amounted to €156.3bn (162.0bn), down 3.5% on the previous year. This was largely due to the heavy losses in the value of equity portfolios and, to a lesser extent, to exchange losses on foreign currencies in relation to our balance sheet currency, the euro.
The real estate portfolios continued to be rejuvenated and diversified in 2002. Our strategy is based on taking advantage of different market cycles, increasing marketability and achieving a favourable relationship between returns on real estate and interest on outside capital.
In the year under review, additions to real estate amounted to €1,223m (1,016m).
The sales activities are based on the long-term strategy of streamlining portfolios in Germany and reallocating investment to fungible, international markets with strong growth, in order to optimise portfolio performance.
At the beginning of May 2000, Munich Re and Allianz ag had announced their intention to reduce their reciprocal stakes of 25% to around 20% each. This reduction was to take place in several steps, with due consideration for the capital markets. In a first step in the year 2000, the shareholdings were lowered to just under 25%.
At the beginning of 2002 the Munich Re Group acquired from Allianz and Dresdner Bank all of their shares in the hvb Group (13.55% and 2.5% respectively ), taking our stake in that group‘s capital up to 25.7%. Furthermore, in the first quarter we successfully completed the increase in our holding in ergo Versicherungsgruppe ag from 62.9 % to 91.9%.
The transactions are summarised in the following diagram:      
Munich Re plans to reduce its shareholding in Allianz to around 15%, probably before the end of 2003. For its part, Allianz will reduce its stake in Munich Re in the course of the year by around 16% to 18%, and then also to around 15% by the end of 2004.
The difference between the market value of our investments and their balance sheet value changed as follows: The negative valuation reserves for the investments in associated enterprises are essentially a reflection of the appreciable fall in Allianz‘s and HypoVereinsbank ‘s share prices.
Valuation Fair value Carrying Valuation Fair value Carrying reserves amount reserves amount
The investment result for 2002 by type of investment was as follows: meag munich ergo AssetManagement GmbH
At 31 December 2002, meag had assets of €118.7bn under management for the Munich Re Group. Like the other players in the market, our asset management company suffered from the extremely difficult conditions on the capital markets. Despite this, it succeeded in increasing business with third parties to €2.6bn (2.4bn), around €1.8bn of which came from retail funds and just under €800m from special funds for institutional investors.
meag received a number of awards in the year under review for its outstanding performance in the management of retail funds. You can read more about this on page 37.
Results of the different types 2002 Prev. year Changeof investment €m €m in %
Expenses for the management of investments Other expenses 500 575 –13.0
The current macroeconomic environment and the situation on the capital markets are still not favourable for the further development of the insurance industry as a whole. Despite this, unlike many other branches of the economy, reinsurance is currently experiencing something of a boom. In primary insurance, the demographic trend, combined with the empty coffers of the state social security system, will boost new business for private insurers.
As far as the overall economic trend in 2003 is concerned, most professional market observers expect the world economy to stabilise, although all forecasts are overshadowed by the war in Iraq. Early economic indicators are currently showing a mixed picture. Negative factors are the threat of terrorism and the growing macroeconomic imbalances in the us. In addition, the central banks have hardly any more scope for further reducing interest rates in order to stoke the economy. In view of this environment, which is described in the section “Business parameters 2002” (see page 131), there has been growing concern since last year and especially since the beginning of 2003 about increasingly deflationary trends like those observable for some time now in Japan. This will remain a risk scenario for future development.
In Euroland, growth is likely to remain restrained in 2003. We do not expect Germany to be able to improve on its position at the bottom of the growth scale. The political parameters, rising tax burden and high unemployment are adversely affecting net income, thus curbing consumption and the readiness to invest.
In the uk, on the other hand, growth will probably again exceed that of Euroland in 2003. Similarly, Australia and Canada are expected to maintain their relatively better growth rates. In Japan, there is the prospect of stagnation and continuing deflation.
We expect the world economic trend to influence developments in the emerging markets, with those in Asia again growing more strongly than the others. Political risks in Latin America remain high. In Central and Eastern Europe, the overall economic trend is likely to be linked to economic development in the eu, especially in the accession countries, where the internal political measures for joining the eu are being taken in 2003.
06 Financial report MANAGEMENT REPORT Prospects for 2003 Munich Re Group Annual Report 2002
It must be assumed that in the foreseeable future the capital markets will not match the yields of the late 1990s, which were influenced by special factors.
If the overall economy and the capital markets develop as currently expected, insurers and reinsurers will have to reckon with distinctly lower investment income in the next few years.
Notwithstanding this new situation and the very high macroeconomic risks in the short term, we are assuming that positive structural forces in the insurance industry will prevail in the medium term.
Life and health reinsurance is continuing to grow strongly. In the long term, demographic trends and the difficult situation in state social security systems will have a positive effect on this business. If the capital markets remain weak, the consolidation trends apparent in important life insurance markets could intensify. It remains to be seen how the necessary reduction in policyholders‘ bonuses – in Germany, for example – will affect demand for covers like endowment insurance. Despite the fact that the yield from insurance products is still high, and attractive compared with alternative savings investments, new business could suffer temporarily as a result of this unavoidable measure.
Particularly in view of the unfavourable capital market situation, the trend towards adequate prices in property-casualty reinsurance has to continue. Underwriting losses can no longer be offset by investment income. For property-casualty insurance, we therefore expect premium volume to grow more strongly than the economy as a whole.
Information on the main events after the balance sheet date is provided under Note 42 to the consolidated financial statements on page 234 f.
All in all, without taking into account the effects of changes in exchange rates, Group premium income for the current business year is likely to total around €42bn (40bn), which would be 5% more than in 2002.
Under these circumstances, we do not have a sufficient basis for publishing a forecast for the Group result at this stage.
As part of our risk management we regularly examine what claims burdens we are able and willing to carry, and adjust our acceptance policy and our retrocessions accordingly. We also use defined scenarios as an early-warning device for considering events whose occurrence appears less probable and take account of this in our liquidity planning.
In our risk management activities, we continually analyse our risk situation. Our experts evaluate the most important risks for us with a view to their occurrence probability and possible financial repercussions. In addition, we carry out stress tests and scenario analyses and take appropriate measures for excluding or limiting unacceptable risks.
The central risk controlling unit defines standards, develops and maintains the systems and coordinates risk management activities. It is also responsible for regularly informing management about the current risk situation and for proposing measures relating to risk policy.
Our risk management system is also checked by the external auditor as part of the annual audit.
Given that risks can arise in all operational areas, functions and processes for a whole range of different reasons, assessing the risk situation requires consideration of each individual risk and the implications for the Munich Re Group as a whole.
We classify our risks according to German Accounting Standard drs 5-20 as follows: – Underwriting risks – Risks from defaults on receivables from underwriting business – Investment risks – Operational risks
Underwriting risks result from the fact that significant cash flows for underwriting business may deviate from expected figures. We distinguish here between – the premium/claims risk in property-casualty business: premiums fixed in advance have to finance claims and benefits whose scope is uncertain at the time the premiums are calculated (risk of random fluctuations and risk of change); – the premium/benefits risk in life and health insurance: a premium that may be fixed for many years at a constant level has to finance benefits which can be affected by intervening trends as regards when they become due and also in terms of scope (risk of change); – the interest-guarantee risk in lines of insurance with guaranteed interest payments; and
Risks from defaults on receivables from underwriting business These may occur – in primary insurance in relation to reinsurers, policyholders and insurance agents; – in reinsurance in relation to retrocessionaires, cedants and brokers.
Operational risks manifest themselves – as operating risks attributable to human or technical failure or to external factors; – as legal risks arising from contractual agreements or the general legal environment.
In our view, closely gearing our operations to the principles of value-based management is an essential element of responsible risk prevention. In insurance and reinsurance we want to make capital available only at conditions that promise an appropriate return. After several years in which rates were far too low, terms of trade in the reinsurance market returned at least partially to riskcommensurate levels. In the year under review we were able to achieve a large portion of the substantial improvements in prices and conditions that were necessary.
In life (re)insurance the biometric risk, the lapse risk and the interest guarantee risk are especially relevant.
With careful monitoring of claims, we regularly check the calculation bases for their appropriateness and adjust them in the event of deviations.
Lapse risks can be restricted in both insurance and reinsurance by means of suitable product and contract design. We estimate the residual lapse risk, like the biometric risks, by means of product-specific portfolio analyses and take this into account in the pricing.
In primary insurance, the guaranteed actuarial interest rate applicable at the time a policy is effected is used in calculating the actuarial reserve for that policy.
In many cases we exclude the interest guarantee risk in the reinsurance sector by means of suitable treaty design, e.g. through depositing investments with the ceding company and agreeing a guaranteed return. As a matter of principle, prudent assumptions regarding the expected interest rate are used in fixing the actuarial interest rate in the calculation of premiums and reserves. In particular, the minimum legal requirements prescribed by local supervisory law are observed. As legally stipulated in a number of countries, the influence of the interest rate risk is additionally limited through asset-liability matching.
We have clearly regulated responsibility and accountability for the whole process of concluding insurance and reinsurance contracts. Binding guidelines and limits for acceptance and underwriting both in insurance and reinsurance document who may accept what risks and up to what amounts; compliance is routinely checked by means of internal reviews. We react with appropriate measures to changes in the global and local markets, implementing these without delay in corresponding underwriting guidelines where necessary. Liability limits are essential for underwriting profitable business, since unlimited covers are ultimately not calculable either in insurance or reinsurance. We support efforts to get unlimited covers abolished where these are still market practice or even compulsory (see page 80).
Providing cover for large and very large catastrophe losses is part of the core business of reinsurance. Particularly in property lines, we assume very large liabilities for earthquake and windstorm losses, and to lesser extent for hailstorm and flood risks. These losses often affect many of our clients at the same time. Owing to this accumulation character, a single loss event can have a substantial impact on the result situation of individual units or even the whole Group. It is therefore essential that the natural hazard liabilities underwritten are controlled and limited on a Group-wide basis. This is why we introduced accumulation budgets, by means of which the Board of Management stipulates annually the maximum liability to be assumed by the Munich Re Group and individual Group units for such events per loss accumulation zone. The loss scenarios underlying the accumulation budgets are regularly checked by means of scientific comparisons and analyses.
In the investment sector, we consistently follow a number of principles: we only make investments from which we can expect an appropriate return, and we endeavour to ensure that they offer a high degree of security, as reflected in high-quality ratings of the issuers and counterparties. Also important for us is sufficient liquidity at all times to cover our obligations from underwriting business and a targeted diversification in terms of region and type of investment. Nevertheless, last year’s dramatic collapse in share prices, of a dimension that no one could have foreseen, meant that the financial stocks in which we traditionally invest particularly strongly were affected to a disproportionate extent. Our stake in Allianz ag amounted to 21.2% at 31 December 2002 (see page 156). This corresponds to a market value of €4.7bn. It thus continues to represent easily our largest individual investment item and even after the large losses in value in 2002 could still be considered a substantial concentration risk.
The companies entrusted with asset management, in particular meag, are given mandates by the insurance and reinsurance companies in the Munich Re Group, based on precise criteria specified by us. Investment committees monitor adherence to these mandates and report directly to top management.
In the asset management units of the Munich Re Group, we pursue a policy of clear functional separation between portfolio management, trading and risk controlling at all hierarchical levels, in line with the requirements of banking supervision.
Using stress tests, we also simulate unexpected market fluctuations and devise strategies for countering them in practice. These analyses showed that thanks to our solid capitalisation we were in a position at all times to compensate for the effects of these scenarios.
Of central importance in the management of credit risks for fixed-interest securities is the credit assessment. The main factor here is the quality of the issuer, as primarily reflected – for investments of the Munich Re Group – in the gradings of international rating agencies: 93.8% of our investments in fixed-interest securities at 31 December 2002 have a rating of a or better, and 85.4% have a rating of aa or better (according to Standard & Poor’s rating classification). The majority of fixed-interest securities in our portfolio have been issued by governments or banks with excellent ratings, e.g. German government bonds, us Treasuries, and mortgage-backed bonds. Also significant for assessing credit risks in the portfolio as a whole are investment volume, collateralisation and the default probability assigned to the individual issuers.
These criteria are taken into account in our Group-wide system for limiting credit risks, which considers the issuer’s individual rating, its capitalisation as a basis for covering the liability, the collaterisation, and our internally defined willingness to incur risk. For our counterparties, we actively monitor and control the credit risks that result from investments. Thus, in terms of the total volume of our investments, Munich Re was only slightly affected by the debtor failures following the accounting scandals in the us.
Credit derivatives are used to a very restricted extent in our investment portfolio. They are only employed for hedging risks. The notional principal amounts of open items had a volume of €24m, with a fair value of €6m.
The question of credit risks is currently being debated intensively in connection with the revision of regulatory requirements for banks (Basel II). We have set up a Basel II centre of competence in order to identify at an early stage the repercussions for the management of credit risks and the resultant business opportunities for Munich Re.
Within its credit business, the Munich Re Group reinsures to a small extent aaa-rated tranches of credit portfolios transferred via credit derivatives. All individual risks within these portfolios are investment-grade quality.
Operational risks are hazards posed by technical or human failure, by natural impairments of a company’s operations or by other adverse developments in its external environment which may lead to unexpected losses. These include criminal acts, inadequate controls, organisational deficiencies or events resulting in claims for damages from third parties. Such risks, which may be connected with any activity at the company, its staff, or the use of technical systems, can only be minimised through a wide range of specific risk management measures. Beyond this, it is our declared 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. An open approach to risks is a central element of efficient risk management.
In our asset management business as well as in our insurance and reinsurance operations, these risks are identified and limited by decentralised security organisations that remain in close contact with one another. On the reinsurance side, an internationally operating unit – supported by a centre of competence – draws up security regulations for the reinsurance subsidiaries and also monitors compliance with these rules. We place emphasis not only on the protection of our own data; of equal importance to us is the security of the information entrusted to us by our clients. A permanent exchange of information between the security officers of the Munich Re Group subsidiaries has been instituted by the formation of disk (Munich Re data protection and information security group) and is already producing the first positive results. Thanks to the precautions we had taken, we were barely affected by the global and sometimes spectacular attacks from computer viruses and other such phenomena to which large firms where exposed in the 2002. Virus infections were unable to inflict any significant damage on our global networks. We attach great importance to permanently improving these precautions (see page 75).
Our security regulations embrace not only the technical design of hardware and software systems but also functional security structures and organisational measures. This includes training our staff in the proper handling of systems and data. Since last year we have had a Security Awareness Programme, aimed at making staff aware of potential risks in the it sector and thus reducing them. Besides this, Munich Re staff have to comply with the directives on information security and data protection.
Staff who have to deal with confidential data and insider information undertake to comply with the relevant regulations and to handle the information responsibly. At the parent company and all the main subsidiaries a compliance officer ensures that insider information is handled in conformity with the law. Information of this kind is generally classified and marked as such.
Within the Munich Re Group, in both primary insurance and reinsurance, we are currently conducting major projects aimed at standardising different it systems. Uniform processes and common data resources are intended to improve service for our clients and facilitate the preparation of flexible and global analyses. As they integrate various claims, contract, evaluation and accounting systems, they are very complex and have repercussions for our core processes. In addition to the relevant commitment of resources, a particularly important factor is keeping to deadlines when integrating individual parts into an overall project. Right at the conception stage of these projects, we therefore took appropriate measures and drew up corresponding project plans in order to minimise the project risks.
In the Holocaust issue, negotiations between the International Commission on Holocaust Era Insurance Claims, the Federal German foundation “Remembrance, Responsibility and Future” and the German Insurance Association were concluded on 16 October 2002 after a duration of nearly two years. The aim is to compensate unpaid or confiscated and otherwise not compensated insurance policies of Holocaust victims. Besides this, the agreement governs the use of resources from the foundation fund for humanitarian purposes. The related class action brought against victoria in the us in October 2001 has meanwhile been dismissed. American Re, together with other insurers and the Reinsurance Association of America, are disputing the legality of the Californian Holocaust Victim Insurance Relief Act, which makes it compulsory to submit policies and policy lists from the years 1920 to 1945. The case is currently pending before the Supreme Court, and a decision is expected around the middle of 2003.
Markets, products, structures and operations are subject to processes of change at ever-shorter intervals. This means that the risk situation is continually altering, one of the potential hazards being that opportunities may not be recognised or exploited in time.
The terrorist attack of 11 September 2001 further sharpened risk perception and revived the debate on how to cover loss or damage caused by terrorism. We make an appropriate amount of capacity available to risk carriers for the coverage of terrorism risks. For example, we have taken a stake of 17.5% in the share capital of the German terrorism pool extremus and have provided it with cover of €300m. In general, terrorist attacks can give rise to loss accumulations that are extremely difficult to control. In order to protect our portfolio, we restrict our liabilities through contractually agreed loss limits, occurrence limits or annual aggregate limits. Our risk is therefore transparent and limited per occurrence and year. In this way, we counter the problem that the frequency of attacks is impossible to predict (cf. the remarks on underwriting guidelines and limits on page 165).
For risks such as those posed by new technologies like genetic engineering and nanotechnology (see page 66) or by innovations in the pharmaceutical industry, our centres of competence monitor current developments arising from the technologies themselves and their application in medicine, agriculture and industry. They examine and evaluate this data with regard to its repercussions for the insurance industry and thus for our own business. Our aim in each case is to extend the borders of insurability prudently, applying appropriate limitations, and thus contribute to responsible progress in the areas in question.
We will continue to refine and improve our risk management in future to ensure efficient identification, analysis, assessment and control of risks. Particular consideration will be given to the dynamic development of our business environment and the need to react to this flexibly.
In the past year our shareholders’ equity decreased substantially as a result of the large cost burdens from reinsurance business and the huge losses in the value of shares. The cash flows in the business year nevertheless resulted in an overall cash increase of €884m. The solvency of the companies in the Munich Re Group was never in danger at any time.
V. Other investments 1. Deposits retained on assumed reinsurance (11) 12,911 12,800 111 0.9
C. Investments for the benefit of life insurance policyholders who bear the investment risk 703 666 37 5.6
D. Ceded share of underwriting provisions (17–20) 10,230 11,994 –1,764 –14.7
II. Provision for future policy benefits (18) 96,088 89,016 7,072 7.9
Consolidated financial statements Financial report 06Munich Re Group Annual Report 2002
Change from the acquisition and sale of consolidated enterprises –531 –196
Change from the acquisition, sale and maturities of other investments –1,329 –9,998
The “cash fund” within the meaning of the German Accounting Standard is limited to cash and cash equivalents shown under balance sheet item F “cash with banks, cheques and cash in hand”.
D. Ceded share of underwriting provisions 2,020 2,308 5,655 7,070 06 Financial report Consolidated financial statements Munich Re Group Annual Report 2002
The Munich Re Group’s segment reporting is based on ias 14 and the principles of German Accounting Standard No. 3 (drs 3) issued by the German Standards Board (dsr). This has been supplemented by the requirements of drs 3-20, which applies specifically to insurance companies.
Life and health Property-casualty 31.12.2002 Prev. year 31.12.2002 Prev. year 31.12.2002 Prev. year 31.12.2002 Prev. year 31.12.2002 Prev. year €m €m €m €m €m €m €m €m €m €m
Life and health Property-casualty 2002 Prev. year 2002 Prev. year €m €m €m €m
Thereof: – From insurance transactions with other segments 1,020 855 987 919 – From insurance transactions with external third parties 5,541 5,045 17,897 15,377
31.12.2002 Prev. year 31.12.2002 Prev. year 31.12.2002 Prev. year 31.12.2002 Prev. year €m €m €m €m €m €m €m €m
Africa, Near and 06 Financial report Consolidated financial statements Munich Re Group Annual Report 2002
Munich Re’s consolidated financial statements have been prepared in accordance with the standards of the International Accounting Standards Board (iasb) as “exempting” consolidated financial statements in line with Section 292 a of the German Commercial Code. The financial statements comply with the EU directives to which we are subject.
On 6 December 2002 the Board of Management and the Supervisory Board published their first declaration of compliance with the recommendations of the Government Commission German Code of Corporate Governance, as per Section 161 of the German Stock Companies Act. They have made this declaration permanently available to shareholders via the internet.
– The provision for premium refunds is markedly higher than under the German Commercial Code because it also includes the deferred entitlements of policyholders in life and health insurance from the accumulated result differences between ias and German Commercial Code and their share of unrealised gains and losses in the investments available for sale.
– Writedowns on investments are lower than under German Commercial Code accounting, because they may only be recognised if the diminution in value is likely to be permanent.
We have calculated the previous year’s figures on the same basis as the figures for the business year 2002.
In the business year, the Munich Re Group acquired a further 4.37% of the ergo Insurance Group at a price of €898m and a further 36.08% of Karlsruher Lebensversicherung at a price of €149m. As at 1 May 2002 ergo Versicherungsgruppe ag acquired 100% of the holding company of KarstadtQuelle Versicherungen, qvh Beteiligungs GmbH, Fürth, at a price of €153m. As part of its joint venture with Karstadt ag, ergo Versicherungsgruppe ag then transferred 45% of the shares in qvh Beteiligungs GmbH and in KarstadtQuelle Lebensversicherung ag to KarlstadtQuelle Financial Services GmbH, Düsseldorf. In addition, ergo Insurance Group acquired shares in insurance companies in Eastern Europe for a total price of €102m and increased its stake in already consolidated companies for a total price of €76m. Apart from this, there were no significant changes in the group of consolidated companies.
The effects of the additionally acquired shares in Karlsruher Lebensversicherung ag and ergo ag on the consolidated financial statements may be seen from the following overview: All figures in €m Effects on the consolidated financial statements 2002
Date of first Profit for the Goodwill1 Amortisation Fair value of Amortised consolidation year of goodwill acquired life fair value of insurance acquired life portfolios1 insurance portfolios 1 At the date of first consolidation.
The aggregate shareholders’ equity of the non-consolidated subsidiaries amounted to less than 1.0% (0.7%) of the Group’s shareholders’ equity at 31 December 2002, and their aggregate annual result to 0.5% (0.1%) of the consolidated profit for the year. The enterprises involved are mainly service and management companies.
Further details of selected associated enterprises are shown on pages 229 ff.
The annual financial statements of the consolidated subsidiaries are subject to uniform accounting and valuation principles. Valuations used in the financial statements of non-significant associated companies are maintained.
Goodwill resulting from the first-time consolidation of subsidiaries is amortised on a straight-line basis over its useful life – up to 20 years (ias 22).
Securities available for sale are stated at market value. Unrealised gains or losses are not included in the income statement; rather, after deduction of deferred taxes and the amounts apportionable to policyholders by the life and health insurers on realisation, they are reflected in shareholders’ equity. This item also includes registered bonds and promissory notes.
Securities held for trading comprise all fixed-interest and non-fixed-interest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences; in addition, they include all derivative financial instruments that we have not acquired for hedging purposes. Securities held for trading are stated at the market value at the balance sheet date; all unrealised gains or losses from this valuation are included in the investment result.
Deposits retained on assumed reinsurance are claims which the reinsurers have on their clients for cash deposits that have been retained under the terms of reinsurance agreements; they are accounted for at face value.
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 d).
The share of underwriting provisions for business ceded by us is determined from the gross underwriting provisions in accordance with the terms of the reinsurance agreements; cf. the notes to the corresponding liabilities items.
Where unrealised losses on securities available for sale are reflected in shareholders ’ equity (see above), the resulting deferred tax assets are recorded but excluded from earnings.
The item issued capital and capital reserve contains the amounts that the shareholders of the parent company have paid in on shares. Under revenue reserves, we show the profits which consolidated companies have earned and retained since becoming a member of the Munich Re Group, and income and expenses resulting from consolidation measures. Unrealised gains and losses resulting from the market valuation of investments are included in the other reserves.
If policyholders participate in aggregate divisible surplus in the same proportion as their policies are considered to have contributed to this surplus (“contribution principle”), the provision for future policy benefits is calculated with reference to the contractually agreed calculation bases (fas 120); as these are prudent assumptions, surpluses regularly accrue, which are for the most part distributed to policyholders. The acquisition costs are capitalised and amortised over the terms of the policies (on the basis of the estimated surpluses).
In the case of life insurance policies where policyholders bear the investment risk themselves (e.g. unit-linked life insurance), the provision for future policy benefits reflects the market values of the relevant investments (fas 97); this provision is shown separately (item d).
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 (provision for deferred premium refunds).
Please see the remarks on assets item c and on the provisions for future policy benefits.
Accumulated depreciation at 31.12. previous year 242 73 91 406 301
Carrying amount at 1.1. business year 179 823 78 1,080 860
Gross amount capitalised at 31.12. business year 610 1,059 271 1,940 1,509 06 Financial report Consolidated financial statements Munich Re Group Annual Report 2002
The figures shown under purchased insurance portfolios mainly comprise the year-end actuarial value of the life insurance portfolios consolidated as a result of the acquisition of Bayerische Vita and cna Financial Corporation’s life reinsurance business, totalling around €303m, and €299m from the acquisition of further shares in the ergo Insurance Group. The addition of €131m derives mainly from the acquisition of additional shares in the Karlsruher Insurance Group and the ergo Insurance Group.
Land and buildings used by Group companies for their own activities are valued at €1,877m (1,955m).
The additions in the business year include €204m from the application of the purchase accounting method to the additional shares acquired in the Karlsruher Insurance Group and the ergo Insurance Group.
Real estate pledged as security and other restrictions on title amount to €505m (214m). The expenses for investments under construction total €184m (36m) at the balance sheet date. Commitments to acquire real estate amount to €288m (367m).
The fair value of real estate at the balance sheet date totals €11,468m (11,124m). The fair value is generally the capitalised earnings value; new buildings and freshly purchased real estate are valued at cost.
An overview of our most important shareholdings can be found on pages 240 ff.
All figures in €m 31.12.2002 Prev. year 31.12.2002 Prev. year 31.12.2002 Prev. year
The corporate bonds mainly comprise mortgage bonds with a high credit rating.
Over five years and up to ten years 26,396 25,558 24,482 24,891
Derivative financial instruments (derivatives) are financial instruments whose market value is derived from one or more underlying assets.
– Futures –54 – – – – –54 06 Financial report Consolidated financial statements Munich Re Group Annual Report 2002
The corresponding notional principal amounts, which show the scope of the underlying assets, had a volume of €4,465m. The following table shows the notional principal amounts, broken down by product type and period to maturity:
Cash flow hedges are used to reduce the risk of fluctuations in future payments, e.g. those expected from planned transactions. The use of cash flow hedges within the Group is mainly concentrated on the management of interest-rate and currency risks. The fair value of these derivatives at the balance sheet date amounted to €192m.
The following table gives the periods to maturity of cash flow hedges at the balance sheet date: Up to 3 3–6 6–12 1–5 Over Total All figures in €m months months months years 5 years
Receivables with a remaining term of up to one year total €8,745m (9,571m); those with a remaining term of over one year total €126m (142m).
Life and Property- Life and PropertyAll figures in €m* health casualty health casualty
Carrying amount at 31.12. previous year 1,603 888 4,442 353 7,286 6,361
We have used interest rates of between 3% and 8% for calculating the deferred acquisition costs, as in the previous year.
These mainly comprise property, plant and equipment and inventories totalling €376m (342m) and deferred items of €170m (93m).
On 3 June 2002 the exercise period for the 1998/2002 warrants ended. The exercising of warrants in the business year up to the expiry date resulted in the issue of 1,717,294 new registered shares at an exercise price of €163.61 each. This increased the share capital to €457,388,254.72, and the company raised a total of €280,972,310.14 from the issue of the new shares.
By resolution of the Annual General Meeting on 18 July 2001, Munich Re was authorised to buy back shares amounting to a maximum of 10% of the share capital up to 18 January 2003. This authorisation was cancelled by the Annual General Meeting on 17 July 2002 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 17 January 2004.
The 1,559 shares remaining at the end of the business year from the Munich Reinsurance Company’s employee share programme were valued at an average price of €116.51 per share. The average acquisition costs of one subsidiary for 120,000 shares to safeguard the stock appreciation rights granted to the Board of Management and top Munich Re executives since 2000 amounted to €255.94 per share.
The Annual General Meeting on 17 July 2002 cancelled the authorisation for a contingent increase in the share capital of €15,360,000 to safeguard conversion or subscription rights resulting from convertible bonds or bonds with warrants and replaced this with a new contingent capital of €30m.
To safeguard subscription rights from exercise of warrants (Contingent Capital Increase 1998) 15.4
To safeguard conversion rights or subscription rights from convertible bonds or bonds with warrants (Contingent Capital Increase 2002) 30.0
The capital authorised for capital increases is thus as follows: Changes in shareholders’ equity
Change in the consolidated group – – –95 –9 – –104
Unrealised gains and losses on other investments – – – –1,888 – –1,888
The changes derive mainly from the increase in our shareholdings in the ergo and Karlsruher Insurance Groups and from the development in the shareholders ’ equity of these two groups.
The “other reserves” include –€793m (+2,310m) unrealised gains and losses resulting from valuation at equity, and €205m (2,108m) unrealised gains and losses on other investments.
The unrealised gains and losses on other investments included in the “other reserves” changed as follows:
The distribution of the net provision for future policy benefits between the different Group segments is as follows: All figures in €m* 31.12.2002 Prev. year
– Property-casualty 1,037 931 * After elimination of intra-Group transactions across segments.
The following table shows the distribution of the net provision for outstanding claims between the different segments of the Group: All figures in €m* 31.12.2002 Prev. year
Net provisions for outstanding claims 13,307 15,142 15,661 17,235 17,979 19,561 19,380 22,706 23,995 29,419 32,656
Net run-off result excluding currency translation differences –1,945 –1,187 –255 1,799 1,229 365 –1,562 –3,179 –4,249 –3,403 –
We have made timely provision for our share of these losses, continually adjusting our reserves in line with the latest knowledge of the loss potential. Thus, against the background of the spreading wave of asbestos-related claims in the us, we strengthened American Re’s reserves by around us$ 280m, or €300m, in the second quarter of 2002.
More information on the subject of asbestos is provided on page 73.
The following table shows the distribution of the net other provisions between the segments of the Group: All figures in €m* 31.12.2002 Prev. year
– Property-casualty 54 78 * After elimination of intra-Group transactions across segments.
The expenses booked in the year under review are made up as follows: All figures in €m 2002 Prev. year
Prev. year Allocations With- Reversal Other 31.12.2002 All figures in €m drawals changes
The miscellaneous other provisions comprise a large number of different items, including derivatives/trading (€43m), competitions for sales staff (€18m) and other remuneration for desk and field staff totalling €14m.
American Re Corporation, Princeton 7.45%, US$ 500m, Senior Notes 1996/2026 475 565
Hestia Investment Organiczona, Sopot 7.3%, PLN 42.1m, Zero Coupon Bonds 2002/2003 10 –
Miscellaneous liabilities 2,037 5,460 €158m (143m) of the other liabilities is apportionable to tax liabilities, €40m (27m) to liabilities for social security, and €29m (84m) to liabilities for interest and rent.
The remaining terms of liabilities shown under this item are as follows: All figures in €m 31.12.2002 Prev. year
All figures in €m* 2002 Prev. year 2002 Prev. year 2002 Prev. year 2002 Prev. year 2002 Prev. year
– Net amount –30 –33 –1,332 –176 28 98 –107 –66 –1,441 –177 * After elimination of intra-Group transactions across segments.
The increase under investments in associated enterprises derives largely from the gain of €4.7bn realised on the sale of shares in companies of the Allianz Group.
In addition to foreign currency exchange gains of €453m (172m), the other income mainly includes income from services rendered of €358m (200m), interest and similar income of €131m (189m), and income from the reversal/ reduction of miscellaneous provisions and adjustments of values for receivables.
All figures in €m* 2002 Pr. year 2002 Pr. year 2002 Pr. year 2002 Pr. year 2002 Pr. year 2002 Pr. year
Change in other underwriting provisions – Provision for future policy benefits 241 938 39 42 3,260 4,083 25 26 3,565 5,089
– Change in provisions for outstanding claims 120 12 56 2,009 –87 –22 126 99 215 2,098
Change in other underwriting provisions – Provision for future policy benefits 26 102 5 1 226 78 –2 –1 255 180
The calculation method used for the provision for future policy benefits was changed in 2002 in order to reflect economic circumstances more accurately. The one-off effect of this on the result amounts to €93m.
All figures in €m* 2002 Pr. year 2002 Pr. year 2002 Pr. year 2002 Pr. year 2002 Pr. year
In addition to foreign currency exchange losses of €669m (139m), the other expenses mainly include expenses for services rendered of €380m (292m), interest and similar expenses of €485m (459m), and writedowns of €124m (335m).
Tax on earnings is made up as follows: All figures in €m 2002 Prev. year
Deferred tax resulting from the occurrence or reversal of temporary differences 126 –590
Effects of changes in tax rates on deferred tax –5 –284
The current tax is derived from the tax results of the business year, to which the local tax rates of the respective subsidiaries are applied. Deferred tax is also calculated using the respective local tax rates; changes in tax rates that have already been adopted by the government at the balance sheet date are generally taken into account. The corporation tax rate of 26.5% applicable only for the year 2003 as a consequence of the German Flood Victims Solidarity Act has not been considered for reasons of proportionally.
The effective tax burden is the ratio between the tax on earnings shown and the result before earnings tax (but after “other tax”). In the previous year there was tax relief of 159%. In the current business year the ratio shows tax relief of 138%.
The item “changes in tax rates” contains income from the reversal of deferred taxes as a result of the necessary revaluation of various deferred tax items in connection with changes in tax regulations.
The item “municipal trade earnings tax” includes the differences between the trade-tax rate applied by the respective Group companies and the Group mixed trade-tax rate.
There are significant business ties with the following two related enterprises: Allianz, one of the world’s largest insurance and financial service groups, has diverse and extensive relations with Munich Re.
Hitherto members of the Boards of Management of Munich Re and Allianz have held seats on the Supervisory Boards of the above-mentioned companies and, in individual instances, on the Boards of other companies in each other’s Groups. In compliance with the underlying principles of the German Code of Corporate Governance and as a consequence of the reorganisation mentioned above, these seats will largely be given up.
As at 11 December, Dr. Hans-Jürgen Schinzler, Chairman of Munich Re’s Board of Management, ceased to be a member of the Supervisory Board of Allianz Lebenversicherungs-ag. With effect from 6 December, Dr. Henning SchulteNoelle, Chairman of the Board of Management of Allianz ag, left Munich Re’s Supervisory Board, of which he was Deputy Chairman. In mid-2002 Stefan Heyd, member of Munich Re’s Board of Management, had given up his Supervisory Board memberships at Frankfurter Versicherungs-ag and Bayerische Versicherungsbank ag.
Dr. Lothar Meyer, Chairman of ergo’s Board of Management, has been a member of HypoVereinsbank ag’s Supervisory Board since 23 May 2002. On 3 March 2003 the appointment to HypoVereinsbank ag’s Supervisory Board of Dr. Hans-Jürgen Schinzler, Chairman of Munich Re’s Board of Management, was registered by the Munich Registration Court. The official election will take place at HypoVereinsbank ag’s agm on 14 May 2003. A member of HypoVereinsbank ag’s Board of Management, Dr. Albrecht Schmidt (now a member of HypoVereinsbank ag’s Supervisory Board with effect from 1 January 2003) was a member of Munich Re’s Supervisory Board in the business year 2002. Members of Munich Re and HypoVereinsbank hold seats on the boards of further companies in each other’s Groups in a few instances.
Relations between Munich Re and Allianz are given documented form in a general agreement. This agreement deals in particular with the question of reciprocal shareholdings and with general arrangements regarding reinsurance relations. The arrangements also outlined regarding shareholdings in jointly held insurance companies are now largely no longer applicable, owing to the restructurings in 2002. The earliest possible date of termination of the general agreement is 31 December 2005. The arrangements for termination were supplemented by an agreement in December 2002 under which the termination provision of the general agreement is suspended until 31 December 2003 and the agreed period of notice reduced from three years to two. This means that the general agreement will be automatically extended for a further period of ten years if it is not terminated prior to 31 December 2003.
Relations between Munich Re and HypoVereinsbank are also given documented form in a general agreement. This agreement deals in particular with general 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 HypoVereinsbank 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 HypoVereinsbank Group are concluded at market conditions.
There are further contractual relations between companies of the Munich Re Group and HypoVereinsbank in connection with the normal running of business, such as the conclusion of insurance policies for own risks (e.g. buildings insurance policies).
In the year under review a total of 132,736 (115,420) stock appreciation rights were granted, 39,631 (42,664) 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.
In 2002 the provision set up in the previous years – reduced by €17.4m in 2001 – was completely reversed. The reversal of the provision resulted partly from the fact that stock appreciation rights from the Long-Term Incentive Plan 1999 had been exercised and partly from the fall in Munich Re’s share price.
Incentive Incentive Incentive Incentive Plan 1999 Plan 2000 Plan 2001 Plan 2002
The emoluments of the Board of Management of the Munich Reinsurance Company for fulfilment of its duties in respect of the parent company and the subsidiaries totalled €11.5m (11.1m). Of this, €6.2m (4.3m) is apportionable to fixed components, €5.1m (3.2m) to variable components, and €0.2m (3.6m) 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 €3.5m (3.3m).
A total of €38m (32m) was set aside for pension commitments towards retired members of the Board of Management or their surviving dependants.
(39) Share trading and shares held by members of the Board of Management and the Supervisory Board
At the end of March 2003 we decided to issue subordination bonds to provide a solid foundation for the Munich Re Group’s further growth and to utilise the opportunities in a hard reinsurance market with adequate prices and conditions. Further details can be found on page 139.
In our opinion, the consolidated financial statements give a true and fair view of the net assets, financial position, results of operations and cash flows of the Group for the business year in accordance with ias.
Our audit, which also extends to the group management report for the business year from 1 January 2002 to 31 December 2002, 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.
RY 13 SE 23,298 das Legal Expenses Insurance Company Limited, Bristol
RY 2,774 SE 21,096 d.a.s. Difesa Automobilistica Sinistri, s.p.a. di Assicurazione, Verona
RY 790 SE 19,605 victoria International Aktiengesellschaft für Beteiligungen, Düsseldorf ** RY 0 SE 155,172
RY –697 SE 14,801 victoria Krankenversicherung Aktiengesellschaft, Düsseldorf ** RY 0 SE 59,087 ** RY 0 SE 238,642
RY 2,640 SE 22,698 dkv Seguros y Reaseguros, Sociedad Anónima Española, Saragossa
RY 6,219 SE 1,023 ergo Trust GmbH, Düsseldorf ** RY 0 SE 21,853 fsb Fondservice Bank GmbH, Unterföhring
***** RY “—” means there is no financial statement yet available, as this is a new company.
Mecklenburgische Lebensversicherung -Aktiengesellschaft, Hanover ** RY 0 SE 10,273 bhs tabletop ag, Selb
More on the subject of security >> CYBERRISKS p. 75 TERRORISM p. 87 RISK REPORT p. 162
The unique thing about the attack of 11 September was the dimension not only of the suffering but also of the losses. Insurers that don’t take adequate precautions against risk accumulations may find their very existence endangered by such events, which are definitely comparable with mega-losses from natural catastrophes or asbestosrelated claims. 11 September was a bitter lesson for the insurance industry, which wasn’t prepared for losses of this magnitude. The earlier attack on the World Trade Center in the nineties was a warning, but the collapse of both towers – unthinkable! In contrast to losses from natural catastrophes, what we had to deal with in the wtc loss was an unprecedented accumulation within a very small area. Such loss scenarios conjure up a completely new risk situation and thus place new demands on accumulation control and the transparency of exposures.
extremus ag is a specialist insurer for terrorism risks. It is the only insurer in Germany for terrorism risks upwards of €25m and is
TERRORISM RISKS CAN BE INSURED AGAIN Munich Re helped initiate and develop a joint solution in Germany. As terrorism risks had to be excluded from insurance cover after 11 September 2001, a gap opened up in insurance. In Germany, this is now filled by EXTREMUS, which thus performs a fundamental economic and social function that no single insurer or reinsurer could fulfil by itself.
Global terror >> The colums indicate the number of terrorist attacks in 2002.
May/June 2004 26.5 AGM 3.6 Interim report as at 31 March 2004
Reinsurance uk Great Lakes Reinsurance (uk) plc Upper Ground Floor 1, Minster Court Mincing Lane, London EC3R 7YH
Further addresses may be obtained from the 2002 annual report of ergo Versicherungsgruppe ag.
E-mail: ergo.trust@ergo.de meag munich ergo AssetManagement GmbH Oskar-von-Miller-Ring 18 80333 München
In the consolidated financial statements of the Munich Reinsurance Company (parent company) all companies are deemed affiliated enterprises in which the Munich Reinsurance Company holds the majority of the voting rights either directly or indirectly (subsidiary companies).
Enterprises on whose financial and operating decisions a significant (but not a controlling) influence can be exercised, regardless of whether this influence is actually exercised or not. A significant influence is presumed if the proportion of voting rights lies between 20% and 50%.
The sum of the loss ratio and the expense ratio. The better the results of the underwriting business, the lower this ratio will be; ratios over 100% indicate loss-making business.
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).
Corporate governance refers to the legal and factual framework for managing and monitoring companies. Corporate governance rules serve to provide transparency and thus strengthen confidence in responsible management and control geared to the creation of value.
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.
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.
The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’slength transaction. Where there is an active market, the fair value of an asset is its current market value.
The terms gross and net mean before and after deduction of the portion attributable to business ceded in reinsurance. Instead of “net”, the term “for own account” is sometimes used.
Protecting against undesirable developments in prices by means of special financial contracts, especially derivative financial instruments. Depending on the risk to be hedged, a distinction is made between two basic types: “fair value hedges” safeguard assets or liabilities against the risk of changes in value; “cash flow hedges” reduce the risk of fluctuations in future cash flows.
International Accounting Standards (ias) Standards formulated by the iasb with the intention of achieving internationally comparable preparation and presentation of financial statements.
International Accounting Standards Board (iasb) An international body of 14 accounting experts responsible for issuing International Accounting Standards. The iasb’s objective is to achieve uniformity in the accounting principles that are used by businesses and other organisations for financial reporting around the world
This mainly involves investments for policyholders under unit-linked life insurances. It also includes investments under index-linked life insurance policies whose performance depends on share or currency indices.
Insurance of industrial, commercial, employers’, product, professional or private liability towards third parties.
That part of the shareholders’ equity and earnings of our subsidiaries that is apportionable to shareholders outside the Group.
These include the expenses for claims (claims payments and the change in the provision for outstanding claims), expenses for premium refunds and the change in the remaining underwriting provisions (provision for future policy benefits and other), in each case after deduction of the ceded share.
Here the reinsurer assumes payment of the primary insurer’s losses above a defined amount. The calculation of the reinsurance premium is based on claims experience with the type of business concerned.
Reinsurance that is binding for both parties. The primary insurer is obliged to cede all risks covered by a reinsurance agreement to the reinsurer and the reinsurer is obliged to accept these risks.
Commission, personnel costs and general expenses for the acquisition and ongoing administration of insurance contracts, less any commission reimbursed by reinsurers, including profit commission.
Pre-tax operating profit/loss on the enterprise’s ordinary activities. Any extraordinary income and expenses are not included in this result.
Securities held for trading comprise temporarily held investments purchased with the intention of obtaining the highest possible return from short-term fluctuations in the market price. They are accounted for at their market value at the balance sheet date. Changes in market value are recognised in the income statement.
Amount of cover that a reinsurance company or the market as a whole can make available.
That part of the risk assumed which the (re)insurer does not (retro)cede.
Reinsurer that provides retrocession cover for other reinsurers (reinsurer of reinsurers).
Fluctuation of actual from statistically anticipated experience as a result of technical, social, legal political changes.
Presentation of the items in the annual financial statements according to classes of business and regions.
Member of a (re)insurance company acting on behalf of his or her employer to negotiate, accept or reject the terms of a (re)insurance contract.
us Generally Accepted Accounting Principles (us gaap) The principles of us accounting that are stipulated as compulsory for listed companies in the us.
Method of quantifying risk which measures the potential future losses that may not be exceeded within a specified period and with a specified probability.
Every shareholder generally has a legal right to vote at the Annual General Meeting. The number of votes that a shareholder has depends on the number of shares with voting rights held. Shareholders can arrange for their voting rights to be exercised by a proxy, i.e. a third party such as a bank, shareholders’ association or company representative.
07 General information Index of key terms Munich Re Group Annual Report 2002
Balanced scorecard 37, 174 Bayerische Vereinsbank ag 156 Board of Management 48 f., 107 ff.
Computer viruses 75, 171 Conference Committee 105 Consolidated financial statements 176 ff. Corporate culture 59
Earnings per share ic*, 235 Emissions trading 82 Environment 119 Equity method 189 Equity ratio 158 ergo Management Akademie (ema) 114 ergo Trust GmbH 58 esprit 77
Europe 2 and Latin America 56, 140, 144 European School of Management and Technology
Gross premiums ic*, 136, 140 ff., 147 ff., 187, 221 Group premium income 136 Group shareholders’ equity 138, 210 ff.
Index of key terms General information 07Munich Re Group Annual Report 2002
Munich Re Canada Group 56 Munich Re United Kingdom Life Branch 52, 142 Munich Reinsurance Company Canada Branch Life
Primary insurers 149 Profit for the year ic*, 140, 176 ff. Property-casualty 55 f.
Purchase accounting method 191 pvfp (present value of future profits) 192, 200
Segment reporting 180 ff. Share price indices 18, 19, 21 Share programmes for staff 115 Shareholder profile 22 Shareholders’ equity ic*, 138 f., 188, 210 ff.
Shares ic*, 7, 18 ff., 210 Social commitment 116 ff. Special and Financial Risks 56, 140, 144 Specimen portfolio 24 Staff ic*, 113 ff., 234 Standing Committee 100, 104
Tax €m –574 –1,040 +44.8 Minority interests in earnings €m –69 145 –
EOS/SPL/Agentur Focus, Hamburg, p. 67 Getty Images/David Joel, Munich, p. 94 Getty Images/Howard Kingsnorth, Munich, p. 92 Getty Images/David Roth, Munich, p. 2-5 Gustav Mahler Jugendorchester, Vienna, p. 118 Lutz Hennig, Weesenstein, p. 2-8 Imagebank/Rob van Petten, Munich, p. 2-3 Imagebank/Villaseca, Munich, p. 12 IO_dencies questioning urbanity, urban action model Knowbotic Research 98, Zurich, p. 250