American Re, Princeton, p. 2-1 Bettmann/Corbis, Düsseldorf, p. 28 Jens Bruchhaus, Munich, pp. 2-4, 45, 97 Corbis, Düsseldorf, p. 30 (microchip) Deutsches Museum/Klaus Brenninger, Munich, p. 2-6
>> Terrorism >> Flood 02 Future >> Pensions >> Health insurance >> Asbestos >> Pension reform >> Cyberrisks 01 Markets 07 Security 05 Partnership 03 Climate
Combined ratio non-life reinsurance % 122.4 127.3 133.1 101.7 5. Net expenses for claims and benefits 31,129 6,686 5,826 10,192 8,425 8. Result before amortisation of goodwill 809 –1,637 –1,204 –1,231 4,881 10. Operating result before tax 438 –1,763 –1,285 –1,321 4,807 12. Minority interests in earnings –69 –20 –52 –8 11 13. Profit for the year 1,081 –2,158 –859 –383 4,481
Reinsurance: We have been in the business of insuring insurers since 1880.
Primary insurance: Our primary insurers – the ergo Group with its brands victoria, Hamburg-Mannheimer, dkv and d.a.s. plus Karlsruher and Europäische Reiseversicherung – provide cover for private individuals and for small and medium-sized businesses.
As a Group we aspire to be one of the leading risk carriers and providers of financial services. We create lasting value by systematically building on our strengths: – the competence and skills of our staff – our global knowledge base – our financial strength – partnership and trust within our business relationships
Share of premium income from outside Germany 2 Primary insurance 19.1%
In November 2002, the Deutsche Museum unveiled its Climate Exhibition in Munich, the result of close collaboration with Munich Re. Our objective is to heighten public awareness of climate change.
Pensions were one of the major topics at our primary insurance subsidiaries last year. Our insurers successfully marketed over 530,000 “Riester” products, set up their own pension funds and arranged company pension schemes with many firms.
Under this motto, Munich Re invited staff, their families and friends to an open day in October 2002. Over 8,000 people, large and small, got to know Munich Re from the inside: our buildings and our work, the art in our passageways and our openness.
In December, Munich Re published its first declaration of compliance with the German Code of Corporate Governance. We fulfil virtually all the Code’s requirements and recommendations.
Fields of business Members of the Board of Management Members of the Supervisory Board Business locations >> Reinsurance >> Primary insurance Structure >> Munich Re Group >> Reinsurance >> Primary insurance >> Asset management Corporate culture
Management report >> Business parameters >> Business performance >> Prospects >> Risk report Consolidated balance sheet Consolidated income statement Consolidated cash flow statement Segment reporting Notes to the consolidated financial statements Auditor’s report Classes of business Key figures Associated enterprises and participating interests
But even worse was to come. In the summer a new disaster loomed – the capital markets experienced an unprecedented crash. In Germany, our home market, the trend was especially dramatic: after the dax had suffered large losses in the two preceding years, it fell by a further 50% within the space of a few months. The dimensions of this immense capital depletion are truly mind-boggling. At the end of 1999 the total market capitalisation of all dax stocks exceeded €1,000bn. By the end of 2002 they were worth around €400bn, and in March 2003 – not least owing to the influence of the war in Iraq – they fell by another 15%. It follows that as one of the biggest institutional investors in Germany, we were particularly badly hit by these massive losses in stock values. Thanks to the confidence of our shareholders, Munich Re shares were initially able to resist the disastrous downward trend, but in the wake of a rapidly accelerating price slide, they lost 60% of their value within a period of three months. In March 2003, they then fell to their lowest level since the end of 1992. We were virtually powerless in the face of such dramatic value destruction. The effects of this quite exceptional development on the value of our investments and naturally also on our capital base were correspondingly grave, especially given that the focus of our investments is on German financial stocks. One of the painful consequences for us was that the rating agencies Standard & Poor’s and Moody’s lowered Munich Re’s rating by two grades. It was all the more gratifying, then, to witness the confidence shown in Munich Re by the capital markets in spring 2003 when the bonds we issued to strengthen our capital base were substantially oversubscribed.
– Our core business, reinsurance, is developing very well. Even before the events of September 2001, we succeeded in implementing more appropriate price levels in the loss-producing lines of industrial insurance. If one takes the results of our reinsurance treaty renewals just concluded and those preceding them, we have been able to increase prices by a total of around 26%. In addition, we have terminated business with an annual premium of about €4bn in the last two years, because it no longer offered the requisite prices and conditions. The results of this uncompromising underwriting policy are already being clearly reflected in our figures. If one disregards the reserve strengthening at American Re and for the World Trade Center loss, treating them as special factors which alone account for 15.9% of our combined ratio, the latter figure improved from 112.7% to 106.5% in the past 12 months. We still cannot be satisfied with this combined ratio, however, even given the heavy burden from natural catastrophes in 2002.
– In the case of our primary insurance subsidiaries, premium growth is above the market average. With the acquisition of KarstadtQuelle Versicherungen, ergo has further improved its strategic and marketing position, even if currently it is also having to deal with exceptional burdens in the area of investments. With the reorganisation of our long-term shareholdings in the financial sector and the sole focus on hbv as a cooperation partner among the banks, we have taken decisive steps in the last two years to promote the further development of ergo’s business. The partnership has made a very good start and is already bearing fruit.
The problem is as old as the market economy. How can market fluctuations be made controllable? All too often, the state and politics are expected to answer this question. Munich Re is taking its own measures to identify market cycles in good time and to utilise them in safeguarding value created by the Group.
DIE MÜNCHENER RÜCK ALS THINK TANK MUZ MITTANEBE RETEN KUNDWERT SCHODER GUAREDISCH KNEU MUZ MITTAN EBE RE TEN KUNDWERT TABSCHODER GUAREDISCH KNEU.TABSCHODER GUAREDISCH KNEU ONDER.
More on the subject of markets >> MUNICH RE SHARES p. 18 BUSINESS LOCATIONS p. 52 BUSINESS PARAMETERS p. 131
Now that the euphoria of e-business has turned to depression, it looks as if the “new” markets are adjusting to the “old”: the rules of solid business management seem to be winning through in the dotcom universe as well. Nevertheless, these new markets will remain fast-moving. The permanent acceleration in global competition will favour strong oscillations and cycles.
“We ensure that we obtain the earnings required for our business.”
Reinsurance has always experienced rises and falls in capacity, and also in rates and results. But these cycles are changing. In the last twenty years, it has been apparent that they are converging throughout the world. We don’t want to let ourselves simply be driven by these cycles and their changes.
AN INTERVIEW WITH DR. CLEMENS MUTH ON CYCLE MANAGEMENT IN REINSURANCE
It’s successful when we take optimum advantage of the market cycles and achieve our objectives – namely satisfactory results – across these cycles.
Munich Re shares are present not only in the major European share price indices but also in the sustainability indices DJ Sustainability World and FTSE4GOOD Europe 50, which only include stocks that are leaders in terms of economic, ecological and socially responsible activity.
Recognition We were awarded a prize for our good investor relations work.
In fact, the stock markets made a promising start to the year, having staged a short-term recovery from the effects of the terrorist attack on 11 September 2001. But from spring onwards, the markets took a sharp downturn in both the us and Europe. Concerns about the development of the economy, even verging on fears of a recession, shaped trends on the stock exchanges – in Europe more than in the us. The risk of a war in Iraq intensified the negative trend, and the major European share price indices fell sharply. Financial stocks and German equities were affected to an above-average extent. Insurers, as big investors on the international equity markets, suffered particularly from the global stock market weakness.
A striking indication of how the markets performed in 2002 is provided by the volatility index for the dax, the vdax. It was one of the few stock market barometers to show a continuing upward trend in the past year. The greater the expected fluctuations of the dax, the higher the value of the vdax. It reached an all-time high of 58.25 on 7 October 2002, having fluctuated between 17 and 47 in the two previous years.
Munich Re shares did not escape these negative influences. They lost around 62.6% of their value between 1 January and 31 December 2002, closing at €114.
At that juncture there was still hope on the capital markets that the worst was now over – and in fact the dax and dj euro stoxx 50 rallied by around 11% up to the end of the year, and Munich Re shares by 15%. However, this hope was short lived: in the first three months of 2003 our shares suffered severe price losses totalling almost 54%, reaching a low of €52.50 on 31 March. The dj euro stoxx Insurance lost 28% in the same period. The broader indices dax 30 and dj euro stoxx 50 recorded a decline of 16% and 15% respectively in the first quarter of 2003.
Overall dividend amount €m 223 221 * Share price at the end of the year as a percentage of the shareholders’ equity shown in the balance sheet, excluding minority interests.
The result situation in our active underwriting business, on the other hand, is good. We have taken a whole range of measures and consequently hope soon to resume the previous continual upward trend in our share price, albeit from a strongly reduced valuation base.
Additional information and news on our shares can be found on our website, in the daily papers and in material published by specialist providers of financial market data. www.munichre.com/ir-d
We again propose to pay our shareholders a dividend of €1.25 for the year under review. The overall amount distributed will thus total €223m. Following the change in German tax law from imputation method to half-income method, the dividend payment will no longer include a corporation-tax credit for our German shareholders, as was the case prior to 2001.
Aiming for sustained value in our investor relations work as well
In addition to regular presentations and commentaries on our quarterly and annual figures, we have shown in interviews with analysts, in conference calls and in road shows that we are guided by the principle of long-term shareholder value. We send representatives to important international conferences of the financial services industry and are systematically expanding our contacts. Our commitment has been recognised: the British agency Financial Dynamics put Munich Re top among the dax companies for its investor relations activities. This was based on a survey involving 300 analysts. In 2002 we underlined our intention to keep up the good work by reinforcing our investor relations team.
By reinvesting dividends to purchase further shares and making use of opération blanche (i.e. reinvesting the proceeds of subscription rights), a German shareholder would have been able to add a total of 480 no-par-value shares to the portfolio.
In April 2003, Munich Re issued two tranches of subordinated bonds via Munich Re Finance b.v. The main part of the issue is the euro tranche with a volume of €3bn, an amount unprecedented in the euro subordinated bonds market.
The pound sterling bond, with which Munich Re has tapped into additional investor circles, has a volume of £300m.
“An investment in knowle the best interest.” BENJAMIN FRANKLIN, AMERICAN POLITICIAN
USING KNOWLEDGE TO SHAPE THE FUTURE When Munich Re first started doing business, the risk world was of a size that today’s insurers and reinsurers can only dream of. Nevertheless, the challenges faced by the insurance industry from the industrial world back then, with its social and technological revolutions, were every bit as great as the challenges of today. And that is why in those days, too, the preferred reinsurer was the one whose knowledge was more productive and beneficial for its clients. "Knowledge shapes the future" was already Munich Re’s motto then. As true then as it is today!
More on the subject of the future >> LETTER TO SHAREHOLDERS p. 6 STRATEGY p. 34 PENSIONS p. 69
THE KNOWLEDGE EXPLOSION WAS IMMINENT Back in 1949 the processing and utilisation of data was about to experience a breakthrough whose significance was apparent to only a few contemporaries. “I think there’s a world market for about five computers.” This forecast came from Thomas Watson, Chairman of IBM. Of course, history proved him wrong.
The knowledge of our staff throughout the world is one of Munich Re’s most valuable resources, which we want to utilise as productively as possible. Our knowledge management programme is intended to improve our relationships with clients, to expand our staff’s expertise, and to intensify global cooperation within our Group. After a successful project phase, 2002 saw the establishment of a Munich Re Knowledge Management Centre of Competence.
We have a whole range of methods for recording knowledge, for making it accessible and for generating it. Just storing information in databases isn’t nearly enough. There must be structures and processes in place to help us use our knowledge more extensively and close any gaps in it. That’s why we have worked not only on the content but also on the relevant processes, on staff behaviour and on the infrastructure. Refining our knowledge management is an
The networks contain topics that will be of relevance for our clients now and in the future, such as bioterrorism, cloning or critical illness. Last year a big client workshop on critical illness took place in Toronto, in which Munich Re staff demonstrated their expertise on this subject. Global collaboration between our experts guarantees a uniformly high quality of knowledge everywhere. And the structured processing of knowledge also promotes new products and innovation. This makes us “fit for the future”, with our clients benefiting by obtaining better products and more efficient service.
Secure market position We consolidate our market position by relying on our strengths of quality and security.
Munich Re puts long-term profitability before short-term growth. Our strengths of expertise, quality and security support us in implementing this strategy.
The Munich Re Group’s objective is to be one of the world’s leading risk carriers and providers of financial services, and thereby to create lasting value – as a reinsurer, a primary insurer and an asset manager.
We have clearly defined our financial and non-financial objectives both for the Munich Re Group as a whole and for significant segments of the Group. Particularly in view of the current situation on the capital markets, we are adhering to our objective of increasing Munich Re’s market value. At present, this market value does not always properly reflect the strengths of our Group that will prove effective in the future: the development of our client relationships, our knowledge, our methods of business management and other factors that will ensure our long-term success and create value.
Furthe r deve lopment a nd imp lemen tation of fina ncial measu res
Determ ination of valu e drive rs bassed on hig hquality
2 We utilise the rich opportunities for synergies within the Munich Re Group. Our primary insurance brands practise systematic cross-selling. The ERGO companies are introducing a joint claims management system and a uniform IT application landscape (see page 77). We will continue to expand our partnership with HypoVereinsbank in banking and insurance business (see page 83). Our subsidiary MEAG handles the management of our own Group investments.
In reinsurance we are aiming for organic, profitable growth in order to consolidate our leading market position worldwide. Systematic use is being made of cycle management (see page 16) to enable us to operate profitably in market downturn phases as well. We exploit the earning opportunities currently presented by the improved market conditions, consciously drawing on our special strengths such as quality, competence and security. In primary insurance, especially insurances of the person and other personal lines business, we are aiming for strictly profit-oriented growth. Our objectives in Germany are to maintain our position as the second-largest primary insurer, and to achieve a place among the three leading providers in the field of company pensions. In the rest of Europe, we want to extend our market position selectively and consolidate parts of our portfolio. Our asset management mainly has a supporting function for the Group. We want to achieve the best possible return on our investments, whilst limiting our risks to an appropriate degree and ensuring we have sufficient liquidity at all times. We naturally cannot detach the performance of our investments from developments on the international capital markets but we deliberately refrain from making any speculative investments. We intend to expand our business with third parties, determinedly exploiting distribution synergies with insurance and reinsurance.
We make use of two main tools to translate these strategic guidelines into successful business. Firstly, we manage our operations Group-wide using modern business tools, such as value-based management, and employ balanced scorecards to define objectives and measures, monitor results and highlight opportunities for optimisation. Secondly, we continue to systematically refine our risk management (see page 128).
– Also in these awards, the MEAG EuroRent fund came top among the funds focusing on European bonds, and it also received five stars from the US investment research institute Morningstar, its top rating.
“Modern man has becom nature than it ever was to HANS JONAS, GERMAN PHILOSOPHER
LIFE GOES ON. BUT HOW? Changes in climate patterns are a topic of overriding importance for the future. Continually growing natural catastrophe losses raise immense financial problems. Loss amounts of around US$ 100bn per event are a realistic scenario, even for the immediate future. Climate change also threatens to have social and economic repercussions on a global scale. The insurance industry therefore needs to make the public even more aware of this highly topical issue. And politicians must at last match words with deeds.
PARTNER FOR THE DEUTSCHE MUSEUM The Deutsche Museum is staging the exhibition “Climate. The Experiment with Planet Earth” until September 2003 in Munich at the Zentrum Neue Techonologien (ZNT). After that, the exhibition will go on tour to various cities. In Munich, it is being accompanied by a series of presentations entitled “Positions”. On five separate evenings, various experts – such as scientists and Munich Re specialists – discuss interesting topics concerned with the climate.
Good loss prevention starts with risk awareness. At the same time it is important to understand the risks of change. The Climate Exhibition at the Deutsche Museum makes visitors aware of the problem of climate change in a very effective way. The exhibition explains how the climate works and impresses on the viewer how sensitive it is. We feel we should share our knowledge about the climate with the public – that’s one of the duties of an opinion leader and knowledge carrier like Munich Re. We’re simply putting into practice what we state in our corporate guiding principles.
People generally assume that museums exhibit “old” things. But the climate is a very topical problem.
For many people, the climate is something abstract. How do you make the subject tangible?
All-round financial services provider Munich Re stands for reinsurance, asset management and well-known primary insurance brands.
Clear structures In reinsurance, seven divisions manage business with our clients.
Our core fields of business are reinsurance and primary insurance. Asset management has a supporting function in our Group.
P ri m a ry i n su ra n ce
Fields of business Group profile 03Munich Re Group Annual Report 2002
They provide more than 27 million clients with security and service in life, health, property-casualty and legal expenses insurance. Having a strong footing in primary insurance, especially personal lines business, is an important part of our strategy. Given the current demographic trends, insurances of the person in particular offer great potential for sound growth, which we are also exploiting in our partnership with HypoVereinsbank (see page 83).
Asset management: We are partners in investment meag munich ergo AssetManagement GmbH, a joint venture established by Munich Re and ergo in 1999, has a total of approximately €120bn under management. The bulk of this is made up of our own investments. But meag is increasingly offering its investment products and its service to private clients and institutional investors as well, primarily other insurance companies. We intend to increase its market share further, although its focus will remain on managing our own assets.
01 Karl Wittmann Asia, Australasia, Africa 02 Dr. jur. Nikolaus von Bomhard Europe 2 and Latin America (until 30 June 2002 together with Dr. jur. Hans-Wilmar von Stockhausen)
Dr. jur. Rolf-E. Breuer (until 6 December 2002) Chairman of the Supervisory Board of Deutsche Bank ag
Prof. Dr. rer. nat. Henning Kagermann Co-Chairman of the Executive Board and Chief Executive Officer of sap ag
Dr. jur. Dr.-Ing. E. h. Heinrich v. Pierer Chairman of the Board of Management of Siemens ag
Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder (from 17 April 2002) Chairman of the Board of Management of Volkswagen ag
Dr. jur. Dr. h. c. Albrecht Schmidt Chairman of the Supervisory Board of Bayerische Hypo- und Vereinsbank ag
For seats held on other supervisory boards and comparable bodies see page 107 f.
03 Group profile Business locations Munich Re Group Annual Report 2002
Seven divisions are responsible for business relations with our clients throughout the world.
03 Group profile Reinsurance structure Munich Re Group Annual Report 2002 and health reinsurance. The new structure is more clearly geared to the needs and organisations of our clients and thus provides a better basis for growing our business. In the operative divisions, the entire responsibility for each client account is now in one pair of hands. The regional divisions are responsible for our business locations abroad and for our subsidiaries doing business there (see page 52).
ergo Insurance Group is the second-largest primary insurance group in the German market. It was created in 1997 by merging victoria, Hamburg-Mannheimer, dkv and d.a.s. The main emphasis of ergo’s business, accounting for approximately 90% of its premium income, is on personal lines insurance, especially insurances of the person. Another important segment is insurance for small and medium-sized firms, whilst programmes for company pension insurance are also increasing in significance. In health insurance and legal expenses insurance, ergo is the market leader in Europe through dkv and d.a.s. respectively.
With numerous subsidiaries and affiliated companies in 11 countries, as well as a network of strategic cooperation agreements, Europäische Reiseversicherung represents an effective international alliance that takes account of the further internationalisation of the travel industry. By far the most important product is travel cancellation expenses insurance. Mercur Assistance offers assistance services worldwide in the field of healthcare and mobility.
meag Securities Management GmbH, München meag munich ergo Real Estate Investment GmbH, München meag munich ergo Kapitalanlagegesellschaft mbH, München meag Real Estate Management GmbH, München
Asset management structure meag munich ergo AssetManagement GmbH – a joint venture of Munich Re and ergo – and its subsidiaries manage the assets of the Munich Re Group.
Corporate culture Group profile 03Munich Re Group Annual Report 2002 corporate culture: An example of openness
Whereas on a normal working day our headquarters in Munich are populated by some 2,600 employees, on open day some 8,200 people streamed through the passageways and corridors: staff, their families and friends, pensioners, trainees, student employees and interns. They all wanted to experience reinsurance “from the inside” and did so with a mixture of curiosity and growing interest, looking behind the doors of Munich Re’s Board rooms and the offices of Board members.
The star of the event, and the real occasion for it, was Munich Re’s newly finished building in Gedonstrasse. Whilst its outstanding architecture is a symbol of Munich Re’s innovative spirit, the building’s ultramodern glass façade no less symbolically reflects Munich Re’s main building opposite, rich in tradition. This “illustrates” an important point: not one element alone, but all of them together make Munich Re. Such unity in diversity was also apparent to visitors in the artistically designed passageways that link all the buildings below ground level
The fact that reinsurance is a multi-facetted business could be experienced by visitors live at 18 “topic islands”, where our central and operative divisions, joined by staff from ergo and meag, provided information on their areas of work. A total of 40 presentations on different aspects of risk and reinsurance completed the information market. The visitors’ response was overwhelming and showed clearly how much interest our “business with risk” commands: many lecture rooms were full to bursting.
ONWARD TO NEW RISKS Progress has always gone hand in hand with risk, and this close relationship will not change. Every innovation will always bring with it potential dangers as well as improvements and growth. Advances through innovation require a venture culture that accepts the existence of risks and their management as a necessary condition for progress.
More on the subject of innovation >> CYBERRISKS p. 75 ESPRIT and GLORIA p. 77 HEALTH INSURANCE p. 85
ALL PROGRESS IS AN OPPORTUNITY – AND A RISK On 19 March 2002, the prototype of the “human” robot SDR-4X was presented to the world. 58 centimetres tall, it can conduct simple conversations, distinguish between colours, recognise human facial expressions and get up again after falling down. Is this homunculus (Latin: little man) a useless discovery? Perhaps. But possibly its abilities may be developed to a far more advanced stage. The reinsurer knows that every major innovation had small beginnings – and will keep an eye on SDR-4X.
Let me give you an example. In the future, instead of using cellophane, we’ll be able to wrap presents in ceramic foil that can even withstand being hit by a hammer! Another example: we already have dirt-resistant car paints. That means never having to wash your car again!
The principle behind nanotechnology is that individual atoms are combined to make products with new properties. There are two groups of nanotechnology products: “active” and “passive”. Passive products were first discovered by scientists accidentally over a hundred years ago: two or three substances were mixed, thereby creating something new – a coating, for example. Active nanotechnology products are completely new, and most of them are still in the realms of fiction. Two examples: nanorobots, so small that they aren’t visible to the naked eye even as a speck of dust, could track down viruses in the human body. A nano “comb” could filter diseased blood corpuscles out of the bloodstream.
Because nanotechnology works with products that are no longer visible, quality control is difficult. The number of product recalls could increase dramatically. You can mark nanoproducts according to origin and manufacturer, but it’s hard to do. If there is a claim, it may not be possible to trace things back to the manufacturer concerned. And there are even bigger risks. If released into the environment, nanorobots could transform organic substances they come across into new substances which no one could control.
Nanotechnology is a “cross-cutting technology”. It will be used in a whole range of products, precisely because it works with the organic and the inorganic. This is reflected in the potential insurance spectrum. We see a need for cover particularly in liability insurance. Demand could increase above all in the fields of public, environmental and product liability – especially if liability standards are made more stringent for manufacturers of active nanotechnology products. The current challenge is finding a form of risk management for active nanotechnology products that don’t yet exist.
Computer simulation of nanotechnology >> This is what the future could look like: a nanorobot designed to track down viruses in the human body moves through a vein like a miniscule submarine.
– And finally, they provide an insight into the wide spectrum of issues involved in Munich Re’s operations.
For the life insurance industry, 2002 was a year of pension reform in many countries. In Germany, newly subsidised pension products were launched on the market. Clients reacted hesitantly, but the ergo insurers achieved an above-average increase in market share.
In industrialised countries and the emerging markets, people are living longer. This trend, which has been evident for some time, will confront national social security systems with substantial financing problems in the coming decades if these systems are run on a pay-as-you-go basis, i.e. if today’s employees finance current pensions and the next generation pay the pensions of today’s employees. For the fact is that future pensioners cannot necessarily count on the “inter-generation contract” being fulfilled any longer or, put bluntly, cannot be sure of having enough money to live on.
04 Business issues 2002 Pensions Munich Re Group Annual Report 2002
All over the world, and especially in Europe, efforts are being made to reform pension systems. The objective everywhere is to supplement pay-as-you-go state pension systems with privately insured old age provision on a funded basis. Concrete improvements to old age provision are already evident in Switzerland, the uk and the Netherlands: these countries moved away from pure pay-as-you-go financing at an early stage. In France and Italy, reforms are currently being debated. Germany has made a start towards private provision with the “Riester” pension and the promotion of company pensions. In fact, the life insurance industry in Germany had been eagerly anticipating 2002, in which subsidisation for these types of product began. However, their high expectations have so far been somewhat disappointed. To begin with, the demand that all market players had hoped for did not materialise, either for private or company pensions. Nevertheless, the Munich Re Group’s primary insurers had developed products at any early stage which met the new regulations for subsidisation, and were exceptionally successful with these. With “Riester” pension products, they have achieved a market share of around18%, selling 530,000 such contracts up to 31 December 2002. Given that interest is meanwhile increasing, Munich Re’s primary insurers are in an excellent position.
A further important market segment is company pensions. Given the attractive support now provided by the state in Germany and the legally established entitlement of every employee, the significance of this segment will increase appreciably. Munich Re’s primary insurers are well prepared for this. They offer companies of varying size a wide range of products: “traditional” types of company pension, such as direct commitment, direct insurance and “relief funds”, as well as the new corporate pension schemes and the pension funds of ergo.
Even though the pension reform in 2002 attracted a considerable amount of criticism, it provided a number of positive impulses. It paved the way for private old age provision on a funded basis and stimulated debate on this issue. Public attention has been drawn to the ageing of society and the future demographic trend. The growing awareness that private provision is essential for retirement and old age has had a generally positive effect on demand for products designed to meet this need, as confirmed by the strong growth in our life insurers’ new business. In the long term, too, we expect our life insurance business to continue showing above-average rates of growth.
New management and a new organisational structure, a decision to concentrate on the us market and discontinue its international operations, more uniform underwriting and risk management policies, together with a significant reduction in expenses, are the main elements in the fundamental changes that occurred at American Re in 2002.
American Re’s market share 1 Gross premiums written by American Re in the US 10.7%
In March 2002, John P. Phelan, head of Munich Reinsurance Company of Canada since 1986 and with the Munich Re Group since 1973, was named ceo of American Re, and in April he became a member of Munich Re’s Board of Management. In just under a year, he has made far-reaching changes at American Re.
The new management set-up reflects the company’s new organisational structure. The company’s strategic business units, and its corporate underwriting and corporate marketing units, have been brought together in a single division reporting to an Executive Committee member. The same applies to its corporate service units. The new organisational structure for the strategic business units ensures a uniform approach to risk and a consistent underwriting policy. The corporate service units, as they are now organised, also have in place uniform structures and processes: for example, enterprise-wide risk management, which is of increasing importance throughout the Munich Re Group. Together, the two divisions have developed and implemented enhanced underwriting and controlling tools, such as a contract evaluation program that models alternative structures for reinsurance transactions on a case-by-case basis.
All of these changes will have a very positive effect on the company’s future profitability. The significant improvements in prices and conditions achieved in the renewal negotiations in the second half of 2002 indicate that American Re is on the right track to writing profits again in 2003.
Liability insurers are being confronted with large claims related to asbestos. Munich Re has made continual and extensive provision for this risk. In so doing, it has had to take account of its specific portfolio, the constantly changing liability situation and the individual market structure.
Many large us firms that were involved in the manufacture and processing of asbestos products have sought creditor protection before bankruptcy courts because of lawsuits from hundreds of thousands of asbestos claimants amounting to billions of dollars. According to one study, firms in the us currently face estimated claims burdens of between us$ 200bn and us$ 265bn.
04 Business issues 2002 Asbestos Munich Re Group Annual Report 2002
The definition of our liability reserves for each country reflects these factors accordingly.
Asbestos costs lives. Worldwide people are dying as a consequence of its use.
Cyberrisks Business issues 2002 04Munich Re Group Annual Report 2002 cyberrisks: New media – new risks
More and people are doing their banking online, or booking holidays and buying concert tickets via the internet. The web is a new, modern sales channel, and its significance for firms is continuing to grow. No large company can exist today without computers or an extensive network infrastructure.
We do not only examine which it risks we must decline: for several years we have also been closely considering where we can expand the cover we provide. In a separate centre of competence, specialists conduct fundamental scientific research and develop coverage concepts. Various working groups, such as “it Liability”, look at topical questions involving it risks. With their know-how and expertise, they advise and support our clients and our staff.
Which of the following tools do you currently use to protect information systems?
At the end of October 2002, staff at victoria and d.a.s. started using large sections of a new data processing system; they will be joined in mid-2003 by the staff of Hamburg-Mannheimer. The system is called esprit – ergo System for Uniform Processes and Integrated Technology. It is scheduled to replace the subsidiaries’ different dp systems and thus improve the competitiveness of the ergo Group as a whole. esprit provides the necessary technical basis for exploiting synergies in business administration – whether it be devising joint solutions or cross-selling. In this way esprit supports the multi-marketing strategy of the ergo Insurance Group.
One of the aims of gloria is to enhance the transparency of the large volume of global data in the reinsurance group and thus to make it easier to analyse the situation at any given time with regard to risks, claims, markets, clients and products. This will provide a better foundation for global risk management, market segmentation, worldwide control of the reinsurance business and the introduction of value-based management systems.
04 Business issues 2002 Flood Munich Re Group Annual Report 2002 flood: Harbinger of climate change
Mud damage, water-soaked walls, buildings destroyed by raging torrents: floods present insurers with huge challenges.
Three full bathtubs, around 670 litres, per square metre – that was the amount of rain that fell within only a day and a half in the Rhône valley at the beginning of September 2002. If none had flowed away, the water would have risen to a level of 67 centimetres, about as high as an office desktop. In August, 224 litres came down in only three hours on Mallorca, and 158 litres descended in 24 hours on Dresden. The summer of 2002 certainly did not live up to its name in central and southern Europe. Along the Danube, Elbe, Vltava and their tributaries, communities were engulfed by the rising waters. The pictures are still vivid: muddy water swirling round a living-room suite, people saved from houses collapsing in the floods, pig carcasses floating down the river. The economic losses are estimated at around €18bn, a good €3bn of which was insured – a huge financial burden for those affected and for the states concerned, but also for the insurance industry.
The August floods wreaked damage in two main ways. On the one hand, deep and powerful torrents arose in narrow river valleys. These destroyed buildings or left them only fit for demolition. On the other hand, large areas next to river channels were flooded. Here the result was mainly damage due to mud and water-soaked walls.
You can find out more about how the effects of flood catastrophes can be reduced in our publication
“topics – Natural Catastrophes 2002” (see p. 255 for the ordering address).
Natural catastrophes in 2002 I Major engineering and fire catastrophes in 2002 I Trends of great natural catastrophes since 1950 I The summer floods in Europe – A millennium flood? I A natural hazard index for megacities I Does geographical underwriting improve risk management?
Various national solutions have been devised for this problem. In Spain, for instance, a compulsory charge is levied on all property insurance policies. This money goes to a “consorcio de compensación”, one of whose tasks is settling flood claims. In France, there is also a compulsory charge. Private insurers only have to cover losses if the government has declared a flood to be a natural disaster. In return, insurers can obtain cover from the state reinsurer ccr. Switzerland uses a “natural hazards pool”, to which primary insurers cede their risks. In Germany, as in many other countries, flood risks are covered by private insurance, although they are subject to the underwriting restrictions described above, and insurance density is low.
Germany is looking at ways of expanding insurance to cope with the flood problem. Like the insurance industry as a whole, Munich Re is willing to consider new approaches. Models from other markets can provide ideas, but should not be slavishly copied. What is needed are solutions carefully tailored to the individual conditions. Munich Re has long been of the opinion that the problem must be solved by a risk partnership between all those that have an influence on the hazard situation and on financial compensation.
04 Business issues 2002 Unlimited cover Munich Re Group Annual Report 2002 unlimited cover: Drawing the line
Catastrophes and terrorism hazards offer proof that motor liability insurance without limits constitutes an unacceptable risk for insurers.
04 Business issues 2002 Climate change Munich Re Group Annual Report 2002
There are also risks arising from climate change for the area of investments. We will keep a close eye on this issue, with ongoing risk analyses, and will respond as appropriate. One of the factors we consider in our investment decisions is the extent to which companies practise sustainable management. Building on this, our asset manager meag will be setting up a retail fund that invests in sustainable stocks. This is just one example of how we will be integrating the project team’s recommendations into our business in 2003.
Partnership between ergo and hvb Business issues 2002 04Munich Re Group Annual Report 2002 partnership between ergo and hypovereinsbank: A successful double-act
Share of ergo’s new business written via hvb (based on annual policy premium)
04 Business issues 2002 Partnership between ergo and hvb Munich Re Group Annual Report 2002
Advancing together in Europe ergo and HypoVereinsbank intend to build on these successes. In autumn 2002 HypoVereinsbank launched a new offensive for private provision products from the field of insurance and real-estate financing. A further major step was realised at the beginning of 2003, with ergo’s insurance products now integrated in HypoVereinsbank’s marketing system. At the same time, the large number of agents in ergo’s highly motivated sales forces are set to drive the cooperation forward. Both partners want to develop the business potential in European markets outside Germany: the prospects for this are especially good in Central and Eastern Europe, particularly Austria and Poland.
The most important issues for private health insurance in the Federal Republic last year were, on the one hand, the debate on raising the earnings ceiling for compulsory state health insurance and, on the other, the law to safeguard contributions to state pension and health insurance. The short-term measures taken, such as raising the earnings ceiling for compulsory insurance to €3,825 per month for all employees, were a step in the wrong direction. As a result, numerous people are prevented from making funded provision for rising healthcare costs through private health insurance. Moreover, the increase in the earnings ceiling has a negative effect on the financing contribution of private health insurance, which at €5bn per year is disproportionately high. The whole healthcare system is weakened as a consequence. The financing of the system can only be safeguarded in the long run if realistic concepts are employed that take account of the demographic developments. This requires two steps: firstly, the concentration of statutory health insurance on its core task of providing essential medical cover to those who are socially in need of such protection; secondly, more personal provision on a funded basis using private health insurance. Increases in the earnings ceiling for compulsory public health insurance are counterproductive.
A reform of the German healthcare system is becoming more and more urgent. Medical advances are making new and often more expensive forms of therapy available. The fact that people are living longer means that more treatment is needed, since the additional years are usually accompanied by more illnesses. When it comes to financing these requirements, statutory health insurance faces the problem that fewer and fewer working people are having to pay for more and more pensioners. In private health insurance, on the other hand, insureds pay premiums whose calculation includes ageing reserves, so that they do not place a burden on future generations.
As the assessment of claims is very complex, settlement will take considerably longer than originally assumed: it currently looks as if it will extend into 2004 at least and for aviation, for instance, may go on long beyond this.
The attack on the World Trade Center showed how urgent it was to fundamentally reassess the terrorism risk. The extent of the damage and the accumulation of losses from different classes of insurance, going as far as impacts on the assets side of insurers’ balance sheets, require a basic reappraisal of how the insurance industry considers and controls such risks. Insurers and reinsurers have had to fundamentally revise their underwriting policy.
In order to evaluate terrorism risks, the risk situation has to be made transparent and the risk in question limited to an acceptable degree. It is then possible to calculate an appropriate price for the risk assumption.
This is why, after 11 September 2001, Munich Re adopted the approach of generally excluding terrorism losses from cover for major risks. Subject to the above-mentioned criteria, however, we offer our clients a limited re-inclusion of such losses in the cover against payment of an additional premium. In this way we have substantially reduced our exposure and made it controllable.
04 Business issues 2002 Terrorism Munich Re Group Annual Report 2002
“Getting together is a sta progress. Working togeth HENRY FORD, AMERICAN ENTREPRENEUR
More on the subject of partnership >> ERGO-HVB PARTNERSHIP p. 83 STAFF p. 113 SOCIAL COMMITMENT p. 116 IMPORTANT ADDRESSES p. 255
The Flaspöhler Research Cedant Survey Europe 2002 was the second of its kind to be carried out by the renowned American market research institute. It was based on a questionnaire sent to 200 European primary insurers, including 22 from Germany. The survey is performed every two years and gives Munich Re the opportunity to learn how clients rate its development.
What did the Flaspöhler survey investigate and what were its results?
We want to enhance our client focus, our flexibility and our creativity. We want to look even more carefully at our clients’ needs and concerns, and react accordingly.
Relationships between clients and reinsurers have become more short term and more opportunistic. Nevertheless, in our case they are still generally marked by continuity and partnership: we have known most of our clients for a long time and generally work with them not only in one particular segment but in many areas.
What clients want above all is more security with regard to the capacity reinsurers provide. We can meet that need. The difficult capital market for insurers and reinsurers alike means that the emphasis is on underwriting once more. If the current trend continues, we will see a situation with risk-commensurate prices and conditions prevailing in 2004, and not only in Germany.
In October 2002, together with the Bavarian Ministry for Development and the Environment, Munich Re staged an event entitled “Risk dialogue”, in which representatives of all participants in the risk process got together to discuss such topics as risk communication and risk perception.
Clearly embracing corporate governance In 2002 we implemented a range of measures to take us further along the path of transparent corporate management.
The percentage of staff in the Munich Re Group working outside Germany has steadily increased, showing the growing internationality of our workforce.
Ladies and gentlemen, 2002 was an exceptionally difficult year for Munich Re, especially because of the heavy price losses on the capital markets, which also had a substantial impact on the Munich Re Group.
Throughout the period under review, the Supervisory Board monitored the Board of Management and gave counsel where appropriate. It regularly obtained detailed information on the development of business and the situation of the Company and its main affiliates. As Chairman of the Supervisory Board, I kept in close contact with the Chairman of the Board of Management for this purpose. The Board of Management also notified all members of the Supervisory Board without delay in between the scheduled meetings about individual decisions and business transactions that were of particular significance for the Group’s further development.
The shareholding transactions announced by Munich Re and Allianz in 2001 were successfully completed in the year under review. Munich Re now holds 25.7% of the capital and 26.3% of the voting rights in HypoVereinsbank ag and 91.9% of ergo Versicherungsgruppe ag; we obtained ongoing reports on the status of the cooperation between HypoVereinsbank and the ergo companies.
The Board of Management outlined detailed plans for the coming business years, first and foremost strategies for developing new markets and future fields of business. Besides this, we considered concepts for new distribution channels, the harmonisation of it platforms, staff development and personnel planning.
At our meeting on 6 December 2002 we established an Audit Committee. Its remit is to deal with the accounting for the annual financial statements and the quarterly report as well as with questions of risk management, the requisite independence of the external auditor, commissioning the annual audit and auditor, determining the focal points of the audit and agreeing the auditor’s fee.
On 6 December 2002 the Supervisory Board and the Board of Management published their first declaration of compliance with the German Government Commission’s Code of Corporate Governance. This declaration makes clear that we have committed ourselves to good, responsible corporate management and control.
As at 30 June 2002 Dr. Wolf Otto Bauer and Dr. Hans-Wilmar von Stockhausen ceased to be members of the Board of Management, having reached retirement age. Both gentlemen served our Company with great personal dedication for over 30 years. We thank them for their responsible and successful work on behalf of Munich Re.
05 Corporate responsibility Report of the Supervisory Board Munich Re Group Annual Report 2002
There have also been changes on the Supervisory Board. One of the representatives of the shareholders, Dr. Ferdinand Piëch, left the Supervisory Board on 16 April 2002. As his successor with effect from 17 April 2002, the Registration Court appointed Dr. Bernd Pischetsrieder. This appointment was ratified by the Annual General Meeting on 17 July 2002.
Corporate governance Corporate responsibility 05Munich Re Group Annual Report 2002 corporate governance: For more confidence and transparency
The year 2002 was of special significance for the development of corporate governance in Germany. In February, the government commission appointed by the Federal Minister of Justice published the German Code of Corporate Governance. It contains essential legal rules that must be observed by listed German companies; in addition it includes – in the form of recommendations and proposals – nationally and international recognised standards of responsible management. The Code is thus a sort of “manual for good company management”. Its aim is to strengthen the confidence of clients, shareholders, employees and the public and especially to create greater transparency for foreign investors.
The Personnel Committee undertakes the preparatory work in connection with the appointment of members of the Board of Management and, together with the Board of Management, concerns itself with long-term succession planning. The Personnel Committee also represents the Company vis-à-vis the members of the Board of Management; it is responsible for all personnel matters involving the Board members. In this connection it decides on secondary occupations they may pursue and seats they hold on the boards of other companies.
Munich Re sends all shareholders entered in the shareholders’ register an invitation to the Annual General Meeting and a copy of the agenda. The documents required by law for the Annual General Meeting are accessible on Munich Re’s website from the day the meeting is convened.
Within the legal parameters, Munich Re supports shareholders in the exercising of their rights as far as possible. This includes informing our shareholders appropriately and promptly on our website about current developments.
05 Corporate responsibility Corporate governance Munich Re Group Annual Report 2002
“Munich Reinsurance Company (Munich Re) fulfils all of the recommendations of the German Commission Code of Corporate Governance with the following exceptions: Additional remuneration is not yet paid for the chairmanship and membership of Supervisory Board committees. At the next Annual General Meeting on 11 June 2003 the Board of Management and Supervisory Board will propose an amendment to Article 15 of Munich Re’s Articles of Association regarding the remuneration for the chairmanship and membership of Supervisory Board committees. (Code item 5.4.5 para. 1 sentence 3).
The annual consolidated financial statements have hitherto been published within the periods stipulated in the German Commercial Code. In 2002, the statements for the business year 2001 were published on 27 May 2002; Munich Re thus kept well within the legal deadline. In future, Munich Re will optimise its processes even further so that the 90-day deadline recommended in the German Code of Corporate Governance can be complied with for the first time in the Group’s annual report for the business year 2004. The 45-day period envisaged in the Code for publishing interim reports will be adhered to for the first time as from the second quarter 2004. (Code item 7.1.2).”
Munich Re is well aware that corporate governance is an ongoing process. We will pursue this issue, developing our corporate governance principles further and thereby taking into account international standards. The decisive thing for Munich Re is that corporate governance is not only incorporated in rules and regulations but is also lived out in practice.
Other seats held by Board members Corporate responsibility 05Munich Re Group Annual Report 2002
Supervisory Board Seats held on Membership of comparable supervisory boards of bodies of German and other German companies foreign business enterprises
Ulrich Hartmann Deutsche Lufthansa ag Henkel kgaa Hochtief ag arcelor, Luxembourg ikb Deutsche Industriebank ag (Chairman) rag ag (Chairman) Powergen Limited, London*
Linde ag Riunione Adriatica di Sicurtà Siemens ag s. p. a., Milan* ThyssenKrupp ag
Deutsche Lufthansa ag Landwirtschaftliche Rentenbank e.on ag Kreditanstalt für Wiederaufbau Siemens ag
Prof. Dr. rer. nat. DaimlerChrysler Services ag – Henning Kagermann Deutsche Bank ag sap Systems Integration ag*
Prof. Dr. rer. nat. Bayerische Motoren Werke ag Aventis s. a., Schiltigheim Hubert Markl Royal Dutch Petroleum Company/ (from 13 December 2002) Shell, The Hague 1 Status: 10 April 2003 (in the case of members who have left the Supervisory Board, the information shows the status at the date of their departure).
De Persgroep, Asse dhv Holding bv, Amersfoort Royal Philips Electronics nv,
Dr. jur. Dr.-Ing. E. h. Bayer ag Siemens ag Österreich, Vienna* Heinrich v. Pierer Hochtief ag (Chairman)
Dr. rer. pol. Alfons Titzrath Allianz ag – (until 17 July 2002) Celanese ag
Other seats held by Board members Corporate responsibility 05Munich Re Group Annual Report 2002 * Own group company within the meaning of Section 18 of the German Stock Companies Act.
Clement Booth Allgemeine Kredit Coface acord, Pearl River, New York Inreon Ltd., London Nova Risk Partners Ltd.,
Dr. jur. Heiner Hasford d. a. s. Deutscher Automobil Schutz Munich London Investment Allgemeine Rechtsschutz- Management Ltd., London Versicherungs-ag ergo Versicherungsgruppe ag American Re Corporation, Europäische Reiseversicherung ag Wilmington, Delaware*
John Phelan – American Re Corporation, (from 1 April 2002) Wilmington, Delaware* (Chairman)
Dr. phil. Detlef Schneidawind dkv Deutsche Krankenversicherung ag Munich American Reassurance Hamburg-Mannheimer Sachver- Company, Atlanta*
Karl Wittmann – Jordan Ins. Co. p.l.c., Amman Saudi National Insurance Company e. c., Jeddah
Rating Corporate responsibility 05Munich Re Group Annual Report 2002 rating: Despite downgradings still among the leaders
American Re-Insurance Company A++ A++ A2 American Alternative Insurance Company A++ AA++ Princeton Excess and Surplus Lines Insurance Company A++ Munich American Reassurance Company A++ AA– Great Lakes Reinsurance (uk) plc A++ AA– Munich Reinsurance Company of Canada A++ AA– Munich Reinsurance Company of Africa A++ Munich Reinsurance Company of Australasia A++ AA– Münchener Rück Italia A++ AA– New Reinsurance Company A++ AA– Temple Insurance Company A++ www.munichre.com/ir-d
The notes and debentures issued by companies in our Group are rated as follows: A. M. Best S&P Moody‘s Fitch
Munich Reinsurance Company, 1.0%, €1,150m Bonds Exchangeable into Allianz AG Shares 2000/2005 aa AA– AA+
ERGO International AG, 0.75%, €345m Bonds Exchangeable into Aventis AG Shares 2001/2006 A+ AA
ERGO International AG, 2.25%, €345m Bonds Exchangeable into E.ON AG Shares 2001/2006 A+ AA
Relations with our staff are characterised by mutual fairness and loyalty. We offer opportunities for personal development and career-building in our international organisation, as well as high-quality fringe benefits. These, in turn, are not a “feather bed” for our staff, but a solid basis for their exceptional dedication: we expect entrepreneurial thinking and a high degree of commitment at all levels.
For many highly qualified academics with international experience, we are the top address for applications each year. At the moment we are looking particularly for mathematicians, a professional sector where – through our targeted promotional work – we have also succeed in making ourselves one of the most attractive employers. In addition, our efforts are constantly devoted to finding highly qualified underwriters with professional experience.
2002 saw the expansion of our staff recruiting and marketing activities on the internet, increasing the information for our applicants and improving online communication.
At ergo, a single database now handles job vacancies for all its group companies. This enables applicants to find a suitable job offer more quickly.
Last year Munich Re refined its performance appraisal system a. i. m. Dialogue (= Agreement of objectives, Individual development plan, Munich Re performance appraisal). As its name suggests, the system requires staff and managers to discuss objectives, development options and collaboration in an open and motivating atmosphere, thus advancing equally the interests of employees and the company. a. i. m. Dialogue is based on the Munich Re’s guiding principles and also takes into account the principles of value-based management.
Along with many other German companies, Munich Re is one of the founding members of the European School of Management and Technology (esmt), which has institutes in Berlin and Munich. The esmt is geared to the needs of European trade and industry and attaches particular importance to Central European traditions and intercultural skills. We expect the esmt to equip selected staff with the further qualifications they need to meet our requirements.
The ergo Management Academy (ema) expanded its range of courses for Board members, managers and senior executives in 2000, making adjustments to take account of the keener competition and rising cost pressure. Training courses can now be called up by the management centrally from one source. For long-term succession planning at upper and middle management level, there are so-called “potential groups”. A summer academy offers ergo senior executives modern forms of learning and innovative curricula.
Despite the difficult situation on the stock market last year, which also took its toll in terms of Munich Re’s share price, the response to the employee share programme surpassed our expectations. We are delighted by the confidence shown by our staff in Munich Re’s future development which this participation reflects.
05 Corporate responsibility Social commitment Munich Re Group Annual Report 2002 social commitment: Support for cancer prevention, the climate, art and culture
We mainly support initiatives that are not usually in the spotlight of public interest and are frequently conducted on a voluntary basis. The wide spectrum of our fields of business, the topics we deal with and the countries in which we operate are mirrored by the broad range of social projects in which we are involved. We have selected a few examples to illustrate Munich Re’s social commitment in 2002.
Munich Re also makes donations of money and goods to the “Pfennigparade”. This is a foundation dedicated to the physical and mental rehabilitation of the disabled which finances numerous medical, therapeutic, social and schooling facilities. In particular, Munich Re supports “Pfennigparade” in projects that bring together disabled and non-disabled children: in 2002 these included school theatre projects and a children’s library night.
After many years of active commitment to the area of environmental protection, our subsidiary Europäische Reiseversicherung is now devoting itself more to social sponsoring. With the motto “Children of the World”, it supports two projects for street children in Colombia and South Africa. Both projects offer leisure programmes, opportunities for training in various trades, education and anti-pollution campaigns. Through such involvement Europäische Reiseversicherung hopes to alleviate problems of social deprivation at tourist destinations.
Let us end this review of our social commitment with the subject of cultural sponsorship. Last year we especially supported the “Gustav Mahler Jugendorchester ”. This youth orchestra, founded on the initiative of Claudio Abbado, offers highly talented young musicians the chance to gain experience with great international conductors and soloists on world tours. It is today regarded as the world’s leading youth orchestra and is a frequent guest at major concert events and festivals.
The environment Corporate responsibility 05Munich Re Group Annual Report 2002 the environment: Sustainability as a business principle
Environmental protection and sustainable development are of direct concern to Munich Re in its business. Both have to do with a consistent approach to thinking about the future and protecting against risk. Munich Re is therefore deeply committed in these areas, a fact acknowledged by our clients and the capital market. Having made our operations transparent, we have been included in the best-known sustainability share indices – the Dow Jones Sustainability Global and the ftse4good. Besides this, Munich Re shares are also featured in the portfolios of many large and small sustainability funds.
We attach great importance to communicating our views on sustainability, the environment and especially the climate. Unlike a manufacturing firm, say, we as financial service providers put relatively little direct strain on the environment. We support environmental protection by using our knowledge edge to draw attention to problems, to warn of dangers, and above all to advise our clients, the primary insurers.
Our understanding of corporate ethics in a market economy entails sharing information gathered in our business operations which is of relevance to everybody. In the following, we would like to mention a few projects from last year as examples: Our environmental magazine
“Perspectives” reports on Munich Re’s contribution to environmental protection and sustainable development
The climate protection protocol formulated in 1997 in Kyoto, Japan, envisages that by 2012 the largest industrial countries will reduce their emissions of greenhouse gases by at least 5.2%, based on their 1990 levels. The ratification of this protocol by governments in 2002 was the subject of heated debates. Munich Re was much in demand as a discussion partner, not least because of its incomparable reservoir of knowledge on natural disasters, especially large weather-related catastrophes. Germany’s Minister of the Environment, Jürgen Trittin, paid tribute to Munich Re’s contribution in an interview: “Munich Re helped ensure that the Kyoto agreement on climate protection was ultimately ratified.”
Munich Re also played an active part in the World Summit on Sustainable Development in Johannesburg in September. The summit had the motto “People, Planet, Prosperity” and addressed the specific problems of developing countries. In addition to several thousand government delegates, around 22,000 representatives from state and non-governmental organisations, associations, the press and companies participated. It is one of Munich Re’s core tasks to identify and assess risks at an early stage so as to take appropriate countermeasures. This world summit presented the opportunity to negotiate binding international agreements for the next summits in order to tackle the great issues of the future, such as man-made climate change.
Munich Re is also supporting – as exclusive partner – a special exhibition running from December 2002 to September 2003 at the internationally renowned Deutsche Museum in Munich: “Climate. The Experiment with Planet Earth”. The exhibition heightens awareness for the topic of climate change, with its substantial risks for people and property, and underscores our opinion leadership on its consequences, a future issue of strategic importance for us.
The British subsidiary of the ergo company d.a.s. is preparing for certification in accordance with the environmental management standard iso 140001 and is one of the first insurers in the uk to introduce an environmental management system of this kind.
Europäische Reiseversicherung supports environmental and social projects at tourist destinations. Its aim is to help conservation and promote sustainable tourism. Since 2001 it has participated in the City of Munich’s Eco Profit project. In December 2002 it received an award for this commitment in the resourcessaving category. In fact, with Eco Profit, Europäische Reiseversicherung helps protect not only the environment but also its balance sheet, which benefits from the resultant cost savings.
“Risk is the bow wave of s CARL AMERY, GERMAN AUTHOR
EARLY-WARNING SYSTEM REINSURANCE One of the duties of a reinsurer is to foresee risks in order to protect its clients. Hence the first step of professional risk management is the most important: to identify risks at an early stage. This is true even if some major losses may appear to emerge out of nothing – like the floods in summer 2002. Here, too, there had been scenarios which had described the consequences of climate change.
More on the subject of risk >> ASBESTOS p. 73 CYBERRISKS p. 75 UNLIMITED COVER p. 80 RISK REPORT p. 162
LEARNING FROM MISTAKES One of the aims of our risk management is to ensure a positive risk culture in our Group – to a create an environment where people feel they can openly admit mistakes without fear of recrimination and above all learn from mistakes in order to do things better.
What goal is Munich Re pursuing with its risk management system?
Every member of staff responsible for business is interested in knowing the risks in his or her area in order to take appropriate action, depending on the situation. Our risk management system supports staff with suitable tools and makes sure these are implemented everywhere in the Group. In addition, we analyse our system and our risk situation at the level of the subgroups and the Group as a whole, taking into account all the main risks of our operative and central divisions. This enables us not only to react but also to actively manage our risks. In addition, by so doing, we meet the legal requirements of the German Law on Corporate Control and Transparency (KonTraG).
Keeping a constant eye on risks >> Our risk management process works on a “circular” basis: we have defined cycles in which we identify, analyse, control and monitor risks. At the end of each cycle we adjust the tools and responsibilities where necessary.
Return to reason Market players are giving priority to their underwriting results again.
Positive result Affected by a whole range of special factors, our profit for 2002 totalled €1,081m.
The combined ratio is sum of the loss ratio (ratio of claims expenses to earned premiums) and the expenses ratio (ratio of operating expenses to earned premiums). The better the underwriting business performs, the lower the combined ratio usually is.
* Thereof for WTC and reserve strengthening at American Re – 2001: 22.4% / 2002: 15.9%.
At just under 3%, global economic growth in 2002 again remained clearly below the average of the last thirty years.
After a relatively strong start, the world economy rapidly slowed down in the further course of the year. Growing uncertainty and a general reluctance to invest dominated the picture to an ever-greater extent in the leading industrialised countries. The continued threat of terrorism and a renewed increase in geopolitical risks, including the emerging threat of military confrontation in the Gulf region, contributed to the uncertainty worldwide. Unemployment rose in all the leading industrialised countries, whilst investors quickly lost confidence as a result of spectacular insolvencies. All this led almost inevitably to a massive collapse in prices on the stock markets, which in turn had a negative impact on the real economy.
The us, which nominally accounts for almost one third of world economic output, again proved to be the main engine of global economic activity in 2002. Strong growth in the first quarter of 2002 led to a real annual rate of 2.4%. However, the monetary and fiscal measures introduced since 2001 to boost the economy have so far been insufficient to ensure lasting growth in the us, and thus also in the global economy.
The economic situation in emerging markets was generally impacted by the global trend during 2002, though regionally there were big differences. Basically, all the emerging markets suffered from the slowdown in the world economy.
The strongest growth was seen in Asia: China achieved a real growth rate of around 8% in 2002, thus maintaining its unbroken upward trend. In Korea, Thailand and Taiwan, annual growth rates were up on those for 2001 – in some cases quite substantially.
Russia and the transition states of Central and Eastern Europe continued to experience stable growth, even though they increasingly suffered from the weak economic situation in Euroland. The eu Summit in Copenhagen sent out a positive signal, however, resolving to expand the eu by ten new members in 2004. Turkey saw a return to positive growth figures following the previous year‘s crisis.
Not least against the background of low overall economic growth, the central banks in the us and Euroland therefore cut interest rates by a further 50 basis points in the second half of the year in order to give their economies an additional boost.
On the bond markets, a flight to quality was observable: long-term yields fell back to a level only reached in recent years as a consequence of the Asian crisis; the spreads for corporate bonds increased noticeably in the second and third quarters, but then stabilised.
The currency markets clearly reflected the worldwide economic trend. The dollar weakened visibly during the course of the year, not least because attention concentrated more on the risks in the us economy, such as the deficit in the current account balance and the indebtedness of private households. However, there is reason to believe that so far this weakening of the dollar is merely a correction after the overvaluation of recent years. The value of the euro was slightly up against the yen.
06 Financial report MANAGEMENT REPORT Business parameters Munich Re Group Annual Report 2002
In 2002, the macroeconomic situation left its mark on the insurance industry to an almost unprecedented extent. In particular, the extreme trend on the capital markets had a substantial impact on the entire financial sector. Falling interest rates and the collapse of prices on the stock markets badly hit insurance companies as investors. This contributed to the tendency among all the market players to at last concentrate more on a commercially sound, profit-oriented approach in their core business.
In health insurance, the global trend towards further liberalisation of healthcare continued, even if no significant steps were actually taken in the larger markets in 2002 (see page 85). Prices and conditions in health reinsurance improved during the year under review.
It is also evident that the demand for effective risk protection has increased again in society as a whole. The events of the last two years have made it clear to everyone how important the insurance industry is, and also enhanced clients‘ readiness to pay an appropriate amount for first-class security.
Finally, a brief look at the development of a number of major markets: In the us, after years of price wars, 2002 saw the emergence of a pricing environment in which rates were more commensurate with risks. Prices and conditions improved significantly, as numerous market indicators confirm. In life reinsurance, the American market is continuing to consolidate. Bigger and better-capitalised reinsurers are achieving larger and larger market shares of new business. Competition for traditional business remains keen.
Premium growth in the European insurance markets mostly exceeded overall economic growth. Altogether, European insurance companies suffered markedly from the bear market on the stock exchanges and declining interest rates, especially the life insurance industry.
In Germany, despite the unfavourable macroeconomic situation, propertycasualty insurance recorded nominal premium growth of 2.8%. Premium income was up by 4.3% in life insurance and by 6.4% in private health insurance.
The demand for capacity to cover risks from natural catastrophes continues to be high in Japan. In Australia, prices and conditions in reinsurance largely reached risk-commensurate levels.
The Chinese insurance market recorded very strong expansion again in 2002. Whereas in 1991 China still lay in 25th place in the global league of insurance markets, thanks to its dynamic development it had already moved up to 13th place by 2001.
06 Financial report MANAGEMENT REPORT Business performance Munich Re Group Annual Report 2002
Following the successful renewal of reinsurance treaties at 1 January 2002, our 123rd business year got off to a promising start, with very strong growth and an outstanding first quarter result, due in no small part to the profits from the long-agreed sale of shares in Allianz Group companies. The second quarter was overshadowed by the major strengthening of reserves for our us business. The third quarter was significantly affected by the flood disasters in Central Europe and Asia. On top of this came the unparalleled crash on the stock markets worldwide. As investors, we were badly affected by this bear market, which persisted in the fourth quarter. But the situation on the investment front also underlined the need for a further improvement in insurance prices and conditions, and in the renewals as at 1 January 2003 we pressed hard for such improvements, which were largely achieved.
Group premium income rose by 10.8% (16.1%) in the past year to €40.0bn (36.1bn), thereby exceeding our high expectations. We grew in all areas, mainly organically, and managed to distinctly improve the profitability of our business, especially in reinsurance.
We earned 59% (57%) of our Group premium from reinsurance, whose premium volume has grown by around 80% since 1998.
The large stock price falls in the year under review led to losses in the value of shares accounted for at market value in our consolidated financial statements. This played a significant part in the reduction to €13.9bn (19.4bn) in shareholders ‘ equity shown in our balance sheet at 31 December 2002. For the same reason we also lost a large portion of our valuation reserves, which had totalled €16.4bn at the end of 2001. The notes to the financial statements provide detailed information on the development of shareholders‘ equity in the balance sheet on page 211. They also include the valuation reserves for investments not accounted for at market value (see page 201 f.).
Valution reserves not recognised in the balance sheet, including those apportionable to minority interests and policyholders
We continually monitor the capitalisation of our Group and the insurance companies belonging to it, with due regard to the requirements of insurance supervisory authorities and the criteria of the leading rating agencies. An increasingly important role is played by our internal risk model (see explanations in the risk report on page 164), which we use to determine the capital requirements of individual business units, taking into account fluctuations in results and risk exposures. Despite the losses in shareholders‘ equity, our capitalisation was still adequate at the end of the business year.
In order to provide a sound basis for further organic growth, we issued two subordinated bonds in April 2003: a euro bond with a volume of €3bn and a spread of 245 basis points above euro mid-swap, and a pound sterling bond with a transaction volume of around €450m and a spread of 295 basis points above gilt.
06 Financial report MANAGEMENT REPORT Reinsurance Munich Re Group Annual Report 2002
The addresses of the most important units can be found on page 255 of this report and also on our website.
Our main objective was to improve the quality of our portfolio as a whole, which we succeeded in doing. Thanks to higher prices for existing business and high-quality new business, we were able to increase our premium income in the year under review by 14.6% (21.1%) to €25.4bn (22.2bn)
MANAGEMENT REPORT Reinsurance Financial report 06Munich Re Group Annual Report 2002
Although we continue to be the leading reinsurer for life and health business in Germany, we are recording significantly higher growth abroad.
Our position is particularly strong in the Canadian insurance market, where Munich Reinsurance Company Canada Branch Life is the main life reinsurer; in the year under review it extended its position further. In the us, our subsidiary Munich American Reassurance Company (marc), one of the biggest life reinsurers in the market, recorded a high rate of organic growth. The Munich Re United Kingdom Life Branch was able to consolidate its position as the secondlargest life reinsurer in the uk, where business continued to grow at aboveaverage rates.
Combined ratio (excluding WTC, American Re and natural catastrophes) 103.2 111.2 113.3 06 Financial report MANAGEMENT REPORT Reinsurance Munich Re Group Annual Report 2002
In the last renewal rounds, we have achieved significantly better prices and conditions, but above all appropriate restrictions in the scope of cover, and we have terminated a substantial volume of business that was performing badly. In 2002, this translated into distinctly improved results for the current underwriting year.
Excluding the reserve strengthening for American Re and the wtc losses, the combined ratio came to 106.5%. This represents a considerable improvement of 6.2 percentage points compared with the figure for 2001 calculated in a comparable way, and is also appreciably better than the average for the last few years, although the impact of natural catastrophe losses, with 3.3 percentage points, was considerable.
– Another important distinguishing feature relates to the time-lag between premium being received and claims being paid. The greater these periods are, the longer the premiums received can be invested in securities or other assets. High combined ratios in classes of business in which claims settlement takes a long time (e.g. liability) therefore also generally entail higher returns from investments with which the loss reserves are covered. These returns are not reflected in the combined ratio.
In all divisions, we made considerable progress with regard to improving prices and conditions, which also had a positive effect on the combined ratios, but in some areas this was overshadowed by special cost burdens.
Because of the flood losses mentioned above, Europe 1 had a combined ratio of 117.7% (106.7%). Europe 2 and Latin America, as well as Asia, Australia and Africa, were largely spared natural catastrophes and therefore achieved the most marked improvements. North America‘s very high combined ratio resulted from the strengthening of reserves at American Re. The increase in our reserves for the wtc losses mainly affected our business with insurers operating globally; this explains the high combined ratio of Corporate Underwriting/Global Clients. The business written by Special and Financial Risks was characterised by very good results in aviation and space insurance, and also in alternative market business; the only negative results recorded were in credit reinsurance – due to the poor state of the economy – and at our Swiss subsidiary, New Re.
The predominant features of the reinsurers‘ investment result were, on the one hand, the high profits from shareholding transactions with Allianz in the first and second quarters of the year under review and, on the other hand, the heavy losses on disposals of investments and writedowns on shares in the third and fourth quarters. These are dealt with in more detail on page 157 f.
For the third time in a row, our Swiss subsidiary showed a significant net loss for the year. Besides having to make high writedowns on equity portfolios, it was necessary to strengthen loss reserves for earlier underwriting years. Having already restructured New Re‘s portfolio, we went on to make extensive staffing and structural changes at the company.
The transfer of insurance risks to the capital market and, conversely, of financial market risks to the insurance market has resulted in the two markets moving closer together. On 1 July 2002, Munich Re strengthened its presence in this business environment by setting up macm, which is intended to exploit the strengths of both markets and provide our clients with specific solutions for complex and capital-intensive risk scenarios.
We regularly examine our extensive network of branches and offices from the cost/benefit standpoint. In the year under review, we closed our office in Istanbul and scaled down those in Moscow and Warsaw, because we can write the business more cost-effectively from Munich. As American Re is now focusing entirely on its home market, we have further streamlined the structure of the business units in our international organisation, especially in Central and South America. On the other hand, we have expanded our presence in China and India. With all these measures, the prospect of positive contribution margins in the long term is the crucial factor.
In future, ergo will concentrate entirely on primary insurance, which is why victoria Re stopped writing inward reinsurance business at the end of 2002. victoria Re‘s premium income from non-Group companies latterly amounted
The attack on the World Trade Center on 11 September 2001 illustrated very dramatically how important it is to limit liability for terrorism risks, which defy all attempts to calculate them by actuarial means. The absence of any limits can threaten an insurer‘s or reinsurer‘s very existence. We have developed a clear concept of how terrorism risks should be dealt with in reinsurance, and have consistently implemented this in renewal negotiations since 1 January 2002. Consequently, we did not suffer any significant claims burden from the terrorist attacks on Bali (October 2002) or in Mombasa (November 2002).
You can find out more about our concept for terrorism covers on page 87.
Our Geo Risks Research Centre of Competence records natural hazards worldwide, in particular the striking increase in catastrophe losses. It analyses their causes, assesses the results with respect to our underwriting policy, and offers our clients a comprehensive service regarding these topics.
Our primary insurers earned 70.8% (70.8%) of their gross premiums from life and health insurance, where we achieved a 5.7% (7.9%) increase in premium income in the year under review.
Premium income in health insurance grew by 5.7% (4.6%) to €4.2bn (4.0bn). The fear among many employees in Germany that a drastic increase in the earnings ceiling for compulsory state health insurance could make it more difficult to switch from statutory to private health insurance made a significant contribution to the good growth in new business.
Gross premiums in property-casualty insurance in €bn 06 Financial report MANAGEMENT REPORT Primary insurance Munich Re Group Annual Report 2002
In property-casualty insurance, premium income reached €4.8bn (4.6bn), or 5.4% (11.7%) more than in the previous year. We managed to achieve growth not only in personal lines business but also in commercial property insurance, which, thanks to price increases, contributed to the positive premium trend.
The floods in Germany and Central Europe, and also severe windstorm damage, gave rise to claims costs for our primary insurers in the mid double-digit million euro range. Despite these and other burdens from natural hazard events, the combined ratio fell to 99.1% (101.4%).
Although operative insurance business performed well all in all, it was overshadowed by the high expenditure for losses on disposals of investments and writedowns on equity portfolios necessitated by the extremely negative trend on the capital markets.
In reporting on our primary insurance operations, we follow the structure of our subgroups, in each case referring to our subsidiaries‘ individual or consolidated financial statements for the year.
Growth ergo‘s premium income rose by 7.6% (9.9%) in 2002. All classes of business, but especially life insurance, contributed to this growth, which exceeded the market average.
MANAGEMENT REPORT Primary insurance Financial report 06Munich Re Group Annual Report 2002
In property-casualty and legal expenses insurance, ergo recorded growth of 5.7% (12.7%), partly driven by commercial and industrial property insurance, where remedial measures have been making themselves positively felt since 2001. The 2.7% (3.9%) growth in legal expenses insurance came mainly from foreign business.
Operative insurance business performed positively overall. Despite the flood losses in Germany and Central Europe and also other natural hazard losses, the combined ratio in property-casualty business fell to 97.6% (98.2%).
ergo, as a large institutional investor, was also affected by the exceptionally adverse situation on the capital markets, which led to a very poor result from investments of –€515m (+5,088m). On balance, the overall result for the year after tax was –€1,125m (+655m).
KarstadtQuelle Finanz Service (kqfs), the joint venture established by ergo and KarstadtQuelle in the first half of 2002, is doing well. In the second half of the year, financial service centres were opened at branches of Karstadt Warenhaus ag in several major German cities. One area of kqfs‘s activities is ancillary or “add-on” business, i.e. additional insurance benefits offered when goods and products are being purchased.
The Karlsruher Insurance Group‘s overall result for the year improved from –€18m to €17m. The previous year‘s result had been affected by adjustments in the calculation bases for actuarial items.
In Germany, Europäische shared the fate of many tour operators, with reductions of 10% to 20% in the number of sales. The claims situation with regard to cancellations by customers has improved again. Net claims expenses for the Europäische Group decreased markedly by €18.3m. This reduction of over 10% was achieved mainly in Germany.
06 Financial report MANAGEMENT REPORT Asset management Munich Re Group Annual Report 2002
In the investment sector, we consistently follow a number of principles: we only make investments from which we can expect an appropriate return, at the same time giving due regard to a high degree of security. We try to reduce currency risks through our asset-liability management, by matching our expected liabilities with assets in the same or similar currencies. How we counter the various investment risks is described in depth in the risk report on page 168.
MANAGEMENT REPORT Asset management Financial report 06Munich Re Group Annual Report 2002
The table below shows the composition of the portfolio by investment type: The reduction in the percentage of shares and investment fund certificates, which are shown in the balance sheet at their fair value, is attributable both to losses in value and to the fact that we have deliberately reduced the proportion of shares in our portfolio as a whole.
We once again invested in top-class foreign real estate in the past year. In December 2002, the ergo Insurance Group acquired the One Capital Square complex, one of the five “class A” properties centrally located in Singapore‘s main business district of Raffles Place. The total area of 37,800 m2 has been let on a long-term basis to well-known international financial service providers.
Disposals amounted to €299m (245m). The properties sold were primarily residential and mixed residential/commercial and mainly involved small-volume items in Germany that had reached the end of their life cycle.
2002 Prev. year Change Investment mix €m % €m % in %
At the beginning of April 2001, Munich Re and Allianz announced a further restructuring of their shareholdings in jointly held subsidiaries and participating interests. In this connection, in the first quarter of 2002 Allianz acquired from the Munich Re Group all its shares in Dresdner Bank and its 40.6% interest in Allianz Lebensversicherungs-ag. Besides this, Munich Re made available from its own holdings shares of 4% in Allianz for the offer to Dresdner Bank shareholders. This reduced Munich Re‘s stake in Allianz to around 21% of the voting rights.
In the year under review, the investment result amounted to €5.6bn (10.4bn), representing a reduction of 46.2% compared with 2001.
All figures in €m 31.12.2002 31.12.2002 31.12.2002 Prev. year Prev. year Prev. year
Owing to the very poor performance of the stock markets, we made writedowns of €6.3bn in the business year 2002, €5.7bn on our equity portfolios alone. Overall, these writedowns placed a burden of €2.5bn on the Group result.
The realised capital gains for 2002 include €4.7bn from the disposal of shares in Allianz ag, Allianz Leben, Frankfurter Versicherung and Bayerische Versicherungsbank.
The item “other income/expenses” contains –€795m from the valuation of Bayerische Hypo- und Vereinsbank ag at equity.
Losses on the disposal of investments derived predominantly from the sale of equities; our equity ratio decreased to 12.0% (20.7%) in the year under review.
In the next three years, third-party business is planned to almost double as a result of organic growth. However, meag‘s main task will still be to manage Munich Re Group investments.
The capital markets remain very volatile and interest rates low, as do share prices, at least when measured against price levels in mid-2002. We envisage a continuation of this volatile trend for the time being.
The raising of the earnings ceiling for statutory health insurance is currently overshadowing developments in private health insurance in Germany, our most important market. Nevertheless, we consider that this step will not improve the difficult situation of statutory health insurance in the long term (see page 85). In the short term, we expect the raised ceiling to lead to a reduction in new business. Health insurance is growing all the same, and not only because of the premium increases that have become necessary to offset rises in claims and benefits. In the medium term, recognition that social insurance systems urgently need to be supplemented by private financing on a funded basis in health insurance, too, will win through.
MANAGEMENT REPORT Prospects for 2003 Financial report 06Munich Re Group Annual Report 2002
Unfortunately, there is a growing tendency among some investors to sue companies in connection with statements they publish on future development. This practice inevitably leads to companies being reticent about the information they give and disclosing only what is required by law.
For this reason we, too, wish to emphasise the following: predictions about the future development of our Group are based primarily on planning figures, forecasts and expectations. They do not contain descriptions of already established facts. Consequently, the following assessment of the Munich Re Group‘s development merely reflects our assumptions and expectations. We do not accept any responsibility or liability for cases in which they are not realised either in part or in full.
We are assuming that for the next few years the prevailing conditions will result in steady growth in reinsurance business, albeit on the moderate side in the single-digit percentage range. The fact that this growth rate is lower than the figures of the last few years reflects our restrictive, strictly profit-oriented underwriting policy. Growth is also being curbed by a stronger euro.
In primary insurance, we again plan to grow by more than the market average in 2003, and are confident of achieving this goal in all classes of business (life and health, property-casualty).
As prices and conditions in reinsurance have been substantially improved, we expect a combined ratio of around 100% in the current business year. In primary insurance, through systematic claims management and effective cost reductions, we want to further improve the combined ratio, which at 99% is already very low compared with the market in general.
The crucial factor for the result, however, will be what claims burdens affect us from natural catastrophes and other major losses, as well as how the capital markets develop. We assume that our investment returns will show a decline due to the lower interest rates, even if stock prices recover from their current low level. Further losses on disposals and writedowns on our equity portfolios must be expected.
The events of 2002 again severely tested our Group and its risk management system. Like many others, we were substantially affected by the dramatic slumps on the capital markets.
The Munich Re Group’s risk management is uniformly structured for reinsurance, primary insurance and asset management, and applies Group-wide. This permeating structure is flexible and can be adjusted to current situations where required. Key features of our risk management system are centralised organisation and decentralised implementation. There is strict separation of risk management and risk controlling, and the related responsibilities are clearly defined.
Competence and responsibility for managing risks lies largely with the decentralised risk managers of the Munich Re Group, who are able to take the appropriate steps to deal promptly with any situations arising. These risk managers are responsible for the risk situation in their respective units and it is their job to check and continually monitor whether the risk policy measures taken are sufficient to effectively reduce the risk potential.
The role of internal auditing at the individual Group companies is to examine independently the risk management system and its further development. It also checks whether the controls and monitoring measures that have been implemented are appropriate and are being complied with.
– the reserving risk in the assessment of the underwriting provisions required.
Investment risks comprise – market price risks: changes in interest rates, share prices or exchange rates may result in losses in the value of invested capital; – credit risks: the creditworthiness of issuers or counterparties may deteriorate, to our disadvantage; – liquidity risks: delays in cash inflows and outflows can jeopardise the fulfilment of our own payment obligations.
All risks from our business are modelled using our internal risk model, i.e. they are quantified and thus made calculable using methods based on probability theory. In this way, we can strive for an optimum diversification of our portfolio, aiming for the best possible utilisation of the risk capital employed. At the same time a balance portfolio can be built up even for large risks and our high degree of security maintained.
Traditionally we are strongly represented in Europe in our primary insurance business, especially in Germany, whilst in reinsurance we attach great importance to diversifying our business relations internationally. This enables us to extend the geographical spread of the risks we assume and to achieve a better balance in our portfolio.
The calculation of underwriting provisions in primary insurance is based on “biometric” calculation tables, i.e. on assumptions with regard to mortality and disablement. These assumptions are checked by the supervisory authorities in accordance with specific national regulations.
In reinsurance, companies generally have a free choice of biometric calculation bases. We calculate on the basis of “best estimates“; these are derived from portfolio data and take into account appropriate assumptions regarding future development. In this process, we particularly consider the calculation bases that have been deemed sufficient by supervisory authorities.
The specific risks in health (re)insurance are the mortality risk, the lapse risk, the benefits risk and the interest guarantee risk; this differentiation exists mainly in the German market with its ageing reserves, and these risks are examined by the supervisory authorities. Outside Germany and in markets without ageing reserves only the benefits risk is relevant in underwriting terms.
All companies in the Munich Re Group have appropriate intra-Group and external reinsurance cover, or retrocession cover in the case of the reinsurers. Of particular significance for our reinsurance business is accumulation excessof -loss cover. To protect ourselves against claims burdens from major natural catastrophe events, we buy various covers on the international retrocession markets, each with very good security. Additional protection is provided by our two natural catastrophe bonds, which we placed in December 2000 with a term of three years (see page 25).
Provisions for uncertain liabilities are established using actuarial methods. Our division Corporate Underwriting/Global Clients regularly checks the claims provisions of the other divisions in Munich and our reinsurance subsidiaries to make sure they are sufficient. Where necessary, we make appropriate adjustments.
In the year under review, American Re increased its loss provisions by us$ 2.0bn. The need for this emerged from an extensive investigation on the claims side. With this reserve strengthening, we consider that – based on the latest knowledge of our experts and our best estimates of the foreseeable and potential development of the market and claims – sufficient provision has been made for the increased burden from reported claims and for possible future obligations.
Risks from defaults on receivables from underwriting business 5.1% of our receivables on underwriting business at the balance sheet date were outstanding for more than 90 days. The average default rate of the last three years amounts to 2.3%. As far as our own retrocessions and reinsurance are concerned, we reduce the risks of defaults on receivables by selecting our retrocessionaires and reinsurers on the basis of particularly strict criteria.
As at 31 December 2002, nearly 70% of the accounts receivable on business were from companies that have been awarded at least aa by Standard & Poor’s or a comparable rating by one of the other internationally recognised rating agencies (Moody’s or A. M. Best).
We only run currency risks to a small extent, as we observe a policy of currency matching. This means that for all important currency liabilities in our underwriting business we establish appropriate matching items in our assets.
Possible market price risks in our investments are measured using the valueat -risk approach, which is also employed in our strategic investment planning to model the optimum investment portfolio according to our risk preference.
06 Financial report MANAGEMENT REPORT Risk report Munich Re Group Annual Report 2002
The liquidity risks of companies in the Munich Re Group are managed by the individual insurers and reinsurers themselves. Detailed liquidity planning ensures that Munich Re and its Group companies are able to make the necessary payments at all times. This planning concept, which has been in place for many years, has proved its worth after large natural catastrophes, and also in connection with the World Trade Center loss.
The global business and Group-wide risk management of the Munich Re Group increasingly require a networking of its business units and systems worldwide. The consequence of this is a growing dependency on electronic communications technology, whose complexity is continually increasing. Dependency on these systems and the value of the processed information is also growing. This means that the organisational and technical measures needed to protect the confidentiality, availability and integrity of these data and systems are acquiring ever-greater importance.
The companies in the Munich Re Group have binding standards of corporate integrity governing conduct within the companies themselves, their business transactions and other relationships with external parties. These standards, tailored to the special features of each company, serve not least to prevent conflicts of interest for staff in order to ensure that we use only fair and legal means of competition. The clear separation of management and control functions limits the risk of criminal acts. Risks arising from insufficiently qualified personnel and “head monopolies” are countered by suitable staff development measures and management instruments, as well as succession planning.
In order to ensure the necessary safety at work for our staff, specially appointed experts support the implementation of appropriate occupational safety and accident prevention measures. Safety officers ensure the proper installation and usage of mandatory safety devices and systems. In addition, we have developed a safety and security plan that comes into effect in emergencies.
Risks arising from changes in the legal environment may affect the whole Munich Re Group. We counter these mainly by monitoring current developments and actively participating in various bodies and associations to contribute our views both as a company and as a representative of our branch of industry.
Of particular significance in this respect are strategic risks, which result chiefly from management decisions on the further development of the Group and its business units. In order to help ensure the effectiveness of our activities, we have detailed our corporate objectives in so-called balanced scorecards. In the context of value-based management, this step enables us to implement better the concrete initiatives required by strategic decisions. In addition, balanced scorecards help us to monitor individual measures and to take countermeasures at an early stage in the event of any deviations from the intended objectives.
Altogether, we see the Munich Re Group’s situation with regard to risks as controlled and viable.
Consolidated balance sheet as at 31 December 2002 06 Financial report Consolidated financial statements Munich Re Group Annual Report 2002
D. Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders 698 655 43 6.6
5. Net expenses for claims and benefits (28) 31,129 34,162 –3,033 –8.9
Total expenses (5–7) 42,445 43,407 –962 –2.2 8. Result before amortisation of goodwill 809 –415 1,224 –
Consolidated income statement for the business year 2002 06 Financial report Consolidated financial statements Munich Re Group Annual Report 2002
Profit for the year, including minority interests in earnings 1,012 395
Change in deposits retained and accounts receivable and payable –650 697
Cash flows for the business year (I + II + III) 884 –400
In accordance with the recommendations of the dsr for insurance companies, we have applied the indirect presentation method.
II. Investments in affiliated enterprises and associated enterprises 4,643 6,583 6,216 7,181
The individual fields of business are shown after consolidation of internal transactions within the individual field but before consolidation across segments.
Life and health Property-casualty 31.12.2002 Prev. year 31.12.2002 Prev. year €m €m €m €m
Thereof: – Income from associated enterprises 1,060 738 3,773 813 5. Net expenses for claims and benefits 4,933 5,033 15,822 14,009 8. Result before amortisation of goodwill 1,661 1,340 930 –2,027 10. Operating result before tax 1,659 1,337 803 –2,161 12. Minority interests in earnings – 1 1 4 13. Profit for the year 1,724 1,151 1,425 –1,203 06 Financial report Consolidated financial statements Munich Re Group Annual Report 2002
Within the framework of a corporate- and trade-tax consolidation agreement, the ergo Insurance Group has concluded profit-transfer agreements with nearly all of its German insurance companies and the ergo Trust GmbH. In our segment reporting, expenditure incurred as a result of profit transfer is deemed appropriation of net income. The segments are thus adjusted to eliminate these expenses, the elimination being carried out in the consolidation column.
2002 Prev. year 2002 Prev. year 2002 Prev. year €m €m €m €m €m €m
Latin America * After elimination of intra-Group reinsurance across segments. Presentation of the figures in the management report differs from this (cf. note on page 136).
ias currently do not contain any standards governing the accounting and valuation of transactions specific to the insurance industry; the relevant items are therefore accounted for and valued in accordance with us gaap (Generally Accepted Accounting Principles for the United States).
The consolidated financial statements have been prepared in accordance with International Accounting Standards adopted up to and including 31 December 2002 whose application was obligatory for the business year, as well as with the interpretations of ias by the International Financial Reporting Interpretations Committee (ifric). In addition, we have observed the standards adopted by the drsc (German Accounting Standards Committee) up to our balance sheet date.
Shareholders’ equity is substantially higher under ias than under German Commercial Code accounting because large portions of the investment portfolio are valued at market; results fluctuate more strongly than under German Commercial Code accounting, because there are no claims equalisation provisions to provide a “smoothing” effect. The most important differences between ias and the German Commercial Code as regards the Munich Re Group are as follows: – Under ias, goodwill is amortised over a maximum period of 20 years with impact on earnings; in German Commercial Code accounting, there is the option to offset goodwill against the revenue reserves without impacting
– A large portion of the investments are valued at market under ias; under the German Commercial Code they are valued at the lower of cost or market.
– The group of associated enterprises valued at equity is considerably larger in ias financial statements, because it is no longer relevant whether a significant influence is actually exercised or not. The consolidated profit includes a corresponding portion of the net profit of the enterprises concerned rather than just the dividend distributions.
– The provisions for future policy benefits are higher because, unlike in German Commercial Code accounting, there is no zillmerisation, but capitalisation of the acquisition costs.
– Provisions for terrorism risks do not constitute liabilities to third parties under ias either and are therefore not admissible. They are also reversed
Consolidated group In accordance with ias 27, the consolidated financial statements include the Munich Reinsurance Company (the parent company) and all the enterprises in which Munich Re owns, directly or indirectly, the majority of the voting shares or over which it has the factual ability to exercise control (subsidiaries). The only exceptions are subsidiaries which are determined as being not material for assessing the Group’s financial position; insurance and reinsurance companies are consolidated regardless of their size. An overview of the group of consolidated companies and other important shareholdings is provided on pages 240 ff.
We generally consolidate subsidiaries as soon as the Group holds the majority of the voting shares or has the factual ability to exercise control. In order to determine the equity capital at the time of acquisition, we include the assets and liabilities of the subsidiary according to uniform Group accounting and valuation methods. The equity capital apportionable to the Group is netted against the acquisition costs of the shares (purchase accounting). Any residual amount is capitalised as goodwill and amortised on a straight-line basis.
Minority interests are shown separately in the balance sheet and the income statement. They represent the amounts apportionable to other shareholders outside the Group from the shareholders’ equity and profits for the year of the subsidiaries concerned.
Associated enterprises In accordance with ias 28, associated enterprises are all enterprises which are not subsidiaries and in which Group companies hold between 20% and 50% of the voting rights – regardless of whether a significant influence is actually exercised on the financial and operating decisions of the enterprise.
The application of the accounting, valuation and disclosure methods follows the principle that a method once chosen should be applied consistently. Effects of any changes in accounting and valuation methods are generally recognised in the income statement.
Investments in affiliated enterprises that we do not consolidate because they are not material are carried at their fair values. If the shares are listed on a stock exchange, we use the share prices at the balance sheet date; for other shares, the fair value is the net asset value based on the German Association of Financial Analysts (dvfa) method or – in the case of new acquisitions – the acquisition cost.
Investments in associated enterprises are valued by the equity method at the Group’s proportionate share of their net assets; as a rule, the most recent individual or consolidated financial statements of the associated enterprise are used for this. The earnings of an associated enterprise apportionable to the Group are included in the investment result. Investments in associated enterprises that are determined as being not material for assessing the Group’s financial position are valued at acquisition cost.
Loans are stated at amortised cost. Writedowns for impairments are made in cases where the repayment of a loan can no longer be expected.
With all securities that are not investments held for trading, permanent losses in value – unlike temporary diminutions – are recognised as an expense in the income statement. Writedowns for permanent losses in value are made on the basis of the market price at the balance sheet date.
In life insurance, the deferred acquisition costs are also capitalised and amortised over the terms of the policies; the amount of amortisation depends on the gross margins of the respective products calculated for the relevant year of the policy term.
Under ias 12, deferred tax assets must be accounted for in cases where asset items have to be valued lower, or liabilities items higher, in the consolidated balance sheet than in the tax balance sheet of the Group company concerned and these differences are temporary. We take into account the tax rates of the countries concerned and the company’s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries.
At each balance sheet date we review the carrying amount of the deferred tax assets. If it is no longer probable that the deferred tax asset will be realised in the future, the carrying amount is reduced.
The provision for future policy benefits covers the anticipated future benefits payable to policyholders in life, health and personal accident insurance and also the ageing reserves in health insurance.
If policyholders can vary their premium payments within certain contractually specified limits (universal life), the amount included in the provision for future policy benefits corresponds to the premiums paid plus the interest credited thereon (fas 97).
These primarily include provisions for post-employment benefits. The companies in the Munich Re Group generally give commitments to their staff in the form of defined contribution plans or defined benefit plans. The type and amount of the pension obligations are determined by the conditions of the respective pension plan. In general, they are based on the length of service and salary of the staff member.
The consolidated companies used the following actuarial assumptions (weighted average values) for calculating their pension obligations: D
Under ias 12, deferred tax liabilities must be accounted for if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax balance sheet of the reporting company and if this difference is temporary; cf. the remarks on the corresponding assets item.
The following table shows the exchange rates of the most important currencies for our business (exchange rate for €1 in each case): Balance sheet Income statement 31.12.2002 Prev. year 2002 Prev. year
Gross amount capitalised at 31.12. previous year 422 917 170 1,509 1,144
Carrying amount at 31.12. previous year 180 844 79 1,103 843
Carrying amount at 31.12. business year 312 913 111 1,336 1,103
Accumulated depreciation at 31.12. business year 298 146 160 604 406
The remaining other intangible assets include rights equivalent to real property amounting to €4m (5m).
The fair value of investments in associated enterprises, which are mostly valued at equity, amounts to €8,753m (26,548m) at the balance sheet date.
In the business year the market values of the loans generally corresponded to the carrying amounts. The “other loans” include loans to affiliated enterprises totalling €34m (44m) and loans to associated enterprises totalling €531m (675m).
Contractual period to maturity of fixed-interest securities Carrying amounts Amortised cost
Over one year and up to five years 41,031 35,737 40,057 35,223
Altogether, the volume of the transactions concluded in the period under review and of the open positions at the balance sheet date was negligible in relation to the balance sheet total. The fair value of open positions at 31 December 2002 totalled €506m (675m), i.e. less than 1% (1%) of the balance sheet total. The fair value of items used for hedging purposes amounted to €218m and the fair value of trading items to €288m.
Up to 3 3–6 6–12 1–5 Over Total All figures in €m months months months years 5 years
Fair value hedges are used to reduce the market-price risk of current investments. Such fair value hedges are employed for the selected and efficient hedging of parts of the portfolio against interest-rate risks. The fair value of the derivatives used here amounted to €27m at the balance sheet date.
Carrying amount at 1.1. business year 1,468 805 4,443 353 7,069 6,413
Carrying amount at 31.12. business year 1,707 1,134 4,203 407 7,451 7,286 * After elimination of intra-Group transactions across segments.
The following table shows the development of the deferred acquisition costs in the business year: Amortisation of the acquisition costs in the life and health segment in primary insurance includes profit-neutral eliminations of €405m necessitated by valuation according to the purchase accounting method in connection with the increase of the shareholdings in the Karlsruher Insurance Group and ergo ag.
On 31 December 2002 a total of 366,371 Munich Re shares with a calculated nominal value of €861,109.76 were held by Group companies. This represents 0.19% of the share capital.
The 2,744 shares remaining at the end of the business year from the ergo Insurance Group’s employee share programme were acquired for an average price of €220.15 per share. In addition, as part of its long-term incentive plan launched at 1 July 2002, the ergo Insurance Group purchased 33,000 shares at an average price of €193.00 each and a further 12,476 shares at €220.15 each.
The transaction value of all Munich Re shares in the possession of Group companies at the end of the business year totalled €93,380,472.17.
The share capital as at 31 December 2002 is divided into 178,667,287 registered shares, each fully paid up and entitled to one vote.
On 17 July 2002 the Annual General Meeting cancelled the existing authorisations for increasing the share capital under “Authorised Capital Increases I, II and III”, replaced these with a new authorisation “Authorised Capital Increase 2002” amounting to €220m, and renamed “Authorised Capital Increase IV” “Authorised Capital Increase 2001”.
Change resulting from valuation at equity – – –539 –3,103 – –3,642
– Property-casualty 91 64 * After elimination of intra-Group transactions across segments.
In calculating the provision for future policy benefits, interest rates of between 3% and 8% have been used, as in the previous year.
The following table shows the distribution of net unearned premiums between the different Group segments: All figures in €m* 31.12.2002 Prev. year
The table illustrates how the estimate of the respective balance sheet provision has changed in the course of time – owing partly to payments made and partly to the re-estimate of the outstanding payments. The net run-off result reflects the difference between the current and original estimate. It is often materially affected by changes in exchange rates. The fluctuations in the value of important foreign currencies for us (mainly the us dollar and the pound sterling) against the euro led to significant changes in the provisions. On the other hand, there have been corresponding changes in the value of investments as a consequence of our consistent currency matching policy. In particular, the strengthening of reserves in our us business at American Re has had a negative impact on the results.
– Property-casualty 4,006 3,947 *After elimination of intra-Group transactions across segments.
Net run-off result of claims provisions –2,068 –509 –240 437 –305 390 –2,908 –4,233 –4,186 –2,181 –
In the mid-eighties industrial insurers writing business worldwide found themselves being confronted with losses from policies taken out decades before. In particular, these included us asbestos-related claims under product liability policies.
On top of this, there were costs for claims under old general liability policies which provided cover against environmental liability claims under us law.
Nevertheless, further loss burdens – particularly from asbestos-related claims – cannot be ruled out. The number of claimants and companies being claimed against is continuing to grow. In view of the unpredictable nature of court decisions in the main markets affected, it will remain difficult to make reliable estimates of future development.
The net provision for premium refunds is distributed between the segments of the Group as follows: All figures in €m 31.12.2002 Prev. year
The provision for premium refunds showed the following development: All figures in €m 2002 Prev. year a) Amounts allocated on the basis of national regulations (gross) Status at 1.1. business year 5,241 5,979
Status at 31.12. business year 3,798 5,241 b) Deferred premium refunds (gross) Status at 1.1. business year 8,577 14,108
Change resulting from unrealised gains and losses on investments –2,727 –5,150
A total of €880m (980m) was credited directly to life insurance policyholders in the business year.
Expenses for defined contribution plans in the year under review totalled €30m (28m).
The financing status of the defined benefit plans is as follows: All figures in €m 31.12.2002 Prev. year
The provision for defined benefit plans changed as follows in the business year: All figures in €m 2002 Prev. year
Tax provisions comprise the provisions for income tax and other taxes of the individual companies, based on their respective national taxation. Deferred tax obligations are shown under deferred tax liabilities.
Munich Reinsurance Company, Munich 1.0%, €1.150m, Bonds Exchangeable into Allianz AG Shares 2000/2005 1,111 1,059
Hestia Investment Organiczona, a subsidiary of the ergo Versicherungsgruppe ag, Düsseldorf, issued zero coupon bonds with a total volume of pln 42.1m on 20 December 2002. With a yield to maturity of 7.3%, these bonds may be exchanged into shares of the bre Bank (478,038 shares). Bonds that are not exchanged will be redeemed on 18 November 2003 at 100% of the face value.
Change in unearned premiums – Gross amount –10 –45 –682 –887 – 114 –76 –52 –768 –870
– Change in provisions for outstanding claims 257 655 4,882 4,251 230 145 158 286 5,527 5,337
Deferred tax resulting from the occurrence or reversal of loss carry-forwards –1,210 –489
Individual Group units generated tax losses in the current period and the previous period. On the basis of future tax result planning, a utilisation of the tax loss carry-forwards before their expiry is to be reckoned with, so that deferred tax assets have to be posted for these.
The key figures of the most important reinsurers in the Munich Re Group are based in some cases on their respective financial statements prepared according to local regulations; those of the primary insurers are based on their ias financial statements.
Investments Rm 2,968 2,951 * Financial statements in accordance with IAS.
Investments US$ m 12,843 10,155 * Financial statements in accordance with IAS.
06 Financial report Consolidated financial statements Munich Re Group Annual Report 2002
Munich Re holds around 19.3% of the share capital of Allianz and – on account of Allianz’s own shares – around 21.2% of the voting rights. Conversely, the Allianz Group held around 23.5% of the voting capital of Munich Re at 31 December 2002 (of this, around 3.5% of the voting rights were deposited with a trust). The shareholdings held by Allianz and Munich Re in Frankfurter Versicherungs-ag, Bayerische Versicherungsbank ag, Allianz Lebensversicherungs -ag and Karlsruher Lebensversicherung ag were reorganised in the course of the business year, as announced in the previous year (see page 156). Further information on the announced reduction of Munich Re’s and Allianz’s reciprocal shareholdings in business year 2003 can be found under Note 42.
HypoVereinsbank ag, one of the largest German private banks, is an associated enterprise of Munich Re. On 15 January 2002, Munich Re acquired the stakes in HypoVereinsbank held by the Allianz Group and Dresdner Bank Group, thus increasing the Munich Re Group’s holding to 25.7% of the capital, or around 26.3% of the voting rights. For its part, the HypoVereinsbank Group holds around 13.2% of the Munich Reinsurance Company’s voting capital.
The following personnel expenses are included in the operating expenses, in the expenses for claims and benefits and in the investment result: All figures in €m 2002 Prev. year
As at 1 July in the years 1999, 2000, 2001 and 2002, Munich Re launched longterm incentive plans. These plans, each with a term of seven years, provide for the members of the Board of Management and senior management in Munich and for the top executives in Munich Re’s international organisation to be granted a defined number of stock appreciation rights.
As at 1 July 2002, ergo and some of its subsidiaries likewise launched a longterm incentive plan. This plan, also with a term of seven years, provides for the members of the Board of Management and top executives in the ergo Group to be granted a defined number of stock appreciation rights in respect of Munich Re shares. The design of the plan is identical to that of Munich Re’s Plans 2000–2002.
In the year under review a total of 45,476 stock appreciation rights were granted, 37,732 of these to members of the Board of Management. To cover future obligations arising from these rights, the companies of the ergo Group participating in the long-term incentive plan purchased Munich Re shares.
In the business year 2002 the companies of the ergo Insurance Group acquired 32,524 Munich Re shares at an average price of €220.15 within the framework of their employee share-ownership programme. As part of this programme, staff of the ergo Insurance Group in Germany were offered the chance to subscribe for up to five of the shares at a price of €87.30 each. In addition, senior executives of the ergo Insurance Group could choose to received their performance-related remuneration in these shares at a price of €193 each. Altogether, a total of 29,780 employee shares were transferred to staff. The remainder were not sold .
Taking into account the proposal for the appropriation of the profit, the emoluments of Supervisory Board totalled €1.2m (1.1m). This sum includes €0.6m (0.6m) dependent on the dividend paid to shareholders.
No acquisition or sales transactions notifiable under Section 15 a of the German Securities Trading Act had occurred up to the end of the business year 2002. The total number of Munich Re shares held by all members of the Board of Management and Supervisory Board amount to less than 1% of the shares issued by the Company.
The increase at the primary insurance companies stems largely from the acquisition of new companies within the ergo Insurance Group.
Beyond this, there were other financial commitments of €196m, including an already concluded real estate purchase agreement. There were contingent liabilities of €211m from a leasing transaction with real estate.
Munich Re will participate by way of “opération blanche” in Allianz ag’s capital increase announced on 20 March 2003, which means that we will not invest any new funds. As a consequence, our stake in Allianz will remain at the same level in value terms during the subscription period; our percentage share in Allianz will decrease at most to 15%. Conversely, Allianz intends to reduce its stake in Munich Re to 15%. For this purpose it will redeem its miles bonds issued in 2000 by exchanging them for Munich Re shares.
No other events have occurred since the balance sheet date which would have a material effect on the financial position of the Group as presented in the financial statements.
New shares created by the exercise of warrants are included pro rata temporis from the respective date of delivery. Shares acquired through share buy-backs are eliminated from the calculation pro rata temporis.
The exercise period for the warrants 1998/2002 expired on 3 June 2002. Thus at the reporting date there were no more potential shares in circulation that would have a diluting effect.
Herbert Loy Peter Ott Wirtschaftsprüfer Wirtschaftsprüfer (Certified public accountant) (Certified public accountant)
Valuation reserves not recognised in balance sheet, including those apportionable to minority interests and policyholders 1.1 16.4 21.9 19.2 19.0
RY 247,521 victoria Versicherung Aktiengesellschaft, Düsseldorf ** RY 0 SE 526,555 d.a.s. Deutscher Automobil Schutz Allgemeine RechtsschutzVersicherungs -Aktiengesellschaft, Munich
RY 385 SE 7,869 victoria-meridional Compañia Anónima de Seguros y Reaseguros, s.a., Madrid
RY –5,917 SE 4,940 meag Securities Management GmbH, Munich ** RY 0 SE 25 meag munich ergo Kapitalanlagengesellschaft mbH, Munich ** RY 0 SE 14,165 meag munich ergo Real Estate Investment GmbH, Munich ** RY 0 SE 5,500 meag Real Estate Management GmbH, Munich
***** Further shares held by: ergo International: 8.7% dkv, 8.7% hmv, 8.7% vicl, 4.4% vickra, 2.2% vicvag, 2.2% hms d.a.s Deutscher Automobil Schutz Allgemeine Rechtsschutz-Versicherungs-ag: 25.5% vicrü, 1.8% hms
Some shares held indirectly. These are calculated proportionally in each case.
THE SHADOW OF TERRORISM There are enough risks as it is to keep us busy. We do not need terrorism as well. The alarming increase in terrorist attacks is causing not only immense material damage but also long-term psychological effects. A certain paralysis and defensive attitude are apparent, among consumers just as much as in the financial markets. This damage to the economic climate is substantial, but not insurable.
THE LESSONS OF 11 SEPTEMBER 2001 11 September 2001 was a disaster: 3,576 killed and countless people injured; wounds to Americans’ sense of security; consequences for the financial markets and many branches of the economy; political ramifications, whose effects are still uncertain. 11 September 2001 was not a bottomless disaster in terms of the material damage. Large reinsurers like Munich Re showed what they are there for. And the civilised world proved that it is stronger than terrorists might have assumed.
SECURITY REDEFINED The world’s vulnerability was exposed on 11 September 2001 in an almost atavistic way. No less vulnerable, however, are electronic structures such as the internet and information systems. It is crucial that our security awareness keeps up with developments in technology. As with other crime, where the police need to be as well armed as the criminals, our security must keep pace with the perfidious intelligence of cyberterrorist attacks.
How does extremus ag, the company recently set up in Germany to insure terrorism risks, work?
largely owned by German insurers and reinsurers. extremus, in turn, is reinsured with German primary insurers and reinsurers, and partly with the international reinsurance market. We believe it provides sufficient capacity: €3bn comes from the insurance industry and €10bn from the German government. Insurance cover can be bought from extremus up to a limit of €1.5bn. At the end of the day, extremus only works because it is government-backed.
We were great advocates of setting up extremus in order to end what could be called an insurance shortage. We took part in the first preparatory talks with the German government and the German Insurance Association and closely partnered those involved in the subsequent steps. Munich Re is represented on the extremus Supervisory Board, on the Advisory Board and in its working groups, and we have supported it with capital and capacity.
Source: MIPT, Oklahoma City National Memorial Institute for the Prevention of Terrorism
Addresses We have compiled a list of important addresses for our Group. You can find more on our website at www.munichre.com.
March 2004 17.3 Provisional figures of annual consolidated financial statements 2003
Munich Reinsurance Company of Canada (mroc) Munich Re Centre 390 Bay Street, 22nd Floor Toronto, Ont., M5H 2Y2
E-mail: toronto@mroc.com us American Re-Insurance Company 555 College Road East Princeton, NJ 08543-5241 us Munich American Reassurance Company 56 Perimeter Center East, N.E., Suite 500 Atlanta, GA 30346-2290
Munich Reinsurance Company of Africa Limited (mroa) Munich Re Centre 47 Empire Road, Parktown Johannesburg 2193, P.O. Box 6636 Johannesburg 2000
07 General information Important addresses Munich Re Group Annual Report 2002
Primary insurance ergo Versicherungsgruppe ag Victoriaplatz 2 victoria Versicherung ag victoria Lebensversicherung ag Victoriaplatz 1 und 2 40198 Düsseldorf
E-mail: pr@hamburg-mannheimer.de dkv Deutsche Krankenversicherung ag Aachener Strasse 300 50933 Köln Address for letters: 50594 Köln
Record showing the results of an insurer’s or reinsurer ’s trading and other operations during the year and its financial position at the end of that period. The annual financial statements contain a balance sheet and an income statement, supplemented by detailed breakdowns and notes.
Management of an investment portfolio on the basis of risk and return considerations. It covers both the preparation and implementation of investment decisions regarding assets and the management of � special funds.
Under this accounting principle the difference between the acquisition cost and redemption value (of an investment) is added to or subtracted from the original cost figure over the period until maturity and credited or charged to income over the same period. Writedowns are made for impairment or uncollectability.
Instrument for strategy implementation which systematically links strategic objectives (financial and non-financial) with initiatives and action plans. Shortterm milestones help in checking the achievement of the objectives.
Statement showing the origin and utilisation of cash during the business year. It shows the change in liquid funds separately according to – cash flows from operating activities, – cash flows from investing activities, – cash flows from financing activities.
The reinsuring of risks by a primary insurer with a reinsurer.
Rules for handling insider information. Generally speaking, insider information may not be used for own investment transactions, for those of the company or for recommendations to others. Therefore, as part of the compliance procedure, business transactions are checked to make sure they are not based on insider information.
Combining the items from the individual financial statements of the companies belonging to the Group into one consolidated financial statement, in which items involving intra-Group transactions are eliminated.
Quantifies the risks that arise if the other party in a transaction does not fulfil its contractual obligations.
Deferred taxes derive from temporary differences between accounting on the basis of International Accounting Standards (consolidated financial statements ) and national tax law. If asset items are valued lower, or liabilities higher, than in the tax balance sheet of the Group company concerned, the resulting future tax relief must be recognised as a deferred tax asset. If the accounting differences between the consolidated financial statements will lead to future tax burdens, these must be recognised as deferred tax liabilities.
A ratio calculated by dividing the consolidated profit by the average number of shares issued. For calculating diluted earnings per share, the number of shares is adjusted by the effects of exercised or still to be exercised subscription rights.
Abbreviation for electronic business. Umbrella term for business conducted via electronic media such as the internet.
Investments in associated enterprises have to be valued in the consolidated financial statements using the equity method. The “at equity” value corresponds to the Group’s proportionate share of the shareholders’ equity of the enterprise concerned.
The degree to which a risk or portfolio of risks is subject to the possibility of loss; basis for calculating premiums in (re)insurance.
Forward rate agreement (fra) Interest-rate forward contract traded over the counter, in which a current interest rate that appears favourable is secured for a date in the future. The parties to the contract will settle the contract on the basis of the difference between the market interest rate applicable on the due date and the agreed interest rate.
Standardised contracts to trade a financial instrument on a money market, capital market, precious-metals market or currency market at a specific price and on a specific future date. Frequently, rather than actually delivering the underlying financial instrument on that date, the difference between closing market value and the exercise price is settled in cash.
Any excess of the purchase price of a subsidiary over the acquirer’s interest in the fair value of the net assets as at the acquisition date. Goodwill is amortised over its useful life.
Measurement of the fair value of companies. The starting point is the proportional equity capital of the company to be valued, plus the valuation reserves, any special reserves, claims equalisation provisions and similar provisions. The net asset value after tax includes the deferred tax liabilities resulting from the adjustment of the equity capital.
Fixed-interest securities which the company has the intention and ability to hold to maturity. They are valued at amortised cost.
Premiums written means all premium income that has become payable in the business year. The portion of this premium income that constitutes payment for insurance cover in the business year is referred to as earned premiums.
Insurance companies that assume risks in return for an insurance premium and have a direct contractual relationship with the holder of the insurance policy (private individual, firm or organisation).
Underwriting provision calculated using actuarial methods to cover future benefits to which policyholders are entitled, especially in life, health and personal accident insurance.
Provisions for premium refunds are made for obligations involving bonuses and rebates – especially in life and health insurance – which are not yet payable at the balance sheet date; the amount posted is based on supervisory or contractual regulations. They also include the unrealised gains and losses from the accounting of certain investments at market value to the extent that policyholders would participate in these gains and losses on realisation (provision for deferred premium refunds).
pvfp (present value of future profits) When insurance companies or individual insurance portfolios are acquired, the present value of the expected earnings from the business acquired is capitalised as “pvfp”. This intangible asset arises in particular when life or health insurance companies are acquired.
Standardised assessment of the credit standing of debt instruments and companies by specialised independent rating agencies.
Although obligatory reinsurance agreements contain agreed periods of notice, they are generally concluded for an unlimited duration. These treaties between insurers and reinsurers may therefore run for long periods. In such cases, the treaty conditions are usually adjusted in renewal negotiations each year, and the treaties renewed.
Reinsurance of reinsurance business assumed from other insurance companies (a reinsurance of reinsurance ). Retrocession enables the reinsurer to lay off part of its risk to other insurance companies.
Risk capital is the amount of capital hypothetically allocated to insurance or reinsurance operations to ensure that the probability of default in respect of the portion of the business exposed to risk is kept to a minimum. The capital required for this purpose is calculated using mathematical risk and financing models.
Used to investigate how certain key figures (book values) change in the event that predefined market developments occur. Scenario analyses usually take the form of deterministic if-then analyses.
Management concept which puts the value of a company and the increasing of this value for the shareholders at the centre of its business strategy.
Investment funds with a maximum of ten unit-holders that are not natural persons. As the fund owners pursue specific objectives with their investments, investment policy is geared to individual requirements.
A special form of scenario analysis. The aim is to make a quantitative statement on the loss potential of portfolios in the event of extreme market fluctuations.
A type of development that satisfies the needs of the present without jeopardising the needs of future generations.
Agreement between two counterparties to exchange payment flows over a specified period in order to profit from relative cost benefits that one party enjoys on a particular financial market. In the case of an interest rate swap, payment obligations in the same currency but with different interest rate conditions (e.g. fixed/variable) are exchanged. In the case of currency swaps, the payment obligations exchanged are in different currencies.
Uncertain liabilities directly connected with insurance business. These provisions are made to ensure that obligations under insurance contracts can always be met.
The portion of premium income in the business year that is attributable to periods after the balance sheet date is accounted for as unearned premiums in the underwriting provisions.
A type of life insurance with a savings component, where the benefits payable depend on the performance of the assets invested in a fund. The investment risk is borne by the policyholder.
Asset-liability management 154 Associated enterprises 189, 191 f., 240 ff. Audit Committee 99 ff., 104 Auditor’s opinion 236
Corporate Underwriting/Global Clients 56, 140, 166 Credit derivatives 169 Credit risk 169 Currency translation 199 Cyberrisks 75 Cycle management 16, 36
Income statement 178 Index weighting 21 Insider rules 172 Internal auditing 163 International Accounting Standards 188 f. Investment mix 158
KarstadtQuelle Finanz Service (kqfs) 151 Key figures ic*, 21, 142 ff., 238 f.
Mercur Assistance 57, 156 Multi-year overview ic* Munich American Capital Markets (macm) 52, 145 Munich American Reassurance Company (marc) 50,
Besides this English translation of the official German original (also available from the company), a translation of our annual report is obtainable in Spanish. You will also find our annual reports and interim reports, along with further information about Munich Re, on the internet at
Shares of Group premium income from reinsurance and primary insurance, broken down by life and health and property-casualty*
Reinsurance, primary insurance and asset management complement each other in our Group to form a strong blend of financial services.
Meta System GmbH, Alt Lussheim, p. 126 Dirk Reinhard, Munich, pp. 2-7, 117, 120 Dirk Thieme, Düsseldorf, pp. 14, 30
© 2003 Münchener Rückversicherungs-Gesellschaft Central Division: Corporate Communications Königinstrasse 107 80802 München Germany