Munich Re’s market capitalisation at 31 December €bn 22.1 20.4 54.0 67.2 44.5 ** Adjusted owing to first-time application of ias 39 (rev. 2003). ** Taking into account the capital increase in November 2003.
Primary insurance: Our primary insurers – the ergo Group with its brands victoria, Hamburg-Mannheimer, dkv, d. a. s. and KarstadtQuelle, 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 with our clients and trust within our business relationships
The issue of two bonds in spring and the capital increase in the autumn added a total of around €7bn to our capital base, strengthening it both quantitatively and qualitatively. This puts us in a good position to exploit attractive market opportunities (see page 16).
A new disease sent a tremor of fear around the world: sars. Even if our claims burden was manageable, the epidemic illustrated one aspect very clearly: the risk that emanates from new infectious diseases (see page 52).
Munich Re held its first client seminar in 1953. Since then we have greatly developed and expanded our range of services – be it in brochures, internet platforms or above all individual consultancy – and have become a much sought-after knowledge partner (see page 48).
Latterly, our “principles of cooperation agreement” with Allianz largely governed issues that had been dealt with or rendered obsolete by decisions and measures taken over the years. We therefore mutually agreed to terminate it and continue to work well together in reinsurance without it.
Munich Re Munich had its environmental management system successfully certified for the second time. We are convinced that only sustainable development provides a viable basis for the future.
The Board of Management The Supervisory Board and its committees The Munich Re Group >> Reinsurance >> Primary insurance >> Asset management >> Service >> Growth market Asia >> sars >> Drought >> Disability >> Awards
Our interviews contain more than words – namely clear intentions and measures, open declarations and values, future-oriented scenarios and positions.
Report of the Supervisory Board Corporate governance Rating Staff Social commitment The environment
Consolidated balance sheet Consolidated income statement Consolidated cash flow statement Segment reporting Notes to the consolidated financial statements Affiliated enterprises and participating interests Auditor’s report Seats held on other boards
The exceptional loss in the value of our investments led to several downgradings in our credit rating by some rating agencies. Despite the general importance attached to this grading in reinsurance, our clients stood by us. Our lower rating did not result in any significant loss of business – proof of the exceptional reputation we enjoy as a reinsurer worldwide. Nevertheless, it is naturally my aim to reattain a rating from all the important agencies as soon as possible that reflects our position among the top reinsurers.
At the end of this difficult year, despite a high Group underwriting profit, we show a net annual loss. The reasons for this are mainly writedowns for impairments of goodwill and the negative result of our shareholding in HypoVereinsbank ag valued at equity. Also, the new tax legislation of recent years in Germany has had a substantial impact on our result, as losses on our equity investments are only considered to a small extent in determining taxable income. By contrast, the earlier first-time application of the revised accounting standards ias 32 and 39 eased the burden on the result for the year. The capital market has given us credit for this measure.
Our technical result in primary insurance and reinsurance must and will show that our staff really know their business. In addition, Munich Re must reap the benefits of its traditional strengths, above all its globally recognised knowledge of risk. I place great emphasis on comprehensive management of the risks on both sides of the balance sheet, i.e. those of our underwriting business and those of our investments and – particularly important – their interdependency. We must not expose our capital with risks that are foreign to our business. Finally, I intend to strengthen our capacity for innovation so that we play a key role in shaping the future with new business models and products that keep us at the forefront of the insurance industry and mark us as a top player.
Why do I expect the Munich Re Group’s development to be positive? For the year 2003 we had set ourselves the objective of achieving a combined ratio of below 100% in our reinsurance business. This we clearly succeeded in doing with a figure of 96.7%, which has met with a suitably positive response. I have no doubt that our strictly profit-oriented underwriting policy offers the prospect of a combined ratio of under 100% in the business year 2004 as well. This forecast is naturally subject to the precondition that large and very large losses remain within normal bounds.
All these measures are starting to bear fruit, but we have not yet reached our goal. The above examples show that we are already well on the way. You can find out more about this in the interviews preceding the individual sections of this report.
“The more information we get, the better the price for the coverage can be.”
jeworrek: What are the criteria you use when you want to buy insurance? I suppose buyers like Unilever take the approach that they do not make a decision about the type of product or coverage they buy on an isolated basis but adopt a sort of a holistic balance sheet view?
jeworrek: That reveals our approach: the expertise to make the assessment. Not just underwriting by regarding everything as either black or white. The assessment of the exposure includes the measures applied to reduce or limit the risk, which are taken into account by our specialists. Only this high degree of expertise enables us to take this underwriting approach and guarantees optimum treatment of customers.
brings: Most important to us is that it does not pay to change insurers every time a cheaper one comes along. We prefer to deploy time and effort
“In the field of natural perils the coverage offered by the worldwide insurance and reinsurance market is too limited.”
jeworrek: That is how we also interpret our relationships. In these relationships it is important to accept the basic insurance principle: an insurance premium is not an investment where one pays in with a payback guarantee later on. The annual premium is paid for the risk transfer, which means the insurer is immediately prepared to meet its full obligation. Of course, the risk-underlying capital, which allocated amount depends on the individual risk profile, needs to achieve an annual return expected by our shareholders. In return Unilever gets capital relief, which in the end is a win-win situation.
“For risks like it viruses or terrorism, the industry is even faced with the limits of what is insurable.”
The first three months of 2003 were still characterised by a severe bear market. Uncertainty regarding the Iraq crisis and the subsequent war was one of the determining factors, but so was a general reluctance to invest and consume. Since then, share price indices have been showing an upward trend again.
Proceeding from the already weak prices at the beginning of the year, the stock markets showed considerable volatility. In Europe, important share price indices like the euro stoxx 50 and the dax fell to new recent-year lows in March, before rallying significantly. The stock markets in the USA and Japan also recorded price setbacks to begin with, but they recovered over the course of the year and closed with overall gains year on year.
In the second quarter, the US economy began sending out positive signals again, but in the eurozone – particularly in Germany – the mood remained subdued, as it did in Japan and the emerging markets. Nevertheless, by the end of May, share prices had recovered to their end-of-2002 level.
jan. feb. march apr. may june july aug. sept. oct. nov. dec. jan. feb. march
Overall dividend amount €m 286 223 * Share price at the end of the year as a percentage of the shareholders’ equity shown in the balance sheet, excluding minority interests.
** Taking into account the capital increase in November 2003. *** Adjusted owing to first-time application of ias 39 (rev. 2003).
At the beginning of November we carried out a rights issue. A total of 50,912,946 new shares were issued at a price of €78 each. The market responded very well to this measure, too. 99.9% of the subscription rights were exercised. Raising an amount €3.9bn, the capital increase substantially improved our capitalisation both quantitatively and qualitatively. This strengthened capital base is an important prerequisite for exploiting profitable business opportunities.
Munich Re shares, which were first listed on the Munich stock exchange in 1888, are no-parvalue registered shares. They are traded on all the German stock exchanges and are also included in Xetra trading. Additional data 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.
dj euro stoxx 50 1.2 msci Euro 0.8 ftse eurotop 100 0.5 dj Sustainability World 0.3 ftse4good europe 0.5
The number of Munich Re shareholders has risen from around 122,000 at the beginning of 2003 to over 187,000. The proportion of private investors in our share capital increased in the course of 2003 from just under 6% to its present level of around 12%. Munich Re’s largest shareholder, with a stake of nearly 10%, is now Bayerische Hypo- und Vereinsbank ag.
We propose to pay our shareholders an unchanged dividend of €1.25 for the year 2003. The overall amount distributed will thus total €286m.
The aim of our investor relations work is to enable the capital markets to make an appropriate assessment of our current business situation and our future prospects. Our objective here is to provide prompt and detailed information and always be there to answer analysts’ and investors’ enquiries, particularly in difficult times. In 2003, we held several telephone conferences, over ten road shows in the USA and Europe, and over 100 individual meetings with investors and analysts at our offices, as well as taking part in several investment conferences around the world.
Reuters Institutional Investor Report singled out our capital market communication in 2003 as the “most improved ir in the insurance sector by the buy side”. The leading French daily, Le Figaro, and La Vie Financière, a top French finance magazine, awarded us the “Prix des fils d’or du meilleur service actionnaires” for best communication with individual shareholders among all the euro stoxx 50 companies. We see these awards as an incentive to constantly develop and further improve our service and transparency. Private investors also made great use of our information services again last year. Via our shareholder hotline and our e-mail postbox for private investors, we answered numerous questions, especially about the Annual General Meeting and the capital increase.
We take account of the interests of our shareholders in many areas of our operations. For example, we have introduced a value-based management system; we realise the principles of corporate governance and comply with recognised standards of responsible corporate management (see page 68); our long-term incentive plans (see page 202) grant the Group’s management stock appreciation rights, underlining our objective of increasing Munich Re’s market value by creating a financial incentive to gear corporate policy to this goal.
We also publish our investor relations information on the internet. We will be glad to send you our quarterly reports and other Munich Re publications on request. You can find our address on page 223.
Our internet service for the Annual General Meeting is very advanced and has met with a good response from shareholders: nearly every fifth admission card was ordered electronically in 2003. The option to authorise a proxy nominated by the company – also online – has proved increasingly popular as well. The proxies represented almost as many shareholders as the banks did through voting rights from shares held in custody. Shareholders unable to attend in person again had the opportunity to follow the Annual General Meeting live via a special shareholder portal on the internet. All the information relating to our 2004 Annual General Meeting can be found on our website.
Performance of a specimen deposit as from 31 December 1994 in €‘000
By reinvesting dividends to purchase further shares and making use of “opération blanche” (i.e. also reinvesting the proceeds of subscription rights), a German shareholder would have been able to add a total of 402 no-par-value shares to the portfolio.
Our bonds exchangeable into Allianz shares were issued in May 2000 with an annual coupon payment of 1.00% on the face value. Investors are entitled to convert each of their exchangeable bonds into Allianz shares, making the investment a combination of bond and call option. The bonds’ volume totals €1.15bn. At the end of the year they stood at 105.50%. Their term ends on 9 June 2005 with a redemption rate of approximately 108.6%.
marc surminski: If you were a politician, what would your election programme have been as a candidate for Munich Re’s Chairmanship?
arno surminski: But this loss of confidence mainly stemmed from the subsidiaries. With hindsight, would you say that it was a mistake to build up the primary insurance group? Your competitors have abandoned comparable strategies.
arno surminski: “Management” seems to be the focus of criticism when it comes to ergo’s results. Are you going to put ergo on a tighter leash from Munich?
bomhard: It’s all too easy to see a certain management or structural model as the sole means of salvation. As the parent company, we have to understand better what makes ergo tick and where we can give support. As Chairman of ergo’s Supervisory Board – my only seat on another Board – I will ensure that the legally required control and counsel is provided.
marc surminski: Let’s stay with management for a moment. Assuming that Munich Re now faces a fundamental change, a watershed, how do you intend to handle this?
bomhard: By making sustained profitability the guiding principle and by leading with clear objectives. We need a clear focus on the fundamentals, on our core business, and the decisions taken must be rigorously implemented. You know, I believe in our business and the strengths of our Group. I want to communicate this enthusiasm.
arno surminski: Your staff have gone through quite a lot recently. Isn’t that a problem for corporate identity?
“Was it a mistake to build up the primary insurance group? Your competitors have abandoned comparable strategies.”
marc surminski: What do you expect of your staff in future?
arno surminski: Many outside observers criticise the fact that your long-standing predecessor is now on the Supervisory Board. Doesn’t that restrict your freedom to do new things? Isn’t there always a feeling of dependency and of needing to act in a certain way out of consideration?
bomhard: I don’t feel restricted in any way. I can ask my predecessor things I could not ask many others, and I also know that he will let me do what I consider essential and right.
marc surminski: Where do you see Munich Re in ten years’ time?
“Those wishing to invest in the insurance industry simply can’t ignore us. This is what a market leader must aspire to.”
The Munich Re Group’s objective is to be one of the leading risk carriers and providers of financial services and to create lasting value and quality as a reinsurer and a primary insurer. Our asset management units support us in this objective.
Over the last few years we have adopted particular strategic courses, which shaped our decisions in 2003. – Since our fundamental reorganisation in 2001, we have consistently geared our reinsurance business to the objective of profitability.
– Reinsurers and primary insurers in the Group have prioritised their target markets, clients and products according to anticipated earnings.
– We have substantially reduced the risks in our investments by cutting back substantial shareholdings in the insurance and banking sector, especially in Allianz, Bayerische Hypo- und Vereinsbank ag and Hypo Real Estate. Beyond this, we have lowered the proportion of equities in our investment portfolio.
– We have significantly strengthened our capital base both quantitatively and qualitatively through the issue of subordinated bonds last spring and the capital increase in November 2003.
Changes in legal parameters – be they the foreseeable modifications in reinsurance supervision, accounting standards (ifrs) or the fundamental revision of solvency rules (Solvency ii) – require tailor-made solutions from reinsurers.
The quality of internal risk management models, especially those of insurers, becomes vitally important in an increasingly globalised and technological world, with its new risks, changes in risk scenarios and connections between risks that were previously considered mutually independent.
– Our simultaneous involvement in reinsurance and primary insurance improves our internal balance of risks and results, and creates greater overall stability. Nevertheless, it is still our objective to achieve sustainable profitability in all business segments, independent of each another.
– Our risk management system is constantly adjusted to the increasing complexity of the different risks and to the greater volatility of the capital markets, whilst the decisionmaking tools are fine-tuned to developments in our business environment.
Our system of value-based management is consistently geared to one central goal: increasing our corporate value.
To achieve this objective, – we optimise the use of capital for managing risks; – we gear all our activities to an ambitious and risk-adequate result target that also meets the expectations of external investors; – we ensure the necessary comparability of value-creating measures and initiatives through the use of uniformly defined performance measures, thus providing a sound basis for decision-making; – we have integrated non-financial factors into our strategic management, so that our value-based management represents a holistic management system; – we closely link strategic and operative planning by defining our strategies in balanced scorecards, from which we derive initiatives, performance indicators and responsibilities; – we promote an entrepreneurial culture among staff through the clear allocation of responsibility and accountability, which makes it more evident how much individuals can contribute to increasing value in their particular areas of work. In addition, ambitious return targets, integrated in our incentive system for the Board of Management and underwriters, ensure that the principles of value-based management are realised.
– In our target markets, we aim to be recognised as an attractive employer.
The Munich Re Group companies have largely transferred asset management to meag, which performs a supporting service function. They aim to maximise the profit contribution from their own investments by investing funds with due regard to optimum security and profitability, to maintaining sufficient liquidity and flexibility at all times, and to an appropriate mix and spread. They therefore pursue a principally conservative investment policy.
In our asset-liability management process, we adjust the periods to redemption in our bond portfolio as far as possible to the match the terms of our liabilities.
We aim to expand meag’s third-party business, in particular by utilising the marketing channels that exist in both reinsurance and primary insurance.
oppenheimer: What for you is the connection between asset management and sustainability?
oppenheimer: In your opinion, is there an interesting return in sustainability investment?
kabisch: Well, there is some research on that issue. The essence of the findings: sustainable companies tend to outperform their peers. So we do not sacrifice performance by investing in sustainable assets. One of the reasons is that a lot of these companies have very strong corporate governance codes, which are also a measure for sustainability.
Besides this, meag manages a sustainability fund for German private and institutional investors. Here we cooperate with the Swiss Group sam, which stands for Sustainable Asset Management. Their analysts deliver the relevant input data for the composition of the Dow Jones Sustainability Index. For our sustainability fund “meag Nachhaltigkeit ”, they identify per industry sector the 10% best-in-class companies. Out of that 10%, our portfolio managers actively compose the fund assets.
kabisch: I believe it might even be favourable for global companies to follow one principle all over the world – ethical or environmental. One positive aspect is that these multinational companies export their sustainability concepts to developing countries.
kabisch: Our portfolio management is free to invest up to 20% of the fund volume outside the benchmark. Within this degree of freedom we pick promising innovators or other smaller companies for “meag Nachhaltigkeit” which are leaders in sustainable technologies.
Let me briefly address a more common point. When looking at sustainability investments, I believe there is no difference in the attitude of analysts in various countries. Would you agree that a British-based analyst takes the same approach to the whole field as an American, French or German analyst?
oppenheimer: They appear to merge very much. It is very difficult to imagine a company that seems to have quality, consistent performance, a strong history of good execution in business and strong corporate finance without at the same time having sustainable principles. I think quality and sustainability are very close and it is difficult to separate them.
Europe 2 and Latin America (until 31 December 2003, from 1 October 2003 together with Mr. Daschner)
04 Dr. jur. Heiner Hasford * 1947, lawyer, with Munich Re since 1978
Dr. rer. nat. Dipl.-Chem. Klaus Schumann Employee of Munich Reinsurance Company
Reinsurance + Primary insurance + Asset management = Munich Re Group
When Munich Re was founded in 1880, it was one of the first independent reinsurance companies, i.e. a reinsurer not run by a primary insurer. Ever since this time, reinsurers have functioned as risk managers, assuming part of the risk covered by primary insurers. Thus, in the insurance industry’s value chain, reinsurers and primary insurers are two complementary elements.
Soon after its establishment, Munich Re expanded its activities to foreign countries. Starting in 1886, it began opening representative offices in Europe, followed by a branch in the USA in 1899. Today it is the largest reinsurer in the world: 5,000 insurance companies in around 160 countries rely on its expertise and financial strength. Of the gross premiums written in 2003, around 73% came from property-casualty and 27% from life and health business. Munich Re offers a full range of products – from traditional reinsurance to alternative risk financing.
Our division Europe 2 and Latin America services clients from Northern, Western and Southern Europe, as well as from Latin America.
SUBSIDIARIES/BRANCHES Munich Ré France, Münchener Rück Italia S.p.A. Münchener Rückversicherungs-Gesellschaft Sucursal España y Portugal Munich Reinsurance Company UK General Branch
The division Asia, Australasia, Africa services business from clients in three continents and the Pacific Islands, an area with a wide range of very different insurance markets.
Our division North America is responsible for our subsidiary American Re-Insurance Company and for Munich Reinsurance Company of Canada.
Hamburg-Mannheimer n.v., s.a., Brussels victoria Seguros de Vida, s.a., Lisbon victoria-Volksbanken Versicherungsaktiengesellschaft, Vienna
dkv Belgium s.a., Brussels dkv Nederland n.v., Rotterdam dkv Seguros y Reaseguros s.a., Saragossa
The second main pillar of the Munich Re Group is primary insurance business. Here we focus on Europe and particularly Germany, where we are the second-largest primary insurance group in terms of gross premiums written in 2003.
As primary insurers, we provide more than 30 million clients – mainly private individuals and small and medium-sized firms – with security and service in life, health and propertycasualty, including legal expenses insurance. 29% of the business derives from propertycasualty insurance and 71% from life and health insurance.
Our primary insurers comprise the ergo Insurance Group, the Karlsruher Insurance Group and Europäische Reiseversicherung.
The ergo Insurance Group was created in 1997 by merging the long-established German companies victoria, Hamburg-Mannheimer, dkv and d. a. s. 2002 saw the acquisition of KarstadtQuelle Versicherungen. The main emphasis of the ergo Group’s business is on personal lines insurances, especially insurances of the person, i.e. life, health and personal accident insurance. Another important segment of ergo’s business is insurance for small and medium-sized firms as well as, on a selective basis, industrial business. In health insurance and legal expenses insurance, ergo is the market leader in Europe through dkv and d. a. s. respectively.
The Karlsruher Insurance Group consists of five companies that operate for the most part in life insurance, but also in all lines of property-casualty business. They mainly offer personal lines insurance and products for small and medium-sized firms. The group’s distribution structure is based on an exclusive Germany-wide sales organisation, on collaboration with brokers and on a network of distribution partners. Life insurance is also sold through branches of cooperative banks, mainly in southwestern Germany.
Mercur Assistance offers assistance services worldwide in the field of healthcare and mobility.
The Watkins Syndicate, which operates within Lloyd’s of London, has belonged to the Munich Re Group since 1997. The syndicate is a primary insurer specialising in marine business and has taken advantage of the favourable conditions over the last few years to significantly improve its market position. It has broadened its risk profile through service companies in the Midlands and the North of England, in Hong Kong and in Singapore.
Munich Re and ergo founded meag munich ergo AssetManagement GmbH together as a joint venture in 1999.
In 2003, the corporate structure of meag and its subsidiaries was reorganised and geared more strongly to third-party clients. Central core functions are bundled in meag munich ergo AssetManagement GmbH. The subsidiary meag munich ergo Kapitalanlagegesellschaft mbH is one of the major investment fund companies in Germany, managing special and retail funds both for Group companies and for clients outside the Munich Re Group.
ergoTrust GmbH designs, markets and manages investment products in the real-estate and financial services sector. It focuses on institutional investors both within and outside the Munich Re Group.
meag primarily manages our Group’s investments. In this capacity, it is chiefly responsible for direct investment in securities and real estate, and for the assets held in segregated managed funds (special funds). Beyond this, it offers its expertise and know-how to both institutional investors and private clients.
gebhardt:The debate about how life insurance companies should be taxed in future attracted a great deal of attention in 2003. The press spoke of a tax gift. What’s your view?
schareck:The current legislation was not a gift but the necessary correction of a shortcoming in the tax laws. Given positive stock markets and the divergence between commercial and tax accounts, we wouldn’t have had to pay tax any more under the legal situation of 1999 – we would have always shown a loss. In the negative stock market situation, however, we could no longer offset our losses on shares. This was a systemic defect in German tax law. We therefore greatly welcome the fact that the law was changed on 19 December 2003. The difficulties of the last three years should now have been overcome, with the “hidden losses” being significantly reduced as a result.
“Life insurers are also dependent on the current capital market situation for the returns they earn.” dr. bernhard schareck
schareck: I grant you there is some room for improvement in cost structures. But even if the cost problems still present in some parts of the industry are solved, we still won’t earn the same returns as in the past. Clients and investors need to take one thing on board. During the phases of high interest rates in the past, we always had a relatively high inflation rate. Today we have low inflation and low interest rates. There is a connection between the two.
“The fundamental problem in our view is one of asset-liability management.” henning gebhardt
The following selection of topics from the business year 2003 shows the inseparable link that exists for us between these standards and reality. Service__>> page 48 Growth market Asia__>> page 51 sars__>> page 52 Drought__>> page 54 Disability__>> page 57 Awards__>> page 59
Many carefully devised, detailed solutions go to make up our extensive package of services. Those provided by our primary insurers are better known to the public, so we intend to focus in the following on the broad range of services we offer in reinsurance.
Ancillary activities demonstrate our expertise and capacity for innovation, supporting our reinsurance business and strengthening our client relationships. Naturally, our clients could approach other providers for individual services – management consultants or research institutes, for example. However, our service has a particular strength: we combine specialist knowledge with many years of international experience, all-round consultancy and, last but not least, our common interest in sharing risks. For our clients, the service we provide is real added value. It embraces elements that only we offer in this breadth. With these activities, we are the recognised market leader in quality.
We also pass on knowledge in printed form, of course. Over 100 brochures deal with topics like genetic engineering, damage caused by pharmaceutical products, nanotechnology, recycling, pipelines, high-rise buildings and 11 September 2001. Some of our publications, such as the World Map of Natural Hazards (available as a brochure, wall-map or cd-rom), are regularly referred to in press reports. An example of how individually Munich Re responds to the interests of its clients, and the extent to which it supports them with print media, is the brochure “Recall of defective products: Practical guidelines for small and medium-sized companies”. This contains explanatory notes, checklists and even an action plan.
A brochure provides information on our Alois Alzheimer Scholarship (see page 223 for the ordering address).
A further online service is connect.munichre, a joint platform for Munich Re and its business partners. The internet portal gives users access to our extensive know-how, which we also tailor to meet individual client requirements. Besides this, connect.munichre makes available current information and a whole range of analytical and transaction tools. For licensed users, connect.munichre is a direct and secure interface to Munich Re. It supports our business partners in their daily work, in such fields as product development, risk management or claims settlement in property, casualty, marine and life insurance. The platform also takes country-specific features into account.
Healthcare is the topic dealt with by athena, one of our information systems on the internet. It helps identify and evaluate hospital risks, recording deviations that result from inadequate diagnosis, therapy or aftercare, and passing this information on. ATHENA thus improves the quality of treatment and care and enables hospitals to avoid or reduce financial losses.
The services provided by our unit Casualty Risk Consulting (crc) primarily revolve around the subject of the environment. crc staff analyse and evaluate for our clients the technical condition of production facilities, for example. These may be hazardous industrial plants of chemical or pharmaceutical companies, paint factories, steelworks, refineries, waste incineration plants or landfills. crc’s experts suggest measures for minimising risks to the environment, assess losses, determine causes and scope of damage, and offer clients support for clean-ups.
This overview of our range of services gives an impression of how broad the spectrum is. Service plays a major role in shaping our business relations, for alongside risk partnership, “knowledge partnership” is a key part of our client relationships. It results in close ties and delivers mutual benefits: with each service that we offer, we learn something about our clients’ requirements; at each seminar, we obtain information on our clients’ needs and wants. Whether it is the assessment of a site’s earthquake exposure or a recall plan: these services are an inseparable part of our business.
A well-organised input mask enables users to enter data quickly and fully, thus ensuring that all the requisite information is recorded.
In the increasingly significant Asian markets, Munich Re is building on its strengths: tradition, knowledge and strong capital resources.
Until the People’s Republic joined the wto in 2001, international reinsurers were only able to write foreign-currency business. The supervisory authority has now opened the door for licensed foreign reinsurers to write business in local currency as well. One consequence of the wto agreement is that the monopoly of China Re, the sole state reinsurer, is being weakened. By the year 2006 its compulsory quota share cessions will be ended, so that there will then be open competition in the reinsurance sector as well. With the growth rates of recent years, the Chinese insurance market numbers among the most dynamic in the world. Before the end of this decade, it will be among the ten largest in the world. In 2002, for example, gross premium volume rose by 44% to us$ 37bn (€29.9bn).
As a result of our good business relations with this market, which date back to 1956, our portfolio is growing positively. With the opening of our representative offices in Beijing and Shanghai in 1997 and with our branch in Hong Kong, which has been in existence since 1962, we were very well represented in relation to market development. The opening of our branch in Beijing in October 2003 provides the platform we need to continue our successful operations in this market.
As far as non-life business is concerned, we are supporting the introduction of legislation that allows us to set up a branch, thus giving us largely unrestricted access to the market. We are confident that under the wto agreements the restrictions currently applying will be overcome.
But it was not only Asian regions that were affected. In Europe and the USA, too, fear of sars grew – with far-reaching consequences: trips to Asia were cancelled and European staff were ordered by their firms to return home.
As far as holiday travel was concerned, sars mainly affected long-haul flights but not the bulk of holidays in Europe. The Munich Re subsidiary Europäische Reiseversicherung ag recorded a substantial reduction in business, but there was no major “sars cancellation wave”. This was due to the information campaign conducted by Europäische, as well as to the new "deterrent" in the form of a deductible in travel cancellation insurance (since 1 November 2002) and to a stricter checking of trip cancellations.
Mercur Assistance, which among its other activities provides the emergency call centre for Europäische Reiseversicherung, dkv and victoria Krankenversicherung, was also confronted with sars when patients had to be repatriated or major use was made of “Demand Management”, a medical information hotline for health insurers. Mercur Assistance’s travel agency recorded fewer bookings for business travellers.
In health, life and workers’ compensation insurance, the loss potential for private insurers depends on the degree to which state social security systems in the respective countries provide cover for medical care, for continued pay in case of sickness, and for pension payments in the event of disability or death.
Europe is discussing the introduction of multi-peril crop insurance along US lines.
The summer of 2003 was an event calculated to occur on average every 450 years at most. But there will be such heat periods more and more often in future. Climate scientists have stated that only slight rises in average temperatures can result in significantly greater changes in extreme values. This leads to more heat periods, more record downpours and more thunderstorms. The risk of severe weather and hailstorms also grows disproportionately with each degree that average temperatures climb upwards. The consequences: neither buildings and infrastructure nor the agricultural and livestock sectors are prepared for such extremes. This is why the losses triggered by these increasingly extreme events are so large – and they are becoming more frequent: what we call a hundred-year event today, will become a ten-year or 20-year event as a result of climate change.
Temperature and precipitation distributions often produce typical patterns that follow the Gaussian bell curve. Extreme values occur rarely
England clearly shows that extremely hot summers are very rare. Given a general increase in temperature, the frequency distribution (bell) shifts towards the right into the warmer zone. In a climate that is just 1.6°C
Sources: fao (five-year averages); Coceral (harvest estimate 2003) Prices: Rheinische Warenbörse (Rhineland commodity exchange)
What does this imply for agriculture? The prospects of achieving higher yields are constantly increasing, thanks to improved agricultural methods and more productive crop strains, but these yields are tending to fluctuate strongly because of weather extremes. The summer of 2003 was an example of this: European farmers sustained losses ranging from minor reductions in crop output to total losses. In Germany, the yield of wheat, barley, maize and the fodder crop triticale was about 15% lower than the five-year average (see below). Potato yields fell by 25% on average. The supply of green fodder also suffered badly, the ensuing fodder deficit amounting to 30% in Germany and as much as 60% in France.
Since such drought losses are currently uninsurable in the EU, with the exception of Austria and Spain, the record summer only had a small impact on agricultural insurance. However, this also means that farmers were largely left to shoulder their crop losses alone. Emergency state programmes exist, but they do not give farmers a definite entitlement to claim. What is more, they usually cover only a fraction of the actual losses.
A solution to this problem is being intensively debated and negotiated in the EU. A statebacked multi-peril crop insurance, based on the US model, could be one solution. This has existed for decades in the USA and meanwhile covers all natural perils. The state acts as a risk partner to agriculture and the insurance industry by subsidising the premiums for multi-peril crop insurance, participating in the reinsurance and carrying the administrative costs. Without state support, the premiums would be too high for farmers, and state cofinancing is required for catastrophes. The system has become one of the American farmers’ most important risk management tools.
Personal insurance closes the gap in provision left by state cuts.
State benefits for occupational disability in Germany have fallen drastically since the “pension for reduced earning capacity” was reformed at the end of 2000. The life insurers in the Munich Re Group offer effective disability products that can bridge the gaps in provision. They are meeting the growing demand for such private provision with a differentiated range of covers. In reinsurance, Munich Re supports clients offering these products with its extensive range of services.
According to statistics published by the state pension insurance carriers, a good 20% of all employees in Germany have to retire early for health reasons. Around half of these are still under 40. However, since the last pension reform, the benefits payable under state social security have been significantly reduced. Employees born after 1 January 1961 are merely insured against general disability, i.e. they are only entitled to benefit if, for health reasons, they are no longer able to pursue an occupational activity of any kind. Otherwise, they are required to do jobs that may not match their training qualifications or professional experience. The state will pay a full or half pension for reduction in earning capacity, depending on how many hours the insured is still able to work in any job. The full pension is payable only to insureds with a remaining earning capacity of under three hours per day. Persons who can work between three and six hours per day receive just half the amount.
Disability insurance is a complex insurance product that is influenced by many factors. Thus, for example, profession, conditions of insurance and economic environment play a crucial part. As market leader, Munich Re supports primary insurers with its individual service: the occupational class tariff or the development of modern conditions of insurance are just two examples. Our range of services makes a decisive contribution to the profitability of these products for primary insurers and we benefit in turn from this as reinsurers.
BERUFSUNFÄH IGKE IT K U R Z I N F O R M AT I O N
Global Finance Award Category Best Companies: Europe – Insurance (US magazine Global Finance)
– Second place among the “small groups” in the one-year performance class (Standard & Poor’s Fund Awards 2003)
Information on other awards can be found in the sections “Munich Re shares” (page 18) and “Corporate responsibility” (pages 74 and 81).
“A forward-looking human resources policy also depends on realising the potential of female staff.”
stebut: Mrs. Schmidt, is there a difference in working life between men and women?
schmidt: Statistically speaking, yes. But in reality, of course, “women” are every bit as individual as “men”. We really should be getting away from the idea that there is a patent solution to women achieving professional success. I wouldn’t for the life of me want the more colourful careers often pursued by women to become as limited as men’s. A large percentage of women are not prepared to invest 100% of their lives solely in their jobs. But a large percentage of men do just that, not realising how much it impoverishes their personal lives. And in management positions, companies rely far too much on the “150% people”.
schmidt: Of course, there is a need for some rethinking in companies. Women should not be regarded from the beginning just as potential mothers. Even if they are mothers or intend to have children, that should not disqualify them professionally. We shouldn’t try to make women into “better men”. Besides their professional qualifications, women have the ability to work in teams and solve conflicts: qualities that are vital in today’s management positions.
stebut: Let’s go back to the issue of children. One of the points we have studied is: Are children the main reason why women don’t make it into higher positions? The first question to ask here is whether the women concerned actually have children. And the results are that only 22% of the women in qualified positions between the ages of 30 and 40 at Munich Re have children.
stebut: ... and in management positions there are only 3% fewer. In other words, women with children do make it – but just as seldom as women without children. A further aspect: how are women and men in management positions regarded?
“Professional careers at Munich Re” was the title of a study commissioned by Munich Re from the Faculty of Social Sciences at Munich’s Ludwig Maximilian University in 2000 with the aim of making better use of our female staff’s potential. Dr. Nina von Stebut, head of the study, spoke with German Family Minister Renate Schmidt in Berlin about men and women, part-time work and parental leave, and possible measures that could be taken at political and company level.
schmidt: What is currently being promoted in German companies is greater compatibility of child-rearing and employment through suitable work-time models, and this is still too often limited to mothers. Such compatibility for both sexes is the issue of the future.
stebut: Compatibility is important. But that merely makes it possible for women to go to work at all. What about career development? We have seen that many women without children don’t advance through the ranks either. Companies must change their personnel investment habits in order to integrate women better. Munich Re has recognised that a forward-looking human resources policy also depends on realising the potential of female staff. As a result, the proportion of women in management positions has risen in the last few years from 9% to 19% today. These are important first steps – the results of the study will enable us to make further progress.
At an extraordinary meeting of the Supervisory Board on 26 March 2003, the Board of Management explained the key data for the business year 2002 and informed us in detail about the intention to strengthen Munich Re’s capital base by issuing two bonds with a total volume of around €3.4bn. Another important topic was the further reduction of the reciprocal shareholdings of Munich Re and Allianz, without any effect on their business relations.
At our meeting prior to the Annual General Meeting on 11 June 2003, the Board of Management gave a detailed report of business development in the first quarter of 2003.
On 15 September 2003, the Board of Management informed the Supervisory Board extensively about the development of the Group result in the first half of the year, which was marked by an extremely heavy tax burden. The Supervisory Board obtained information on the results in the Munich Re Group’s reinsurance and primary insurance segments, as well as on the prospects for the business year 2003 and the business policy and planning for 2004. A subject also addressed was the structure of the remuneration system for the Board of Management.
On 16 October, another extraordinary meeting took place, at which we discussed in depth the volume and conditions of the planned capital increase.
Between the meetings, we were informed comprehensively in writing about various business transactions, including the successful renewals in reinsurance business, the further reduction of Allianz’s and Munich Re’s crossholding, the subordinated bonds, the sale of Munich Re’s stake in Hypo Real Estate Holding ag, and the termination of the “principles of cooperation agreement” with Allianz.
The four committees of the Supervisory Board are each composed of shareholder and employee representatives. Except for the Audit Committee, they are chaired by the Chairman of the Supervisory Board. The composition of each committee is shown separately on page 36.
The Personnel Committee met five times in the year under review. It concerned itself with changes on the Board of Management, with the compensation structure and remuneration for members of the Board of Management, and with the latter’s acceptance of seats on external supervisory, advisory and similar boards.
Regular detailed information about the work of the committees was provided at the meetings of the full Supervisory Board.
Annual financial statements kpmg Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft audited the following documents and gave them an unqualified auditor’s opinion: Munich Reinsurance Company’s bookkeeping, its company financial statements and its consolidated financial statements as at 31 December 2003, plus the management reports for the Company and the Group. The auditor’s reports were promptly given to all the members of the Supervisory Board. The Audit Committee examined the company and consolidated financial statements, the management reports and the auditor’s reports and discussed them in detail with the auditor at the Audit Committee meeting on 13 April 2004 in order to prepare for the examination of the audit by the full Supervisory Board. The results of the Audit Committee’s discussion were then presented to the full Supervisory Board at its meeting the following day.
On 30 September 2003, Clement Booth left the Board of Management for personal reasons. His successor in charge of the Special and Financial Risks Division with effect from 1 October 2003 is Dr. Torsten Jeworrek, who has been with Munich Re since 1991, most recently heading the divisional unit for Northern Europe and the UK. We thank Mr. Booth for his valued service and successful work for the Company.
We have taken the new version of the German Code of Corporate Governance as another spur to further enhance transparency in our Group.
“Corporate governance” stands for a form of responsible company management and control which is geared to long-term creation of value. Of particular importance to the Munich Re Group in this context are the promotion of shareholders’ interests, efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies, and corporate communications which are open and transparent.
Last year we reported in detail on the changes and “fine-tuning” connected with implementing the code. We have posted details of the duties, composition, remuneration structure and cooperation procedures of the Board of Management and Supervisory Board on our website. This includes information on the duties and composition of the four committees of the Supervisory Board (see also page 36), on the powers of the Annual General Meeting and how to participate in it, and on other topics of corporate governance.
As envisaged in the German Code of Corporate Governance, the Supervisory Board reviewed the efficiency of its activities in the business year 2003. This chiefly involved looking closely at existing operational procedures on the Supervisory Board and cooperation with the Board of Management. As a result, the Supervisory Board took up numerous suggestions for improvements from its members to enhance the efficiency of the whole Board and its committees, such as discussing core strategic topics in more depth in future. Other points considered were the form, content and timing of reports from the Board of Management to the Supervisory Board, and the flow of information between the committees and the full Supervisory Board.
Munich Re is well aware that corporate governance is an ongoing process. We will pursue this issue, refining our corporate governance principles and thereby taking into account the guidelines laid down by the German Code of Corporate Governance. But for Munich Re the most important thing is that corporate governance is not only incorporated in rules and regulations but is also lived out in practice. Mainstays in ensuring this are internal auditing, risk management and a compliance office. Our Internal Auditing Division supports the Board of Management in its monitoring duties by performing risk-oriented reviews and audits. The Munich Re Group’s risk management is explained in detail on page 131 ff. The Compliance Office makes sure that particular legal and supervisory obligations, such as those arising from securities trading law, are properly met.
The annual consolidated financial statements have hitherto been published within the periods stipulated in the German Commercial Code. In 2003, the statements for the business year 2002 were published on 30 April 2003; 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 item 7.1.2 of the Code can be complied with for the first time in the Group’s annual report for the business year 2004. The 45-day deadline for the publication of interim reports, provided for in Code item 7.1.2, is scheduled to be complied with for the first time as from the second quarter 2004.
The remuneration of the members of Munich Re’s Board of Management is shown in detail for the whole Board in the notes to the consolidated financial statements, broken down according to fixed compensation, performance-related components and components with long-term incentive effect. In view of these informative details on the structure and amount of the remuneration and its components, Munich Re is dispensing with an individualisation of the remuneration within the meaning of item 4.2.4 sentence 2 of the Code.”
Traditionally, Munich Re numbers among the reinsurers whose financial strength is given top ratings by the leading rating agencies. As a consequence of the share price losses on the stock markets worldwide, which affected both our capitalisation and our results, Munich Re – like most of its competitors – experienced a series of downgradings in 2003.
The rating agencies A.M. Best, Moody’s and Fitch still put Munich Re in their second-best category for financial strength, and Standard & Poor’s in their third-best. They all attest to our superior market position, outstanding expertise and good capitalisation.
Munich Re Finance B.V., 7.625%, £300m, Subordinated Bonds 2003/2028 a+ A+ A2 A–
American Re Corporation, 7.45%, US$ 500m, Senior Notes 1996/2026 a– A3 BBB
ergo International AG, 2.25%, €345m, Exchangeable Bonds 2001/2006 (E.ON) AA– A–
With their experience, expertise, creativity and commitment, our staff are the basis for our success. We offer them perspectives and systematic opportunities for development, and provide them with continual motivation and support.
For staff at Munich Re Munich, there are variable salary components whose amounts depend on individual components and the achievement of objectives. For senior executives there is additional performance-related compensation, dependent on the extent to which various performance factors are achieved and how the function of the staff member concerned contributes. American Re remunerates senior executives on the basis of a three-tier model: a basic salary is complemented by two variable compensation components, whose amounts are based on one-year and multi-year performance parameters.
The primary insurers also make use of variable compensation to reflect the performance of senior staff more strongly in their remuneration. Up to now the variable component used has mostly been based on individually agreed objectives. With the introduction of value-based management (see page 26) as a central management tool in 2003, the first ergo companies now have a corporate performance component as well as the individual components. Other ergo companies will follow suit in 2004.
In 2003, the ergo Group gave jobs to 686 new trainees, despite its cost-saving programme. The intention is to maintain this figure in 2004. ergo sees initial training as an important investment to which it will generally adhere – even in difficult situations.
Last year, the ergo Management Academy (ema) received special recognition for its activities in advanced training. The Financial Times Deutschland wrote that it could serve as an international role model. High praise indeed for a young project that has only been in existence since 2001. It supports ergo in implementing group strategy in business practice and at the same time in developing the management qualities required for value-based management. Since the summer of 2003, a development programme has been in place for the second ergo management tier as well: the Manager Performance Program. The target group for the services offered by ema thus comprises approximately 800 senior executive staff.
At all companies in the Munich Re Group we attach great importance to a family-friendly human resources policy, which is a basic precondition for satisfied and motivated staff. We are convinced that it will help us succeed in keeping well-qualified young staff with their valuable know-how in our Group long term. Our companies have therefore introduced part-time schemes, created options for working from home, concluded appropriate agreements with their staff councils, and employed work-time managers and welfare officers.
Munich Re Munich was awarded a prize by the state of Bavaria back in 2000 for the measures it had taken to promote equal opportunities for women in the company. We are expanding employment models that allow staff to reconcile the needs of family and job better. In 2003, for instance, we launched a pilot project for teleworking. There is more about our commitment to promoting equal opportunities for women in the interview on page 60.
victoria holds seminars to prepare parents for returning to work. In addition, it offers childcare and kindergarten places. In 2003 it received a “Job and Family” Basic Certificate from the Hertie Foundation. The underlying audit required for this not only evaluates measures that have been taken but also highlights development potential at the company and helps it to take further steps.
Munich Re expanded its staff recruiting and marketing activities further in 2003. We have extended the scope of our online applications process on the internet, and in some cases can already dispense with applications on paper.
We are committed to serving the communities in which our Group companies operate. This commitment is an integral part of our corporate culture. Our focal points in 2003 were supporting the socially disadvantaged, sponsoring young people and promoting healthcare. We frequently help initiatives that are not necessarily in the spotlight of public interest. The broad range of our social commitment in different countries mirrors the wide spectrum of Munich Re’s fields of business.
Under the title “Architektur der Obdachlosigkeit” (Architecture of Homelessness), the Munich Pinakothek der Moderne staged an exhibition of architectural photography with a difference. Seven well-known photographers portrayed homeless people, their lives and their world – living spaces that have no walls but are delineated at most by cardboard or blankets. Munich Re supported the project financially in connection with the tenth anniversary of the Munich street magazine biss. Since 1993, the biss organisation has been helping people in social difficulties to help themselves.
For many years, Munich Re has been sponsoring the “Schwestern und Brüder vom heiligen Benedikt Labre” (Sisters and Brothers of St. Benedict Labre). This society offers homeless people in Munich a place where they can live, eat and work together. In each of the homes, several Christians – mostly women – help look after the occupants, some of whom are severely ill alcoholics. This society is a private initiative that does not receive support either from the state or a major charity. With the money donated by Munich Re in 2003, the society mainly purchased winter clothes.
The companies of the Munich Re Group are also involved in numerous other projects for the socially disadvantaged. The Hamburg-Mannheimer foundation “Jugend & Zukunft” (Youth & Future) supports socially deprived young people with education and training programmes. It aims to prepare the youngsters for later working life and help them find qualified jobs. Since its establishment in 1999, the foundation has sponsored over 1,300 young people in Hamburg, Leipzig and Dresden in its “Job Locomotive” projects. Full-time social education workers provide training in making job applications, career guidance and video-assisted interview training. Each year, as a supporter of the foundation, HamburgMannheimer Versicherungs-ag makes available four additional apprenticeships that are exclusively reserved for youngsters from these projects.
American Re’s social commitment centres on the theme of healthcare. It sponsors, for instance, an organisation dedicated to supporting deaf and blind people: the New Jersey Association of the Deaf-Blind (njadb). In 2003, one American Re staff member received a special award for her involvement. Last year American Re also again sponsored charity races in which the entry fees went to an organisation dedicated to supporting women suffering from breast cancer.
dkv has become the first private health insurer to include hospices in its catalogue of benefits. It also sponsored their work with donations in 2003. Hospices enable people suffering from terminal illnesses to spend their last few weeks and months in comfort and dignity. Thus, for example, it has provided the Lazarus Hospice in Berlin with financial support for the construction of a new bathing area. And in the summer, it donated a garden for the Cologne Lebenshaus Hospice.
The “bodytravel” exhibition offered spectacular intellectual and sensual stimuli on board a 65-metre ship.
For the Munich Re Group, environmental protection and sustainable development are of strategic importance. Our new environmental audit, our know-how regarding renewable energy, and a sustainability fund were instrumental in helping us move further forward in 2003.
Munich Re regards economy and ecology as two inseparably linked aspects of its long-termoriented business operations; the connection is especially close in the case of climate protection. By systematically integrating aspects of sustainability into our business, we ensure optimum quality in the acceptance of risks and thus further the long-term success of our business.
Munich Re has concerned itself with the topic of climate change for three decades now. This phenomenon is linked to a rising number of weather-related extreme events, which in future will destroy values more and more frequently and threaten our living environment (see page 54), a point we made in our briefing of the German and international press in autumn 2003. Reinsurers have an important function as an early-warning system for such natural hazards. Munich Re consequently aims to play an active part in strategies designed to avoid or reduce the effects of global climate change. We also participate in a wide range of international studies, organisations and initiatives, such as the ipcc (Intergovernmental Panel on Climate Change), unep (United Nations Environmental Program) and the isdr (International Strategy for Disaster Reduction). In 2003 we forged ahead with our interdisciplinary project “The Challenge of Climate Change”. The aim of this project is to integrate sufficiently well-verified prognoses on climate change into our business decisions. For the fact is that climate change affects the whole insurance industry, including of course Munich Re’s business – from underwriting to investment (see page 30). In 2003 we concentrated particularly on adjusting insurance products, designing appropriate covers, exploiting potential investment options and offering consultancy services. We are proceeding on the assumption that emissions trading, which commences in 15 EU Member States on 1 January 2005, will rapidly expand. However, a few important preconditions for global trading have not yet been met: the Kyoto protocol is not yet binding in international law, as it still has to be ratified by some countries. As soon as this happens, we will implement our business plans for selected areas so as to be the preferred partner for our clients in this field as well.
The British subsidiary of the ergo company d. a. s. was certified in accordance with iso 14.001 in 2003, becoming one of the first insurance companies in the UK to introduce an environmental management system of this type.
Europäische Reiseversicherung has participated in the City of Munich’s ecoprofit project since 2001 and received a second award for its efforts in the resources-saving category in 2003. ecoprofit stands for ecological project for integrated environmental technology. The companies that take part carry out operational measures to reduce environmental impact and at the same time to profit from the resultant cost savings.
shamieh: The iais, a relatively young organisation, has recorded some impressive achievements in the area of risk and solvency regulation in such a short time. How did your group manage to reach consensus given the varying stages of development in local supervisors’ frameworks?
dullemond: I think there are three main reasons for this. Firstly, ten years ago there was virtually nothing in the international arena on insurance regulation, so it was possible to start from a clean sheet of paper. Secondly, the iais is represented by supervisors focusing on the content and issues of substance. Finally, in my subcommittee, we have the privilege of working with some highly qualified and experienced people who are fully committed to making effective progress.
shamieh: As the world’s largest and most diversified non-life reinsurer, Munich Re has always said: “Take away the principle of diversification and you take away the most fundamental feature of the insurance and reinsurance business model”. How does the iais propose to embrace this principle in its regulatory framework?
shamieh: Some of your represented local supervisors have developed pioneering approaches built around the admissibility of internal risk and capital models, thereby encouraging insurers and reinsurers to represent their risks using a more robust, independent and bottom-up riskbased approach. How important is it that regulatory frameworks encourage best practices in risk management, including a deep understanding of the risks they carry and their capital requirements?
“For example, we would need to be convinced that the model is being run from an independent risk management unit that has no business interests.”
How suitable are internal risk models for supervisory purposes? What is the relationship between capital and risks? How can supervisory standards be made comparable internationally? These and similar topics were the subject of a discussion in the Dutch town of Appeldorn between Charlie Shamieh, Head of Munich Re’s Integrated Risk Management Division, and Wil Dullemond, Chairman of the iais (International Association of Insurance Supervisors) Subcommittee for Solvency, Solvency Assessments and Actuarial Issues.
“Take away the principle of diversification and you take away the most fundamental feature of the insurance and reinsurance business model”.
shamieh: Could you please outline your Subcommittee ’s key areas of focus in the next 12 to 18 months?
dullemond: We have four main areas of focus. The first, which is the most advanced, is a standard on suitable forms of capital. Secondly, there is our work on a supervisory framework paper – this is essentially an iais strategy paper where we are taking stock of what has been achieved, looking more closely at leveraging the work produced by the other subcommittees and arriving at a fresh prioritisation of activities. The third is a paper examining how the supervision process should work in practice. And finally, we are developing standards for capital requirements. We are unlike a Basel Committee in that we cannot simply set standards in an accord – we have to take care that in trying to reach consensus in the international arena we do not opt for a solution that represents the lowest common denominator, yet continue to advance in manageable steps – as opposed to giant leaps – with meaningful achievements over time.
Business parameters 87 Business performance 91 >> Reinsurance 95 >> Primary insurance 113 >> Asset management 122
(2) Other intangible assets 171 (3) Real estate 172 (4) Investments in affiliated enterprises and associated enterprises 173
(15) Shareholders’ equity 181 (16) Minority interests 184 (17) Subordinated liabilities 185 (18) Unearned premiums 185 (19) Provision for future policy benefits 185 (20) Provision for outstanding claims 186 (21) Other underwriting provisions 188 (22) Other accrued liabilities 190 (23) Notes and debentures 192 (24) Other liabilities 192 (25) Other deferred items 193
(27) Investment result 194 (28) Other income 196 (29) Net expenses for claims and benefits 197 (30) Net operating expenses 198 (31) Other expenses 198
(33) Parent company 201 (34) Related enterprises 201 (35) Personnel expenses 202 (36) Long-term incentive plans 202 (37) Employee share-ownership programmes 204 (38) Compensation and loans for Board members 204 (39) Board of Management compensation structure 204 (40) Share trading and shares held by members of the Board of Management 205 (41) Number of staff 205 (42) Contingent liabilities, other financial commitments 205 (43) Events after the balance sheet date 206 (44) Earnings per share 207
Fuelled by high private and public consumption, gdp in the UK grew in real terms by 2.3% in the period under review.
In the eurozone, economic development stagnated initially, owing to weak export and domestic demand. The economies of several countries, including Germany, shrank in the first two quarters compared with the respective previous quarter. In the second half of the year, favoured by increasing exports, the economy started to gain ground again. With an annual gdp rate of 0.4%, however, growth as a whole remained weak. The strongest growth rates, as in the previous year, were achieved by Greece (around 4%), Ireland and Spain. Bringing up the rear were the Netherlands and Portugal.
In Germany, real gdp stagnated at a rate of –0.1% in 2003, thus providing – as in the previous year – scarcely any impulses for demand in the insurance sector. Seasonally adjusted, unemployment in Germany continued to increase in the period under review, with 4.3 million people out of work by the end of the year. The number of people in employment fell by 1.0%. The difficult situation persisting on the labour market had an adverse impact particularly on private consumption, which declined by 0.4%. With the government’s Agenda 2010 programme, initial steps towards political reform were taken, but private demand continued to suffer as a result of the general logjam of reforms, especially in the area of social security. This also applies in particular to the demand for insurance products.
In the first quarter of the year, adversely affected by the approaching conflict in Iraq, prices on the international stock markets continued the downward trend of the previous years. The most important indices in Europe, such as the euro stoxx 50, the dax and the ftse 100, hit new recent-year lows in March. But in the subsequent period, as a result of the incipient economic recovery in the USA and other countries, and owing to companies’ improved profit expectations, the markets staged an impressive rally, whose trend continued up to the end of the year. Thus the most important share price indices recorded a marked increase year-on-year, with the euro stoxx 50 showing a 16% rise in its year-end level, and the dax growing by 37% in the period under review.
The insurance industry was greatly influenced by the state of the economy as a whole. Although the improved environment on the capital markets from spring onwards brought appreciable relief on the investment side, this was not nearly enough to compensate for the losses of many insurance companies from the preceding years.
Since last spring, the capitalisation of the insurance industry has continually improved, thanks to underwriting earnings, capital measures and the more favourable capital market situation. The series of rating downgradings involving many companies, which began in 2002, came to an end in the course of the year. Altogether, the rating levels of most of the leading reinsurers have fallen by one whole notch or more compared with three years ago.
Driven by an improving economy and stable to rising prices for insurance cover, the strong growth in premium volume was maintained in US non-life insurance, according to initial estimates. The improvement in prices and conditions in both insurance and reinsurance was reflected – with a time lag – in falling combined ratios and better underwriting results for insurers. The consolidation trend in life and non-life business in the US insurance market is persisting.
The emerging markets again registered high growth rates for gross premiums in 2003. This was due not only to the generally stronger overall economic growth but also to increasing insurance penetration in these markets. There was impressive expansion again in China (see page 51).
On top of this came the fact that, since the German tax reform of 2001, the resultant losses from writedowns and disposal of equities are no longer tax-deductible or only partially so (in the case of life and health insurance companies). This legislation leads to a disproportionate tax burden in times of weak capital markets.
– We reduced our shareholding in Allianz to 12.2%. The sale of a 2% stake in November produced a profit of €390m for us.
– We made writedowns of €317m for impairment of goodwill. – The overall tax burden for the business year 2003 totalled €1.8bn (–0.6bn), or 135%
Large losses in reinsurance, i.e. losses giving rise to claims costs of over €5m each, were within the normal range, totalling €1,054m (1,844m).
Munich Reinsurance Company’s result for the year according to its financial statements prepared on the basis of the German Commercial Code amounts to €510.8m (2,605.8m). Of this sum, €224.3m has been allocated to the revenue reserves so that, including the profit brought forward from the previous year, a balance sheet profit of €287.0m remains. The Board of Management will propose to shareholders at the Annual General Meeting that this profit be used for payment of an unchanged dividend of €1.25 on each share entitled to dividend and that any residual amount be carried forward to new account.
We earned 56% (59%) of our Group premium income from reinsurance and 44% (41%) from primary insurance. Since 1999, premium volume has grown in reinsurance by around 61% and in primary insurance by 30%.
For the reporting on individual fields of business, the following principle applies: figures that derive from business within a segment are eliminated, whereas figures that derive from business with companies from other segments (e.g. intra-Group reinsurance cessions from primary insurers to reinsurers) are included in the data.
The generally pleasing development of Group shareholders’ equity since the end of the previous year up to 31 December 2003 was characterised by the following aspects: – On 11 November 2003 we successfully completed a substantial rights issue. This strengthened our shareholders’ equity by €3.9bn and also significantly enhanced its quality. As the subscription ratio of 99.9% shows, the market responded very positively to the capital increase.
– Net unrealised gains recognised in equity rose by €3,251m. This was mainly due to the positive trend on the stock markets since the second quarter and the reallocation of our Allianz shares from “associated enterprises” to “securities available for sale”, as well as to the first-time application of the stricter impairment rule of ias 39.61 (rev. 2003).
As at 31 December 2003, there were bonds from the spring issues and from previous years with a carrying amount of €2,209m (2,205m) in circulation; of these €1,813m (1,720m) was apportionable to exchangeable bonds, where holders can demand redemption in certain shares at a previously fixed price instead of cash on maturity.
How we safeguard our liquidity and hedge against foreign currency risks is described in the risk report (see page 131 ff.).
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 page 131), which we use to determine the capital requirements of individual business units, taking into account fluctuations in results and risk exposures. In the year under review, our shareholders’ equity increased substantially. The notes to the financial statements provide detailed information on the composition of our shareholders’ equity (page 183 f.). The valuation reserves for investments not accounted for at market value are given on page 93.
The Munich Re Group companies operate in virtually all classes of reinsurance and offer a full range of products – from traditional reinsurance to alternative risk financing and risktransfer structures (see page 38).
Our reinsurance business is divided between seven divisions (see page 38 ff.): Life and Health; Europe 1; Europe 2 and Latin America; Asia, Australasia, Africa; North America; Corporate Underwriting/Global Clients; and Special and Financial Risks.
Our main objective in 2003 was to improve the quality of our portfolio. We achieved good results both in our existing portfolio and in our new business. This success is reflected in the favourable development of our combined ratio.
Special and Financial Risks 92.9 116.5 140.9 134.1 * Figures for health reinsurance only.
The substantially better prices and conditions we achieved in the renewal seasons for the year under review and the previous year are reflected in a combined ratio of 96.7% (122.4%). We thus met our objective in operative property-casualty business in the year under review. Broken down by division, the combined ratio developed as follows: Although we had to cope with the after-effects of the bear market in the investment sector, the pre-tax operating result was clearly positive.
Other classes of business 1,987 2,098 1,905 1,862 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
In original currencies, our premium income rose by 9.8% compared with the previous year. Of the total reinsurance premium, 37% derived from the eurozone, whilst 32% was written in US dollars, 15% in pounds sterling, 1% in yen and 15% in other currencies. As a consequence, changes in exchange rates have a strong impact on our premium income shown in euros. In 2003, the significant and persistent decline in the US dollar and other currencies against the euro had an adverse effect on our premium volume. This currency influence offset the very good premium growth in original currencies, so that premium income expressed in euros fell by 2.6% to €24.8bn (25.4bn).
Demographic trends and the cutting back of state social security systems are continuing to have a very positive effect on life insurance business. Life reinsurance is benefiting over and above this from the unbroken demand for products that provide our clients with relief in meeting equity capital requirements and with financing their acquisition costs.
In our German business, premium volume reached about the same level as in the previous year. Owing to the difficult situation on the capital markets, demand increased for reinsurance products offering solvency relief and financing solutions. As the reform projects in German state pension insurance look certain to lead to a growing need for private and company pension cover, we expect strong impulses for our new business in this market.
In the UK, thanks to the good market positioning of our branch, premium again grew appreciably. The main reason was the assumption of insurance portfolios in reinsurance. For the future, we expect growth to be lower, but coupled with attractive market conditions.
In the other core European markets – France, Italy, Spain and the Netherlands – our operations were also characterised by concentration on profitable fields of business. Having strengthened our presence, we were able to further expand such business in these countries.
In the USA, our subsidiary Munich American Reassurance Company (marc) recorded pleasing organic growth of 18% and maintained its position among the leading providers. Risk experience in core business was favourable. The overall result reached the planned level.
Several Asian life insurance markets offer the promise of remarkable potential in reinsurance. This applies especially to China, where our new licence and the continuing expansion of our local presence mean we have an excellent basis for developing our business (see page 51).
With a share of around 30% of the premium income, the USA is the most important and also currently the most profitable market. Thanks to our consistently profit-oriented underwriting policy, we have succeeded in achieving a return to risk-commensurate prices and writing attractive new business. But we have also significantly improved the profitability of our portfolio in force. We are proceeding on the assumption that the market environment as a whole will remain favourable and we aim to carry on growing strongly there.
Insurance companies’ need for innovative reinsurance solutions has increased in Germany, because of the rising trend in large claims triggered by cost-intensive treatments with the latest medical technology. We expect this situation to yield interesting business opportunities for us.
The strong privatisation trend is continuing in China. At the same time, the market is opening up further for foreign investors, and the insurance industry is gradually being liberalised. We have already entered into cooperation with the most important companies. We will take advantage of the reinsurance licence we were recently granted to extend our position in this important market.
We have now had two renewal seasons in which we have improved prices and conditions, in some cases very markedly, so that now a technically appropriate level has largely been reached. In 2003, the consequences of these extensive remedial measures made themselves really felt in the result for the first time.
The combined ratio in property-casualty reinsurance fell to 96.5%, thus being well below the 100% mark for the first time in five years. We therefore achieved one of our most important objectives. With our risk management and underwriting, our combined ratio has been markedly improved.
With 1.8 percentage points of the combined ratio, burdens from natural catastrophes in 2003 were on the low side. The following were the most notable. In spring 2003, several tornadoes raged in the US state of Oklahoma, which gave rise to losses of €90m for us. In September, Hurricane Isabel hit the US East Coast with wind speeds of up to 200 km/h, cutting a devastating path of destruction. Nevertheless, the claims burden for Munich Re remained within reasonable bounds at around €60m. The autumn wildfires in California cost us €46m and Typhoon Maemi in Korea €38m. Claims costs for other large losses stayed within the normal range. On 14 August 2003 the biggest power cut ever occurred in the US North East and Canada, affecting around 50 million people. Although the losses for the economy were enormous, our claims costs remained relatively low at approximately €50m.
In this environment of greatly varying market conditions, we benefit from our sophisticated capital-management and pricing tools. Overall, we have significantly improved the quality of our non-life reinsurance portfolio – thanks to our remedial measures, to our withdrawal from inadequately quoted business, to our acquisition of profitable new business, and to our higher shares in attractive accounts.
With premiums of €1,284m (62.5% of the division’s premium volume), Germany is still by far the most important market serviced by the division.
In Switzerland, our premium grew by 47.8% to €81m. We succeeded in almost completely renewing our existing business and acquiring new treaties. The result was very satisfactory.
Our premium income in Austria was up 24.7% to €180m. The pleasing profit we recorded was due to the success of our remedial measures and also to the low claims burden from natural catastrophes compared with the previous year, with its flood losses.
Our interest centres on the countries set to join the EU, especially Poland. We also achieved above-average growth in Russia, with premium of €15m. Facultative reinsurance for large individual projects plays an important role here.
In Greece and Turkey, we made good progress overall. In Turkey, where we closed our office at the end of 2002, we were able to renew all our business. The market is now serviced from Munich. We achieved a very good result in both countries.
We were able to maintain and in some cases even extend our leading position in the core markets. Business experience in the year under review was good. There were no significant major individual losses. Without the markedly higher claims costs for motor business in the UK and France reported at the end of 2003, the result would have been even more positive.
In the UK, easily the division’s largest market with premium income of €1.1bn, original rates rose in both liability and property insurance. This improved both the premium income and the results of proportional reinsurance. Rates in non-proportional reinsurance increased by between 10% and 30%. Nevertheless, our premium income showed a decrease of 4.4%, partly due to currency translation and partly because some major treaties were not renewed. There was an absence of large losses. In 2003, we were again able to defend our top position in property-casualty reinsurance.
Profit for the year €m 4.7 51.0 * Consolidated financial statements in accordance with ias.
Responsible for: Middle East, Africa, Asia, Australasia, Greater China, Southeast Asia 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
The division was again affected by natural catastrophes, albeit to a limited extent. Typhoon Maemi struck South Korea in September, leaving a trail of destruction. Although this was a “hundred-year” event, the division’s claims burden only totalled around €38m. Claims costs for other major losses were within the normal range. The combined ratio increased by 5.0 percentage points compared with the previous year with its low loss level, but was still outstanding at 91.8%.
In Japan, the world’s second-largest non-life insurance market, we maintained our position. Premium income totalled €242m. In Korea, we increased our premium volume by 48.3% to €168m and enhanced our leading position, thanks to the good development of the economy, to larger shares in attractive treaties and to new business.
In July 2003, Munich Re became the first foreign reinsurer to obtain a licence for composite business for the whole People’s Republic of China. This licence will enable Munich Re to intensify its operations in one of the most exciting and dynamic insurance markets and also to write business in renminbi (rmb), the domestic currency (see page 51). Hong Kong’s economy was adversely affected by sars, but thanks to good technical underwriting, Munich Re expects its treaty losses there to be small. Through the introduction of event limits, we greatly reduced our natural catastrophe exposure for Hong Kong and South China, which had previously been very high.
Despite stronger competition, we were able to keep our technical conditions at the same level in Taiwan, thus preparing the ground for sustained good results in the future. In Southeast Asia, we defended our leading position in all lines of business and, as in the preceding years, successfully geared client accounts to our profit targets. Although rates began to fall, we achieved our objectives in all areas. The result for the year was gratifying. There was an absence of claims burdens from natural catastrophes.
In Africa, we operate through our subsidiary Munich Reinsurance Company of Africa (mroa), which writes business in 35 countries. In the past year, we further streamlined mroa’s structures, adapting organisational procedures even better to clients’ needs and making them more efficient. Despite portfolio rehabilitation measures, mroa recorded premium growth of around 23% in 2003. The bulk of our €356m premium comes from South Africa, where we are the market leader. Especially in motor business, we had to terminate treaties that did not meet our technical requirements. Owing to the favourable market environment and the lack of major losses in the second half of 2003, the combined ratio fell very markedly to 88.4%.
Responsible for: American Re-Insurance Company, Munich Reinsurance Company of Canada 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
American Re ended the year with a statutory surplus of us$ 3,344m and a risk-based capital (rbc) ratio in excess of 220%, both much improved from last year and putting the company among the financially strongest reinsurers in the US market once again. In recognition of its financial strength, its improved operations and the subsidiary’s strategic importance to the Munich Re reinsurance group, A. M. Best affirmed American Re’s a+ (Superior) financial strength rating with a stable outlook.
Investments us$ m 14,169 12,843 * Consolidated financial statements in accordance with ias.
In order to take best possible advantage of the profitable business opportunities that continue to present themselves in the US property-casualty market, Munich Re decided to increase Munich Re’s capital by us$ 300m at the end of 2003.
The combined ratio improved by 22.8 percentage points to 98.0% in comparison with the loss-plagued year 2002. Even after elimination of the special burdens in that year resulting from the World Trade Center reserve strengthening, the reduction amounted to 14.7%. Claims costs for natural catastrophes, which are included in the combined ratio figure, were within the normal range at €90m. However, we recorded substantial expenditure for late-reported claims from our clients arising from losses in previous years.
We succeeded in consolidating and even extending our position in business with our globally operating clients. Every chance was taken to put cooperation with these clients on an even broader footing. The result was impacted by several fairly large losses, especially from engineering business of earlier underwriting years and from tornadoes in the USA.
Overall, selective shares in attractive business led to a consolidation of our portfolio in 2003 and to a slight volume increase only in some segments, measured in original currencies. In the year under review, we recorded appreciable profits.
We maintain close contact with scientific institutions around the world and with domestic and foreign media, in order to contribute our point of view to public debate. Our experts are highly sought-after. A special event in this context was the Climate Exhibition at the internationally renowned Deutsche Museum in Munich from November 2002 to November 2003, for which Munich Re was the exclusive partner. Last year’s extremely hot summer and the floods in August 2002 confirmed the forecasts we have been giving for many years and made clear the great economic relevance of climate change, which is manifesting itself more and more strongly.
Our consistent consolidation measures were clearly reflected in our figures in the year under review. Premium income fell accordingly by 8.1% to €2,284m (€2,485m), mainly owing to the strategic reorientation of our subsidiary New Re in Switzerland. Premium volume was also adversely affected by the strong euro.
The result was very pleasing. We succeeded in reducing the combined ratio to 92.9%, which was thus 23.6 percentage points lower than the previous year’s figure of 116.5%; 9.0 percentage points in 2003 were attributable to costs for retrocession cover. Natural catastrophes gave rise to expenditure of around €87m. We were able to achieve a good result, even though we incurred a large tornado loss in the USA and had to strengthen reserves for past losses.
With premium income of €700m, this business segment is the largest written by the division in terms of volume. The drop in premium due to currency influences was compensated for by new business production, so that the volume remained about the same.
Owing to the unabated competition and the prevailing overcapacities, especially in airline business, we witnessed a reduction in rates. Through a selective underwriting policy, we were able to keep the prices for our business at a technically adequate level. Thanks to our remedial measures and the good claims experience in the last two years, we have managed to almost completely make up for the horrendous losses of 2001, which stemmed in particular from the attack on the World Trade Center.
Although there was a decline in the number of satellite launches in the year under review, we recorded stable premium income and a positive result in space business, thanks to price increases. As other market players withdrew from this highly specialised line, market capacity again decreased and we were able to strengthen our leading position.
With a further steep rise in the number of insolvencies both in Germany and the rest of Europe, the general business environment was extremely problematic again in 2003. We nevertheless succeeded in returning to the profit zone with a satisfyingly positive result. There were three main reasons for this: our stringent underwriting and pricing policy, already implemented in the previous year; the remedial measures consistently pursued by nearly all specialist insurers since 2001; and the reduction in spectacular large losses. The premium growth of 31.0% to €620m was driven by rate increases in original and reinsurance business and to a smaller extent by new business, especially in export credit insurance.
In this business segment, we bundle the retrocession cover for the whole reinsurance group. In order to optimise our risk situation, we purchase covers for selected underwriting risks on the international retrocession markets. We attach the greatest importance to financial solidity when selecting our retrocession partners.
The mainstay of our retrocession structure is a cover against losses from natural hazards. In the year 2003, we succeeded in substantially broadening our natural hazard retrocession programme at commercially acceptable prices. For 2004, we planned a fundamental restructuring and further extension of our retrocession programme, which was implemented on 1 January 2004.
This business segment consists primarily of major industrial clients. We have further developed the international orientation of this segment’s activities, now operating with highly qualified teams in Munich, London and Australia. We were able to extend our position in all the markets of importance for us and, with our products and services, we number among the market leaders in this segment as well. Premium income increased to €470m (437m), with growth of around 20% in original currencies. In spite of high losses caused by tornadoes in the USA, we posted a very good result.
Aftermath losses from previous years’ stock market slumps also had a significant impact on the result. Our primary affected insurance segment ultimately had to recognise writedowns and losses on disposals totalling €3,545m.
Altogether, the result of our primary insurance business developed as follows:
Premium income in health insurance climbed by 7.3% (5.7%) to €4.5bn (4.2bn). Growth in Germany was driven by premium adjustments for business in force. The prolonged debate about healthcare reform, which is definitely necessary in our view, engendered a climate of uncertainty, which had a curbing effect on our new business in Germany.
In reporting on our primary insurance operations, we will follow the structure of our subgroups, in each case referring to our subsidiaries’ individual or consolidated financial statements for the year.
Marketing, employees ergo’s marketing is based on its various strong sales organisations, direct sales and brokers. An important part of this strategy is its exclusive cooperation with the hvb Group, which generated a new business volume of €400m (292m) in 2003, thus again surpassing the ambitious marketing targets that had been set. The joint-venture company KarstadtQuelle Finanz Service was also able to firmly establish itself in its first full calendar year since formation; its new business volume in 2003 totalled €89m.
As an after-effect of the capital market crisis of the last three years, the ergo Insurance Group had to cope with heavy losses. It again recorded a large deficit of €1,431m, partly due to the exceptionally high tax burden, as well as to writedowns for impairment of goodwill.
The stabilisation of the capital markets alone should result in a significant improvement in earnings. In order to strengthen its competitive position, ergo is concentrating on expanding its core fields of business whilst at the same time increasing its efficiency. The ergo companies in Germany and abroad have identified potential ways of enhancing efficiency and saving costs in all units, functions and processes, and are implementing planned measures to achieve a sustained improvement in the Group’s result. By the end of 2005, annual cost savings are expected to reach €300m. The measures initiated already had a positive effect in the year under review.
On 14 July 2003, the joint it application landscape ergo 1.0 was launched at the victoria and Hamburg-Mannheimer companies and at d. a. s. After remedying the inevitable teething problems inherent in such major projects, the ergo strategy is being consistently realised with ergo 1.0: identical handling processes in administration can be used with separate brands, thus creating synergies. The common it platform will make a significant contribution to further enhancing the ergo Insurance Group’s competitiveness and to saving costs.
The already very good combined ratio of 97.6% achieved in the previous year fell in the year under review to an excellent 89.7%. At 99.2% (101.1%), it was also below the 100% mark in the legal expenses segment in 2003.
The result before amortisation of goodwill was nevertheless unsatisfactory, totalling €7m (–908m). After tax and amortisation of goodwill, the result for the year stands at –€1,431m (–1,212m).
At the end of 2003, the ergo Insurance Group employed 25,514 (25,815) desk staff and 5,956 (5,974) salaried field staff.
Munich Re Group Annual Report 2003 ergo Insurance Group 2003 Prev. year (adjusted)
In property-casualty insurance, gross premium income declined by 2.2% (–6.1%) due to the cessation of victoria Re’s operations. Without this factor, growth would have been 5.4%, since there was significant expansion of new business in nearly all lines. Premium in legal expenses insurance increased by 6.1% (2.7%). This was mainly attributable to foreign business, but pleasing growth of 10.5% was also achieved again in Germany.
* Adjusted owing to first-time application of ias 39 (rev. 2003).
An extensive project to optimise results has been in progress at all the companies in the Karlsruher Group since 2002. The first practical measures were already implemented in 2003. Cost savings are scheduled to total approximately €35m by 2005.
The combined ratio in property-casualty and legal expenses business amounts to 104.9% (112.3%). At €1.0m (17.9m), the Karlsruher Insurance Group’s overall result for the year was again positive in the year under review, notwithstanding the enormous strains from the after -effects of the depressed stock market and the excessively high tax burden.
For the two life insurance companies in the Karlsruher Group, the year 2003 was marked by the termination of several large contracts. Adjusted to take account of this special factor, gross premiums written grew by 1.6% compared with the previous year. The two companies together recorded growth of 6.7% in new business. Their total new business premiums were 2.0% lower than in the previous year.
Operating with a uniform logo and market presence, the Europäische Group is represented in all the main European countries through its international network of subsidiaries and affiliated enterprises. It is keeping pace with the further internationalisation of the travel industry and, with its intelligent network of subsidiaries and cooperations, accompanies its marketing partners in the tourist industry in their European-wide expansion. Reacting to changes in travel behaviour, it overhauled its products in 2003, and in future will offer policies specially tailored to very different types of travel (low-cost, city trips, package tours, study tours and cruises). Besides this, it has established a new field of business in Germany for the insurance of business travel.
Since last year, Europäische Reiseversicherung has been conducting an extensive project to save costs, which is starting to bear fruit.
In this section, we report on the performance of our Group’s own investments, which derive almost entirely from our core business fields of reinsurance and insurance, and on third-party business.
Retail and special funds for private investors and for institutional investors are offered directly by meag. Its investment products are also becoming an increasingly established part of ergo’s insurance marketing. In view of the growing importance of private provision for old age, this trend is likely to intensify.
At the end of the year under review, meag and its subsidiaries employed 605 (617) people.
As at 31 December 2003, the Munich Re Group’s investments amounted to €171.9bn (156.3bn), up 10.0% on the previous year.
In October, we sold our shares in Hypo Real Estate Holding ag, prior to its flotation on the stock exchange, thus reducing our exposure in the German banking sector. We had acquired the shares through the spin-off of Hypo Real Estate from HypoVereinsbank ag. We are also not participating in the capital increase announced by HypoVereinsbank in February 2004. As at 31 December 2003, our shareholding in HypoVereinsbank ag still amounted to 25.7%, which we have significantly reduced in connection with HypoVereinsbank ’s capital measure in spring 2004.
In our asset-liability management, we generally adjust the periods to redemption in our bond portfolios to match the periods of our liabilities as far as possible. In the year under review, we therefore slightly shortened the durations in the investments that serve to cover our reinsurance business.
Investment result by type of investment 2003 Prev. year Change in (adjusted)* %
Expenses for the management of investments, and other expenses 544 500 8.8 * Adjusted owing to first-time application of ias 39 (rev. 2003).
The investment result in the year under review amounted to €7.1bn (4.9bn), representing an improvement of 44.5% on 2002.
The table below shows the investment result for 2003 broken down by type of investment: Investment result
The vast majority of the Munich Re Group’s investments are managed by meag munich ergo AssetManagement GmbH, a 100% subsidiary of Munich Re and ergo. As at 31 December 2003, meag had assets of €131.3bn under management for the Munich Re Group. The Group’s other investments are managed by Munich Re Capital Management, Munich Re Asia Capital Management, ergoTrust GmbH and the Munich Re Group insurance companies.
meag recorded net inflows of over €300m from retail funds in 2003, surpassing the comparative figure for the previous year (just under €200m) by more than 50%. This pleasing increase, albeit from a relatively low initial level, confirms that investment products excellently complement insurance products in ergo’s marketing programme. Altogether, meag had retail funds of over €2bn under management at the end of 2003.
meag received a number of awards for its impressive performance in the management of retail funds in the year under review. More details are provided on page 59.
The current macroeconomic environment and the situation on the capital markets are more favourable than last year. The situation in the insurance industry has definitely brightened. As a whole, the marked increase in price levels achieved since 2001 has largely been maintained. Furthermore, reinsurers have succeeded in implementing better terms of trade, even where the conditions in primary insurance are not yet commensurate with the greater risks and the necessary return requirements. New opportunities may present themselves for insurers and reinsurers as a result of demographic changes, developments in social security systems and generally heightened risk awareness. We expect the business year 2004 to be a successful one for the Munich Re Group.
The global economic recovery should continue to make further progress in 2004, at least initially. In the eurozone, this recovery is being supported by planned structural and fiscal reforms in some countries, such as Germany. However, the eurozone growth rate in 2004 will still lag behind that of the USA. The UK economy is once more likely to grow more strongly than the eurozone. Germany looks set to achieve only average growth in the eurozone again in 2004, although various early indicators point in the direction of a marked revival here as well.
In Japan, growth should continue, even if the chances of breaking out of the deflationary cycle appear to be limited.
The emerging markets should keep on profiting from the economic growth in industrial nations, with the export-oriented emerging markets in Asia again likely to grow most strongly. In Latin America, the scene is set for an economic upswing, but the political risks in some countries remain high. Economic momentum in Central and Eastern Europe will benefit especially as growth picks up in the eurozone. The Baltic states, Poland, Slovakia, Slovenia, the Czech Republic, Hungary, Malta and Cyprus will join the European Union in May 2004.
Increasing economic activity is accompanied by increasing risks and rising demand for insurance cover. In nearly all countries, we are currently seeing growth in the insurance industry at least equal to that of the economy as a whole. The constantly increasing need for private provision and the demographic changes continue to favour the prospects for insurances of the person in industrial nations. Gross premiums in life and health insurance should therefore carry on growing strongly in these markets. In addition, the stabilised capital market environment should have a positive effect on demand for life insurance products.
Information on the main events after the balance sheet date is provided on page 206 under Note 43 to the consolidated financial statements.
In most sectors of liability insurance, we expect further price increases and improvements in conditions, whereas in property insurance we are proceeding on the assumption that terms of trade will stabilise at the currently high level. Given the substantially improved prices and conditions, we aim to achieve a combined ratio in property-casually reinsurance of 97%. And in primary insurance, partly because of the cost-reduction measures we have implemented to improve results, our objective is a combined ratio of the same level.
Altogether, we are aiming at a Group result of €2bn for the current business year 2004, which would already take us close to our objective of a return on equity of 12% after tax. The extent to which we achieve this result naturally depends on what claims burdens from natural catastrophes and other major losses affect us in insurance and reinsurance and on how the capital markets develop.
In primary insurance, we reckon with growth of around the market average. Despite the inevitable adjustment of policyholders’ bonuses and the guaranteed interest rate to take account of the lower level of market interest rates, the high demand for private provision among clients, the quality of our products and the recognised franchise strength of our insurers should ensure an appropriate increase in premium income.
The structure and systems of our risk management are designed by our central risk controlling unit and are implemented throughout the Munich Re Group by decentralised risk controllers in the operative units, who adjust to them to current situations where required. Ultimately, the Board of Management is responsible for the conception and effectiveness of risk controlling and risk management as a whole.
Our central risk controlling unit defines standards, and develops and maintains the systems. It is also responsible for regularly informing the management about the current risk situation and for checking measures relating to risk policy, where necessary proposing new ones. This information is communicated through quarterly reports and annual reports, supplemented by ad-hoc reports where required.
The Munich Re Group complies both with the German Law on Corporate Control and Transparency and with the locally applicable regulations on risk management in the different countries in which it operates. Under German Accounting Standard drs 5–20, risks are classified as follows: – Underwriting risks – Risks from defaults on receivables from underwriting business – Investment risks – Operational risks
In addition, we closely consider geopolitical, macroeconomic, supervisory, fiscal and other significant risks resulting from our business environment (e.g. rating). We also analyse our strategic risks, such as management and controlling risks, or risks connected with our strategic shareholdings. The most important risks are dealt with in detail in the following.
A further preventive risk controlling measure is the agreement of accumulation budgets in reinsurance. Particularly in property lines, our reinsurance companies assume very large liabilities for earthquake and windstorm losses, and to a lesser extent for hailstorm and flood risks. These losses often affect many clients at the same time. Owing to this accumulation character, a single loss event can have a substantial impact on the result situation. It is therefore essential that the natural hazard liabilities underwritten are controlled and limited on a Group-wide basis. This is why we introduced accumulation budgets for the hazards earthquake and windstorm many years ago. By means of these budgets, the Board of Management stipulates annually the maximum liability to be assumed by individual reinsurance companies of the Munich Re Group for such events per loss accumulation zone. The loss scenarios underlying the accumulation budgets are regularly checked.
In reinsurance, we exclude the interest-guarantee risk in many cases by means of suitable treaty design. Furthermore, as a matter of principle, prudent assumptions regarding the expected interest rate are used when fixing the actuarial interest rate in the calculation of premiums and reserves. In particular, the minimum legal requirements are observed. In both primary insurance and reinsurance, we are permanently refining our asset-liability management to limit the interest-rate risk.
Finally, a further important risk control measure is the cession of a portion of our risks to third parties via external reinsurance or retrocession. All our companies have appropriate intra-Group and external reinsurance cover, or retrocession cover in the case of the reinsurers. The core component of Munich Re’s retrocession is an accumulation excess-of-loss cover, which provides protection against losses from natural catastrophes (earthquake, windstorm, inundation, flood, etc.). The dimensions of this accumulation excess-of-loss cover are based on analyses of our accumulation budget in the parts of the world exposed to natural catastrophes. The cover is placed on the international reinsurance market.
We only choose business partners for our externally placed reinsurance and retrocessions that have been accepted by our Security Committee, which examines the security of potential reinsurers and retrocessionaires on the basis of a range of criteria. The minimum requirement for participating in one of our reinsurance or retrocession treaties is usually a rating of a– or better from one of the two leading international rating agencies for the insurance industry. This approach has proved its worth: even in the case of the World Trade Center loss in 2001, only 0.12% of our retroceded loss was not recoverable.
The market value of our fixed-interest securities as at 31 December 2003 totalled €99.9bn. This represents 57.5% of the market value of the Munich Re Group’s investments and thus makes up the largest portion of our investments available for sale and held to maturity.
The interest-rate risk constitutes a significant risk for fixed-interest investments. Falling interest rates result in increases in the market value of fixed-interest securities, and rising interest rates to reductions in market value. In order to match investments even more closely with the liabilities to be covered, the primary insurers in the Munich Re Group gave preference in 2003 to securities with longer terms; looked at in isolation for the portfolio of fixed-interest securities, this increases the risks of losses in market value.
Credit assessment is of central importance for the management of credit risks relating to fixed-interest securities. The main factor here is the quality of the issuer or the respective issue, as primarily reflected – according to the investment principles of the Munich Re Group – in the gradings of international rating agencies: as at 31 December 2003, 93.6% of our investments in fixed-interest securities had a rating of a or better (according to Standard & Poor’s rating classification). The majority of fixed-interest securities in our portfolio have been issued by governments or banks with excellent ratings or security, e.g. German government bonds, US Treasuries, and mortgage-backed bonds.
Besides addressing the structure of our equity portfolio, we have also taken a close look at the share of equities in our overall portfolio, with the aim of further reducing and flexibilising the proportion of equities held. As at 31 December 2003, on a market-value basis and taking hedging transactions into account, the ratio of equities to total investments amounted to approximately 14.5% (31 December 2002: 16.5%).
The changes in market value shown in the table can only be taken as rough indicators of the actual market value losses that might occur in the future, as they do not consider any counteractive measures.
Change in interest rates Change in market value of investments sensitive to interest rates
Credit risks in the investment portfolio are measured and limited using the credit-value-atrisk approach. The main factors for measuring the credit risk are the investment volume, the term of the investment, the collateralisation, and the default probability of the individual issuers. Our Group-wide system for limiting credit risks, with which we restrict default risks in respect of individual issuers, considers the issuer’s individual rating, its capitalisation as a basis for covering the liability, the quality of the collaterisation, the sector concerned, and our internally defined risk tolerance. Credit derivates are only employed in our investment portfolio for hedging purposes. The notional principal amounts of open positions had a volume of €16m at 31 December 2003, with a fair value of €1m. Regular watch-lists with critical cases are prepared in order to monitor individual issuers. Thus, as in previous years, Munich Re’s investments were only affected to a very slight extent by defaults in connection with accounting scandals.
Operational risks are hazards posed by technical or human failure, by natural impairments of the Group’s operations or by other adverse developments in its external environment which may lead to unexpected losses. These include criminal acts, inadequate controls, organisational deficiencies or events (for example, inadequate reporting due to deficient data quality, data transparency or data security) which result in claims for damages from third parties.
In asset management, insurance and reinsurance business, these risks are identified and limited by decentralised security organisations that liaise closely. We are working constantly on improving these measures and adjusting them to take account of the latest knowledge and state of the art. Our security regulations embrace not only the technical design of hardware and software systems but also functional security structures and organisational measures, including training staff in the proper handling of systems and data. We organise appropriate training programmes for this purpose, as well as issuing directives on information security and data protection which have to be complied with by all staff.
Risks arising from changes in legal parameters as a result of legislation or court decisions may affect the whole Munich Re Group. We counter these risks mainly by monitoring current developments and by actively participating in relevant bodies and associations in order to contribute our views both as a Group and as a representative of the insurance industry.
In December 2002, the EU adopted a directive regarding solvency requirements. Once this directive is implemented in Germany, the Munich Re Group may face more stringent requirements regarding its capitalisation. But on the basis of current knowledge, even such requirements would be fulfilled by the Munich Re Group.
As we have two branches in the United Kingdom – the UK Life Branch and the UK General Branch – we are also subject to supervision by the British Financial Services Authority (fsa). Supervision relates not only to business written by these two branches, but also to Munich Reinsurance Company’s global business activities. Since the fsa uses different criteria to BaFin in evaluating capitalisation, there was a need for clarification between the fsa and Munich Reinsurance Company last year. On the basis of the present state of the talks, we are convinced that we also meet the fsa’s requirements.
In developing new markets, such as those in Asia and Eastern Europe, the Munich Re Group is largely dependent on the prevailing economic, political and regulatory conditions, the accessibility of the respective market segments, and the local sales channels. But even in developed markets, major social or political changes may result in a deterioration in the legal, fiscal or economic conditions, and this may ultimately affect the assets, liabilities, financial position and results of individual companies or the Munich Re Group as a whole.
For this reason, Munich Re’s Strategic Planning Division systematically examines and monitors the economic and political situation of our main markets, and informs the Board of Management without delay about relevant developments so that, if necessary, suitable risk minimisation measures can be taken. Possible scenarios are also discussed and coordinated with meag to enable us to react appropriately on the investment side as well.
The virus infection sars, which manifested itself particularly in East Asian countries, not only influenced the stock markets but also had a concrete effect on our business operations (see page 52). At present we are keeping a very close eye on the development of avian flu and its possible repercussions for the insurance industry.
Of particular significance for the outlook are strategic risks. These result chiefly from management decisions on the further development of the Group and its business units. One of the potential hazards is that opportunities may not be recognised or exploited in time. As part of our risk management, we therefore attach special importance to this aspect, including it in our quarterly risk assessments, for example. Risk managers identify and evaluate the specific strategic risks in their areas using a standardised questionnaire. The central risk controlling unit analyses the completed forms, informs the Board of Management about the results, and proposes suitable measures for risk limitation. Furthermore, we compare the results from the risk assessment process with the contents of our strategic planning tools (e.g. balanced scorecards or swot analysis). In so doing, we ensure that each risk identified as significant is matched by an adequate risk-reducing initiative in the balanced scorecard. It is up to decentralised and central risk controlling to check whether this measure is then implemented in the course of the following year and whether it is effective.
The terrorist attack of 11 September 2001 further sharpened risk perception and revived the debate on how to cover loss or damage caused by terrorism. For the majority of the perils involved, we have either excluded terrorism risks as a whole in our conditions of insurance or have limited the scope of cover and raised prices very substantially for their coverage. This has made the terrorism risk transparent but has not eliminated it. We quite consciously support the newly formed pools and specialist insurers covering terrorism risks in some countries, such as France, Germany and the Netherlands. This could give rise to substantial, but clearly limited claims burdens in the event of attacks.
We will continue to refine our risk management and risk controlling in future and develop even more effective and efficient management instruments in order to identify, assess and control risks even better and more quickly. Particular consideration will be given to the dynamic development of our business environment and the need to react to this flexibly.
V. Other investments 1. Deposits retained on assumed reinsurance (11) 14,480 12,911 1,569 12.2
C. Investments for the benefit of life insurance policyholders who bear the investment risk 1,009 703 306 43.5
E. Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders 958 698 260 37.2
5. Net expenses for claims and benefits (29) 32,487 31,265 1,222 3.9 8. Result before amortisation of goodwill 2,012 11 2,001 >1,000.0 10. Operating result before tax 1,325 –360 1,685 –
12. Minority interests in earnings (16) –34 –74 40 54.1 13. Profit for the year –434 288 –722 –
** After taking into account the capital increase in November 2003.
Profit for the year, including minority interests in earnings –468 214
Change from the acquisition, sale and maturities of other investments –9,677 –1,329
Cash flows for the business year (I + II + III) –823 884
C. Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders – – – –
Thereof: – From insurance transactions with other segments 969 1,020 1,010 987 – From insurance transactions with external third parties 5,907 5,541 16,909 17,897
Thereof: – Income from associated enterprises –35 913 –130 3,241 5. Net expenses for claims and benefits 5,277 4,933 11,308 15,822 8. Result before amortisation of goodwill 439 1,485 2,278 293 12. Minority interests in earnings – – –10 1 * Adjusted owing to first-time application of ias 39 (rev. 2003).
€m €m €m €m €m €m €m €m €m €m * Adjusted owing to first-time application of ias 39 (rev. 2003).
INVESTMENTS* Reinsurers Primary insurers Asset management Total 31.12.2003 Prev. year 31.12.2003 Prev. year 31.12.2003 Prev. year 31.12.2003 Prev. year €m €m €m €m €m €m €m €m
GROSS PREMIUMS WRITTEN* Reinsurers Primary insurers Total 2003 Prev. year 2003 Prev. year 2003 Prev. year €m €m €m €m €m €m
Munich Re’s consolidated financial statements have been prepared in euros (€) in accordance with the standards of the International Accounting Standards Board (iasb) as “exempting” consolidated financial statements in line with Section 292 a of the German Commercial Code. The financial statements comply with the eu directives to which we are subject.
In accordance with ias 32.97/ias 39.104 (rev. 2003), both standards are being applied retrospectively, i.e. the consolidated financial statements for 2003 and the comparative consolidated figures for 2002 are presented as if the new accounting policies of ias 32 and ias 39 (rev. 2003) had always been in use. The resultant cumulative restatements required as a result of the first-time application of ias 39 (rev. 2003) for the business years prior to 1 January 2002 are recognised in equity without impact on the income statement; the restatements needed for the business years 2002 and 2003 are recognised in the respective income statement figures.
The new provisions of ias 39.58 ff. (rev. 2003) on impairment and uncollectibility of financial assets require the following adjustments to previously applied valuation methods: – In contrast to ias 39 (rev. 2000), the revised standard in ias 39.61 (rev. 2003) now contains explicit rules on impairment for equity investments available for sale. These state that impairment of an equity investment exists if there is a significant or prolonged decline in the fair value of the investment below its acquisition cost. This deviates from the impairment rule hitherto applied in Munich Re’s consolidated financial statements, whereby there had to have been a significant and prolonged decline in the fair value of the investment below its acquisition cost.
As a result of the provisions of ias 28.20 (rev. 2000) to apply uniform accounting policies for like transactions and events in the case of shareholder and associated enterprises, appropriate adjustments have been made to the consolidated financial statements of Bayerische Hypo- und Vereinsbank ag for the purposes of Munich Re’s consolidated financial statements, in application of ias 39.58 ff (rev. 2003).
The new provision of ias 32.74 (rev. 2003) also requires additional disclosures in the notes to the financial statements insofar as the book values of financial instruments that are exposed to an interest-rate risk must now also be broken down per year for the period between one and five years.
– The provisions for future policy benefits tend to be higher because, unlike in German Commercial Code accounting, there is no zillmerisation, but capitalisation of the acquisition costs. Besides this, under ias, reserves for terminal bonuses in life insurance are shown as part of the provisions for future policy benefits, whereas under the German Commercial Code the terminal bonus fund is part of the provision for premium refunds. A mitigating effect, however, results from cases in which the provisions for future policy benefits have to be discounted with a higher actuarial interest rate than under the German Commercial Code.
– The provision for outstanding claims is lower under ias, because the actuarial calculations on the basis of partial portfolios generally result in a smaller requirement than the individual valuation of all claims based on the prudence concept, which the German Commercial Code prescribes.
– Claims equalisation provisions as under the German Commercial Code do not constitute liabilities to third parties and are thus not admissible under ias; they therefore have to be reversed.
– In accordance with the revised ias 39 (rev. 2003), impairments losses are recognised for financial instruments with an equity character if there is a significant or prolonged decline in the fair value of the investment below its cost. By contrast, under the German Commercial Code investments which have suffered an impairment in value must be measured at the value to be attributed at the balance sheet date.
The previous-year figures published to date were calculated on the basis of ias 39 (rev. 2000) and ias 32 (rev. 1998). In accordance with ias 32.97/39.104 (rev. 2003), the revised standards must be applied retrospectively, i.e. the figures for the business year 2002 have been restated as if the new accounting policies had always been in use. In accordance with ias 8.53 (rev. 1993), the resultant amounts of the adjustments are given for the business year 2002 and additionally for the business years prior to 2002.
These subsidiaries were not consolidated owing to their overall subordinate importance for the Group’s assets, liabilities, financial position and results. The aggregate annual result of these companies as a proportion of the Group result for the year is insignificant. Insurance companies have been consolidated regardless of their size.
Consolidation principles The balance sheet date of the consolidated companies is generally 31 December. Some of the special funds have other balance sheet dates. These funds are consolidated on the basis of interim accounts as at 31 December.
Germany Other Total Enterprises valued at equity countries 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
We generally consolidate subsidiaries and special funds as soon as the Group holds the majority of the voting shares or has the factual ability to exercise control. In order to determine the equity capital at the time of acquisition, we recognised the assets and liabilities of the subsidiary or special fund at fair value. The equity capital apportionable to the Group is netted against the acquisition costs of the shares (purchase accounting). Any residual amount is capitalised as goodwill and amortised on a straight-line basis.
The profits earned by the subsidiaries or special funds after their first consolidation are included in the Group shareholders’ equity unless they are apportionable to minority interests.
Amounts relating to intra-Group transactions (receivables and liabilities, expenses and income between consolidated companies) are eliminated unless they are determined as being not material. This also applies to gains and losses on intra-Group sales of investments.
The application of the recognition, measurement and disclosure methods follows the principle that a method once chosen should be applied consistently. In accordance with ias 39.104 (rev. 2003), we recognise the effects of changes in accounting policies on earlier periods not included in the consolidated financial statements in the opening balance of revenue reserves and other reserves for the earliest prior period presented. All other adjustment amounts are generally recognised in the income statement.
Other intangible assets mainly comprise purchased and internally generated software, and purchased insurance portfolios. The valuation basis is the original cost less straight-line depreciation. The useful life assumed for software is three to five years and for insurance portfolios up to 15 years.
Investments in associated enterprises are valued by the equity method at the Group’s proportionate share of their net assets. The associated enterprise’s earnings apportionable to the Group are included in the investment result. As a rule, the most recent individual or consolidated financial statements of the associated enterprise are used; exceptional transactions of material importance for a true and fair picture of the associated enterprise’s financial position are taken into account in the same business year. 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, i.e. any premiums or discounts are deducted or added to the acquisition costs according to the effective interest method, with impact on the income statement, until the redemption amount becomes payable. Writedowns for impairments are made in cases where the repayment of a loan can no longer be expected.
With all fixed-interest and non-fixed-interest securities, impairments in value – in contrast to temporary diminutions – are recognised as an expense in the income statement. ias 39.59 (rev. 2003) contains a list of factors providing objective evidence that such investments are impaired in value. In addition, ias 39.61 (rev. 2003) states that for equity investments a significant or prolonged decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. In the case of an impairment, a writedown is made to the fair value at the balance sheet date, i.e. the publicly listed market price if available.
Securities held for trading comprise all fixed-interest and non-fixed-interest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences; in addition, they include all derivative financial instruments that we have not acquired for hedging purposes. Securities held for trading are stated at the fair value at the balance sheet date. If there are no stock market prices available, these values (particularly with derivatives) are based on recognised valuation methods. All unrealised gains or losses from such valuation are included in the investment result.
The share of underwriting provisions for business ceded by us is determined from the gross underwriting provisions in accordance with the terms of the reinsurance agreements; cf. the notes to the corresponding liabilities items. Appropriate allowance is made for credit risks.
This item contains the shares of third parties in the shareholders’ equity of subsidiaries and special funds that are not wholly owned directly or indirectly by the parent company.
Subordinated liabilities are liabilities which, in the event of liquidation or insolvency, are only satisfied after the claims of other creditors. They are valued at amortised cost, i.e. any premiums or discounts are deducted from or added to the acquisition costs according to the effective interest method, with impact on the income statement, until the redemption amount becomes payable.
Provisions for future policy benefits are generally calculated using actuarial methods from the present value of the future benefits payable to policyholders less the present value of the premiums still to be paid by the policyholders; the calculation is based in particular on assumptions relating to mortality, morbidity and interest rate development.
The provision for outstanding claims covers payment obligations arising from insurance and reinsurance contracts where the size of the claim or the date of the payment is still uncertain. Such provisions are posted for claims that have been reported, for claims incurred but not yet reported, and for internal and external claims adjustment expenses. Provisions for outstanding claims are based on estimates; the actual payments may be higher or lower.
Underwriting provisions for life insurance policies where the investment risk is borne by the policyholders
The consolidated companies used the following actuarial assumptions (weighted average values) for calculating their pension obligations: All figures in % 31.12.2003 Prev. year
Actuarial gains or losses from pension obligations and plan assets result from the deviation of actual risk experience from estimated risk experience. They are recognised by means of the corridor method laid down in ias 19. According to this, actuarial gains or losses are recognised in the income statement if they exceed 10% of the present value of the vested benefits at the beginning of the business year.
The liabilities shown under this item – notes and debentures, accounts payable, deposits retained on ceded business and other liabilities – are stated at the settlement value.
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 31.12.2003 Prev. year 2003 Prev. year
Gross amount capitalised at 31.12. previous year 610 1,059 271 1,940 1,509
Carrying amount at 31.12. previous year 312 913 111 1,336 1,103
Carrying amount at 1.1. business year 313 896 111 1,320 1,080
Carrying amount at 31.12. business year 459 831 82 1,372 1,336
Accumulated depreciation at 31.12. business year 388 205 212 805 604
Gross amount capitalised at 31.12. business year 5,398 5,584 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
The figures shown under “purchased insurance portfolios” include year-end amortised carrying amounts of €692m resulting from the acquisition of Bayerische Vita and cna Financial Corporation’s life reinsurance business and from the acquisition of additional shares in the Karlsruher Insurance Group and the ergo Insurance Group.
Depreciation of software is apportioned in the income statement between the investment result, expenses for claims and benefits, and operating expenses. Amortisation of purchased insurance portfolios is shown under “other expenses”.
Real estate pledged as security and other restrictions on title amount to €1,152m (505m). The expenses for investments under construction total €68m (184m) at the balance sheet date. Commitments to acquire real estate amount to €221m (288m).
The fair value of real estate at the balance sheet date totals €11,630m (11,468m). The fair value is generally the capitalised earnings value; new buildings and freshly purchased real estate are valued at cost.
An overview of our most important shareholdings can be found starting on page 208.
The fair values of the loans at the balance sheet date amounted to €15,876m. The “other loans” include loans to affiliated enterprises totalling €41m (34m) and loans to associated enterprises totalling €688m (531m).
Over three years and up to four years 94 122 99 130
All figures in €m 31.12.2003 Prev. year 31.12.2003 Prev. year 31.12.2003 Prev. years (adjusted)* (adjusted)*
The rating categories are based on the gradings of the leading international rating agencies.
– Non-fixed-interest securities 1,287 2,293 * Adjusted owing to first-time application of ias 39 (rev. 2003).
The first-time application of ias 39 (rev. 2003) has no effect on the valuation of fixed-interest securities, since the revised provisions on impairments and write-ups only concern equity investments available for sale.
By contrast, the application of the revised standards to non-fixed-interest securities available for sale leads to a reduction in net unrealised gains of €3,016m for business years prior to 1 January 2002, to an increase of €2,203m in the business year 2002, and to an increase of €1,431m in the business year 2003. The carrying amounts do not change with the application of the new accounting policies of ias 39 (rev. 2003), since the fair values determined at the balance sheet date continue to be used. Accordingly, there are adjustments in the amortised costs corresponding to the amount for unrealised gains and losses.
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 2003 totalled €113m (506m), i.e. less than 1% (1%) of the balance sheet total. The fair value of items used for hedging purposes amounted to €16m and the fair value of pure trading items to €97m.
– Forwards –2 – –– – – – – – –2
– Futures –6 – – – – – – – –6
The corresponding notional principal amounts, which show the scope of the underlying assets, had a volume of €7,457m. The following table shows the notional principal amounts, broken down by product type and period to maturity: The products used for hedging can be divided into cash flow hedges and fair value hedges.
Cash flow hedges are used to reduce the risk of fluctuations in future payments, e.g. those expected from planned transactions. The use of cash flow hedges within the Group is mainly concentrated on the management of interest-rate and currency risks. The fair value of these derivatives at the balance sheet date amounted to €14m.
We have used interest rates of between 3% and 8% for calculating the deferred acquisition costs, in the same way as in the previous year.
Carrying amount at 31.12. previous year 1,707 1,134 4,203 407 7,451 7,286
Carrying amount at 31.12. business year 1,651 1,083 4,849 414 7,997 7,451 * After elimination of intra-Group transactions across segments.
These mainly comprise property, plant and equipment and inventories totalling €331m (376m) and deferred items of €409m (170m).
The total share capital as at 31 December 2003 is thus divided into 229,580,233 registered shares, each fully paid up and entitled to one vote.
On 31 December 2003 a total of 479,209 Munich Re shares with a calculated nominal value of €1,226,775.04 were held by Group companies. This represents 0.21% of the share capital.
The 1,559 shares remaining from Munich Reinsurance Company’s employee share programme set up in 2002 stayed in the portfolio in the business year 2003. In addition, one subsidiary holds 286,592 shares to safeguard the stock appreciation rights granted to the Board of Management and top Munich Re executives.
The acquisition value of all Munich Re shares in the possession of Group companies at the end of the business year totalled €106,794,589.68.
The Annual General Meeting on 11 June 2003 cancelled the remaining Contingent Capital Increase 1993 for the issue of warrants, amounting to €6,945.28 and the other contingent capital created for this purpose (Contingent Capital Increase 1998), amounting to €15,360,000.00, and replaced these with a new contingent capital of €35m (Contingent Capital Increase 2003 I).
The capital authorised for capital increases in thus as follows: All figures in €m 31.12.2003
To safeguard subscription rights from exercise of warrants (Contingent Capital Increase 2003 I) 35
Furthermore, the Annual General Meeting on 11 June 2003 cancelled the authorisation for a contingent increase in the share capital of €30m to safeguard conversion or subscription rights resulting from convertible bonds or bonds with warrants and replaced this with a new contingent capital of €100m (Contingent Capital Increase 2003 II).
– Associated enterprises – – – – – – – – –
Unrealised gains and losses on other securities – – –539 – –3,103 – – – –3,642
Profit for the year – – – – – – – 1,081 1,081
Acquisition of own shares – – – – – – – –221 –221
– Associated enterprises – – – – 794 – – –794 –
Restatement of currency translation reserve – – –337 – – 337 – – –
Translation differences – – – – – –736 – – –736
Change in the consolidated group – – –58 – –294 – – – –352
Unrealised gains and losses on other investments – – – – 4,052 – – – 4,052
Profit for the year – – – – – – – –887 –887
The “other reserves” include €48m (1m) unrealised gains and losses resulting from valuation of associated enterprises at equity and €4,463m (1,259m) unrealised gains and losses on investments in non-consolidated affiliated enterprises and other securities. The unrealised gains and losses apportionable to non-consolidated affiliated enterprises and other securities are distributed between the different items as follows:
– Consolidation effects –6 –16 * Adjusted owing to first-time application of ias 39 (rev. 2003).
– Property-casualty 121 91 * After elimination of intra-Group transactions across segments.
– Property-casualty 1,083 1,037 * After elimination of intra-Group transactions across segments.
– Property-casualty 4,027 4,006 * After elimination of intra-Group transactions across segments.
The table on the following page shows the provisions for outstanding claims in propertycasualty business for the primary insurers and reinsurers for the last ten years. This covers virtually 100% of the total claims provisions of the Group. What the table considers is not the run-off of the provisions for individual accident years, but the run-off of the provision posted at each balance sheet date, which contains the provisions for the respective current accident year and for all previous accident years. The figures for the years 1997 and earlier were determined on the basis of the relevant national accounting regulations; the figures for the years 1998 to the present have been based on International Accounting Standards.
Net provision for outstanding claims 15,335 15,780 16,855 18,031 19,615 19,485 23,125 24,230 29,556 32,992 31,739
Thereof: Net run-off result excluding 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
We have made timely provision for our share of these losses, continually adjusting our reserves in line with the latest knowledge of the loss potential. The reduction in the provision for environmental liability is based on the adjustment of our exposures as a consequence of commutation negotiations in 2003.
The net provision for premium refunds is distributed between the segments of the Group as follows: All figures in €m 31.12.2003 Prev. year
– Property-casualty 2 45 in €m Gross Net Gross Net Gross Net * The previous years’ figures have been adjusted to take account of currency translation differences.
The provision for premium refunds showed the following development: Prev. year All figures in €m 31.12.2003 (adjusted)*
a) Amounts allocated on the basis of national regulations (gross) Status at 1.1. business year 3,798 5,241
Status at 31.12. business year 3,004 3,798 b) Provision for deferred premium refunds (gross) Status at 1.1. business year 3,290 8,577
Change resulting from unrealised gains and losses on investments –797 –2,863
Capital transfer of Munich Reinsurance Company to cta model –334 –
The provision for defined benefit plans changed as follows in the business year: Defined benefit plans
Tax provisions comprise the provisions for current income tax and other taxes of the individual companies, based on their respective national taxation. Deferred tax obligations are shown under deferred tax liabilities.
The miscellaneous other provisions comprise a large number of different items, including salary obligations (€37.6m), competitions for sales staff (€19.8m), other remuneration for desk and field staff (€12.8m), severance pay (€19.9m) and social insurance against occupational accidents (€11.5m).
American Re Corporation, Princeton 7.45%, US$ 500m, Senior Notes 1996/2026 396 475 ergo International ag, Düsseldorf 2.25%, €345m, Bonds Exchangeable into e.on ag Shares 2001/2006 0.75%, €345m, Bonds Exchangeable into Aventis ag Shares 2001/2006 647 609
Hestia Investment Organiczona, Sopot 7.3%, PLN 42.1m, Zero Coupon Bonds 2002/2003 – 10
The bonds issued by Hestia Investment were redeemed in November 2003.
The remaining terms of liabilities shown under this item are as follows:
Expenses for the management of investments, other expenses 544 500 * Adjusted owing to first-time application of ias 39 (rev. 2003).
Change in unearned premiums – Gross amount –195 –10 –373 –682 –2 – –45 –76 –615 –768
– Ceded share 3 –20 –6 –650 –1 28 –63 –31 –67 –673
– Net amount –192 –30 –379 –1,332 –3 28 –108 –107 –682 –1,441
Furthermore, in ias financial statements there are no “premiums from the provision for premium refunds”. Instead, there is a reallocation of the premiums used, without impact on the income statement, from the provision for premium refunds to the provision for future policy benefits.
Management expenses, interest charges and other ** After elimination of intra-Group transactions across segments.
The decrease in the result of investments in associated enterprises is due mainly to the fact that the previous year’s figure includes the gain of €4.7bn realised on the sale of shares in companies of the Allianz Group.
Owing to the first-time application of ias 39 (rev. 2003), the result of investments in associated enterprises had to be reduced by €1,484m for the business year 2002 and by €77m for the business year 2003. For the same reason, the result of non-fixed-interest other securities available for sale had to be increased by €814m for the business year 2002 and by €1,488m for the business year 2003. The sum of these two effects led to a reduction of €670m in the investment result for 2002 and to an improvement of €1,411m in the investment result for 2003.
Losses on the disposal of * After elimination of intra-Group transactions across segments.
In addition to foreign currency exchange gains of €440m (453m), the other income mainly includes income from services rendered of €306m (358m), interest and similar income of €145m (131m), and income from the reversal/reduction of miscellaneous provisions and adjustments of values for receivables.
– Change in provisions for outstanding claims 2,131 257 1,635 4,882 458 230 128 158 4,352 5,527
The earlier application of the revised ias 39 (rev. 2003) as at 31 December 2003 meant that the expenses for premium refunds in the primary insurance segment life and health had to be adjusted as follows: Adjust- Adjust- Adjust- Adjust- Adjust- Adjustment ment ment ment ment ment amount amount amount amount amount amount 31.12.2003 31.12.2003 31.12.2003 Prev. year Prev. year Prev. year
All figures in €m* 2003 Prev. year 2003 Prev. year 2003 Prev. year 2003 Prev. year 2003 Prev. year
This item shows the corporation tax and municipal trade earnings tax paid by the German companies (including solidarity surcharge), the comparable taxes on earnings paid by the foreign companies in the Group, and other tax. In accordance with ias 12, the determination of the tax on earnings includes the calculation of deferred taxes.
Tax on earnings is made up as follows: (30) Net operating expenses
The first-time application of ias 39 (rev. 2003) leads to no adjustment of deferred taxes in the business year 2002; in the business year 2003 it leads to adjustments of deferred taxes amounting to €23m for Germany.
The current and deferred tax on earnings mainly result from the following: All figures in €m 2003 Prev. year
The current tax is derived from the tax results of the business year, to which the local tax rates of the respective subsidiaries are applied. Deferred tax is also calculated using the respective local tax rates. Sometimes for simplicity’s sake we use uniform tax rates for individual circumstances or subsidiaries. Changes in tax rates and tax legislation that have already been adopted by the government at the balance sheet date are generally taken into account. “Other” refers to both current and deferred tax.
Tax effect of Tax rate differences between Group companies –30 42
Tax on earnings shown 1,752 –605 * Adjusted owing to first-time application of ias 39 (rev. 2003).
The effective tax burden is the ratio between the tax on earnings shown and the result before earnings tax (but after “other tax”). In the previous year there was tax relief of 155%. In the current business year the ratio shows a tax burden of 136%.
The item “municipal trade earnings tax” includes the differences between the trade-tax rate applied by the respective Group companies and the Group mixed trade- tax rate.
No deferred taxes were calculated on retained earnings of affiliated enterprises, as there is no intention of distributing these earnings in the foreseeable future. Calculation of these disregarded tax liabilities would have involved a disproportionate amount of work.
The Munich Re Group assumes and cedes reinsurance and retrocessions from and to the Allianz Group under a large number of reinsurance and retrocession agreements. The following table shows Munich Re’s premiums assumed from and ceded to Allianz as at 31 December: The reinsurance agreements between Munich Re and Allianz are concluded at market conditions.
By contrast, HypoVereinsbank ag, one of the largest German private banks, continues to be an associated and related party of Munich Reinsurance Company. As at 31 December 2003, the Munich Re Group held 25.7% of the bank’s share capital, representing 26.3% of the voting rights. For its part, the HypoVereinsbank Group held around 13.2% of Munich Reinsurance Company’s voting capital.
Dr. Lothar Meyer, Chairman of ergo’s Board of Management, has been a member of HypoVereinsbank ag’s Supervisory Board since 23 May 2002. Dr. Hans-Jürgen Schinzler, Chairman of Munich Re’s Board of Management and since 2 January 2004 member of its Supervisory Board, has been a member of HypoVereinsbank’s Supervisory Board since 3 March 2003. Dr. Albrecht Schmidt, Chairman of HypoVereinsbank ag’s Supervisory Board since 7 January 2003, was a member of Munich Re’s Supervisory Board in the business year 2003. Members of Munich Re and HypoVereinsbank hold seats on the boards of further companies in each other’s Groups in a few instances.
On 2 October 2003, the Munich Re Group sold its 25.7% stake in Hypo Real Estate Holding ag, which it had obtained as a result of the spin-off of HypoVereinsbank ag’s commercial real estate financing business. The sale of these shares resulted in a loss on disposal in the fourth quarter 2003; at the same time, however, it reduced the hidden negative valuation differences on our remaining interest in HypoVereinsbank ag.
Further details on the changes arising from the announcements of HypoVereinsbank ag on 26 February 2004 can be found on page 206.
As a result of Munich Re’s capital increase in the business year 2003, the initial share prices for the stock appreciation rights issued and the number of stock appreciation rights already granted were adjusted in accordance with the conditions.
Number of rights on 31 December 2002 78,668 80,261 109,301 132,466 –
As at 1 July 2002, the ergo Insurance Group and some of its subsidiaries, as well as Europäische Reiseversicherung ag, Karlsruher Lebensversicherung Aktiengesellschaft and Karlsruher Versicherung Aktiengesellschaft, first launched long-term incentive plans. These plans, also with a term of seven years, provide for Board of Management members and in individual cases also top executives to be granted a defined number of stock appreciation rights in respect of Munich Re shares. The design of the plans is identical to that of Munich Re’s long-term incentive plans.
The stock appreciation rights may only be exercised after a two-year vesting period and then only if the share price is at least 20% higher than the initial price. In addition, Munich Re shares must have outperformed the dax 30 (Plan 1999) or the euro stoxx 50 (from Plan 2000) twice at the end of a three-month period during the term of the plan. The gross amount that may be obtained from the exercising of the stock appreciation rights is limited to an increase of 150% of the initial share price.
In the year under review, provisions of €1.4m had to be posted for stock appreciation rights.
The employee share-ownership programmes of Munich Re and the ergo Insurance Group were not continued in 2003. The remaining portfolio of own shares from the previous years’ programmes was not sold.
Remuneration of Supervisory Board members in the business year 2003 as per
Name Fixed Dividend- Remuner- Total remuner- related ation for ation remuner- committee ation2) work
All other members of the Supervisory Board (Appel, Burgmayr, Ficker, Köppen, Prof. Dr. Markl, Mayrhuber, Prof. Van Miert, Dr. v. Pierer, Dr. Sommer, Stögbauer, Võ, Wegmann) each received total remuneration of €52,500.00 (fixed remuneration of €25,000.00 and dividend-related remuneration2) of €27,500.00).
1) Plus turnover tax in each case, in accordance with Article 15 para. 5 of the Articles of Association. 2) Payment after adoption of the dividend proposed by the Supervisory Board and Board of Management (€1.25) at the 2004 Annual General Meeting. 3) After capping in accordance with Article 15 para. 4 of the Articles of Association.
In addition, at annual intervals starting on 1 July 1999, Munich has set up a series of long-term incentive plans that 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. Details are provided under Note 36. Up to now it has only been possible to exercise stock appreciation rights under the plan set up as at 1 July 1999.
In accordance with the recommendations of the German Code of Corporate Governance, the total compensation of the Board members thus comprises fixed and variable components, all of which are appropriate in themselves and as a whole. Criteria for the appropriateness of compensation are in particular the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole and the financial situation, performance and future prospects of Munich Re, taking into account the relevant benchmarks for Board remuneration.
(40) Share trading and shares held by members of the Board of Management and the
As the German life insurers in our Group participate in Protektor Lebensversicherungs-ag, they are committed to assuming its payment obligations to the extent of their market share totalling 12.9%.
The remaining periods for leasing obligations from rental leasing arrangements are as follows: (41) Number of staff
As at 20 February, the outstanding 50% of the Allianz Group’s miles bond (Market IndexLinked Equity Securities) issued via its Dutch subsidiary on 12 January 2001 was redeemed in Munich Re shares. This reduced the Allianz Group’s stake in Munich Reinsurance Company ’s voting capital by 3.1 percentage points to 9.4%.
The adjustment amounts resulting from the first-time application of ias 39 (rev. 2003) for the business years 2002 and 2003 are summarised in the following table: Calculation of diluted earnings per share is not necessary.
Hamburg-Mannheimer n.v./s. a., Brussels 92.74% 10,577 –623 dkv belgium s.a., Brussels 92.74% 17,864 –4,834 dkv Deutsche Krankenversicherung Aktiengesellschaft, Berlin/Cologne *** 92.74% 529,639 0 dkv Luxembourg s. a., Luxembourg 69.55% 12,960 889 dkv Seguros y Reaseguros, Sociedad Anónima Española, Saragossa 92.74% 45,497 –15,795 d.a. s. Deutscher Automobil Schutz Allgemeine Rechtsschutz-Versicherungs-Aktiengesellschaft, Munich 92.74% 208,647 550 d.a. s. Deutscher Automobil Schutz Versicherungs-Aktiengesellschaft, Munich 92.74% 38,783 –3 das Legal Expenses Insurance Company Limited, Bristol 92.74% 53,324 5,702 d.a. s. Nederlandse Rechtsbijstand Verzekeringmaatschappij n.v., Amsterdam 49.36% 18,969 3,567 d.a. s. Österreichische Allgemeine Rechtsschutz-Versicherungs-Aktiengesellschaft, Vienna 92.72% 23,265 2,131
Neckermann Lebensversicherung ag, Fürth 38.25% 8,745 –1,600 ergo International Aktiengesellschaft, Düsseldorf 92.74% 853,676 –542,101 ergo Kindlustuse as, Tallinn 92.15% 9,107 887 ergo Lietuva draudimo uab, Vilnius 92.73% 8,827 87 ergo Latvija Versicherung ag, Riga 91.43% 5,567 –482
Nieuwe Hollandse Lloyd Schadeverzekeringmaatschappij n.v., Woerden 92.74% 21,065 –2,181 stu ergo hestia s.a., Sopot 92.73% 155,667 6,874 stunz ergo hestia s.a., Sopot 92.74% 10,599 –2,701 europäische Reiseversicherung Aktiengesellschaft, Munich 100.00% 82,148 –2,292
Bloemers Holding b. v., Rotterdam 22.73% 8,938 –4,484 d.a. s. Difesa Automobilistica Sinistri, s. p. a. di Assicurazione, Verona 46.36% 6,507 1,395
Storebrand Helseforsikring as, Oslo 45.97% 5,751 -2,108 union versicherungs-aktiengesellschaft, Vienna 41.73% 46,171 6,042 vereinsbank victoria Bauspar Aktiengesellschaft, Munich 27.82% 67,718 1,207 victoria-volksbanken Pensionskassen Aktiengesellschaft, Vienna 38.46% 7,640 –27
Bayerische Hypo- und Vereinsbank ag, Munich 25.67% 14,230,000 –858,000 fsb FondsServiceBank GmbH, Unterföhring 48.55% 7,180 0
Jenoptik ag, Jena**** 9.98% 430,604 40,275 man Aktiengesellschaft, Munich 7.61% 2,691,000 147,000
**** The amounts are taken from the individual companies’ financial statements.
The following is a translation of the auditor’s opinion in respect of the original German consolidated financial statements and Group management report: We have audited the consolidated financial statements, consisting of the balance sheet, the income statement and the statements of changes in shareholders’ equity and cash flows as well as the notes to the financial statements, prepared by the Münchener Rückversicherungs -Gesellschaft Aktiengesellschaft in München, Munich, for the business year from 1 January 2003 to 31 December 2003. The preparation and the content of the consolidated financial statements in accordance with the International Financial Reporting Standards (ifrs) are the responsibility of the Company’s Board of Management. Our responsibility is to express an opinion on the financial statements based on our audit.
Prof. Dr. rer. nat. Henning Kagermann DaimlerChrysler Services ag – Deutsche Bank ag
Prof. Dr. rer. nat. Hubert Markl Bayerische Motoren Werke ag Aventis s.a., Schiltigheim Royal Dutch Petroleum Company/Shell,
Wolfgang Mayrhuber Eurowings Luftverkehrs ag Heico Corporation, Miami Thomas Cook ag lsg Lufthansa Service Holding ag* Lufthansa Cargo ag* Lufthansa CityLine GmbH* (Chairman) Lufthansa Technik ag*
Dr. Ing. e. h. Dipl.-Ing. Bernd Pischetsrieder Dresdner Bank ag Tetra Laval Group, Pully metro ag
Dr. jur. Hans-Jürgen Schinzler Bayerische Hypo- und Vereinsbank ag Aventis s.a., Schiltigheim (from 2 January 2004) Deutsche Telekom ag metro ag
Dr. jur. Dr. h. c. Albrecht Schmidt Bayerische Hypo- und Vereinsbank ag Thyssen’sche Handelsgesellschaft m. b. H. (Chairman)
(in the case of members who have left the Supervisory Board, the information shows the status at the date of their departure).
Dr. jur. Hans-Jürgen Schinzler Bayerische Hypo- und Vereinsbank ag Aventis s. a., Schiltigheim Chairman (until 31 December 2003) Deutsche Telekom ag ergo Versicherungsgruppe ag (Chairman) metro ag
Dr. jur. Nikolaus von Bomhard ergo Versicherungsgruppe ag (Chairman) – Chairman (from 1 January 2004)
BOARD OF MANAGEMENT SEATS HELD on supervisory MEMBERSHIP of comparable boards of other German bodies of German and foreign companies business enterprises 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
Dr. phil. Detlef Schneidawind dkv Deutsche Krankenversicherung ag Munich American Reassurance Company, Hamburg-Mannheimer Sachversicherungs-ag Atlanta* Hamburg-Mannheimer Versicherungs-ag Karlsruher Lebensversicherung ag (Chairman) Mecklenburgische Kranken Versicherungs-ag Mecklenburgische Leben Versicherungs-ag
Karl Wittmann – Jordan Ins. Co. p.l.c., Amman Saudi National Insurance Company e. c.,
The situation where a significant number of risks insured or reinsured with the same company may be affected simultaneously by a loss event.
In the consolidated financial statements of Munich Reinsurance Company (parent company) all companies are deemed affiliated enterprises in which Munich Reinsurance Company holds the majority of the voting rights either directly or indirectly (subsidiary companies).
The distribution of investments between various asset classes, e.g. equities, participating interests, fixed-interest, real estate and money market. The investments are subsequently distributed between various regions and currencies as appropriate. A distinction is generally made between strategic (medium- to long-term) and tactical (shortterm ) allocation.
A captive is an insurance company established as a subsidiary of one or more industrial/trading companies or groups mainly for purpose of insuring the risks of these companies and their affiliates.
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 and cash flows from financing activities.
Ratio, in per cent, of the sum of net claims expenses plus net operating expenses to net earned premiums. The sum of the loss ratio and the expense ratio.
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.
Deferred taxes derive from temporary differences between accounting on the basis of International Accounting Standards and national tax law. If in the consolidated financial statements asset items are valued lower, or liabilities higher, than in the tax balance sheet of the Group company concerned, the resulting future tax relief must be recognised as a deferred tax asset. Deferred tax assets are also posted for tax loss carry-forwards. If the accounting differences between the consolidated financial statements and tax balance sheet will lead to future tax burdens, these must be recognised as deferred tax liabilities. Deferred tax assets are reversed if a realisation of the corresponding receivable is not probable.
Deposits retained on assumed reinsurance are claims which reinsurers have on their cedants for cash deposits that have been retained by the cedants as a security to cover future reinsurance claims. The cedants show the retained funds as deposits withheld on ceded business.
The concept of embedded value is used in valuing life and health insurance business. Embedded value mainly comprises the present value of earnings calculated according to actuarial principles less the value of equity capital, including valuation reserves, and less capital commitment costs.
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 measurable extent of a risk or portfolio of risks. Basis for calculating premiums in reinsurance.
Simplified capital model based on applying a series of “factors” (or capital charges) to volumes such as premiums, reserves or asset values. The model provides only a crude proxy for the risk-based capital requirements.
Forms of reinsurance in which the transfer of underwriting risk from the insurer to the reinsurer is significantly restricted, being replaced by financing mechanisms. In view of the accounting regulations in many markets, it is no longer a customary form of reinsurance. � Finite risk reinsurance
With this method, only half of the dividend income received by a shareholder (disregarding prior corporation tax charged to the distributing company) forms part of the shareholder’s taxable income. This also applies to taxable income from the sale of capital shares.
ias 32/39 Accounting standards on financial instruments published by the � International Accounting Standards Board (iasb). ias 32 governs disclosure whilst ias 39 is concerned with recognition and measurement of financial instruments. Both standards were revised by the iasb in December 2003 and are already being applied by Munich Re.
An international body of 14 accounting experts responsible for issuing � ias/ifrs. The iasb’s objective is to achieve uniformity in the accounting principles that are used by businesses and other organisations for financial reporting around the world.
This mainly involves investments for policyholders under � unit-linked life insurances. It also includes investments under index-linked life insurance policies whose performance depends on share or currency indices. Obligations arising from this type of contract are mainly shown under the balance sheet item “underwriting provisions for life insurance policies where the investment risk is borne by the policyholders”.
The publicly listed market price obtainable for an asset in an active market (especially stock market price).
That part of the shareholders’ equity and earnings of subsidiaries that is apportionable to shareholders outside the Group.
Commission, personnel costs and general expenses for the acquisition and ongoing administration of insurance contracts, less any commission reimbursed by reinsurers, including profit commission, plus expenses from amortisation of � pvfp.
Here the reinsurer assumes payment of the primary insurer ’s losses above a defined amount. The calculation of the reinsurance premium is based on claims experience with the type of business concerned.
Although obligatory reinsurance agreements contain agreed periods of notice, they are generally concluded for an unlimited duration. These treaties between insurers and reinsurers may therefore run for long periods. (cf. � facultative reinsurance).
Pre-tax operating profit/loss on the enterprise’s ordinary activities, before minority interests in earnings and any extraordinary income or expenses.
Derivative financial instruments where the holder is entitled – but not obliged – to buy (a call option) or sell (a put option) the underlying asset at a predetermined price within a certain period. The writer of the option is obliged to transfer or buy the asset and receives a premium for granting the option to the purchaser.
Derivative financial instruments which are not standardised and are traded not on an exchange but directly between two counterparties via over-the-counter (otc) transactions.
The amount that has to be paid for the insurance cover provided by an insurer. It may be paid as a regular or single premium. In the case of products that are largely of an investment nature (e.g. financing treaties and unitlinked life insurance) it only includes – under ias – the amount serving to cover the risk and the costs. In ias financial statements there are no “premiums from the provision for premium refunds” either. 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.
Umbrella term for all insurance business that is not life or health insurance, e.g. liability, motor and fire insurance.
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.
Share registered in the owner’s name. Registered shares are entered in the company’s share register with the shareholder ’s personal data and the number of shares held.
Risk capital is the amount of capital hypothetically assigned for the conducting of insurance of reinsurance business 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.
Ongoing monitoring and control of risks and measures, including methodological development and risk analysis/ reporting, by a neutral, independent unit that also proposes and initiates additional measures.
Ongoing, systematic and continual identification, analysis, evaluation and control of potential risks that may jeopardise the assets, liabilities, financial position and results of a company in the medium- to long-term. The aim is to safeguard the existence of the company and its objectives against disruptive influences by means of suitable measures, and to increase corporate value.
Ability (and willingness) of a reinsurer to meet its financial obligations from reinsurance agreements in full and at all times. Security depends on such factors as earnings capacity, quality of investments, capitalisation and liquidity.
In the case of structured products, a � derivative financial instrument (e.g. an � option) is combined with a nonderivative instrument (e.g. a bond). Structure products are also referred to as hybrid products.
Member of an insurance or reinsurance company that acts on behalf of his or her employer to negotiate, accept or reject the terms of a (re)insurance contract.
Balance of income and expenses apportionable to the (re)insurance business and shown in the technical income statement.
Every shareholder has a legal right to vote at the Annual General Meeting. The number of votes that a shareholder has depends on the number of shares with voting rights held. Shareholders can arrange for their voting rights to be exercised by a third party, e.g. a bank or a shareholders ’ association (proxy).
Geo Risks Research 48, 110 gloria 139 Great Lakes Reinsurance (UK) plc 37
Liability insurance 101 Life and Health 39, 98 * Inside cover mira 49 Münchener Rück Italia (mri) 37, 103 Münchner Tor 139 Munich American Reassurance Company 37, 98 Munich Re Asia Capital Management 126 Munich Re Capital Management 126 Munich Reinsurance Company of Africa 37, 78, 106 Munich Reinsurance Company of Australasia 37, 59, 105 Munich Reinsurance Company of Canada 37, 40, 108 Munich Reinsurance Company of Canada Branch, Life 99 Munich-American RiskPartners (marp) 40, 95, 111
E-mail: info@ergo.de www.ergo.de victoria Lebensversicherung ag victoria Versicherung ag victoria Pensionskasse ag Victoriaplatz 1 und 2 40198 Düsseldorf
E-mail: PSC@hamburg-mannheimer.de www.hamburg-mannheimer.de dkv Deutsche Krankenversicherung ag Aachener Strasse 300 50594 Köln
Profit for the year –434 288 250 1,750 1,133 * Adjusted owing to first-time application of ias 39 (rev. 2003).
** Adjusted owing to first-time application of ias 39 (rev. 2003).
Picture credits ap Photo/Vincent Yu, p. 2 Caro/Jens Gehring, p. 2 dkv/David Brandt, Cologne, p. 78 e.on ag/Albrecht Fuchs, Düsseldorf, p. 64 Gabor Geissler, Munich, p. 2 Karsten de Riese, Bairawies, title page, front outside cover flap, pp. 4–6, 10–13, 20–23, 30–34, 44–47, 60–63, 82–85, back title page Picture-Alliance/dpa, p. 3 left Thomas Mayfried, Munich, p. 3 right