How do you see the state of aviation one year on from 11th September?
How can Munich Re’s clients benefit from the Centre of Competence for Life Sciences?
How do insurers perform the double act of taking on risks and getting a return?
Has Munich Re’s share price always been near its fair value?
Asset management: MEAG, established in 1999, offers its investment products and its services to institutional investors – primarily other insurance companies – and to private clients. We are developing MEAG into one of the top asset management companies.
TThhee eeaarrtthh ttrreemmbblleess.. An earthquake of magnitude 7.7 triggers thousands of landslides in El Salvador, burying hundreds of people.
Munich Re Group Report for the 122nd year of business 1st January 2001 to 31st December 2001
For 2002 we have terminated a substantial volume of loss-producing reinsurance treaties, which underscores our determination to carry on working for a return to appropriate prices in reinsurance. We have not reached our goal yet. In the treaty renewals for 2003 we need further adjustments in prices and conditions to reflect both the actual risk situation and the financial costs we have to reckon with in future.
We continue to see the focus of our primary insurance operations as being in personal lines business. In this sector particularly, we aim to go on increasing the share of ERGO’s premium income from foreign business, which rose to 19% in 2001. Of course, this does not rule out our seizing opportunities in Germany to expand and augment our business as well. Thus in March this year we concluded a strategic partnership between ERGO and KarstadtQuelle AG, which opens up further very promising avenues for us in primary insurance and other financial services. As part of this partnership, ERGO acquired Quelle Versicherungen Holding, which is the third-largest German direct insurer. This gives us an additional distribution channel: the direct selling of insurance products and financial services.
We are adhering to our objective of growth in all fields of our business, coupled with sustained optimization of profitability. Despite the setbacks we suffered in 2001, we are convinced that we are on the right track. Insurance and reinsurance are growth markets, and there is no sign of an end to the growth: risks are continuing to increase worldwide, and with them the need for cover and security.
Europe 1 together with Christian Kluge Europe 2 and Latin America together with Dr. Nikolaus von Bomhard
At four meetings in the business year 2001, the Supervisory Board obtained detailed information from the Board of Management on the situation in the most important insurance and reinsurance markets, the development of business, and the position of the company and its main affiliates. The Board of Management’s reports on business experience, future planning, questions of risk management and significant individual measures were all discussed intensively. Between the meetings, the Chairman of the Supervisory Board remained in close contact with the Chairman of the Board of Management and obtained ongoing information on all important business transactions.
The members of the Supervisory Board were also notified without delay in between the meetings about all transactions that were of fundamental significance for the further development of the Group, in particular – the restructuring of Munich Re’s shareholdings in the insurance and banking sectors, decided on in the first half of the year; – the combined public purchase and exchange offer to ERGO shareholders; – the cooperation between the HVB Group and the Munich Re Group.
The Standing Committee met four times in 2001. Its work included matters for which the Supervisory Board’s approval was required under the internal rules of procedure. The Board of Management Committee also met three times in order to deal with personnel matters involving members of the Board of Management. No meeting of the Conference Committee was required.
At the balance sheet meeting of the Supervisory Board, we approved and adopted the annual financial statements drawn up by the Board of Management. We agree to the Board of Management’s proposal for the appropriation of the balance sheet profit, which provides for an unchanged dividend of €1.25 per share.
There has also been a change on the Supervisory Board. One of the shareholders ’ representatives, Dr. Ferdinand Piëch, left the Board on 16th April 2002. As his successor with effect from 17th April 2002, the Registry Court has appointed Dr. Bernd Pischetsrieder; this appointment is scheduled to be ratified by the AGM on 17th July. We thank Dr. Piëch for the valuable contribution he made during his time as member of our Supervisory Board.
The great dedication shown by the members of the Board of Management and the staff of the individual Group companies was again a significant factor in the Munich Re Group’s performance in the year under review. The Supervisory Board wishes to thank them for their hard work and commitment on behalf of the company.
Dr. techn. h.c. Dipl.-Ing. ETH Ferdinand Piëch (until 16th April 2002)
Dr. jur. Dr.-Ing. E. h. Heinrich von Pierer President and Chief Executive Officer of Siemens AG
For seats held on other supervisory boards and comparable bodies see page 165 f.
HAS MUNICH RE’S SHARE PRICE ALWAYS BEEN NEAR ITS FAIR VALUE?
What we needed to do was convince analysts and investors that even such a mega-catastrophe could not reduce Munich
Re’s value by anything like that amount. On 12th September, at 15.00 hrs, we announced our initial estimate of Munich Re’s total claims burden, and this brought the turnaround. We were the first to quantify the losses and thus helped to provide a yardstick for an appropriate assessment of the event on the market. The negative speculation was gradually replaced by a reverse trend towards fair value. Despite this, our Investor
Business headlines in the past year were largely dominated by profit warnings. Blue chips experienced some substantial falls in share prices. The New Market was particularly badly affected, with the NEMAX 50 suffering an erosion of around 60%. Shares of many media and IT firms are now only penny stocks.
In the fourth quarter, share prices recovered and largely made up for what they had lost in the September crash. The autumn rally brought some stocks a plus of up to 50%. The DAX closed the year at 5,160 points, nearly 20% lower than at year-end 2000.
The performance of Munich Re shares largely matched the development of the most important share price indices in 2001. Our shares began the new year at €379.00.
Munich Re shares German share price index (DAX) Morgan-Stanley insurance index (in €) Status: 7th May 2002
The atrocity of 11th September triggered the absolute low point in the performance of our shares in 2001. However, our policy of intensive communication with the financial markets in the immediate aftermath contributed significantly to stabilizing the market situation. The transparency, speed and credibility of the information we provided was rewarded, and succeeded in countering negative speculation.
In the days that followed, the situation gradually returned to normal, and from 21st September onwards our share price outperformed the DAX and other insurance stocks again. It closed the year at €305.00, giving us a market capitalization of €54.0bn.
Munich Re’s most important shareholder continues to be Allianz, with a stake of 24.8%, followed by HypoVereinsbank with 13.3% and Deutsche Bank with 5.5%. Our free float amounts to 56.4%. Around half the increase in the number of Munich Re shareholders to the current total of almost 100,000 is attributable to the share exchange with which we increased our shareholding in the ERGO Insurance Group.
Even after such turbulent events as those that hit us in the 2001, we continue to pursue a policy of continuity with regard to dividends. We again propose to pay our shareholders a dividend of €1.25 per share for the year under review. The overall amount distributed will thus total €221m.
The continual expansion of our investor relations activities proved its worth in the year under review, particularly in the critical period following 11th September. Our policy of actively informing analysts and fund managers with full and prompt reports helped to curb the speculative downslide in our share price.
We also attach importance to being represented at important national and international conferences of the insurance industry and to systematically expanding bilateral contacts.
At the end of 1992, with the share price at DM 2,600 (= €1,329.36), a portfolio of 100 Munich Re registered shares with a par value of DM 100 (= €51.13) required a total investment of €132,936 (excluding transaction costs). After the two stock splits in August 1997 and January 1999, this investment today amounts to a portfolio of 2,000 no-par-value registered shares.
Other securities issued by the Munich Re Group are the Munich Re warrants 98/02, exchangeable bonds on Allianz shares and two natural catastrophe bonds.
– During the exercise period, bearers of the warrants are entitled to subscribe for one Munich Re registered share for every two warrants held, at a strike price of €163.61. In the year 2001 the warrants decreased in value by 34.7% to €70.50. Of the original 3,500,000 warrants, a total of 68,218 had been exercised up to 7th May 2002.
The exercise period will expire on 3rd June 2002. As the current share price is well above the strike price, we expect virtually all the warrants to be exercised.
EEaarrtthhqquuaakkee.. The inhabitants of Seattle experience the worst quake for 50 years, with a magnitude of 6.8. It causes insured losses of US$ 300m and economic losses of US$ 2bn. 2288tthh FFeebbrruuaarryy 2200001
GGlloobbaall ccuullttuurraall iinnhheerriittaannccee.. The radical Islamic Taliban blow up the world-famous Buddha statues in Afghanistan, which date back to the 4th and 6th centuries. 11sstt MMaarrcchh 22000011
The destruction of the World Trade Center in New York brought great suffering to many people and had direct political consequences that are still with us. The insurance industry was hit extremely hard by this event in two respects: Not only was there the unprecedented extent of material damage caused by a terrorist attack across all classes of insurance, but the industry was also painfully confronted with the far-reaching influence of this loss event on the development of the global economy, including stock prices. Even though we at
Munich Re had not imagined a terrorist act of these dimensions, our other extreme scenarios had included loss events that would have a knock-on effect on the financial markets.
In Euroland and Switzerland there was also a marked slowdown in economic growth, with rates decreasing to 1.5% and 1.3% respectively. Growth in Germany lagged even further behind at 0.6%, and unemployment reached a record 4.29 million in February 2002.
After the record year 2000, the global economy experienced a sharp slowdown in 2001. The events of 11th September further impaired the already weak state of the global economy and dashed emerging hopes of an early recovery. The attacks on New York and Washington, and their consequences, led to falls in macroeconomic growth rates worldwide. In major industrialized countries these amounted to around 0.5 percentage points of real GDP. The net result was a decline in global economic growth to 2.5% – the lowest figure since 1993. After growth of 12.4% in 2000, the volume of world trade fell by 0.2% in the year under review.
Measured over the year as a whole, the inflation rate in Euroland amounted to 2.6%. Following an increase in energy prices, it temporarily touched 3.4% in May. However, its subsequent reduction enabled the European Central Bank to lower interest rates by 125 basis points.
In contrast to the situation in Euroland, economic growth in the UK remained robust in 2001 thanks to strong domestic demand. Real GDP rose by 2.2%.
Japan is currently experiencing its fourth recession in 11 years. In 2001 real GDP fell by 0.4%. On top of this, there are signs that the economy is again in deflationary waters.
The euro was unable to benefit from the weakness of the US economy in the past year and fluctuated between 0.84 and 0.95 against the US dollar. At the turn of the year the European single currency was being traded at 0.88.
J F M A M J J A S O N D J F M A
We are proceeding on the assumption that inflation will remain at a low level worldwide, rising towards the end of the year in tandem with the business cycle. Yields on the bond markets will tend to increase if the economy improves. Further reductions in interest rates by central banks are unlikely in this environment.
Prices on the commodity markets will probably stabilize in the next few months and then gradually rise, as soon as the real economy picks up again.
If there is a sustained upward trend in stock prices and the mood lifts on the corporate bond market, more capital is likely to flow into the US again. The value of the US dollar against the euro is therefore likely to stay within the range of the last two years, despite the overvaluation of the US currency.
The fruitful and creative transfer of knowledge will therefore continue to be a key element of Munich Re’s partnerships with clients. And we can still always play golf afterwards.
We achieved our growth targets in primary insurance and reinsurance last year. But as a result of the terrorist attack and other major losses, our claims costs climbed to a record level, so that despite the improved terms of trade our Group profit showed a massive decline.
We earned 57% (54%) of our premium income from REINSURANCE, where premiums written were up 21.1% (19.2%) to €22.2bn (18.3bn). Adjusted to eliminate the effects of changes in exchange rates and acquisitions, premium growth still amounted to a notable 17.9% (11.5%). Munich Re’s capacity and security were more in demand than ever.
AAlllliiaannzz.. Allianz’s acquisition of Dresdner Bank creates the world’s fourthlargest financial group. 11sstt AApprriill 22000011
It is therefore all the more pleasing to report that Munich Re’s new structure has been well received by clients and staff alike.
The new structure was launched on schedule on 1st July 2001, giving us sufficient “warm-up” time before the year-end treaty renewals for 2002. Not least owing to the terrorist attack of 11th September, these renewals took place under much more difficult conditions than usual. The new structure was given a
In the meantime cross-divisional cooperation has started to work well, too. Its main objectives are quality assurance in underwriting and the continuing development of our professional know-how.
Following the positive report to date, our task for 2002 will be to consolidate the new structure and fine-tune it where necessary.
Net underwriting provisions €bn 50.8 43.9 05 MANAGEMENT REPORT / REINSURANCE
We paid and reserved an amount of €2.2bn net for the losses in New York and Washington. On top of this devastating loss event, we had to cope with a large number of other major losses in the year under review. We also had to again strengthen provisions for losses from previous business years.
Life and Health Europe 1 Europe 2 and Latin America Asia, Australasia, Africa North America Corporate Underwriting/Global Clients Special and Financial Risks
Life In the year under review we again considerably expanded our premium income, achieving an increase of 23.4% (22.1%). As in the previous year, growth mainly derived from non-German markets.
The significant trends we have experienced for life insurance in recent years have continued: stable spending power among clients, demographic changes and the cutting-back of social security systems. These have been accompanied by new business potentials in emerging markets. We have improved our competitiveness in important markets and for 2002 expect further strong growth in premium income and another satisfactory result.
Premium income in our German business remained at about the same level as in 2001. The issue that dominated the German market was the reform of the pension system, which involves partially replacing the state pension with privately funded provision and also strengthening company pensions. We support our business partners on the one hand by helping them develop suitable products for this reform; on the other hand we devise specially tailored reinsurance concepts to protect them against biometric risks (longevity and disability).
New markets like China and India promise good business opportunities. The Chinese insurance market opened further at the end of 2001 as a result of the accession of the People’s Republic to the World Trade Organization (WTO). In India the ending of the state monopoly in insurance and the liberalization of the market offer opportunities that we are seeking to develop through the office we opened in Mumbai last year.
Health In health reinsurance, our premium income again grew strongly, producing an increase of 35.3% (44.6%). We also saw the first fruits of our involvement in China, where we are partnering DKV’s strategic cooperation with a local insurer. This led to an appreciable increase in our shares of business. In Latin America and in the Middle East we also strengthened our market position, even though we had to terminate some loss-producing accounts.
In most markets we were able to improve our results. Our overall result declined, however, because a major product field in our North American business did not progress as well as first appeared likely.
In our view, health insurance continues to offer very substantial growth potential. Throughout the world, state systems of healthcare are experiencing financial strains which make liberalization and privatization of social security systems a realistic proposition, at least in the medium term. Reinsurance will also benefit from the increase in demand in established insurance markets with large premium volumes, albeit not to the same extent as primary insurance. On top of this, we see above-average growth prospects now in the markets of Latin America, the Middle East and Asia. We are working hard to add innovative managed care solutions to the range of services we provide in the areas of claims and risk management, risk selection and product development.
For 2002 we expect reduced growth, due to the termination of business in our US portfolio. Our systematic remedial measures should, however, lead to an improvement in the result.
The premiums of €1,596m (1,776m) earned in Germany accounted for 74.2% (82.5%) of the division’s premium volume. Compared with the previous year, premium income fell by 10.1%. Especially in motor insurance, reductions in cessions and restructuring measures involving proportional reinsurance treaties with large premium volumes have had a negative effect on the development of our premium. The casualty lines of business still make up more than half of our German business, however. Our result showed a marked deterioration. Claims costs from major liability claims and fire losses outweighed the distinct improvements in results made possible by remedial efforts in both insurance and reinsurance.
Premium income from business in Switzerland written by the division Europe 1 rose by 11.9% to €53m (47m). In comparison with 2000, which was hit by natural catastrophe losses, we also managed to substantially improve the result.
In the 24 countries of Eastern Central Europe and Eastern Europe, the candidates for membership of the EU, especially Poland, are of prime importance for us. Our premium volume totalled €169m (124m). All in all, our result was not yet satisfactory.
In the treaty renewals for 2002 we terminated some long-standing treaty relationships in individual cases where it proved impossible to find a mutually acceptable basis for further cooperation. This will lead to falling premium income in some countries in the current year. We expect our Europe 1 division to produce premium growth of 3–5% in 2002 and a considerably better result.
Premium volume showed an increase of 38.3% in 2001. The result was affected by several large individual losses.
Contrary to our expectations, the underwriting result in the Netherlands stayed in the red. The switch from proportional to non-proportional reinsurance programmes is increasingly affecting the development of our premium.
Our subsidiary in Italy, Münchener Rück Italia (MRI), maintained its leading market position. Its technical result in non-life business was unsatisfactory, however.
In Spain and Portugal the result also remained below our expectations. This was mainly due to claims experience in property business.
The economic situation in some countries of Latin America deteriorated in 2001, in several cases dramatically. Our business proved stable in this difficult environment. There was a further delay in the opening of the Brazilian market. Despite the occurrence of some large losses and natural catastrophes – the earthquake in El Salvador, for example – we again recorded good results.
Despite the extremely difficult economic environment, Japan remains the world’s second-largest non-life insurance market. With premium income of €298m (271m) and a 20.0% share of the premium volume, this country is the division’s biggest market. Structural change in the Japanese insurance industry persists, with mergers and cooperation agreements still the order of the day. We were able to expand our business relations with the main Japanese insurance groups and to maintain our market leadership in the non-life sector.
Loss ratio 67.3 83.1 Expense ratio 31.8 29.4 Combined ratio 99.1 112.5
As a whole, we are optimistic about current-year business development in the division Asia, Australasia, Africa. We are satisfied with the results we achieved in the treaty renewals for 2002. We were able to implement some significant improvements in areas where prices and conditions were previously inadequate. Our remedial efforts may lead to a fall in business volume in some markets, but this will not cloud the overall picture. We take into account in our underwriting policy that many countries in the region are exposed to natural catastrophes; in so doing, we seek to earn the profits in catastrophe-free years that are urgently necessary for covering very large losses. Altogether, we expect further growth in 2002 and a good result.
In the US, American Re experienced its most difficult year to date. This was mainly due to the following circumstances: As one of the leading reinsurers in the US non-life market, American Re had to cope with extremely high claims costs of €1.2bn gross from the atrocity of 11th September. Besides this, provisions for losses from previous years had to be substantially strengthened again. This was a consequence – also faced by other market players at both insurance and reinsurance level – of the completely inadequate prices and conditions that had been a feature of the American property-casualty market in recent years.
Compared with the dramatic impact of these developments, losses from natural catastrophes were relatively low, albeit higher than the average for the last few years. They included the tropical storm Allison, which cost American Re nearly €56m.
All this was exacerbated by the significant fall in interest rates and the downtrend on the stock markets, which caused the investment result to decline, preventing it from compensating for underwriting losses to the same extent as in previous years.
For the current year we expect the hardening of the US non-life market to continue. Besides notable rate increases averaging 35% in treaty business and 38% in facultative business, American Re was able to achieve a further objective in the renewals as at 1st January 2002: an appreciable reduction in commission paid to clients. This at last marks the return to more risk-adequate conditions.
Loss ratio 91.4 125.2 Expense ratio 30.7 31.6 Combined ratio 122.1 156.8
Its gross premium volume was up 37.3% on the previous year. The result for the year was again positive.
Altogether, we expect the current business year to produce rising premium income in our North American business and – given unexceptional claims experience – an improved result.
This division, which writes 22.2% of our property-casualty business, handles accounts with major international insurance groups (hence “Global Clients”). It also writes business worldwide in selected special classes and markets. Parallel to this, it performs the function of corporate underwriting for the reinsurance group in non-life business, which includes the following: – Fundamental questions of underwriting policy and quality assurance – Development of products and services – Claims management – Integration of actuarial methods in our business processes – Calculation of provisions for IBNR (incurred but not reported) losses
Premium income written by the division rose by 27.1% in the year under review, with growth in virtually all client segments. The underwriting result deteriorated markedly compared with the previous year, mainly because of the WTC loss. But even excluding these claims, the result was not satisfactory – a consequence of the inadequate rating level in many markets.
The adjustments in terms of trade that have meanwhile been achieved, combined with our acquisition of new business, will have a positive effect in the business year 2002. We therefore anticipate pleasing growth in premium and a distinct improvement in the result. Nevertheless, risk-commensurate prices and conditions have not yet been implemented everywhere, so that there will be a need for further remedial measures in the 2003 renewals.
Loss ratio 93.0 130.3 Expense ratio 29.6 30.1 Combined ratio 122.6 160.4
In the year under review we were able to further reduce the losses deriving from business in force in markets where remedial measures have now been implemented. As social security systems are reformed and privatized, we hope to use our specialist knowledge to acquire substantial volumes of business, with corresponding earnings capacity in the medium term. We have built up an internationally recognized centre of competence for this purpose.
In this highly specialized segment we offer our clients tailor-made financing solutions for the run-off of loss portfolios. We continue to see attractive prospects in this area long term. The business usually involves large individual transactions for which single premiums are paid.
TTooppppiinngg--oouutt cceerreemmoonnyy.. Members of Munich Re celebrate the company’s restructuring with a big party. 1199tthh JJuullyy 22000011
This division develops innovative fields of business and products, establishes new distribution channels, works to win new client segments, and underwrites the special lines of credit, aviation and space reinsurance. It is also responsible for planning and placing the retrocession of the whole reinsurance group, with the exception of American Re.
The sluggishness of the overall economy has led to a rising number of insolvencies since the second quarter of 2001. These have included headline-hitting failures like Hornitex, APP/AFP, Enron and Kmart. The results of our credit reinsurance in the year under review were correspondingly negative.
For the rest of 2002 it is predicted that there will be a discernible recovery in the world economy. This will only be reflected in the results of credit insurance with a certain time lag, however. It also remains to be seen when the remedial measures of the primary insurance market, initiated as from mid-2001, will bear fruit and to what extent. In the last renewals we were able to improve reinsurance conditions across the board, in some case significantly. Premium growth in the current business year will be in the single-digit percentage range.
The negative result is attributable for the most part to the WTC loss, but also to remaining deficits in original rates. In the light of the massive claims burden, it proved possible to implement long-overdue increases in the premium level in the last quarter of 2001. For 2002 we therefore look forward to strong growth again and – given average claims incidence – a pleasing result.
Loss ratio 105.6 109.3 Expense ratio 28.5 31.6 Combined ratio 134.1 140.9
The retrocession capacity available on the world market became scarce in 2001. For this reason, and because there has been an above-average accumulation of major loss events in the last few years, we had to accept price rises for all our own retrocession covers. In small special lines of business, for which retrocession cover was not available at reasonable terms and conditions, we systematically reduced our previous covers.
This section supports the divisional units in developing innovative business models and is a centre of competence for Munich Re’s e-business strategy. Its work is currently focusing on knowledge management and the use of webbased customer relationship management to expand and enhance our business relations.
Our primary insurance business is clearly focused on insurances of the person. In this segment, the market environment in most European countries is characterized by the weakness of state security systems in the face of demographic trends.
This situation continues to result in a high demand for private provision. In such an environment, the growth potential for our
Group’s life, health and personal accident insurers is substantial. We are utilizing these opportunities by systematically expanding our various distribution channels and developing appropriate products. A current example is the “Riester pension ” in Germany, where we have been able to translate our strengths in product design and distribution into a substantial increase in market share.
The concept of “financeability” immediately raises the issue of capital market trends: the recent volatility in the markets has naturally made life more difficult for us. But even this can be turned into an opportunity. We have been able to keep the investment results of our companies relatively stable. That gives us a good platform.
The primary insurers in our Group write all forms of life and health insurance and nearly all lines of property-casualty insurance. Our Group includes ERGO, Karlsruher and Europäische Reiseversicherung.
Our premiums from primary insurance in 2001 were up 9.0% (6.8%) to €15.7bn (€14.4bn), representing 43% (46%) of Group premium income.
Minority interests exist mainly in the ERGO Insurance Group, in which Munich Re held a stake of 87.5% (62.9%) at 31st December 2001; since 15th January 2002 this has been increased to 91.7%.
Life and health 71% (72%) of our premium income in primary insurance derives from life and health business, where we recorded premium growth of 7.9% (5.0%) in the year under review.
Our premiums in life insurance climbed by 9.9% (4.1%) to €7.1bn (6.5bn), with foreign subsidiaries accounting for €1.1bn (0.4bn). Expenses for claims and benefits fell by 9.3% (+17.2%). Operating expenses amounted to €640m, and the expense ratio to 10.3%
Property-casualty Our growth in this sector was again strong, the Group expanding both within Germany and in the rest of Europe. Thus our premium income rose altogether by 11.7% (11.4%) to €4.6bn (4.1bn), to which the foreign subsidiaries contributed €1.3bn (0.9bn). Expenses for claims and benefits showed a further increase, but the combined ratio was still satisfactory.
Reporting by subgroup 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.
By far the most important market of our primary insurers is Germany, where they earned around 80% (87%) of their premium income. Their foreign premium income of €3.0bn (1.8bn) derived mainly from five markets; in order of volume these are Italy, the Netherlands, Spain/Portugal, Belgium and Austria.
ERGO Insurance Group is the second-largest primary insurance group in the German market. It was created in 1997 by merging VICTORIA, Hamburg-Mannheimer, DKV and D. A. S. The main emphasis of ERGO’s business, accounting for approximately 90% of its premium income, is on personal lines insurance, especially insurances of the person. Another important segment of its business is insurance for small and medium-sized firms, whilst programmes for company pension insurance are also increasing in significance. In health insurance and legal protection insurance, ERGO is the market leader in Europe through DKV and D. A. S. respectively
Investments €bn 89.3 88.8 * Consolidated financial statements in accordance with IAS.
ERGO’s premium income rose by 9.9% (6.2%) in 2001. This growth was primarily due to life insurance and property-casualty business. The companies Bayerische Vita in Italy and ERGO Hestia in Poland, which were acquired in the second half of 2000, contributed substantially to the dynamic premium growth. Both companies have been consolidated for the first time for a full year in our financial statements for 2001.
The ERGO Group’s shareholders’ equity amounted to €6.0bn (6.3bn) at the end of the year under review. This decrease of 5.7% (+22.7%) is due to the fall in the value of investments resulting from the adverse stock market situation.
New business in Germany grew by a pleasing 8.9% (4.2%). In comprehensive health insurance, ERGO’s core business in this sector, we were able to record a total of 78,359 new insureds.
Costs in healthcare are continuing to escalate. The question of how they can be curbed is also a key issue for private health insurers. ERGO’s health insurers are therefore looking to play an increasingly active role in the healthcare management of their insureds, which includes expanding their relevant capabilities and services.
ERGO’s property-casualty and legal protection insurers succeeded in growing their premium income by 12.7% (7.4%) to €4.0bn (3.5bn).
Karlsruher’s distribution structure is based on a main sales organization present throughout Germany, collaboration with brokers, and a distribution network of partners. Life insurance is also sold through the branches of cooperative banks, mainly in Southern Germany. Sales via brokers are growing in importance.
The number of staff employed by the Karlsruher Group at the end of 2001 totalled 4,152 (3,900), of whom 1,777 (1,612) were desk staff and 2,375 (2,288) field staff.
The Karlsruher Group’s result for the year deteriorated, partly because of the difficult capital market situation and partly because the lower returns expected from the capital markets necessitated an adjustment in the calculation bases for actuarial reserves, burdening the result.
In view of rising costs and the marked fall in interest rates, the Karlsruher Group is making efforts to increase its profitability. In so doing, it is pursuing two objectives: enhanced operational processes – particularly through the use of Internet-based technologies – and improved client service.
Karlsruher Lebensversicherung AG’s new business developed much better than the market average in 2001. Premiums from new business rose by 23.5% (–32.9%), whereas the life market as a whole achieved growth of only 15.9%. Gross premiums written remained constant at €1.1bn. For 2002 we expect life insurance premium to be boosted by pension insurance sales. In the course of the year Karlsruher Lebensversicherungs AG will also be able to offer its clients company pension fund products, and intends to step up its sales of “Riester” pension contracts.
Yes, MEAG has successfully passed the test even under the most difficult market conditions!
Measured against the respective benchmarks, our equity and bond investments achieved an above-average performance.
This was certainly helped by the great flexibility of MEAG’s investment process, which enables portfolio managers to react swiftly to sharp swings on the markets.
Nevertheless, we consider stocks and real assets to be an important investment class in the medium to long term, and have structured our asset allocation accordingly. All in all, we further diversified our equity portfolio internationally in 2001, making shifts away from Euroland towards the US, Asia and the UK. The globally low interest rates and the liquidity in the markets will continue to support the stock markets in the immediate future, especially as the generally less attractive bond markets do not offer an interesting alternative.
The international bond markets have proved extremely volatile over the past months. Numerous reductions in interest rates by the leading central banks in the course of the year led to a marked interest-rate spread between short-term and long-term investments; yields on long-term papers were subject to smaller fluctuations but remained at more or less the same level over the year as a whole.
Jan. Febr. March April May June July Aug. Sept. Oct. Nov. Dec.
10-year German government bonds (benchmark) 10-year US government bonds (benchmark) 10-year UK government bonds (benchmark)
Results of the different types of investment €m €m in %
In the negotiations for the renewal of reinsurance treaties, which were largely at the turn of the year, we reached important intermediate goals. Especially in highly exposed non-proportional business and cover for large individual risks, we succeeded in getting marked price adjustments and improvements in conditions. However, there is still a substantial need for further premium increases in the renewals for the coming risk periods.
For this reason, and because we are assuming coverage of a particularly large block of business that will initially be limited to one year, our premium income for 2002 will show another strong increase: we anticipate growth of 11.0% (21.1%) and a substantially reduced combined ratio.
For our Group’s primary insurance business, we expect premium growth of nearly 5% in 2002. Our primary insurers are unlikely to contribute as much to the consolidated result as in 2001, when they benefited from large one-off tax effects.
With a view to the situation on the capital markets in 2002 and generally in the next few years, we must reckon with regular income from investments being lower than in the past. Information on our assumptions and expectations can be obtained from Section 04 (Economic Parameters) on pages 16 to 21.
Whilst 11th September surprised and shocked us, it did not catch us completely unprepared. Of course, we did not consider it probable or even possible that a relatively small group of fanatics could cause such human suffering and material damage within the space of only a few minutes. Such a catastrophe has inevitably focused the attention of the insurance industry on the risk potential of further such atrocities aimed at wreaking the maximum possible devastation.
As a professional reinsurer with 120 years of experience, we are essentially prepared both organizationally and financially for dealing with catastrophe losses even on this scale. Professional risk management is a key element of our operations. Hence we regularly examine what claims burdens we are able and willing to carry, base our underwriting policy and retrocessions on major loss scenarios, and take account of all this in our liquidity planning.
The risk managers in the Munich Re Group are responsible for the situation in their respective units. It is their job to check and continually monitor whether the risk policy measures taken are sufficient to effectively reduce the risk potential. Where necessary, they initiate further measures.
The remit of central risk controlling includes on the one hand the conceptual development and maintenance of the risk management system. This means above all defining standards for the identification and analysis of risks and laying down reporting requirements.
On the other hand, its duties involve reporting regularly to the management on how the overall risk situation of the Munich Re Group is developing. Where necessary, it proposes measures to limit or reduce critical risk potentials.
Risks may basically arise in all operational areas, functions and processes. Assessing the risk situation of the Munich Re Group therefore requires a holistic approach. We classify the risks as follows: – Underwriting risks – Risks from defaults on receivables from underwriting business – Investment risks – Operational risks
Operational risks manifest themselves in operational systems or processes either as operating risks attributable to human or technical failure or to external factors; or as legal risks arising from contractual agreements or the general legal environment.
For effective control, the appropriate package of measures has to be allocated to each of the above risk categories. To make the risks quantifiable and thus calculable, all risks from our technical and non-technical business are modelled using methods based on probability theory, incorporated in an internal risk model.
Traditionally we are strongly represented in Germany and Europe, but we attach great importance to diversifying our business relations internationally. This enables us to extend the geographical spread of the risks we assume and to achieve a better balance in our insurance and reinsurance portfolios.
We have clearly regulated responsibility and accountability for the whole process of concluding insurance and reinsurance contracts. Underwriting guidelines and limits stipulate who may accept what risks and up to what amounts. These limits are regularly adjusted to current requirements. The sales staff of our primary insurance companies are given binding guidelines for the acceptance of business, and compliance with these is continually monitored.
It is therefore essential in terms of risk management that the natural hazard liabilities underwritten are controlled and limited on a coordinated basis throughout the Group. This is why we introduced accumulation budgets more than ten years ago. By means of these budgets, the Board of Management stipulates annually the maximum liability to be assumed by the Munich Re Group and the individual Group units for such events per loss-accumulation zone.
The accumulation budgets are based on scenarios per loss zone, each with defined occurrence probabilities and supplemented by worst-case considerations. These scenarios are constantly monitored and validated by comparison with the relevant findings of scientific institutes and other professional organizations.
All companies in the Munich Re Group have appropriate intra-Group and external reinsurance cover, or retrocession cover in the case of the reinsurers. Of particular significance for our reinsurance business is accumulation excessof -loss cover. To protect ourselves specifically against claims burdens from major natural catastrophe events, we buy various covers on the retrocession markets, each with outstanding security.
Of all our receivables on underwriting business at the balance sheet date, 5.6% were outstanding for more than 90 days. The average default rate of the last three years amounts to 2.4%.
In the investment sector, we consistently follow a number of principles: we only make investments from which we can expect an appropriate return, and we always ensure that they offer a high degree of security. Also important for us is sufficient liquidity at all times and a targeted diversification in terms of region and type of investment. Our shareholding in Allianz AG, with a market value of €17.0bn, represents easily our largest individual investment item and might be considered a substantial concentration risk. Such an assessment is relativized, however, when the volume of the investment is compared to the size of the Munich Re Group’s investment portfolio as a whole; in view of its strategic importance, we consider the retention of this shareholding to be justified.
The companies entrusted with asset management, in particular MEAG, are given uniformly based mandates by the insurance and reinsurance companies in the Munich Re Group. In detailed investment guidelines we specify precise criteria for management of the assets, enabling us to limit risks and check precisely whether instructions have been followed. Investment committees monitor adherence to these mandates and report directly to top management.
In the asset management units of the Munich Re Group, in line with requirements of banking supervision, we pursue a policy of clear functional separation between portfolio management, trading and risk controlling, right up to top management level.
We only run currency risks to a small extent, as we observe a strict policy of currency matching. This means that for all important currency liabilities in our underwriting business we establish appropriate matching items in our assets.
At the balance sheet date the scenarios described give rise to the following changes in market value: Change in share prices Change in market value of investments sensitive to share prices
Also significant for assessing credit risks in the portfolio as a whole are investment volume, collateralization and the default probability assigned to the individual issuers. These criteria are taken into account in our Group-wide system for limiting credit risks. The system considers the issuer’s individual rating, its capitalization as a basis for covering the liability, the collaterization, and our internally defined willingness to incur risk.
The globally oriented development strategy of the Munich Re Group requires an increasingly dense networking of its business units worldwide. The consequence of this is a growing dependency on electronic communications technology. At the same time, information and data are exposed to various risks as regards confidentiality, availability and integrity.
Our security regulations embrace not only the technical design of hardware and software systems but also functional security structures and organizational measures, e.g. access controls and training requirements for staff.
It goes without saying that in business transactions we respect the laws and regulations of each country and use only fair and legal means of competition.
CCaanncceerr rreesseeaarrcchh.. The Nobel Prize for Medicine is awarded to Leland H. Hartwell, R. Timothy Hunt und Sir Paul M. Nurse for their discoveries in connection with regulation of the cell cycle. These fundamental findings apply to all organisms from yeast to humans, and have a great influence on all aspects of cell growth. In the long term they may give rise to new possibilities in cancer therapy. 88tthh OOccttoobbeerr 22000011
SSaallvvaaggee.. After more than a year, the Kursk is raised from a depth of 108 metres.
The Russian North Fleet’s most modern submarine had sunk to the bottom of the Barents Sea, probably after a torpedo had exploded. All the crew perished. 99tthh OOccttoobbeerr 22000011
Munich Re already fulfils a number of these recommendations, and in fact has done so for some time. Our Supervisory Board has always appointed committees of its members for preparing certain decisions. The Chairman of the Supervisory Board keeps in regular contact with the Chairman of the Board of Management between official meetings to confer on issues of corporate strategy, business development and risk management. The Board of Management’s remuneration has for some years now consisted of fixed and variable components, plus elements that constitute long-term incentives. Our consolidated financial statements and interim reports to shareholders are prepared in accordance with internationally recognized accounting principles. Since the last AGM in 2001 shareholders have had the option of voting via a company proxy. In the current business year, for the first time, they will be able to follow the AGM on the Internet and, where necessary, change the instructions they have given to their proxy directly before a vote.
The Code’s recommendations and proposals, including their adjustment to the special features of our company and line of business, will be implemented at Munich Re in close collaboration between Board of Management and Supervisory Board. Decisions on further initiatives will be taken once the German parliament has passed the German Transparency and Public Disclosure Act, which will lay down further regulations on the subject of corporate governance.
This much-quoted headline certainly captured the mood of most people in the days following 11th September. But it also exemplifies the short-term nature of such statements. For today – not even one year later – we find the world almost exactly the same as it always was: with its customary mixture of crises and attempted solutions, of progress and setbacks.
So in a way this is renewed proof that the long-term impact of singular major losses and catastrophes is often greatly exaggerated in the immediate aftermath. Yet we must differentiate with regard to 11th September: New York will indeed be scarred by this catastrophe for many years to come, and the political consequences are still very much with us.
Claims management for the losses of 11th September was one of the greatest challenges in Munich Re’s history.
The art of the insurer consists in fixing premiums at the right level so that in the course of time premiums and claims will roughly balance. In this task, the insurer can draw on extensive claims statistics. To make sure that major loss events do not disturb the balance, the insurance industry – especially with the help of reinsurance – has developed proven mechanisms for distributing the costs of these losses over several years (what are termed “return periods”). But the success of this approach presupposes that the major losses which occur are of a dimension that insurers have reckoned with.
Since these reserves continue to be required for this other business, it is necessary – also for reasons of “premium fairness” – for the balance between premiums and claims to be restored as quickly as possible.
In other words, the money used to settle claims like those from 11th September has to be included – in small portions – in the calculation of the premiums of all those risks which in principle could be affected by such an event. The extent and duration of the premium increases depend on how likely or unlikely a repeat of 11th September is.
Simple though it may sound: insurers can cope with events like 11th September provided that the community of insureds is prepared to pay the higher premiums needed to cover the increased claims costs.
The loss of 11th September 2001 in comparison (insured losses in US$**)
Loss of 11.9.2001 * Estimate (Source: rating agencies, brokers, investment bankers)
their portfolios of accepted risks, so that they can identify in time where, or in what conceivable scenario, they are threatened with very high liabilities. Finally, an appropriate price must be calculated for the coverage of the terrorism risk, insofar as it is still insured.
__ Reinsurers are specialists not only in the field of natural catastrophes but also in the area of man-made disasters.
Here a distinction can be made between technological risks, political risks and risks arising from the interaction of technology and nature. A further differentiation can be made between short-term and long-term risks: industrial accidents like Bhopal and the hundred-year history of asbestos and its consequences; 11th September 2001 and the globally increasing claims for damages in connection with historical injustices; man-made aspects in connection with earthquakes or floods and the long-term processes of climate change or the pollution of soil and water.
WHAT ARE POTENTIALLY THE MOST VULNERABLE POINTS OF OUR INFORMATION NETWORKS?
Still holds good for the digital future – only if you know the risks can you control them.
__ According to Munich Re’s global statistics, insurers’ claims costs from natural catastrophes – adjusted for inflation –
show a clear increase since the 1960s. This is mainly due to weather catastrophes, e.g. storms and floods, which are today responsible for an average 85% of the insured catastrophe losses. Along with the many other causes, such as urbanization, settlement in high-risk zones and the increasing vulnerability of modern industrial societies, climate change and other environmental factors are having a growing impact.
more weather catastrophes of ever greater severity. With its global loss statistics, the insurance industry provides an important early-warning system, which is taken seriously by environmentalists, scientists and politicians alike.
__ In the past millennium, global temperature mostly showed little change, but for around the last 150 years they have been gradually rising more and more steeply. By the end of this century they will probably be around 1.5 to 6°C higher than the mean temperature of the last few decades. This would mean a “super” warm age, the like of which man has never experienced before.
Variations in near-surface air temperatures from the year 1000 to 2100
HOW CAN MUNICH RE’S CLIENTS BENEFIT FROM THE CENTRE OF COMPETENCE FOR LIFE SCIENCES?
This latest centre of competence at Munich Re focuses on genetic engineering, which is impacting key areas of our society to a growing extent and with increasing rapidity. Forecasters are predicting that this branch of science will have a major influence on the economy, medicine and society in the 21st century. But like every development and every advance, genetic engineering also harbours new risks. One of the most obvious and topical is the lack of a clear picture regarding scientific progress and its repercussions. Coping with the explosive growth of knowledge in genetic engineering (a doubling approximately every two years) requires special expertise. Our Centre of Competence registers significant advances in research, critically examines them, and evaluates their relevance for business. The Centre’s priorities in this
The areas of society and insurance that will be affected by the development of genetic engineering are numerous. They range from agriculture to the broad fields of medicine and legislation. They involve life and health insurance as well as environmental and product liability. Given the many different challenges, solutions to the problems connected with genetic engineering can only be arrived at in an ongoing dialogue between users, risk carriers and insureds. With its Centre of Competence for Biosciences, Munich Re seeks to make a significant contribution to this process, to the benefit of all concerned. Our new 150-page publication provides information on the current state of genetic engineering, its fields of application, the sectors of insurance affected, statements by Munich Re on the claims exposure from genetic engineering in different insurance sectors, and the future implications for insurance. Compact yet extensive, and very useful: www.munichre.com.
The consequences would be even more serious if the cultivation of modified varieties were permitted. Wind-borne pollination would inevitably result in the contamination of crops in neighbouring fields. It would then be impossible for farmers operating according to the revised EU directive for organic production to meet the 0% tolerance threshold. As far as the insurance of agricultural products against natural hazards is concerned, there will also be a need to examine what changes are necessary in the case of genetically modified crops. For example, a higher drought tolerance says nothing about sensitivity to other hazards. The jury is thus still out on the question of genetically modified crops and insurability.
For further information, please see Munich Re’s environmental magazine “Perspectives” at www.munichre.com.
The answer lies in the soil. Agricultural specialists inspecting crops during a training programme.
Agriculture is one of the favoured areas for genetic engineering. The risks are unclear.
Market capitalization is an expression of earnings power, financial strength and reputation in the market. All those involved with the company, the so-called “stakeholders”, have a vital interest in it.
Particularly for our clients, therefore, the initial question may be answered with a counter-question: Would I like to be insured with a financial services provider and risk carrier with a weak market capitalization? Certainly not!
The state and society are also stakeholders with an interest in healthy companies like Munich Re – partly as a source of tax revenue and partly for their social commitment, reflected in sponsoring, donations and the support of public projects.
Likewise, the employees of the Munich Re Group benefit from a high market capitalization. Earnings power and an excellent reputation mean safe jobs and secure salaries long term.
__ A long-term investment in Munich Re shares promises an attractive return: over the last 20 years our shares have been the number one among the current DAX
Munich Re Banking group Automobile manufacturer Producer of electrical and electronic goods DAX 30
investors – were able to exploit opportunities to enter the market and to selectively expand positions. The markets have since risen by almost 30%. The fact that we were able to profit from these developments is due both to our strict risk management and to our liquidity planning, which is based on a projection of our future cash flows adjusted daily.
With our asset and financial management service, we also support clients in the sustained optimization of their investment results. Here, too, the strategy we are pursuing is proving successful.
And there is no better form of knowledge transfer than dialogue.
Such investments in human resources are the best investments in the future – they are a key element in securing Munich Re’s market and opinion leadership.
“Yes”, is certainly a common answer and, looking at the US with over 40 million citizens lacking health insurance, it is not a totally unjustified fear. Demographic ageing, medical progress, an increase in chronic illnesses – a number of reasons can be given for the internationally rising expenditure in healthcare.
How access is to be safeguarded for all – whether health insurance should be subsidized as soon as premiums exceed a certain percentage of income, for example – is largely for the politicians to decide. Health insurers, for their part, can curb the rise in costs through cost management, acting in the interests of patients. To sum up: an intelligent interplay of the insurance market and a state cost-distribution system could secure access to the healthcare system for all.
Accounting and valuation rules have yet to be standardized worldwide. This makes it more difficult to compare the financial statements of international groups of companies.
– compulsory for consolidated and company financial statements; – binding in all countries and for all companies, regardless of their size and legal form; – recognized by major stock exchanges and supervisory authorities.
Board, work on such standards is moving forward. Munich Re supports this promising initiative. Not only because of Enron, the principle of prudence should continue to be accorded the importance it deserves, especially in the insurance industry.
Consolidated balance sheet as at 31st December 2001 07 CONSOLIDATED FINANCIAL STATEMENTS 2001
5. Net expenses for claims and benefits (28) 34,162 29,770 4,392 14.8 8. Result before amortization of goodwill –415 2,615 –3,030 –115.9 10. Operating result before tax –645 2,470 –3,115 –126.1 12. Minority interests in earnings (16) 145 321 –176 –54.8 13. Profit for the year 250 1,750 –1,500 –85.7
Change in deposits retained and accounts receivable and payable 697 517
Change from the acquisition and sale of consolidated enterprises –196 –910
Cash flows for the business year (I + II + III) –400 1,791
This has been supplemented by the requirements of DRS 2-20, which applies specifically to insurance companies.
In deviation from the previous year, only net cash flows are shown. We have adjusted the previous year’s figures accordingly.
II. Investments in affiliated enterprises and associated enterprises 6,583 4,759 7,181 6,059
In accordance with the recommendations of the DSR, we have made the primary segmentation between the fields of business reinsurance, primary insurance (each broken down into life and health and property-casualty) and asset management.
Life and health Property-casualty 31.12.2001 Prev. year 31.12.2001 Prev. year 31.12.2001 Prev. year 31.12.2001 Prev. year 31.12.2001 Prev. year €m €m €m €m €m €m €m €m €m €m
Total equity and liabilities 202,054 193,567 * Group shareholders’ equity and minority interests.
Thereof: – Income from associated enterprises 738 404 813 515 5. Net expenses for claims and benefits 5,033 3,643 14,009 10,069 8. Result before amortization of goodwill 1,340 904 –2,027 621 10. Operating result before tax 1,337 902 –2,161 491 13. Profit for the year 1,151 857 –1,203 464
Within the framework of a corporate- and trade-tax consolidation agreement, the ERGO Insurance Group concluded profit-transfer agreements with nearly all of its German insurance companies and the ERGO Trust GmbH in the business year 2001. In our segment reporting, expenditure incurred as a result of profit transfer is deemed appropriation of net income. The segments are thus adjusted to eliminate these expenses, the elimination being carried out in the consolidation column.
Life and health Property-casualty 2001 Prev. year 2001 Prev. year 2001 Prev. year 2001 Prev. year 2001 Prev. year €m €m €m €m €m €m €m €m €m €m 14 – – – – – –1,788 –1,626 – –
31.12.2001 Prev. year 31.12.2001 Prev. year 31.12.2001 Prev. year 31.12.2001 Prev. year €m €m €m €m €m €m €m €m
2001 Prev. year 2001 Prev. year 2001 Prev. year €m €m €m €m €m €m
Latin America * After elimination of intra-Group reinsurance across segments. Presentation of the figures in the management report differs from this (cf. note on page 25).
Munich Re’s consolidated financial statements have been prepared in accordance with the standards of the International Accounting Standards Board (IASB) as “exempting” consolidated financial statements in line with Section 292a of the German Commercial Code. The financial statements comply with the EU directives to which we are subject and are equivalent to financial statements prepared in accordance with the German Commercial Code in terms of their informative value.
IAS currently do not contain any standards governing the accounting and valuation of transactions specific to the insurance industry; the relevant items are therefore accounted for and valued in accordance with US GAAP (Generally Accepted Accounting Principles for the United States).
Exemption from consolidated accounting pursuant to commercial law, in accordance with Section 292a of the German Commercial Code, requires a description of the main differences between IAS and German Commercial Code accounting, valuation and consolidation methods.
CClloosseedd.. The Swiss Gotthard Tunnel is used by around 18,700 vehicles daily. A fire breaks out after a collision between two lorries. Eleven people die. The tunnel is closed and only reopened for cars two months later. 2244tthh OOccttoobbeerr 22000011
– Writedowns on investments are lower than under German Commercial Code accounting, because they may only be recognized if the diminution in value is likely to be permanent.
In accordance with IAS 27, the consolidated financial statements include the Munich Reinsurance Company (the parent company) and all the enterprises in which Munich Re owns, directly or indirectly, the majority of the voting shares or over which it has the factual ability to exercise control (subsidiaries). The only exceptions are subsidiaries which are determined as being not material for assessing the Group’s financial position; insurance and reinsurance companies are consolidated regardless of their size. An overview of the group of consolidated companies and other important shareholdings is provided in Section 08 (pages 162–164).
The changes among our non-consolidated subsidiaries in the business year were as follows: Non-consolidated subsidiaries Germany Other Total countries
The aggregate shareholders’ equity of the non-consolidated subsidiaries amounted to less than 0.7% (0.9%) of the Group’s shareholders’ equity at 31st December 2001, and their aggregate annual result to 0.1% (0.2%) of the consolidated profit for the year. The enterprises involved are mainly service and management companies.
In the business year the Munich Re Group acquired a further 24.65% of the ERGO Insurance Group at a price of €3,363m. In addition, ERGO Insurance Group acquired shares in insurance companies mainly in Eastern Europe for a total price of €83.2m. Apart from this, there were no significant changes in the group of consolidated companies.
The effects of the additionally acquired shares in ERGO AG on the consolidated financial statements may be seen from the following overview: 07 CONSOLIDATED FINANCIAL STATEMENTS 2001
Securities held for trading comprise all fixed-interest and non-fixed-interest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences; in addition, they include all derivative financial instruments that we have not acquired for hedging purposes. Securities held for trading are stated at the market value at the balance sheet date; all unrealized gains or losses from this valuation are included in the investment result.
Where unrealized losses on securities available for sale are reflected in shareholders ’ equity (see above), the resulting deferred tax assets are recorded but excluded from earnings.
This item contains the shares of third parties in the shareholders’ equity of subsidiaries that are not wholly owned directly or indirectly by the parent company.
The underwriting provisions are shown gross in our balance sheet, i.e. without deduction of the share apportionable to business ceded by us; cf. the explanatory remarks on the relevant assets item. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements.
Unearned premiums are accrued premiums already written for future risk periods. For primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases where the data for a calculation pro rata temporis is not available.
In the case of life insurance policies where policyholders bear the investment risk themselves (e.g. unit-linked life insurance), the provision for future policy benefits reflects the market values of the relevant investments (FAS 97); this provision is shown separately (item D).
OOffffsspprriinngg.. Japan celebrates the birth of a daughter to the heirs to the throne.
Although this has not provided them with a male heir, it could secure the continuation of the Japanese imperial dynasty. 11sstt DDeecceemmbbeerr 22000011
Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders
Please see the remarks on assets item C and on the provisions for future policy benefits.
These primarily include provisions for post-employment benefits. The companies in the Munich Re Group generally give commitments to their employees in the form of defined contribution plans or defined benefit plans. The type and amount of the pension obligations are determined by the conditions of the respective pension plan. In general, they are based on the length of service and salary of the staff member.
Under defined contribution plans the company pays fixed contributions to an insurer or a pension fund. This fully covers the company’s obligations.
The consolidated companies used the following actuarial assumptions (weighted average values) for calculating their pension obligations: Actuarial gains or losses from pension obligations and plan assets result from the deviation of actual risk experience from estimated risk experience. They are recognized by means of the corridor method laid down in IAS 19. According to this, actuarial gains or losses are recognized in the income statement if they exceed 10% of the present value of the vested benefits at the beginning of the business year.
Other provisions are posted in the amount of the probable requirement; such amounts are not discounted.
Carrying amount at 31.12. previous year 114 657 72 843 269
Accumulated depreciation at 31.12. business year 242 73 91 406 301
The goodwill results mainly from the acquisition of American Re in November 1996 and from the acquisition of the additional shares in the ERGO Insurance Group in 2001.
The figures shown under purchased insurance portfolios mainly comprise the actuarial value of the life insurance portfolios consolidated as a result of the acquisition of Bayerische Vita and CNA Financial Corporation’s life reinsurance business, totalling around €350m; the “other movements” result mainly from the application of the purchase accounting method to the CNA portfolio. The addition amounting to €321m derives from the acquisition of additional shares in the ERGO Insurance Group in July 2001.
The additions in the business year include €346m from the application of the purchase accounting method to the additional shares acquired in the ERGO Insurance Group.
Real estate pledged as security and other restrictions on title amount to €214m (193m). The expenses for investments under construction total €36m (66m) at the balance sheet date. Commitments to acquire real estate amount to €367m (141m).
The fair value of investments in associated enterprises, which are mostly valued at equity, amounts to €26,548m (33,004m) at the balance sheet date.
Depreciation of software is apportioned in the income statement between the investment result, expenses for claims and benefits, and operating expenses. Amortization of purchased insurance portfolios is shown under “other expenses”.
Assets pledged as security for liabilities and restrictions on title under “other intangible assets” amount to €1m (0m).
In the business year the market values of the loans generally corresponded to the carrying amounts. The “other loans” include loans to affiliated enterprises totalling €44m (199m) and loans to associated enterprises totalling €675m (483m).
Over one year and up to 5 years 554 498 550 518
Valuation at market value results in valuation reserves of €3,613m (13,005m) in comparison with amortized costs. After deduction of provisions for deferred premium refunds, deferred taxes and minority interests, we have allocated unrealized gains and losses of €1,756m (4,979m) to shareholders’ equity.
The securities held for trading include fixed-interest securities totalling €155m (137m) and non-fixed-interest securities and derivatives totalling €257m (122m).
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 31st December 2001 totalled €675m (497m), i.e. less than 1% (1%) of the balance sheet total. The fair value of items used for hedging purposes amounted to €458m and the fair value of trading items to €217m.
Contractual period to maturity of Carrying amounts Amortized cost fixed-interest securities
The fair values shown in the following table are either listed prices or values at the balance sheet date determined using mathematical models.
Receivables with a remaining term of up to one year total €9,571m (8,877m); those with a remaining term of over one year total €142m (268m).
All figures in €m months months months years years 07 CONSOLIDATED FINANCIAL STATEMENTS 2001
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 €464m.
These mainly comprise property, plant and equipment and inventories totalling €342m (282m).
Carrying amount at 31.12. previous year 980 945 4,011 425 6,361 5,989
Carrying amount at 31.12. business year 1,603 888 4,442 353 7,286 6,361
We have used interest rates of between 3% and 8% for calculating the deferred acquisition costs.
The following table shows the development of the deferred acquisition costs in the business year.
Amortization of the acquisition costs in the life and health segment in primary insurance includes profit-neutral eliminations of €1,051m necessitated by valuation according to the purchase accounting method in connection with the increase of the shareholding in ERGO AG.
The exercising of Munich Re 1998/2002 warrants in the course of the business year resulted in the issue of 5,921 new registered shares at an exercise price of €163.61 each. This increased the share capital to €452,991,982.08, and the company raised a total of €968,754.95 from the issue of the new shares.
On 31st December a total of 166,592 Munich Re shares with a calculated nominal value of €426,475.52 were held by Group companies. This represents 0.09% of the share capital. The shares were acquired for an average price of €319.77 per share via the stock exchange; the transaction value totalled €53,271,622.08. The shares are purely for safeguarding the stock appreciation rights granted to the Board of Management and top Munich Re executives since 2000.
The share capital as at 31st December 2001 is thus divided into 176,949,993 registered shares, each fully paid up and entitled to one vote.
The contingent capital is as follows: All figures in €m 31.12.2001
To safeguard subscription rights in rights issue from capital authorized for this purpose 15.4
The capital authorized for capital increases is thus as follows: All figures in €m 31.12.2001
The unrealized gains and losses on other investments included in the “other reserves” changed as follows: All figures in €m 2001 Prev. year
Changes in the consolidated group – – 1,190 –1,152 – 38
Change resulting from valuation at equity – – – 847 – 847
The changes derive mainly from the increase in our shareholding in the ERGO Insurance Group.
The following table shows the distribution of the net provision for outstanding claims between the different segments of the Group: All figures in €m* 31.12.2001 Prev. year
In addition, we have substantially strengthened the claims provisions of our US subsidiary American Re several times. Like our competitors, we were negatively surprised by the number and size of losses reported in 2001 for past years; we have therefore made additional provision for these.
Net claims provisions and their 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12.
Thereof: currency translation differences –347 –509 307 –378 –1,775 –1,955 –372 –1,748 –1,446 –352 –
In the mid-eighties industrial insurers writing business worldwide found themselves being confronted with losses from policies taken out decades before. In particular, these included US asbestos-related claims under product liability policies. On top of this, there were costs for claims under old general liability policies which provided cover against environmental liability claims under US law. We made timely provision for our share of these losses, continually adjusting our reserves in line with the latest knowledge. The reduction in the reserves is attributable to two factors, among others: the commutation of a major account and a further stabilizing of the results of business written via the London market and since terminated. Altogether, at the present time we believe our provisions for these claims complexes to be adequate, although further loss burdens for the Group as a whole – particularly from asbestosrelated claims – cannot be ruled out. The number of claimants and companies being claimed against is continuing to grow. This reflects to some extent the knowledge that has meanwhile been gained regarding causation in this risk
in €m Gross Net Gross Net Gross Net * The previous years’ figures have been adjusted to take account of currency translation differences.
sector; it constitutes a special form of the risk of change. Observers are reckoning with a further wave of lawsuits, and not only in the US. In view of the unpredictable nature of court decisions in the main markets affected, it is difficult to make reliable estimates of future development.
The net provision for premium refunds is distributed between the segments of the Group as follows: All figures in €m 31.12.2001 Prev. year
The provision for premium refunds showed the following development: All figures in €m 2001 Prev. year a) Amounts allocated on the basis of national regulations (gross) Status at 1.1. business year 5,979 5,014
Status at 31.12. business year 5,241 5,979 b) Deferred premium refunds (gross) Status at 1.1. business year 14,108 15,339
The following table shows the distribution of the net other provisions between the segments of the Group: All figures in €m* 31.12.2001 Prev. year
– Property-casualty 78 63 * After elimination of intra-Group transactions across segments.
The miscellaneous provisions include in particular the unearned portions of premiums for the coverage of natural catastrophe risks.
All figures in €m Gross Ceded Net Gross Ceded Net 07 CONSOLIDATED FINANCIAL STATEMENTS 2001
Expenses for defined contribution plans in the year under review totalled €28m (39m).
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 Rating: AA+ 581 –
Munich Reinsurance Company, Munich 1.0%, €1,150m Bonds Exchangeable into Allianz AG Shares 2000/2005 Rating: AAA 1,059 1,009 * QUIPS redeemed in February 2002.
The miscellaneous other provisions comprise a large number of different items, including derivatives/trading (€159m), competitions for sales staff (€21m) and other remuneration for desk and field staff totalling €10m.
Miscellaneous liabilities 5,460 1,385 €143m (232m) of the other liabilities is apportionable to tax liabilities, €27m (34m) to liabilities for social security, and €84m (98m) to liabilities for interest and rent.
The increase in investments in associated enterprises derives largely from the one-off effect of €550m in the at-equity valuation of our shares in Allianz on a less deferred basis.
Change in unearned premiums – Gross amount –45 108 –887 –308 114 –31 –52 –52 –870 –283
– Net amount –33 53 –176 –284 98 –27 –66 –45 –177 –303 * After elimination of intra-Group transactions across segments.
All figures in €m* 2001 Pr. yr. 2001 Pr. yr. 2001 Pr. yr. 2001 Pr. yr. 2001 Pr. yr. 2001 Pr. yr.
Deferred tax resulting from the occurrence or reversal of temporary differences –590 114
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.
– Change in deferred acquisition costs (gross) –297 –190 45 –93 –665 27 5 –14 –912 –270 * After elimination of intra-Group transactions across segments.
Tax effect of tax rate differences between Group companies –52 40 tax-free income –744 –327 non-deductible expenses 271 90 changes in tax rates –284 –423 municipal trade earnings tax –25 –110 corporation tax reduction/increase from dividends –37 –79
The current tax is derived from the tax results of the business year, to which the local tax rates of the respective subsidiaries are applied. Deferred tax is also calculated using the respective local tax rates; changes in tax rates that have already been adopted by the government at the balance sheet date are taken into account.
The following table shows the reconciliation between the expected tax on earnings and the tax on earnings actually shown. The expected tax expenses are calculated by multiplying the operating result before tax on earnings (but after “other tax”) by the Group tax rate. The Group tax rate is the expected average tax rate of the Group. For German Group companies, expected components of the Group tax rate are 26.4% corporation tax including solidarity surcharge, and a mixed trade-tax rate of 8.6% (13.6%).
The parent company of the Munich Re Group is Münchener RückversicherungsGesellschaft Aktiengesellschaft in München (Munich Reinsurance Company Joint-Stock Company in Munich). It is entered in the commercial register with the address Königinstrasse 107, 80802 München. In addition to its function as a reinsurer, the company also fulfils the function of holding company for the Group.
Munich Re has diverse and extensive relations with Allianz, one of the world’s largest insurance and financial service groups.
With regard to the restructuring of shareholdings between Munich Re and Allianz, reference is made to Note 41.
In the business year 2001 the companies of the ERGO Insurance Group acquired 59,139 Munich Re shares at an average price of €325.11 within the framework of their employee share-ownership programme. As part of this programme, staff of the ERGO Insurance Group in Germany were offered the chance to subscribe for up to two of the shares at a price of €171.28 (DM 335) each. In addition, senior executives of the ERGO Insurance Group could choose to received their performance-related remuneration in these shares at a price of €250 each. After the issue of 29,897 employee shares, the remainder were sold at the end of the year.
Taking into account the proposal for the appropriation of the profit, the emoluments of Supervisory Board totalled €1.1m (1.1m). This sum includes €0.6m (0.6m) dependent on the dividend paid to shareholders.
A total of €32m (33m) was set aside for pension commitments towards retired members of the Board of Management or their surviving dependants.
At year-end a total of 134 (204) Munich Re shares were held by members of the Board of Management, and 476 (522) by members of the Supervisory Board.
The number of staff employed by the Group at year-end totalled 27,894 (27,283) in Germany and 10,423 (9,198) in other countries.
Commitments under rental, work and service contracts amounted to €430m. In addition, there were obligations from leasing arrangements amounting to €185m. Of this, €50m was due not later than one year, €119m due later than one year and not later than five years, and €16m due later than five years. Investment obligations totalled €397m. These figures represent undiscounted nominal amounts.
Beyond this, there were contingent liabilities of €560m. These include liabilities under option agreements, not fully utilized credit lines of an affiliated company, a binding offer to acquire shares, and a commitment from a leasing transaction with real estate.
In March 2002 the ERGO Insurance Group acquired 100% of Quelle Versicherungs AG.
Our audit, which also extends to the group management report for the business year from 1st January 2001 to 31st December 2001, has not led to any reservations. In our opinion, altogether the group management report provides a suitable understanding of the Group’s position and suitably presents the risks of future development. In addition, we confirm that the consolidated financial statements and group management report for the business year from 1st January 2001 to 31st December 2001 satisfy the conditions required for the Company’s exemption from its duty to prepare consolidated financial statements and group management report in accordance with German accounting law.
For many years Munich Re has belonged to the select band of reinsurers awarded top ratings by the rating organizations – A. M. Best, Moody’s, Standard & Poor’s, and now Fitch as well (A. M. Best: A++; Fitch: AAA; Moody’s: Aaa; S&P: AAA).
Both Victoria Lebensversicherung Aktiengesellschaft and Hamburg-Mannheimer Versicherungs-Aktien-Gesellschaft improved their Moody’s ratings from Aa2 to Aa1 in the year under review.
Earnings per share, diluted 7.08** 6.44 9.84 1.41 * The first consolidated financial statements in accordance with IAS were prepared for the business year 1998.
* Before elimination of intra-Group transactions across segments. Ratio of total net underwriting provisions to net written premiums.
Munich Reinsurance Company of Australasia Limited (MRA) 7th Floor, Munich Re House 143 Macquarie Street Sydney NSW 2000 P.O. Box H35 Australia Square Sydney NSW 1215
Deutsche Krankenversicherung AG Aachener Strasse 300 50933 Köln Address for letters: 50594 Köln
BHW Holding AG, Hamlin Heidelberger Druckmaschinen Aktiengesellschaft, Heidelberg Jenoptik AG, Jena Österreichische Volksbanken, Vienna MAN Aktiengesellschaft, Munich
VICTORIA MERIDIONAL Compañía Anónima de Seguros y Reaseguros, S. A., Madrid 88.96 11,689 –3,747
DKV Seguros y Reaseguros, Sociedad Anónima Española, Saragossa 91.74 48,511 2,289
Previasa Vida, S.A. de Seguros y Reaseguros, Saragossa 91.74 12,808 2,173
D.A.S. Difesa Automobilistica Sinistri, S.p.A. di Assicurazione, Verona 45.34 5,108 1,299
Dr. jur. Henning Schulte-Noelle BASF AG Assurances Générales de France E.ON AG S. A., Paris* Linde AG Riunione Adriatica di Sicurtà Siemens AG S. p. A., Milan* Thyssen Krupp AG
Prof. Dr. rer. nat. DaimlerChrysler Services AG – Henning Kagermann IDS Scheer AG
Dr. techn. h. c. Dipl.-Ing. ETH Dr.-Ing. h. c F. Porsche AG Porsche Holding GesmbH, Ferdinand Piëch Salzburg (until 16th April 2002) Porsche GesmbH, Salzburg 1 Status: 7th May 2002. * Own group company within the meaning of Section 18 of the German Stock Companies Act.
Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder METRO AG Tetra Laval Group, Pully (from 17th April 2002)
Dr. jur. Albrecht Schmidt Allianz AG Bank Austria, Vienna* (Chairman) Bayerische Börse AG (Chairman) Siemens AG
Clement Booth – ACORD, Pearl River, New York Inreon Ltd., London Nova Risk Partners Ltd.,
ERGO Versicherungsgruppe AG American Re Corporation, Europäische Reiseversicherung AG Wilmington, Delaware*
(Chairman) BHS tabletop AG MAN Nutzfahrzeuge AG Nürnberger Beteiligungs-AG VICTORIA Lebensversicherung AG VICTORIA Versicherung AG WMF Württembergische Metallwarenfabrik AG
* Own group company within the meaning of Section 18 of the German Stock Companies Act.
Board of Management Seats held on supervisory boards Membership of comparable of other German companies bodies of German and foreign business enterprises
Forward rate agreement (FRA) Interest-rate forward contract traded over the counter, in which a current interest rate that appears favourable is secured for a date in the future. The parties to the contract will settle the contract on the basis of the difference between the market interest rate applicable on the due date and the agreed interest rate.
Net asset value Measurement of the fair value of companies. The starting point is the proportional equity capital of the company to be valued, plus the valuation reserves, any special reserves, claims equalization provisions and similar provisions. The net asset value after tax includes the deferred tax liabilities resulting from the adjustment of the equity capital.
Operating result before tax Pre-tax operating profit/ loss on the enterprise’s ordinary activities. Any extraordinary income and expenses are not included in this result.
Primary insurers Insurance companies that assume risks in return for an insurance premium and have a direct contractual relationship with the holder of the insurance policy (private individual, firm or organization ).
Reinsurers Insurance companies that assume the insurance risks of other insurance companies without themselves having any direct contractual relationship with the policyholder.
Segment reporting Presentation of the items in the annual financial statements according to classes of business and regions.
Shareholder value Management concept which puts the value of a company and the increasing of this value for the shareholders at the centre of its business strategy.
Genetic engineering 82 f., 86 f. Geo Risks Research 37 Global clients 36 Glossary 169 ff.
Marine, aviation, space 62 Market capitalization IC Market value 90 f. MEAG MUNICH ERGO
Asset-Management GmbH 3, 46, 48 Multi-year overview 156 Munich American Reassurance Company (MARC) 27 Munich Reinsurance Company of Africa (MRoA) 30 Munich Reinsurance Company of Australasia
Terrorism risk 56, 70 f. Transparency and Public Disclosure Act 62
Reinsurance, primary insurance and asset management complement each other in our Group in an optimum way.
Primary insurance: Our primary insurers – ERGO, Karlsruher and Europäische Reiseversicherung – offer the highest degree of security and service to their more than 27 million clients. Having a strong footing in primary insurance, especially personal lines business, is an important part of our strategy. Given current demographic trends, there is great potential for growth in insurances of the person in particular.
LLiigghhttss oouutt.. The two largest US energy providers are insolvent, and California’s power supply breaks down.
E d it o ri al d ea d lin e: 3t h
Shareholders’ equity bn 19.4 23.6 –18.0 Net underwriting provisions bn 138.6 131.5 5.4
CCaalleennddaarr.. The reader will be accompanied through this annual report by references to the year 2001 in the form of “margin notes”. The pictures are snapshots of a year which, though overshadowed by the event of 11th September, was in other ways a completely normal risk year. 11sstt JJaannuuaarryy 22000011
MMeelliissssaa.. A new version of the computer worm that caused damage of US$ 1.1bn back in 1999 spreads like wildfire over the Internet. It paralyses many thousands of computers, networks and e-mail systems, in some cases putting them out of action for days. 1188tthh JJaannuuaarryy 22000011