Picture credits ap Photo/Matthias Rietschel, p. 32 ap Photo/Jeff Robbins, p. 29 dpa, Hamburg, p. 31 Getty Images/Hulton Archive, pp. 30, 31, 32 Getty Images/Photodisc, pp. 23, 91 Hartmut Nägele, Düsseldorf, front cover, pp. 2, 5, 7, 10, 13, 15, 16, 18, 21, back cover ibm, pp. 23, 61 modis Rapid Response Project of nasa/gsfc, p. 63
Service for media Journalists receive information from our Press Division: Rainer Küppers
Large and very large losses (net) €m 1,201 1,054 1,844 3,407 1,150 *Before elimination of intra-Group transactions across segments.
Primary insurance: Our primary insurers – the ergo Group with its brands victoria, HamburgMannheimer, dkv, d.a.s. and KarstadtQuelle Versicherungen, plus Karlsruher and Europäische Reiseversicherung – provide cover for private individuals and for small and medium-sized businesses.
Result before amortisation of goodwill €m 2,948 1,971* –20* –445* 2,595*
Net expenses for claims and benefits 31,636 32,487 31,265 34,162 29,770
Operating result before taxes on income 2,604 1,284* –391* –675* 2,450*
Combined ratio 5. Net expenses for claims and benefits 31,636 7,820 8,008 7,935 7,873 8. Result before amortisation of goodwill 2,948 510 485* 1,103* 850*
Gauß Prize for Dr. Gerhard Quarg The German Association of Actuaries (DAV) and the German Society for Insurance and Finance Mathematics (DGVFM) have been awarding the Gauß Prize since 1998. Named after Carl Friedrich Gauß, who was outstanding as a scientist in combining theory and practice, the prize recognises achievements in mathematics that are exceptional and, above all, of practical relevance. In 2004 it was awarded to Dr. Gerhard Quarg of Munich Re. His achievement: a marked improvement in loss reserving and rate calculation. The consequence: greater reliability and accuracy of many important prognoses. This work is also a further illustration of how important mathematics is for Munich Re in modelling and anticipating risks.
A further area of activity for mathematics came into being with the rapid growth of the stock markets, which promoted the shareholder-value principle and made return on equity the most important key indicator. Since then, one of our tasks has been to calculate the necessary operating equity for our reinsurance portfolio and distribute this in such a way between the individual segments that a riskcommensurate return can be determined for each business segment. We have a sophisticated risk model for this, which incorporates both our underwriting business and our investments. Ultimately, what this amounts to is a model for “steering“ the whole Group. After all, the more accurately we can calculate the steering components, the more precisely we can quantify the profit and loss potential inherent in each segment. Our actuaries’ work thus helps to prepare business policy decisions quantitatively.
Closely linked to this is an extremely important aspect which has grown in significance, not least owing to globalisation: the progressive tightening of accounting and solvency requirements. These demand a more realistic evaluation of assets and liabilities, for which loss reserves – and here we are back with Mr. Quarg’s topic – need to be accurately projected.
That hit home. But it was only years later that the best among us were able to grasp the practical dimensions of this bon mot. Of course, emotions are very difficult to capture in figures and formulae. But the field in which we actuaries at Munich Re move is scarcely less complex, our job being to model risks – and thus future scenarios – mathematically. We have made substantial progress in this area, arriving at calculations that are of enormous practical significance. This includes in particular the area of loss reserving, where our actuaries have been active for many years. With the new mathematical model, Munich Chain Ladder, loss reserves can be determined more precisely than before. Dr. Gerhard Quarg was awarded the Gauß Prize for this innovation – to the great delight of us all.
Whilst mathematics has always played an important part in life insurance, it was neglected for a long time in non-life insurance. This was partly because insurers believed errors in premium calculation could be remedied relatively quickly, owing to the short policy periods. It was also because the bases for calculating with higher volatilities had yet to be developed. All this has changed significantly in the last ten years, so that mathematics now plays an indispensable role in non-life insurance as well.
Premium calculation is a classic domain of mathematics, in which new areas of work are constantly emerging for our actuaries. Owing to the global deregulation trend and resultant privatisations, for example, rates and products have to be developed that enable underwriting to be conducted on a reasonably sound basis right from the start. The stronger the competition, the narrower the margins – and the more precise the premium calculations need to be, especially in the case of complex and non-standardised covers. We have created a pricing tool for such individual requirements.
More accurate ultimate loss projections with Munich Chain Ladder Two different data sets are commonly used for calculating loss reserves: on the one hand, data from the development of paid losses and, on the other, data that reflects the development of losses incurred, i.e. the sum of paid losses and case reserves. Ideally, the results of the two calculations should tally. In practice, however, they are nearly always different. It is therefore difficult to decide which of the two ultimate loss projections is likely to be the more accurate. Especially in liability business, with its long runoff periods, this is a major problem. Gerhard Quarg therefore looked into whether correlations between the two data sets could be found that would pave the way for a new, more reliable calculation system. He found them by working out a third approach involving parameters from old, fully settled accident years in which the values of the paidloss and incurred-loss data converged. He used this to link the two previously separate calculation methods with each other. Thus the chain ladder method became the Munich Chain Ladder method. With this model, it is possible to refine reserving procedures to such an extent that the uncertainty they always entail can be reduced in many instances – a significant improvement in loss reserving and rate calculation, also for our clients to whom we make the new calculation method available.
Head of Munich Re’s central mathematics team for many years: Prof. Dr. Thomas Mack.
* Ulrich Beck, Risikogesellschaft. Auf dem Weg in eine andere Moderne (Frankfurt a. M.: Suhrkamp 1986), translated into English as Risk society: Towards a new modernity.
We have understood the need to sharpen our “hunting instinct” further and have made innovation – one of Munich Re’s old strengths – a central topic. The objective is an omnipresent, creative and productive restlessness that courageously tackles new issues but is also able to recognise misdevelopments quickly and to stop projects without hesitation if necessary. After all, the relationship between risk and opportunity must be right.
Our innovation teams have an important part to play here. They are made up of highly qualified staff with a broad knowledge profile who work together with the operative units to identify and develop new fields of business, create new products and optimise our services and distribution channels. As they operate on a cross-divisional basis, they have the benefit of a broader perspective. They can approach the various topics from different angles and give new answers to new questions, not least because they incorporate experience from other areas and so initiate synergy effects. In short, the innovation teams function as catalysts that can stimulate fruitful developments within Munich Re and open up new sources of earnings.
Dr. Torsten Jeworrek, Board member responsible for the Special and Financial Risks Division, which coordinates Munich Re’s innovation teams.
At the end of the 19th century, Munich Re – still a young company – devised a completely new concept for machinery insurance. In contrast to fire insurance, which only indemnified losses resulting from named perils, machinery insurance was conceived as an all-risks cover – an innovative product that was rapidly expanded and soon offered for machines in nearly all sectors. Success was forthcoming: machinery insurance was soon being marketed in Austria, Hungary, Italy, the Netherlands and overseas as well. Munich Re developed further new products like loss of business insurance in 1910 (which anticipated the basic features of machinery loss of profits insurance) or erection all risks insurance (providing cover for the construction of technical facilities). Ever since that time, Munich Re has been partnering technological development and setting standards with its products, right up to the present “information age”.
Munich Re has also taken innovative paths in life insurance, especially in the field of so-called substandard risks. In 1916, for example, it set up the Research and Service Department for Medically Substandard Risks, which gave many companies in Germany and abroad the chance to offer insurance cover to groups of people who had previously been considered uninsurable. This actually involved around 40% of applications. Heart attacks, mental diseases, hernias or bronchial tuberculosis, a disease still very common at the time, were no longer grounds for exclusion. Besides this, it introduced a new rating system that no longer simply added together individual impairments but considered an applicant’s overall medical condition. This approach, together with medical progress, has meanwhile led to a situation where a good 98% of life insurance applications can be accepted. The evaluation system initiated by Munich Re has been continually refined and is used throughout the world as a rating aid. Given the constant acceleration in medical advances, the rating basis is reviewed at ever-shorter intervals. Most of the rating aids are long since available as internet-based services, which offer clients the latest knowledge on a constantly updated basis.
I remember it well. It was in Mumbai in September 1999. I was sitting in the office of my X-ray institute. Mr. Weber of Munich Re came in – and had to be careful not to bang his head on the ceiling. That might have become our first joint claims case. It was quickly evident that we shared the same vision: the development of a professional management system for Indian health insurance business. In India there are around 250 million potential insurance clients who can afford private health insurance cover. But only 4% of them have health insurance at present. What potential! Since data is lacking and there are no uniform standards for cooperation between medical providers, these opportunities could not be exploited up to now. Patients themselves are hardest hit: they are left to fend for themselves financially and cannot influence the quality of services. What we urgently needed was a constructive intermediary role between insurers, patients and healthcare providers, someone who could assess and manage the benefits and the related risks professionally so that trust is engendered among all concerned. With strong backing from Munich Re, Paramount has managed to fill this role – and with considerable success. Of the original total of 23 licensed Third Party Administrators (tpas), only three to four have respectable volume, and Paramount is today considered number one in the market. It lists among its clients all four state companies and six of the seven private insurers and enjoys an excellent reputation. Whereas to begin with we had 30 staff at our head office in Mumbai, today we have over 780 in more than 20 branch offices all over India, including more than 100 excellently trained doctors; with 200,000 claims cases a year, they manage a volume of some us$ 65m. Anyone familiar with the Indian market knows that this is only the beginning.
With Paramount, we already manage and administer two million insureds, and thus a considerable claims volume. As a result, we are acquiring an increasingly strong negotiating position with medical providers. Thanks to our business volume and know-how, we are able to negotiate discounts, to make treatments more transparent, to prevent manipulations in the settlement of accounts, and to trigger improvements in quality in the healthcare sector. We consequently offer our clients further added value, which they could not attain on their own. Increasing cooperation additionally gives rise to trust and confidence, also with the medical providers – to our mutual benefit. The hospitals and their investors recognise the growing demand potential. Their capacity is better utilised and the increasing revenue streams from the private sector create more financial stability.
Horst Weber and Dr. Nayan Shah, both pleased about the development of service company Paramount.
Professor Vahrenholt, you are quoted as saying “We have to solve three important problems in the 21st century: first the energy question, second the energy question and third the energy question.“ What makes the energy question so important? Vahrenholt: For me, there are three driving factors. The first is scarcity. We are about to experience an enormous hunger for energy – just think of developments in China, India or Brazil. Affluence is growing there, as are the populations. At the same time, oil production will reach its peak in the next 15 to 20 years. You’ll buy your next-but-one car in the oil crisis! The second driving factor is dependency. In the oecd states, we are reliant on politically unstable regions where 70% of the oil reserves are to be found. The third factor is the climate. We have already reached a position where we can only curb the force of climate change, not prevent it. If we need more energy, it will have to be sustainable. Whoever solves the energy question also answers all the important questions of the future, such as those relating to drinking water and food, because you need sustainable energy for all of them.
The key thing is to reduce carbon dioxide emissions. For that, major investments in renewable energy are necessary. What are the most important steps? Vahrenholt: Given the scarcity of resources and the growing demand, large investments are essential. What we need is sufficient co2-free energy. At present, all forms of renewable energy are more expensive than the classic forms. We need to get them to where they have the biggest chance of being competitive – technically and regionally. Every new form of energy takes 30 years to become competitive. With the renewables, we have only five to ten years behind us; in ten to 20 years, they will be the cheap forms of energy in the power mix. All nations and firms that are far-sighted and invest in renewable energy today will have an unassailable lead in ten years’ time.
What contribution can insurers make? Vahrenholt: If we don’t run any risks, we won’t have any chance of solving the huge problems of the future. Insurers can help to carry the risks. For this, we need companies like Munich Re which have the knowledge to recognise the role of renewable energies and, in their own interests, share the climate-policy perspective of those who are breaking new ground in this field.
During the drilling work, our experts were regularly on site for consultation and advice. The geothermal project was successful: the production rate of over 150 litres of water per second at a temperature of 122°c is sufficient to operate a 3.9 mw turbine for generating electricity and to run a district-heating system. This amounts to an annual saving of 30,000 tonnes of carbon dioxide, 7 tonnes of sulphur dioxide and 11 tonnes of nitrous oxide. Apart from significantly enhancing our reputation for innovative solutions in the field of renewable energies, the project also brought us an economic profit with its positive outcome, and documented one of Munich Re’s special qualities: being able to model risks well even on the basis of limited data – an ability that makes it possible to insure innovative projects at all. In the meantime there have been further enquiries, relating to similar projects. Trend: Strongly rising.
Competent risk management for human resources Employees are a company’s distinctive and most important asset. Nevertheless, few firms take the initiative to safeguard and develop this asset, using systematic and consistent risk management. “All soundly run firms practise personnel development”, says Dr. Rudolf Lürzer, partner of General Consulting Network and organiser of the Insurance Industry Conference at Arlberg. “The new and fascinating thing about the model Munich Re has devised is that for the first time the risks – which are difficult to quantify – are defined and measured using clearly formulated criteria. That’s what I call a consistent approach to human resources work. This concept can also be of enormous benefit to firms outside the insurance industry.”
An interview with Dr. Detlef Schneidawind, member of the Board of Management responsible for Human Resources, Life and Health
How great is this risk? Schneidawind: That’s precisely the problem. A firm may quickly find itself short of capital, but that risk is easy to measure. By contrast, the problem of having staff with insufficient or inappropriate qualifications is difficult to quantify. For that reason alone, we all too easily lose sight of it.
Schneidawind: We had long been discussing different risks, especially those posed by storms, diseases, new technologies and investments. What it came down to in every case was the need for functioning risk management. Then the penny dropped for me: How do I, as the Board member responsible for human resources, actually handle the risk connected with loss of staff, inadequate qualifications, or lack of motivation?
– Risk of demotivation: Staff do not give their best. – Risk of losing staff: High performers and knowledge carriers may leave the company. In our personnel controlling, we identify indicators for evaluating, monitoring and managing the individual risks.
We also incorporate other factors in the evaluation, such as the efficiency of staff recruitment and the capacity of our successor pool. The measure for this, includes an internal recruitment quota: if many positions can be filled internally, the company is not so dependent on external factors such as demographic development and the situation on the employment market. If the successor pool is well stocked by the staff development scheme, it is possible, for example, to nominate at least three potential managers for each executive position to be filled. Munich Re can counter the risk of shortages well in this way – but at the same time it exposes itself to another risk: if three potential successors are available for each management position, two inevitably lose out. That can lead to frustration, demotivation or even loss of very well trained staff. We counter this risk with a whole package of measures. Employees must be eligible for several positions. Supply and demand should be more or less balanced out. But a competitive, performance-related salary is also part of the equation, as are fringe benefits and a company pension.
This shows that the interdependencies of different influences and measures make the management of human resources risks a similarly complex task to that of the classic risk management with which we conduct our business.
Today I am in a much more agreeable position than one year ago, when I had to report to you on a disappointing result for 2003. It was already becoming apparent then, however, that the steps we had taken would bear fruit in 2004. With the Group profit for the past business year – the best in Munich Re’s history – we have achieved a turnaround that could not be more striking. What did I want to accomplish in the first year of my chairmanship? Are we on course with our result for 2004? At the beginning of last year, we established three focal points in our programme to secure a profitable future for the Munich Re Group: – Firstly, in reinsurance, to maintain the high level of profitability we had regained in the previous year, building on it where possible. – Secondly, in primary insurance, to return ergo to the profit zone. – Thirdly, to ensure by means of tools like our integrated risk management that our investments support our underwriting business – without themselves tying up too much risk capital.
We worked energetically on these three major projects in the past year. The result we achieved in 2004 is an important and visible step towards sustainable profitability. It documents our will to regain our undisputed strength of former years and gives us the strategic scope we need to secure lasting success for the Munich Re Group in the future. And that is how we also aim to fulfil your justified expectations: the capital that you have invested in Munich Re should earn an adequate return. For I regard your confidence in Munich Re – and thus also the confidence of the capital markets – as a basic precondition for longterm success.
Despite these adversities, a combined ratio of 98.9% enabled us to post an underwriting profit in property-casualty reinsurance. For me, this shows two things. Our reinsurance portfolio has now attained a quality that allows us to absorb even large additional loss burdens. At the same time, the result endorses our policy of not deviating from risk-adequate prices and conditions.
Given its importance in the Group, ergo has a major part to play in sustaining future profitability. The steps for restructuring ergo, which I strongly supported, were initiated in 2004 and are already having a positive effect. With the clear accountability that now exists, business objectives can be pursued much more vigorously than before.
We are following our clear words on the significance of primary insurance in the Munich Re Group with action. Not only does ergo remain an integral part of the Group, we will also be placing more emphasis on the Group perspective when taking decisions that affect the Munich Re Group as whole. ergo and Munich Re will cooperate more closely in future. As regards the fundamental questions of strategy development and value-based management of our business, we see ourselves as one unit. That – no more and no less – is the meaning of “uniform control“, to which we committed ourselves at the end of last year. But we have strictly separated the two big blocks in terms of operative business, not least because our clients in reinsurance rightly expect this of us.
Munich Re shares We have set ourselves clear objectives: sustained profitability and rigorous management of our business. The majority of analysts assess our shares positively.
To this end, we need methods and tools for dynamically managing risks with foresight and prudent deployment of capital. The integrated management of risks on the assets side (such as investments) and the liabilities side (underwriting business) is of great importance. The better we control our risks, the more risk capital we can free up to finance, say, strategic growth opportunities and advance our Group’s development.
Geothermal energy project insured Germany’s largest geothermal energy project is launched in Unterhaching. The plan is to erect a geothermal power plant with an output of around 3.7 MW by the end of 2005, saving up to 30,000 tonnes of carbon dioxide per year. We come up with a new kind of insurance to cover the investment risks involved.
Involvement in India By founding Munich Re India Services Ltd, Mumbai, we strengthen our presence in the Indian insurance market. Our service company Paramount offers local health insurers effective services.
dkv in China dkv plays an active part in becoming a shareholder of the first private health insurer in growth market China. > Page 71
Shareholdings reduced further We reduce our investments in the financial services sector further in conjunction with HypoVereinsbank’s capital increase and by lowering our stake in Allianz to under 10%. The marketing cooperation between ergo and the hvb Group is maintained.
New management structure for ergo ergo reorganises its management, providing for uniform, group-wide control and thus greater profitability. The identity of the individual brands and their sales channels remain intact.
Cyclones cause high losses An unusually high number of cyclones hit the Atlantic and Pacific coasts. In a space of six weeks, four major hurricanes give rise to losses in the Caribbean and southeastern United States running into billions.
1880 – Founding of Munich Re On 19 April, Carl Thieme establishes the Munich Reinsurance Company together with Messrs. Cramer-Klett, von Finck, Schauss, Pemsel and Schmidt-Polex. The first treaty is concluded with Thuringia. This and 32 other treaties, one of which is the first to be taken out with a foreign partner, are the proud results of Munich Re’s first year of business. Five years later, Munich Re is the largest reinsurer in the world.
1916 – Life insurance for everyone Life insurance used to be reserved for the healthy. In 1916, Munich Re creates a department that looks into “substandard risks”. Its records and those of other insurers are used to develop a risk assessment system. To this day, Munich Re’s mortality tables are the material basis for underwriting life insurance policies – also for people who are not completely healthy.
1996 – Acquisition of American Re On 14 August, Munich Re and the Board of Directors of American Re as well as the latter’s majority shareholder, investment company Kohlberg Kravis Robert & Co., reach agreement on Munich Re acquiring American Re for a total price of approximately us$ 3.3bn. Through the us reinsurer, Munich Re strongly expands its market position in the USA, the world’s largest insurance market.
1997 – ergo and meag established 3 July. The insurance groups victoria/d.a.s. and HamburgMannheimer /dkv merge under one holding company and become ergo Versicherungsgruppe ag. To reinforce the financial strength of Munich Re and ergo on a sustained basis, meag munich ergo AssetManagement GmbH is founded in 1999. Today, meag manages assets totalling approximately €146.8bn (as at 31 December 2004) and is hence one of the largest asset managers in the German insurance industry.
1985 – Mexico City in ruins On 19 September, the largest city in the world is jolted by an earthquake measuring 8.1 on the Richter Scale and with a 7.5-magnitude aftershock the following day. 10,000 people are killed. A third of the city is reduced to rubble. Mexico’s earthquake is the largest earthquake loss since the 1923 quake in Tokyo and one of the greatest burdens for the company since its founding.
1890 – London, a difficult terrain From 1886, the first representative offices abroad are established in Paris, St. Petersburg, Copenhagen and Stockholm. London, however, is still viewed with caution. The market is regarded as extremely difficult for foreign companies. Carl Schreiner goes to London in 1890. Contrary to all expectations, business develops amazingly well. In 1899, Schreiner ventures to cross the big pond – and is again successful. London is considered a milestone in the internationalisation of Munich Re.
125 years Advancing innovation 1882 – “Our phone number is 46” The Royal Bavarian Post Office succeeds in enlisting 104 parties interested in owning a telephone and begins to set up a telephone network. Munich Re is one of these parties, and its first telephone connection is number 46. Not until 17 years later are electric light bulbs used to light the Company’s offices. On 2 August 1899, Maffeistrasse 1 is hooked up to the municipal electricity grid.
1950 – The third beginning Things are finally starting to look up. Foreign trade is allowed again, and the Company moves back into the previously requisitioned Main Building. Dr. Alois Alzheimer steers the company through the difficult post-war years. He is considered a strong guarantor of continuity and symbolises the successful rebuilding of Munich Re. In 1954, he recruits Horst K. Jannott, who in 1969 becomes his successor as Chairman of the Board of Management and heads the Company until 1993.
1973 – A logo travels the world Anton Stankowsi designs Munich Re’s new logo: parallel lines meeting on a square field. The linear structure stands for connection and exchange, partnership and interaction, reciprocity and trust, development and order, safety and solidarity, size and differentiation. The logo is introduced worldwide on 1 January 1973.
1906 – Earthquake in San Francisco On 18 April 1906, the San Andreas Fault tears open over a distance of more than 200 kilometres. The earthquake strikes San Francisco with full force. 750 people are killed. The property damage incurred comes to an inconceivable 500 million dollars, Munich Re’s share amounting to 11 million marks. In terms of premium income, the San Francisco earthquake constitutes the highest financial burden Munich Re has ever had to bear.
1910 – Munich Re takes to the air Munich Re enters an absolutely new field – aviation business. The market is young, the number of potential insureds is low, a spread of risks is hardly possible. In 1913, seven insurers purchase the first reinsurance cover for the fire insurance of an airship. In 1918, an extensive exposé is written on the liability and accident insurance of aviation risks. The first aviation risks are reinsured in 1919.
1919 – The second beginning During the First World War, trading-with-the-enemy laws prohibit any business contacts with the German Reich. Countless reinsurance treaties are annulled and companies in foreign countries wound up. After the war, important countries such as Russia, England and the USA remain closed to Germany for many years. Gradually, from 1919 onwards, Munich Re’s old business partners start coming back, eager to revive relations.
I am sure that I speak on your behalf when I thank the staff of the Munich Re Group for their dedication and hard work in the business year 2004. Without their commitment, the great turnaround in results would not have been possible.
Munich Re – 125 years 2005 is a special year, as we are celebrating our 125th anniversary. Munich Re became the largest reinsurer in the world within five years of its foundation. A glance at our history shows why we have been successful over so many years. We have always looked ahead, have constantly pursued new avenues of opportunity, and have utilised our risk competence for ourselves and our clients. Developing creative and innovative solutions for new risks – that is the recurrent theme of our corporate history.
Tsunami in South Asia On 26 December, there is an extremely strong earthquake off Sumatra. Seismic sea waves (tsunamis) surge with great force against sections of coast thousands of kilometres away. Around 180,000 people are killed, 100,000 reported missing and millions made homeless.
On 21 March 1888, our shares were traded on the Munich stock exchange for the first time at a price of 700 marks. Demand was so great that they had to be allocated. By 1900, their price had already reached 2,435 marks. Today we are one the world’s most recognised listed companies in successfully reconciling economy and ecology.
Stock market year 2004 Hesitant start but strong finish Although we were not satisfied with the performance of our shares in 2004, the largely positive assessments from analysts show their confidence in the development of our Group
Insurance stocks moved more or less parallel to the market as a whole, with the msci insurance index rising by 3.9% in 2004. Within the insurance industry, international reinsurers had a rougher ride as their results came under pressure from heavy windstorm losses. The hurricanes and typhoons in the USA, the Caribbean and Japan, and the earthquake off Sumatra, made 2004 the costliest year ever for natural catastrophes.
In the first half of 2004, a sideways trend prevailed on the main stock markets. Positive news of rising company profits was negated by investors’ fear of higher interest rates. After most stock exchanges had recorded their year low in mid-August, share prices took an upward turn, boosted by declining yields on the bond markets and the outcome of the elections in the USA. At the end of 2004, indices like the Dow Jones, the euro stoxx 50 and the dax closed between 3% and 7% up.
The insurance sector also suffered following the news that a lawsuit was being filed by the New York Attorney General against us insurance brokers (see page 142). In the aftermath of this announcement, our shares fell to a year low of €72.73 in October. However, bolstered by the turnaround of the ergo Group and the unchanged prospect of a record result for 2004, our shares rallied at the end of the year. In the last two months, they recorded an aboveaverage price increase compared with the market and the sector as a whole.
Nevertheless, ending down 5.9% overall in 2004, Munich Re shares were outperformed by the blue chip indices and competitors’ stocks. We are not satisfied with our share price performance, but we remain convinced that if we continue to rigorously pursue our strategy, our stock price should soon reflect the fundamental positive development of our Group.
By reinvesting dividends to purchase further shares and making use of opération blanche (i.e. reinvesting the proceeds of subscription rights), a German shareholder would have been able to add a total of 1,007 no-par-value shares to the portfolio.
Share profile Munich Re shares are no-par-value registered shares. Each share carries one vote. First launched on the stock exchange in Munich on 21 March 1888, they are today traded on all the German stock exchanges. The major part of the trading (over 95%) takes place on the electronic platform Xetra. We ranked 11th among the dax stocks in terms of market capitalisation as at 31 December 2004.
Our free float, which is important for the weighting of Munich Re shares in various indices, stands at around 80.6%.
Featured in many indices Munich Re shares have been represented for many years in the main national and international share price indices like the dax and the euro stoxx 50. In the sector indices for insurance companies, Munich Re has traditionally had a strong weighting. Since 2001, our shares have also been included in the Dow Jones Sustainability and the ftse4Good index family. These sustainability indices only accept companies that fulfil exacting ecological and social criteria and are among the best in their sector (see page 83).
North America 9.3% UK 9.2% Others 0.1% *Percentage of share capital.
dj euro stoxx 50 1.1 msci Euro 0.8 ftse eurotop 100 0.6 dj Sustainability World 0.3 ftse4Good europe 0.6 dj euro stoxx Insurance 8.6
Investor relations work Quick and pertinent information is a key factor for participants in the international capital markets. Our investor relations team is a competent contact partner, always ready to meet their needs. We attach importance to open and honest dialogue – particularly in difficult times. This gives investors the transparency they require for their investment decisions.
Our communications have been further enhanced by the speed of our financial reporting. Since the second quarter of 2004, we have been publishing our quarterly reports three weeks earlier than three years ago. Our “fast close” approach is designed to meet the capital markets’ high-level requirements. The annual report, too, is appearing one month earlier than last year and six weeks earlier than the annual report for 2002.
Internet services expanded We publish all important investor relations information on our website where, besides annual and quarterly reports, investors can find details about our shares, analysts’ opinions, important dates in the financial calendar, and much more. Our already extensive online services were expanded further last year with the section “Socially responsible investing”. A further addition followed on 3 January 2005 with our new online shareholder portal. www.munichre.com/register
Great interest in the Annual General Meeting The 117th Annual General Meeting of shareholders on 26 May 2004 was attended by over 4,000 at the International Congress Center Munich. The proposals of the Board of Management and Supervisory Board on the individual agenda items were adopted by the shareholders with clear majorities in each case.
Our internet service for the Annual General Meeting is highly advanced. Nearly every fifth admission card was ordered electronically in 2004. Many shareholders again availed themselves of the option to authorise a proxy nominated by the Company. In fact, these proxies represented more shareholders than the banks did via voting rights from shares held in custody. Shareholders who were unable to attend in person once more had the opportunity to follow the whole Annual General Meeting live on the internet.
All the information relating to our 2005 Annual General Meeting can be found on our website in a special section created for the agm (www.munichre.com/agm). Our portal’s service pages also offer shareholders other options, such as registering to receive documents for the Annual General Meeting by e-mail or updating their registered shareholder data online.
The term of the bonds exchangeable into Allianz shares ends on 9 June 2005. If bond holders do not make use of their conversion rights, the bond will be redeemed at 108.56%. At the end of the year the bonds stood at 107.4%.
Issuer Munich Re Finance b. v. Munich Re- ergo International ag American Re insurance Company Corporation
Diversification effects are calculated using our risk model, with which we determine the amount of risk capital necessary for the respective risk assumed. If risks are independent of each other in terms of their occurrence probability, less risk capital is needed for the portfolio as a whole than for the sum of the individual risks. The size and mix of our risk portfolio allows us to use such diversification effects on our existing risk capital to make available comparatively more capacity. A further dimension is to be found in the area of capital allocation between the fields of business, e.g. in asset-liability management, which we are making a point of expanding, not least in the light of our experiences in the stock market crisis of the last few years. Also important in this context is accumulation control.
Under “operative quality” we subsume a number of different requirements. We devote particular attention to sophisticated steering tools and excellent management. Thus we see the “art of underwriting” as a cycle that includes not only sophisticated actuarial methods but also ongoing analysis and monitoring of business development. By incorporating feedback from claims experience into pricing policy, we can respond rapidly to current trends. The art of underwriting also means that knowledge from science or trend research is taken into account for new risks at an early stage, using scenario techniques, in order to make such risks manageable and thus insurable. The more successful we are in this, the greater the lead we have on the competition and on possible political measures that might limit the scope for structuring appropriate underwriting solutions.
* Non-life. ** Property-casualty (including legal expenses insurance). ***Annual result divided by mean shareholders’ equity, including minority interets in each case.
In life primary and reinsurance and in health primary insurance, we manage and measure performance using the embedded-value system.
– We strive for operative quality in the management of our business and in the methods and tools we use to steer it.
3) Online monitoring of the renewal progress (comparison of target price/ actual price) inter alia with our Renewal Steering and Monitoring System (rsm). This ensures the close intermeshing of vbm and underwriting.
Risk-commensurate prices and conditions – A hallmark of quality In order to make ourselves as independent as possible of the cyclical movements that have always characterised the reinsurance market in non-life business, we focus strictly on achieving risk-commensurate prices and conditions based on our calculations of the technically required level.
Strong capital base, integrated risk management and concentration of our resources on commercial success – Financial strength: We safeguard and improve our financial strength, which offers our clients top-level security. – Integrated risk management: We strive for an optimised portfolio in respect of the risks on the assets and liabilities sides of our balance sheet – i.e. the risks of investments and underwriting – both individually and in the interplay between the two, in order to use our risk capital in the best possible way. Internal risk models form the basis for decision-making. The structure of our obligations on the liabilities side of the balance sheet determines the investment of our assets.
– Innovation: We draw on our innovative capacity for dealing with challenges of the future like climate or demographic change, and exploit it to derive new business perspectives.
– We have achieved the desired turnaround in results in primary insurance. The new structure of the ergo Group, which was conceived and largely put in place in 2004, is designed to make this recovery lasting.
How does Munich Re manage its business? Our system of value-based management is consistently oriented towards one central goal: increasing our corporate value.
For non-life business, we use the following financial concept: The adjusted result serves as the basis for determining the value added. It consists of the adjusted underwriting result, the investment result and the remaining non-technical result, each adjusted to eliminate the effects of random fluctuations.
If a business unit holds equity capital in excess of the risk-based capital in order to comply with market, rating or supervisory requirements, a return needs to be earned on this as well.
In addition to these purely financial performance factors, non-financial performance measures like market penetraction, process efficiency and staff satisfaction play a major part in the strategic management of the Munich Re Group. We closely link strategy and operative planning by defining our strategies in balanced scorecards, from which we derive initiatives, performance measures and responsibilities within a framework of four perspectives: “financial ”, “market and client”, “process” and “employee”. We promote an entrepreneurial culture among staff through the clear allocation of responsibility and accountability, which makes it more apparent 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 executives, ensure that the principles of value-based management are realised. In this way, we create the basis for identifying quickly and clearly those fields of business which add value for Munich Re, and for optimising the use of our resources.
Munich Re Group Annual Report 2004 03_Group profile The Board of Management
* 1956, lawyer, with Munich Re since 1985 Executive Offices Press Internal Auditing Strategic Planning 03 Dr. jur. Heiner Hasford *1947, lawyer, with Munich Re since 1978 Finance General Services Organisational Design and Development 05 Dr.rer.nat.Torsten Jeworrek *1961, mathematician, with Munich Re since 1990 Special and Financial Risks Information Technology 07 John Phelan *1947, underwriter, with Munich Re since 1973 North America 09 Dr. jur. Jörg Schneider *1958, business graduate, lawyer, with Munich Re since 1988 Accounting Controlling Integrated Risk Management Taxes Investor Relations 02 Georg Daschner *1949, chartered insurer, with Munich Re since 1965 Europe 2 and Latin America 04 Stefan Heyd *1945, lawyer, with Munich Re since 1975 Corporate Underwriting/Global Clients 06 Christian Kluge *1941, chartered marine insurer, with Munich Re since 1964 Europe 1 Corporate Communications 08 Dr.phil. Detlef Schneidawind *1944, lawyer, graduate in business management, with Munich Re since 1973 Life and Health Human Resources 10 Karl Wittmann *1945, chartered insurer, with Munich Re since 1961 Asia, Australasia, Africa
Dr. jur. Hans-Jürgen Schinzler (from 2 January 2004) Former Chairman of the Board of Management of Munich Reinsurance Company
Peter Burgmayr (until 26 May 2004) Employee of Munich Reinsurance Company
Holger Emmert (from 26 May 2004) Employee of Munich Reinsurance Company
Dr. rer. nat. Rainer Janßen (from 26 May 2004) Employee of Munich Reinsurance Company
Prof. Dr. rer. nat. Henning Kagermann Chairman of the Executive Board and Chief Executive Officer of sap ag
Wolfgang Mayrhuber Chairman of the Board of Management of Deutsche Lufthansa ag
Ingrid Müller (from 26 May 2004) Employee of Munich Reinsurance Company
Dr. jur. Dr.-Ing. E. h. Heinrich v. Pierer Chairman of the Board of Management of Siemens ag (until 27 January 2005) Chairman of the Supervisory Board of Siemens ag (from 27 January 2005)
Kerstin Seefried (from 26 May 2004) Employee of Munich Reinsurance Company
Ludwig Wegmann (until 26 May 2004) Employee of Munich Reinsurance Company
Munich Re Group Annual Report 2004 03_Group profile Munich Re Group
The Munich Re Group is one of the world’s leading risk carriers. Over 40,000 staff in 60 countries vouch for the outstanding quality of our service. Our business extends along the value chain in insurance to include all aspects of risk-carrying in primary insurance and reinsurance business. We also operate in the field of asset management.
Reinsurance is by nature internationally oriented, since many large and catastrophe risks can only be borne in economic terms if they are spread globally. For perils such as earthquake, a balance of risks can only be achieved in a portfolio that is global in composition.
Besides the traditional lines of business, we reinsure inter alia the risks of natural catastrophes, satellites and major events, and those arising from the use of genetic engineering and information technology or from the management of companies.
The Life and Health division underwrites our life and health reinsurance business worldwide. It reflects the structure of many of our clients, which conduct these two classes of business separately from property-casualty insurance, often through independent companies.
In our division Europe 1, we handle non-life business from our clients in Germany, Switzerland and Austria, eastern Europe, Greece, and Turkey.
Our division Asia, Australasia, Africa takes care of property-casualty business with clients in these three continents and the Pacific Islands.
Subsidiaries/Branches: Munich Ré France Münchener Rück Italia Münchener Rückversicherungs-Gesellschaft Sucursal España y Portugal Munich Reinsurance Company UK General Branch
Atlanta, Boston, Chicago, Columbus, Dallas, Hartford, Kansas City, Los Angeles, New York, Philadelphia, Princeton, San Francisco, Seattle, Montreal, Toronto, Vancouver
Atlanta, Chicago, London, Montreal, Mumbai, Princeton, Santiago de Chile, Sydney, Toronto, Waltham
Subsidiaries/Branches: Munich Reinsurance Company of Australasia Munich American Reassurance Company Munich Reinsurance Company Canada Branch (Life) Munich Reinsurance Company UK Life Branch
The division Corporate Underwriting/Global Clients (cugc) handles our accounts with major international insurance groups (hence “Global Clients”) and writes business worldwide in special classes such as agriculture and workers’ compensation. Its most important markets are Germany, the UK and the USA. In addition to this, it performs the important function of corporate underwriting for the reinsurance group in non-life business: its staff clarify fundamental, cross-divisional issues of underwriting policy, are responsible for quality assurance, integrate actuarial methods in our business processes and set standards for claims management and reserving.
Flaspöhler Survey 2004: Best Overall Reinsurer In a survey by the Flaspöhler Research Group, an independent us market research institute, Munich Re was voted “Best Non-Life Reinsurance Company” ahead of all other competitors. It also came out top in the “Life Reinsurers” category. This means Munich Re was considered by the participating primary insurers to be the best provider, taking the title of “Best Overall Reinsurer”.
Best annual report Munich Re was awarded first place by “manager magazin” in its competition for the best annual report.
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 2004.
Health dkv Belgium s.a., Brussels dkv Seguros y Reaseguros s.a., Saragossa
Legal expenses d.a.s. Subsidiaries and branches in Austria, Belgium, Czech Republic, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Poland, Slovak Republic, Spain, Switzerland and the UK
Munich Re primary insurance group *Only ergo companies with a premium volume of more than €50m are listed by name.
As primary insurers, we provide more than 30 million clients – mainly private individuals and small and mediumsized firms – with security and service in life, health, property -casualty and legal expenses insurance. Around 30% of the business, which has a total premium volume of €17.5bn, derives from property-casualty and 70% from life and health insurance.
Structure of the primary insurance group Our primary insurers include the ergo Insurance Group, the Karlsruher Insurance Group, Europäische Reiseversicherung and the assistance services provider Mercur Assistance.
In April 2004, ergo unveiled its new management organisation. Segment responsibility at holding company level and the chairmanship of the relevant company have been combined. In addition, there are two new seats on the ergo holding company board for cross-segment functions. This bundling of responsibilities represented a consistent extension of the single back-office approach. The strong identity of the individual brands and their sales channels remain intact.
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. Moreover, ergo is one of the leading providers in the market for company pensions. In health insurance and legal expenses insurance, it holds a leading position in Europe through dkv and d.a.s. respectively.
ergo’s marketing strategy is built on the interplay of different distribution channels: apart from its own strong sales organisations, its exclusive banking partnership with the hvb Group in Germany plays an important role. ergo also has a joint venture with KarstadtQuelle ag for the sale of insurance products.
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 products are also sold through branches of cooperative banks, mainly in southwestern Germany.
The Watkins Syndicate has been part of the Munich Re Group since 1997. It specialises in marine business and has taken advantage of the favourable conditions over the last few years to substantially improve its market position and broaden its risk profile. Today it is the largest marine syndicate at Lloyd’s and is represented in the UK, Hong Kong and Singapore.
ergo Trust 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 mainly manages our Group’s own investments. It is 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.
Asset management structure 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.
meag’s stake in the joint venture fsb FondsServiceBank GmbH was sold with effect from 1 January 2005.
“Integrated risk management” or “customised portfolio solutions” would have been completely unknown to our founder Carl Thieme – but not the commitment to developing future-oriented, individual client solutions. In 1910, we broke new ground by writing aviation insurance; nowadays it is the uncharted territory of fields like nanotechnology and biotechnology that we are concerned with. For 125 years it has been our task to answer the questions of tomorrow today.
Hurricanes and typhoons: New paths through the storms Behind us lies a record year of windstorms. The trend is clear: a higher incidence of cyclones and increasing losses. Our approach to managing the risks more effectively includes new solutions to supplement a high level of underwriting discipline.
The northwest Pacific was also affected by violent storms in 2004. Typhoons Songda and Tokage caused billions of dollars of destruction on the Japanese islands. Insurance losses from these two cyclones and from eight other tropical cyclones are estimated at us$ 5–6bn.
The trend is unmistakeable: severe storms are becoming more frequent. Long-term weather observations prove this, as does the record year 2004. In the northwest Pacific, it is the tropical cyclones and weaker typhoons that are occurring more frequently, whereas in the Atlantic and Caribbean the number of windstorms in all categories is increasing. Particularly alarming is the rise in very severe hurricanes: around 150 years ago there was an average of only one windstorm of this category over the Atlantic every year; now the expectation stands at three.
Consistent underwriting policy Munich Re is countering this trend by adopting various strategies. We are using our meteorological expertise, which is unique in the international insurance industry, to calculate the weather risks as accurately as possible and taking these findings into account in our treaty conditions, for instance by consistently introducing event limits. Our underwriting policy is positively reflected in our result for 2004: in relative terms, Munich Re was not hit as hard by the windstorms as some other providers.
This is illustrated by the greatest-ever loss in the history of marine and offshore energy insurance, which is currently estimated at us$ 2.5bn and was triggered by Hurricane Ivan. Munich Re’s share amounts to only approximately us$ 40–45m, i.e. less than 2% of the overall loss. Since we consider the accumulation exposure for offshore energy risks to be very high, we consciously kept our share in catastrophe layers comparatively low in this business segment. In our view, the reinsurance premiums that can be achieved in the market are not commensurate with the statistically expectable return periods. This is one of the reasons why Ivan’s effect on Munich Re was relatively limited, even though our world market share in treaty reinsurance is significantly over 10% in the marine and offshore energy area.
Hurricane Ivan, moving at wind speeds of up to 220 km/h towards the coast of Alabama. Picture by kind permission of the modis Rapid Response Project of nasa/gsfc.
Eastern Europe: Differentiated view required The enlargement of the EU to the east has given a definite boost to economies in central and eastern Europe. A differentiated view of the economic parameters is nevertheless essential. New insurance products, in-depth knowledge of the local situation and good relations with clients can open up sustainable opportunities for development.
Progress in the markets of the candidates for eu accession, Bulgaria and Romania, is considerably slower than in the new eu member states. People in these countries have not yet adjusted to the idea of privately insuring themselves against risks. The attitude still prevails in many cases that the state is responsible for providing cover for its citizens.
Social security systems under pressure The states of central and eastern Europe face similar if not even greater problems with their social security systems to those encountered by western countries. Whereas Germany currently spends approximately 4% of its gross domestic product on financing its system, this figure is around 15% in Poland. Here, too, new models are called for to provide the necessary security, and we draw on our know-how to support the creation of appropriate solutions.
In order to provide new impulses and expand our business, we are employing innovative concepts in these countries to help primary insurers launch new insurance products on the market. One example is a model we have devised for disability insurance, which ensures extensive cover for two years after the occurrence of occupational disability. The idea is that insureds endeavour to take up a new occupation within these two years. If they do not succeed, they only continue to receive insurance benefits if their disability prevents them from pursuing any occupation at all. This scaled cover makes it possible to set an attractive insurance premium for the eastern European market.
Another way to protect oneself against losses from natural catastrophes like earthquakes or windstorms is through structured bonds, known in the trade as catastrophe bonds or insurance securitisation. Here the risk of a potential loss event is securitised and issued as a bond. This has a better return than traditional bonds, because investors demand an enhanced spread for what is generally regarded as a novel form of risk. For if the predefined loss event occurs, the bond loses some or all of its value, the paid-in capital is used to cover the losses, and the investor could be left with nothing.
Growing capital-market appetite We are convinced that our tools for assessing risks and for devising these innovative capital market solutions constitute an important part of risk management – both for our clients and for our own business. Although the capital market ’s appetite for insurance-related risks is currently still small, there is clearly an upward trend. Institutional investors in particular can no longer ignore such products and regard these risks as an interesting way to complement and diversify their investment portfolios.
Prepared for the new regulations Many companies underestimate the advantages that can be derived from arranging protection for their claims portfolios. But pressure is growing to carry out effective risk and capital management – it is required by investors, rating agencies and new solvency and accounting regulations. Retrospective reinsurance also offers interesting opportunities for limiting risks in the case of strategic realignments or takeovers.
Our cps brochure introduces the Munich Re centre of competence and concisely outlines the basic functioning of retrospective reinsurance. www.munichre.com/ mr-publications Order number 302-00926
Health is a valuable good. The industrial nations in particular spend a great deal of money on it. Top of the table in per capita expenditure for healthcare is the USA, which according to a World Health Organization report, stood at us$ 4,887 in 2001. In second place was Switzerland with us$ 3,779, whilst average spending in the European Union totalled us$ 1,843. The costs of healthcare systems are constantly rising worldwide. In many countries, ideas for more efficiency are being debated, some of which have been implemented. But not much has changed with regard to the fundamental problems. There is still a tendency to look at things in isolation, with a lack of coordination between service providers, cost carriers and end consumers.
The Munich Re Group is one of the major cost carriers in healthcare. dkv, for example, which belongs to our primary insurance group ergo, is the largest private health insurer in Europe. Europäische Reiseversicherung provides cover for medical costs incurred during travel. In addition, as health reinsurers, we assume and manage risks from our primary insurance clients throughout the world. Given this position, we naturally have a vital interest in money being spent well on patient care and in all technical risk components being soundly assessed and managed.
Munich Re has been offering individual reinsurance solutions for claims portfolios since 1997. The risk assessment process for these covers focuses on different elements to those in traditional reinsurance: at the centre are the risks of error and change. The underwriting of such business has consequently been assigned to a dedicated centre of competence – Customized Portfolio Solutions (cps).
Twelve specially qualified staff provide the expert knowledge required for the underwriting and performance control of such business and ensure that this know-how is developed further. cps also draws on the experience and knowledge of actuaries, lawyers and other experts via the international network of the Munich Re Group. This enables us to successfully exploit the whole range of opportunities emerging from this globally growing market.
Munich Re Group Annual Report 2004 04_Business issues 2004 Healthcare management
Competence along the whole treatment chain Optimising the management of medical care is at the very heart of our initiatives. Throughout the whole treatment process – from searching for the right specialist, through diagnosis and therapy, to rehabilitation – we provide services that give our clients additional benefits to those of the insurance itself and also improve our risk management. A guiding principle in this process is a fair balance of interests between insured, insurer and provider, to achieve the best possible treatment at economically acceptable conditions.
We help to resolve the apparent conflict between optimum care and lowest possible costs through our additional services. Our subsidiary MedNet, for instance, assumes organisational tasks in connection with health insurance, especially in the Arab region but also in Italy, Greece, Turkey and Cyprus. In these countries, many health insurers are not equipped to deal with the special procedures and business processes connected with medical care and invoicing. In order to improve healthcare management, we draw on the information gained from our insurance cases and the medical know-how of our experts. We work out proposals for better and more cost-effective treatment. Thus a patient whose complex medical treatment in the United Arab Emirates would have cost us$ 17,000 was, on our initiative, treated in Germany – at a higher standard of medical quality and a significantly lower cost of us$ 12,000.
And so, in quite different ways, we as the Munich Re Group improve the management of medical and insurance cases with our experience and competence. Our service initiatives provide added value for health insurers and patients, as well as enhancing quality and efficiency both at primary insurance companies and in our own insurance and reinsurance.
A cool head and experience in disaster relief are essential in such operations. With its extensive know-how in providing professional aid, also internationally and over long distances, Mercur Assistance ensured that those in need received fast and competent help.
dkv in China: Initiative in the largest growth market The Chinese market offers virtually unparalleled potential for development. ergo’s health insurance subsidiary dkv has played an active part in establishing the first private health insurer in China.
dkv has contributed not only financially; it has also offered the new company organisational and personnel support. 15 of its specialists are providing initial assistance in building up picc Health. dkv is represented on the company’s administrative, management and supervisory bodies. It also provides the chief actuary, who plays a major role in developing new products and premium calculations. dkv can draw on its experience as Europe’s largest private health insurer, and we are convinced that all parties will benefit from it.
Munich Re Group Annual Report 2004 04_Business issues 2004 DKV in China
Life insurance: The future belongs to private provision Despite the reforms in Germany, life insurance remains an attractive way of making private provision for old age. The companies in the Munich Re Group offer security and profitability.
Throughout Europe, demographic change is putting pressure on public pension systems. The trend towards lower birth rates is unbroken, whilst life expectancy is increasing. The consequences: lower pensions from social security systems financed on a pay-as-you-go basis, and a greater need for private provision. This is particularly evident in Germany, where there is a substantial amount of catchingup to do in the field of private provision compared with other countries. We are therefore expecting especially good business opportunities for the life insurers in our Group in the coming years.
New: Taxation at the benefit stage Following the major pension reform of 2001, legislation was adopted in Germany last year for another extensive reform. The Retirement Income Act provides for a gradual transfer to taxing pensions at the benefit stage, with tax being reduced on contributions step by step and levied instead on the pensions paid. Putting this reform into practice will take time: the change is scheduled to be completed by the year 2040.
Munich Re Group Annual Report 2004 04_Business issues 2004 Life insurance
Our life insurers are paying even greater attention to cost and risk management, with the aim of making life insurance secure and profitable both for their clients and for our shareholders. Their risk management focuses particularly on investments and the biometric risks like longevity. Munich Re has developed an extensive range of tools to address the short-term risks (e.g. fluctuating share prices) and long-term hazards (e.g. interest-rate and biometric risks). The tools allow the respective risk situation to be optimally assessed and managed. We utilise the findings to further enhance our asset-liability management and our life insurers’ product development.
Focal points of the meetings Five meetings of the Supervisory Board took place in the business year 2004. The Supervisory Board allocated more time overall for the individual meetings – acting on a suggestion resulting from the efficiency audit of its activities – and was thus able to devote itself even more extensively to the Company’s business situation. Special topics were also dealt with in depth, including the significance of long-term global trends and the related challenges for Munich Re. The meetings were attended by all the members in virtually every case.
Between the meetings, we were informed by the Board of Management in writing about various business transactions and events, including the successful renewals in reinsurance, Munich Re’s approach with regard to HypoVereinsbank ’s capital increase, the new management structure for the ergo Insurance Group, the consequences of the hurricanes in the Caribbean and the USA, the typhoons in Asia, and the earthquake off Sumatra.
Committees of the Supervisory Board The four committees of the Supervisory Board are each composed of shareholder and employee representatives. Their membership changed in the period under review and is shown separately on page 79. Except for the Audit Committee, they are chaired by the Chairman of the Supervisory Board.
The Standing Committee, which also met three times, devoted itself mainly to topics of corporate governance. Among other things, it discussed how the efficiency of the Supervisory Board’s work could be further improved and submitted proposals for this to the full Supervisory Board.
The Audit Committee met five times. It concerned itself extensively with the annual financial statements for Company and Group and the quarterly financial statements; the external auditors reported on their work. The committee also deliberated issues of corporate governance in accounting and risk management, the Internal Auditing Division’s annual report, and the financial conglomerates directive. Apart from this, it made preparations for the appointment of the external auditor, which has to be decided on by the Supervisory Board as a whole, obtained the auditor’s declaration of independence, and acquired detailed information on the type and scope of services not related to auditing. It appointed the auditor and specified the focal points of the audit.
The Supervisory Board closely considered the company financial statements, the consolidated financial statements, the management reports and the proposal of the Board of Management for the appropriation of the balance sheet profit. On the basis of the Audit Committee’s prior examination and our own examination, we approved the company and consolidated financial statements. At our balance sheet meeting on 14 March 2005, we adopted the annual financial statements drawn up by the Board of Management. We agree to the Board of Management’s proposal for the appropriation of the balance sheet profit, which provides for a dividend of €2.00 per share.
Corporate governance and declaration of compliance Munich Re is committed to good corporate governance. The Supervisory Board therefore again examined the efficiency of its work in the year under review and decided on various changes to the rules of procedure for the Board of Management and Supervisory Board. More information on this can be found in the section “Corporate governance” on page 80.
Following the election for the employees’ representatives, Klaus-Peter Biebrach, Peter Burgmayr, Gertraud Köppen, Dr. Klaus Schumann and Ludwig Wegmann ceased to be members. We wish to thank them all for their personal commitment and constructive work on the Supervisory Board. The new members elected were Holger Emmert, Dr. Rainer Janßen, Ingrid Müller, Dr. Jürgen Schimetschek and Kerstin Seefried; the other employees’ representatives were re-elected.
Herbert Bach Dr. Bernd Pischetsrieder Wolfgang Stögbauer (until 26 May 2004)
Corporate governance: Transparent and efficient We have expanded and broken down further the data we provide on the Board of Management’s compensation, thus offering extensive information even without individualised disclosure
Corporate governance stands for a form of responsible company management and control 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 that are open and transparent internally and externally.
With its international organisation, the Munich Re Group has to consider corporate governance rules in different national legal systems. Clearly, we observe the respective national standards and internationally recognised best practices. In Germany, where Munich Re has its registered seat, corporate governance rules are contained in statutory provisions and also in the German Code of Corporate Governance, which came into force in 2002 and was revised in 2003. The Code contains the main legal rules to be observed by listed German companies; in addition, it gives recommendations and proposals based on nationally and internationally recognised standards of good and responsible management.
On mature reflection, the Board of Management has ultimately decided against publication in this form because it does not consider such disclosure to be appropriate. The notes to our consolidated financial statements show how much the Board of Management as a whole earned in the business year 2004 (see p. 190 f.), broken down according to the different compensation components. In addition, the notes specify the structure of the Board of Management’s compensation system (see p. 191). Supplementary to the data provided last year, there is now information on the Board members’ pension entitlements as well. Even without individualised disclosure, Munich Re thus meets the objective needs of investors and shareholders for information, since they are in a position to assess the relationship between the Board of Management’s performance and compensation on the basis of the details they receive regarding the Board of Management as a collegial body.
We thus cover the most important grounds advanced in favour of individualised publication. The allegation that if a company does not disclose compensation on an individual basis, it may be concealing unreasonably high amounts does not withstand scrutiny. Any excessive remuneration of individual Board members could be deduced from the amount of compensation for the Board as a whole, which is published every year. And as the relationship between performance and compensation can be ascertained on the basis of the existing information, the requirements of transparency are also met. The publication of managers’ remuneration in the Anglo-American legal sphere has in no way prevented compensation excesses there.
In order to enhance the efficiency of its operations still further, the Supervisory Board made various adjustments to the rules of procedure for both Board of Management and Supervisory Board in 2004. On the one hand, it has expanded the group of transactions that require its approval and is therefore able to perform its supervisory function better than before. On the other hand, a change in its own rules of procedure has transferred certain responsibilities of the Standing Committee back to the full Supervisory Board, so that particularly important decisions are taken by all the members. This means that with regard to some topics that were previously discussed mainly in the committees, the Board of Management will report in detail at meetings with the full Supervisory Board.
Corporate governance is an ongoing process. We will continue to address 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 us the key is that corporate governance is not only incorporated in rules and regulations but is also lived out in practice. Major contributors to ensuring this are internal auditing, risk management and the Compliance Office. Our Internal Auditing Division supports the Board of Management in its monitoring duties by performing risk-oriented reviews and audits. The job of Munich Re Group’s risk management is to identify and analyse risk situations holistically. You can find detailed information on this starting on page 133. The Compliance Office makes sure that particular legal and supervisory obligations, such as those arising from securities trading law, are properly met.
On 9 December 2004 the Board of Management and the Supervisory Board published the following declaration of compliance, in accordance with Section 161 of the German Stock Companies Act: “Since the last declaration of compliance on 5 December 2003, Munich Re has fulfilled the recommendations of the Government Commission’s German Code of Corporate Governance in the version of 21 May 2003, or will fulfil these recommendations in future, with the following exceptions: – Item 7.1.2
The consolidated financial statements for the business year 2003 were published on 15 April 2004. This means Munich Re kept well within the deadline stipulated in the German Commercial Code but did not comply with the 90-day deadline recommended in the German Code of Corporate Governance.
Notes and debentures The notes and debentures issued by our Group are rated as follows: A.M.Best Fitch Moody’s S&P
ergo International ag, 0.75%, €345m, Exchangeable Bonds 2001/2006 (Aventis) A A–
ergo International ag, 2.25%, €345m, Exchangeable Bonds 2001/2006 (e.on) A A–
Munich Re Group Annual Report 2004 05_Corporate responsibility Sustainability as an opportunity / Sustainable investment
We view sustainability from four perspectives: economic, ecological, employee-related and social. It is our objective to ensure the long-term success of our Group by continually improving our risks. Aspects of sustainability are to be systematically incorporated into product design
We already integrate numerous features of sustainability into our business: in evaluating and managing risks, investing capital, taking account of corporate governance guidelines, developing working-time models and advanced training concepts, devising insurance products, making available our expertise to numerous social and political bodies, and financially supporting cultural enterprises as well as the needy. Examples are provided in the individual parts of this section.
Munich Re shares included in sustainability indices Munich Re is also well positioned as an object of investment in the constantly growing market for sustainabilityoriented investors. Since 2001, Munich Re shares have been included in the world’s two most renowned sustainability indices, the Dow Jones Sustainability and the ftse4Good. We also feature in other such indices as the aspi, esi and Ethical Index. We work to achieve this success year for year – through our commitment to sustainability and the servicing of our investors. The central contact for banks, financial institutions and rating agencies that specialise in sustainability is Munich Re’s Investor Relations Division. Our involvement in this area ensured that Munich Re shares were again included in the sustainability indices in 2004. Our presentations at important European financial centres have also met with lively interest. With our traditionally high level of dedication to sustainable development, we are committed to protecting the value of our investments and our Group.
Staff: Well-qualified for the future Promoting the skills and qualifications of our staff is one of our most important tasks in safeguarding our Group’s future. To make sure there will be no shortage of qualified staff, we are developing existing talents, pursuing new training routes and looking to integrate women more strongly in all areas, including senior management positions.
Our staff provide the basis for our success with their competence, motivation and commitment. They embody the qualities that make Munich Re the preferred partner in risk for its clients. It is therefore a logical step to invest consistently in their development.
International promotion of talent Since 1997, Munich Re Munich has been systematically identifying and preparing staff for future management tasks with its scheme for assessing and developing staff potential. This scheme is now being extended to the international reinsurance group. Last year we devised an approach that meets the requirements of our head office in Munich and those of our international organisation. Highly talented and qualified staff are selected and groomed for management functions in Munich and for leading functions at business units abroad. We applied this process for the first time last October in the Asia, Australasia, Africa (AAA) Division. In future, each business unit in our international organisation will carry out its own potential assessment procedure based on common rules, in order to foster its management talent and to create career perspectives for its staff within the reinsurance group as a whole.
On the primary insurance side, the ergo Management Academy (ema), which is responsible for the personnel development of ergo’s executives, expanded its repertoire in 2004. Collaboration in the ema programmes, which intensify the exchange of views and experience between management staff, were supplemented by an event for all German ergo executives in December 2004.
New training routes Initial and further training number among our strategic tasks, not least for reasons of risk management in the human resources sector (see page 19). Our staff must be highly qualified and motivated to ensure the continued success of our operations. Their knowledge edge is crucial in designing solutions for new market developments at an early stage and in meeting the growing requirements of our business.
We ensure the necessary qualifications and skills through systematic personnel development that takes into account individual abilities and future requirements. Hence, we consistently maintain the number of internal seminars for personal and specialist training at a high level.
Munich Re supports young academics and scientists with various initiatives and projects. Since its foundation in 1992, the Munich University Society has been housed rentfree on Munich Re premises. As the largest foundation of its type in Germany, it supports research and teaching at scientific institutes of higher education. We not only support this work in material form – we have also had close personal links with the society since its formation. Our Board member responsible for human resources, Dr. Schneidawind, has been its Chairman since 1993.
For scientific progress in society Societies are dependent on scientific knowledge. It is with this in mind that we have sponsored the internet portal www.mathematik.de of the German Mathematicians Association (dmw) for over three years now. This informative, lively and instructive website is directed at all those interested in the science of numbers and spaces. As an insurance enterprise, promoting mathematics is of vital interest to us.
There is hardly any discipline with such a long-standing internationality as science, one of the reasons it is sponsored worldwide by Munich Re. This year, for instance, a new Chair of Insurance began its work at the renowned University of Waterloo in Canada, thanks to Munich Reinsurance Company Canada Branch (Life). In Italy, our reinsurance subsidiary Münchener Rück Italia S.p.A. supports talented graduates from the University of Bocconi in Milan by financing part of their postgraduate studies in the areas of insurance and risk management.
Munich Re helps people in need Our social commitment is not limited to the academic and scientific field. We also sponsor and aid people in social difficulties who are dependent on others’ help. The Munich society “Schwestern und Brüder vom heiligen Benedikt Labre” (Sisters and Brothers of St. Benedict Labre) offers homeless people practical assistance and a roof over their heads. Last year we helped the society convert a newly acquired building for this purpose.
Munich Re also supports initiatives for self-help in Africa, i.e. schemes that do not give rise to new dependencies but promote long-term independence. In Ghana, we are partnering the drilling of a well, with simultaneous training for local people in developing a water supply for themselves. In Nairobi, Kenya, our African subsidiary Munich Reinsurance Company of Africa Ltd. is sponsoring a school for disadvantaged children as part of a new initiative.
Voluntary work pays But not only our companies help people in need. Our staff are pulling in the same direction. We are happy to support their initiatives, such as the sola relay race in Zurich, where two Munich Re teams ran many miles for a good cause last year. The amount they raised was added to by us, the resultant donation going to the “Münchner Pfennigparade”, a rehabilitation centre for the physically disabled. Another example: On the initiative of our Singapore office, staff from throughout the Munich Re Group gave money to support local medical teams in their work for the victims of the flood disaster in South Asia, and we also increased this donation. At our primary insurance subsidiary victoria, staff organise aid for children from war-torn regions. They donate a few cents from their salaries each month and the company doubles this amount.
Dedicated to culture People cannot and should not be considered purely in terms of their economic and social needs. Consequently our social commitment also includes culture. We support the Gustav Mahler Jugendorchester, for example, and the Bavarian State Opera. The youth orchestra is giving classical music a new lease of life at a very high level, whilst the traditional opera house is showing unique initiative in the new directions it is taking. We sponsor the Gustav Mahler Jugendorchester in its concert tours, one of which took these highly talented musicians to St. Petersburg last year, for example. In the case of the Bavarian State Opera, we are members of a sponsorship group made up of representatives from trade and industry. Here we want not only to strengthen the exchange between culture and industry but also to develop new opportunities for partnership. Initiatives like that with the State Opera extend our economic activities, underscoring our sustained commitment in another way.
We are continually improving our efforts in this area, both in our internal operations and in our products and communications. The framework for these activities is our environmental management system based on the European Union’s emas regulation.
Conscious of our social responsibility, we draw the public’s attention to risks such as climate change, also suggesting solutions and taking the initiative ourselves. In the following, we present a few projects devoted to climate protection from the year 2004 as examples of our environmental commitment as a whole.
2004 also saw a fresh breeze blowing in the wind energy market, not least in Canada and the USA. Munich Re’s competence was in demand in several cases to devise reinsurance solutions for major wind park projects. High investment in wind energy is to be expected in both countries.
In Germany, a number of prototypes for a new generation of high-performance wind power plants were erected in 2004. The five-megawatt wind turbines being tested are three times more powerful than the current turbines customarily in use on land. Munich Re is also keeping a close eye on this segment of the wind energy sector. We expect mounting demand for reinsurance solutions in this area for different risks, be they technical, those arising from guarantee obligations, or weather-related and accumulation risks.
In its first business year 1880/81, Munich Re concluded 33 reinsurance agreements with 27 cedants. Premium income: 1.05m marks. In 2004, with a premium volume of €38.1bn from reinsurance and primary insurance business, we achieved a profit for the year of €1.8bn – the best result in our 125-year history.
– Reinsurance 101 – Primary insurance 118 – Asset management 126
– Assets 150 – Equity and liabilities 152 – Income statement 154 – Investments 156 – Gross premiums written 157
(2) Other intangible assets 167 (3) Real estate 168 (4) Investments in affiliated enterprises and associated enterprises 168
(6) Other securities, held to maturity 169 (7) Other securities, available for sale 170 (8) Other securities, held for trading 172 (9) Miscellaneous other investments 173
(11) Receivables and liabilities in respect of affiliated enterprises and participating interests 174 (12) Deferred acquisition costs 175 (13) Deferred tax 175 (14) Other assets 175
Notes to the consolidated balance sheet – Equity and liabilities (15) Shareholders’ equity 176 (16) Minority interests 177 (17) Subordinated liabilities 177 (18) Unearned premiums 177 (19) Provision for future policy benefits 178 (20) Provision for outstanding claims 178 (21) Other underwriting provisions 180 (22) Other accrued liabilities 181 (23) Notes and debentures 183 (24) Other liabilities 183 (25) Other deferred items 183
Other information (33) Parent company 188 (34) Related enterprises 188 (35) Personnel expenses 188 (36) Long-term incentive plans 188 (37) Employee share-ownership programmes 190 (38) Compensation and loans for Board members 190 (39) Board of Management compensation structure 192 (40) Share trading and shares held by members of the Board of Management and the Supervisory Board 193 (41) Number of staff 193 (42) Contingent liabilities, other financial commitments 193 (43) Events after the balance sheet date 194 (44) Earnings per share 194 (45) Proposal for appropriation of profit 194
The main stock markets moved more or less sideways in 2004. Long-term interest rates on the bond markets climbed until the middle of the year but fell again in the second half.
Economy In 2004, the pace of growth of the world economy was the strongest it had been since the end of the 1980s, although it decelerated again by the end of the year. Healthy growth rates were achieved by the USA, but also by many Asian countries, particularly China.
The emerging markets benefited from the global economic upswing, especially through exports. Oil-exporting countries (e.g. Russia and the countries in the Middle East) additionally gained from the high oil prices. In the emerging markets of Asia, with their strong exports, growth was especially vigorous. Although the Chinese government made every effort to cool its economy, the increase in gdp remained high at 9.5%. Central and eastern Europe profited from strong domestic demand, while Turkey experienced an investment boom. The economies in Latin America also profited from the global growth dynamic and the high commodity prices, with the upswing in Brazil and Mexico especially pronounced. Argentina showed strong growth as well, but an agreement on its defaulted foreign debt still has to be reached with private creditors.
Yields on ten-year us and German government bonds initially declined in the first quarter but then increased up to the middle of the year because of concerns about rising inflation and short-term interest rates. With economic expectations again becoming bleaker, the yield on German government bonds fell in the last quarter, finishing the year at 3.7%, whilst the yield on us government bonds closed at
The European insurance and reinsurance markets were also characterised by improved prices and conditions. According to first estimates, growth in life insurance in France was particularly pronounced at 13%. Based on an estimate for the first three quarters, health and personal accident insurance also recorded a significant rise, whereas the growth rates in property-casualty insurance were more moderate. In Spain, on the other hand, initial estimates on the basis of the first nine months indicate that non-life insurance, which showed nearly double-digit growth, expanded more strongly than life business.
In 2004, premium income in the German insurance industry grew about as strongly as the overall economy. Gross premiums climbed by a total 3.5%, according to first estimates. There was expansion above all in private health insurance, where premium income recorded a significant increase of 6.9%. Given the substantial raising of the earnings ceiling for compulsory public health insurance at 1 January 2003, the rise in the number of policyholders with comprehensive private health cover was again lower, but the number of policyholders with supplementary private insurance cover increased significantly. The discussions about a long-term reform of the health insurance system, in particular the idea of a “citizens’ insurance scheme” and “flat-rate health contributions” have not yet produced any concrete results. Premium income in life insurance climbed only slightly by 3.5% for the full year 2004. Rising only marginally in the first nine months of the year, premium volume benefited in the last few months of 2004 from a run on endowment insurance policies and annuity insurance covers with a lump-sum option in anticipation of the new German Retirement Income Act, which entered into force at the beginning of 2005. Gross premium income in property -casualty insurance was up by 2% and the combined ratio was approximately the same as in 2003.
In private health insurance, modern case and healthcare management is gaining in importance. With increasing frequency, our clients are demanding an integrated range of financial security, extensive services and medical care. We are responding to these mounting requirements by offering appropriate solutions in primary insurance and reinsurance, which we are continuing to expand. In short, there has been a move away from pure cost reimbursement towards active healthcare management.
Employees On 31 December 2004, the Munich Re Group employed 40,962 (41,431) staff worldwide, 6,612 (6,445) in reinsurance, 33,703 (34,360) in primary insurance and 647 (626) in asset management.
In the past year, we successfully implemented our “profit before growth” strategy, thereby achieving the best result in Munich Re’s history.
Result In the year under review, the Group result showed a significant improvement on 2003 in nearly all segments. With a profit of €1,833m (–434m), we almost achieved our target of approximately €2bn after taxes on income, despite the exceptionally high claims burden from natural catastrophes. The result before amortisation of goodwill climbed from €1,971m to €2,948m, mainly due to a much better investment result. We made particularly marked progress in the primary insurance segment life and health. Here, both the underwriting result and the Group result are in the black again.
Operating result before taxes on income 2,604 1,284 –391 –675 2,450
The Group’s result for 2004 was affected in particular by the following factors: – Owing to our selective underwriting policy, premiums in reinsurance declined by 9.7% (2.6%). Changes in exchange rates also had an adverse effect on gross premiums. However, at €22.4bn they are still at a high level.
– Losses from natural catastrophes (in particular the cyclones) impacted the operating result before taxes on income with about €715m (290m). A combined ratio of 94.4% (95.1%), adjusted to eliminate natural catastrophe losses, shows that our portfolio is in good shape, in particular considering the fact that this figure includes 2.5 percentage points for the strengthening of our us claims provisions for accident years prior to 2002. The unadjusted combined ratio was 98.9% (96.7%). At €1,201m (1,054m) before tax, claims costs for major losses were at the same level as in the previous year.
– In primary insurance, we recorded marginal growth in premiums of 0.6% (–6.3%) and a pleasingly low claims burden in property-casualty. Moreover, our programme for increasing efficiency and lowering costs already had a positive impact on the result in 2004.
– We further reduced our equity holdings in the banking and insurance sector, our stakes in Allianz and HypoVereinsbank being lowered to 9.0% and 18.4% respectively. At –€331m, the proportionate annual result from associated enterprises was clearly negative, in particular because of the special writedowns totalling €2.5bn made by HypoVereinsbank at the end of the year. After deduction of provisions for deferred premium refunds, however, the impact on our Group result was considerably lower at –€180m.
– Our effective income tax rate returned to normal and declined from 136% in 2003 to 27%.
All figures in €m 31.12.2004 31.12.2004 31.12.2004 Prev. year Prev. year Prev. year
The rise in the fair value of the already significantly larger portfolio of loans was mainly due to falling interest rates.
Information on the valuation reserves recognised in the balance sheet is provided on page 177.
Premium We earned 54% (56%) of our Group premium income from reinsurance and 46% (44%) from primary insurance.
– Net unrealised gains rose by €110m compared with the position at the beginning of the year. The reason for this was the good development in the value of fixed-interest securities owing to the decline in interest rates, which more than offset the reduction in net unrealised gains in the equity portfolio primarily due to realisations.
– In some cases, exchange rates underwent significant changes compared with the beginning of the year. Especially the appreciation of the euro against the us dollar was responsible for a reduction of €275m in the reserve for currency translation, where we recognise the effects of changes in exchange rates arising from the translation of our foreign subsidiaries’ assets and liabilities.
Liquidity In the year under review, the liquidity of Munich Re and its subsidiaries continued to be assured at all times. Our cash flow from operating activities amounted to €5,308m (3,145m). Details are provided in the cash flow statement on page 148. How we safeguard our liquidity and hedge against foreign currency risks is described in the risk report (see page 133 ff.).
The Munich Re Group operates in virtually all classes of reinsurance. We offer a full range of products – from traditional reinsurance to alternative risk financing and risk transfer structures.
Our reinsurance business is divided between seven divisions (see page 55 f.): Life and Health; Europe 1; Europe 2 and Latin America; Asia, Australasia, Africa; North America; Corporate Underwriting/Global Clients; and Special and Financial Risks.
Marketing As reinsurers, we write our business predominantly in direct collaboration with the primary insurers but also via
Business performance: Reinsurance brokers. The latter includes business offered to us by industrial clients through their captives or risk retention groups (alternative market business), which we accept via Munich-American RiskPartners (marp).
Overview and important key figures Last year business again developed very satisfactorily. Cyclones on the coasts of the Atlantic and Pacific, as well as the tsunami triggered by the severe earthquake in the Indian Ocean, significantly burdened the combined ratio with 4.5 percentage points. Nevertheless, it remained below 99% for reinsurance as a whole.
The global standardisation of our business processes and data resources on the new reinsurance platform Global Reinsurance Application (gloria) is making excellent progress. The test phase, which is scheduled to take one year, began in autumn 2004; it will be followed by the implementation in Munich of the first productive version of the sap-supported it system tailored to our requirements. Once the system is finally established, the internationally integrated data resources will allow us to analyse, manage and control our reinsurance business even better.
Please see page 141 for information on the investigations in the USA in connection with placement service agreements (psas) and inquiries by the us Securities and Exchange Commission (sec) into certain financial reinsurance products.
Operating result before taxes on income 2,281 2,606 1,639 –834 1,386
Special and Financial Risks 78.9 92.9 116.5 140.9 *Figures for health reinsurance only.
Another reason for the decline in premium income was our strictly risk-adequate underwriting policy. Where prices or conditions were not commensurate with the risks, we refrained from renewing treaties or writing new business. In addition, a slight trend away from proportional business towards non-proportional forms of cover also had a reducing effect on premium income.
Thanks to the good development of our business, we increased our premium income in life and health reinsurance by 9.7% to €7.5bn. Moreover, we achieved a good result before amortisation of goodwill totalling €598m and a segment profit of €432m.
Responsible for: Life and health reinsurance business worldwide 2004 2003 2002 2001
With €1,051m (983m), we were again able to increase our volume of business in the United Kingdom compared with the previous year – despite declining premiums for risk products in primary insurance and a decreasing need for endowment insurance policies in association with real estate financing. Measured in terms of overall new premiums, our branch ranks second among the uk life reinsurers. Excluding guaranteed-premium critical illness business, a segment that the branch office avoids on principle, it even holds the leading position. Profit margins remained stable, in spite of significant competition.
The positive economic development in central and eastern European countries and an increasing public awareness of gaps in the social security systems indicate that our life reinsurance business will continue to develop very positively in this region.
Investments US$ m 3,183 2,704 *Financial statements according to national accounting law.
Munich Re Group Annual Report 2004 06_Financial report Life and health
As the combined ratio rose only minimally to 98.9% (97.8%) and the investment result improved significantly, the overall result reached nearly the same very good level as in the previous year, which had been influenced by positive one-off effects. The good results were mainly due to the pleasing performance of major business acquired in 2003 and existing European and us business.
Contributing approximately 32% of our health reinsurance premium, the USA is not only our most important but also our most profitable market. It continues to offer risk-adequate prices, so that we will be stepping up our activities here. In the coming years, there will be dynamic growth especially in the innovative product segments such as health saving accounts (health insurance products with savings components) and disease management – a concept for patient care optimisation. By building up skills in these specific areas and suitably adapting our organisation, we have created the platform for further profitable growth.
Munich Re sees strong growth potential in the area of health insurance in India as well. So far, at less than 1%, the share in the Group’s overall health reinsurance business is relatively low. We are confident, however, that by improving the quality of our range of products and strengthening our ties with clients, we will assume a significant role in the reinsurance market. Our local service company is supporting us in these endeavours.
In our renewal negotiations for 2004, we largely obtained the prices and conditions we sought. We consistently held back in cases where, given the prevailing market conditions, we would have had to accept business at insufficient conditions not commensurate with the risk.
Consequently, at €14.9bn, premium was 17.1% below the previous year’s high level. Approximately 2.8 percentage points of this decline were attributable to the development of foreign exchange rates, which negatively affected all divisions with the exception of Europe 1.
The reduction of premium in liability, motor and fire was particularly marked, mainly due to lower shares or termination of large-volume business.
In property reinsurance, prices stabilised at a riskadequate level. The favourable claims experience in the previous two years put pressure on rates up to the middle of the year. Especially the prices for natural hazards covers declined somewhat. This trend was broken, however, following the cyclones in August and September. The series of severe natural catastrophes in 2004, whose tragic culmination was the tsunami of 26 December, emphatically confirmed the dramatic increase in exposure. The greatest insured losses were due to the considerable rise in extreme weather events. There are many indications that human activity is one of the causes of this increase, underlining the fact that reasonable limitations of liability are needed in order to cover the risks reliably.
The same, of course, also applies to liability insurance. The need for urgent improvements, at least in some markets, is evidenced by the USA, where claims provisions for previous years had to be increased yet again. In negotiating and structuring our treaties, we have succeeded in obtaining even greater transparency with regard to the loss exposure involved. We have clearly defined the scope of cover and have done away with unlimited liability in motor liability insurance as far as possible. Moreover, we have managed to raise prices further, in particular for large industrial risks and professional indemnity. Terms of trade improved for both proportional and non-proportional covers.
In marine insurance, the price level was generally riskadequate, with primary insurers able to raise prices in most classes of business. Our treaty conditions have been supplemented by various risk-limiting clauses, in particular with regard to hazards such as biochemical or radioactive contamination.
The year 2004 was the most expensive year in the history of natural catastrophe insurance. The severest disaster was the tsunami following an earthquake, which caused immeasurable human suffering, leaving in its wake more than 180,000 fatalities, over 100,000 missing people, and countless persons injured and homeless. The economic loss to the regions affected is estimated at over us$ 10bn. The loss to the insurance industry (us$ 1–2bn) will – given the extent of the tragedy – be manageable, as insurance penetration in the coastal areas affected is relatively low. The burden from this event for the Munich Re Group is likely to total less than €100m. Given the vast geographical extent of the regions hit, the loss estimate is still uncertain.
For the insurance industry and Munich Re, the cyclones over the Atlantic and Pacific in August and September gave rise to significantly higher expenditure than the tsunami in Asia. Hurricane Charley swept across Florida on 13 and 14 August, moving from west to east and reaching maximum gust speeds of over 240 km/h. Hurricane Frances hit Florida on 5 September, causing severe damage. Hurricane Ivan was the third severe tropical storm within six weeks to strike the USA and the Caribbean. Attaining an intensity of 4–5 on the five-category Saffir-Simpson Hurricane Scale, it raged over several Caribbean islands – also in the first days of September – and wreaked major devastation, in particular on Grenada, Jamaica and the Cayman Islands. In marine insurance and offshore energy insurance, Hurricane Ivan became the greatest loss event worldwide, currently estimated at us$ 2.5bn. Hurricane Jeanne cut a path of destruction on Haiti, killing over 2,000 people before reaching Florida as a Category 3 hurricane on 15 September (see also page 62 f.).
We anticipate about €66m in loss expenditure for Charley, around €97m for Frances and approximately €221m for Ivan. Jeanne is likely to cost us €64m. The Pacific typhoons Songda and Tokage will lead to a claims burden of about €165m for the Munich Re Group.
Following a good start in the first six months of the year, the second half of 2004 was thus marked by an accumulation of natural hazard events that were highly unusual both in terms of their number and severity. These events had a significant impact on our result, despite the many measures taken to limit liability in the past few years. However, it should not be overlooked that the result without this random exceptional burden was excellent. At 94.4%, the combined ratio without natural catastrophes was at an all-time low. The improvement in portfolio quality that we have achieved over several years is thus proving to be increasingly sustainable. In spite of the numerous natural catastrophes, our closing figures for the property-casualty segment were therefore a good result of €1,783m before amortisation of goodwill and a Group profit totalling €1,229m.
The division Europe 1 was spared losses from severe natural catastrophes in 2004, and other major losses were less frequent than in the past. The combined ratio improved to a very satisfactory 89.1% (96.5%). We thus clearly surpassed our result target for 2004, partly owing to the exceptionally favourable experience in the area of natural catastrophes. At €1,666m, premium income in the division was 19.0% lower than in 2003. Nearly half of the decrease was attributable to expiring business written by the former victoria Re.
With premium totalling €1,173m or 70.4% of the division ’s aggregate premium income, Germany is Europe 1’s most important market. The premium volume of the German reinsurance market as a whole shrank in 2004. As we also terminated treaties that no longer met our profitability requirements, premiums decreased to €1,173m (1,284m). Nevertheless, we consider that our home market offers interesting medium-term growth opportunities.
We have optimised the risk structure of our German portfolio. For instance, we have limited the scope of natural hazard covers and have excluded asbestos risks in industrial and commercial liability business.
Given the favourable claims experience in primary insurance and our selective underwriting policy, our combined ratio was very satisfactory. Expenditure for large losses amounted to only €49m.
Premiums in Switzerland were stable at €94m (81m), and the result was positive.
Business performance in Greece and Turkey was satisfactory. Premiums fell by 5.1%, totalling €111m. In the year under review, we were involved in insurance programmes for the Olympics in Greece where we mainly wrote engineering and car insurances for sports facilities and infrastructural measures. We did not participate in cancellation-ofevents insurance and terrorism covers, however.
Europe 2 and Latin America Leading market position defended Increase in overall claims amount More demand for innovative reinsurance solutions
The demand for non-traditional forms of reinsurance and non-proportional treaties grew in Europe 2 and Latin America in the past year.
The United Kingdom remains the largest individual market, with a premium income of €984m (1,051m), representing 34.2% of the division’s total premium volume.
Since we opted not to renew a number of proportional treaties because of the unsatisfactory prices and conditions, premium volume shrank by 6.4% compared with 2003. We did not have to cope with significant major claims or natural catastrophe losses. The combined ratio thus again reached a pleasing level – and this despite reserve strengthening for non-proportional motor liability business written in prior years.
In France and Belgium premium was down by 7.4%, with premiums written totalling €239m (258m). The result is characterised by countervailing trends. In property business, we repeated the success of previous years, whereas our motor liability business did not perform satisfactorily. Here, French court rulings and above all the development of long term care costs have led to a significant rise in the costs of bodily injury claims over the past few years. This made it necessary to strengthen our loss reserves for motor liability business.
In 2004, the premium volume of our subsidiary in Italy, which operates in life and non-life business, declined marginally by 2.0% to €635m (648m). The losses of premium that the subsidiary had been prepared to accept in property-casualty and health insurance were largely compensated for by increases in the life segment. The consolidation of primary insurers in the Italian market intensified over the course of the year, reducing the amount of premium ceded to the reinsurance market. Münchener Rück Italia’s result was impacted by one-off effects from writedowns and by the fact that additional provisions for outstanding liability claims were posted for covers that have meanwhile largely been terminated.
In the Netherlands, the demand for traditional reinsurance decreased. Although premium income fell by 9.6% to €160m (177m), we maintained our leading position in the market. The result developed very satisfactorily. For the future, we see good opportunities for marketing further innovative reinsurance solutions.
Asia was hit particularly badly by natural catastrophes in 2004. Starting in September, an unusually high number of typhoons swept over Japan. Along with the earthquake in October 2004, these gave rise to economic losses in Japan running into billions. The severest event by far, in terms of both human and economic losses, was the tsunami triggered by an earthquake off Sumatra on 26 December, by which the inhabitants of the coastal areas of the Indian Ocean were worst affected. For the division Asia, Australasia, Africa, we expect claims burdens from natural catastrophes of around €205m overall before taxes on income.
On balance, premium fell marginally in Japan by 3.3% to €234m (242m) in the past year. Premiums were down compared with the previous year, since we partially withdrew from windstorm business and our treaties provided for higher cedant retentions. In marine reinsurance, we improved conditions following the major losses in 2002 and 2003. At the same time, we were able to maintain our good market position as the leading foreign non-life reinsurer.
Munich Re Group Annual Report 2004 06_Financial report Asia, Australasia, Africa
The number of typhoons over Japan last year was several times higher than in previous years. 2004 was a record year with a total of ten tropical storms: the average annual number of tropical cyclones making landfall in Japan since 1950 had been 2.7. In September and October, typhoons Songda and Tokage alone impacted the division’s result with about €165m before taxes on income (see page 62).
In Korea, we expanded our business through new participations in direct insurers selling motor cover. We remain the leading foreign non-life reinsurer.
India is another of the markets with great potential. In Mumbai, we set up mr India Services (mris), a local service company focusing on life reinsurance. Low insurance penetration, a fast-growing middle class and necessary investments in infrastructure are indicative of the great potential also existing in all classes of property-casualty insurance. We are doing what we can to encourage an adjustment of the legal framework so that we can obtain a licence as a local reinsurer for property-casualty business in India, too. Having taken measures to remediate the business, we are now expanding our activities particularly in the liability and property classes. We are cooperating with newly established private primary insurers and with the state insurance sector.
Result for the year A$ m 54.3 20.8 *Financial statements according to national accounting law.
Owing to this advantage, we successfully expanded our business in China in 2004. In Taiwan, we achieved riskadequate prices despite keener competition and extended our position in the market. As a whole, the result for Greater
Munich Re Group Annual Report 2004 06_Financial report Asia, Australasia, Africa / North America
Responsible for: American Re-Insurance Company, Munich Reinsurance Company of Canada 2004 2003 2002 2001
Gross premiums written were increased as planned by 15.9% to Can$ 445m (384m). There were only few major losses in 2004, and claims expenditure in general was within the expected range. mroc continues to maintain its leading position in the Canadian market.
Investments Can$ m 1,161 1,056 *Financial statements according to national accounting law.
Corporate Underwriting/Global Clients Premium income lower than in previous year New services very well received
In the past business year, the division’s premium was again strongly influenced by the original business development of our global clients. Our premium volume in 2004 declined by 23.9% to €3,464m (4,552m). This was due to the fact that we reduced shares and terminated treaties because of unacceptable conditions. There were also scheduled treaty reductions. Thus the scaling back of a quota share treaty with a large British insurance group alone led to a decrease of €509m.
Global clients We consolidated our position among global clients and even extended it in certain areas. We took advantage of every opportunity to put cooperation on an even broader footing.
Agricultural insurance Our premium rose and we achieved a good result. There were no major losses like the disastrous drought that affected large parts of Europe in 2003. Our agricultural business stems mainly from the USA and mostly derives from federal-supported multi-peril crop insurance.
Corporate underwriting Besides underwriting business, the division performs a number of additional Group-wide corporate underwriting functions. It sets quality standards for underwriting and claims management in the reinsurance group and makes sure they are complied with. The basis for new products and services is dialogue with clients. This allows us to carry out needs-based research and development, to draw up suitable underwriting guidelines and to design customised services and training programmes.
Responsible for: Globally operating clients, agricultural risks, workers’ compensation business, loss portfolios, Lloyd’s/us business 2004 2003 2002 2001
Research and development In the cross-divisional Centre of Competence for Biosciences, doctors, agricultural scientists, biochemists and human geneticists analyse the flood of information on progress in genetic engineering and the implications of these advances for our business and that of our clients. For example, our specialists seek answers to the questions of how genetically modified plants may influence loss potential in agricultural insurance or to what extent and in what areas of application genetic testing is being used in healthcare worldwide. We use statistics and risk scenarios to help insurers in the health, pension, life, liability and agricultural sectors develop new products and coverage concepts.
This reallocation of some units to other divisions as well as changes in exchange rates were the reasons why the premiums written in Special and Financial Risks declined by 10.5% to €2,044m (2.284m). Some 55% of the business is written in us dollars.
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 the public debate. Our experts are highly sought-after as partners in such discussions.
Although we recorded major losses in industrial oil and gas business totalling approximately €72m and had to bear a proportionate burden from the cyclones in the Caribbean and USA of about €23m before taxes on income, our result was nevertheless again exceptionally good. All areas contributed to the profit. Approximately 3.3 (9.0) percentage points of the combined ratio of 78.9% (92.9%) were attributable to expenditure for retrocession cover for the whole reinsurance group, which we account for in Special and Financial Risks.
Owing to the rise in the number of satellite launches, premiums in space insurance climbed significantly. Prices remained stable after the increases in recent years. There were no unexpectedly high claims and the result was again well into the black.
Enterprise, contingency and political risks In this area, we offer a wide range of reinsurance solutions such as cancellation-of-events, film, residual value and prize indemnity insurance. However, there is also increasing demand for innovative forms of cover such as insurance for geological risk in geothermal projects (see page 17). In this novel sector for us, we take great care that the risks are balanced by correspondingly high earnings potential. Despite still relatively low premium income, we achieved an exceptionally good result last year.
Munich Re Group Annual Report 2004 06_Financial report Special and Financial Risks
The primary insurers in the Munich Re Group essentially comprise the ergo Insurance Group, the Karlsruher Insurance Group, Europäische Reiseversicherung and the Watkins Syndicate, which operates within Lloyd’s and belongs to Munich Re Underwriting Ltd. They write nearly all classes of life, health, property and casualty insurance. Some 81% (83%) of their premium stems from Germany and the remaining 19% (17%) derives mainly from other European countries. The bulk of business is therefore transacted in euros.
The trend on the claims side was also positive. In the health segment, the loss burden improved, partly owing to our efforts in claims management. In property-casualty insurance, the combined ratio of 93.0% (96.4%) remained at an excellent level, unaffected by major losses.
Premium Development of premium income in the various classes of business differed. While the life and health insurers suffered marginal losses, premium income increased in
ment insurance policies did not trigger strong impulses until the fourth quarter. Overall, new business in 2004 remained below the very good previous year’s level. In terms of total premiums, an indicator that is of greater relevance for analysis, there was clear growth.
The new structure will make the ergo Group more cohesive and effective. With management for each line of business in one pair of hands, ergo will be able to exploit market opportunities and synergies even more consistently. For more information on the general structure of the primary insurance group see page 57 f.
Reporting by subgroup In reporting on our primary insurance operations, we follow the structure of our subgroups, in each case referring ergo Insurance Group Significant turnaround achieved New management structure ensures greater efficiency Capital injection for victoria Leben
In the year under review, the ergo Insurance Group reorganised its management structure. The objective was to bring the Group closer together. This was achieved by placing each of the individual classes of primary insurance business under uniform Group-wide management and accountability. At holding company level, there is one member of the Board of Management responsible for each of the divisions life, health and property-casualty (including legal expenses), who manages the Group companies in the respective line and, in the case of large companies, is the Chairman of their Board. In addition to the existing central divisions Accounting, Finance and Foreign Business
Group result €m 202 –1,431 –1,212 655 to our subsidiaries’ individual or consolidated financial statements for the year under ifrs.
Munich Re Group Annual Report 2004 06_Financial report ergo Insurance Group
In 2004, victoria Lebensversicherung ag was given a capital injection of €500m by ergo Versicherungsgruppe ag. Munich Re made €400m available to the ergo Insurance Group, mainly in the form of a subordinated loan. The remainder was provided by ergo.
The joint it application platform was launched successfully at d.a.s. Rechtsschutz on 8 August 2004. In July 2003, the Hamburg-Mannheimer companies had been included in the new system. The teething troubles have been overcome in the meantime (see risk report on page 140). Since October 2002, the staff at the victoria companies and of d.a.s. Versicherung have been using a uniform it platform. The next to be integrated are the health insurers. With this uniform and modern platform, we will be able to significantly reduce it costs and further improve ergo’s competitiveness in the long term.
Marketing The ergo Group stands for great franchise strength. Its strategy consists in accessing clients via multiple sales channels. ergo has over 22,000 self-employed insurance agents and also works with brokers and strong partners. Its exclusive cooperation with HypoVereinsbank generated €334m (400m) in new business volume in 2004, even though norisbank ag now no longer belongs to the hvb Group. The joint-venture KarstadtQuelle Finanz Service continued to develop positively, with new business totalling €87m.
Result Compared with the previous year, the ergo Insurance Group notably improved both its operating result before taxes on income and its consolidated profit, reflecting the measures taken to enhance profitability. These include the cost reduction programmes with an overall volume of €300m annually from 2005, of which considerably more than the planned two-thirds had already been achieved at the end of the year under review. The result before amortisation of goodwill rose to €529m (7m). ergo earned a consolidated profit of €202m, a substantial improvement over the previous year (–€1,431m). The Group profit was influenced by special effects that offset each other and, all in all, had a negative impact of €65m on the result. These special effects mainly involved changes in the calculation of deferred taxes on segregated funds and an amendment to Italian tax law, along with the fact that provisions for deferred premium refunds were taken into account in the amortisation of goodwill of associated companies. Effects from the amortisation of goodwill, the same-phase reporting of special writedowns made by HypoVereinsbank in the fourth quarter 2004 and the remediation of a shareholding had a countervailing impact.
Life insurance generated premiums of €6,768m (6,954m), a decrease of 2.7%. This especially reflects lower single premiums in Germany and a higher number of normal policy expiries. New business rose significantly in the fourth quarter, but for the year as a whole it remained 8.0% below the excellent previous year. However, in 2003 various special factors had an exceptionally positive influence: there had not only been a high automatic adjustment of premiums but also the very successful sale of a capitalisation product, which was no longer actively offered in the year under review. The significant adjustment of policyholders ’ bonuses to take account of the low level of interest rates, especially at victoria Leben, had a negative impact on new business. Moreover, prices for annuity insurance, in contrast to those of competitors, were raised to reflect the higher life expectancy and to increase profitability. Total new business premiums are of greater informational value for a balanced assessment of growth.
Premium income in the health segment was 0.2% lower than in the previous year. German business grew by 4.8%, while foreign business declined by 26.4%, noticeably affected by the sale of the Dutch health insurer dkv Nederland n.v. Adjusted to eliminate the effect of changes in the consolidated group, growth totalled 10.5% in foreign business and 3.7% overall. In Germany, there was double-digit growth in new business, which was largely attributable to good sales of supplementary insurances. Partnerships with public health insurers supported this positive development. In addition, Globale Krankenversicherung and Zürich Krankenversicherung were acquired. As a consequence, we agreed long-term and promising cooperations with the marketing departments of Zurich Group Germany, the Gerling Group and Deutsche Bank.
In property-casualty insurance, gross premiums rose by 4.3% to €3,420m (3,278m), despite the sale of our Belgian property insurance activities. In Germany, the growth of 4.0% was above the market average. Here we were able to expand personal lines business and, on a selective basis, commercial and industrial business. In legal expenses insurance, gross premiums climbed by 7.3% to €844m (787m). This increase mainly derived from foreign business, which grew by 15.2%.
Premium As was the case in the whole primary insurance group, ergo’s premium income in the individual classes was varied. Altogether, gross premiums written totalled
Karlsruher Insurance Group Boost in new life business in the fourth quarter Clear increase in the consolidated profit
Result In 2004, the Karlsruher Insurance Group profited from its extensive range of products and targeted marketing approach in life insurance. Clients responded very favourably in particular to a new annuity product introduced at the beginning of the year which can be tailored flexibly to a policyholder’s demands. In property-casualty business and in legal expenses insurance, the combined ratio improved to 101.5% (104.9%). The result was positively influenced by the cost-reduction programme introduced in 2002 for all companies of the Karlsruher Insurance Group. Group-wide savings thus far total approximately €28.9m.
Premium At €1,285m (1,328m), gross premiums written showed a decrease overall.
In property-casualty business, we consistently maintained our course of putting profits before growth. In line with this business strategy, gross premiums fell by 2.7% to €249m (256m). With new business remaining stable and premium adjustments to business in force, premiums for legal expenses insurance grew by 6.2%.
europäische further expanded the young field of business travel insurance in Germany. It developed products for groups of companies, small- and medium-sized enterprises and single travellers and successfully launched them on the market. europäische is now also recognised, beyond the area of classic travel agency marketing, as a specialist and partner for insurance, assistance and information services in the area of business travel. Outside Germany, in particular in the Nordic countries, europäische is the market leader in this field and earns more than 50% of gross premiums written in Sweden and Denmark.
Result The cost-saving measures begun in the previous year allowed Europäische Reiseversicherung to stabilise its expense ratio in 2004. For almost the whole year, the development of europäische ’s result was characterised by a further decrease in claims expenditure. This trend was not broken until the tsunami disaster in South Asia in the last week of 2004. Together with its partners in the travel industry, europäische showed its competence in coping with this crisis situation. Overall, the combined ratio was 96.0% (93.9%). The consolidated profit in the year under review climbed to €10.8m (5.0m). The very positive performance overall is also reflected in the development of investments, which rose by 15% to €179m (156m) as a consequence of the positive cash flow.
A valuable knowledge carrier in primary marine insurance, the syndicate also plays a key role in the Munich Re Group’s knowledge management network.
Result The syndicate writes business in the main marine classes, excluding ocean hull business, from which it withdrew in 2000 due to inadequate profitability expectations. It currently focuses on the areas of offshore energy, cargo and marine liability, in which it can draw upon sound underwriting expertise and high professional competence. Its strategic objectives are organic growth and controlled portfolio expansion instead of short-term increases with disproportionately higher risk.
Watkins Syndicate Hurricanes cause the greatest-ever loss in the history of marine insurance Syndicate’s return targets surpassed despite the natural catastrophes
Business performance: Asset management Reduction of shareholdings in the banking and insurance sector consistently pursued Target for institutional third-party business surpassed
The concentration of asset management provides the basis for optimising our Group’s investment result. At the same time, we also make available the competence derived from managing assets for the Munich Re Group to third parties, thus tapping additional sources of earnings. Assets managed for third parties by meag, ergo Trust and Munich Re Capital Management in the Munich Re Group totalled €13.2bn (11.7bn) as at 31 December 2004.
The result of the asset management segment decreased to –€42m (20m) because of the remediation of the ideenkapital Group.
The table below shows the composition of the portfolio by investment type: In making our investment decisions, we take account of market size and liquidity. Tenants’ demands are rising and changing at an increasing pace because of altering requirements. This is leading to a reduction in amortisation periods. Making flexible use of floor space and mapping out suitable withdrawal strategies in the case of new investments is becoming more significant, as is active leasing management which allows real estate to be used efficiently.
In 2004, the properties sold were primarily mixed residential /commercial items which had reached a point in their life cycles where their development in value was only likely to be below average in relation to the risks involved.
Shareholdings in insurance companies and other financial services providers In the past business year, it was again our objective to further diversify our investment portfolio. That is why we consistently reduced our shareholdings in the banking and insurance sector. In this context, we cut back our stake in Allianz from 12.2% to 9.0%.
We did not take part in HypoVereinsbank ag’s capital increase in spring 2004, thereby reducing our stake in HypoVereinsbank from 25.7% to 18.4%. We also pruned back smaller holdings in insurance companies that are no longer of strategic importance for us.
Deposits retained on assumed reinsurance business, and other investments 19,494 10.9 18,879 11.0 3.3
The structure of our investments has changed only slightly compared with the previous year. As a consequence of price gains on bonds and new investments made, the portion of interest-sensitive items (“fixed-interest securities” and “loans”) increased from 67.4% to 69.3%. To protect our portfolio more effectively against fluctuations on the stock markets and to further streamline our shareholdings, we have reduced the percentage of investments in affiliated and associated enterprises and in equities and equity funds from 15.1% to 13.9%.
Fixed-interest securities In our asset-liability management, we generally adjust the terms to maturity in our bond portfolios to match the patterns of our liabilities as far as possible. In the year under review, we slightly increased the duration, i.e. average capital commitment, of our bond portfolios to 6.2 years. In particular, the primary insurance companies in the Munich Re Group are concentrating in their investment policy, in the interests of policyholders, on achieving a competitive net return. In order to earn sufficient regular income for this, they have invested in securities with longer terms to maturity and correspondingly higher coupon rates.
Equities and equity funds The portfolio of equities and equity funds shown at fair value in the balance sheet was reduced in the business year 2004. We are continuing with our strategy of diversifying our equity portfolio more strongly. In our fine-tuning,
Result Prices on the international stock markets continued the upward trend that began in 2003 and closed with marked gains after their year-end rally. The German bond markets recorded an annual low of 3.7% for yields on ten-year government bonds, whilst the yield on us government bonds fell to a low of 4.2%.
In the past year, private investors were reluctant to make new investments in retail funds, given the economic environment in Germany and increasing fears of unemployment. The stock markets did not provide any clear impulses for investment decisions. Moreover, given the fact that the tax privileges on life insurance policies were coming to an end, the main focus of insurance marketing was not on new business in investment funds. Despite these adverse circumstances, meag’s retail funds recorded net inflows of €134m in 2004, with notable amounts achieved by equity funds, in particular the European equity fund meag EuroInvest, which attracted the investors’ interest thanks to its top rankings by leading rating agencies. The inflows and outflows in money market funds and bond funds remained at a high level and more or less balanced each other out throughout the year.
The year 2004 has shown that we are on the right track with our business policy; profitability will therefore again take precedence over growth. Our objectives for 2005 are challenging but realistic. We aim for a return on equity of 12% for 2005 after taxes on income – assuming that there are no exceptional events.
Overall economy The slowing of worldwide economic growth that began in the second half of 2004 is likely to continue in 2005. Especially in the USA, waning monetary and fiscal policy impulses are weakening the dynamics of consumer and investment activity. In addition to persistently high commodity prices, there is growing concern about the rising imbalance in the us current and fiscal account, which could affect the exchange rate.
The Japanese economy should pick up, but the annual growth rate is expected to be lower than in 2004. The chances that consumer prices will rise again have increased.
Nevertheless, in 2005, macroeconomic growth is likely to again lag behind that of the USA. In Germany, economic stimuli will probably be generated not only by the export industries but also increasingly by consumer demand; however, growth in Europe seems set to remain below average in 2005. We anticipate that there will also be a slowdown in the strong growth dynamics in the UK.
Capital markets Developments on the capital markets in 2005 are likely to be determined by the macroeconomic environment of an expected economic slowdown and comparatively high commodity prices. In view of this, the performance of the stock markets will tend to be moderate. Despite possible changes in key interest rates by the central banks, we anticipate that there will be only limited scope for higher long-term interest rates on the bond markets.
Insurance industry In the face of dampened economic expectations for 2005, we nevertheless expect robust overall growth for the global insurance industry. We anticipate a continued increase in the requirement for insurance cover, in particular in the emerging markets. In the industrial countries, a growing need for private provision will continue to fuel the demand for life and health insurance. On the reinsurance markets, writing business at risk-commensurate prices and conditions should again be the focal issue. We do not anticipate that there will be a decline in prices but rather a differentiated sideways movement.
In Germany, economic development is likely to provide only limited impulses for demand in property-casualty insurance. The Retirement Income Act, which has been in force since 1 January 2005, involves new challenges and opportunities for the insurance industry. Not only will there be a gradual transition to the taxation of life and annuity insurance policies at the benefits stage, but income from newly concluded endowment insurance policies will also be taxable in future (see page 72). In the long term, the state social security systems’ withdrawal from this area will increase demand for private insurance products, as can be seen from development in other industrial countries. For private health insurance, we anticipate that the rising need for more personal provision will again lead to strong growth, although the political debate on long-term, viable financing models is still open. In our view private health insurance, which is currently the only form of cover with a solid capital base, should be given an even stronger role in the future healthcare landscape, rather than being eroded.
Asset management In 2004, we already extended the periods to redemption in our bond portfolios, thereby achieving correspondingly higher returns. If interest rates remain low, however, interest-bearing securities will not earn the same regular income achieved in previous years. It will therefore be difficult to emulate last year’s investment result.
We consider the risk of losses in market value due to a rise in interest rates to be low, especially as such losses would not be recognised in income and we assess any effects on equity primarily from the perspective of assetliability management. More importantly, the economic value of our liabilities would show a corresponding fall.
Given the risks described, we will continue to closely monitor the assets side of our balance sheet and further reduce our equity exposure as required.
Reinsurance The renewals at 1 January 2005 did not result in any major changes in prices and conditions. The market remained largely disciplined. In certain segments, stronger competitive pressure has set in, particularly since capacities in the market as a whole have increased. We offered our capacities only at risk-adequate conditions and realised the required margins; our superior reinsurance expertise and capital strength were again in great demand.
Primary insurance The German Retirement Income Act, which entered into force on 1 January 2005, will worsen Germany’s fiscal conditions for endowment policies and annuity covers with a lump-sum option. It was therefore precisely these products that were in especially great demand at the end of 2004. As a result, there will initially be a significant market-wide decline in new business in 2005, especially since there is no time pressure on clients wanting to conclude private provision covers and many policies were taken out in 2004. For the medium and long term, we expect sustained growth impulses from changes relating to company pension business. This area will continue to gain in significance. Thanks to the reduced taxation on the income content of annuity policies, traditional annuity insurance will become increasingly popular. In addition, the new type of pension insurance on a funded basis, included in the “basic pension” category, can and will constitute an interesting supplementary provision for old age. A number of amendments have made the so-called “Riester pension” more attractive and will give this product a second chance in the market.
For primary insurance as a whole, we anticipate growth of approximately 4.0% in gross premiums written, which would mean a premium volume of €18.2bn.
Responsibility for holistically analysing, regulating and controlling the risks on the asset and liability sides in the Munich Re Group is located centrally with Integrated Risk Management. Here, we have combined important instruments such as asset-liability management, active capital management and capital modelling. We gear our business portfolios to the requirements set by management, allocating risk capital on the basis of our internally developed risk model and the risk and return expectations derived from it. Thus, for example, mismatch risks between assets and liabilities are significantly diminished by means of appropriate investment and hedging strategies, reducing the risk capital required and improving capital productivity.
In day-to-day business, responsibility for systematically handling individual risks in insurance and reinsurance lies with executives in their function as risk managers. They identify, analyse, monitor and manage the risks on an ongoing basis with support from the risk controllers. Processes, tools and systems – including appropriate controls – are in place throughout the Group to measure and assess the risks as far as possible and to identify, avert and protect against potential hazards. The basis for the permanent and systematic handling of risks is formed by management requirements and decisions on risk tolerance, which are derived from the Group’s risk strategy and risk policy and are geared to capitalisation and liquidity. This process includes examining what claims burdens can be borne or are still tolerable. We also use simulations of pre-defined catastrophe scenarios to ensure that events whose occurrence appears less probable are also considered in our planning and decisions.
Central Risk Controlling coordinates regular risk assessments. Besides a standardised risk survey among the risk managers, relevant risks and risk fields are looked at in more depth with the respective experts and are evaluated in workshops together with the insurance and reinsurance risk controllers responsible in order to assess the risk situation holistically.
The risk assessments have different focal points. In the annual risk assessment, the inventory and comprehensive analysis of risks are to the fore. The business-plan risk assessment, on the other hand, concentrates on comparing the results from the risk assessment process with the contents of the operative strategic planning; we ensure that each risk identified as significant is matched by an adequate risk-reducing measure. Ad-hoc risk assessments are triggered by risks or hazards that suddenly emerge.
Central Risk Controlling sets standards and develops the systems further; the decentralised risk controllers in the units throughout the Group adjust these to the current situation where necessary. Risk management and risk controlling are functionally separate. The related functions and responsibilities of all participants, such as the Board of Management, risk managers, decentralised risk controllers and central risk controllers, are clearly defined. Central Risk Controlling is also responsible for reporting to management about the current risk situation – on an ad-hoc basis if required – and for checking measures relating to risk policy and proposing new ones where necessary.
The Munich Re Group complies both with the German Law on Corporate Control and Transparency and with the local regulations on risk management in the different countries in which it operates. The risk management system is regularly examined independently, both by internal auditing units at the individual Group companies and by the external auditor as part of the annual audit.
Munich Re Group Annual Report 2004 06_Financial report Risk report occurrence probability, etc.). In addition, we systematically perform “swot analyses” (strengths, weaknesses, opportunities, threats) and define the required action in the course of our balanced scorecard process.
One of the main risks for any company is being too conservative and failing to recognise new business opportunities. We counter this danger by, among other things, integrating innovation teams into our operative reinsurance units in order to tap into new product and client segments at an early stage. This approach is also designed to ensure that we identify and work on current market and client issues, as well as fields of knowledge that are of critical importance for the future.
Excluding natural *Thereof World Trade Center and reserve strengthening at American Re: 22.4%. **Thereof World Trade Center and reserve strengthening at American Re: 15.9%.
financial statements, in order to take account of the expected marked increase in life expectancy. In addition, we are further expanding the safety margins in our biometric calculation bases.
Risk control measures In the Munich Re Group, binding underwriting guidelines and limits and clear underwriting authorities precisely regulate who is authorised and accountable for concluding insurance and reinsurance contracts and at what conditions. We regularly check compliance with these guidelines and closely observe developments in the global and local markets, reacting where necessary with appropriate measures that are translated without delay into underwriting guidelines if required. As a general rule, our treaties and the original business ceded to us contain clear liability limits, since unlimited covers are ultimately not calculable either in insurance or reinsurance. Accidents like the one that occurred on the German Wiehltal bridge in August 2004 strengthen our resolve to continue working for the general abolition of unlimited covers in the insurance industry worldwide. Despite the implementation of our restrictive underwriting policy with regard to unlimited covers, such risks will continue to feature in our portfolio in the foreseeable future, as insurers do not convert their original inforce policies immediately.
Another 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. 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.
A further important risk control measure in the field of underwriting is the cession of a portion of our risks to third parties via external reinsurance and retrocession.
The market value of our equity investments, including participating interests, amounted to €25.3bn at 31 December 2004. We aim to spread equity risks by means of systematic diversification in different sectors and regions. In the year under review, companies in the Munich Re Group also made use of derivative financial instruments for
hedging purposes. We continued to systematically reduce the historically evolved overweight of our equity investments in the banking and insurance sectors. This included cutting back our stake in the Allianz Group further and refraining from participation in Bayerische Hypo- und Vereinsbank’s capital increase. Such measures are geared to achieving a progressive reduction in our concentration risks and optimising our portfolio structure from the risk and earnings point of view.
Besides addressing the internal 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 2004, on a market value basis and taking hedging transactions into account, the ratio of equities to total investments amounted to approximately 13.4%
The investments of Group companies that write a substantial part of their business in foreign currencies are subject to currency risks from fluctuations in exchange rates.
The changes in share price assumed in these scenarios, ±10% and ±20% respectively, a corresponding shift in the interest rate curve of ±100 and ±200 basis points (bp) respectively, and a fluctuation in exchange rates of ±10%, would produce the following changes in market value: 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. Moreover, the effects on the Group’s annual results and shareholders’ equity would be reduced as a consequence of the policyholders ’ shares and the tax consequences.
The investment process for the Group’s own investments is controlled by the individual companies in the Munich Re Group themselves, with asset-liability management forming the basis for their investment strategy. In other words, besides return and risk aspects, the companies consider requirements relating to underwriting, supervisory regulations, accounting, tax, liquidity and currencies. Besides this, in reinsurance for individual products involving explicit financial risks, such as interestrate or currency risks, asset-liability management is already carried out at micro level when the product is being designed. This is especially the case with long-tail business, owing to the high interest-rate risk.
The companies entrusted with our asset management, in particular meag, are given mandates by the insurance and reinsurance companies in the Munich Re Group, based on uniform investment criteria. The status of the individual mandates is continually monitored on the basis of various key risk and earnings figures as part of a Group-wide earlywarning system for investments. This is designed to ensure the achievement of result targets, the fulfilment of solvency requirements and sufficient equity capital protection at individual company level. At all companies, we have established asset-liability teams that advise on and monitor strategic decisions relating to investments. This has enabled us to standardise the Munich Re Group’s risk management activities in the investment sector. In the asset management units of the Group, we pursue a policy of clear functional separation between portfolio management, trading and risk controlling at all hierarchical levels, in line with the requirements of banking supervision.
Market-price risks in investments are measured and limited using the value-at-risk approach, which is also employed in our strategic investment planning to model the optimum investment portfolio according to risk preference. Using stress tests, sensitivity analyses and duration analyses, we also simulate market fluctuations and devise strategies for countering them where necessary. How we additionally deal with the market-price risks from real estate is described in detail on page 127.
Our counterparty system with which we restrict default risks in respect of individual issuers considers a whole range of factors. These include the issuer’s individual rating, its capitalisation as a basis for covering the liability, the quality of the collateralisation and the respective issue, the sector concerned, and our internally defined risk tolerance.
We minimise such risks, which may be connected with any type of corporate activity, our staff or technical systems, through a wide range of specific risk management measures. In two major projects, for instance, we are creating a comprehensive and consistent data basis for the reinsurance group and for ergo respectively. Beyond this, it is our declared corporate aim to sensitise employees to possible risks and to establish an appropriate risk culture. This includes the chance and the willingness to learn from mistakes and to recognise and grasp opportunities for change and improvement. To this end, we organise seminars and information events, support open communication in the field of risk management and give thorough consideration to constructive criticism.
Risks in the area of information technology and project risks Munich Re’s global business requires a networking of our business units and systems worldwide, both organisationally and technically. The consequence of this is a growing dependency on electronic communications technology, the complexity of which is continually increasing. The value of the processed information is also growing. Consequently, the organisational and technical measures needed to protect the confidentiality, availability and integrity of these data and systems are acquiring ever-greater importance. We are also exposed to it risks such as breakdowns and outages, disruptions due to viruses, attacks by hackers and theft of data, including misuse by our own staff.
The dependence on central it systems requires that, in the event of failure or outage of computer centres, the most important systems and applications can be restored as quickly as possible. At Munich Reinsurance Company, an enhanced contingency and disaster recovery concept has been in place since the it Division moved to its new premises “Am Münchner Tor”. This concept makes it possible to limit the restart time for all relevant core systems to a maximum of 48 hours across all locations. For this purpose, for example, we have distributed all the relevant electronically stored business data and the it infrastructure between two locations and, if disaster strikes, can be online again without undue delay.
Major projects are currently being realised in our primary insurance and reinsurance business in a multi-project landscape that will, among other things, develop integrated information architecture in the back-office area. In order to assess project interdependencies better, Munich Re’s project landscape will be made more transparent using multi-project management, which will take existing management processes as its starting point.
The aim of our gloria project is to unify the entire reinsurance group’s it and process landscape on the basis of an sap standard product. The size and complexity of the undertaking naturally harbour project risks. Risk management and problem-handling are therefore central tasks of the project management. Now that we have successfully put the first major module into operation, the development of the basic system is scheduled to be concluded in the course of 2005.
After systems had for the most part been successfully converged in ergo’s project for it systems and it processes (esprit), deficiencies in service readiness and inefficiencies in the procedural organisation became apparent. Supplementary functions are being developed and introduced to effectively prevent disruptions in client-related processes.
Staff who have to deal with confidential data or insider information undertake to comply with the relevant regulations and to handle the information responsibly.
Legal risks Legal risks may arise on the one hand from court decisions and legislation (changes in legal parameters) and on the other from legal disputes and arbitration proceedings in which we as an international insurance group are involved, especially in the area of claims settlement.
– The ongoing discussion about the reform of the social security systems in Germany harbours substantial risks for the health insurers in the ergo Insurance Group. As the reform proposals are not yet sufficiently concrete, the perspective for private health insurance in Germany is currently unclear. In the most extreme case, the longterm existence of the private health insurance model would be in jeopardy.
– In the USA, the Fairness in Asbestos Injury Resolution Act 2004 is currently going through the federal legislative procedure. A decision on the bill, which envisages the formation of a privately financed fund to compensate asbestos victims, will be taken in 2005 at the earliest. What consequences this proposed legislation will have for our companies in the USA and to what extent the burden may exceed our current provisions depends on how the individual regulations are framed.
– There are currently uncertainties regarding the size of our final claims burden in connection with the attack on the World Trade Center of 11 September 2001. A portion of the claims resulting from this event are the subject of pending cases concerning the amount and scope of the claims filed. In the case of the Wilprop policy underwritten by us, the courts in question take the view that only one loss event was involved. The remaining uncertainties are, however, covered by sufficient provisions for not yet reported claims.
Supervisory risks As a result of our global activities, we are subject to a large number of supervisory regulations in different countries.
At the moment, for example, antitrust proceedings are being conducted against victoria Versicherung ag on the grounds of alleged collusion in restraint of competition in industrial insurance business. The outcome is uncertain at present. Furthermore, after the considerable losses in assets suffered by our primary insurers in the weak capital markets of recent years, the resultant supervisory requirements for these companies’ investments could also entail risks for the Munich Re Group.
Currently the us Securities and Exchange Commission (sec) and New York Attorney General (nyag) are making inquiries with respect to “certain loss mitigation insurance products”. Munich Re has received requests from both to produce information and material, and is cooperating fully in this regard.
Macroeconomic and geopolitical risks As insurers and reinsurers, we are dependent on economic and political parameters in the different markets in which we operate, as well as on the macroeconomic and geopolitical situation. The development of the economy not only affects our insurance business but also influences the capital market. An economic downturn can lead to payment defaults and credit-rating downgradings among our debtors, which may require writedowns in our books.
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 market segments, and the local sales channels. But even in developed markets, social or political changes may result in a deterioration of 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, our economists study and monitor the economic and political situation of our main markets and inform 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 our asset management company meag to enable us to react appropriately at any time on the investment side as well.
In view of the European Commission’s Solvency ii project, Munich Re has set up working groups to ensure the transfer of know-how on this issue within the Group. In addition, they are examining how changes to the relevant parameters may affect our product portfolios and those of our clients. Besides this, we are involved in shaping the Solvency ii provisions at European and national level through participation in working groups and projects of actuarial associations (Groupe Consultatif, dav) and industry associations (cea, gdv).
Within a system that permeates the whole Group, we are intensifying and systematising risk management and controlling at our individual companies and at Group level. We are devoting particular attention to linking integrated risk management, risk controlling and capital planning even more closely.
With our risk management instruments, we will systematically control the risks in reinsurance and ensure that we firmly adhere to our policy of risk-adequate prices and conditions (e.g. exclusions), even if this means having to refrain from participating in some business. Beyond this, we will focus on especially important sub-aspects of sensible risk limitation, such as strict liability caps in motor insurance or basic prerequisites for the insurability of natural catastrophes. A particular cause of concern to us continues to be the growth in liability claims from prior accident years in the USA. We are keeping a close eye on developments and will adjust our balance sheet reserves where necessary. We will decisively minimise the risk of insufficient data availability and not yet fully consistent data resources when the integrated it and process architecture provided for in the gloria project has been implemented. In our primary insurance business, we have moved back into the profit zone. The reorganisation project vektor in the ergo Group is designed to create synergies and opportunities which will far outweigh possible risks associated with changes in existing distributions of tasks, allocations of functions and processes.
Through an extensive programme of measures and the strengthening of victoria Leben’s capital base, we have regained room for manoeuvre and have improved risk-bearing capacity. At all companies in our Group, we have ensured that there is both sufficient coverage of the reserves with assets and capital well in excess of the minimum solvency requirements.
The above examples demonstrate how we concern ourselves with the whole of the Munich Re Group’s risk landscape and consider all the facets of possible and necessary control measures.
According to our assessment, there are no risks which could have a significant and lasting adverse effect on the assets, liabilities, financial position and results of our Group.
Assets Notes Prev. year Change €m €m €m €m €m %
V. Other investments 1. Deposits retained on assumed reinsurance (11) 14,530 14,480 50 0.3
Consolidated financial statements Consolidated balance sheet as at 31 December 2004
Equity and liabilities Notes Prev. year Change €m €m €m €m %
II. Provision for future policy benefits (19) 101,926 98,134 3,792 3.9
Munich Re Group Annual Report 2004 06_Financial report Consolidated balance sheet
*As from year-end 2004, “other tax” is included in “other expenses”. Item designations and the previous-year figures have been adjusted accordingly throughout the reporting.
Munich Re Group Annual Report 2004 06_Financial report Changes in Group shareholders’ equity
Issued Capital Revenue reserves Other reserves Consoli- Sharecapital reserve dated result holders’
Currency translation – – – – – –736 – – –736
Currency translation – – – – – –284 – – –284
Change in consolidated group – – –13 – – 9 – – –4
Change resulting from valuation at equity – – –1 – 102 – – – 101
Unrealised gains and losses on other securities – – – – 8 – – – 8
Share buy-backs – – – –51 – – – – –51
Change in deposits retained and accounts receivable and payable –177 –1,921
Change from the acquisition, sale and maturities of other investments –3,389 –9,677
The Munich Re Group’s segment reporting is based on ias 14 and the principles of German Accounting Standard No. 3 (drs 3) issued by the German Standards Board (drs). This has been supplemented by the requirements of drs 3–20, which applies specifically to insurance companies.
In accordance with the recommendations of the drs, we have made the primary segmentation between the fields of reinsurance, primary insurance (each broken down into life and health and property-casualty) and asset management.
Goodwill has been allocated to the segment of the respective subsidiary.
Thereof: – From insurance transactions with other segments 957 969 869 1,010 – From insurance transactions with external third parties 6,583 5,907 13,988 16,909
Thereof: – Income from associated enterprises –24 –35 –87 –130 5. Net expenses for claims and benefits 6,244 5,277 10,178 11,308 8. Result before amortisation of goodwill 598 437 1,783 2,274 10. Operating result before taxes on income 592 436 1,689 2,170 12. Minority interests in earnings – – 5 –10
Investments* Reinsurers Primary insurers Asset management Total 31.12.2004 Prev. year 31.12.2004 Prev. year 31.12.2004 Prev. year 31.12.2004 Prev. year €m €m €m €m €m €m €m €m
Since 2002, the standards adopted by the iasb have been referred to as “International Financial Reporting Standards (ifrs)”; the standards from previous years continue to bear the name “International Accounting Standards (ias)”. Insofar as we do not explicitly refer to a particular standard, we use the two terms synonymously.
On 31 March 2004, the iasb adopted ifrs 4 Insurance Contracts, which for the first time governs how insurance contracts are to be accounted for and valued. Munich Re will be applying this standard, as prescribed, for accounting periods beginning on or after 1 January 2005. In our consolidated financial statements as at 31 December 2004, the underwriting items are therefore still accounted for and valued in accordance with us gaap (Generally Accepted Accounting Principles for the United States).
– A large portion of the investments are valued at market under ifrs; under the German Commercial Code they are valued at the lower of cost or market.
– The provision for premium refunds is markedly higher than under the German Commercial Code because it also includes the deferred entitlements of policyholders in life and health insurance from the accumulated result differences between ifrs and German Commercial Code and their share of unrealised gains and losses in the investments available for sale.
– The provision for outstanding claims is lower under ifrs, 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.
– Premiums tend to be lower under ifrs. In the case of products which are mainly of an investment character (e.g. financing treaties, unit-linked life insurance) only that portion of the premium used to cover the risk insured and associated costs is treated as premium income. In ifrs financial statements, no “premiums from the provision for policyholders’ dividends” are shown. Instead, the relevant amounts are allocated to the provision for future policy benefits, with no impact on income.
In the business year, dkv Deutsche Krankenversicherung acquired 100% of the shares in Globale Krankenversicherungs -ag and Zürich Krankenversicherung ag (Germany) at a total purchase price of €63m.
The changes among our non-consolidated subsidiaries in the business year were as follows: 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.
Associated enterprises In accordance with ias 28, associated enterprises are generally all enterprises which are not subsidiaries but on whose financial and operating policies we as investors can exercise a significant influence. In the case of shareholdings amounting to between 20% and 50% of the voting rights, it is presumed that the enterprises in question are associated enterprises.
Recognition and measurement The annual financial statements of the consolidated subsidiaries and special funds are subject to uniform accounting and valuation principles. For the annual financial statements of significant associated enterprises we have, in accordance with ias 28.20 (rev. 2000), made appropriate adjustments for the purposes of the consolidated financial statements. Valuations used in the financial statements of associated enterprises not classified as significant are maintained.
Intangible assets Goodwill resulting from the first-time consolidation of subsidiaries is amortised on a straight-line basis over its useful life – up to 20 years. In accordance with ifrs 3, goodwill resulting from business combinations agreed to on or after 31 March 2004 is not amortised, but tested and written down for impairment if necessary.
Investments Real estate is carried at cost. Maintenance expenses and repairs are recognised as an expense. Subsequent expenditure that increases the value of real estate is capitalised if it extends the useful life. The capitalised costs of buildings are amortised over 50 years at most, in accordance with their useful lives. If the recoverable amount of land and buildings falls below their carrying amount and the diminution in value is likely to be permanent, the carrying amount is reduced to the recoverable amount. Any impairment loss is recognised as an investment expense in the income statement, and any increases in value as investment income.
A 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.
Other investments are also stated at face value. The financial assets in our direct portfolio are generally accounted for at the settlement date. Investments held in special funds are accounted for at the trade date.
Investments for the benefit of life insurance policyholders who bear the investment risk These are mainly investments for policyholders under unitlinked life insurances. They are accounted for at market value; unrealised gains and losses are matched by corresponding changes in the underwriting provisions (equity and liabilities item E).
Ceded share of underwriting provisions 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.
Cash with banks, cheques and cash in hand Cash and cheques are shown at their face value.
Deferred acquisition costs Deferred acquisition costs comprise commissions and other variable costs directly connected with acquisition or renewal of insurance policies.
In life reinsurance, the deferred acquisition costs are capitalised and amortised over the term of the policies either proportionally to the premium income (fas 60) or proportionally to the expected profits (fas 97). In other reinsurance and in property-casualty insurance, the deferred acquisition costs are amortised on a straight-line basis over the average term of the policies, from one to five years.
Where unrealised losses on securities available for sale are recognised in shareholders’ equity (see securities available for sale), the resulting deferred tax assets are recorded but excluded from earnings.
Other assets Other assets are generally stated at amortised cost. Selfoccupied real estate is valued as outlined under B. Investments – real estate.
Subordinated liabilities 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.
The provision for future policy benefits comprises the underwriting reserves for guaranteed entitlements of policyholders in life and personal accident insurance and also the ageing reserves in health insurance.
In the case of life insurance policies where policyholders bear the investment risk themselves (e.g. unitlinked life insurance), the provision for future policy benefits reflects the market values of the relevant investments (fas 97); this provision is shown separately (item E).
Provisions for premium refunds are made for obligations involving bonuses and rebates in life and health insurance that are not yet payable at the balance sheet date; the amount posted is based on supervisory or contractual regulations. The item “other underwriting provisions ” also includes amounts apportionable to policyholders from the accumulated valuation differences between ias and German Commercial Code in the amount of the expected future participation quota (provision for deferred premium refunds). If in this context unrealised gains and losses are recognised directly in equity (see securities available for sale), the resultant provision for deferred premium refunds is also posted without impact on profit or loss.
Munich Re Group Annual Report 2004 06_Financial report Equity and liabilities
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.
Other liabilities The deferred items shown here involve income received before the balance sheet date for a certain period after the balance sheet date. They are calculated pro rata temporis and reversed accordingly.
Munich Re’s reporting currency is the euro (€). The balance sheets of foreign subsidiaries whose national currency is not the euro are translated in accordance with the functional currency principle using the year-end exchange rates, and their income statements using quarterly average exchange rates; any translation differences arising in the process are recognised in shareholders’ equity (other reserves) and excluded from earnings.
Foreign-currency business is essentially translated into the Group companies’ respective national currencies in accordance with ias 21. In the case of reinsurance, the principle of currency matching also applies. This means that
Group companies that write a significant portion of their business in foreign currency generally safeguard themselves against exchange losses by attempting to match assets and liabilities in the same currency. Where exchange gains or losses occur nevertheless in the translation of foreign -currency transactions into the local currencies of the consolidated companies, they are generally accounted for under “other income” and “other expenses” respectively.
The goodwill results mainly from the acquisition of American Re in November 1996 and from the acquisition of the additional shares in the ergo Insurance Group in 2001 and 2002. The additions to goodwill of €30m derive from acquisitions in the ergo Insurance Group.
Carrying amount at 31.12. previous year 459 831 82 1,372 1,336
Carrying amount at 1.1. business year 459 825 82 1,366 1,320
Carrying amount at 31.12. business year 461 708 74 1,243 1,372
Gross amount capitalised at 31.12. business year 958 1,079 305 2,342 2,177
The figures shown under purchased insurance portfolios include amortised carrying amounts of €619m 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. Writedowns for impairment of €41m and €19m result from the purchased insurance portfolios of Münchener Rück Italia and victoria Leben respectively.
(3) Real estate ings value is calculated by internal experts in accordance with the Statutory Order on Valuation. Sites where the construction project has not yet been completed are valued at cost. The valuation is performed for each site individually as at 31 December 2004 except where valuation units are formed. For real estate held through real estate companies, the fair values are determined in accordance with the statutory regulations by internal or external experts.
The maximum useful life for buildings was reduced in the year under review to 50 years, which resulted in an increase in depreciation of €242m.
The fair value of investments in associated enterprises, which are mostly valued at equity, amounts to €4,191m (4,596m) at the balance sheet date.
An overview of our most important shareholdings can be found on page 195 ff.
Contractual period to maturity Carrying amounts Fair values All figures in €m 31.12.2004 Prev. year 31.12.2004 Prev. year
Over one year and up to two years 164 109 171 115
Over two years and up to three years 41 93 44 98
The fair values of the loans at the balance sheet date amounted to €21,259m (15,876m). The “other loans”
include loans to affiliated enterprises totalling €45m (41m) and loans to associated enterprises totalling €611m (688m).
Issuers Carrying amounts Fair values All figures in €m 31.12.2004 Prev. year 31.12.2004 Prev. year
Contractual period to maturity Carrying amounts All figures in €m 31.12.2004 Prev. year
Measurement at fair value results in valuation reserves of €8,440m (6,889m) in comparison with amortised costs. After deduction of provisions for deferred premium refunds, deferred taxes, minority interests and consolidation effects, we have allocated unrealised gains and losses of €4,441m (4,431m) to shareholders’ equity (other reserves).
The rating categories are based on those of the leading international rating agencies.
Munich Re Group Annual Report 2004 06_Financial report Notes to the consolidated balance sheet – Assets
Over two years and up to three years 9,089 9,194 8,875 8,989
Over three years and up to four years 9,592 9,320 9,326 9,112
Over five years and up to ten years 34,101 30,968 32,728 30,298
(8) Other securities, held for trading The securities held for trading include fixed-interest securities totalling €304m (251m), non-fixed-interest securities totalling €53m (104m) and derivatives totalling €300m (193m).
A distinction is made between “over-the-counter” (otc) products and standardised transactions concluded on the stock exchange.
– Swaps – – – – – – – –1 –1
– Options –2 – – 1 – – – – –1
The risk of default is practically non-existent in the case of products traded on the stock exchange. Over-thecounter products, on the other hand, harbour a theoretical risk in the amount of the replacement costs. Therefore, in the Munich Re Group, only top-quality counterparties are selected for such transactions.
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 2004 totalled €249m (113m), i.e. less than 1% (1%) of the balance sheet total. The fair value of items used for hedging purposes amounted to €35m and the fair value of pure trading items to €214m.
(9) Miscellaneous other investments This item includes deposits with banks totalling €2,829m (1,887m).
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
Up to 3 3–6 6–12 1–2 2–3 3–4 4–5 Over 5 Total All figures months months months years years years years years
Contractual period to maturity of receivables Carrying amounts All figures in €m 31.12.2004 Prev. year
The following table shows the distribution of the deferred acquisition costs between the different Group segments: (13) Deferred tax This involves the following items: (14) Other assets These mainly comprise self-occupied property totalling €683m (–), plant and equipment and inventories totalling €339m (331m) and deferred items of €392m (409m). The 31.12.2004 Prev. year All figures in €m Assets Liabilities Assets Liabilities
(15) Shareholders’ equity The total share capital of €587,725,396.48 as at 31 December 2004 is divided into 229,580,233 registered shares, each fully paid up and entitled to one vote.
By resolution of the Annual General Meeting on 11 June 2003, Munich Re was authorised to buy back shares amounting to a maximum of 10% of the share capital up to 11 December 2004. This authorisation was cancelled by the Annual General Meeting on 26 May 2004 and replaced by a new one, authorising the Board of Management to buy back shares amounting to a maximum of 10% of the share capital up to 25 November 2005.
On 31 December 2004, a total of 1,060,826 Munich Re shares with a calculated nominal value of €2,715,714.56 were held by Group companies. This represents 0.46% of the share capital.
10,000 shares were purchased at an average price of €78.64 for the employee share programme set up by Munich Reinsurance Company in 2004. After subscription by the employees in 2004 and taking into account the 1,559 shares left over from the 2002 employee share programme, a total of 1,436 shares remain. In addition, one subsidiary holds 803,269 shares to safeguard stock appreciation rights granted to the Board of Management and top Munich Re executives since 2000.
Europäische Reiseversicherung ag also acquired a further 3,200 Munich Re shares at a price of €91.00 per share in the year under review to safeguard future obligations from the long-term incentive plan it set up on 1 July 2003. As at 31 December 2004, together with the shares acquired in 2003 to safeguard the long-term incentive plans, it had a total portfolio of 4,200 shares.
To safeguard conversion rights or subcription rights from convertible bonds with warrants (Contingent Capital Increase 2003 II) 100
Changes in shareholders’ equity The shareholders’ equity is made up as follows: 31.12.2004 Prev. year
The “other reserves” include €150m (48m) unrealised gains and losses resulting from valuation of associated enterprises at equity and €4,471m (4,463m) 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: Unrealised gains and losses
(16) Minority interests These are mainly minority interests in the ergo Insurance Group and the Karlsruher Insurance Group.
Munich Re Finance b.v., Amsterdam, 6.75%, €3,000m, Bonds 2003/2023 2,973 2,969
The following table shows the distribution of the net provision for outstanding claims between the different segments of the Group: All figures in €m* 31.12.2004 Prev. year
– Property-casualty 4,481 4,027 *After elimination of intra-Group transactions across segments.
The distribution of the net provision for future policy benefits between the different Group segments is as follows: In calculating the provision for future policy benefits, interest rates of between 3% and 8% have been used, in the same way as in the previous year.
Net provision for outstanding claims 15,780 16,855 18,096 19,681 19,546 23,209 24,334 29,665 33,091 31,818 32,201
Net provision for the year concerned and previous years, plus payments already made from the original provision 15,780 16,855 18,096 19,681 19,546 23,209 24,334 29,665 33,091 31,818 32,201
All figures in €m Gross Net Gross Net Gross Net *The previous years’ figures have been adjusted to take account of currency translation differences.
The net provision for premium refunds is distributed between the segments of the Group as follows: All figures in €m 31.12.2004 Prev. year
The net provision for premium refunds showed the following development: All figures in €m 2004 2003 a) Amounts allocated on the basis of national regulations (gross) Status at 1.1. business year 3,004 3,798
Change resulting from unrealised gains and losses on investments 1,553 –797
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. In the light of incurred developments, American Re increased its net reserves for asbestos losses in 2004 by us$ 180m.
– Property-casualty 69 63 *After elimination of intra-Group transactions across segments.
Defined benefit plans The financing status of the defined benefit plans is as follows:
There are reinsurances for pension entitlements amounting to €59m (58m) (repayment claims).
The provision for defined benefit plans changed as follows in the business year: All figures in €m 2004 Prev. year
Tax provisions 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.
Prev. year Allocations With- Reversal Other 31.12.2004 All figures in €m drawals changes
€197m (185m) of the other liabilities is apportionable to tax liabilities, €39m (41m) to liabilities for social security, and €153m (212m) to liabilities for interest and rent.
The remaining terms of liabilities shown under this item are as follows: (23) Notes and debentures
American Re Corporation, Princeton 7.45%, US$ 500m, Senior Notes 1996/2026 367 396 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 652 647
The result of investments in associated enterprises for 2004 was negatively affected by a gross amount of €459m for our proportionate share of hvb’s special writedown of €2.5bn in the fourth quarter 2004, the accounts being drawn up to the same date.
On “loans” and “other securities held to maturity”, we earned interest income of €911m and €36m respectively.
Writedowns on investments involve the following categories: All figures in €m 2004 Prev. year
Life and health Property-casualty Life and health Property-casualty All figures in €m* 2004 Prev. 2004 Prev. 2004 Prev. 2004 Prev. 2004 Prev.
– Change in provision for outstanding claims 478 2,195 710 944 159 447 259 169 1,606 3,755
Total expenses for claims and benefits 18 294 474 524 235 296 183 328 910 1,442
– Change in provisions for outstanding claims 653 2,131 1,387 1,635 164 458 222 128 2,426 4,352
Change in other underwriting provisions – Provision for future policy benefits 964 673 18 12 2,298 1,328 23 27 3,303 2,040
Munich Re Group Annual Report 2004 06_Financial report Notes to the consolidated income statement
(31) Other expenses In addition to foreign currency exchange losses of €589m (727m), the other expenses mainly include expenses for services rendered of €183m (238m), interest and similar expenses of €622m (562m), writedowns of €209m (84m), and other tax of €37m (41m).
(32) Taxes on income This item shows the corporation tax and municipal trade earnings tax paid by the German companies (including solidarity surcharge) and the comparable taxes on earnings paid by the foreign companies in the Group. In accordance with ias 12, the determination of taxes on income includes the calculation of deferred taxes.
Deferred tax resulting from the occurrence or reversal of temporary differences 265 993
No deferred taxes were calculated on retained earnings of affiliated enterprises, as there is no intention of distributing these earnings in the foreseeable future.
Deferred tax assets are recognised for unused loss carry-forwards to the extent that it is probable that future taxable profit will be available against which the loss carryforwards can be utilised
The following table shows the reconciliation between the expected taxes on income and the tax on income actually shown. The expected tax expenses are calculated by multiplying the operating result before taxes on income (but after “other tax”) by the Group tax rate. The Group tax rate amounts to 40%. This takes into account corporation tax including solidarity surcharge, and a mixed trade-tax rate.
(34) Related parties HypoVereinsbank ag, one of the largest German private banks, continues to be an associated and related party of Munich Reinsurance Company. On 1 March 2004, HypoVereinsbank ag carried out a capital increase, in which companies of the Munich Re Group did not participate. As a consequence, the Munich Re Group’s stake in the bank’s share capital is down to 18.4% as at 31 December 2004. For its part, the hvb Group held around 10% 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 until 31 December 2003 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 2004. Members of Munich Re and HypoVereinsbank hold seats on the boards of further companies in each other’s Groups in a few instances.
Relations between Munich Re and HypoVereinsbank are given documented form in a general agreement. This agreement deals in particular with cooperation activities. On the basis of individual cooperation agreements, companies of the Munich Re Group sell selected hvb Group products. Similarly, staff of various companies of the hvb Group market insurance products of victoria, in which the other ergo companies participate via reinsurance or coinsurance. The cooperation agreements between companies of the Munich Re Group and the companies of the hvb Group are concluded at market conditions.
There are further contractual relations between companies of the Munich Re Group and the hvb Group in connection with the normal running of business, such as the conclusion of insurance policies for own risks (e.g. buildings insurance policies).
(35) Personnel expenses The following personnel expenses are included in the operating expenses, in the expenses for claims and benefits and in the investment result: (36) Long-term incentive plans As at 1 July in the years 1999 to 2004, Munich Re launched long-term incentive plans. These plans, each with a term of seven years, provide for the members of the Board of Management and senior management in Munich and for the top executives in Munich Re’s international organisation to be granted a defined number of stock appreciation rights.
Each stock appreciation right entitles the holder to draw in cash the difference between the Munich Re share price at the time when the right is exercised and the initial share price.
In the year under review, provisions of €3.2m (1.5m) had to be posted for the reinsurers in the Munich Re Group; the personnel expenses totalled €1.7m (1.5m).
New initial share price after 2003 capital increase €173.67 €303.72 €304.80 €247.64 €82.02 €88.65
Fair value 2004 for one right €0.41 €0.09 €0.36 €2.04 €25.82 €25.15
Number of rights on 31 December 2000 119,885 74,636 – – – –
Number of rights on 31 December 2001 85,645 80,582 109,474 – – –
In the year under review, provisions of €1.1m (–) had to be posted for the primary insurers in the Munich Re Group; the personnel expenses totalled €1.1m (–). The fair value of all stock appreciation rights granted by the primary insurers amounted to €4.1m (1.6m) at the balance sheet date.
New initial share price after 2003 capital increase €247.64 €82.02 €88.65
(37) Employee share-ownership programmes In 2004, Munich Reinsurance Company staff again had the opportunity to acquire employee shares at preferential conditions and thus to participate directly in Munich Re’s success also as shareholders. For this purpose, a total of 10,000 shares were purchased at an average price of €78.64. In addition, 1,559 shares remained from the employee share-ownership programme in 2002. In the 2004 programme, non-senior-executive staff of Munich Reinsurance Company were given the chance to subscribe for up to five shares at a price of €54.00 per share. Altogether, 2,037 availed themselves of this offer and acquired a total of 10,123 shares. The remaining shares were not sold.
This amount takes into account the possibility of growth in value up to the time the rights are forfeited or elapse. It is determined in consideration of the exercise conditions using recognised valuation models, but is not included in personnel expenses.
Payments to retired members of the Board of Management or their surviving dependants total €4.3m (3.3m).
Remuneration of Supervisory Board members in the business year 2004 in accordance with Article 15 of the Articles of Association1
Dr. Schinzler, Chairman from 26 May 2004 39,890.70 14,959.02 73,797.81 27,674.18 156,321.714
All other re-elected members of the Supervisory Board (Prof. Dr. Markl, Mayrhuber, Prof. Van Miert, Dr. v. Pierer, Dr. Sommer, Võ) each received total remuneration of €71,250.00 (fixed remuneration of €25,000.00 and dividend-related remuneration3 of €46,250.00).
(39) Board of Management compensation structure The Board of Management’s compensation is made up of various components, as shown in the following table: Component Assessment basis/ Corridor Precondition for Payment parameters payment
Annual bonus 50% annual result 0–100% Achievement of Once annually in 50% achievement of 0–100% objectives following year personal objectives
As far as the pension entitlement is concerned, the pension level starts at 30% and can reach a maximum of 60% of annual basic remuneration.
A different arrangement applies to the compensation structure for Mr. Phelan, who is not only a member of the Board of Management but also the President, Chief Executive Officer and Chairman of the Board of American Re Corporation and therefore has special compensation agreements, with the major portion of his income in the USA.
(41) Number of staff The number of staff employed by the Group at year-end totalled 29,851 (30,223) in Germany and 11,111 (11,208) in other countries.
(42) Contingent liabilities, other financial commitments Commitments under rental, work and service contracts amounted to €95m (154m). Leasing obligations from rental leasing arrangements totalled €613m (590m). Financial leasing transactions had an insignificant volume of only €9m. Investment obligations amounted to €423m (488m). These figures represent undiscounted nominal amounts.
Following amendments to Section 124 ff. of the German insurance supervision law, the German life and health insurers of our Group are obliged to be members of a protection fund. In addition to the regular compulsory contributions, the protection fund may levy special contributions up to the amount of one per mille of net underwriting provisions in the case of life insurers and two per mille in the case of health insurers. This could give rise to a potential payment obligation of €97m at Group level.
(43) Events after the balance sheet date No events have occurred since the balance sheet date which require separate disclosure.
(45) Proposal for appropriation of profit Munich Reinsurance Company’s result for 2004 according to its financial statements prepared on the basis of the German Commercial Code amounts to €777.0m (510.8m). Of this sum, €318.5m has been allocated to the revenue reserves so that, including the profit brought forward from the previous year, a balance sheet profit of €459.2m remains. The Board of Management will propose to shareholders at the Annual General Meeting that this profit be used for payment of an increased dividend of €2.00 on each share entitled to dividend and that any residual amount be carried forward to new account.
Primary insurance, consolidated subsidiaries ergo Versicherungsgruppe ag, Düsseldorf 93.67% 1,934,740 68,167 victoria Krankenversicherung Aktiengesellschaft, Düsseldorf *** 93.67% 59,669 0 victoria Lebensversicherung Aktiengesellschaft, Düsseldorf *** 93.67% 738,642 0 victoria meridional Compañía Anónima de Seguros y Reaseguros, s.a., Madrid 93.67% 17,176 1,475 victoria Versicherung Aktiengesellschaft, Düsseldorf *** 93.67% 528,738 0 victoria-Seguros de Vida, s. a., Lisbon 93.67% 18,642 1,056 victoria-Seguros s. a., Lisbon 93.67% 10,516 –1,437 victoria General Insurance Company s. a., Thessaloniki 93.67% 17,019 792 victoria Life Insurance Company s. a., Thessaloniki 93.67% 5,965 –209 victoria-volksbanken Versicherungsaktiengesellschaft, Vienna 72.28% 41,432 1,862
Nieuwe Hollandse Lloyd Schadeverzekeringmaatschappij n. v., Woerden 93.67% 23,805 2,740 stu ergo hestia s. a., Sopot 93.67% 184,394 6,114 stunz ergo hestia s. a., Sopot 93.67% 9,050 –2,914
Powszechne Towarzystwo Emerytalne Ergo Hestia s. a. (Pension Fund), Warsaw 93.67% 15,144 –146 europäische Reiseversicherung Aktiengesellschaft, Munich 100.00% 85,458 3,311
Middle Sea Valetta Life Assurance Co. Ltd., Floriana 10.00% 46,400 3,046
Munich Re Group Annual Report 2004 06_Financial report Affiliated enterprises, participating interests and other shareholdings
Other shareholdings in listed companies bhs tabletop ag, Selb 28.91% 25,920 6,844 bhw Holding ag, Berlin**** 9.24% 1,478,328 232,226
**** Result for the year after profit transfer. **** Including special funds.