A. M. Best, Standard & Poor’s and Moody’s have each awarded Munich Re their top rating.
: T e l.: F a x : E -m a il: M u n ic h R
MANAGEMENT REPORT Business experience in 1999 – Reinsurance – Primary insurance – Asset management Prospects for 2000 Risks of future development
PERSPECTIVES Our staff Information technology Knowledge management E-commerce Value-based management Environment
CONSOLIDATED FINANCIAL STATEMENTS 1999 International Accounting Standards Consolidated balance sheet Consolidated income statement Consolidated cash flow statement Segment reporting Notes to the consolidated financial statements Auditor’s report
FURTHER INFORMATION Important addresses Affiliated enterprises, participating interests Glossary Index of key terms Important dates
1999 was a very bleak year for reinsurers: earthquakes and storms heavily impacted earnings. The two winter storms that swept over Europe in December, wreaking havoc especially in France, cost us around half a billion euros alone; besides this, we were hit by Typhoon Bart in Japan and the severe earthquakes in Turkey, Greece and Taiwan. It was not the size of the insured losses in these individual natural catastrophes that was exceptional, but the number of such events that occurred: for the reinsurers in the Group 1999 was, all in all, the worst year in Munich Re’s history in terms of claims costs.
Munich Re’s share price rose by 22% in the past year. This is in line with the long-term average but not with our expectations. We aim for a price performance that consistently exceeds the DAX and have therefore now linked bonus payments for our top executives to the achievement of this goal.
– In primary insurance we are aiming, through ERGO, to become one of the most important groups in personal lines business in Europe. The expansion of foreign business – also through acquisitions – remains an important part of our strategy.
– We aim to increase our profit after tax by at least 10% annually and thus earn a growing and appropriate return on equity.
The prerequisites for this success are favourable: on the reinsurance markets there are increasing signs that the market is bottoming out and the overheated competition is cooling down; our primary insurers are systematically expanding their business at home and abroad from a very solid base.
The German government’s bill to lower tax rates and reform company taxation has had a very positive preliminary effect on the performance of our share price. The planned reform would indeed mean a substantial reduction in Munich Re’s tax burden.
At the beginning of this year recommendations for the corporate governance of listed companies were published in Germany. We support these recommendations, which are based on OECD guidelines. Insofar as we do not follow them already, we are currently examining how we can best implement them for Munich Re.
Finance (from 1st April 2000) General Service Company Structure and Organization
France, Belgium, Luxembourg Austria Switzerland Central/Eastern Europe, Turkey, Turkic States Italy, Malta (from 1st July 2000) Greece, Cyprus (from 30th June 2000)
Africa, Near and Middle East Engineering (from 1st July 2000) Research and Development Investor Relations Strategic Planning
At several meetings the Board of Management gave us its assessment of the competitive situation in reinsurance and the consequences for Munich Re of the numerous mergers and acquisitions in the primary insurance sector. Besides this, the Board of Management provided us with extensive information on how genetic technology will influence insurances of the person and what consequences could result from this for Munich Re. We also talked separately about activities of Munich Re and its subsidiaries in financial reinsurance.
The Board of Management reported to us in detail on Munich Re’s preparations for the millennium changeover; this included a discussion of the insurance and reinsurance aspects of the millennium problem.
The introduction of the long-term incentive plan, which links the compensation of the reinsurance group’s top management to the Munich Re share price, was also closely considered.
All members of the Supervisory Board were informed without delay, as well as at the meetings, about transactions that were of particular significance for the further development of the Group. This includes the restructuring of our shareholdings with Allianz, announced a few weeks ago.
The Standing Committee, whose work includes business requiring the approval of the Supervisory Board, met three times in 1999, as did the Board of Management Committee, which is responsible for personnel matters involving members of the Board of Management. The Conference Committee did not meet.
The Munich Reinsurance Company’s bookkeeping, its company financial statements and the consolidated financial statements as at 31st December 1999, as well as the management reports for the company and the Group, were audited by the KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft and received an unqualified auditor’s opinion. The auditor’s reports were promptly sent to all the members of the Supervisory Board. After a detailed discussion between the Chairman of the Supervisory Board and the auditor, there was also extensive consideration of the company financial statements and the consolidated financial statements, the management reports and the auditor’s reports at the meeting of the Supervisory Board on 29th May 2000, at which the auditor was present. Also discussed was the quality of Munich Re’s risk monitoring system.
At the end of the AGM on 22nd July 1999 the term of office of the incumbent Supervisory Board ended. As the company had employed more than 2,000 staff in Germany since the end of 1998, the Supervisory Board had to be re-structured in line with the provisions of the German law on co-determination so that, in accordance with the Articles of Association, it was composed of ten shareholder representatives and ten staff representatives.
As regards the staff representatives on the Supervisory Board, Ms. Christiane Bartl and Mr. Ludwig Knabl no longer stood for re-election. We thank them for their many years of constructive work on the Board. Mr. Hans-Georg Appel, Ms. Gertraud Köppen, Dr. Jörg Schneider, Mr. Wolfgang Stögbauer, Mr. Josef Süßl, Ms. Judy Võ and Mr. Ludwig Wegmann were newly elected to the Supervisory Board. The other staff representatives were re-elected.
DEPUTY CHAIRMAN Herbert Bach (from 22nd July 1999) Employee of the Munich Reinsurance Company
DEPUTY CHAIRMAN Dr. rer. pol. Wolfgang Röller (until 22nd July 1999) Honorary Chairman of the Supervisory Board of Dresdner Bank AG
Hans-Georg Appel (from 22nd July 1999) Employee of the Munich Reinsurance Company
Christiane Bartl (until 22nd July 1999) Employee of the Munich Reinsurance Company
Ludwig Knabl (until 22nd July 1999) Employee of the Munich Reinsurance Company
Dr.-Ing. E.h. Eberhard v. Kuenheim (until 22nd July 1999) Former Chairman of the Supervisory Board of Bayerische Motoren Werke AG
Dr. techn. h.c. Dipl.-Ing. ETH Ferdinand Piëch Chairman of the Board of Management of Volkswagen AG
Dr. rer. nat. Klaus Schumann Employee of the Munich Reinsurance Company
Dr.-Ing. Dieter Soltmann (until 22nd July 1999) General Partner of Gabriel Sedlmayr Spaten-Franziskaner-Bräu KGaA (until 16th March 2000)
Judy Võ (from 22nd July 1999) Employee of the Munich Reinsurance Company
Ludwig Wegmann (from 22nd July 1999) Employee of the Munich Reinsurance Company
Munich Re, founded 120 years ago as a reinsurer, is today pre-eminent in this market worldwide. No other reinsurer offers in comparable measure such experience and capacity, coupled with innovation, financial strength and consistent clientorientation.
Our primary insurers concentrate on business with private clients in the European market. And in asset management we expanded our earnings and growth potential promisingly last year with the formation of MEAG, a joint-venture subsidiary of Munich Re and ERGO.
We create lasting value by systematically building on our strengths: – the competence and skills of our staff – our global knowledge base – our financial strength – partnership and trust within our business relationships
“Competence in handling risks”: since its foundation 120 years ago Munich Re has embodied this core quality to an extent virtually unparalleled worldwide. A total of 5,000 insurance companies in around 150 countries today rely on our competence and financial strength. We assume a part of their risk and find solutions for the whole spectrum of risk management. By reinsuring business worldwide in all classes of insurance, we contribute to a global balancing of risks.
The guiding principle of our asset management strategy is to safeguard and increase our investment income on a secure and lasting basis. In order to pursue asset management even more professionally in future, we established MEAG MUNICH ERGO AssetManagement GmbH in 1999 as a joint subsidiary of Munich Re and ERGO. Not only the Group companies involved benefit from this development, but also their shareholders and business partners. MEAG will number among the big asset management companies in Germany; it will offer its investment products and its services to institutional investors – above all other insurance companies – and also to private clients.
Allianz, traditionally Munich Re’s largest shareholder, currently holds a stake of just under 25%. Other shareholders with stakes of over 5% are HypoVereinsbank, Deutsche Bank and Dresdner Bank.
Munich Re has always cultivated an intensive dialogue with analysts and investors.
Interest in Munich Re shares is continuing to grow strongly, a trend we want to encourage. On 30th May 2000 – i.e. the day this annual report is published – we will therefore be staging an analysts’ conference for the first time.
If you have questions regarding our shares, you can call our service telephone number +49 1 80/2 22 62 10 or contact us via our website (www.munichre.com), which also provides data on our share price performance.
On 11th May 2000 Munich Re had a market capitalization of €54.5bn, making it one of the biggest stocks on the German equity market.
Dividend size is determined by a company’s profit and its dividend policy. Even for a difficult reinsurance year like 1999, our earnings strength will enable us to adhere to our continuity-oriented dividend policy and pay
our shareholders an unchanged dividend of €0.95 per share. Owing to the stock split in 1999, this actually means a doubling of the overall amount distributed.
At the end of December 1990, with the share price at DM 2,295, a deposit of 100 Munich Re registered shares (par value then: DM 100) required a total investment of DM 229,500 (not including transaction costs). After the two stock splits on 18th August 1997 and 25th January 1999, this investment today amounts to a portfolio of 2,000 registered shares.
On the basis of a price of €308.00 per share and €76.00 per warrant on 11th May 2000, the value of the deposit amounts to €764,824, equivalent to an increase of 551%. According to the internal rate of return method, this works out at an average annual return of 22.2%.
Munich Re’s warrants 98/02 also show how attractive our capital measures are: during the exercise period, bearers of such warrants are entitled to subscribe for one Munich Re registered share for every two warrants held, at a strike price of €163.61. On 17th August 1998 the price of the warrants on the stock exchange was €42.95. Owing to the smaller amount of capital committed in this investment, investors with warrants have participated more than proportionally in the overall increase in value of Munich Re registered shares. In the meantime the warrants have risen in value by 80.2%; on 11th March 2000 their price stood at €76.00.
As a whole, 1999 was a year of positive surprises on the economic front. Important stock market indices reached all-time highs, the recovery of the world economy bettered all forecasts. Particularly in the emerging markets, but also in the USA, the economy proved to be unexpectedly strong. In this environment the insurance markets developed positively overall. In Eastern Europe and Asia the insurance industry even achieved double-digit growth in some cases.
1974/75 First oil price shock 1980/81 Second oil price shock 1990 German reunification 1991 Gulf War From 1992 Upswing in US economy 1997/98 Crisis in emerging markets
Growth in the world economy recovers Change in GDP in %
A pleasant surprise was provided by the emerging markets which had been hit by crises in the previous year: in the countries that had been affected by the Asian crisis, a rapid “V-shaped” recovery pattern emerged (real growth in GDP of 5.0% after a reduction of 8.4% in the previous year). Korea even achieved real GDP growth of almost 11%, as opposed to the 2% still being forecast by the International Monetary Fund as late as April/May.
In Latin America the debt crisis feared by quite a few observers following the devaluation of the Brazilian real in January failed to materialize. Brazil’s economy stagnated (growth: 0.8%), but the inflation rate stayed within reasonable bounds at 5%. Thus of the major Latin American economies, only Venezuela and Argentina had to cope with a significant recession. And, to date at least, Ecuador’s failure to meet payments on Brady bonds (created in the wake of the Latin American crises of the eighties and named after the US Treasury Secretary of the time) has not found any imitators.
The economy in Russia showed itself to be pleasingly robust (real growth: 3.2%), mainly owing to special factors like the rising oil price. The massive inflation which many had feared did not occur.
In contrast to this, the states participating in European monetary union (Euroland) again lagged behind in terms of growth (2.3% following 2.8% in the previous year), with Germany and Italy bringing up the rear. The development of GDP in Ireland, Spain and the Netherlands was considerably more dynamic, however. Growth in Denmark and the UK remained below average, as it did in Switzerland (1.7% in real terms). The end of the year saw an appreciable improvement in the economic climate, especially in Germany, and signs of a sustained upswing in economic activity.
Nevertheless, the unemployment rate in Germany remained stubbornly around 8.7% according to OECD figures (10.5% according to German labour market statistics). It thus ranged more than twice as high as in the Netherlands (3.3%), Portugal (4.5%), the USA (4.2%) and Japan (4.7%).
The difference in economic development between the USA and Euroland was not without effect on the currency markets: within a year, the eurodollar exchange rate had fallen from 1.17 to below parity. In the same period the euro fell considerably in value against the British pound and the Japanese yen as well. But this was not a collapse of the euro exchange rate: long-term observations show that similar economicallyrelated fluctuations also used to occur with the D-mark exchange rate.
Not a collapse of the euro: D-mark compared with dollar, pound and yen
In Japan the government continued its attempts to tackle the growth crisis with public spending programmes (fiscal policy). Certainly signs of a turnaround are emerging, but there has so far been a lack of selfsupporting growth emanating from the private sector.
Overall, the market situation remained tight and characterized by a persistent fall in original rates. On top of this, overcapacity continued to put pressure on reinsurance prices. Competition is especially fierce in North America. The consolidation process in the primary insurance sector is also leading to a fall in the demand for reinsurance.
For the year 2000 we expect a further upturn in the world economy. It is probable that the USA and Euroland will develop more in parallel again; growth rates will thus start to converge at a high level. This trend will be supported by the planned tax and structural reforms in Europe. The prospects for Japan remain muted, despite new stimulants on the fiscal policy front. Latin America should catch up in relation to the other emerging markets. There will be consolidation of the strong growth in Asia. In the eastern Central European states, the approaching prospect of EU membership should favour additional inward foreign investment.
In keeping with the moderate inflation expectations, only a limited – economically-related – rise in yields on the bond markets is to be expected. The average interest rate level for 10-year government bonds over the next two to three years should therefore, at 5 to 6%, continue to be appreciably below the average levels of the eighties and early nineties. We are proceeding on the assumption that American interest rates will remain high, not least owing to the considerable structural deficit in the US balance of payments.
Yields on 10-year government bonds in %: fears of deflation dispersed
A special situation exists in Japan, whose interest-rate level is (to date) being kept low by political measures. Not until the onset of a real upswing supported by private consumption will Japanese interest rates start to move up again towards the general world level.
The equity markets will continue to react in a volatile manner to the prospect of further increases in interest rates. However, they will be supported by the upswing in world economy and high corporate profits. Investors will here revert to a more selective strategy and invest to a greater extent in high quality shares.
The liberalization of the insurance industry worldwide will continue this year: in China expected membership of the WTO will accelerate developments in the insurance sector; in India the formation of private insurance companies and the admission of foreign minority holdings in these companies is imminent. In South America the privatization of the state Brazilian reinsurer should be an important further step in advancing liberalization; in Mexico the 100% participations of US and Canadian companies that have been possible since the beginning of the year will further stimulate competition.
Despite the exceptional burdens in reinsurance, the Group achieved an overall result for 1999 that was only just below the very good result of the previous year.
With our concept of integrated risk balance and given the signs of improvement in the reinsurance market, we see ourselves as well positioned for 2000.
A.M. Best, 21st December 1999 – leadership position in the global reinsurance market – outstanding operating performance – superior balance sheet strength – substantial earnings power
Tax expenses were over 50% less than in the previous year, totalling €383m (791m). This decrease is mainly due to the fact that the corporation tax rate in Germany was lowered to 40% (45%), reducing our deferred tax liabilities by €300m.
For the reporting on individual fields of business, the following principle applies: figures that derive from business within a segment are eliminated, whereas figures that derive from business with companies from other segments (e.g. intra-Group reinsurance cessions from primary insurers to reinsurers) are included in the following data.
However, in a range of markets there are early signs that the available reinsurance capacity is shrinking and that the rate level is gradually picking up. We interpret this as the beginning of the long-overdue market recovery.
Gross premiums €bn 15.4 14.1 Loss ratio non-life % 88.2 75.8 Expense ratio non-life % 30.7 29.9 Operating result €m 1,093 1,421 Investments €bn 59.6 53.4 Net underwriting provisions €bn 40.4 34.3
The unsatisfactory result in reinsurance can be explained partly by the strong competitive pressure in many markets, which produces prices and conditions that are in some cases completely inadequate. It is also due to the exceptional number of natural catastrophes that occurred last year: none of them caused spectacular losses, but together they gave rise to costs of over €1.1bn, or €700m more than in the previous year.
LIFE AND HEALTH In life and health business we increased our premium income by 24.3% in 1999 and also achieved strong growth in the profit.
In the past year we did a great deal to further strengthen our market position in life business. For instance, we extended our global presence – e.g. in Asia and Latin America – and reinforced the financial base of our units in North America to enable them to take swift advantage of new business opportunities. We offer our clients detailed advice and we work together with them to devise solutions for financing and reinsuring their business.
Impulses for growth in health business are particularly evident in Asia, Latin America and the Middle East. Especially in China and India we have therefore strengthened our presence and have in some cases entered into long-term-oriented partnerships with local insurers in order to secure future growth potential for our business.
Loss ratio 93.3 80.0 Expense ratio 26.4 24.9 Combined ratio 119.7 104.9
The appreciably higher underwriting loss stems mainly from our US subsidiary American Re, which in 1999 had to cope with much higher claims burdens than initially anticipated, also for the two previous underwriting years. It therefore significantly augmented its loss reserves, especially for asbestos-related claims and environmental impairment losses.
American Re has taken decisive measures to return to the profit zone despite the unfavourable circumstances in the highly competitive US market; this includes giving up a substantial amount of business which failed to offer adequate prices and conditions.
Loss ratio 76.6 75.2 Expense ratio 33.8 29.9 Combined ratio 110.4 105.1
Our premium in the classes marine, aviation and space was up 3.8%. Whilst gross premiums in marine and aviation insurance increased, they fell in space insurance because fewer insured satellites were launched in 1999 than in the previous year. The original rates in both marine and aviation are completely inadequate – chiefly because there continues to be considerable overcapacity in important markets. Despite a marked improvement in the result of our space business, our overall result was therefore even worse than in the previous year.
In fire business the excessive competition persisted in 1999, especially in industrial fire insurance and for natural hazard covers. Our gross premium income rose by 3.7%, mainly because of changes in exchange rates.
These are only some of the natural catastrophes from a long list. 1999 was the second most expensive year for the insurance industry ever as regards losses from natural catastrophes, only being surpassed by 1992, which included the devastation caused by Hurricane Andrew in Florida and other states in the USA. For us, 1999 was by far the most expensive year ever, beating even 1992.
Loss ratio 80.7 81.9 Expense ratio 24.3 27.4 Combined ratio 105.0 109.3
The reinsurance of covers against natural hazards is part of our core business. We are well equipped for this task in every respect. Following the erosion of premium rates in fire insurance over many years, we are now seeing the first encouraging signs of improvement and a return to riskcommensurate prices and conditions. But the effects of this transition will not be evident until 2001. Our premium income in the current year will decline. The result depends to a large extent on what burdens we have to bear from natural catastrophes and other major losses in the year 2000.
In the engineering classes of business (machinery, EAR and CAR, electronic equipment, etc.) there was a further fall in our premium income last year by 10.5%; but we were able to successfully defend our number one position in all the important markets. The reasons for the premium decline were familiar ones: higher retentions by our clients, in particular as a result of mergers; fierce competition, leading to a deterioration in prices and conditions; and the persisting economic problems in many countries. Our result in engineering was negative, not least because of the heavy impact of losses from natural catastrophe events in this sector as well.
Loss ratio 67.1 72.0 Expense ratio 33.5 38.5 Combined ratio 100.6 110.5
Loss ratio 59.9 78.9 Expense ratio 33.8 35.1 Combined ratio 93.7 114.0
In the year under review there was again a spate of mergers and acquisitions in all the important insurance and reinsurance markets. In other words, our clients are getting bigger and their reinsurance needs are changing: on the one hand, the demand for reinsurance cover is diminishing and on the other hand it is shifting more and more from proportional to non-proportional covers, which sometimes embrace more than one class of business and may have a term of several years. This applies especially to Europe and North America, which together produce a good three-quarters of global market premium. Competition among reinsurers in these markets is especially strong.
Our premium income, broken down by region, developed as follows: Premium income in €m 1999 Prev. year Change in %
The following information on our subsidiaries refers to their individual or consolidated financial statements for the year.
Most of our German reinsurance business is written by the parent company.
In the German market, which is now largely deregulated, we succeeded in further consolidating our position as market leader in the year under review. However, our premium income as a whole fell, even though we recorded notable growth in life reinsurance. The massive losses written by German primary insurers in motor business and the gales in December 1999 cause our underwriting result to go into the red for the first time in years.
In the current business year our premium will probably show a slight rise, owing to rate increases; the result should improve if we are not hit by major losses from natural catastrophes.
In the year under review we substantially increased our premium income – especially in life reinsurance and in the reinsurance of motor and marine risks. In some important fields of business we are now market leader, and in life reinsurance we are number two. Owing to the inadequate rates in some sectors, the result was less good than in the previous year.
In the year 2000 we will further extend our position. Given that signs of a recovery in the price level are apparent, we should then also achieve a better result than last year.
Gross premiums £m 154 134 Net premiums £m 17 12 Loss ratio non-life % 105.9 73.8 Expense ratio non-life % 15.1 16.7 Profit for the year £m 0.3 7.8
Great Lakes UK mainly writes international business and concentrates on particular business segments.
Our subsidiary Münchener Rück Italia (MRI), the largest reinsurer in Italy, was able to enlarge its premium volume by more than 28%, partly due to the now-completed merger with Torino Ri. The marked increase in the profit for the year was attributable to a strongly improved investment result.
Gross premiums Lit bn 1,046 813 Net premiums Lit bn 502 374 Loss ratio non-life % 88.7 77.0 Expense ratio non-life % 26.7 31.9 Profit for the year Lit bn 43.7 7.8 Investments Lit bn 1,999 1,428 * Financial statements in accordance with IAS.
We see potential for expanding our Italian business especially in insurances of the person; life insurance has one of the highest growth rates in Europe in this market at around 34%. MRI is also prepared for the possible abolition of the state monopoly in workers’ compensation insurance.
In the past year we were able to expand our business in life reinsurance and thus appreciably strengthen our market position; among other things, we succeeded in acquiring a leading role in the development of private long-term care insurances. On the other hand, this important market produced a very negative result for us owing to the winter storms Lothar and Martin. These two natural catastrophes cost us around €400m in France alone.
In 1999 Swiss primary insurers experienced a decline in premium for the first time in 60 years. In our case, the fall in our premium income is due to the fact that we had included premiums from two years in the previous year’s figure, owing to the change in the business year of our subsidiary New Reinsurance Company. Natural catastrophes (the winter storm Lothar) and an unusually high number of fire losses led to our worst result for decades.
The regional focus of New Re’s business is on Europe; it also operates in Southeast Asia.
We are the market leader in Scandinavia. Despite the continuing wave of mergers, we even managed to extend this position in 1999. Unfortunately we incurred substantial losses in Norwegian workers’ compensation insurance, and windstorm Anatol hit Denmark at the beginning of December. This is reflected in a very negative overall result.
Our premium income from the North American market grew by 23% to €4.4bn (3.6bn); however, without the appreciation in the value of the US dollar, growth would have been restricted to 18%. The result was far worse than in the previous year.
In the current business year we expect a decline in premium income but a better result – assuming we are not hit by major natural catastrophe losses.
Our subsidiary American Re is one of the market’s leading reinsurers in the non-life sector; in terms of net premiums it is number three. American Re succeeded in increasing its premium income by 13%, but it closed the business year with a loss of US$ 101m. In view of the unsatisfactory overall market and claims situation in the USA, American Re substantially strengthened its loss reserves; on top of this, there were heavy claims costs from natural catastrophes and a loss from a financial reinsurance treaty that was settled by way of compromise. American Re has taken decisive measures to rectify its result situation; among other things, it has not renewed reinsurance treaties with a volume of more than US$ 500m because it regarded their prices and conditions as no longer adequate. American Re’s premium income for the year 2000 will therefore show a decrease.
Gross premiums US$ m 3,537 3,118 Net premiums US$ m 2,928 2,419 Loss ratio non-life % 90.7 69.6 Expense ratio non-life % 29.7 33.7 Profit for the year US$ m –101.0 226.0 Investments US$ m 7,440 7,801
Munich American Reassurance Company (MARC-Life), which specializes in life reinsurance business, had a successful business year. It strengthened its market position, but we have even more ambitious plans for the company. Thus we gave MARC-Life a further capital injection of US$ 30m to reinforce its financial base for the planned expansion of its business.
Gross premiums US$ m 302 182 Net premiums US$ m 166 101 Profit for the year US$ m 14.1 9.0 Investments US$ m 936 893
Gross premiums Can$ m 253 281 Net premiums Can$ m 101 112 Loss ratio non-life % 69.0 90.0 Expense ratio non-life % 32.0 31.0 Profit for the year Can$ m 14.5 –0.6 Investments Can$ m 381 365
Our branch in Toronto, Munich Reinsurance Company Canada Branch (Life), recorded large growth in premium income and remains the market leader. The consolidation process among life insurers continues; four of the five largest mutual insurance companies have meanwhile been converted into stock companies. Our business in this market will continue to grow despite the keen competition.
In our business region Asia and Australasia our premium income showed a marked increase of 9.7% to €972m (886m); this growth is partly due to changes in exchange rates. We were able to expand our market share in many countries – especially in India and South Korea. Owing to natural catastrophes, however, our result was the worst that we have ever recorded in this region.
This region still numbers among our growth markets – especially in insurances of the person; we have therefore considerably reinforced our team in Singapore in the past few years.
In the People’s Republic of China, the planned membership of the World Trade Organization (WTO) could have a certain liberalizing effect on the market. We are represented by offices in Beijing and Shanghai. We also have a branch in Hong Kong, where we set up a life and health unit in the year under review, especially with a view to supporting our clients in the People’s Republic.
The state-run insurance industry in India significantly reduced its reinsurance cessions in 1999; we were able to increase our market share, however, so that our premium income (in euros) remained almost the same. We are preparing intensively for the partial privatization and deregulation of the Indian insurance industry and are in the process of establishing a liaison office in Mumbai in order to have a stronger presence in this potentially large market.
In Australia the demand for traditional reinsurance solutions is stagnating, whereas there is an upward trend in the demand for innovative covers of balance sheet risks. Competition is as hard as ever, although a number of companies have suffered high underwriting losses in reinsurance and have even had to cease operations in some cases. A hailstorm in Sydney in April 1999 cost us more than €120m, and we unfortunately also had to cope with additional high losses in financial reinsurance.
Our premium income in this business region stagnated at €505m (501m) in 1999. In many countries there was a further fall in original rates. The result improved, but is still negative. In the current business year we hope for a positive development of both premium and result.
Despite a continuation of the weak economy in some important markets, we were able to strengthen our position. At the same time we improved our result – not least as a consequence of remedial measures in health insurance, whose development we have been promoting in close cooperation with our subsidiary MedNet.
We are well represented in Latin American countries, with six offices. This puts us in a position to take advantage of all the opportunities arising from further liberalization – especially the imminent demonopolization of reinsurance in Brazil.
The primary insurers in our Group are among the most sought-after partners in this market. More than 15 million private individuals and businesses place their trust in the ERGO companies VICTORIA, Hamburg-Mannheimer, DKV, D.A.S., the Karlsruher Group and Europäische Reiseversicherung. In health insurance and legal protection insurance we are the market leaders in Germany and Europe.
We intend to considerably strengthen our activities in the rest of Europe in future, also through acquisitions.
The primary insurers in our Group write all forms of life and health insurance and nearly all lines of property-casualty insurance. By far their most important market is Germany, where they earn around 90% of their premium income. Our Group includes ERGO, Karlsruher and Europäische Reiseversicherung.
Our premiums from primary insurance were up 6.5% in 1999 to €13.5bn, representing 49% of Group premium income. In Germany we succeeded in expanding premium by 5.2%, with our life insurers in particular achieving substantial growth. Our foreign business grew by 19.6%.
The result before tax, amortization of goodwill and minority interests in earnings improved by 13.4% to €948m (836m).
The minority interests are mainly in the ERGO Insurance Group, in which Munich Re holds a stake of around 63%.
The life insurers in the Group acquired an extensive amount of new business in the year under review, totalling €1.6bn (1.1bn). There were basically two reasons for this notable increase: on the one hand people’s growing awareness of the need to make private provision and on the other the plans of the German government – since abandoned – to tax interest income from endowment policies taken out on or after 1st January 2000. Many people decided to take out new policies before this date in order to avoid the taxation.
Our Group insurers were able to increase their premium income in all the important classes of business except fire insurance, where it fell slightly. Claims costs rose by 5.8%, owing to weather-related claims in motor insurance and the windstorms at the end of the year.
ERGO Insurance Group was created in 1997 by merging VICTORIA, Hamburg-Mannheimer, DKV and D. A. S. and is the second largest primary insurance group in the German market. The emphasis of ERGO’s business is on personal lines insurance, from which it earns around 90% of its premium income; in health insurance and legal protection insurance it is the market leader in Europe. In addition, it concentrates on insurance for small and medium-sized firms. The ERGO companies also selectively write insurance for larger commercial and industrial business.
ERGO’s premium income rose by 5.3% in 1999. Of the gross premiums written, 43% came from life insurance, 30% from health insurance, 25% from property-casualty insurance and 2% from reinsurance business.
ERGO’s profit for the year increased by 42% to DM 913m (642m); DM 170m of this was due to the reduction in the German corporation tax rate from 45 to 40%.
The beginning of 1999 saw the launch of the new distribution cooperation strategy within ERGO: the aim is to keep all business acquired by ERGO’s marketing organizations within the group. Since January 1999 DKV has therefore been channelling property-casualty business to VICTORIA Versicherung, personal accident business to Hamburg-Mannheimer Sach and legal protection business to D. A.S. As hitherto, life insurance business is passed on to Hamburg-Mannheimer Leben. The new business generated as a result of this reorganization proved to be very gratifying in the first year. The cooperation is being intensified.
At the end of 1999 ITERGO Informationstechnologie GmbH was set up to bundle all ERGO’s IT activities. The intention is on the one hand to promote knowledge transfer and on the other to benefit from economies of scale – we expect substantial savings in the costs for hardware and applications development.
ERGO is the third-largest life insurer in Germany. Its premium income in life insurance rose by 8.9% to DM 10.0bn (9.2bn).
New business premium in Germany showed very satisfactory growth of 45.1% to DM 2.4bn (1.7bn). In terms of annual premiums, the insured portfolio of ERGO’s German life insurers increased by 6.6% to DM 8.6bn (8.0bn) and that of its life insurers outside Germany to DM 0.6bn (0.5bn).
The group’s market leadership in Germany and Europe was further consolidated: in its core business – comprehensive health cover – the number of clients insured by ERGO in Germany increased by 3.2% to 886,000. The ERGO health insurers serve a total of 4.8 million clients in Germany and abroad. DKV is supporting the expansion of private health insurance in Scandinavia and is promoting the launch of health business in China via a representative office.
At DM 4.5bn (4.3bn), expenditure for claims was 3.8% up on the previous year. The claims ratio rose to 68.7% (67.5%); DKV is working hard on controlling claims expenditure long term and is expanding its know-how in healthcare management in particular. A further step will be developing DKV into an international healthcare manager, which partners its clients through the healthcare systems and assists them in seeking the best healthcare provision.
Counter to the market trend and despite the unrelenting pressure on prices in motor and fire insurance, the property-casualty insurers succeeded in achieving growth of 2.4% to DM 6.4bn (6.2bn). These figures include DM 1.3bn (1.3bn) from legal protection insurance, in which D. A. S. and its subsidiaries continue to be number one in Germany and in Europe.
ERGO’s property-casualty insurers merged their claims management resources in property insurance in 1999: this pooling of skills and experience will enhance claims service and reduce costs.
Gross premiums DM bn 2.6 2.3 Net premiums DM bn 2.1 1.8 Profit for the year DM m 29 19 Investments DM bn 23.8 21.9 * Consolidated financial statements in accordance with IAS.
Karlsruher Leben was able to substantially expand the volume of its new business in the year under review; premium from new business production rose by 61.7%, exceeding the market average (58%). Gross premiums reached DM 2.1bn (1.8bn) – a plus of 14.2%. The insured portfolio (in terms of annual premiums) totalled DM 1.6bn (1.5bn) at the end of the year. The profit for the year increased to DM 30.8m (28.8m).
A total of 631 (535) staff were employed by EUROPÄISCHE and its subsidiaries in 1999.
45% of its premium comes from abroad. Together with its subsidiaries and participations, EUROPÄISCHE is now represented in 11 European countries; in the year under review it acquired Compañía Europea de Seguros, S. A. in Madrid.
* Value of the Munich Re Group’s investments (in €) at 31st December 1999.
The Munich Re Group succeeded in substantially growing its investments again in 1999. Its assets rose by 10.9% to €151bn and the investment result improved by 12.5% on the previous year.
A breathtaking final sprint led to the European stock markets finishing 1999 with an annual price level increase of 47%, based on the Dow Jones Euro STOXX 50. This put shares in the euro-zone in top place worldwide.
But 1999 was a bad year for the international bond markets. The continuing strong economic growth in the USA and the expected economic upswing in Europe caused the central banks to start raising interest rates, with the consequence that yields on long-term bonds increased significantly.
In such an environment, the choice of individual stocks is crucial. All in all, we profited from the fact that we had expanded the proportion of equities in our investment portfolio. Shares and investment fund certificates now account for around 26% of our investments.
The past year posed particular challenges for investment in fixed-interest securities: the stability of the financial markets increased and there was a general growth in global economic activity. This led first in the USA and later in Europe to an alteration in monetary policy. Yields on long-term bonds reacted to the first signs of a re-emerging inflation threat with a marked increase. Thus the yield on 10-year German government bonds climbed in the course of the year from a low of 3.6% to 5.3% at the end of the year. We therefore acted to limit price risks and at the same time to take advantage of the higher yields for reinvestment.
Bonds still make up the bulk of our investments. In this sector we are concentrating on the growing market for European corporate bonds.
We have systematically expanded the portion of our investments outside Germany, our focal points being Europe and North America.
For Europe, a new age of investment opportunities has dawned: the successful introduction of the euro has produced a pan-European investment market. This has profound implications for the investment behaviour of European and international investors and companies. In the very first year of the common currency, the number of mergers and acquisitions among European firms rose appreciably. We also witnessed a growing trend for firms to cover their M&A financing requirements by issuing bonds on the capital market. The effect of these activities is positive for investors in both equities and bonds, the consequence being that the European stock markets continue to be stimulated and the spectrum of fixed-interest securities is simultaneously expanded. In addition, the end of fluctuations in exchange rates has created a stable basis for European investments and means a reduction in transaction costs.
Apart from legal requirements, one of the main criteria influencing the structure of our investments is the type of underlying insurance business. Depending on the field of business and the product range of the individual Group company, we determine both the optimum portion of equities and the appropriate duration of the bond portfolio per currency. In asset liability management, we additionally make sure that we cover our underwriting liabilities with investments in the same currency, in order to limit currency risks.
In our cash management, our objective is to optimize the liquid funds available in the Group and to ensure cost-efficient liquidity. Our advance liquidity planning with a one-year horizon, which is based on a projection of our future cash flows adjusted daily, has proved especially effective here.
The guiding principle of our investment strategy is, as ever, to safeguard and increase our investment income on a secure and lasting basis. To this end, we established MEAG MUNICH ERGO AssetManagement GmbH in 1999 as a joint subsidiary of Munich Re and ERGO. MEAG is meanwhile responsible for the entire asset management of the companies involved; it also manages the Group’s extensive real estate portfolios insofar as they serve as investments.
Our investments increased by 10.9% to €150.9bn (136.1bn) in 1999; €150.5bn (136.0bn) of this was apportionable to our own investments and €417m(146m) to investments in connection with unit-linked life insurance.
The distribution of our investments between reinsurers and primary insurers and their regional spread is shown in the segment reporting in the financial statements; cf. page 110ff.
The fair value of our real estate amounted to €9.2bn, and the fair value of our investments in affiliated and associated enterprises totalled €27.3bn. This means there are valuation reserves of around €19bn.
Risks are the core of our business. The core of our success is our competence in handling them, drawing on many years’ experience, in-depth knowledge and a wide range of tried-and-tested and state-of-the-art processes for risk identification, evaluation and management.
We expect the consolidated result for the business year 2000 to show an increase of over 10% to more than €1.2bn, even though it will not benefit from the very positive one-off effect of the reduction in the German corporation tax rate as 1999 did. In this forecast, we are assuming that the costs for losses from natural catastrophes significantly decrease and that there is no major change in the situation on the capital markets.
We anticipate that we will again be able to pay our shareholders a dividend of at least €0.95 per share.
Remarks on expected experience in the individual fields of business can be found in the preceding sections of the management report; information on our assumptions regarding overall economic development can be obtained from Section 04 Economic Parameters.
At the beginning of May, Munich Re and Allianz AG announced their intention to reduce their reciprocal stakes of 25% to around 20% each. This reduction is to take place in several steps, with due consideration for the capital markets, and is scheduled to be completed by the end of the year 2003. In a first step the shareholdings have been lowered to just under 25%. In addition, Munich Re has issued a €1.15bn bond exchangeable into Allianz shares.
It is also planned that Allianz will acquire Munich Re’s stakes of 45% in Bayerische Versicherungsbank AG and 49.9% in Frankfurter Versicherungs -AG. In return, Munich Re intends to acquire Allianz’s stakes of 36.1% in Karlsruher Lebensversicherung and 39% in Mercur Assistance. The acquisition of Mercur Assistance is planned for the current business year; all the other transactions are scheduled to take place next year. The exchange operations with Allianz will therefore not have a significant effect on equity capital or results for 2000.
Over the course of time we have developed a whole range of processes and tools that enable us to identify, evaluate and master risks. And we are continually reviewing our operational procedures and methods with an eye to adjusting them to take account of the changes in risks. Our Internal Auditing Division regularly checks the efficiency of our internal control system in all units of the Group.
These include above all – The risk of random fluctuations: higher claims are incurred than expected owing to chance factors, e.g. as a consequence of natural catastrophes.
– The risk of change: legal or economic parameters or even behavioural patterns are subject to change; it is not always possible to counter such changes quickly enough by adjustments in the prices or conditions of insurance or reinsurance cover.
We seek to control the underwriting risks by means of the following measures in particular: – A balanced mix and spread of business between insurance and reinsurance and between classes of business and markets
– Strictly controlled budgets for the reinsurance of natural catastrophe risks, the scope of which is fixed annually for a number of potential loss scenarios
– A conservative valuation of the provisions we make for uncertain liabilities arising from our commitments, with claims provisions generally not subject to any discounting
– Retrocession cover for certain risks we have assumed, with high standards applied to the security of our retrocessionaires
– a broad mix of investments, – a geographical spread of investments which follows that of our underwriting business, – a careful selection of issuers – and also, in individual cases, through the strictly controlled use of derivative financial instruments.
In particular in the reinsurance group, a substantial portion of the business is conducted in foreign currencies. This results in currency risks. We endeavour to reduce these by matching our liabilities in foreign currencies with assets in the same or similar currencies, so that exchange gains and losses largely neutralize each other. In individual cases, selective use is also made of derivative financial instruments for hedging purposes.
Altogether, we cannot perceive any development at present that could have a lasting and significant adverse effect on the assets, liabilities, financial position or results of the Munich Re Group.
One example of how ideas of today translate into added value of tomorrow is e-commerce, which opens up whole new avenues of opportunity for our business. Another example is the systematic use of information technology, which will appreciably accelerate the integration of our worldwide organization.
The far-reaching changes in the insurance markets and in our Group are presenting our staff and our human resources work with great challenges.
The dynamic growth of our business has required considerable personnel expansion. Altogether, the number of staff employed in our Group increased by 3.0% last year.
The professional and social skills of our staff, their commitment, capacity to learn and flexibility are today more important than ever. At the same time, particularly in reinsurance, it is becoming increasingly difficult to find staff that meet our high-level requirements. How are we responding?
– We are stepping up our activities in personnel marketing, especially in the graduate market.
– We are intensifying our efforts in the field of training at all levels: we offer our staff a broad range of opportunities to develop their professional, linguistic and interpersonal skills and to adapt them to meet future requirements.
In reinsurance business it is increasingly important to deploy our worldwide know-how as efficiently as possible, so that our clients can derive the maximum benefit. How do we achieve this? Through international human resources management. We systematically assess the skills and qualifications of our experts in Munich and at our subsidiaries, and promote the development of our future management staff. We attach great importance to international exchange of experience. At present we are in the process of creating the technical basis within our Group for transferring knowledge swiftly.
We are linking the remuneration of our staff more and more to individual performance on the one hand and the results of the respective Group company on the other. Examples of this are variable salary components, such as bonus payments, and the chance to acquire shares or fund units at preferential conditions.
This incentive plan and ERGO’s stock participation plan, which is open to all its staff, are two examples of instruments with which we aim to make staff and management identify more closely with the Group and enhance the Group’s performance.
We have also taken new steps as far as pension arrangements are concerned.
On 1st October 1999 the Munich Reinsurance Company introduced deferred compensation as an additional component to supplement its company pension scheme: staff can waive part of their remuneration during their active service and thus reduce their taxable income; in compensation for this, Munich Re gives them an equivalent pension commitment. Tax only becomes payable on this amount when it is paid out in benefits. Similar arrangements apply to staff at the primary insurance companies.
All Munich Re’s reinsurance subsidiaries, branches and offices are today networked and electronic communication between them has been standardized worldwide. All members of the reinsurance group, wherever they are employed, have 24-hour access to our Group-wide intranet. Thus we have created the technical platform for improved communication and intensive exchange of knowledge between Group staff and with our business partners.
The most important IT systems are always accessible, as are the globally networked helpdesks, which operate according to uniform rules and support any user who has a problem. Our IT Security Office sees to it that our high standards of information security are complied with.
The standardized technology enables IT solutions that were previously only available at one location to be used worldwide at any time. This flexibility facilitates the handling of our global reinsurance business. For example, in ERIS-95 (Engineering Individual Risk Information System) we have available a database for the uniform processing and assessment of facultative engineering risks Group-wide.
– We have taken a conscious decision to nurture knowledge as a resource even more carefully than hitherto. We favour and promote, also by means of incentives, all initiatives geared to exchanging professional knowledge within the Group and to making this knowledge useful and useable for all staff. We expressly encourage staff to participate in working groups and projects in which new knowledge is generated and experience shared.
New technologies offer efficiency benefits. We are currently devoting our efforts to centralizing the knowledge we have available all over the world, including documented material (e.g. manuals), and to developing electronic forums in which our experts, wherever they are employed, can compare experiences and discuss current problems.
We have been successfully practising knowledge management at Munich Re for 120 years. But new challenges and modern technology are opening up many promising avenues for us in this field, too. We intend to take systematic advantage of them.
MEAG MUNICH ERGO AssetManagement GmbH is initially concentrating its Internet activities on creating an information and communication platform together with its distribution partners. The next stage will involve making the Internet an integral part of its mix of distribution channels, with a transaction platform and strategic partnerships.
In reinsurance, we are using e-commerce as an instrument to strengthen our partnerships with clients and to support our reinsurance business. Extranet models with selected groups of clients have already been tested and exploit additional, complementary service and sales potential. Besides this, we are investing in the development of further e-commerce models, such as portal strategy or independent marketplaces, and are examining cooperation arrangements with external specialists. To this end, we have set up an e-commerce centre of competence in our Research and Development Division.
It has always been our aim to increase Munich Re’s value, not only for our shareholders but also for our clients and staff.
Value-based management presupposes transparency. Several years ago we began the process of making our shares and our accounting more transparent for shareholders and analysts. The simplification of our share structure and the change in our balance sheet date were the first big steps; the switch to International Accounting Standards is a further one. This is also a form of value enhancement. And we will be continuing along this path in the years to come.
Firstly, the environmental audit will help us organize current activities more efficiently: resource-saving measures in our office operations, for example, such as the use of refill materials, which has been standard practice for some time; or measures for structural ecology in the conversion of our buildings; or the consultancy frequently given to clients by our experts which serves to promote preventive environmental protection measures. In all these areas we are committed to continually improving our performance. And this will be followed by action.
These internationally accepted, high-quality accounting standards benefit shareholders, analysts, investors and the public alike.
International Accounting Standards provide for more information, greater transparency and easier comparability of figures in financial statements. We welcome this, not least because it further enhances the competitiveness of our registered shares on the international capital market.
– A large portion of the investments are measured at current market value. This means that a truer picture is given of shareholders’ equity – a key figure for every insurer – than is possible under German accounting regulations: in German Commercial Code accounting, investments are valued at their acquisition cost at most; their actual values are merely disclosed in the notes to the accounts.
– For the balance sheet and income statement we provide a division of the individual items between our three core business areas (segment reporting). Our core business embraces reinsurance and primary insurance. In both cases we make a further differentiation between life and health insurance on the one hand and property-casualty insurance on the other. Besides this, there is our third core business area of asset management, which we are currently in the process of developing.
What effect does the changeover from German Commercial Code (HGB) accounting to IAS have on the most important figures? We explain this below, with reference to the previous year’s figures.
– Premiums Premiums on an IAS basis tend to be lower than in the HGB accounts: in the case of life insurance products which are more in the nature of investments, only part of premium may be shown as premium income (essentially what is known as the risk premium). This business is still being developed by our primary insurers, so the premium-reduction effect due to the new accounting is small. Owing to a change in the translation of foreign currency items (use of average exchange rates instead of year-end rates) the premiums for 1998 are actually slightly higher under IAS than in the HGB accounts.
– Profit for the year In the HGB consolidated financial statements, the profit for the year is “smoothed” by the legally prescribed claims equalization provision. In IAS financial statements there is no claims equalization provision, i. e. the profit for the year will fluctuate more strongly than hitherto.
The profit for the year in IAS financial statements is shown less minority interests in earnings.
Shareholders’ equity HGB 6,270 Deferred acquisition costs 5,680 Investments 25,118 Provision for future policy benefits –3,508 Provision for premium refunds –11,508 Claims equalization provisions 2,973 Other underwriting provisions 907 Provision for deferred taxes –7,415 Minority interests –2,212 Miscellaneous –141
C. Investments for the benefit of life insurance policyholders who bear the investment risk 417 146
D. Gross underwriting provisions for life insurance policies where the investment risk is borne by the
Acquisition of investments in affiliated enterprises and associated enterprises –205 –198 Sale of investments in affiliated enterprises and associated enterprises 11 20
Acquisition of securities available for sale –25,347 –32,291 Sale of securities available for sale 16,192 25,935
Acquisition of consolidated affiliated enterprises –42 –272 Sale of consolidated affiliated enterprises 0 0
Cash flows for the business year (I + II + III) –98 –129
Life and health Property-casualty 31.12.1999 Prev. year 31.12.1999 Prev. year €m €m €m €m
Life and health Property-casualty 31.12.1999 Prev. year 31.12.1999 Prev. year 31.12.1999 Prev. year 31.12.1999 Prev. year 31.12.1999 Prev. year €m €m €m €m €m €m €m €m €m €m
B. Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders 0 0 0 0
Total equity and liabilities 179,880 159,161 * Group shareholders’ equity and minority interests
Thereof: – From insurance transactions with other segments 735 646 713 669 – From insurance transactions with external third parties 3,007 2,365 10,913 10,466
Thereof: – Dividends from associated enterprises 318 268 405 339 5. Net expenses for claims and benefits 3,009 2,745 8,964 7,336
INVESTMENTS Reinsurers Primary insurers Total 31.12.1999 Prev. year 31.12.1999 Prev. year 31.12.1999 Prev. year €m €m €m €m €m €m
Munich Re’s consolidated financial statements have been prepared for the first time in accordance with the standards of the International Accounting Standards Committee (IASC).
Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and
The balance sheet date of all the consolidated companies is 31st December.
Goodwill resulting from the first-time consolidation of subsidiaries is amortized on a straight-line basis over its useful life – up to 20 years (IAS 22).
Writedowns are made on all securities that are not investments held for trading if they suffer an impairment in value that is not temporary. These writedowns are recognized in the income statement.
The item issued capital and capital reserve contains the amounts that the shareholders of the parent company have paid in on shares. Under revenue reserves, we show the profits which consolidated companies have earned and retained since becoming a member of the Munich Re Group, and income and expenses resulting from consolidation measures. Unrealized gains and losses resulting from the market valuation of investments are included in the other reserves.
Provisions for future policy benefits are generally calculated using actuarial methods from the present value of the future benefits payable to policyholders and from the present value of the premiums still to be paid by the policyholders; the calculation is based in particular on assumptions relating to mortality, morbidity and interest rate development.
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 unrealized gains and losses resulting from the accounting of certain investments at market value to the extent that policyholders will participate in such gains and losses on the basis of statutory or contractual regulations (provision for deferred premium refunds).
These primarily include provisions for post-employment benefits. In accordance with IAS 19, these are calculated using actuarial instruments (e.g. current mortality tables and disablement probabilities) and assumptions in relation to the future development of wages and salaries, as well as increases in current pensions and pension entitlements. The interest rate at which the pension provisions are discounted is based on the yields for long-term bonds of first-class issuers (e.g. government bonds).
Provisions for taxes are posted – without discounting – in accordance with the probable tax payments for the year under review or previous years.
Under IAS 12, deferred tax liabilities must be accounted for if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax balance sheet of the reporting company and if this difference is temporary; cf. the remarks on the corresponding assets item.
The following table shows the exchange rates of the most important currencies for our business (exchange rate for €1 in each case): Balance sheet Income statement 31.12.1999 Prev. year 1999 Prev. year
– The provision for outstanding claims is lower under IAS, because the actuarial calculations on the basis of partial portfolios generally result in a smaller requirement than the individual valuation of all claims based on the prudence concept, which the German Commercial Code prescribes.
– Claims equalization provisions as under the German Commercial Code do not constitute liabilities to third parties and are thus not admissible under IAS; they therefore have to be reversed.
– Premiums tend to be lower under IAS. In the case of products which are mainly of an investment character (e.g. financing treaties, unitlinked life insurance) only that portion of the premium used to cover the risk insured and associated costs is treated as premium income. In the IAS financial statements there are no “premiums from the provision for policyholders’ dividends”.
The goodwill results mainly from the acquisition of American Re in November 1996 and from acquisitions within the ERGO Insurance Group in the years 1998 and 1999.
The other intangible assets include rights equivalent to real property amounting to €5m (5m).
Land and buildings used by Group companies for their own activities are valued at €1,687m (1,540m).
The fair value of real estate at the balance sheet date totals €9,220m (8,667m). The fair value is generally the capitalized earnings value; new buildings are valued at cost.
An overview of our most important shareholdings can be found on page 154f.
In the business year the market values of the loans generally corresponded to the carrying amounts. The “other loans” include loans to affiliated enterprises totalling €65m (119m) and loans to associated enterprises totalling €164m (5m).
Up to one year 251 329 274 336 Over one year and up to 5 years 618 676 648 762 Over 5 years and up to 10 years 464 580 471 732
The rating categories are based on the grading of the leading international rating agencies.
Gains on disposal 1,680 1,566 – Fixed-interest securities 274 426 – Non-fixed-interest securities 1,406 1,140 Losses on disposal 253 90 – Fixed-interest securities 94 44 – Non-fixed-interest securities 159 46
The market value of derivatives for fair value hedges totals €2m and the market value of derivatives for cash flow hedges €114m.
Amounts receivable on primary insurance business 522 494 Thereof – from policyholders 276 263 – from intermediaries 246 231 Accounts receivable on reinsurance business 4,541 2,641 Interest and rent 1,716 1,764 Other receivables 1,277 1,198
The share capital as at 31st December 1999 is thus divided into 176,905,155 registered shares and 14,621 bearer shares, each fully paid up and each entitled to one vote.
Capital authorized for capital increases I 109.9 Capital authorized for capital increases II 25.6 Capital authorized for capital increases III 76.7
Changes in unrealized gains and losses on other investments: All figures in €m 1999 Prev. year
Unconsolidated affiliated enterprises 25 –14 Securities available for sale – Fixed-interest –1,995 254 – Non-fixed-interest 4,860 161 Less: – Provision for deferred premium refunds –3,078 –245 – Deferred taxes 168 69
The following table shows the distribution of net unearned premiums between the different Group segments: All figures in €m* 31.12.1999 Prev. year
– Life and health 9,558 8,387 – Property-casualty 650 661 Primary insurers 62,199 57,712 – Life and health 62,182 57,709 – Property-casualty 17 3 * After elimination of intra-Group transactions across segments.
The following table shows the distribution of the net provision for outstanding claims between the different segments of the Group: All figures in €m* 31.12.1999 Prev. year
– Life and health 641 358 – Property-casualty 20,349 16,245 Primary insurers 3,625 3,743 – Life and health 796 782 – Property-casualty 2,829 2,961 * After elimination of intra-Group transactions across segments.
The provision for outstanding claims includes gross provisions for annuity obligations arising from motor, personal accident and liability insurance totalling €99m (264m). These annuity provisions have been calculated using actuarial assumptions.
– Life and health 0 0 – Property-casualty 0 6 Primary insurers 20,310 18,276 – Life and health 20,257 18,238 – Property-casualty 53 38 * After elimination of intra-Group transactions across segments.
The provision for premium refunds showed the following development: All figures in €m 1999 Prev. year a) Amounts allocated on the basis of national regulations (gross) Status 1st January 4,721 4,333 Changes in the consolidated group 0 318 Allocations/withdrawals 293 70
Status 31st December 5,014 4,721 b) Deferred premium refunds (gross) Status 1st January 13,593 10,243 Change resulting from unrealized gains and losses on investments 2,158 2,553 Changes in the consolidated group –412 797
A total of €777m (738m) was credited directly to life insurance policyholders in the business year.
The following table shows the distribution of the net other provisions between the segments of the Group: All figures in €m* 31.12.1999 Prev. year
The companies in the Munich Re Group generally give pension commitments to their employees in the form of defined contribution plans or defined benefit plans. The type and amount of the pension obligations are determined by the conditions of the respective pension plan. In general, they are based on the length of service and salary of the staff member.
Under defined contribution plans the company pays fixed contributions to an insurer. This fully covers the company's obligations.
Present value of unfunded obligations 912 836 Present value of funded obligations 211 189 Fair value of plan assets –151 –121 Actuarial gains/losses not recognized –24 –34 Past service cost not yet recognized 1 1
Current service cost 43 32 Interest cost 70 53 Expected return on plan assets –13 –10 Net actuarial gains/losses recognized in year –12 32 Past service cost 2 1 Gains/losses on curtailments and settlements 1 1
Discount rate 5.9 5.7 Expected rate of return on fund assets 9.3 8.9 Future increases in entitlement/salary 3.8 3.7 Future pension increases 2.0 2.0
American Re Corporation, Princeton 7.45%, US$ 500m Senior Notes 1996/2026 497 427 American Re Capital, Delaware
Liabilities with a remaining term of up to one year total €13,576m (10,931m); liabilities with a remaining term of over one year total €1,483m (1,659m).
All figures in €m* 1999 Prev. year 1999 Prev. year 1999 Prev. year 1999 Prev. year 1999 Prev. year
Life and health Property- Life and health Property- management casualty casualty
In addition to foreign currency exchange gains of €302m (13m), the other income mainly includes income from services rendered of €106m (63m), interest and similar income of €91m (34m), and income from the reversal /reduction of miscellaneous provisions and adjustments of values for receivables.
Provision for future policy benefits 732 856 194 155 538 701
Change in the provision for outstanding claims 111 106 –7 –18 118 124
All figures in €m* 1999 Pr. year 1999 Pr. year 1999 Pr. year 1999 Pr. year 1999 Pr. year
Less reinsurance commission and profit commission * After elimination of intra-Group transactions across segments.
The amount is derived as follows: All figures in €m 1999 Prev. year
Actual tax paid for business year 928 691 Actual tax paid for other periods 74 –205 Deferred tax resulting from the occurrence or reversal of temporary differences –334 270 Effects of changes in tax rates on deferred tax –300 5 Other –8 14
The following personnel expenses are included in the operating expenses, the expenses for claims and benefits and the investment result: All figures in €m 1999 Prev. year
As at 1st July 1999 Munich Re decided to introduce a long-term incentive plan. The plan, with a term of seven years, provides for the members of the Board of Management and senior management in Munich and the top executives in Munich Re’s international organization to be granted a defined number of stock appreciation rights.
A total of €65m (65m) was set aside for pension commitments towards retired members of the Board of Management or their surviving dependants.
The Board members did not receive any advances or loans in the year under review.
The number of staff employed by the Group at year-end totalled 26,121 (25,556) in Germany and 6,575 (6,263) in other countries.
Commitments under rental, leasing, work and service contracts amounted to €667m. In addition, there were investment obligations totalling €206m (416m). These figures represent undiscounted nominal amounts.
As a member of the German Reinsurance Pharmapool, the parent company is committed – to the extent of its proportional share – to assuming the payment obligations of another pool member if the latter is not able to meet these obligations. Similar commitments exist in connection with its membership of the German Nuclear Insurance Pool and the German Aviation Pool.
At the beginning of May Munich Re and Allianz AG announced a restructuring of their shareholdings scheduled to be completed by the end of the year 2003. The measures planned, which will result in a substantial inflow of liquid funds for Munich Re, are explained in the management report (Section 05). No other events have occurred since the balance sheet date which would have a material effect on the financial position of the Group as presented in the financial statements.
In our opinion, altogether the group management report provides a suitable understanding of the Group’s position and suitably presents the risks of future development. In addition, we confirm that the consolidated financial statements and group management report for the business year from 1st January 1999 to 31st January 1999 satisfy the conditions required for the Company’s exemption from its duty to prepare consolidated financial statements and group management report in accordance
Lutz Wiegand Christine Peschel Wirtschaftsprüfer Wirtschaftsprüfer (certified public accountant) (certified public accountant)
Münchener Rück Italia S. p. A. Via Turati 16/18 20121 Milano
Munich American Reassurance Company 56 Perimeter Center East, N.E. Atlanta, GA 30346-2290
De Amersfoortse Reinsurance Limited, Dublin 25.0000 23,527 3,573 Golden Gate Reinsurance Company Limited, Hamilton 33.3333 43,161 4,116 Prévoyance Re S. A., Paris 34.0000 14,363 –784
ERGO Versicherungsgruppe AG, Düsseldorf 62.9180 1,445,192 105,318 VICTORIA Lebensversicherung Aktiengesellschaft, Düsseldorf 62.6034 245,318 24,542 VICTORIA Versicherung Aktiengesellschaft, Düsseldorf 62.0623 544,272 58,799 VICTORIA Krankenversicherung Aktiengesellschaft, Düsseldorf 62.7377 57,086 5,829 VICTORIA MERIDIONAL Compañía Anónima de Seguros y Reaseguros, S. A., Madrid 60.7800 15,436 –3,514 VICTORIA-Seguros de Vida, S. A., Lisbon 62.0622 15,309 –278 VICTORIA-Seguros S. A., Lisbon 62.0622 24,369 –714 VICTORIA-VOLKSBANKEN Versicherungsaktiengesellschaft, Vienna 46.3170 32,459 1,043 Vorsorge Lebensversicherung Aktiengesellschaft, Düsseldorf 62.6034 25,191 1,560 Nieuwe Hollandse Lloyd Levensverzekeringmaatschappij N. V., Woerden 62.0622 27,292 1,403 Nieuwe Hollandse Lloyd Schadeverzekeringmaatschappij N. V., Woerden 62.0622 19,189 –138 Olympic-Victoria Life Insurance Company S. A., Thessaloniki 62.0622 6,551 –76 Hamburg-Mannheimer Versicherungs-Aktien-Gesellschaft, Hamburg 62.9180 424,367 64,928 Hamburg-Mannheimer Sachversicherungs-AG, Hamburg 62.9117 344,072 39,013 Hamburg-Mannheimer Rechtsschutzversicherungs-Aktien-Gesellschaft, Hamburg 62.5084 9,950 827 Hamburg-Mannheimer N. V., Brussels 62.9117 14,806 1,728 DKV Deutsche Krankenversicherung Aktiengesellschaft, Berlin/Cologne 62.9551 554,999 70,047 DKV Luxembourg S. A., Luxembourg 62.9469 8,457 771 dkv International S. A., Brussels 62.9488 18,825 2,320 DKV Previasa S. A. de Seguros y Reaseguros, Saragossa 62.9551 34,202 916 Previasa Vida, S. A. de Seguros y Reaseguros, Saragossa 62.9551 10,635 1,198 NVS Verzekeringen N. V., Amsterdam 62.9551 47,638 865 NVS Zorgverzekeringen N. V., Amsterdam 62.9551 21,122 –378 D. A. S. Deutscher Automobil Schutz Allgemeine Rechtsschutz-Versicherungs-Aktiengesellschaft, Munich 62.1211 220,220 25,812 D. A. S. Deutscher Automobil Schutz Versicherungs-Aktiengesellschaft, Munich*** 62.1210 36,854 0 DAS Legal Expenses Insurance Company Limited, Bristol 62.1210 51,544 10,382 D. A. S. Nederlandse Rechtsbijstand Verzekeringmaatschappij N. V., Amsterdam 39.0417 24,405 3,251 D. A. S. Österreichische Allgemeine Rechtsschutz-Versicherungs-AG, Vienna 62.1210 15,343 3,832 Europäische Reiseversicherung Aktiengesellschaft, Munich 100.0000 93,356 4,862 Europæisk Rejseforsikring A/S, Copenhagen 100.0000 18,839 329 Europeiska Försäkeringsaktiebolaget, Stockholm 100.0000 6,122 568 Karlsruher Lebensversicherung Aktiengesellschaft, Karlsruhe 54.0000 137,828 15,769 Karlsruher Rechtsschutzversicherung AG, Karlsruhe 53.0485 7,157 597 Karlsruher Versicherung Aktiengesellschaft, Karlsruhe 53.0485 55,787 3,378 The Princeton Excess and Surplus Lines Insurance Company, Princeton 100.0000 24,205 –353
Allianz Aktiengesellschaft, Munich**** 25.0007 22,232,200 1,819,100 Allianz Lebensversicherungs-Aktiengesellschaft, Stuttgart 40.5720 939,945 151,200 Bayerische Versicherungsbank Aktiengesellschaft, Munich 45.0000 283,910 23,136 Frankfurter Versicherungs-Aktiengesellschaft, Frankfurt am Main 49.9834 314,879 14,253 TELA Versicherung Aktiengesellschaft, Berlin/Munich 25.0000 141,964 18,509 Union Versicherungs-Aktiengesellschaft, Vienna 20.9706 39,085 5,131 Vereinsbank-Victoria Bauspar Aktiengesellschaft, Munich 18.7328 17,112 1,376
The complete list of shareholdings required by Article 313 para. 2 of the German Commerical Code will be filed with the commercial registry in Munich; we will be glad to send you a copy on request.
Cash flow statement Statement showing the origin and utilization of cash during the business year. It shows the change in liquid funds separately according to – cash flows from operating activities, – cash flows from investing activities, – cash flows from financing activities.
Combined ratio The sum of the loss ratio and the expense ratio. The better the results of the underwriting business, the lower this ratio will be; ratios over 100% indicate loss-making business.
Derivative financial instrument Financial instruments whose increase or fall in value is based on and determined by the change in the amount of an underlying value (a particular interest rate, security price, exchange rate, price index, etc.). The main derivatives are futures, forwards, swaps and options.
Earnings per share A ratio calculated by dividing the consolidated profit by the average number of shares issued. For calculating diluted earnings per share, the number of shares is adjusted by the effects of exercised or still to be exercised subscription rights.
Financial Accounting Standards (FAS) US accounting regulations that give detailed rulings on individual accounting questions and which must be complied with by listed companies that prepare accounts in accordance with US GAAP.
(IASC) An independent private sector body whose members comprise representatives of professional accountancy bodies and other accounting specialists from over 100 countries. IASC’s objective is to achieve uniformity in the accounting principles that are used by businesses and other organizations for financial reporting around the world
Investments for the benefit of life insurance policyholders who bear the investment risk This mainly involves investments for policyholders under unit-linked life insurances. It also includes investments under index-linked life insurance policies whose performance depends on share or currency indexes.
OTC derivatives Derivative financial instruments which are not standardized and are traded not on an exchange but directly between two counterparties via over-the-counter (OTC) transactions.
Other securities held to maturity Fixed-interest securities which the company has the intention and ability to hold to maturity. They are valued at amortized cost.
Provision for future policy benefits Underwriting provision calculated using actuarial methods to cover future benefits to which policyholders are entitled, especially in life, health and personal accident insurance.
Retrocession Reinsurance of reinsurance business assumed from other insurance companies (a reinsurance of reinsurance). Retrocession enables the reinsurer to lay off part of its risk to other insurance companies.
Value-based management The concept of valuebased management is geared to increasing the value of a company on a long-term basis. Value is only created long term if a company regularly earns a profit that exceeds the costs of the equity capital invested.
Alte Leipziger 67, 80 American Re 53 Asia and Australasia 55f. Asset management 72ff. Associated enterprises 120, 121, 154ff. Auditor’s opinion 148f.
Great Lakes UK 50 Gross premiums 39, 44ff., 62ff., 117, 141
Incentive plan 89, 145 Income statement 107, 114f. Inflation 31 Information technology 90f.
Münchener Rück Italia 51 Munich American Reassurance Company 53 Munich Reinsurance Company of Africa 56 Munich Reinsurance Company of Australasia 55 Munich Reinsurance Company of Canada 53
Personal accident 46 Personnel expenses 145 Primary insurance 62ff. Profit for the year 39 Property-casualty insurance 46f., 63 Prospects 32f., 45ff., 75, 80, 88ff. Provisions 136ff.
Besides this English translation of the official German original (also available from the company), a translation of our annual report is obtainable in Spanish. You will also find our annual reports and interim reports, along with further information about Munich Re, on the Internet (www.munichre.com).
Our Investor Relations Division will be glad to supply you with any other information you require.
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