Our cooperation with the hvb Group is going well – in fact, better than planned. Our stake in Hypo Real Estate Holding, the HypoVereinsbank sister company responsible for financing commercial real estate, was not needed for this cooperation so we sold it, significantly reducing our investment in the German banking sector (see page 92).
To begin with, we were confronted with an unprecedented plunge in most of the world’s major share price indices, especially the dax. This development hit Munich Re shares particularly hard. Within a period of three months, our shares lost over 60% of their value and fell to their lowest level since 1992. The effects of the bear market on the value of our investments, and thus on our capital base, were severe. In order to restrengthen our equity capital and take advantage of the favourable business environment in our sector, we issued two subordinated bonds in spring and carried out a rights issue in autumn. I regard the impressive oversubscription of all three issues as an encouraging sign, indicating that our investors share my conviction that we will overcome the difficulties we have encountered. There are indeed good reasons for holding this view, which I will come to in a moment.
On 31 December 2003, the term of our two natural catastrophe bonds ended. These had a total volume of us$ 300m and had been placed with institutional investors. The term of the bonds had begun on 1 January 2001.
03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
– Bolstered by the €3.9bn raised in the capital increase of 2003, our financial strength is beyond doubt.
– The primary insurance companies are further expanding their various distribution channels. The ergo companies pursue a multi-channel distribution strategy, based on their own sales force of tied agents, contacts with brokers, direct sales and exclusive cooperation Germany-wide with the hvb Group. The Karlsruher Insurance Group uses cooperative banks as external marketing partners.
Quality and sustainability go together – this view is reinforced by the London analyst Peter Oppenheimer, Head of Portfolio Strategy at Goldman Sachs, in a talk with Thomas Kabisch, Chief Executive of meag, Munich Re’s asset management company. The investment experts spoke about sustainable investments, the “meag Nachhaltigkeit” fund and the return prospects of ethically oriented companies.
“Sustainability also focuses on the ability to initiate change, the will to structure our future.”
gebhardt:The long-term nature of your products is something you must and can convey to your clients. The Germans of all people are security fanatics. On the one hand, they want to insure their lives; on the other hand, they regarded the return of 6% which the life insurance industry used to offer as almost permanently guaranteed. And now many are disappointed.
warmer, a rare hot summer like 1995 (with an occurrence probability of 1.3%, i.e. on average once every 75 years) occurs 25 times more frequently.This means that we then have to expect a comparably extreme summer every three years. As a result of the current process of global warming, the hot summer in Europe in 2003 shifted from a 10,000-year event to a 450-year event (the occurrence probability was reduced by a factor of 20!).
Precipitation was already below average in the spring of 2003. In Bavaria, the amount recorded between February and August was only 40% of the usual quantity. Throughout Germany, the levels of lakes and rivers fell to record lows. Very high temperatures combined with prolonged periods of drought caused crop damage of varying severity, depending on the region. In the meteorological summer (June to August) the mean temperature in Germany was no less than 3.4°c above the average for the period 1961–1990 (the yardstick for the “climatic normal period”).
Best Overall Reinsurer (2003 Survey of US Cedant Perceptions About Reinsurance and Reinsurers by Flaspohler Research Group)
“Are children the main reason why women don’t make it into higher positions?”
With effect from 1 January 2004, we appointed Dr. Nikolaus Bomhard Chairman of the Board of Management, of which he had been a member since 1 January 2000. We are confident that, under the leadership of Dr. von Bomhard, the Board of Management is excellently equipped to meet the challenges of the present and the future, as a wellbalanced and convincing team.
Munich Reinsurance Company, 1.0%, €1,150m, Exchangeable Bonds 2000/2005 aa AA A+
Trainees at Munich Re Munich who decide to go and study after completing their training can qualify for a special return programme. This may involve maintaining contact with Munich Re through work as a student employee, for example, or as an intern.
All companies in the Munich Re Group accept their social responsibility. In 2003 we again supported the socially deprived, devoted ourselves to socially relevant issues and helped promote the arts.
Life reinsurance maintained its long-term growth trend. It continues to profit from the generally rising demand for life insurance resulting from demographic changes and a growing need for private provision. On top of this, new business opportunities for life reinsurance are emerging from the difficult capital market situation and from changes in regulatory parameters that are increasing insurers’ need for reinsurance cover. Health reinsurance continues to benefit from the long-term global trend towards greater liberalisation of healthcare financing, necessitated by the generally tight financial situation of state social security systems.
The difference between the fair value of our investments and their balance sheet value developed very positively: The balance sheet reserves in the form of unrealised gains and losses on securities available for sale also increased. As at 31 December 2003, unrealised gains amounted to €7,812m, compared with unrealised losses of only €923m. Details are provided on page 174. Given the market conditions at the balance sheet date, the potential need for further writedowns on securities available for sale is small. This is partly attributable to the application of the stricter impairment rule for equity investments under ias 36.61 (rev. 2003).
Life and health have a share of 27.7% (25.8%) of our total premium written in reinsurance. Around 36% of our gross premium in this sector comes from the eurozone and 54% from the USA, Canada and the UK. Here, too, the changes in exchange rates had a curbing effect on the good organic premium growth: The growth in our property-casualty reinsurance derived mainly from appreciable premium increases for business in force. Of the reinsurance treaties up for renewal for the year under review, we terminated 16% – measured in terms of premium volume – because riskadequate prices and conditions were not achievable. At the same time, we not only agreed appreciably better terms of trade for the renewed business, but also acquired attractive new business. The following table shows premium development by class of business in euros:
Investments us$ m 2,704 2,288 01__Munich Re shares 02__Strategy 03__Group profile 04__Business issues 2003 05__Corporate responsibility 06__Financial report 07__General information
In Eastern Europe, we focus on selected target markets and there on a limited number of clients with whom we can expect to conduct profitable business relationships in the medium to long term. This strategy is intended to make optimum use of our resources.
In Northern Europe, the trend away from proportional towards non-proportional covers persisted. We were able to maintain our shares at a high level in property insurance. In liability insurance, we terminated treaties that did not appear attractive but also expanded shares in interesting business. Altogether, premium volume rose by 3.1% to €258m. The result improved substantially on that of the previous year.
Our premium income in the countries of North Africa and the Near and Middle East remained at around the same level as in the previous year, owing to negative currency influences. The result improved very substantially, partly thanks to the absence of major losses. A notable development was our resumption of business relations with clients in Iran. The most important country for us in this region is Saudi Arabia, where we expect a further consolidation in the insurance market following the introduction of a new insurance law. As a consequence of the minimum required capital, the number of insurance companies will fall from around 90 to approximately 25, making it possible to implement the necessary technical conditions and rates on the market.
Munich Reinsurance Company of Canada (mroc) achieved a profit of Can$ 4.8m in 2003 with a combined ratio of 111.8% (119.7%). Its business volume increased by 19.3%. mroc continues to maintain its leading and influential position in the market.
Our primary insurers, essentially comprising the ergo Insurance Group, the Karlsruher Insurance Group and Europäische Reiseversicherung (see page 41), write nearly all lines of life, health and property-casualty insurance. Around 83% (81%) of their premium income in 2003 stemmed from Germany. The remaining 17% (19%) of their premium was earned mainly in Italy, the Netherlands, Spain and Belgium.
The development of the primary insurers in the Munich Re Group is marked by a positive performance in their underwiriting business. This is reflected in the result before amortisation of goodwill which, despite considerable burdens from writedowns on investments in associated enterprises and losses on disposals, totals €247m (–654m). The net result for the year of –€1,091m (–939m) is also heavily affected by writedowns on goodwill and the high tax expenditure.
Like their domestic and foreign competitors, the life insurers in our Group have lowered policyholders’ bonuses in Germany for the third time in succession. The current interest rates now lie within a range of 3.2–4.4% (4.2–5.2%). Including maturity bonuses, the overall return amounts to 3.5–4.8% (4.5–5.2%). Our life insurers have thus taken reasonable account of the lower level of market interest rates. If one regards the return in real terms, i.e. the return after consideration of the low inflation rate, our life insurers’ products are still attractive.
The distribution structure of the Karlsruher Insurance Group is based on an exclusive nationwide sales organisation, collaboration with brokers and cooperation agreements with banks. Life insurance in particular is sold through branches of cooperative banks, mainly in the southwest of Germany. Since the year under review, self-developed consultancy software has been in use to support distribution. In order to strengthen competiveness and target-group-oriented marketing, the Group developed a modem annuity insurance product in 2003 and offered package products for cover in the lines of property, liability, personal accident and legal expenses insurance.
The table below shows the composition of the portfolio by investment type: The large reduction in investments in affiliated and associated enterprises is due to the fact that we sold part of our stake in Allianz (see page 17) and have reallocated our remaining Allianz shareholding to securities available for sale. These shares now have the character of a purely financial investment for us.
In spring 2003, prior to the Iraq conflict, the stock markets hit rock bottom. Subsequently, however, they recovered and concluded the year under review with marked gains after three years with negative returns. A detailed report on the development of the capital markets is given in the section “Business parameters” on page 87 ff. The result for the year under review was impacted in significant areas by losses resulting from the stock market slump of the previous reporting periods.
Other income/expenses –1,504 –2,692 –675 –476 –327 * Adjusted owing to first-time application of ias 39 (rev. 2003).
In this macroeconomic environment, we expect the mood on the international stock markets to remain buoyant for the time being, with a further increase in yields. In the course of the year, however, there is the threat that the markets will weaken, especially if growth in the real economy in the USA should turn out to be unsustainable.
After the years 2001 to 2003, which were particularly difficult for the insurance industry and the Munich Re Group, we are now back on track. The burdens from the terrorist attack of 11 September 2001 and from the stock market slumps in the subsequent period have been absorbed. Our objective of earning an overall return of 4.5% on our investment portfolio, which has been improved in terms of risk aspects, remains unchanged.
Change in exchange rates Change in market value of investments sensitive to exchange rates
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 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 early-warning system for investments. This is designed to ensure the achievement of profit objectives, the fulfilment of solvency requirements and sufficient equity capital protection at individual -company level. Asset-liability teams have been set up at all the companies to monitor and advise on strategic investment decisions. This has enabled us to standardise risk management activities in our investment operations. In the asset management units of the Munich Re Group, a policy of clear functional separation between portfolio management, trading and risk control is pursued at all hierarchical levels, in line with the requirements of banking regulation.
In Germany, the Federal Financial Supervisory Authority (BaFin) monitors the asset coverage and reserve situation of life insurers. Owing to the highly volatile capital market situation in 2003, the degree of coverage of our life and health insurers’ committed assets at market values fluctuated significantly. However, the policy reserve fund was covered at all times, both at book values and at market values.
Total equity and liabilities 209,384 196,441 12,943 6.6 * Adjusted owing to first-time application of ias 39 (rev. 2003).
Interest paid 385 302 * Adjusted owing to first-time application of ias 39 (rev. 2003).
Consolidated group In accordance with ias 27, the consolidated financial statements include Munich Reinsurance Company (the parent company) and all the enterprises in which Munich Re owns, directly or indirectly, the majority of the voting shares or over which it has the factual ability to exercise control (subsidiaries). This applies analogously to the special funds held by Munich Re and its subsidiaries. The only exceptions are subsidiaries and special funds which are determined as being not material for assessing the Group’s financial position; insurance and reinsurance companies are consolidated regardless of their size. An overview of the group of consolidated companies and other important shareholdings is provided on page 208 ff.
In the business year, the Munich Re Group acquired a further 0.8% of the ergo Insurance Group at a price of €119m. Apart from this, there were no significant changes in the group of consolidated companies.
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, in particular in respect of the earlier application of ias 39 (rev. 2003). Valuations used in the financial statements of associated enterprises not classified as significant are maintained.
Goodwill resulting from the first-time consolidation of subsidiaries is amortised on a straight-line basis over its useful life – up to 20 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 these differences will even themselves out again with impact on taxable income (temporary differences); cf. the remarks on deferred tax assets.
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 the annual average exchange rates; any translation differences arising in the process are recognised in shareholders’ equity (other reserves) and excluded from earnings.
Over three years and up to four years 10,775 9,112 10,519
The following table shows the development of the deferred acquisition costs in the business year: Reinsurance Primary insurance Total Prev. year
2,739 shares remained in the portfolio of ergo ag from the ergo Insurance Group’s employee share programme in the business year 2002. In the business year 2003, companies of the ergo Group bought back 127,249 shares at an average price of €97.13 each and 15,897 shares at €94.45 each to cover future commitments from the long-term incentive plan launched at 1 July 2003. Together with the remaining Munich Re shares acquired to safeguard the stock appreciation rights granted in 2002, the ergo Group had a total portfolio of 190,058 shares.
After its partial utilisation in November 2003, Authorised Capital Increase 2002 amounting to €220m, adopted by resolution of the Annual General Meeting on 17 July 2002, now totals €89,662,858.24.
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.
Total (net) 6,727 7,019 * Adjusted owing to first-time application of ias 39 (rev. 2003).
A total of €313m (880m) was credited directly to life insurance policyholders in the business year.
Expenses for defined contribution plans in the year under review totalled €27m (30m).
Miscellaneous liabilities 2,602 2,037 €185m (158m) of the other liabilities is apportionable to tax liabilities, €41m (40m) to liabilities for social security, and €212m (29m) to liabilities for interest and rent.
Adjustment amount Adjustment amount Adjustment amount Adjustment amount Adjustment amount Adjustment amount
“Changes in tax rates” contains expenses from deferred taxes as a result of the necessary revaluation of various deferred tax items in connection with changes in tax regulations for life and health insurers.
As at 1 July in the years 1999 to 2003, 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.
In the year under review a total of 181,579 (45,476) stock appreciation rights were granted, 156,656 (37,732) of these to Board of Management members. To cover future obligations arising from these rights, the companies participating in the long-term incentive plan purchased Munich Re shares to some extent.
Allgemeine Rechtsschutz-Versicherungs-ag ergo Versicherungsgruppe ag Europäische Reiseversicherung ag (Chairman) man ag Nürnberger Beteiligungs-ag victoria Lebensversicherung ag victoria Versicherung ag wmf Württembergische Metallwarenfabrik ag
Term used in excess-of-loss reinsurance to denote a stratum of cover. Its point of attachment and extent is defined in terms of the sum insured. Example: €5,000 in excess of €1,000 refers to the layer €1,000 to €6,000.
Securities held for trading comprise temporarily held investments purchased with the intention of obtaining the highest possible return from short-term fluctuations in the market price. They are accounted for at their fair value at the balance sheet date. Changes in value are recognised in the income statement.
Insurance companies that assume the insurance risks of other insurance companies without themselves having any direct contractual relationship with the policyholder.
Further addresses may be obtained from the 2003 annual report of ergo Versicherungsgruppe ag.
© 2004 Münchener Rückversicherungs-Gesellschaft Central Division: Corporate Communications Königinstrasse 107 80802 München Germany