29. June 1998
Letter to shareholders
Dear Shareholders,
The business year 1997/98, which ends on 30 June 1998, was again a very successful one for the Munich Re Group. We were able to achieve a further marked increase in premium income and in the Group profit.
Above-average share performance
The price of Munich Re registered shares continued to rise in the year under review. Its increase of over 60% clearly outperformed the German share index (DAX) and the insurance index. Foreign investors are still seeking to position themselves in Europe, and Munich Re shares are much soughtafter as an international investment. We notice this, too, in the substantially increased interest shown by financial analysts and fund managers in our shares. The number of Munich Re shareholders rose by 68% to around 21,000 in the year under review, also as a consequence of our stock split in August 1997.
Warrants prove great success
The exercise period for the Munich Re warrants that we issued as part of our capital increase in spring 1994 expired on 14 March 1998. Only 64 of the 850,000 warrants issued were not exercised. A total of approx. DM 527m was raised from the exercising of the warrants.
The performance of the warrants - an innovation on the German capital market - was excellent: they yielded a return of around 500% in four years. This exceptional growth in value was, of course, mainly due to the positive performance of the German stock market as a whole, but it also reflects Munich Re's individual success. We are delighted that our shareholders have been able to participate in this success to such a large extent.
Pleasing business performance
The 1997/98 consolidated accounts will differ considerably from those of the previous year. American Re's income and expenditure are included for the first time, and DKV's are now consolidated for a full year. Besides this as a result of the formation of ERGO, the accounts now also include the VICTORIA Group's income and expenditure, consolidated on a pro rata basis for the months August to December 1997
These changes in the group of consolidated companies have contributed significantly to the big rise of 38% in Group premium income to DM 44.4bn. Without the changes premium would have increased by around 6%. About 56% of the premium is apportionable to the reinsurers and 44% to the direct insurers. There has thus been a further shift towards the direct insurers compared with the previous year. When we consolidate the VICTORIA Group fully at our next balance sheet date, 31 December 1998, our Group premium income will derive almost equally from direct insurers and reinsurers.
The Group profit for the year will be significantly higher than in the previous year. We expect a profit of over 1.1bn (previous year: 699m). This represents an increase of 65% (17.5%), attributable in particular to the firsttime consolidation of American Re's results and the pro rata firsttime consolidation of the VICTORIA Group.
Earnings per share (calculated according to the DVFA/GDV system) are expected to be around DM 16.00 (15.65). The fact that the improvement in the overall result is not reflected in this figure is due to the calculation system: the profit from the sale of GFC (Degussa shares) has to be eliminated from the result.
In view of the pleasing development of our business, we held out the prospect at the last AGM of a further dividend increase this year. The Supervisory Board and the Board of Management will propose to the next AGM that the dividend be raised by DM 0.10 to DM 1.80 per share. In addition, it will once more be possible to make an appropriate allocation to the revenue reserves (surplus) from the profit for the year.
Reinsurance
Overall, we are satisfied with the reinsurance result for the year 1997, despite the deterioration in the general environment for our business. Thus competition among direct insurers has intensified and original rates have fallen further. This has had a negative impact above all on premium income in proportional reinsurance. The business volume that is ceded in reinsurance has also been reduced as a result of the concentration process in direct insurance and distinct increases in retentions on the part of cedants, who after several very good business years are carrying increasingly large shares of risks themselves.
Whereas demand for reinsurance has been decreasing, the supply of cover has grown. In nearly all sectors there is more than enough capacity available in the reinsurance markets. This has led to further - sometimes marked - price reductions and deteriorations in conditions.
We have not been able to exclude ourselves from these market developments, but we have reacted to them flexibly. In many important markets we have been able not only to maintain but even to extend our market position. We have continued our involvement in the area of new forms of risk coverage; this has included not only the further development of financial reinsurance but also involvement in the transfer of natural catastrophe risks to the capital market.
On a consolidated basis the reinsurance group recorded a gross premium income of DM 24.8bn (19.3bn). This represents an increase of around 28%, which is mainly due to the changes in the group of consolidated companies. Without these changes the increase would have been about 9%, a substantial portion of which is attributable to changes in exchange rates.
Following the acquisition of American Re, the regional spread of our reinsurance business has improved. The share of North American business in the reinsurance group's gross premium income has risen to 28% (17%). Conversely, the share of European business has decreased to 57% (69%), with 34% (45%) coming from Germany.
Premium development in the individual classes of business has also been significantly affected by the firsttime consolidation of American Re. Above all in fire, motor, liability and personal accident, premium income has increased markedly as a result of this. The structure of our portfolio continues to be balanced, with around one quarter of the premium coming from life and personal accident/health, 21% from fire and 19% from motor.
The portfolio of reinsured life business amounted to approx. DM 613bn (512bn) at the end of the year under review.
In the previous business years we had succeeded in continually improving our reinsurance underwriting result, to the point of recording underwriting profits again. Despite the continuation of our selective acceptance policy, we were unable to prevent a deterioration in this result in the year under review. We will show a deficit of around DM 50m (+ 231m).
This development mainly reflects the price reductions and concessions in conditions resulting from the keener competition. In addition, we recorded somewhat higher claims costs for natural catastrophes, though compared with the longterm average they were still relatively low.
Development of the underwriting results in the different classes of reinsurance business varied.
In fire we were able to further improve on the already pleasing profit of the previous year. We are also expecting an increased profit in marine, aviation and space business. By contrast, we will record a considerable deterioration in the result for personal accident/health. And in liability the deficit has grown again after the appreciable reduction in the previous year. Engineering shows only a breakeven result after the previous year's pleasing profit.
Direct insurance
It continues to be an essential part of our strategy to have part of our Group's operations firmly anchored in direct insurance, thus creating a balance between fluctuationprone reinsurance business and more stable personal lines insurance, which is our direct insurers' main field of activity.
Through the merger of VICTORIA, Hamburg-Mannheimer, DKV and D.A.S. to form ERGO Versicherungsgruppe as at 1 August 1997 we have paved the way for the further positive development of our direct insurance interests. We are very satisfied with the way the merger has gone, with the state of integration achieved so far and with the response to it both internally and externally; the corporate concept has clearly met the expectations of shareholders, clients, staff, analysts and the media.
The performance of our direct insurance business depends to a very large extent on the development of the German market. The consolidation of the market is increasing and the competitive pressure resulting from deregulation has intensified. The range of products being offered has widened. In some classes of insurance a hard-fought price war for clients is being waged - this applies particularly in motor and industrial fire business. Added to this, the general economic environment continues to be difficult. The stagnation of real incomes has curbed the demand of private households for additional insurance cover.
Considering this situation, we are satisfied with the development of our direct insurance companies. The focus of their business is on the relatively stable classes of life and health insurance and thus on fields we consider to be particularly promising.
Our direct insurers recorded a premium income of DM 19.6bn (12.9bn); the increase of more than 52% on the previous year is due chiefly to the changes in the group of consolidated companies. Without these changes growth would have been a little over 2%.
The most important class of business in terms of premium volume continues to be life, with a share of 49% (60%). As a result of the firsttime consolidation of DKV for a full year, the share contributed by health insurance to the gross premium has grown significantly to 30% (18%). Property-casualty insurance, which shows a marked increase in premium, contributed a share of 21% (22%).
At the end of the year under review the portfolio of insured life business amounted to approx. DM 330bn (233bn).
The direct insurers' underwriting result showed a further improvement, the profit rising to DM 655m (545m). This is mainly due to the first full consolidation of DKV and the pro rata consolidation of the VICTORIA Group.
Investments
At the beginning of the business year the trend towards lower interest rates continued, leading to historically low levels in the most important capital markets in January 1998. Since then a flat trend has been observable in the USA and in Europe. The capital markets in Europe have reacted positively to the forthcoming introduction of the euro with eleven states participating; the convergence of interest rates is largely concluded.
Against this background the stock markets in Europe, particularly in the Southern European states, have performed exceptionally well; since the beginning of 1998 increases in prices of 40% and more have been recorded. The upward trend for shares has continued in the USA as well. By contrast, the situation is problematic in most of the Asian capital markets, where no improvement is foreseeable in the short term.
American and European government bonds have profited from the uncertainties in Asia, with the emphasis focusing on quality
Group investments increased substantially in the year under review, rising by over 60bn to around DM 209bn. This big leap is due mainly to the first-time consolidation of the VICTORIA Group's investments
The structure of our Group's investments has not been significantly affected by this. The proportion invested in shares and investment fund certificates increased by 4 percentage points to 23%; but loans, with 47%, continue to account for by far the largest part.
The development of investment income and expenditure has also been influenced by the changes in the consolidated group.
A further special factor was the sale of GFC Gesellschaft für Chemiewerte mbH. The turbulence on the Asian capital markets has not affected us to a significant extent.
The profit from investments amounts to over DM 13bn (9.4bn). In accordance with accounting regulations, around DM 9.3bn of this (the amount apportionable to life and health insurance) is incorporated in the underwriting result.
Further substantial strengthening of reserves
A very large allocation of DM 1.3bn (1.2 bn) will again be made to the claims equalization provisions. This means there are now total provisions of more than DM 6.9bn available to mitigate future fluctuations in annual results. DM 5.8bn of this is apportionable to the Munich Reinsurance Company - an impressive amount, but one that is necessary in view of the volatility of reinsurance business.
Large special allocations, amounting to DM 270m (200m), will also be made again to the provision for outstanding claims, especially in liability business.
Our staff
The number of staff employed by our Group has increased further: in the business year 1997/98 the number working for the consolidated companies averaged 23,948 (18,021); 4,307 of these were employed by the reinsurers and 19,641 by the direct insurers.
Annual General Meeting
The 1997/98 accounts for the Munich Reinsurance Company will be discussed and submitted for approval at the meeting of the Supervisory Board on 23rd September 1998; the consolidated accounts for the Group will be submitted at the same time. Following this, we will report to you again.
The AGM is scheduled for 5 November 1998.
Yours sincerely,
Munich Reinsurance Company
Munich, 29 June 1998