5 November 1998
Letter to shareholders
Dear Shareholders,
Please find enclosed the invitation to this year's Annual General Meeting of Shareholders, which will take place at our head office, 107 Königinstrasse, Munich, at 10 a.m. on Thursday, 5 November 1998.
In this letter we would like to inform you about the final figures for the business year 1997/98 and let you have an interim report on the current business year 1998. In addition, we wish to explain some of the items on the attached agenda for the 1998 AGM in more detail.
The business year 1997/98
The Munich Re Group was again very successful in the business year 1997/98. We were able to achieve a marked increase in premium income and further improve the Group profit.
This pleasing development was especially due to the changes in the group of consolidated companies: 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.
The premium income of the companies consolidated in the Group accounts rose by 38% to DM 44.5bn (32.2bn). Without the changes in the consolidated group, the increase would have been approximately 8%. Net premiums totalled DM 40.5bn (28.9bn) or 40% more than in the previous year. Around 56% (60%) of the premium income derived from the reinsurers and 44% (40%) from the direct insurers.
The Group's underwriting profit fell to DM 596m (776m), as results in reinsurance deteriorated due to keener competition. By contrast, the investment result improved markedly to DM 13.3bn (9.4bn); in accordance with accounting regulations, DM 9.4bn (7.1bn) of this is incorporated in the underwriting result.
The claims equalization provision and similar provisions have once more been increased by a very large amount, totalling DM 1.3bn (1.2bn). In addition, we have again been able to make large special allocations, amounting to DM 270m (200m), to the provision for outstanding claims, especially in liability business.
The Group profit for the year is substantially higher than in the previous year. It shows an increase of 64% to DM 1,149m (699m). Earnings per share calculated according to the DVFA/GDV system rose to DM 19.42 (15.65).
The Munich Reinsurance Company's profit for the year is DM 303m. We have transferred DM 150m of this to the revenue reserves (surplus). The balance sheet profit at the disposal of the AGM therefore amounts to DM 153m.
If the AGM follows the proposals of the Supervisory Board and the Board of Management, the balance sheet profit of the Munich Reinsurance Company will be utilized for the payment of an increased dividend of DM 1.80 on every registered and bearer share, each of which is entitled to dividend on the amount of DM 5.
Interim report on the current business year 1998
As from 1998 the Munich Reinsurance Company is changing its balance sheet date. Its next consolidated accounts will therefore be for a shortbusiness year which covers its underwriting business for the whole calendar year 1998 but the rest of its business in particular, investment earnings only for the period from 1 July to 31 December 1998.
The change in the balance sheet date will enable us to inform our shareholders about the past business year significantly earlier and also let them participate in the profit at an earlier date. The next annual report will be published in June 1999; the AGM will take place on 22 July 1999, over four months earlier than hitherto.
We will consolidate the VICTORIA Group fully for the first time, in contrast to its inclusion on a pro rata basis with five twelfths in our consolidated accounts as at 30 June 1998. After its sale to the British insurance group CGU, Berlinische Leben will no longer be consolidated in the 1998 accounts. Reali Ri, now Torino Ri, whoseacquisition we completed in July 1998, will be consolidated for the first time.
On this basis, at unchanged currency parities, we expect our premium income for 1998 to be around DM 50bn. This is an increase of around 12% on last year. The premium will derive almost equally from the direct insurers and the reinsurers.
As things stand at present, the result will again be very good. Owing to the full consolidation of the VICTORIA Group and the expected improvements in the results of the reinsurance subsidiaries, the Group profit for the year should reach at least the same level as in 1997/98, even though the parent company will only be included for a short business year. However, this forecast presupposes that we are not affected by exceptional developments in the remainder of 1998, especially by heavy claims burdens from natural catastrophes or other very large losses.
In detail:
Competition among insurers is increasing, so that original rates are falling. In addition, our cedants are significantly raising their retentions. At the same time, the supply of capacity in reinsurance is growing. Nevertheless, the parent company will succeed in more or less maintaining its premium volume in the risk period 1998.
The premium income from German business despite the successful defence of our market share is showing a marked decrease; this applies especially to motor business and industrial fire insurance. By contrast, our premium volume will show further pleasing expansion abroad, especially in life business but also in agricultural insurance and in fire.
Owing to the market situation, but also on the basis of claims development to date, we have to reckon with a deterioration in the parent company's underwriting result for 1998.
Claims experience for 1998 has so far been less favourable than last year. The claims costs for natural catastrophe losses are higher. This is due to several ice storms in Canada and the USA at the beginning of the year and to a tropical cyclone in India in June 1998, which among other things damaged several large technical installations. By contrast, our business is practically unaffected by the widespread flooding in China. The claims burdens from other large losses have also increased considerably, especially in fire and engineering, but also in space business.
The proven principles of our investment policy remain unchanged in 1998. Owing to the parent company's short business year, a portion of its regular income from investments will be missing in the investment result. Despite this, we will still be able to post an appropriate result. In connection with its acquisition by Merrill Lynch, we have sold our longstanding interest in Mercury Asset Management. The proceeds from the sale of these shares will have a positive effect on the result of the short business year. Also included in the short business year will be the gains on the sale of AMB shares to Generali.
Altogether, therefore, the parent company will be able to show an appropriate profit for the short business year despite lacking some of the regular income from investments. This presupposes that claims experience for the rest of the risk period 1998 and the development of the capital markets do not produce any negative surprises.
American Re has terminated or reduced its shares in some treaties, owing to deteriorating prices and conditions. In addition, the consolidation process in the primary insurance market has had a direct influence on its business opportunities. What is by far our largest reinsurance subsidiary consequently recorded a 6.8% fall in premium income to US$ 1,570m in the first six months of the risk period. By contrast, its result has improved by more than 70% to US$ 147m.
As far as the other consolidated reinsurance subsidiaries are concerned, there have been no exceptional developments so far. Business experience has matched our expectations.
All in all, we expect premium income of around DM 25bn (24.9bn) for the reinsurers in the risk period 1998. Their overall profit for the year should be lower than last year, owing to the short business year of the parent company.
The development of our direct insurers depends to a large extent on the general economic situation in Germany, which continues to be marked by a very modest increase in disposable incomes and sustained high unemployment. This limits opportunities for growth in insurances of the person: German life and health insurers are expecting premium income to grow by about 4% each (4.8% and 5.5%). In property-casualty insurance, the battle for good risks will intensify. Prices and conditions in motor insurance and industrial fire business are continuing to come under pressure; in German property-casualty business, overall premium income is expected to decline by 2%. Altogether, the German insurance industry is only reckoning with premium growth of 2%.
In the first six months of the business year, the business of the direct insurers in the Munich Re Group developed very satisfactorily. In life insurance there was pleasing growth in new business and in premium income as a whole. In health insurance new business production was brisk; the level of premium income clearly exceeded last year's. In property-casualty insurance, premiums show a slight increase, contrary to the general trend in this sector. Overall, the companies are expecting premium growth of over 3%.
The development of our direct insurance premium in the consolidated accounts will again be influenced by the changes in the group of consolidated companies: VICTORIA and D. A. S. will be fully consolidated for the first time, whereas Berlinische Leben ceased to be a member of our Group as at 1 January 1998. On balance, this will increase premium income for direct insurance to DM 25bn (19.6bn); the direct insurers will thus contribute about half the Group premium income.
On the claims side, there have so far been no exceptional developments. The increase in health-care costs is slowing down; this will have a positive effect on the results in health insurance. The claims situation in property-casualty insurance has also improved further. At present we are anticipating a higher underwriting profit in direct insurance.
The investment result is likely to be better than last year.
All in all, we expect our direct insurers to show a larger profit for the year; their contribution to the Group result will be significantly bigger in any case, owing to the first full consolidation of the results of VICTORIA and D. A. S.
To sum up, we are anticipating another good Group result for the business year 1998, despite the short business year of the parent company.
We continue to see good opportunities for growth and earnings in both reinsurance and direct insurance. To enable us to take advantage of these, we carried out a capital increase in July/August 1998. The stock market reacted very favourably to this rights issue, which raised a total of around DM 2.1bn.
New developments are continually affecting the environment in which we operate. We intend to utilize the opportunities that result from this process of change to further enhance the value of your company. Following the strategic measures taken in the last few years, the Munich Re Group is well equipped for the challenges of the future.
Explanatory information on the agenda for the Annual General Meeting
The agenda for the AGM is enclosed with this letter. We wish to provide you with the following explanatory information in addition to that given in the agenda:
Item 5: Election to the Supervisory Board
Professor Dr. Dieter Spethmann, who has been a member of our company's Supervisory Board since 1976 and was Vice-Chairman of this body in 1977 and Chairman from 1978 to 1996, will be retiring from the Board at the end of the AGM on 5 November 1998. We thank him for the constructive contribution he has made to the development of our company in his many years on the Supervisory Board.
It is proposed that for the remainder of its term of office, i.e. until the end of the AGM in 1999, Dr. Ron Sommer, Chairman of the Board of Management of Deutsche Telekom AG, be elected to our company's Supervisory Board.
Items 6 to 8: Stock split, conversion to no-par-value shares, etc.
The resolutions proposed here are part of the package of measures designed to simplify Munich Re's share structure, already presented to you in our letter to shareholders of 29 June 1998. The stock split for the registered shares and their conversion into no-par-value units also form the basis for the conversion of the shares to euros, as proposed under item 13 of the agenda.
Items 9 to 12: Resolutions on further authorization to increase the company's share capital and contingent capital
Against the background of worldwide consolidation in our industry, it has become increasingly important for the company to have a flexible range of appropriate capital measures at its disposal. It is therefore proposed that a further authorization to increase the company's share capital by a total of DM 200 million be granted, in which the subscription rights of shareholders may be excluded. In addition, it is proposed that the Board of Management be authorized, with the consent of the Supervisory Board, to issue convertible bonds or bonds with warrants for registered shares. To safeguard these conversions rights and warrants, a contingent capital with a nominal amount of DM 30 million is required. In addition, we are proposing that authorization for a further contingent capital increase, also with a nominal amount of up to DM 30 million, be granted so that in future rights issues the new shares to be subscribed for by the shareholders can also be issued with warrants for further Munich Re shares, as in the rights issues of July 1994 and this July.
Item 15: Resolution on further amendments to the Articles of Association involving the Supervisory Board
The proposed amendments, which include a Supervisory Board of 20 members, must be seen in connection with a future application of the German law on co-determination to our company.
Yours sincerely,
Münchener Rückversicherungs-Gesellschaft
|
Consolidated balance sheet
|
|
Consolidated balance sheet as at 30th June in DM
|
1998
|
1997
|
| Investments (including deposits retained on assumed reinsurance business) |
208,845 |
148,288 |
| Reinsurers |
71,091 |
61,803 |
| Insurers |
137,754 |
86,485 |
| Shareholders' funds |
9,962 |
6,604 |
| Claims equalization provisions |
6,956 |
4,816 |
| Underwriting provisions (without claims equalization provisions) |
182,929 |
130,643 |
| Life |
117,959 |
78,886 |
| Non-life |
64,970 |
51,757 |
|
Consolidated profit and loss account in DM
|
1997/98
|
1996/97
|
| Gross premiums written |
44,522 |
32,181 |
| Life |
13,691 |
11,538 |
| Non-life |
30,831 |
20,643 |
| Net premiums written |
40,477 |
28,934 |
| Life |
12,711 |
10,579 |
| Non-life |
27,766 |
18,355 |
| Net earned premiums |
40,485 |
28,665 |
| Underwriting result |
596 |
776 |
| Life |
400 |
404 |
| Non-life |
196 |
372 |
| Investment result |
13,252 |
9,362 |
| Thereof incorporated in underwriting result |
9,384 |
7,104 |
| Unadjusted earnings |
3,755 |
2,629 |
| Special allocations to the provision for outstanding claims |
-270 |
-200 |
| Change in the claims equalization provision |
-1,282 |
-1,216 |
| Operating result |
2,203 |
1,213 |
| Tax |
-1,054 |
-514 |
| Profit for the year |
1,149 |
699 |
Invitation to the Annual General Meeting
We hereby invite our shareholders to the 111th Annual General Meeting, to be held at the head office of the company, 107 Königinstrasse, Munich, at 10 a.m. on Thursday, 5 November 1998.
Agenda
1. Submission of the approved company accounts and the Board of Management report for the business year 1997/98, the consolidated accounts and the Board of Management report for the Group for the business year 1997/98, and the report of the Supervisory Board
2. Resolution on the appropriation of the balance sheet profit from the business year 1997/98:
The Supervisory Board and the Board of Management propose that the balance sheet profit of DM 152,927,712 be utilized for the payment of a dividend of DM 1.80 on every bearer and registered share, each of which is entitled to dividend on the amount of DM 5.
3. Resolution to approve the actions of the Board of Management in respect of the business year 1997/98:
The Supervisory Board and the Board of Management propose that approval for the Board of Management's actions be given.
4. Resolution to approve the actions of the Supervisory Board in respect of the business year 1997/98:
The Supervisory Board and the Board of Management propose that approval for the Supervisory Board's actions be given.
5. Election to the Supervisory Board
The Supervisory Board proposes that
Dr. Ron Sommer, Cologne,
Chairman of the Board of Management of Deutsche Telekom AG,
be elected to the Supervisory Board with effect from the end of this Annual General Meeting to replace Professor Dr. Dieter Spethmann, who will be retiring from the Board at the end of the meeting, as a representative of the shareholders for the remainder of the latter's term of office, that is until the end of the Annual General Meeting in 1999.
The composition of the Supervisory Board is determined by Article 96 paragraph 1 of the German Stock Companies Act and Article 76 of the 1952 Works Constitution Act in conjunction with Article 129 of the 1972 Works Constitution Act.
The Annual General Meeting is not obliged to follow election proposals.
6. Report on the full paying-up of the registered shares, 1:2 split of the fully paid-up registered shares, conversion of the registered and bearer shares into no-par-value shares, and amendment of the Articles of Association to take account of the full paying-up of the registered shares and the introduction of no-par-value shares
The German law on the admission of no-par-value shares, which came into force on 1 April 1998, enables stock companies to divide their share capital into no-par-value shares instead of par-value shares. Partly in view of the advantage of no-par-value shares for conversion to euros, Munich Re wishes to avail itself of this option. As no-par-value shares constitute equal units of a company's share capital, the Board of Management has resolved as a first step with the consent of the Supervisory Board to call in the unpaid amount of DM 5 on each of the partly paid-up registered shares with a par value of DM 10. After being fully paid up and as part of the conversion into no-par-value shares, the registered shares will then be split in a ratio of 1:2. Like the bearer shares, they will then each constitute a unit of DM 5 of the company's share capital.
The Supervisory Board and the Board of Management propose the following resolution: that the registered shares, after being fully paid up, be split in a ratio of 1:2; that the second registered share resulting from the split in each case be granted entitlement to dividend as from 1 January 1999; and that the share capital be divided into no-par-value shares. Each registered share with a par value of DM 10 shall be replaced by two no-par-value shares and each bearer share with a par value of DM 5 shall be replaced by one no-par-value share. The Articles of Association shall be amended to take account of the full paying-up of the registered shares, the stock split and the introduction of no-par-value shares.
The following amendments to the Articles of Association are proposed for this purpose:
a) Article 3 paragraph 1 shall be reworded as follows:
"The share capital of the Company amounts to
eight hundred and sixty-nine million five hundred
and ninety-eight thousand four hundred Deutschmarks.
It is divided into 170,919,680 no-par-value registered shares
and 3,000,000 no-par-value bearer shares."
b) Article 3 paragraph 2 sentence 1 shall be deleted.
c) Sentence 2 of Article 3a paragraph 1 shall be deleted, as shall the word "however" in sentence 3.
d) Article 3a paragraph 2 sentence 1 shall be reworded as follows:
"A contingent increase in the share capital by a further nominal amount of 8,751,600 Deutschmarks, consisting of registered shares, has been authorized."
Sentence 4 shall be deleted.
e) Article 4 items 3, 4 and 5 shall be deleted.
f) In Article 6 paragraph 1 the words "fully paid-up" and "not fully paid-up" shall be deleted.
g) Article 9 shall be reworded as follows:
"One vote shall be attached to each share."
h) In Article 15 sentence 1 the word "dividend-bearing" shall be deleted.
i) In Article 20 the words "in proportion to the dividend-bearing capital" shall be deleted.
The Board of Management shall be instructed to file the aforementioned amendments to the Articles of Association for entry in the Commercial Register after the envisaged full paying-up of the registered
shares as at 31 December 1998.
7. Amendment to the Articles of Association to create a right for holders of bearer shares to convert these into registered shares
In order to end the separate trading in Munich Re shares in two different market segments and consequently make the shares more transparent, liquid and thus more attractive for both German and foreign shareholders, the company is aiming to alter its share structure so that it has only one share category: fully paid-up registered shares. The holders of bearer shares are therefore to be given the possibility to exchange their shares for fully paid-up registered shares. An incentive for this is to be provided by the capital increase proposed under item 8 of the agenda.
The Supervisory Board and the Board of Management propose that directly following the new division of the share capital into no-par-value shares in accordance with Article 24 of the German Stock Companies Act a right be granted to the holders of bearer shares in the Articles of Association to convert their shares into registered shares, the following new Article 4a being inserted for this purpose:
"Holders of bearer shares are entitled to have each of their shares converted into one restrictedly transferable registered share. The Company may limit the exercise of this right to individual periods within the business year by means of appropriate notification. The costs of conversion shall be borne by the Company."
The Board of Management shall be instructed to file this amendment to the Articles of Association for entry in the Commercial Register together with the amendments as per item 6 of the agenda.
Resolution to be voted on by all shareholders and separately by the holders of bearer shares and the holders of registered shares.
8. Increase of the share capital by DM 15,000,000 through the issue of 3,000,000 registered shares to the holders of bearer shares
Notwithstanding their different par values, the company has traditionally based dividend entitlement, voting rights and subscription rights for the bearer and registered shares purely on the amounts paid up. As the registered shareholders will be able to acquire a second registered share in connection with the full paying-up of their shares and the stock split, the holders of bearer shares, who naturally cannot participate in the full paying-up process, are also to have the opportunity to acquire a second share. The envisaged issue price of DM 247 is based on the average amount that holders of bearer shares would have had to spend if they had sold a bearer share in May 1998 and purchased a registered share instead, plus the amount of DM 5 per share to be paid by the registered shareholders for the full paying-up of their shares. At the same time an incentive is to be created for the conversion of bearer shares into registered shares.
The Supervisory Board and the Board of Management propose that the company's share capital be increased by DM 15,000,000 from the current amount of DM 869,598,400 to an amount of DM 884,598,400 through the issue of 3,000,000 registered shares against cash contribution. The new shares shall be issued at a price of DM 247 and entitled to dividend from 1 January 1999.
With the legal subscription rights of the registered shareholders being excluded, the new shares shall be offered for subscription to the holders of bearer shares on the condition that for every bearer share for which conversion into a registered share is requested, a new registered share may be subscribed for. The subscription period shall run for at least 6 weeks.
The Board of Management shall be authorized to determine the details of the capital increase and its execution.
Article 3 paragraph 1 of the Articles of Association shall be reworded as follows:
"The share capital of the Company amounts to eight hundred and eighty-four million five hundred and ninety-eight thousand four hundred Deutschmarks. It is divided into 173,919,680 no-par-value registered shares and 3,000,000 no-par-value bearer shares."
The Board of Management shall carry out the capital increase so that its execution is not filed for registration in the Commercial Register until after the amendments to the Articles of Association as per items 6 and 7 of the agenda have been entered.
Resolution to be voted on by all shareholders and separately by the holders of bearer shares and the holders of registered shares.
9. Resolution on a further authorization to increase the company's share capital (Authorized Capital Increase II) and the relevant amendment to the Articles of Association
Article 186 paragraph 3 sentence 4 of the German Stock Companies Act permits companies to issue new shares to a limited extent at near-market prices, excluding shareholders' subscription rights, in order to win new groups of investors and to strengthen their shareholders' funds as much as possible. To enable the Board of Management to avail itself of this option, the Supervisory Board and the Board of Management propose that a further authorization to increase the company's share capital by up to DM 50 million be granted (Authorized Capital Increase II) and that the Articles of Association be amended as follows:
A new paragraph 2 shall be inserted in Article 3a:
"The Board of Management is authorized, with the consent of the Supervisory Board, to increase the Company's share capital at any time up to 5 November 2003 in one or more stages by an amount of up to 50 million Deutschmarks by issuing new registered shares against cash contribution (Authorized Capital Increase II). For the issue of these shares, the Board of Management may exclude shareholders' subscription rights in order to issue shares for an amount not significantly lower than the market price."
In Article 3a paragraph 1 the words "(Authorized Capital In-crease I)" shall be inserted at the end of sentence 1.
The present paragraph 2 of Article 3a shall become paragraph 4.
Resolution to be voted on by all shareholders and separately by the holders of bearer shares and the holders of registered shares.
10. Resolution on a further authorization to increase the company's share capital (Authorized Capital Increase III) and the relevant amendment to the Articles of Association
The Supervisory Board and the Board of Management propose that a further authorization to increase the company's share capital against non-cash contribution be granted (Authorized Capital Increase III) and that a new paragraph 3 be inserted in Article 3a of the Articles of Association as follows:
"The Board of Management is authorized, with the consent of the Supervisory Board, to increase the Company's share capital at any time up to 5 November 2003 in one or more stages by an amount of up to 150 million Deutschmarks by issuing new registered shares against non-cash contribution (Authorized Capital Increase III). Shareholders' subscription rights shall be excluded. The Board of Management shall decide on the issue of the new shares and the terms of issue."
The present paragraph 3 of Article 3a shall become paragraph 7.
Resolution to be voted on by all shareholders and separately by the holders of bearer shares and the holders of registered shares.
11. Authorization to issue warrants, increase of the contingent capital and amendment of the Articles of Association
The authorization to issue warrants granted at the AGM on 3rd December 1993 expires on 3rd December 1998 and, apart from an amount of DM 1,600, has been exhausted by the issues in 1994 and 1998. The Supervisory Board and the Board of Management propose that a further authorization be granted as follows:
a) In the event of a capital increase at any time up to 5 November 2003 from the capital authorized for this purpose, the Board of Management shall be empowered, with the consent of the Supervisory Board, to attach one bearer warrant to each of the new shares to which the shareholders have a subscription right when the capital authorized for this purpose is utilized. These warrants shall entitle the bearer, on the basis of the warrant conditions then stipulated, to acquire Munich Re registered shares. At least two, and a maximum of six, warrants will entitle the bearer to subscribe for one further share.
Exercise periods of up to six years may be fixed for the warrants. Warrants may be issued for Munich Re registered shares totalling up to DM 30 million of the share capital.
The warrant exercise price for one Munich Re registered share shall be fixed in Deutschmarks or after listing of the shares on the stock market has changed to euros in euros. It shall corre-spond to the average market price for Munich Re registered shares (official price fixed on the Frankfurt stock exchange) on the ten trading days prior to the date of the Board of Management's resolution to issue the warrants. A discount of up to 25% of the average market price may be applied.
The respective warrant exercise price shall be reduced on the basis of a clause safeguarding against dilution of stock in the event that during the term of the warrants the Munich Reinsurance Company, granting its shareholders subscription rights, either increases its capital or creates conversion rights or warrants. No reduction will be granted on warrant exercise prices if the bearers of the warrants are
granted a subscription right.
The Board of Management shall be authorized to decide on the further details of the bearer warrants issue.
b) To safeguard the warrants described under a), a contingent capital with a nominal amount of DM 30 million, consisting of registered shares, shall be created and a new paragraph 5 inserted in Article 3a of
the Articles of Association as follows:
"A contingent increase in the share capital by a further amount of 30 million Deutschmarks, consisting of registered shares, has been authorized. This increase in the share capital shall be carried out only to the extent that bearers of warrants which are attached to shares issued from capital authorized for this purpose, on the basis of the authorization granted to the Board of Management on 5 November 1998, exercise these warrants. The new shares shall be entitled to dividend from the beginning of the business year in which they come into being through the exercise of warrants."
The Board of Management shall be authorized to determine the further details of the contingent capital increase.
Resolution to be voted on by all shareholders and separately by the holders of bearer shares and the holders of registered shares
12. Authorization of the Board of Management to issue convertible bonds and bonds with warrants, creation of a new contingent capital and amendment of the Articles of Association
The Supervisory Board and the Board of Management propose that the following resolutions be adopted:
a) The Board of Management shall be authorized, with the consent of the Supervisory Board, to issue bonds with conversion rights or warrants for Munich Re registered shares on one or more occasions up to 5 November 2003. The bonds may also be issued through a wholly-owned Group company held directly or indirectly. In such a case the Munich Reinsurance Company shall guarantee the redemption of the bond and ensure the granting of conversion rights or warrants.
The bonds and the conversion rights and warrants may be provided with different maturity and exercise periods, but no more than 15 years as from the issue date. The bonds may be denominated in Deutschmarks, in euros if legally permissible or in any other legal currency. The aggregate par value of the bonds may not exceed DM 3,000,000,000 or the equivalent amount in euros on the basis of the official conversion rate or the relevant equivalent in one of the other designated currencies.
The individual bonds shall be made out to bearer.
In an issue of bonds with warrants, each bond shall be accompanied by one or more warrants which entitle the bearer to obtain Munich Re registered shares in accordance with the warrant conditions.
In an issue of convertible bonds, the bearers shall receive the right to convert their bonds into Munich Re registered shares in accordance with the conversion conditions. The conversion ratio shall be arrived at by dividing the par value of one bond by the fixed conversion price for one Munich Re registered share. The conversion ratio may also be arrived at by dividing the issue price of one bond that is less than the par value by the fixed conversion price for one new Munich Re share. The conversion ratio may be rounded off to a whole number.
Conversion rights or warrants may be issued in respect of Munich Re registered shares totalling DM 30 million of the share capital.
The conversion or exercise price for obtaining one Munich Re registered share shall be fixed in Deutschmarks or after listing of the shares on the stock market has changed to euros in euros. It may not be significantly lower than the market price at the time of issue.
The conversion or exercise price thus fixed shall be reduced on the basis of a clause safeguarding against the dilution of stock in the event that during the exercise period of the conversion rights or warrants the Munich Reinsurance Company, granting its shareholders subscription rights, either increases its capital or creates conversion rights or warrants. The conversion or exercise price shall not be reduced if the bearer of the conversion right or warrant is granted a subscription right.
The Board of Management shall be authorized to determine all further details of the issue and terms of the bond, particularly the interest rate, the issue price and the maturity period, or to establish these in agreement with the executive bodies of the Group companies issuing the bonds.
The Board of Management shall be authorized, with the consent of the Supervisory Board, to exclude the shareholders' subscription rights in respect of bonds with conversion rights or warrants for registered Munich Re shares if the issue price is not significantly lower than the theoretical market price of the convertible bond or bond with warrants, established by means of recognized mathematical methods. If the Board of Management does not make use of this authorization to exclude subscription rights, it is authorized to exclude fractional amounts from the legal subscription rights of shareholders and also to exclude these subscription rights as far as is necessary to grant subscription rights to bearers of conversion rights or warrants for Munich Re shares to the extent to which they would be entitled if they were to exercise their conversion rights or warrants.
b) To safeguard the conversion rights and warrants described under a), a contingent capital with a nominal amount of DM 30 million shall be created and a new paragraph 6 inserted in Article 3a of the Articles of Association as follows:
"A contingent increase in the share capital by a further amount of 30 million Deutschmarks, consisting of registered shares, has been authorized. This increase in the share capital shall be carried out only to the extent that bearers of convertible bonds or warrants attached to bonds issued up to 5 November 2003 by the company or through a wholly-owned Group company held directly or indirectly, on the basis of the authorization granted to the Board of Management on 5 November 1998, exercise these conversion rights or warrants. The new shares shall be entitled to dividend from the beginning of the business year in which they come into being through the exercise of conversion rights or warrants."
The Board of Management shall be authorized to determine the further details of the contingent capital increase.
Resolution to be voted on by all shareholders and separately by the holders of bearer shares and the holders of registered shares.
13. Conversion of the share capital to euros
Directly following commencement of the third stage of European economic and monetary union, the company's share capital and the other DM amounts in the Articles of Association, as well as the authorizations granted by the AGM, are to be converted to euros at short notice. Since at the time of the AGM the euro/DM conversion rate will not yet have been determined, the proposed resolution includes authorization for the Supervisory Board to effect the relevant amendments to the Articles of Association immediately after the final conversion rate has been fixed. The filing of the amendments to the Articles of Association for entry in the Commercial Register shall be carried out by the Board of Management without delay directly following the commencement of the third stage of European economic and monetary union and the adoption of the relevant resolution by the Supervisory Board.
The Supervisory Board and the Board of Management propose that the following resolutions be adopted:
a) At the commencement of the third stage of European economic and monetary union the DM amounts in Articles 3 and 3a of the Articles of Association (share capital, contingent and authorized capital increases) and in the underlying resolutions of the Annual General Meeting shall be replaced with euro amounts on the basis of the euro/DM conversion rate determined by the European Council in accordance with Article 109 I) paragraph 4 sentence 1) of the EU Treaty.
b) After commencement of the third stage of European economic and monetary union and entry of the amendments to the Articles of Association as per item 6 of the agenda, the Supervisory Board shall be authorized to make the requisite amendments to Articles 3 and 3a of the Articles of Association.
c) The Board of Management shall be instructed to file the amendments to the Articles of Association described under b) for entry in the Commercial Register without delay after the adoption of
the relevant resolution by the Supervisory Board.
d) The foregoing resolution of the Annual General Meeting shall cease to be effective if the amendments to the Articles of Association have not been filed for entry in the Commercial Register before the Annual General Meeting in 1999.
14. Remuneration for members of the Supervisory Board and conversion to euros
The introduction of no-par-value shares and the conversion of the share capital to euros necessitate an amendment to Article 15 of the Articles of Association. On the occasion of this amendment the calculation of that part of the remuneration dependent on the dividend amount is to be changed to a calculation method based on the dividend per share, and the remuneration is to be increased to bring it into line with that of comparably large public companies.
a) The Supervisory Board and the Board of Management propose that after commencement of the third stage of European economic and monetary union Article 15 of the Articles of Association be amended as follows:
"Apart from the reimbursement of their expenses, the members of the Supervisory Board shall receive a fixed annual remuneration of 25,000 euros, which shall be increased by 250 euros for every cent by which the dividend per share exceeds the amount of 15 cents. The Chairman of the Supervisory Board shall be entitled to twice, and each of the Deputy Chairmen to one-and-a-half times, this remuneration. Turnover taxes due on this remuneration shall be reimbursed to the Supervisory Board members. This provision shall supersede the previous provision pertaining to the calculation of the remuneration, commencing with the remuneration payable for the business year 1999."
b) The Board of Management shall be instructed to file this amendment to the Articles of Association together with the amendments as per item 13 of the agenda for entry in the Commercial Register.
c) The foregoing resolution of the Annual General Meeting shall cease to be effective if the amendments to the Articles of Association have not been filed for entry in the Commercial Register before the Annual General Meeting in 1999.
15. Resolution on further amendments to the Articles of Association involving the Supervisory Board
The terms of office of the current members of the Supervisory Board expire at the end of the 1999 AGM. It is expected that the election of the new Supervisory Board members will be subject to the provisions of the German law on co-determination. The Articles of Association are to be prepared for this. In order to ensure that the shareholders continue to be represented on the Supervisory Board in the same quality, balance and strength of numbers as hitherto, a Supervisory Board of 20 members is to be formed. Furthermore, the provision of the Articles of Association relating to requisite majorities (Article 12 paragraph 2) is to be deleted, since the law on co-determination contains conclusive provisions for this. In addition, the provision on the quorum required for a resolution by the Supervisory Board is to be amended.
a) The Supervisory Board and the Board of Management propose the following amendments to the Articles of Association:
Article 10 paragraph 1 shall be reworded as follows:
"The Supervisory Board shall consist of 20 members, 10 of whom shall be elected by the shareholders and 10 by the employees."
Article 12 paragraph 2 shall be deleted; Article 12 paragraph 1 shall become Article 12.
Article 13 shall be reworded as follows:
"As from the end of the Annual General Meeting in 1999, once the Chairman of the Supervisory Board has been elected, a meeting of the Supervisory Board shall be quorate if all its members have been invited to the meeting or called upon to vote in writing and if 10 members including the Chairman or alternatively 15 members participate in the vote."
b) The Board of Management shall be instructed to file these amendments to the Articles of Association for entry in the Commercial Register as soon as it has been ascertained, according to the procedure laid down in Article 97 ff. of the German Stock Companies Act, that the Supervisory Board is to be formed in accordance with the provisions of the law on co-determination.
c) The foregoing resolution of the Annual General Meeting shall cease to be effective if the amendments to the Articles of Association have not been filed for entry in the Commercial Register before the Annual General Meeting in 1999.
16. Resolution on the preconditions for attending the Annual General Meeting and amendment of the Articles of Association
In order to adjust the preconditions for attending the company's Annual General Meeting in the Articles of Association to what is customary practice today, the Supervisory Board and the Board of
Management propose the following amendments to the Articles of Association:
a) In Article 6 paragraph 1 item 1 the full-stop after sentence 2 shall be replaced with a semicolon. Sentence 3 of item 1 shall be inserted as a subparagraph after item 2; this shall be followed by a new sentence worded as follows:
"If the last day of the period for giving notice of intention to participate falls on a Sunday, on a recognized public holiday at the seat of the Company or on a Saturday, the preceding working day shall apply instead. Saturday shall not be deemed a working day within the meaning of this provision."
b) Article 6 paragraph 1 item 2 shall be reworded as follows:
"2. in respect of registered shares, is entered in the Company's register of shareholders."
Preconditions for attending the Annual General Meeting
On the basis of the relevant provisions in Article 6 of the Articles of Association, each shareholder may attend the Annual General Meeting in person or be represented by a proxy appointed in writing, provided the shareholder has given notice of his or her intention to participate to the Board of Management not later than Monday, 2 November 1998, and, by the same date,
1. has deposited with the company or one of the following banks fully paid-up bearer shares or certificates issued thereon by either a collective securities depositary or a German Notary Public, such shares or certificates being retained by the depositary up to the end of the Annual General Meeting:
Dresdner Bank AG
Bayerische Hypo- und Vereinsbank AG
BHF-Bank AG
Commerzbank AG
Deutsche Bank AG
Goldman, Sachs & Co. oHG
B. Metzler seel. Sohn & Co. KGaA
J. P. Morgan GmbH
Morgan Stanley Bank AG
Warburg Dillon Read AG
and all their branches
and in Switzerland UBS AG
The deposit shall also be deemed to have been properly made if the shares, with the consent of one of the depositaries, are kept in a blocked deposit at another bank up to the end of the Annual General Meeting.
2. has submitted to the Board of Management of the company, in respect of not fully paid-up registered shares, a list showing the numbers of the shares entered in the register of shareholders in his or her name.
Every shareholder who has fulfilled these conditions will receive an admission card for the Annual General Meeting.
Munich, 29 September 1998
The Board of Management
For the Annual General Meeting on 5 November 1998
Report of the Board of Management on the exclusion of subscription rights proposed under items 8, 9, 10 and 12 of the agenda (in accordance with Articles 186 paragraph 4 sentence 2, 203 paragraph 2 sentence 2, and 221 paragraph 4 sentence 2 of the German Stock Companies Act)
1. Re item 8 of the agenda
The holders of bearer shares are to be offered new registered shares in a ratio of 1:1, with the subscription rights of the registered shareholders being excluded; this is to give the holders of bearer shares the chance to acquire a second share like the registered shareholders after the full paying-up of their shares.
Behind this proposed exclusion of subscription rights is the company's traditional objective of not changing the proportionate holdings of its bearer and registered shareholders through capital measures to the detriment of either one of these groups. By way of explanation, we would like to quote the central passage from reports that we have sent you in the past on proposed capital measures:
"According to the company's Articles of Association, entitlement to dividends and voting rights in connection with our shares are dependent on the amount paid up. Only an allocation of new shares according to paid-up amounts guarantees our shareholders that their participation as expressed in these rights remains unchanged."
After the full paying-up of the registered shares and the subsequent stock split, the number of shares held by the registered shareholders will have doubled. The quota of the holders of bearer shares as regards the most important membership rights conveyed by their shareholdings would be nearly halved if they did not have the opportunity to acquire a second share as well. This is the purpose of the proposed capital increase; the exclusion of subscription rights for registered shareholders is necessary to achieve the goal of maintaining the proportionate holdings of the bearer and registered shareholders.
The proposed issue price is based on the average price difference between the partly paid-up registered shares and the bearer shares in May 1998 prior to the announcement of the measures. It puts the holders of bearer shares in the same position as if they had sold their bearer shares prior to the announcement of the forthcoming full paying-up and had acquired partly paid-up registered shares instead, then taking part in the full paying-up with an additional payment of DM 5 per share. This takes account of the different valuation of the partly paid-up registered shares and the bearer shares that the capital markets have applied for some considerable time.
The envisaged capital measures are intended to unify Munich Re's two share categories, which is in the interests of both the shareholders and the company. To achieve this aim, the subscription right is subject to the holder of bearer shares agreeing to the conversion of these shares into registered shares in each case. The creation of the relevant conversion right is proposed under item 7 of today's agenda. Given the subscription ratio of 1:1 and the aforementioned conversion obligation, a trading of subscription rights is not envisaged. The relatively long subscription period of at least 6 weeks is intended to ensure that as many holders of bearer shares as possible avail themselves of their subscription right, so that a high conversion rate is achieved.
2. Re item 9 of the agenda
The proposed authorization enables the Board of Management, with the consent of the Supervisory Board, to exclude the shareholders' subscription rights in respect of new shares in accordance with Article 186 paragraph 3 sentence 4 of the German Stock Companies Act. Under this provision an exclusion of subscription rights is permissible if the capital increase does not exceed 10% of the share capital and the issue price is not significantly lower than the market price. The proposal in item 9 of the agenda is within this legal limit. The volume of the authorization even together with the contingent capital to be resolved under item 12 of the agenda is equivalent to less than 10% of the current share capital. When making use of this authorization, the Board of Management will fix the issue price as near to the then-current market price as possible in consideration of the respective situation on the capital market.
There is no financial disadvantage for the shareholders for whom subscription rights are excluded, because of the obligation to place the new shares at as near-market price as possible. In making use of this authorization, the Board of Management will endeavour to place the new shares with due regard to market circumstances. As a result of the liquid market in Munich Re shares, shareholders wishing to maintain their proportionate holding in the company always have the possibility of buying the requisite number of shares on the stock market.
3. Re item 10 of the agenda
It is becoming increasingly common in the acquisition of companies or participations, especially in the international sector, for payment to be effected not in cash but in own shares. In other words, it is not unlikely that a seller may require Munich Re shares in payment for acquisitions that we wish to make. In individual cases it may therefore be of advantage when competing for an attractive participation if we can offer the seller new Munich Re shares in exchange.
In order to also open up this possibility for Munich Re as a global player, we propose that the Board of Management be authorized to increase the capital by a further nominal amount of DM 150 million (Authorized Capital Increase III). This authorization will enable the company to react quickly and flexibly to attractive offers and in appropriate cases to acquire companies or participations by issuing new Munich Re registered shares. Before seeking the consent of the Supervisory Board to a capital increase for this purpose, the Board of Management will carefully examine in each individual case whether it is necessary to use this instrument and whether the valuation ratio between the new Munich Re shares and the participation to be acquired is appropriate.
4. Re item 12 of the agenda
When issuing convertible bonds or bonds with warrants, the Board of Management is to be authorized, with consent of the Supervisory Board, to exclude shareholders' subscription rights up to a nominal amount of DM 30 million.
The issue of bonds with conversion rights or warrants for Munich Re registered shares enables the company to take up capital at attractive conditions. The premiums received on the conversion rights or warrants accrue to the benefit of the company.
Placement of these issues with exclusion of shareholders' subscription rights makes it possible to achieve a markedly higher inflow of funds than would be the case in an issue with subscription rights. The main reason for this is that the exclusion of subscription rights provides the company with the necessary flexibility to take advantage of favourable circumstances on the stock market at short notice. In contrast to cum-rights issues of convertible bonds or bonds with warrants, the issue price here can be fixed directly prior to the placement and thus avoid any risk of alterations in the share price to be expected in view of the volatility of Munich Re registered shares for the duration of a subscription period.
In accordance with Article 221 paragraph 4 sentence 2 of the German Stock Companies Act, the provisions of Article 186 paragraph 3 sentence 4 apply analogously to the exclusion of subscription rights in the issue of convertible bonds and bonds with warrants. The limit of 10% of the share capital for the exclusion of subscription rights provided for there will as mentioned at the outset not be reached even if the authorized increase of the capital under item 9 of the agenda is included. Furthermore, on the basis of Article 186 paragraph 3 sentence 4, the issue price may not be fixed significantly lower than the market price. To ensure that this requirement is also met when convertible bonds or bonds with warrants are issued, the Board of Management undertakes to obtain the expert opinion of an independent and reputable investment bank prior to all issues. This takes account of the shareholders' need for protection against dilution of their shareholdings. Owing to the envisaged fixing of the issue price at a level not significantly lower than the market price, the value of a subscription right would be practically zero. In other words, shareholders suffer no financial disadvantage from an exclusion of subscription rights; they have the opportunity to maintain their proportionate holding in the company's share capital at almost the same conditions by acquiring the necessary shares on the stock exchange.
Munich, 29 September 1998
The Board of Management