Munich Re (Münchener R

views updated

Munich Re (Münchener Rückversicherungs-Gesellschaft)

Königinstrasse 107
Postfach 40 13 20
D-8000 Munich 40
Federal Republic of Germany
(89) 38 91 0
Fax: (89) 39 90 56 7

Public Company
Incorporated: 1880
Employees: 1,850
Assets: DM20.11 billion (US$11.90 billion)
Stock Exchanges: Frankfurt Berlin

Munich Re—known as Münchener Rückversicherungs-Gesellschaft in German-speaking countries—is the world’s largest reinsurance company, in terms of net premium income more than twice the size of its nearest rival, Swiss Reinsurance Company. Munich Re has a well deserved reputation in the insurance world for consistently profitable performance and considerable financial muscle. It rarely boasts of this achievement—quiet strength has long been one of Munich Re’s hallmarks.

The modern reinsurance industry is dominated by central European, particularly German, companies. This is due to the fact that the German insurance industry of the 19th century had few of the inhibitions about reinsurance which characterized the then-leading insurance industry, that of the United Kingdom. Munich Re was not the first reinsurance company to be established—the Cologne Re preceded it by 34 years—but it was the first to be totally independent of a primary insurance operation.

Its founder, Carl Thieme, a native of Erfurt in Thuringia, had reached the sound but—in the 1870s—unfashionable conclusion that dependence on a primary insurer meant reinsurance operations had to take on a narrow range of often poor quality risks with frequently disastrous financial results. Instead Thieme sought to set up an independent reinsurance company which could choose its risks according to their quality and spread the risks by operating in all extant classes of insurance.

Thieme, already an experienced and successful insurance agent in Munich, had developed good connections with the leading figures of the Bavarian financial world of the time. Chief among these was Theodor Cramer-Klett, who had been instrumental in developing in Bavaria a modern banking system capable of servicing the rapid industrialization that was going on in Germany under the protectionist policies of Otto von Bismarck.

Undeterred by the perilous state of the German insurance industry in the 1870s—Bismarck had even considered nationalizing it—Thieme and Cramer-Klett, along with four others, decided to set up a joint-stock operation with a capital of the then-large sum of three million marks. The share capital, partly paid, was subscribed by eight shareholders, most of whom were the cofounders of the new company. On April 19, 1880, Munich Re was formed. Thieme also favored the conclusion of mutually binding treaties between insurer and reinsurer instead of the hitherto traditional individual placement of risks. He regarded treaties as both more efficient and more secure from the point of view of both insurance and reinsurance companies. The new company’s first treaty was with the Thuringia Insurance Company, whose Bavarian agent Thieme was and remained until 1886.

By the end of the first year’s trading, gross premium income had passed one million marks. In 1888 Munich Re shares were offered for the first time on the Munich stock exchange by the bankers Merck, Finck & Company, themselves founded by the ubiquitous Cramer-Klett, and competition for shares was intense. The firm’s capital base was expanded several times in the closing years of the century and by 1914 stood as some 20 million marks. In that year Munich Re was able to offer its shareholders a 40% dividend on profits from a turnover which had grown to nearly 177 million marks—a powerful statement of the company’s financial soundness. At its founding in 1880 Thieme had employed just five employees. By 1914 the staff numbered 450.

Thieme had been anxious from the start to see Munich Re establish itself not only in other parts of Germany but also in foreign countries. Thus the establishment of offices in Hamburg and Vienna in the year of founding was matched by Munich Re’s first reinsurance treaty with a foreign insurance company, the Danish Almindelinge Brand-Assurance-Compagni of Copenhagen. During the 1880s the company used an office in St. Petersburg.

Thieme, however, realized that the greatest reinsurance opportunities lay in Britain and, increasingly, in North America. To exploit these markets a London branch office was set up in 1890. London was regarded as a notoriously difficult insurance market for foreign firms to penetrate, but Munich Re managed to do this under the able and energetic leadership of the London manager, Carl Schreiner. In 1892 Schreiner founded Munich Re’s first U.S. operation by putting up the required security of US$500,000.

Thieme was astute enough to realize that if new classes of insurance could be created then Munich Re would be well placed to secure the resulting reinsurance treaties. As Thieme wished Munich Re to retain its status as a reinsurer—a policy maintained to this day—he chose to help set up new insurance operations rather than risk the wrath of his clients by attempting to take Munich Re into the field of primary insurance.

In 1890 Thieme’s efforts to introduce personal accident insurance into Germany led to the founding of Allianz, and his interest in export credit insurance resulted in the creation of Hermes in 1917, a large proportion of whose initial share capital was provided by Munich Re. At the turn of the century, Munich Re was one of several insurers introducing machinery and luggage insurance. Munich Re pioneered machinery insurance in association with Allianz and at about the same time introduced luggage insurance into central Europe.

The risks as well as the potential profits of an international spread of business became apparent in the first two decades of the next century. The Baltimore fire of 1904 and the San Francisco earthquake and fire in 1906, the latter costing Munich Re 11 million marks, demonstrated the size of losses which the reinsurance industry could now face. The promptness of Munich Re’s settlement of its primary insurers’ claims contributed much to the establishment of reinsurance as an industry on an equal footing with primary insurance.

The outbreak of World War I in Europe in 1914 again proved the double-edged nature of international coverage. Munich Re, with its comparatively large commitments in the United Kingdom and North America, found its business in the United Kingdom suspended, a blow compounded by the growing anti-German feeling in the United States and the eventual total loss of its U.S. business in 1917 when the United States entered the war on the Allied side.

Hard on the heels of Germany’s military defeat in 1918 came occupation, reparation payments, and, most damaging of all, the ruinous hyper-inflation of 1923 when the German mark plummeted out of control. In 1924-1925, after the stabilization of the mark, Munich Re’s turnover amounted to only 127 million marks, less than two thirds of its 1914 turnover in real terms.

In 1917, Munich Re had helped found the Hermes Kreditversicherungsbank by providing share capital and accepting the reinsurance of risks. Hermes was an export-credit-insurance operation designed to offer wartime protection to German exporters, but in the postwar period it was used to help stimulate German export trade back to recovery. Gains made in this sector, however, were offset almost immediately by the onset of the Depression in 1929. Munich Re was forced to cut both salary and staffing levels in the early 1930s—in 1932 staff numbers sank to 342 against a 1920 total of more than 600. Munich Re also found it necessary to assist a number of ailing primary insurance companies—a far-sighted move at a time of great financial difficulty.

During the difficult interwar years, control of Munich Re was largely in the hands of Wilhelm Kisskalt, who succeeded Thieme as chief executive in 1922. He in turn was succeeded by Kurt Schmitt in 1938, another former employee who had transferred to the Allianz in 1914 and had become general manager there in 1921.

In 1933 Schmitt became minister of economic affairs in the new National Socialist government of Adolf Hitler. According to Munich Re, Kisskalt and Schmitt hoped that Schmitt’s acceptance of the post would enable him to exercise a moderating influence on the extremist policies of the new Nazi government, and when this hope proved illusory, Schmitt resigned of his own accord in 1934. This episode did not appear to harm the fortunes of Munich Re—in the mid-1930s its turnover exceeded prewar levels for the first time.

During World War II, as in World War I, Munich Re lost its position in the huge insurance markets of the Allied nations. Although this had a considerable impact on its growth, Munich Re’s turnover still reached 230 million marks by the end of the conflict in 1945. In spite of the briefness of Schmitt’s official association with the former German leadership, Munich Re found it expedient to appoint a new chief executive that year, at the start of the Allied occupation. The new chief executive was an Austrian, Eberhard von Reininghaus. Although he may have been regarded with more favor than his predecessor, this did not prevent the Allies from occupying Munich Re’s headquarters in Munich’s Kóniginstrasse until 1951. More seriously, Munich Re found itself banned from operating abroad in common with all other German companies. This compounded the damage already caused by the massive economic dislocation in Germany in the immediate postwar period. Munich Re was once again forced to cut its staff—by 1950 only 302 were left—and turnover for the 1949-1950 fiscal year amounted to only half that of 1945.

Munich Re adopted a policy of concentrating on whatever gaps remained in the home insurance market. The impact of the Marshall Plan and the reorganization of the German currency began that process of economic recovery now known as the German “economic miracle” of the 1950s and 1960s. Insurance and reinsurance benefited from the economic upturn and by the middle of the 1950s Munich Re’s turnover had surpassed all previous levels at nearly a third of a billion Deutsche marks. Eberhard von Reininghaus died in 1950 and his place was taken by Alois Alzheimer, who had joined Munich Re in 1929. Alzheimer, general manager for the next 18 years, oversaw the restoration of the company’s fortunes and its reestablishment as a leading player in the world’s reinsurance industry. At the time of his retirement in 1969, Munich Re’s annual turnover exceeded DM2 billion.

General manager Horst K. Jannott is the second-longest serving chief executive of Munich Re after Thieme. A lawyer by training, he joined Munich Re in 1954, made his name in balance sheet mathematics, and progressed rapidly to the top of the corporate ladder. During his stewardship Munich Re’s gross premium income has increased nearly sixfold to stand at DM12.4 billion in 1989.

The mid-1970s marked a significant shift in the balance of the company’s profits away from reinsurance toward what the company calls its “general business,” primarily investment income. Reinsurance profitability began to decline rapidly in the early years of the decade and recorded a loss for the first time in 1977 of about DM15 million. By 1981 this figure had increased to DM116 million and by 1989 had reached DM381 million. Munich Re’s increasingly large losses in this part of its business have been spectacularly offset by the growth of profits in its general business. In 1977 this brought in about DM49 million, and in 1989, DM900 million.

Consequently, Munich Re has been able to turn in consistently strong and rising net profits. The decline in reinsurance underwriting results has been caused largely by overcapacity in the reinsurance industry and consequent severe rate competition, plus the growing tendency of primary insurers to organize their own reinsurance cover, ceding to the established reinsurance companies a growing proportion of the more volatile risks. Against this background, Munich Re’s ability to offer regular dividends of 18% to 20% is quite an achievement.

Also apparent over the last two decades has been the increasing proportion of foreign business written by Munich Re, despite the effects of a strong Deutsche mark in the same period. At the end of the 1970s about 40% of its business originated outside West Germany and foreign business was outperforming domestic business. Half of these foreign earnings came from other European countries, the remainder from the rest of the world. The early 1980s registered a slowdown in the growth of foreign premium income, partly due to an appreciating Deutsche mark and partly due to setbacks in the transport and life insurance sectors. Disasters such as the 1985 Mexico earthquake and Hurricane Gilbert—the latter cost Munich Re between DM100 million and DM120 million—and the increasingly high cost of U.S. liability claims further cut into foreign profits. At the end of the decade, the foreign sector picked up as the Deutsche mark began to depreciate against both dollar and sterling. By 1989 about half of Munich Re’s earnings came from abroad.

This upturn was not solely the result of external factors such as the Deutsche mark rate of exchange. Munich Re’s wisdom in declining to provide coverage on war risks was proved during the 1980-1988 Gulf War between Iran and Iraq, which cost other underwriters heavily.

Munich Re, in accordance with German regulations, consistently undervalues the worth of its assets. In 1987 its two principal holdings—25% in Allianz and 46% in Allianz Lebens—were valued by the market at DM10 billion, yet the recorded book value for all Munich Re’s holdings at the time amounted to only DM2.4 billion. Munich Re defends this extremely conservative accounting policy on the grounds that it needs substantial hidden reserves as a cushion against unexpected losses. As a result, Munich Re is widely considered to be one of the most undervalued insurance operations in the world.

The diversity as well as the size of Munich Re’s holdings is an important part of its strength. Munich Re has holdings, often cross-holdings, in a number of other insurance operations, but also in non-insurance companies—for example, it has a 7.5% holding in Heidelburger Drueck, Europe’s largest maker of printing equipment, and a 6.3% stake in MAN, a vehicle manufacturer. This means it is in a comparatively better position than many of its rivals to weather downturns in the insurance and reinsurance industries.

In contrast to Europe’s primary insurance industry, which is still characterized by a network of national trade restrictions, the reinsurance industry has been relatively open since the mid-1960s. Many analysts think that deregulation in the primary insurance industry in 1992 will lead to a smaller number of larger insurance groups with a reduced requirement for direct reinsurance coverage. They predict nonproportional reinsurance coverage, for example, the increasingly important catastrophe coverage and liability coverage, as the future growth areas in the industry.

Munich Re believes the company is well positioned to survive the expected contraction in traditional reinsurance and to exploit the new growth areas because of its size, acknowledged expertise, and network of cross-holdings. Instead of using its assets to pay for diversification into direct insurance—here it differs from Swiss Re, its nearest competitor, which is in the process of doing this—Munich Re remains committed to its traditional core business of reinsurance and related activities. Munich Re is adamant that this concentration will leave it in an unassailable position.

Principal Subsidiaries

Munich Reinsurance Company of Australia; Munichre Service Limited Hong Kong; Munich Reinsurance Company of Canada; Muenchener de Mexico, S.A.; Munichre New Zealand Service Limited; Munchener Correduria de Reaseguros (Spain); Munich Reinsurance Company of South Africa; Munich American Reinsurance Company (U.S.A.).