Munich Re (Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München)

Königinstrasse 107
D-80791 Munich
Germany
Telephone: (49) (89) 3891-0
Fax: (49) (89) 3990-56
Web site: http://www.munichre.com

Public Company
Incorporated: 1880
Employees: 36,481
Total Assets: EUR 31.1 billion ($29.1 billion) (2000)
Stock Exchanges: Frankfurt am Main Berlin
Ticker Symbol: MUV
NAIC: 52413 Reinsurance Carriers; 524128 Other Direct Insurance (Except Life, Health, and Medical) Carriers

Munick Re (known as Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München in Europe) is the world’s largest reinsurance company. Munich Re’s reinsurance division, whose subsidiary American Re is third in the American non-life insurance market, reinsures more than 5,000 insurance companies in about 150 countries and has leading market positions in Italy, Scandinavia, the Netherlands, Canada, and Japan. Focusing solely on reinsurance for most of its history, almost half of the company’s premium income is now generated from direct insurance. In direct insurance, Munich Re focuses on insurance for individuals, such as life and health insurance, as well as on insurance for small and medium-sized businesses. The company’s major direct insurance subsidiary is ERGO Insurance Group, Germany’s second largest direct insurer. Munich Re’s investment arm, MEAG Munich ERGO AssetManagement GmbH manages the group’s own EUR 158 billion investment portfolio and offers its services to third parties. Munich Re also developed a strategic partnership with HypoVereinsbank, a private bank based in Munich that has a 13.3 percent stake in Munich Re. The company holds a 20 percent stake in Allianz, Germany’s leading direct insurer, which in turn owns about the same amount of Munich Re shares. Another 7.5 percent of the company’s shares is owned by Deutsche Bank.

Origins

Quiet strength has been one of Munich Re’s hallmarks throughout the company’s 120-year history. The German insurance industry of the nineteenth century had few of the inhibitions about reinsurance that characterized the then-leading country in the insurance industry, the United Kingdom. German Munich Re was not the first reinsurance company to be established; Cologne Re preceded it by 34 years. However, it was the first to be totally independent of a primary insurance operation and soon became a driving force of this new branch of insurance.

The company’s 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 DM 3 million. The share capital, partly paid, was subscribed by eight shareholders, most of whom were the co-founders of the new company. On April 19, 1880, Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München 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 percent dividend on profits from a turnover which had grown to nearly DM 177 million—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.

Internationalization Delayed by World Wars

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 also founded Munich Re’s first U.S. operation by putting up the required security of $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, 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 DM 11 million, 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 1924–25, after the stabilization of the mark, Munich Re’s turnover amounted to only DM 127 million, less than two thirds of its 1914 turnover in real terms.

Company Perspectives:

We are developing modern insurance solutions: In a world characterized by change, insurers are faced with ever-new challenges. We support our business partners by identifying future trends, generating future knowledge and developing joint products for the challenges of tomorrow. In this central task, our longstanding tradition of innovation repeatedly stands us in good stead: for example, in evaluating know-how from sophisticated insurance markets for application in less developed markets. Thus Munich Re is currently supporting private initiatives to establish new export credit insurers in Eastern Europe, Latin America and Asia—areas in which the globalization of trade is opening up new business opportunities for reinsurers as well.

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. 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 DM 230 million 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 Königinstrasse 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 1949–50 fiscal year amounted to only half that of 1945.

A Leading Reinsurer in Postwar Years

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 DM 2 billion.

General manager Horst K. Jannott became 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 increased nearly sixfold to stand at DM 12.4 billion in 1989.

Profits Decline in the 1970s and 1980s

The mid-1970s marked a significant shift in the balance of the company’s profits away from reinsurance toward what the company called its “general business,” primarily investment income. Reinsurance profitability began to decline rapidly in the early years of the decade, and the company recorded a loss for the first time in 1977 of about DM 15 million. By 1981, this figure had increased to DM 116 million, and by 1989 had reached DM 381 million. Munich Re’s increasingly large losses in this part of its business, however, were spectacularly offset by the growth of profits in its general business. In 1977, this brought in about DM 49 million, and in 1989, DM 900 million.

Munich Re was able to turn in consistently strong and rising net profits. The decline in reinsurance underwriting results were 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 percent was quite an achievement.

Key Dates:

1880:

Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München is formed.

1888:

Munich Re shares are offered for the first time on the Munich stock exchange.

1899:

The company opens a branch office in the United States.

1906:

The San Francisco earthquake and fire cost Munich Re DM 11 million.

1917:

Total loss of U.S. business ensues when the United States enters World War I.

1930s:

The company develops life insurance rating manuals.

1945:

Munich Re is banned from operating abroad after World War II.

1970s:

The company establishes a Geoscience Research Group for analyzing natural hazards.

1977:

The company records a loss for the first time.

1985:

The Mexico earthquake and Hurricane Gilbert cost Munich Re over DM 100 million.

1996:

Munich Re acquires North America’s third largest property-casualty reinsurer, American Re.

1997:

The company becomes majority shareholder of Germany’s second largest direct insurer ERGO.

2000:

Munich Re acquires a majority stake in Alte Leipziger Europa.

During the 1970s and 1980s, Munich Re’s proportion of foreign business increased continuously, despite the effects of a strong deutsche mark in the same period. At the end of the 1970s, about 40 percent 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 100 million and 120 million deutsche marks—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 1980–88 war between Iran and Iraq, which cost other underwriters heavily.

Acquisitions, New Products, and Disasters in the 1990s

In the 1990s, three major trends had a strong impact on the world’s reinsurance market. First, the decade started out with devastating winter storms, hurricanes, and typhoons, and a trend towards increasing risks of major natural catastrophes became evident. For reinsurers, that meant an increasingly volatile business with more significant losses. Second, primary insurance companies were consolidating on a global level, thereby reducing the number of reinsurance clients and boosting their own financial strength. Third—besides an intensifying competition among reinsurers—some large banks and primary insurers entered the market for reinsurance. Munich Re’s management reacted in different ways. It strengthened the company’s reinsurance business through several mergers and acquisitions and a strong foothold in the German direct insurance market; it established a new asset management subsidiary and invested in new product development; and it reorganized its shareholdings and took measures to attract new investors. As a result, Munich Re more than quadrupled its premium income within a decade, while profits multiplied by a factor of 38 and dividends were raised eight times.

In a $3 billion deal, Munich Re acquired North America’s third largest property-casualty reinsurer, American Re based in Princeton, New Jersey, in November 1996. In October 2000, the company bought the life insurance division of Chicago-based CNA Financial Corporation and established a new holding company for its North American business, Delaware-based Munich-American Holding Corporation. Munich Re also strengthened its presence in Western Europe and expanded into Eastern Europe, Asia, and Latin America. The company acquired Italian Reale Ri in 1998 and a new office location in the inner city of Paris in spring 2001. New branch offices opened in China in 1997 and in Poland and Chile two years later. To counteract declining reinsurance profits, Munich Re invested heavily in the European direct insurance market. In 1997, Munich Re merged Hamburg-Mannheimer AG, a direct insurer in which the company held an 80 percent stake, with the VICTORIA group, another large direct insurer of which Munich Re owned 23 percent, to form ERGO Versicherungsgruppe, which instantly became Germany’s second biggest direct insurance company. In 1999, the two companies established MUNICH ERGO AssetManagement GmbH (MEAG), a joint venture to manage their assets. Two years later, Munich Re took over more than 90 percent of ERGO’s shares. The company also acquired a 60-percent stake in Bad Homburg-based Alte Leipziger Europa Beteiligungsgesellschaft AG (AL Europa), a holding company with majority stakes in 14 insurance companies in eight Central and Eastern European countries, including Poland’s third biggest insurer, Hestia. In addition, the company supported private initiatives to establish independent export credit insurers in Eastern Europe, Latin America, and Asia.

In the area of new product development, Munich Re, together with Swiss Re, Internet Capital Group, and Anderson Consulting launched London-based “inreon,” an Internet-based reinsurance exchange where standardized reinsurance risks could be traded between insurance companies and reinsurance companies or brokers, in December 2000. In the first half of 2001, Munich Re promoted a new agricultural insurance scheme for European farmers, who in general were not covered against drought, floods, or storms by state-supported insurance, as they were in the United States. The company partnered with European insurer AXA Colonia in developing a new kind of cancellation coverage for major sporting events and provided earthquake coverage for FIFA’s soccer World Cup in 2002 in Japan and Korea. Munich Re’s Geoscience Research Group closely watched global trends for the occurrence of natural disasters and published reports and a World Map of Natural Hazards.

Beginning in the late 1990s, Munich Re started restructuring its shareholdings involving Allianz, Germany’s number one direct insurance group. Allianz had been co-founded by Munich Re founder Carl Thieme in 1890, which resulted in a close connection between the two companies and in a number of joint and cross-shareholdings. The two companies exchanged their shares in American Re and Allianz of America. Munich Re became the sole owner of American Re and Allianz the sole owner of Allianz of America. Munich Re lowered its stake in life insurer Allianz Lebensversicherungs-AG to 40 percent and sold its stakes in Dresdner Bank AG, Bayerische Versicherungsbank AG, and Frankfurter Versicherungs-AG to Allianz. In turn, the company acquired 6.5 percent of Allianz’ shares in ERGO and health insurer DKV, and the shares that Allianz and Dresdner Bank held in Hypo-Vereinsbank (HBV), raising Munich Re’s share to 25.7 percent. In addition, Munich Re planned to take over Allianz shares in Karlsruher Lebensversicherung AG, raising its stake in the life insurer to 90.1 percent by July 2002. Munich Re and Allianz also reduced their cross-holdings from 25 to roughly 20 percent. These measures were aimed at making Munich Re more attractive to investors. The company took another step in that direction when it converted the existing bearer shares, which represented about two percent of its share capital, into registered shares in January 1999.

While 1999 had been Munich Re’s worst year in its history in terms of losses caused by natural disasters, a man-made disaster of, to date, unimaginable proportions dwarfed those losses when on September 11, 2001, two hijacked planes hit the twin towers of New York’s World Trade Center, causing them to collapse. While claims cost from aviation, building, business interruption, life and worker compensation insurance to American Re were estimated at EUR 1 billion at first, that amount was soon doubled to a “conservative estimate” of EUR 2.1 billion—approximately $1.89 billion or 11.5 percent of the group’s reinsurance premiums in 2000. Only two months later, another plane crashed into a residential neighborhood in New York’s borough Queens, causing another loss of around $50 million. While this would have been the end for many reinsurers, Munich Re expected to be able to cope with these, the biggest losses in its history.

In accordance with German regulations, Munich Re had consistently practiced extremely conservative accounting policy which undervalued the worth of its assets. It was estimated that the stock exchange transactions with Allianz would uncover hidden reserves of over EUR 4 billion and that, in addition, Munich Re could expect equalization payments in cash of about EUR 700 million from Allianz in 2002. In November 2001, Munich Re announced a capital boost for American Re of over $1 billion. For the future the company was expecting a revitalized re-insurance market in the attack’s aftermath, an increase in direct insurance sales through its partnership with HBV, growing profits from asset management generated by MEAG, and a potentially huge new market for private pension plans supported by the German government.

Principal Subsidiaries

ERGO Versicherungsgruppe AG (91.7%); Karlsruher Lebensversicherung AG (54%); Europäische Reiseversicherung AG; MEAG Munich ERGO AssetManagement GmbH (85.1%); American Re Corporation (United States); American Re Insurance Company (United States); Munich American Reassurance Company (United States); Munich Reinsurance Company of Africa (South Africa); Munich Reinsurance Company of Canada; Munich Reinsurance Company of Australasia (Australia); Münchener Rück Italia S.P.A.; New Insurance Company (Switzerland); Great Lakes Reinsurance (UK) PLC.

Principal Competitors

General Cologne Re; Swiss Reinsurance Company; “Winter-thur” Swiss Insurance Company; Hannover Re.

Further Reading

Dönch, Uli, and Matthias Kowalski, “Ende der Bescheidenheit: Der unheimliche Gigant Münchener Rück drängt ins Rampenlicht,” Focus, August 5, 1996, p. 136.

1880–1980: 100 years of Munich Re, Munich: Munich Re, 1980.

“Münchener Rück kauft American Re,” Frankfurter Allgemeine Zeitung, August 15, 1996, p. 16.

“Münchener Rück kündigt weitere Entflechtung von Allianz an,” Frankfurter Allgemeine Zeitung, December 6, 1997, p. 17.

“Münchener Rück landet Milliarden-Coup in USA,” Süddeutsche Zeitung, August 16, 1996.

“Münchener Rück realisiert stille Reserven in Milliardenhöhe,” Frankfurter Allgemeine Zeitung, July 19, 2001, p. 17.

—D. H. O’Leary
—update: Evelyn Hauser