O p e rational ear n i n g s 3, , 6 2 2

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1 Corporate Customers 1998 was a difficult year for corporate customer business. Despite the efficiency gains already realized in the first year of the merg e r, as reflected in the improved cost-income ratio, the division on the whole perf o rmed below par due to excessive risk costs in commercial lending. As a result, the division re p o rted a loss of D M304 million for 1998 (pre-tax result). A weakening domestic economy, negative sector trends and the crisis in Southeast Asia, Russia and Latin America were the causes. We have already overhauled the control parameters for our corporate customer operations, completing the t r a n s f o rmation from a revenue-driven business to a pro f i t - driven business. Our present aim is to reduce risk costs by taking a considerably more selective approach to developing new business. At the same time, we will engage in pro a c t i v e risk management for our existing business. We will withdraw f rom local lending operations in non-european emerg i n g markets and cut back our activities on the whole. More o v e r, we will significantly increase the share of our commission business which conserves equity capital.

2 FROM REVENUE-DRIVEN TO PROFIT- D R I V E N S e rves 60,000 small and mid-sized businesses (companies with sales of between D M10 million to D M500 million), 100 E u ropean multinationals, 800 correspondent banks Most important product offerings: commercial lending, including special loans, project financings, acquisition and leveraged financing, equity capital financing, liquidity and investment liquidity and investment consulting, foreign trade financing, electronic serv i c e s S e rvice principle: relationship management MERGER BRINGS GREATER EXPERTISE, HIGHER PRODUCTIVITY, AND A BROADER CUSTOMER BASE Not only did the merger enlarge our customer base, it also enhanced our expertise. The principle guiding our business is relationship management: Every corporate customer of H y p o Ve reinsbank deals with only a single person at the Bank, the relationship manager, who provides comprehensive service, collaborating with specialists wherever necessary. Our p roduct range consists of classical lending business funding O P E R ATING PE RFOR MANCE 4 in millions of D M C o r p o rate Customers O p e rational ear n i n g s 3, , P rovisions for losses on loans and adva n c e s 1, , Ad m i n i s t ra t i ve expense 1, , O p e rating pr o fi t ( 210 ) 9 6 Result bef o re tax e s ( ) 5 9 C o re capital allocation 6, 729 5, R e t u rn on equity before taxes in % ( 4. 8 ) 1.1 Cost-income ratio in % S t a ff 4, , 273

3 of current business operations and project finance. At the same time, we are active in such business areas as stru c t u re d finance, corporate finance, and liquidity consulting. Thanks to the merg e r, we have already been able to realize synerg y gains and hence lower our costs. M o re business in g o v e rn m e n t - subsidized loans LENDI NG BUSINESS MARKED BY MARGIN PRESSURE AND HIGH RISK COSTS Thinner margins continued to dog commercial lending to mid-sized businesses in Given the current risk situation, the Bank scaled back its overall lending volume to D M119 billion from D M149 billion in Nonetheless, we were able to further expand our alre a d y s t rong position in government-subsidized loans. We are among the industry s leading advisors to companies seeking to lower their financing costs with the aid of such facilities. The volume of our government-subsidized lending business amounted to D M8 billion. The Bank s leasing operations expanded faster than the ind u s t ry average. Our Hanseatische Leasing subsidiary p e rf o rmed well in the fast-growing segment of equipment leasing. Bayerische Immobilien-Leasing, the Bank s re a l estate leasing s u b s i d i a ry, i n c reased its new business by a round 40%. E ffects of economic crisis FOREIGN TRADE FINANCE: STRONG DEMAND FOR EXPORT CREDIT FACILIT IES AND DOCUM ENTA RY CREDITS In foreign trade finance, one of our growing businesses, we w e re faced with extraord i n a ry challenges in The economic crisis gripping Southeast Asia and the C I S p ro v o k e d a reduction in the volume of European trade with these regions. This development primarily impacted our commerc i a l f o reign trade financing operations, with money transfer s e rvices and documentary credits re p o rting earnings slightly below the 1997 figure. In export finance, on the other hand, we were able to maintain the high level of the previous year. There was heavy demand for our general credit facility agreements, which we have signed with more than 200 banks and major investors in 40 diff e rent countries.

4 Our relations with 800 correspondent banks are primarily g e a red toward international money transfer services. Due to the precarious risk situation in emerging markets, our G e rman customers increasingly turned to the Bank for short - t e rm hedge instruments such as documentary credits. We o ffer our clientele a comprehensive solution in the form of our export package. Relationship m a n a g e m e n t BUSINESS WITH MULT I N ATIONALS BOOSTED BY STRUCTURED FINANCE DEALS P rofessional relationship management was the backbone of our success with multinational corporations in T he o v e r 100 multinationals we served during the year were especially i n t e rested in our expertise in stru c t u red finance complex solutions applied to foreign trade finance and the securitization of re c e i v a b l e s. Customized financing solutions In Italy and France, we made significant pro g ress in the business of structuring foreign trade financing deals. Thanks to the merg e r, we enjoy a higher market share thro u g h g reater expertise in key Central European countries like H u n g a ry, the Czech Republic, and Slovakia. C O R P O R ATE FINANCE, PROJECT AND ASSET-BASED FINANCING EXPAND FURT H E R We advise companies and provide customized financing solutions. In the wake of the merg e r, we have re-oriented the Corporate Finance unit serving a business segment that has g rown rapidly in recent years. At HypoVe reinsbank, corporate finance includes acquisition and leveraged financing, taking companies public, mergers and acquisitions, financing 5 S T R O N G R I S E I N S T O C K I S S U E S Co-Lead manager 3 Joint-Lead manager 2 B o o k runner 3 Co-manager 13 Co-Lead manager 6 Joint-Lead manager 2 B o o k runner 3 Co-manager 13

5 of participations, loan syndication, and corporate financial engineering. The newly established Project and Asset-Based Financing unit on the other hand combines asset- and m o rtgage-backed securitization (A B S, M B S), a i rcraft financing, lease asset finance, and project financing. We have expanded our acquisition and leveraged financing operations considerably. In this segment, which includes strategic acquisitions and management buy-outs, the volume of business doubled from around D M2 billion in 1997 to D M4 billion this year. In all, we were involved in 77 transactions in Germany and abroad. In Germany we s t ru c t u red and arranged the takeover financing of Deutsche Wo o l w o rth GmbH and the Medi-Bayreuth Group and became the market leader in financing M&As involving mid-sized companies. Outside Germany we were joint lead arranger for the Italian paper manufacturer Cart i e re Del Garda and coa rranger for the Seat Gro u p. We helped numerous companies, among them stock exchange newcomers like Augusta, transtec, Consumer Elect ronics, and P S I, to go public in In the mid- and smallcap segments we are now one of the leading underwriters in Germ a n y. The year was also a very successful one for our new Project and Asset-Based Financing unit. In the A B S and M B S s e g m e n t s p roviding innovative refinancing of receivables on the capital markets, we expanded the range of receivables we re f i n a n c e. We arranged several transactions with short- and mediumt e rm trade receivables, automobile loan leasing re c e i v a b l e s, and mortgage loan receivables. The Bank securitized assets totaling D M4.3 billion using an innovative stru c t u re (Geldilux 99-1) to conserve equity. In the aircraft financing segment, there was brisk demand for innovative financing models, and most notably fund models. We have re i n f o rced our market position by adding nine leasing funds arranged by us for companies like Austrian Airlines and Cathay Pacific. Cro s s - b o rder leasing transactions were at

6 70% commission e a rn i n g s M o re project finance u n i t s the heart of our lease asset finance (L A F) activities. The B a n k s transaction volume for advisory and financing mandates amounted to some D M3 billion. Commission income makes up around 70% of the revenues from this business area. L A F thus makes an important contribution to achieving the Group target of increasing the share of net commission income in all operational earn i n g s. P roject finance remains one of the strongest pillars of our corporate finance business. We won 80 new financing mandates in 1998 alone. The total volume of our pro j e c t financings comes to over D M10 billion, one third of which we lead-managed. We have further expanded our local pre s e n c e with project finance units in Munich, London, New York, Rio de Janeiro, and Singapore. Over 60% of all project loans are for We s t e rn industrial countries. In the emerging markets outside Europe, we proceeded very cautiously and are taking steps to contain risk. Overall, we are one of the leading financial institutions in Europe in project and asset-based f i n a n c i n g. SPECIALIZED FUNDS AND LIQUIDITY CONSULTING FOR MID-SIZED COMPA N I E S We offer our main target group, small and mid-sized businesses, specialized funds that are normally only open to l a rge-scale institutional investors. The new Pro f i f o n d s family consists of four individual investment funds investing in European blue-chip stocks and bonds. The appeal of these is further enhanced by features such as the ability to shift money within the four investment funds free of charge and the attractive conditions for investing short - t e rm monies. 5 Our liquidity consulting and investment services are also aimed at the same target group. This service, provided in close collaboration with the Bank s International Markets division, includes securities investments and time deposits, intere s t rate derivatives, and other tre a s u ry-like pro d u c t s.

7 Brisk demand ELECT RONIC SERVICES: THE EURO IN FOCUS Our range of electronic money transfer tools, order systems and cash management systems assists our customers in their e ff o rts to boost efficiency and realize potential cost savings. The launch of the euro h a s stimulated demand for these s e rvices. Companies turned to us for expert advice on c o n v e rting their payment systems and changing contract t e rms to accommodate the new curre n c y. EMPLOYEE PENSION PLANS HIT THE MARK Our customers showed great interest in the services off e re d by our new specialist unit Pension Consult. Pursuing a p roduct-neutral advisory approach developed in conjunction with acclaimed experts in Germany and abroad, Pension Consult offers innovative solutions to customers designing their own employee pension plans. By the end of 1998, we had invested some D M300 million in pension fund assets on behalf of our corporate customers, an impre s s i v e p e rf o rmance considering that Pension Consult was only f o rmed last year. Deposits of D M440 billion LIQUIDITY MANAGEMENT ACCOUNT ENHANCES APPEAL OF DEMAND DEPOSITS A new product, the liquidity management account, enables customers to optimize liquidity planning and control. Wi t h i n only a few months, a total of D M440 million had been deposited in such accounts. RISK MANAGEMENT FURTHER REFINED The valuation result of the Corporate Customers division continued to be affected in 1998 by the rising number of business failures in Germany and by developments in the crisis regions of Southeast Asia, Russia and Latin America. We strengthened the quality management of our lending operations by forming locally-based market teams and assigning them P/L re s p o n s i b i l i t y. Our risk management is also stru c t u red by sector, for example constru c t i o n, mechanical engineering, health care, and pharm a c e u t i c a l s.

8 Having consolidated all decision-making stru c t u res at H y p o Ve reinsbank, we further optimized the Bank s cre d i t p rocess in the wake of the merg e r. In line with our decentralized management stru c t u re, most lending decisions were made by local managers bearing P/L re s p o n s i b i l i t y. Our intention is to continue streamlining our decision-making p ro c e s s e s. Mid-sized companies t a rg e t e d OUTLOOK: SHARPER PROFILE AND HIGHER PROFITA B I L I T Y As a corporate division bearing full responsibility for pro f i t s and losses, Corporate Customers faces significant challenges. We aim to increase our productivity substantially for each c u s t o m er g ro up a n d a l s o l o ok f o rw a rd t o re a p i n g t h e f i r s t benefits of the merger in Despite the persistently high number of business failure s among small and mid-sized companies, we will continue to focus on this target group. In a break from the past, however, we intend to strive for bro a d e r-based customer re l a t i o n s h i p s that allow for a fair risk-adjusted re t u rn on the basis of our customers re q u i rements. A detailed examination of the u n s a t i s f a c t o ry perf o rmance of corporate customer business reveals, however, that a large part of the portfolio had on the whole already achieved the re t u rn targeted by the bank. To p priority will be assigned to reducing risk costs, maintaining strict cost discipline, and increasing the share of commission income that does not tie up equity capital. Our strategic orientation is based not on volume considerations, but riskadjusted profit considerations. C o n s e q u e n t l y, some o f t h e B a n k s tied equity capital will be freed up. We will continue to upgrade our expertise in profitable, highg rowth areas such as foreign trade finance and corporate finance. More o v e r, we will increasingly employ forw a rd - looking, cost-efficient distribution channels, among them I n t e rnet banking for corporate customers. Considering the measures taken, we are confident that the Corporate Customers division will be able to re p o rt significantly better results in