Letter to shareholders
Dear Shareholders,
2008 was probably the most turbulent year in Munich Re’s recent history.
Unparalleled upheavals on the financial markets and substantial major losses
in reinsurance impacted our result.
Against this background, we are presenting figures to you which I could not
be satisfied with under normal circumstances, given that we did not achieve
our ambitious targets for 2008. The fact is, though, that our objectives for the
past business year were set under conditions that ceased to exist months ago.
And I fear it will be some considerable time before we can again take such
assumptions as a basis for our planning. Therefore it is only logical, in view of
the new reality, to abandon our earnings per share target for the year 2010.
But we are adhering to our objective of a 15% return on risk-adjusted capital
(RORAC) over the cycle, even though this appears much more ambitious now
than it did one or two years ago.
With a profit of €1.5bn, however, we have no reason at all to be despondent. In
the given situation, this profi t for the year is a respectable result, especially in
direct comparison with our competitors. In other words, Munich Re has come
through the crisis relatively well so far, an achievement reflected in our share
price. We have our strategy to thank for this and the fact that we have “practised
what we preach” in our risk management.
Our integrated business model, focused on risks from reinsurance, primary
insurance and the international healthcare market, has proved its effectiveness.
It has also been endorsed, in my view, by the activities of some of
our competitors who, having increasingly extended their business models
beyond the borders of insurance in recent years, are now rethinking their
strategies. Unreasonably high result expectations in the fi financial sector have
been disappointed; sustained returns on equity of 20% or more cannot be
earned if a sensible approach is taken to risk.
Which brings us back to risk management: in January 2009, the German Federal
Financial Supervisory Authority published its circular on the minimum
supervisory requirements for the risk management of insurance companies.
A draft had been available since the beginning of 2008, when we already met
most of these requirements, having devoted ourselves intensively to this topic
since 2004. In order to satisfy the standards in every respect, we set about
taking the measures still necessary without delay. In the light of the financial
crisis, I can say that our efforts over many years have paid off - our risk management
has passed an extremely severe test.
And you, ladies and gentlemen, are evidently convinced of this as well. In
these difficult times, you have remained loyal to us. I thank you sincerely, also
on behalf of my colleagues on the Board of Management and all staff in the
Group. We are delighted that we will be able to propose an unchanged dividend
of €5.50 per share at the Annual General Meeting.
In the first few months of 2009, the crisis has continued to hold the markets
firmly in its grip: almost every day, we are confronted with reports of new
record losses and the threat of insolvencies at leading companies. The future
development of the economy is uncertain at present. You can read our assessment
of the perspectives and the outlook for the capital markets later on in
this annual report, in the prospects section of the management report.
Times will remain difficult. But I am not going to join the general chorus of
lamentation. We are guardedly optimistic of weathering this crisis well,
having created the best possible foundations for doing so. We do not have to
change the basic points of our strategy and can continue to realise projects
that we launched at the end of 2007.
These projects included an initiative of our Changing Gear programme for
profi table growth which has led to an extensive restructuring of our reinsurance
group. The first step was to redefine ne the tasks of our central divisions and
optimise their interfaces with each another and with the operational divisions.
A short time later, we gave our operational units an even greater client focus.
Both projects have now been concluded. The renewal of a large portion of
our treaty business at 1 January 2009 took place using the new structure. We
reported the satisfactory outcome to the public on 4 February 2009.
In ERGO’s case, we last year initiated a project for constantly improving its
competitiveness. ERGO is remaining true to its strategy of “One entity with
strong brands” and is exploiting the economies of scale that result from the
combination of business segments and central functions in the ERGO Group.
This project will significantly reduce the expense ratio in due course and
ensure the necessary high quality of products and client service.
We cannot determine our market environment, but we can prepare ourselves
for it. With our fi financial strength and our risk-carrying capacity, we are ideally
equipped. In a setting characterised by great uncertainty, this should prove a
competitive advantage and open up opportunities for profi table new business
for us. We are renowned for our risk knowledge and have strong marketing
teams for business with private clients. We can deploy various risk carriers
and service providers as needed to offer our clients appropriate solutions. We
thus systematically cover the individual elements of the value chain in the
insurance industry, as illustrated particularly clearly in the business field of
Inter national Health. And, finally, we have the financial wherewithal to
assume a shaping role in the expected consolidation of the markets, always
provided the crisis does not take an even more dramatic turn. You can rely on
us to continue applying the care and discipline in our business to which you
are accustomed and rightly expect from us.
Our maxim of profitability before growth remains unchanged. I will neither
make any concessions in this respect nor tolerate any deviations. Because
next year I again want to present a result to you that underlines Munich Re’s
leading status in our industry.
Yours sincerely,
Nikolaus von Bomhard
Chairman of Munich Re’s Board of Management
