Investments of the Munich Re Group

Investment principles

Our investment strategy naturally considers supervisory requirements aimed at ensuring optimum security and profitability, with sufficient liquidity at all times, and an appropriate mix and spread. We continue to satisfy all applicable accounting and taxation requirements and invest only in assets from which we expect an adequate return, our asset managers paying strict attention to the risk tolerance of each company. In reinsurance in particular, we limit currency risks by matching our expected liabilities with assets in correlated currencies where possible. We also take care that the maturities of our fixed-interest securities are aligned with those of our liabilities. The methods we use to control investment risks are described in detail in the risk report on here; our approach to asset-liability management is explained on here.

Our investment strategy is committed to the principle of sustainability. We aim to invest at least 80% of the market value of our investments in assets that are included in a sustainability index or satisfy generally recognised sustainability criteria. Since mid-2007, we have used the services of oekom research, an independent rating agency for sustainability, to advise us in this area. Our sustainability criteria for corporate and bank bonds have been considerably tightened as a result.

Liquidity

The Munich Re Group’s liquidity is ensured at all times by means of detailed, Group-wide liquidity planning. As a rule, the Munich Re Group generates significant liquidity from its premium income, from regular investment income and from investments that mature. We also attach great importance to the credit rating and fungibility of our investments. Given the maturity structure of the outstanding bonds and the credit facilities employed (which are, in any case, relatively insignificant in scope), the Munich Re Group has no re financing requirements.

Significant developments in the 2008 financial year

Considering the capital market upheavals, we achieved a respectable investment result of €5.8bn (9.3bn), although this represented a significant decrease of 36.8% on the previous year. The heavy falls on stock markets worldwide on account of the financial crisis have played a crucial part in this deterioration in the result. Owing to our strict application of the impairment rules, the capital market developments led to high write-downs of €4.9bn on our equity portfolios. Thanks to our active portfolio management, this was partially compensated for by the net balance of €2.8bn from write-ups and write-downs de riving from our hedging transactions. Furthermore, our result from disposals was lower than in the previous year, which had benefited significantly from the sale of a German real-estate package and large sections of our equity port folios.

Despite the considerable turmoil on the capital markets, we recorded only a slight reduction of €1.2bn or 0.7% to €175.0bn in Group investments. Above all, our equity portfolio shrank noticeably as a consequence of disposals and falling market values. By contrast, the value of our fixed-interest securities improved over the course of the year, partly due to new investments and partly to interest-rate trends. Especially in primary insurance, we classify longterm fixed-interest securities which are not traded on an active market as loans at the time of acquisition, recognising these at amortised cost. At carrying amounts, our investments in loans thus increased appreciably by €4.9bn or 13.9%. For the additional investment in loans, we used cash flows from in surance business as well as liquid funds from disposals. These reallocations led to shifts in our investment mix.

On 13 October 2008, the IASB (International Accounting Standards Board) fast-tracked an amendment of IAS 39 Financial Instruments relating to the reclassification of financial instruments. In the light of the financial crisis, the changes made are intended to eliminate the potential competitive advantages of US banks by aligning IFRS with US GAAP and to provide balance-sheet relief in the financial sector.

Until 31 October 2008 and under certain conditions, the amendments permitted non-derivative financial instruments in the categories “securities held for trading” and “securities available for sale” to be reclassified under other categories retroactively to 1 July 2008. As of 1 November 2008, the reclassification will become effective as of the date of execution, enabling such securities to be recognised at amortised cost. As a consequence, losses in value occurring in the second half of the year and in the future generally need no longer be recognised in the income statement or in equity.

Thanks to our well-balanced investment policy and our already somewhat conservative accounting methods, we do not need to reclassify financial instruments in order to take advantage of these relaxations in requirements. We attach importance to continuity in our accounting practices as well as to the transparency of our assets and results.