Development of the Munich Re Group

Reinsurance

Reinsurance continues to hold considerable promise for the future, with a wide variety of earnings opportunities in the long term. On the one hand, the economic burdens for primary insurers also impact reinsurers’ growth and profit opportunities. On the other hand, reinsurance gains in importance in the current financial situation. Since the capital base of insurers has shrunk as a result of the crisis, the capital-relief effect of reinsurance is in demand. In addition, the lasting security of the cover offered is more important than ever. The Munich Re Group will benefit from this trend. Owing to our consistent financial solidity and expertise in the field of risk assessment and risk management, we are in a position to offer our clients reliable solutions and added value.

Economic recovery should be accompanied in the medium to long term by increased demand in all classes of business. We predict that the highest percentage growth rates will come from the emerging markets of Asia and Latin America. Given their higher starting level, however, Europe and North America should record significantly greater absolute growth. With our worldwide presence, we will be able to tap the potential in all regions of the world and fields of business assuming we emerge stronger than our competitors from the economic crisis.

Especially life reinsurance will offer good growth opportunities in the medium to long term. It is frequently used by our clients in particular as a capital substitute. Further impulses for new business are also expected to derive from the restructuring of European supervisory rules (Solvency II), the continuing privatisation trend in old-age and disability provision in the developed markets, the growing need for asset protection, and the dynamic expansion of the Asian and eastern European life insurance markets. As an important component of our diversification and due to its relatively low volatility, life reinsurance is being strengthened as a core element of our strategy. Munich Re is renowned for its in-depth risk and market expertise, good client relations, and financial strength. It is not possible at present to provide a reliable forecast of how the result will develop in 2009. A severe recession may negatively impact disability and suicide rates. Also, short-term premium development may come under pressure owing to declines in the business production of our primary insurance clients. Nevertheless, we remain committed to our very ambitious aim of doubling the value added by new business in the period 2006 to 2011 based on embedded value calculations.

A range of growth opportunities also present themselves in the field of healthcare, where the Munich Re Group covers the whole value chain through its integration of insurance and reinsurance. Our services, ranging from risk assessment and risk management to healthcare support, involve much more than just the assumption of risks. With our expertise, we are thus closer to the markets and can devise viable and sustainable solutions tailored to the needs of our clients. In the second quarter of 2009, we plan to merge our International Health operations into an independent organisational unit at Munich Re, which will enable us to leverage the many synergies even better.

In property-casualty reinsurance, which is naturally cycle-dependent, Munich Re will maintain its clear, profit-oriented underwriting policy and accept risks only at commensurate prices, terms and conditions. During the renewals at 1 January 2009, market terms and conditions in most regions hardened and prices in some segments improved markedly. In a difficult environment, our financial solidity, acknowledged risk expertise, service and client-centric focus have increasingly enabled us to negotiate better prices and conditions with our clients than those obtained by a number of less well-positioned competitors.

At 1 January 2009, about two-thirds of our property-casualty reinsurance portfolio was up for renewal, which corresponds to a premium volume of around €8.3bn. The situation of the economy as a whole, with its effects on the insurance industry’s capitalisation and results, has not yet led to a situation in all markets where the players recognise the need for pricing that is consistently risk-adequate. The development of prices, terms and conditions varied greatly between classes of business and regions but generally followed a positive trend. Overall, we succeeded in halting the erosion of reinsurance prices that has taken place over the last few years and in improving our portfolio, partly through price increases for existing business and partly through attractive new business, but also by terminating business where prices were no longer sufficient.

Of the total business up for renewal, 17.6% (around €1.5bn) was not renewed. New business of €954m was written in more attractive segments. Together with the renewed business (around €6.8bn) and a slight rise in shares in existing business (€256m), the net outcome was a reduction of 3% in premium volume to around €8.0bn. The price level improved by 2.6% compared with the previous year – an increase required just to offset the lower interest income and thus satisfactory at best.

Although not all of our expectations were fulfilled, we are nevertheless satisfied with the improved portfolio quality we have achieved. The share of casualty business fell by around four percentage points, whilst the share of other lines – mainly shorter-tail business – rose. In particular, owing to inadequate original rates, we scaled back proportional business in China, motor business in Germany, and workers’ compensation business in the USA. On the other hand, we grew our business in other lines. An example is offshore energy business, where the price level improved markedly, rising in some cases by over 100% following last year’s hurricane losses. Other treaties with US hurricane exposure now also have a much improved rate level. Agricultural business, which has produced profitable results for many years, was expanded.

Reinsurance is currently one of the few possibilities for primary insurers to overcome shortages in capital. We are therefore firmly convinced that there will be a further increase in the significance of reinsurance, and particularly in the importance of individual reinsurers’ security. For the forthcoming renewals on 1 April 2009 (Japan and Korea) and 1 July 2009 (parts of the US market, Australia and Latin America), we expect a positive trend.

The acquisition of the HSB Group, one of the world’s leading providers of specialty insurances and the inspection of engineering risks, is an important step towards realising our new US strategy, enabling us to expand our position in highly specialised and thus profitable niche segments. The purchase price for the 100% stake is US$ 742m (€531m) – plus or minus any changes in HSB’s equity occurring between 30 September 2008 and the ultimate completion date – and will be fully financed from our own resources. The transaction is expected to be concluded at the end of the first quarter of 2009, once the requisite approvals have been obtained from the competent authorities.

If exchange rates remain stable and the cyclical losses in premium income for primary insurers remain within reasonable bounds, gross premiums in reinsurance should range between €21bn and €22bn in 2009. Owing to the anti cipated increase in demand for reinsurance as a substitute for equity and the shortages in capacity on the supply side, terms of trade should improve in 2009 – despite the weakened overall economy. In addition, we project that the growth markets will continue to develop favourably, albeit at a temporarily reduced rate. For property-casualty reinsurance, we anticipate a combined ratio of around 97% for 2009 of our net premiums earned, in line with our target for the market cycle as a whole. This estimate is based on an average major-loss burden of 6.5% from natural catastrophes, which takes account of shifts in the portfolio. The uncertainties involved in the estimate derive not only from the random incidence of major individual losses: a strong rise in losses due to the recession cannot be completely ruled out, particularly in the highly exposed classes previously mentioned. Conversely, if market conditions continue to harden, experience is likely to be far more favourable.