Risk management in an integrated business model

Transparent and consistent – that is the essence of Munich Re’s approach to implementing its strategy. In May 2007, we unveiled our Changing Gear programme for profitable growth and our corporate objectives for the years up to 2010. In this period, we aim

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  to be the most profitable of the top five globally operating reinsurers,
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  to expand profitably in growth markets and segments in primary insurance,
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  to take major steps towards market leadership in the international health market,

thereby turning risk into value and enhancing Munich Re’s corporate value on a sustained basis.

Every initiative in the context of Changing Gear is embedded in our integrated risk management, from accepting individual insurance risks to managing whole portfolios or our investments, not to mention mergers and acquisitions. Identifying and evaluating risks holistically – a process that we have substantially developed, continually refined and, above all, practised in recent years – clearly proved its worth in 2008.

The most severe capital market crisis since the Second World War has hit many heavyweights in the financial sector hard, in some cases causing their corporate values to fall significantly. Although Munich Re’s shares also fell in value in the course of last year, they were considered a "safe haven" on the stock markets.

We continue to have sufficient risk capital for risk-carrying. Despite several acquisitions, financed from our own resources, we have been able to carry on with the share buy-back programme launched in 2007 with the aim of returning over €5bn to our shareholders by the close of the financial year 2010. We essentially wish to adhere to this target, but plan to wait a little before further implementation. We will carefully weigh up the benefit of the buy-backs against the advantages of comfortable capitalisation, also with a view to growth opportunities.

Our financial strength, reflected in these payouts, certainly played a key part in our clients’ voting us "Best Overall Reinsurer" in life and non-life in the Europe-wide Flaspöhler survey last autumn.

Bringing together what belongs together

Our integrated business model of primary insurance and reinsurance, with its synergy effects and diversification benefits, has proved its effectiveness. We are therefore continuing to expand it consistently – on both a large and a small scale.

For instance, we have transferred Europäische Reiseversicherung and Mercur Assistance – previously held directly by Munich Reinsurance Company – to ERGO, where they will become part of a new centre of competence combining our insurance and services for the growing market of private and business travellers.

The acquisition of the remaining shares in the Turkish company ERGOISVIÇRE from the family founders and additional shares in Bank Austria Creditanstalt Versicherung were important steps in further internationalising ERGO, even if the global economic crisis is likely also to have a curbing effect on the development of these subsidiaries in the immediate future.

Realignment in the USA gains momentum

In the USA, the world’s most important insurance market, we have decided on a strategic realignment of our business, which we have lost no time in implementing: in April, we concluded the acquisition of specialty insurer The Midland Company and also purchased The Roanoke Companies, a large underwriting agency and broker of marine insurance. Roanoke complements the international network of our Watkins Syndicate, which has not been represented in North America before. In return, Roanoke can offer its clients the broader spectrum that Watkins provides.

The financial market crisis also presents us with opportunities. Our acquisition of the Hartford Steam Boiler Group (HSB), agreed on in 2008, is just one example. HSB is a leading insurance and inspection company for engineering risks and previously belonged to the AIG Group. It enhances Munich Re’s already significant position in the field of engineering insurance. Munich Re America will manage both HSB and Midland, as this will enable us to achieve the greatest synergies.

These acquisitions, like others before them, give us greater access to profitable niche segments that we cannot reach through "traditional" reinsurance. They also make us more independent of market cycles in reinsurance and enhance our diversification.

From virtuality to reality

Munich Health, our third field of business alongside primary insurance and reinsurance, was last year more closely unified, regionally aligned, and given its own management, establishing it even more clearly as a third pillar in the Group. Munich Health integrates our Group’s international expertise and more than 20 years’ experience with health risks, in a market that is growing at an above-average rate globally.

In other words, we are pooling a wide range of services and insurance companies which we can combine and deploy flexibly, depending on market circumstances and specific requirements. This means that in each case we can operate in those parts of the value chain where we can create the greatest added value and grow profitably.

Following our acquisition of Sterling Life Insurance Company in 2007, a specialist health insurer in the USA, the expansion of our international health business is being supported by further initiatives, including the formation of DKV Salute in Italy and the building of a new hospital and provision of healthcare by DKV Seguros in the Spanish municipality of Denia.

Our strategy shows its strength

In the past financial year, thanks to our good capitalisation, we were able to move ahead with our strategy in a difficult market environment, the crisis even improving the opportunities for realising our objectives in individual cases. While we are not fully satisfied with the result for the year in absolute figures, we are in a much better position than many of our competitors. Our risk-based business management and discipline in realising our objectives enabled us to achieve a comparatively good performance.

We are driving forward the various initiatives in our three fields of business consistently and with due rigour, continuing to put profitability before premium volume, because that is the only way of creating sustained value for our shareholders.