Letter to Shareholders
It is rare that a single topic defines an entire year like the spread of the coronavirus defined 2020. As elsewhere, the pandemic left its mark on our results. All the same, Munich Re concluded the year by generating a profit of €1.2bn. If it hadn’t been for the COVID-19 losses, we certainly would have attained our profit guidance of €2.8bn for 2020. In this light, we regard our multi-year ambition for 2018–2020 as accomplished.
As Munich Re shareholders, you have been able to count on our robust financial substance and a high dividend, even in turbulent times. COVID-19 has not changed that. Between 2018 and 2020, our total shareholder return advanced to number one among the eight leading reinsurers worldwide and primary insurers in Europe. We want you, our shareholders, to benefit once again from our ongoing success through a stable dividend – and so we are proposing that the Annual General Meeting approve a dividend of €9.80 per share, the same as last year.
Our business model has proved that it will outlast this crisis, as it has others. The insured losses arising from COVID-19 in life business and in property-casualty were financially manageable for Munich Re. By covering insured losses totalling billions, we are playing a substantial role in helping the economy and society cope with the pandemic.
We neither applied for government aid nor used the instrument of reduced working hours. And we will not reduce our dividend. Munich Re continued doing business despite the pandemic; our operations were in no way limited. We managed to transition very quickly to working almost exclusively from home, without hampering our productivity. Our staff were able to count on their employer. Against the backdrop of the coronavirus pandemic, we made our rules on working hours as flexible as we could, in turn enabling our staff to better balance family and work responsibilities.
At the same time, COVID-19 laid bare the failure of countries and societies around the world to make sufficient, comprehensive preparations. The global community should learn from these shortcomings now so as to increase resilience prior to the next pandemic. It is impossible to insure the economic costs of a pandemic. Neither insureds nor insurers can privately shoulder such enormous burdens. In such situations, governments naturally must assume responsibility. Smart strategies are needed to sustain the world’s economies, in which insurers can and want to add value. Munich Re therefore endorses the establishment of state-backed pandemic risk pools.
Despite the justified focus on the pandemic, we must not forget that other major risks of a systemic nature also pose enormous challenges to our industry. Cyber risks and especially climate change both pose major risks. In 2020, natural catastrophes caused US$ 210bn in worldwide losses, which was once again considerably worse than the long-term average. It is not possible to definitively attribute the developments in any one year or an individual event to climate change. All the same, two things are clear: Climate change is real. And natural catastrophe losses are on the rise.
The time to act is now. Experts in politics, business and science – as well as society as a whole – must become more determined and assertive in combating climate change. In this context, market leaders and players that influence public opinion need to lead the way by setting good examples. To this end, Munich Re launched very ambitious and specific climate protection targets at the end of last year for its investments, its insurance business and its own operations for the period between 2021 and 2050.
These targets are science-based, concrete, binding, quantifiable, and compatible with the Paris Agreement on climate change. Based on our pledge to achieve net-zero CO2 emissions in all categories no later than 2050, we have defined straightforward interim targets. In five-year time frames, we will gradually and verifiably reduce our emissions. We will conduct our first interim assessment in 2025.
This also means that we will withdraw from insurance business and insurance income associated with fossil fuels. Conversely, we anticipate new business from covering risks in the renewable energy sector. Our innovative insurance solutions facilitate the market entry and affordability of key new technologies. In recent years, we have become a market leader in performance-guarantee insurance for wind turbines, photovoltaic facilities and energy storage systems.
Especially in (re)insurance business, which is characterised by long time horizons, yesterday’s strategic decisions blaze trails to tomorrow’s success. As 2020 ended, we simultaneously concluded three projects: the three-year Munich Re Group Ambition, the three-year reinsurance strategy and the five-year ERGO Strategy Programme. The overarching objective of our strategic orientation was to make Munich Re more profitable, more digital and leaner. We have succeeded. When adjusted for special effects and major losses, our operating earnings have risen considerably over the past three years. The intelligent use of data and technology has accelerated the automation, advancement and disruption of products and services throughout the Group. In addition, our strict focus on markets and clients has appreciably improved our organisation’s efficiency and propelled our business forward.
Having concluded the above-mentioned strategy programmes in 2020, we now turn our attention to the next five years. To this end, we launched our Munich Re Group Ambition 2025 in December 2020. Under the triad of Scale – Shape – Succeed, our Ambition 2025 strategy synchronises the planning processes for reinsurance, ERGO and asset management. It also outlines the path to a successful future and to the top of the competition for our entire Group.
To help make that happen, we will reinforce the growth factors of our proven strategies in reinsurance and at ERGO, while also boosting the earnings power of our investments. ERGO will further increase profitability in Germany and in its international business by focusing on the expansion of cutting-edge IT architecture for sales; accelerating international growth, particularly in India and China; and systematically catering to the hybrid customer. In property-casualty reinsurance, the current market hardening points to rising prices in the years to come, in turn creating favourable conditions for organic growth. We want to profit here by purposefully leveraging our underwriting excellence. We perceive sustained opportunities for good growth in life and health reinsurance – especially in North America and Asia, and particularly as regards digital services and transactions that provide financing or capital relief for our clients’ lines of business. Following significant recent investments designed to transform Risk Solutions, we expect disproportionately high growth in this operating field. As for investments, we are seeking to improve our return on investment in the long term by specialising – without increasing our appetite for market risk.
This will make investing in our Group even more appealing for you, our shareholders, in coming years. As part of our Ambition 2025, we have defined an industry-leading target return of 12–14% on invested capital in 2025. Continued earnings growth will translate into higher earnings per share, which are set to increase annually by at least 5% on average by 2025. Similarly to the increase in earnings per share, the dividend per share is to likewise rise by at least 5% on average – at a somewhat higher rate than in recent years. As in the past, it is expected that the dividend per share will at least remain the same following years with unusually high claims burden.
Success in business is of paramount importance for Munich Re; it lays the foundation for our role in helping society. But, as a conscientious business, we can never allow ourselves to measure success only in terms of economic indicators. That is why a certain pillar of our Ambition 2025 is especially important to me: our belief in and our commitment to diversity and inclusion.
Munich Re unites colleagues from over 60 countries under one roof, at more than 50 locations around the world. Over 80 professions are represented in our Group. Diversity is a defining characteristic of Munich Re. But we have room for improvement, including the number of women managers – a matter we will resolutely tackle. We want to increase the percentage of women in senior management at Munich Re to 40% by 2025.
Despite considerable uncertainty caused by COVID-19, in 2020 we laid the tracks to the future of the Munich Re Group. I am confident that we have thus established a solid basis for growth and value creation for all our stakeholders. On behalf of our approximately 40,000 staff members worldwide, I wish to thank you for the trust you place in us and our Group. I invite you to accompany us on the journey ahead.