Letter to Shareholders

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Annual Report

Letter to Shareholders

Dear Shareholders,

Like any shareholder, you must ask yourself from time to time: have I invested my money in the right company?

The quality of a company becomes evident not in boom years, but when things become more difficult. Munich Re has been experiencing a challenging period for some time now – due to continuing low-interest-rate policies, and the consequential intensive competition on the reinsurance markets. Since 2012, these two effects alone have had an overall negative impact of over €1bn on our profits. Nevertheless, Munich Re has posted rather good results in recent years, without having to veer away from its path of sustainable development.

The same is true for 2016. A profit of €2.6bn is pleasing, and falls within the upper half of the profit guidance of €2.3–2.8bn we forecast at the start of the year. This result allows us to propose an increase in the dividend to €8.60 per share. Munich Re is adhering to its shareholder-friendly and sustainable dividend policy. We are confident that we will be able to sustain this higher level in the future.

On the one hand, this confidence rests on the strength of our balance sheet. The solvency ratio is above average at 267%, and our investments show valuation reserves of €28bn. We continue to take a conservative approach when measuring our assets and liabilities, particularly the loss reserves that are so important for us. As before, the settlement of claims and regular restructuring of investments should generate profits over time. In these challenging and uncertain times, we do not have unrealistically high financial targets that require us to erode our financial substance. You can be sure of that.

On the other hand, our confidence is also based on changes that we have already introduced which will have a positive impact on the consolidated result in the future. First, I would like to mention our initiatives in the areas of innovation and digitalisation. In recent years, we have built up a potent innovation infrastructure, and established many partnerships with promising start-ups. Our pipeline is overflowing with new insurance products and innovative services. The digitalisation of important processes within our business is progressing well. In this year, and in the coming years, we will continue to work hard to develop as many of these innovations as possible to the point where they make a visible contribution to the Group’s profits.

At ERGO, we have also introduced changes that promise significantly higher earnings potential in the future. We expect that as from 2021 primary insurance will provide an annual contribution to profits of €600m. To make this possible, we introduced the ERGO Strategy Programme last year. From the shareholders’ perspective, we are investing around €1bn, in particular in infrastructure that is fit for the future. ERGO will have modern and more flexible IT systems, which will allow the opportunities offered by digitalisation to be utilised for the benefit of our clients. The Strategy Programme will also ensure a more efficient settlement of life insurance business, while accelerating development of new, attractive retirement provision products for our customers. These measures will be accompanied by a significant cost-cutting programme.

We reorganised our health business with effect from 1 February 2017. The reinsurance units of Munich Health were allocated to the Life Reinsurance division, and responsibility for health primary insurance business was transferred to ERGO. Munich Health had been doing well recently, and its contribution to the consolidated profit of around €140m for 2016 beat expectations. However, in recent years Munich Health has not been able to develop dynamically profitable growth. But the crucial point for the decision to integrate the Munich Health units into our two largest fields of business was due to the changing demand from our clients. They are increasingly less likely to ask for separate reinsurance and primary insurance solutions, and seek a cross-divisional and integrated approach to life and health business. At the same time, digitalisation and the associated potential offered by data analysis opens up new possibilities for both fields, and these can be better exploited by being combined under one roof.

Munich Re is also a company in transition. Digitalisation is shifting client and customer demand, and enabling a comprehensive reorganisation of our business. Innovative business models and partnerships that would previously not have been taken into consideration are now being set up. All this has the effect of changing our company. My successor as Chairman of the Board of Management, Joachim Wenning, will continue to drive this process forwards.

Thanks to our strong balance sheet, we are able to operate from a position of strength in difficult times such as we are currently experiencing. Thanks to the huge pool of expertise offered by our staff, we have the creative potential to set today the foundation of tomorrow’s profits.

So ask yourself again: have I invested my money in the right company? In my opinion, the answer is: yes, you certainly have!

With my warmest regards,

Nikolaus von Bomhard

Nikolaus von Bomhard - Munich Re

Dr. Nikolaus von Bomhard
Chairman of Munich Reinsurance
Company’s Board of Management
(until 26 April 2017)

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