Letter to Shareholders

Annual Report

Letter to Shareholders

Dear Shareholders,

2017 was one of the most loss-affected years in the history of our Company. Hurricanes Harvey, Irma and Maria, as well as the earthquakes in Mexico, caused misery and destruction across the Caribbean, Central America and the southern USA. Munich Re is paying out over €3,000m for these events alone, and is thus helping to alleviate the plight of those affected, at least financially. Although this unusual accumulation of severe catastrophes meant that our original profit guidance for 2017 was no longer attainable, we were well positioned to absorb even such heavy losses.

These disasters have once again highlighted the importance and necessity of reinsurance cover, and Munich Re is committed to providing strong support for the insurance industry in all lines of business and throughout the world. Nevertheless, we need to change. With ever-shorter innovation cycles, increased competition in the reinsurance markets, persistently low interest rates, digitalisation sweeping through all areas of life and work, and disruptive new business models, our world is changing fast – as are the demands on our Company. We are transforming Munich Re in order to seize new opportunities, including those offered by digitalisation, and sustain our earnings power in the long term.

Munich Re is investing heavily in digital transformation. We have set up dedicated units to capture, structure, and analyse data, and we make these findings available to our business units. Munich Re already employs over 200 data specialists, and more than 300 staff work in innovation. And these numbers are set to rise. More and more of our experts are spending most or all of their time coming up with innovative solutions to meet existing and new requirements in their area of expertise. We are developing new digital business models – such as for the Internet of Things. We are the world leader in the rapidly growing cyber insurance market. And insurance start-ups see Munich Re as their go-to partner. We also have our own start-up, as it were, in the form of our purely digital insurer, nexible. We are investing heavily in digitalisation at ERGO, and are working to offer customers a seamless and modern customer experience – whether they choose to deal with us online, by telephone, or in person at one of our offices.

These are just a few examples of the profound digital transformation taking place in our Group. Our strategy is not to imitate the business models of data and internet companies – but rather to enhance our core business and push back its boundaries by adding digital elements. Reinsurance and insurance will continue to be the heart of our business.

At the same time as building digital competence, we are reducing complexity in other areas. Internal processes are being streamlined and made more efficient. We are reducing costs and lowering our headcount where we can do so without harming our business. This is how we are making Munich Re fit for the future.

We will halt the downward profit trend that we have seen in recent years – even adjusted for the major-loss expenditure in 2017 – and gradually increase our profitability. With this in mind, we have launched ambitious initiatives for profitable growth in our two fields of business and at our assetmanagement subsidiary, MEAG.

ERGO is making good progress with its Strategy Programme, having reached important milestones in 2017. ERGO is also delivering in terms of results: its profit of €273m surpassed our guidance for 2017, which we had already raised halfway through the year. But we still have a lot of hard work to do until the Strategy Programme is successfully completed. Our aim is still for ERGO to contribute at least €600m to the consolidated result for the year as from 2021, and lay the strategic foundations for a successful future.

The hurricanes in the USA and the Caribbean, the fierce wildfires in California, and the earthquakes in Mexico had a severe impact on our result in the reinsurance field of business. Property-casualty reinsurance, which usually generates most of Munich Re’s profits in normal years, posted a loss in 2017. But – and this is the good news – prices for reinsurance business renewed at the start of the year increased as a result of the huge market losses. This positive development is likely to intensify later in the year when many other treaties come up for renewal in the markets affected by the catastrophes. We are confident that market conditions will continue to improve.

In addition, we want to grow profitability in reinsurance with our own initiatives. We will be resolute in seizing opportunities for profitable business. In some selected markets, we will increase our willingness to take on risk without compromising our underwriting principles. At the same time, we will vigorously pursue new markets in uninsured or under-insured risks. One good example of this is the partnership we struck with the World Bank and the World Health Organization last year to cover pandemic risk in developing countries.

As regards our long-term investment horizon, we are seeking to improve our investment result by expanding our investments in less liquid markets and slightly raising the risk profile of our portfolio without abandoning our tried-and-tested policy of gearing our investments to the structure of our liabilities. Munich Re remains a conservative investor – both in absolute terms and by market comparison. As Munich Re invests heavily in interest-bearing securities, decisions made by central banks are of great significance to us. We are still not feeling any tailwinds in this respect, but at least the headwinds have eased. Interest rates have started to rise again slowly, particularly in the US where we are a heavyweight in reinsurance. Accordingly, in 2018 we should see an end to the falling running yield in reinsurance overall.

We will continue to reward your investment in Munich Re by making high payouts, and increasing them where possible. You can rely on the Munich Re dividend, which we have not lowered for almost 50 years. Of course, we strive to continue this success story. Despite a financial year marked by large losses – and subject to the approval of the Supervisory Board and Annual General Meeting – Munich Re will pay an unchanged dividend of €8.60 per share.

Overall, we can look to the future with optimism. Munich Re is well on track to actively use digital transformation to provide our clients with better, more efficient and tailored solutions. At the same time, we are cutting costs and setting targeted impulses for profitable growth. We have the financial strength to expand through acquisitions, but especially through organic growth. We envisage generating a profit in the range of €2.1–2.5bn for the year 2018, which is a slight increase on our profit guidance for 2017.

Thank you – also on behalf of my 42,000 colleagues across the world – for the trust you place in Munich Re by investing in our Company.

Yours sincerely,

Joachim Wenning

Nikolaus von Bomhard - Munich Re

Dr. Joachim Wenning
Chairman of Munich Reinsurance
Company’s Board of Management

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