Munich Re Group Managing strategic risks

Transcription

1 Munich Re Group Managing strategic risks Fox-Pitt Kelton Cochran Caronia Waller CRO conference Jo Oechslin Group Chief Risk Officer 6 June 28

2 Introduction Failure of risk governance within the financial sector was not expected Munich Re s well-balanced investment portfolio held up well Losses in sub-prime investments up to Q1 28 only 171m Conservative stance of Munich Re towards structured credit paid off Credit spreads did not compensate for the risk, in our view In current market environment, Munich Re is prepared to carefully increase credit risk exposures Munich Re Group Managing strategic risks, 6 June 28 1 Structured products Bet on correlation Diversification? Correlation drives the loss profile Securitisation suppresses idiosyncratic risk Systematic risk is enhanced in every step of securitisation CDO squared, CDO cubed, have the highest level of systematic risk Systematic risk is not diversifiable Munich Re Group Managing strategic risks, 6 June 28 Source: Reserve Bank of Australia, Bulletin November 27 2

3 Some typical management actions in the market were inappropriate Management action Possible causes? Focus on growth, lack of clear strategy Early warning signs, general uneasiness in September 26, yet no reaction by senior management Resistance to change funding framework Resistance to implement hard limits (proposal by treasury perceived as limitation of growth and rejected by CEOs) Structural incentives: Alpha creation based on low funding cost Asymmetric risk/reward compensation: No adjustment for riskier positions, e.g. partial hedge preferred over full hedge Insufficient incentives to protect reputation in long term: Cash bonuses for short-term performance of traders Behavioural science: Stick to prior beliefs, ignore contradicting signs Munich Re Group Managing strategic risks, 6 June 28 3 accompanied by ineffective risk management infrastructure Measurement and control Valuation: mark-to-market which market? No internal pricing/valuation model Strong reliance on ratings Limited look-through and fundamental analysis Exposure distortion by hedges Reliance on statistical risk measures and lack of risk-factor limits Reporting Many formal reports existed, but no comprehensive view, also due to incomplete data "Hedged" positions netted in reports CDO desk presented pessimistic outlook and proposed to increase limits (declined) Individual limits, yet no comprehensive coverage No reliances and limitations section Real risks not captured by the applied tools Model risk! Munich Re Group Managing strategic risks, 6 June 28 4

4 Munich Re's Strategic Risk Management Framework (SRMF) Comprehensive focus SRMF complements business strategy A rigorous framework designed to Enable Munich Re Group to protect and generate sustainable shareholder value Ensure highest degree of confidence in meeting policyholders claims Protect reputation of Munich Re Group Deeply rooted in economic steering concepts "Flexible" enough to reflect other constraints Generate shareholder value while protecting policyholder Munich Re Group Managing strategic risks, 6 June 28 5 SRMF: Portfolio criteria and supplementary criteria Criterion Focus Detailed criteria Whole portfolio criteria Financial strength Avoiding financial distress Policyholders Shareholders Internal risk model (VaR type), Solvency requirements, Rating agencies' requirements Economic earnings of or less tolerated every ten years Supplementary criteria Peak risk management Asset-liability mismatch Shareholders (mainly) Shareholders Concentration limits, maximum per-risk retention, etc. VaR limits for market and credit risk Supplementary criteria enhance robustness of SRMF Munich Re Group Managing strategic risks, 6 June 28 6

5 Spotlight: Supplementary insurance risk criteria Purpose Limit the probable maximum loss from any one systematic risk-type Ensure that we do not over-concentrate to any one risk type, even if whole portfolio risk criteria are satisfied (enforced diversification) Reduce model risk / risk of change Strategy Limit set for remote events (e.g. 1-1 year events) relative to Available Financial Resources We do not "overhedge" expected digestable short-term event volatility Keeps profits in-house Minimises reliance on external protection Risk limits (examples) Nat Cat (per scenario) Terrorism (portfolio) Pandemic (scenario) Individual risk accumulations (life, non-life) Limits reviewed at least annually relative to business opportunities (cycle management) Supplementary risk criteria in place for material systematic risks Munich Re Group Managing strategic risks, 6 June 28 7 Spotlight: Supplementary insurance risk criteria NatCat Top Group exposures Storm Europe Atlantic hurricane VaR (Exposure as of ) bn (pre-tax) VaR (Exposure as of ) bn (pre-tax) 7 6 Ceded Retained 7 6 Ceded Retained Scenarios further refined Return period (years) Includes exposures previously shown as stress test for extension of territorial coverage and clash scenarios Return period (years) Refined scenario (combination of various existing US hurricane scenarios) with extended scope and considering multiple landfalls Single cat risks have low correlation with each other and other insurance risks (portfolio approach) Munich Re Group Managing strategic risks, 6 June 28 8

6 Spotlight: Supplementary insurance risk criteria Pandemic and terror Pandemic Group-wide scenario Greater model uncertainty relative to NatCat (few observed pandemics) Terror Group-wide scenarios (property-driven and life-driven) Limit set at portfolio level Part of business model Uncertain correlation to market risk for very severe pandemic Lower risk appetite than for NatCat Actual exposures close to internal limits Regular review of modelling capabilities, risk appetite and risk transfer technology in view of life growth strategy Good capabilities to model exposures; however, frequency assumption remains problematic Strict budgeting and specific capital allocation in place Lower risk appetite than for pandemic risk Risk appetite set in line with strategic fit and modeling capabilities Munich Re Group Managing strategic risks, 6 June 28 9 Risk transfer programmes consistent with Group risk appetite Key insurance exposure bottlenecks Storm Europe (NatCat criterion) Pandemic (Pandemic criterion) Tailored protection programme Storm Europe cat bond 25: 11m Aiolos 28: 17m Queen Street Mortality bond 28: US$1m Nathan (US$1.5bn shelf structure) Efficient use of growing capital market capabilities General retro programme increased vs. 27, focus on creation of "arbitrage" gains Munich Re Group Managing strategic risks, 6 June 28 1

7 Economic risk capital (ERC) bn Risk category 1 Risk segment Property-casualty 2 Life and health Market Credit Operational risk Total ERC Group December 27 Reinsurance Primary insurance Simple sum Diversification effect bn diversification effect between risk segments evaluated at Group level Diversification effect 2.bn diversification benefit between reinsurance and primary insurance on aggregate level 1 Risk categories broadly based on refined "Fischer II" risk categories recommended for standardised industry disclosures. 2 Includes credit reinsurance. 3 Measured diversification effect depends on risk categories considered and explicit modelling of fungibility constraints Munich Re Group Managing strategic risks, 6 June Capital position required vs. available Capital position bn Available financial resources (3.9) Economic risk capital (18.4) Economic capital buffer Economic capital buffer after finalised share buy-back and dividends Hybrid capital Strong economic capitalisation increased throughout 27 despite share buy-back programme (12.5) (1.8) Munich Re Group Managing strategic risks, 6 June 28 1 Based on requirements of internal risk model (175% of VaR 99.5%). 2 Announced share buy-back of 2.bn in 27/28, thereof.4bn in January 28; 1.1bn dividend paid in April

8 Structured product portfolio Structured product portfolio (ABS/MBS/CDO..) m AAA AA A BBB <BBB NR USA Europe Total Consumer-related ABS Corporate-related ABS ABS Subprime HEL CDO/ CLN CDO / CLN Agency 2, ,75 2,75 MBS Non-agency prime Non-agency other (not subprime) Commercial MBS Total ,92 1 Consumer loans, auto, credit cards, student loans. 2 Asset-backed CPs, business and corporate loans, commercial equipment. As at 31 March Limited structured credit exposure, 87% rated AAA , ,862 Munich Re Group Managing strategic risks, 6 June History and future of Enterprise Risk Management (ERM) Late 9s «Boom» Crisis «Restoring» 27 «Profitable growth» Company focus Growth Restoring capital basis Restoring earnings power Restoring credibility Turn focus on profitable growth Manage excess capital ERM development waves ERM role Risk management tasks assumed by variety of functions No or little central coordination Infancy Central ERM teams established under CRO leadership RM governance and risk reporting implemented Risk models established Market-consistent EEVs deployed ALM improved Emancipation Strategic risk management Enable new products Reinsurance: Turn Solvency II into an opportunity Business enabler Munich Re Group Managing strategic risks, 6 June 28 14

9 Appendix Financial calendar Contacts Disclaimer Munich Re Group Managing strategic risks, 6 June Appendix Financial calendar 6 August 28 Interim report as at 3 June 28 7 October 28 Investors' Day on life reinsurance, London 7 November 28 Interim report as at 3 September February 29 Balance sheet press conference for 28 financial statements (preliminary figures) 22 April 29 Annual General Meeting 23 April 29 Dividend payment 6 May 29 Interim report as at 31 March 29 4 August 29 Interim report as at 3 June 29; Half-year press conference 5 November 29 Interim report as at 3 September 29 Munich Re Group Managing strategic risks, 6 June 28 16

10 Appendix For information please contact Sascha Bibert Head of Investor & Rating Agency Relations Tel.: +49 (89) [email protected] Ralf Kleinschroth Tel.: +49 (89) [email protected] Dr. Thomas Dittmar Tel.: +49 (89) [email protected] Andreas Silberhorn Tel.: +49 (89) [email protected] Münchener Rückversicherungs-Gesellschaft Königinstrasse 17, 882 München, Germany Fax: +49 (89) [email protected] Internet: Martin Unterstrasser Tel.: +49 (89) [email protected] Munich Re Group Managing strategic risks, 6 June Appendix Disclaimer This presentation contains forward-looking statements that are based on current assumptions and forecasts of the management of Munich Re. Known and unknown risks, uncertainties and other factors could lead to material differences between the forward-looking statements given here and the actual development, in particular the results, financial situation and performance of our Company. The Company assumes no liability to update these forward-looking statements or to conform them to future events or developments. Munich Re Group Managing strategic risks, 6 June 28 18