DELIVERING GROWTH IN BOTTOM-LINE RESULTS

Transcription

1 DELIVERING GROWTH IN BOTTOM-LINE RESULTS May 2013

2 Agenda Munich Re Group Equity Story 3 Backup Group 23 Reinsurance 51 Primary insurance 71 Munich Health 84 Key figures Q Appendix Profitability Delivering on our promise Strong position for successful business development Focus on mastering industry challenges Managing the low-yield environment to deliver on our promise Guidance Active capital management Actual Strengthening operational profitability close to bn Main drivers of future earnings growth Reinsurance Solid profitability Non-life: Expansion of know-how-intensive business, active portfolio and cycle management and strong reserving position Life: Producing steady results above market average focused approach paying off Primary insurance Delivering on plan Life: Proactive management of back book and launch of less interest-rate-prone products International: Back to normal Group: Streamlining sales organisation Munich Health Consolidation Fixing problems in US primary building on solid foundation to develop other business Despite decreasing earnings contribution from investments, Munich Re paving the way for continuously improving net income 1 Upper bar: Assuming normal natcat claims based on 8.5 budget. 2

3 Profitability Good financial results contributing to attractive long-term shareholder return Return on equity in excess of cost of capital Average RoE: 10.9 Average CoC 2 : Value creation RoE clearly exceeding cost of capital by ~300 basis points Attractive risk/return profile 1 Total shareholder return (p.a.) Peer 2 Peer 3 Peer 4 Peer 6 Peer 5 Peer Volatility of total shareholder return (p.a.) for the benefit of shareholders Investment in MR more than doubled over the last 8 years Munich Re creating value with comparatively low correlation to capital markets 1 Annualised total shareholder return defined as price performance plus dividend yield over the period from until ; based on Datastream total return indices in local currency; volatility calculation with 250 trading days per year. Peers: Allianz, Axa, Generali, Hannover Re, Swiss Re, ZIG. 2 Calculation using CAPM with 10-year bunds, 5 market risk premium and one-year raw beta to DJ Stoxx600, daily basis. 3 Profitability Profitability in core business becoming even more important in times of financial repression Consistently decreasing capital market yields, hence investment income RoI 10Y bund yield Running yield Investments Proactively reducing interest rate sensitivity and mitigating attrition of running yield... compensated for by increasing earnings contribution from core insurance business Net investment result Technical result Underwriting Continuously increasing profitability via efficient allocation of risk capital and disciplined u/w Successfully dealing with low-yield environment 1 Contribution of net investment result (investment result minus income from technical interest) and technical result as a percentage of operating result. 4

4 Munich Re highlights Key achievements in recent years remain building blocks of Munich Re's future development Key achievements 1 Disciplined asset-liability management Investment and duration management mitigate capital market disruptions 2 Deeply-embedded risk management Continuity in terms of risk profile 3 Sound capital base Economic solvency ratio resilient to withstand extreme years 4 Well-balanced business portfolio Complementary profiles with relatively low gearing to the economic cycle Munich Re well-set for a deleveraging environment 5 1 Disciplined asset-liability management Active asset management on the basis of a well-diversified investment portfolio Investment portfolio 1 Land and buildings 2.3 (2.4) Shares, equity funds and participating interests (3.7) Miscellaneous (10.0) Loans 28.4 (28.2) Portfolio duration 4 Reinsurance Primary insurance Munich Re (Group) 6.2 (6.7) 8.0 (8.1) 7.3 (7.6) TOTAL 227bn Fixed-interest securities 55.0 (55.7) Assets Liabilities 6.0 (6.1) 8.9 (9.2) 8.1 (8.3) Portfolio management Shift from US, UK and Canadian to select eurozone government bonds Slight reduction and ongoing geographic diversification of covered bonds Further increase of inflation-linked exposure to 5.6 and investments in corporate bonds Cautious expansion of net equity exposure to 3.9 Decrease of asset duration in reinsurance match at Group level remains tight Net DV01 () Fair values as at ( ). 2 Net of hedges: 3.9 (3.4). 3 Deposits retained on assumed reinsurance, unit-linked investments, deposits with banks, investment funds (excl. equities), derivatives and investments in renewable energies and gold. 4 As at ( ). Net DV01: Sensitivity to parallel upward shift of yield curve by one basis point reflecting portfolio size. 6

5 2 Deeply-embedded risk management Munich Re s enterprise risk management (ERM) safeguards investors interests and clients protection Components of Munich Re s ERM System consisting of triggers, limits and measures in conjunction with responsible management actions Risk strategy Clear limits define framework for operational actions ERM cycle Risk management culture as solid base Comprehensive overview with special focus on main issues Based on right balance between flexibility and stability Objectives Protect and generate sustainable shareholder value Implementation Ensure high degree of confidence in meeting claims Risk steering Pricing/Underwriting Liability-driven investment strategy Performance measurement and management compensation Protect Munich Re s reputation Well-structured business and investment portfolio meeting all defined risk criteria Risk management is a key part of our corporate management 7 2 Deeply-embedded risk management Group economic risk capital (ERC) Breakdown by risk category Economic risk capital Breakdown by risk category bn Development of Group ERC bn Risk category Group RI PI MH Div. ERC Prop.-casualty Propertycasualty risk +0.2 Life and health Life and +0.5 Market health risk Credit Market +2.1 risk Operational risk Credit 0.0 risk ERC Simple sum Total ERC Operational Diversification risk METHODOLOGY Probability ERC = 175 VaR 99.5 VaR 99.5 Loss RISK MANAGEMENT Limiting losses from individual risks or accumulation exposure and liquidity risk that could endanger survival capability Diversification benefits Between different risk categories Between business segments, especially primary (PI) and reinsurance (RI) 1 Credit (re)insurance included. 2 Default and migration risk. 3 After diversification. 8

6 2 Deeply-embedded risk management Set-up of Munich Re's risk strategy Category Risk criteria Measure Criteria's objective ERM objective addressed Whole portfolio criteria Supplementary criteria Financial strength Avoiding financial distress Acc. risk management Individual nat cat perils Financial sector limit Terrorism Pandemic Longevity ALM limits Liquidity ERC Rating Solvency Probability of breaching financial strength criterion VaR limits In of AFR or Limit for maximum exposure Stress testing Safeguarding sufficient excess capital and limiting frequency of negative economic results of Munich Re's entire risk portfolio Limiting losses from individual risks or accumulation exposure and liquidity risks that could endanger Munich Re's survival capability Maintaining Munich Re's financial strength, thereby ensuring that all liabilities to our clients can be met Protecting and increasing the value of our shareholders' investment Other criteria Counterparty-credit risk Single risks Alternative investments Non-investment-grade investments Individual risk limits Limiting risks that could sustainably damage the trust of stakeholders in Munich Re Safeguarding Munich Re's reputation, thus perpetuating future business potential 9 3 Sound capital base Strong balance sheet reflected in favourable external perception Solvency ratio Agency Rating Outlook Solvency I ratio Economic solvency ratio Solvency II ratio A.M. Best Fitch Moody s A+ (Superior) AA (Very strong) Aa3 (Excellent) stable stable stable Excellent solvency ratios resistant to severe stress scenarios S&P AA (Very strong) stable Stable AA rating from all agencies since 2006 reliable partner for our clients Munich Re itraxx Senior Financials itraxx Europe Comfortable reserving position 3 supporting underwriting profitability Q Ongoing low CDS spread reflecting high market credibility 1 Based on VaR 99.5 of Munich Re capital model. 2 Defined as Available Financial Resources (AFR) over Economic Risk Capital (ERC; 175 of Solvency II calibration). 3 Run-off result in of net earned premiums in property-casualty reinsurance. 10

7 3 Sound capital base Sound capital position Capital structure bn Sustainable book value growth 1 Senior and other debt Subordinated debt Shareholders equity Debt leverage 2 () 0.3 CAGR: 9.2 BV/share (plus dividend/share buy-back) BV/share Munich Re one of the least leveraged groups in the industry 88.0 CAGR: Financial solidity leading to low cost of capital 1 Other debt includes bank borrowings of Munich Re and other strategic debt. 2 Strategic debt (senior, subordinated and other debt) divided by total capital (= sum of strategic debt + shareholders' equity) Sound capital base Financial security and stability Economic capital position Capital with Solvency II calibration Available financial resources (AFR) bn Economic risk capital Economic capital buffer Capital buffer under Solvency II calibration Economic capital buffer after dividends Capital buffer after dividends 4 under Solvency II-calibration Additional 75 buffer Economic solvency ratio 1 Sensitivity Ratio as at Interest rate +100bps Interest rate 100bps Spread +100bps Equity markets +30 Equity markets Limit at 80 according to Munich Re's risk strategy Munich Re able to withstand further stress scenarios 1 Solvency ratio defined as available financial resources (AFR) over economic risk capital (ERC; 175 of Solvency II calibration); AFR after announced dividend for 2012 of 1.3bn paid in April Solvency II capital based on VaR 99.5, Munich Re internal risk model based on 175 of Solvency II capital. 3 After announced dividend payout of ~ 1.3bn for 2012 paid in April : after dividend of 1.1bn for

8 3 Sound capital base Strong capitalisation allowing for attractive capital repatriation Munich Re actions 1 Munich Re solvency ratio Regulatory actions 2 >120 Excellent capitalisation Capital repatriation Increased risk-taking Holding excess capital to meet external constraints Comfortable capitalisation Adequate capitalisation Tolerate and monitor (Partial) suspension of capital repatriation <80 Below target capitalisation Risk transfer Scaling down of activities Raising of (hybrid) capital MRCM Solvency ratio adjusted for capital repatriation Actual solvency ratio Solvency II MCR 3 MCR 100 Below target capitalisation Obligation to submit a comprehensive and realistic recovery plan Insurer to take necessary measures to achieve compliance with the SCR <MCR Insufficient capitalisation Obligation to submit a shortterm realistic finance scheme Regulator may restrict or prohibit the free disposal of insurer's assets Ultimate supervisory intervention: Withdrawal of authorisation 1 Based on Munich Re capital model (MRCM): 175 of VaR Based on Solvency II calibration: VaR MCR = Minimum Capital Requirement, typically between 25 and 45; for groups called "Group SCR floor" Sound capital base Sound capitalisation providing flexibility Dividend continuity and seizing opportunities for profitable growth Strong capitalisation facilitating enabling enabling profitable business expansion capital repatriation Several options Examples Sustainable dividend growth Organic growth Solvency relief deals Participation in original growth in emerging markets CAGR: Strategic partnerships M&A Successful partnership in UK motor market Joint ventures in Asia Expansion of Risk Solutions Acquisition of Hartford Steam Boiler, Midland, Roanoke, Dividend yield ()

9 4 Well-balanced business portfolio Business portfolio of complementary profiles covering the risk value chain Premium breakdown by segment Reinsurance Property-casualty 17.1 (33) ( 3.0) 1 Reinsurance Life: 11.1 (21) ( 17.4) Munich Health 6.7 (13) ( 12.3) Premium breakdown by geography Africa, Near and Middle East 1.1 (2) Total Q bn bn Primary insurance Property-casualty 5.6 (11) ( 0.7) Primary insurance Life: 5.8 (11) ( 5.6) Primary insurance Health: 5.7 (11) ( 0.4) bn Europe 27.6 (53) Key business segments Reinsurance Leading expertise worldwide for 133 years Full range of products: Traditional reinsurance, specialty commercial/personal solutions, alternative risk transfer Diversification A key success factor Primary insurance Germany-based with presence in attractive growth markets in Eastern Europe and Asia Offers p-c, life and German health insurance Multi-channel sales strategy Latin America 1.6 (3) Asia and Australasia 5.0 (10) North America 16.8 (32) Total Q bn Munich Health A leading specialised risk carrier in selected international health markets Flexible combination of business models and products across healthcare sector value chain compared to Well-balanced business portfolio largely uncorrelated to the macroeconomic cycle Sensitivity to macroeconomic changes Lower Higher ILLUSTRATIVE Primary non-life Quite robust to macroeconomic changes delivering stable earnings Reinsurance non-life Nat cat and some other businesses hardly correlated with macroeconomic cycle Primary life In particular, products with investment component dependent on interest rate development Primary health Yearly price adjustments to reflect medical inflation in addition to high client retention ERGO International Cautious business expansion in CEE and Asia in a macroeconomic-sensitive environment Munich Health Managing political risks and portfolio consolidation while long-term growth opportunities persist Reinsurance life Potentially more client demand for capital relief in addition to further business expansion in Asia Capital generation Business development Balancing long-term growth opportunities and capital generation 16

10 4 Well-balanced business portfolio Underwriting Continuously improved value creation building the foundation for earnings growth Reinsurance Primary insurance Munich Health (MH) Non-life Target combined ratio at attractive level ~97 ~96 ~94 until Non-life international Combined ratio back to normal Operating result Apart from US primary business MH total MH ex US primary Life Delivering on increased technical result ambition until p.a. Life Management of low yields from early stage Interest-rate hedging programme started in 2005 Increase of asset duration Reasonable bonus policy Launch of new product family good financial development in line with expectations Building on solid foundation to develop other business Still adhering to our expectation of mid-term segment result of ~ 100m p.a. Execution and delivery Management measures securing sound profitability irrespective of interest-rate level 17 Financial highlights Q After strong Q1 well on track to meet 2013 financial targets Munich Re (Group) Q NET RESULT 979m Good operating performance across all segments driven by sound underwriting and resilient investment result SHAREHOLDERS' EQUITY 28.6bn (+4.4 vs ) Strong capitalisation according to all metrics providing high degree of financial flexibility INVESTMENT RESULT RoI of 3.6 Solid return given low-yield environment Restrained portfolio turnover preserving valuation reserves Reinsurance Primary insurance Munich Health NET RESULT 827m P-C Combined ratio 85.7 Major loss ratio of only 2.6 LIFE Strong technical result of 209m NET RESULT 127m P-C Combined ratio 95.9 LIFE Result in line with expectations HEALTH Solid stable performance NET RESULT 37m 37 REINSURANCE Combined ratio 98.8 Good development across all lines PRIMARY INSURANCE Combined ratio Focus on Windsor Health improvement 18

11 Outlook Outlook 2013 Munich Re (Group) GROSS PREMIUMS WRITTEN Target bn Focus on bottom-line growth prevails Volume not an end in itself RETURN ON INVESTMENT NET RESULT Target 2013 ~3.3 Target 2013 Close to 3bn Q1 return of 3.6 cannot be extrapolated to the entire year fewer disposal gains for Q2 4 expected RoRaC target of 15 after tax over the cycle to stand Reinsurance Primary insurance Munich Health COMBINED RATIO Target ~94 COMBINED RATIO Target 2013 ~95 COMBINED RATIO Target 2013 ~100 NET RESULT NET RESULT NET RESULT Target bn Target m Further loss cannot be excluded 1 By segment: Reinsurance ~ 27, primary insurance slightly below 17bn, Munich Health slightly above 6.5bn 2 Or better, if major losses remain within the expected range in Q Key takeaways Delivering growth in bottom-line results Good track record Successfully dealing with challenging economic conditions We remain a strong partner for clients and reliable for shareholders, delivering on our promises Business strategy Focus on insurance risks safeguarding sustainable value creation Complementary business profiles limiting correlation to capital market development Rigorous risk management Based on a high level of diversification, actively managing the low-yield environment and strictly budgeting all our insurance risks Strong capital position Reliability Continuing the long-term track record of attractive capital repatriation while keeping the flexibility to seize opportunities for profitable growth 20

12 Backup Group 23 Reinsurance 51 Primary insurance 71 Munich Health 84 Key figures Q Backup: Group Key figures of Munich Re Munich Re and our shares Munich Re 1, Gross premiums written bn Operating result 5,350 1,180 3,978 4,721 3,834 Taxes on income ,264 1,372 Consolidated result 3, ,430 2,564 1,579 Thereof attributable to minority interests Investments bn Return on equity Equity bn Off-balance-sheet reserves 3 bn Net technical provisions bn Staff at 31 December 45,437 47,206 46,915 47,249 44,209 Our shares Earnings per share Dividend per share Amount distributed 1,254 1,110 1,110 1,072 1,073 Share price at 31 December Market capitalisation at 31 December 4 bn No. of shares at year-end (ex own shares) m Previous years figures adjusted owing to IAS 8; see Changes in accounting policies and other adjustments. 2 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly. Comparability with the years 2009 and 2010 is thus limited. 3 Including amounts attributable to minority interests and policyholders. 4 This includes own shares earmarked for retirement. 22

13 Backup: Group Dividend Sustainable dividend growth for decades Dividend continuity CAGR ,255 Munich Re s dividend policy is designed to give shareholders an appropriate share in the company s success. The minimum amount set aside for the dividend is 25 of the annual profit The actual basis, however, is the current dividend level per share, which we will strive not to undercut in future dividend payments, depending on the actual results and the capital position Year of dividend payment Sustainable dividend growth: 1969 was the only year since 1952 with a decreased dividend per share Munich Re aligned business year to calendar year (short business year 1 July to 31 December 1998). 23 Backup: Group Rating Insurance financial strength ratings providing for strong competitive position 1 A.M. Best A++ Berkshire 2 Berkshire/Gen Re Fitch AAA AA+ Berkshire/Gen Re Moody's Aaa Aa1 Berkshire/Gen Re Standard & Poor's AAA AA+ Berkshire 2 neg Berkshire/Gen Re neg A+ Allianz Everest Re Hannover Re Partner Re neg Renaissance Re Swiss Re Zurich AA AA Allianz Allianz 2 Axa neg Berkshire 2 Everest Re Partner Re Aa2 Aa3 Allianz Germany Berkshire 2 Allianz SE neg Axa neg Everest Re neg Zurich AA AA Allianz Hannover Re Renaissance Re Swiss Re Zurich A A- AIG Generali neg Lloyd s SCOR Transatlantic Re XL Re A+ Lloyd s SCOR Swiss Re 3 Renaissance Re A AIG XL Re A- Generali neg A1 A2 A3 Partner Re Renaissance Re SCOR Swiss Re pos Transatlantic XL Re A+ Axa Everest Re Lloyd s pos Partner Re SCOR Transatlantic Re A AIG Generali neg XL Re pos A- B++ BBB+ Baa1 Generali neg BBB+ 1 As at 21 March Issuer rating of holding. 3 Based on public information. neg Outlook negative or watch negative pos Outlook positive or watch positive 24

14 Backup: Group Outstanding bonds Munich Re Group bonds Subordinated bonds 1 Nominal volume Coupon rate p. a. Emission/ Issue Maturity First possible redemption date 900m Until , thereafter variable May m Until , thereafter variable May ,000m Until , thereafter variable May ,349m Until , thereafter variable 2007 undated 12 June ,000m Until , thereafter variable June m Until , thereafter variable June 2018 Maturity pattern of Munich Re Group bonds Maturity in years 1,259 1,454 1,374 1, undated Currency pattern of Munich Re Group bonds USD $ 6 GBP 16 EUR 78 1 Bonds with a nominal value below 100m not considered. All specified bonds issued by MünchenerRückversicherungsgesellschaft AG, Munich. In addition, Munich Re has placed some natural catastrophe bonds. As at 30 June Backup: Group Market Consistent Embedded Value 2012 Improved MCEV result Strong growth in reinsurance and benefit from spread-tightening in primary insurance Reinsurance Primary insurance 9, ,225 1, , ,193 1, , ,852 1 MCEV Opening Adjusted adjustment MCEV OperatingEconomic Closing adjustment MCEV earnings MCEV MCEV Opening Adjusted adjustment MCEV OperatingEconomic Closing adjustment MCEV earnings MCEV Sustainably high value of new business ( 573m) Favourable mortality development Overall positive impact from economic environment Closing adjustment driven by negative FX and dividends High opening adjustment due to inclusion of ERGO Direct Health Increase of economic variances largely driven by calmer capital markets spread-tightening more than compensating for decline in interest rates MCEV according to Solvency II 2 : ~ 4.7bn Munich Re strictly adhering to market-consistent valuation of embedded value refraining from any smoothing measures 1 Economic and other non-operating variances. 2 Inclusion of countercyclical premium and extrapolation according to current Solvency II discussions. For further details please refer to MCEV report

15 Backup: Group Market Consistent Embedded Value 2012 MCEV IFRS uplift Reinsurance Primary insurance Value not recognised in IFRS equity (IFRS uplift) Value not recognised in IFRS equity (IFRS uplift) IFRS equity 6,224 IFRS equity 3,554 MCEV 9,992 3,769 MCEV 875 2, IFRS equity 6,653 IFRS equity 4,175 MCEV 10,616 3,963 MCEV 2,728 1, Backup: Group Risk management Property-casualty risks: Natural catastrophe exposure Munich Re Group's nat cat exposures (net of retrocession) 1 AggVaR (return period 200 years) (pre-tax) 4,000 3,000 AggVaR (return period 200 years) (pre-tax) Atlantic Hurricane Cyclone Australia Storm Europe Key issues Cyclone Australia Growth in exposure and model enhancement 2,000 Storm Europe 1, Atlantic Cyclone Storm Europe Hurricane Australia Top nat cat exposures Reduced exposure in line with price changes in the market Munich Re benefits from strong diversification between natural catastrophe risks 1 Exposures relate to the full year, e.g relates to the period from to

16 Backup: Group Risk management Capital position Available financial resources (AFR) Change and relation to economic earnings AFR development in 2012 bn ( 1.7) ( 1.2) Previous year Probability distribution of economic earnings Expected economic earnings 2013 Munich Re ERC ( 27.3bn) bn ,000 10,000 Loss return period (years) AFR restated 1 Capital mgmt. 2 Economic earnings AFR Economics earnings in 2012 correspond to a 10 quantile according to our risk model 3 Significant profit in a challenging market environment 1 Includingfundsfinancingnew businessrecognised for first time at year-end Thereof dividends ( 1.1bn) and change in hybrid capital replacement (+ 0.8bn subordinated liabilities). 3 Probability of achieving at least the corresponding economic earnings. 29 Backup: Group Risk management Munich Re s performance 2007 to 2012 Strong increase in AFR despite capital repatriation and difficult economic environment AFR development bn Economic earnings bn Confidence 2 ~30 ~99 ~10 ~50 ~90 ~ Munich Re market capitalisation bn AFR AFR restatements Capital Economic mgmt. 1 earnings AFR Market cap Capital mgmt. 3 Share price variation Market cap Strong performance despite highly adverse environment, but economic earnings not yet matched by share performance 1 Dividends, share buy-back, hybrid capital replacement and higher goodwill/intangibles. 2 Probability of achieving at least the corresponding economic earnings. 3 Dividends, share buy-back. 30

17 Backup: Group Risk management Impact of capital market scenarios on Munich Re's financial strength Scenario Capital market impact Impact on Comments Relief Safe haven yields Weaker sovereign spreads Corporate credit spreads EUR vs. USD Equities AFR ERC ESR AFR Impact moderate in both scenarios Offsetting positions on various asset classes and across business divisions (primary and reinsurance) Proven in the past Further escalation Safe haven yields Weaker sovereign spreads Corporate credit spreads EUR vs. USD Equities ERC Exposures fall in case of relief and vice versa ESR Impact on economic solvency in case of further escalation manageable Munich Re well protected against extreme scenarios 31 Backup: Group Risk management Limited impact of economic cycle on core non-life and health business Countervailing effects in life Non-life Life and health Property (esp. fire) Relatively low impact on premium and claims, e.g. in fire segment Nat cat business hardly correlated with GDP Robust technical profits Health Stable existing portfolio as purchase of health insurance remains priority, but potential increase in claims Product mix change in new business Impact dependent on duration and severity of recession Casualty (esp. credit, D&O, PI) Potential increase of loss frequency Credit might face increased claims due to higher default rates Closer monitoring required for lines with higher vulnerability Life Reduced new business, especially products with investment component Higher lapse rates, more suicide and disability claims Potentially more client demand for solvency relief (life reinsurance) Lower Sensitivity to negative changes in macroeconomic environment Higher Uncertain economic prospects providing challenges and opportunities Munich Re well-set to perform in any market environment 32

18 Backup: Group Solvency II Solvency 1.5 Despite delay in Solvency II introduction, risk-based thinking is winning recognition Current situation Further development of Solvency II process will depend on appropriate solutions for the valuation of insurance liabilities (long-term guarantee) in low-interest-rate environment Current LTGA 1 addresses a certain set of measures 2 results expected for mid-july Rising concerns that the LTGA will not resolve the deadlocked negotiations possibly new measures need to be considered Solvency 1.5 In order to keep up the momentum, EIOPA and some national supervisory authorities propose an interim period bringing forward certain elements of Solvency II Industry generally supportive of Solvency 1.5 idea with regard to certain Pillar II elements (governance, ORSA, etc.) and in particular for an ongoing internal-model pre-approval process Munich Re's positions Munich Re supportive of a transitional approach to phase in Solvency II Against backdrop of stressed financial markets, it is essential to find a balance between a smooth transition and adhering to the letter and spirit of the Solvency II Directive in the long run. While solutions to resolve open valuation questions are being sought, Solvency 1.5 could pave the way for the Solvency II regime Munich Re well prepared for Solvency II 1 Long-Term Guarantee Assessment conducted by EIOPA. 2 E.g. counter-cyclical premium, matching adjustment. 33 Backup: Group Solvency II Basic concept Solvency II motivates the insurance industry to fully adopt stringent risk-based economic steering 3 pillars of Solvency II 1 Quantitative 2 Qualitative 3 Transparency Solvency requirements Standard approach or internal model Supervisory process Efficient risk management and control Market transparency Disclosure requirements to strengthen market discipline Enterprise risk management to replace the traditional accounting-based focus facilitating a stringent economic and holistic approach to manage risks Changes compared to Solvency I Principle-based (in contrast to Solvency I rules) Economic and market-consistent valuation of all material risks Reinsurance and other risk mitigation instruments fully applicable under Solvency II (no more 50 cap on non-life reinsurance) Some issues remain, especially with regard to non-proportional reinsurance Consideration of diversification effects Investment risks are comprehensively taken into account In the past success was measured by combined ratio and investment income In the future the focus will be on return on risk capital 34

19 Backup: Group Solvency II Diversification effects Example Solvency II expected to provide growth potential by fully crystallising the value of the reinsurance business model Risk transfer Illustrative Primary insurer's portfolio Risk capital Gross 130 Before risk transfer Capital relief 70 Net 60 After risk transfer Reinsurer's portfolio Additional risk capital RISK TRANS- FORMATION <70 Capital requirement Diversification of reinsurers is higher due to Number of individual risks Geographical spread (global business model) Product and line of business mix Well-diversified reinsurers will benefit from Solvency II Deduction on capital relief for the counterparty default risk 1 1 reinsurer 2 reinsurers 3 reinsurers 4 reinsurers 5 reinsurers 6 reinsurers AAA AA A BBB BB 38 Explicit consideration of reinsurance credit risk through a deduction from capital relief Example: Capital relief from a reinsurance treaty with only one AA-rated reinsurer greater than with a panel of six A-rated reinsurers Financial strength to provide a clearer competitive edge 1 Graph based on QIS5 technical specifications. 35 Backup: Group Solvency II Outlook Solvency II allows for an adequate reporting of the insurance business model Assets in SII EBS 1 Liabilities in SII EBS Subordinated liabilities Excess of assets over liabilities Basic own funds (BOF) Own funds: BOF & ancillary own funds Deductions Available own funds T3 T2 T1 SCR MCR Purpose Detailed summary of own funds shows legal origin and mix of own funds Disclosure of tiers permits assessment of quality of own funds Compares own funds with capital requirement / minimum capital requirement Requirements To be produced quarterly though only published annually Required for both legal entities and groups (the latter with additional information) Increased transparency on own funds components and quality 1 Economic balance sheet. 36

20 Backup: Group Solvency II Outlook Munich Re capital model Possible refinements from adoption of Solvency II implementing measures Change from AFR to own funds Change in ERC Change in ESR EIOPA interest rate curve Taxes Higher discounting of liabilities due to partial compensation of losses from bond spread widen-ing via valuation adjustments and earlier start of extrapolation No effect as AFR are post-tax Lower insurance risks due to higher discounting might be partly offset by additional market risk Risk-mitigating effect of deferred taxes recognised Fungibility restrictions Transferability and fungibility restrictions are currently reflected in the ERC By aligning with Solvency II, these constraints will be reflected within the own funds instead of the ERC, reducing both Positive effects on economic solvency ratio possible due to adaption of internal model to Solvency II guidelines 37 Backup: Group Investment process Well defined ALM process basis for success ALM process Liabilities Replicating portfolio Restricted neutral position Benchmark portfolio Active asset management Determining the expected technical cash flows of our operating business Calculation of risk minimal, investable asset portfolio, reflecting the capital market sensitivity of the liabilities Risk minimal replication of liabilities and economic surplus Compliance with all legal and statutory requirements Including strategic holdings determining an optimal, well diversified asset portfolio reflecting our risk preference Providing MEAG with risk capital to add value through tactical deviations from the given Benchmark Portfolio Best-estimate projections Cash-flow and currency-matching Compliance with all legal and statutory requirements Long-term investment strategy with dynamic asset allocation overlays Asset management skills A disciplined, well defined process is the basis for good long-term performance results 38