Quarterly Report 3/2008 (PDF, 308 KB) - Munich Re

Interim management report Business experience
The volume of our investments in shares at carrying amounts (including
those in affiliated and associated enterprises) fell €8.4bn to €15.7bn during
the course of the year. This was due on the one hand to our selective equity
port folio cutbacks in the third quarter of 2008 by disposing of hedged items,
and on the other hand to the sharp setbacks in share prices on the stock
exchanges, especially towards the end of the third quarter. At market value,
our equity portfolio (including investments in affiliated companies and associates)
represents 9.3% of our overall investment portfolio – down 4.5 percentage
points compared with the start of the year. However, because we have
hedged this portfolio to a large extent using derivatives, at the end of the quarter
our economic exposure to equities accounts for only 4.6% (10.8%) of our
investments at market value. This decreased ratio is mainly attributable to the
greater use of additional derivative financial instruments in the third quarter.
Expressed as a percentage of adjusted equity 1 , the value of investments in
equities – minus derivatives, policyholders’ bonuses and deferred taxes – is
only 22% (“equity gearing”). Proceeding from a percentage of 51% at the end
of the previous year, we have significantly reduced our dependence on the
stock market in the current financial year also in relation to our equity capital,
in the light of the volatile capital market environment.
At the end of the quarter, fixed-interest securities and loans accounted for
€136bn or approximately 79% of our total investment portfolio at carrying
amounts, which is around five percentage points more than at the beginning
of the year. In this segment, we have been considerably more circumspect
than many of our major competitors and have been very restrained with
regard to the assumption of credit risks. Only since the start of the year have
we cautiously expanded our portfolio of credit-exposed fixed-interest securities,
particularly asset-backed securities, mortgage-backed securities and
corporate bonds. We took advantage of the considerable widening of risk
spreads in comparison to government bonds to restructure our portfolio
accordingly and earn higher interest income.
At the reporting date, our portfolio of asset-backed securities and mortgagebacked
securities totalled €6.7bn, which corresponds to an increase of approximately
€1.2bn since the beginning of the year, chiefly effected in the first
quarter. We invest only in assets with a high credit rating. Consequentially,
our portfolio has a good rating structure: as at 30 September 2008, 98.5% of its
securities were rated A to AAA. Even though the credit crisis has made it clear
that the ratings of complex financial instruments are of limited relevance as an
analysis tool, we consider our portfolio to be relatively low-risk in the current
economic circumstances.
With our investments, we anticipated the risk of continued inflation expectations
at an early stage, gradually adding to our portfolio of inflation-indexed
bonds over the course of the year to protect us from the inflation risk and the
associated increase in interest rates. These bonds are linked to a consumer
price index, ensuring that where there is inflation, interest payments and
redemptions increase continuously. As at 30 September 2008, the volume of
inflation-indexed bonds at market values was just under €7.5bn (3.3bn), thus
making up around 5.6% of our portfolio of fixed-interest securities and loans
at market values.
On 13 October 2008, the IASB (International Accounting Standards Board)
fast-tracked an amendment of IAS 39, Financial Instruments, relating to
the reclassification of financial instruments. In the light of the crisis on the
financial markets, the changes made are intended to eliminate the potential
competitive advantages of US banks by aligning IFRS with US GAAP, and to
provide balance-sheet relief in the financial sector.
1 Disregarding minority interests and goodwill and including net off-balance-sheet reserves.
Munich Re Group Quarterly Report 3/2008
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