Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (ETR:MUV2)

Earnings Call: Q4 2014

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Mar 11, 2015

Today, pretty much as always, six presentations, comprehensive schedule. There will be a first Q&A cession after the first three presentations. After the break, we will continue with the presentations and then end the official part of today's event with a second round of Q&A. The event should be closed, the official part, by roughly, at the latest, hopefully, 6:00 P.M. Then we would very much like to invite you for an informal get-together with us here on this level in a private function room in order to discuss further issues with all speakers of today's panel. I'm sure all of you took a very close look to our release of the preliminary results just a few weeks ago. Today, we will dig a bit deeper into those numbers, but first and foremost, we would like to look into the future together with you and discuss Munich Re's future prospects. I'd like to introduce the panel at this time, starting on my very right with Bernhard Kaufmann, our Chief Risk Officer. Jörg Schneider, our CFO. Nikolaus von Bomhard, CEO of Munich Re Group. Torsten Jeworrek, CEO of the reinsurance part of the group. Joachim Wenning, board member of Munich Re and responsible for the life reinsurance business. Last but not least, Torsten Oletzky, CEO of ERGO. Also, I would like to introduce two gentlemen in the first row, Gerhard Quarg from Central Reserving and Christoph Jurecka, CFO of ERGO. Both of them will support us during the Q&A. Of course, the entire Munich Re IR team is here today and a special thanks go to our colleagues supporting this conference in the back office. So far from my side. I can hand it over now to Nikolaus von Bomhard. Well, thank you, Christian. Good afternoon to all in the room and wherever you listen in to this meeting. It's a pleasure to have you here and to have so many of you here, I must add, because I think this is one of the best turnouts, at least in the recent past. Certainly, here in Munich. It's a pleasure to have you, whatever that tells us. Let me start by a remark that may be a little unusual. Many of us manage whatever they manage in business for quite some time. These times certainly count among those that I would label as quite interesting. The reason being that a lot is going on on both sides of the balance sheet. Not all can be influenced by us, but we have to manage it one way or the other. Be it the asset side of the balance sheet, interest rates moving down, down in many places, volatility being relatively high in many markets and the risk/reward equation seems out of balance, at least for many of the assets. At the same time, we have quite challenges in some, for us at least, quite relevant insurance markets. Last but not least, to counter some of those effects, innovation is very high on our priority list, and that all makes a mix that I think for a manager, as long as you have option space and do not stand with your back against the wall, for interesting times, and that's what we have. It's not all gloomy. It's not all unpleasant. We try to enjoy that to some extent, at least. The good news is, and I always remember fondly what I think it was at the time, some high senior manager of AIG who said, and this for some may be true even today, nothing left on the right side of the balance sheet and nothing right on the left. We are not in that position, and we are not anywhere close to it. That being said, let me start with my first slide, number 3. I should say we're not overly proud of the fact that we tend to over-deliver because you said, can't you get your planning right? Because you should deliver what you say. But those who know us do know that we have and take a cautious approach with our business because it is characterized by some uncertainty. It's not exact science, what we do, and we tend to take a cautious stance at it. I must admit, it served us well also and particularly so when we were in trouble some 10 years back, 2002 and 2003, because we could build what we then built on the fact that we were taking by our word. So delivering is close to our heart, and you see we managed that certainly over the last five years quite well. No unreasonable risk-taking. This is certainly also part of the reason behind that kind of delivery. We have to admit, and it's an obvious one, of course, that I remember when we were presenting the plans and it was unluckily in the 2006 year, what we might have in the future ahead of us or might see there and what we would go for. This was a time where we'd still dare to come up with midterm targets. Long gone these days. Since then, of course, interest rates never stopped falling. So what we thought then was a floor, EUR 3 billion, back then in 2006, turned out to be not a floor. Now we were close again to the fact that this might be a floor and interest rates continue to fall. So again, and you see it with what we expect as a profit It may not be the floor, unfortunately. But this has to do with interest rates, and we will not chase yield, as we always said, to make up and fill that hole in our net income by taking more asset risk. 2015, for the reasons I mentioned in my introductory note, will certainly be challenging. It will not be easier, maybe more difficult than 2014. But 2014, Jörg tends to say that accounting-wise, was actually not so challenging because the way accounting works, it made our life relatively easy in terms of what we showed to the outside world, even though, of course, in economic sense, it was not an easy year as well. We have option space that makes us feel well because we can make decisions. We are not just moving and trying to administer the obvious. We have room. So you can challenge us as well when it comes to strategy. The balance sheet is strong. We make that point all the time and run the risk that you say, okay, that tells us that you will use substance sitting in the balance sheet to produce net income. Of course, if you release reserves that you have built over the years, that has that flavor to some extent. But rest assured, it is not, and this is different from other players in the market, we will not use the reserves sitting on the balance sheet, which are the shareholders anyway, and just move them from the balance sheet into the P&L and then clap our shoulders and say, "Great, we are because we delivered." These reserves, however, cannot be increased forever, so some of that reserves will be released. Sometimes we have it to some extent in our hand. When it comes to tax reserves, not entirely in our hand. When it comes to assets or not realized gains sitting on the asset side of the balance sheet. In today's world, we cannot decide not to realize anything because otherwise we would not be able to move any asset anymore. So there will be some releases, and they will support net income. And you may say then, as you always do, this is not a high-quality net income. You are right. We cannot avoid it. But we will not use substance of the balance sheet to create net income. Here you see this, I would call my misery slide. Here you see the problem. Today, 10-year Deutsche Bund is heading towards 20 basis points. Luckily, we never thought 50 is the end, and I would not even say that zero is the end. We will see how far it can go. The ECB apparently tries everything to make us see, feel, and whatever, how deep it can go. But it is still falling. The consequence of that is an obvious one, that our investment result, as I said already, will follow suit. If we continue with that extremely low interest rate, our reinvestment rate will be rather below 2%. And that means also that maybe 20 bps will not be what we see as attrition, as a lose, losing on the ROI. It could be even more on the running yield. We will see where we end up. We never get it entirely right, but 20 basis points, I think is the minimum. The second order effects of that liquidity, this abundant liquidity in the market, of course, is that also markets who tend to be more resilient and elastic like insurance market do react for two reasons. One, people feel rich. They have a lot of E, whether it is air or not. Some apparently do not care too much about that. And we have also increases of retentions. We see restructuring of reinsurance programs. The one is cutting down the demand side, the other one is delivering more supply. On top of that, we have those who try to diversify their assets for the sheer level of the interest rates. This means new players coming to our plate to eat our cooking. That is why it is not easy for those who deal with large wholesale in the first place, and that means reinsurance. It goes both for life and non-life. Of course, it starts to affect and more and more so depending where you are and which market also regionally, the large risk in primary insurance. The name of the game is, of course, underwriting discipline. This is our way to deal with that situation, and that may mean that we continue to lose what we call traditional reinsurance business. Torsten, Jörg, of course, will go into more detail. I don't think we will fall off a cliff in that regard, but I don't know. Or falling off a cliff here means that we use or lose bigger pieces even of our business in the traditional book. We will have to wait and see, but it looks as if the market will not enhance the sliding of the erosion of the rates. That alone for me is the beginning of good news, and maybe we come to see a bottom to that valley soon. My next slide is a slide on capital ratios. At the lower end, all deep in the green. This is good news. This morning we announced another share buyback. To round numbers off, I take the day after the upcoming general assembly, the day after when we pay out the dividend. Then we will have 10 years of dividends and share buybacks who together make up EUR 19 billion, which corresponds roughly to 60% of our market cap. Eight of those being share buyback, 11 dividends. I doubt there are many companies out there in the financial world who, through the crisis, have achieved the same kind of payout or cash yield. In relative terms, it is a good 8% cash yield, and of course, we would like to continue. I don't mind being able to deploy the capital into business, but it doesn't look like we will soon. The question, of course, is in the room somewhere, why not EUR 1.5 billion share buyback or even 2? This is about how you deal with this enormous amount of uncertainty out there. Of course, we have to have at least one eye, and York will go more into that on our local balance sheet. It is balancing needs, opportunities, and unfortunately, also risks that we see out there. As we do not like too much lowering the dividend, I must admit, at least I personally don't like to hop around too much with a share buyback as well. The billion is a nice round number, and for the time being, let's rather stick to that amount, but maybe we have a discussion on that one later on. So far to this slide, all the rest, I think, is very easy and well known by all of you anyway. If we come to slide 6. Another topic I talked about, the left and the right side of the balance sheet. This one on the left is about the right. That means the liabilities and our reserves, to be more specific. The good news about the reserving is that we have released reserves all through the last years. For a couple of years, it was each year EUR 200 million more. Now we said that we come to a plateau, the floor being 4%. We do admit that a relatively low inflation helped us with all that, and most likely will help us to even come across with releases north of 4% for the at least immediate foreseeable future. But this is good news, and what I should stress here as well is whatever we released in 2014, it was not at the cost or confidence level of the reserves we have on the balance sheet. Actually, we even slightly, very slightly for the room we have, not much left, increased them. Of course, the same goes, and this is not shown here for the left side of the balance sheet, but I said that already, the unrealized investment gains at per end of last year were north of EUR 31 billion. I guess they are even higher now. The shareholder's share of that is somewhere between EUR 9 billion and EUR 10 billion today, and we will not make offensive or even aggressive use of those to create net income. The other important message of that slide is also known to you, but I would like to repeat it. We have set a strategy where we want to create most of the value for the shareholders on the right side of the balance sheet. That means with the insurance business. Except if you take the last five years of the, of course, nature hit year 2011, first quarter, New Zealand and Japan, we managed quite well. These numbers here relative to the operating result include the technical interest, the risk-free interest. So what you see there is obviously way north of 50%, and I would say three-quarter to 80% of that result being furnished or being created by the insurance business is probably what we go for. Another way to look at it would be how does risk capital look if we split it up? When Bernhard talks about it between market credit risk on the one side and the insurance related risk on the other. I am not saying that insurance risk is not also in one or the other way, and actually, we will bring numbers quite obviously correlated to interest rate level as well. But if we take that as a proxy, we would always like to see more capital tied up on the insurance side than on the asset side in general. Right now, we stand roughly about 50/50. But as I said, unfortunately, some of the business, even in insurance, is moving up and down in terms of risk capital consumption with the interest rate level. Well, we managed this actively. That was at our heart when we took on and defined the strategy of that group. This is a slide we show each time we meet. On the left, you have the return on equity. I remember one analyst who covered us for long said, "Never will we see double-digit ROEs with Munich Re Group." I repeat that also all the time because I think we managed quite well to prove him wrong, even though we hold quite a large E. Even inflated these days. At the same time, we always made the point that we think that our costs of capital for the lesser volatility of our business, even though we have CAT business on our book, should put us into the single digit range as regards costs of capital. So if we provide or deliver double-digit ROEs, then there must be something in that goes north and beyond the cost of capital, which alone from an investment point of view, I think is relevant. The volatility you see on the right side of that slide is the lowest. We were sometime peer one down there was close to our volatility. Now we, in the last year, moved further left. We are not at the top. This is something we still work on, but we are certainly in the right corner of that graph. If we talk the business in reinsurance, I only briefly touch on it because both Torsten and Joachim, of course, will go deeper into both non-life and life. I think strategically, with the benefit of hindsight, we did the right thing in 2003, 2004, 2005 when we put more emphasis on developing what we today, not then, today call risk solutions. It is a wonderfully growing and well-performing book of business. There is, in theory and in practice, no end to that growth. This is so relevant because it is not immediately, at least, dependent on what goes on in the markets. It's a more detached, unbundled business when it comes to cycles. That's why also now, when markets turn softer or did turn softer, the growth rate on average of that book is in the high single-digit percentage points. The name of the game for Torsten, I should always say Jeworrek, in that case, is, of course, for the traditional book, being very close to clients. We have the advantage of having long lasting client relationships. There is elasticity in these relationships. Not endlessly, but the fact that last renewal, a good half of our business was on special terms one way or the other, January renewal is an evidence or a proof of that vicinity. But you not only have to be close, you also have to understand what the client is really worried about. I'm not saying we are great there. We can be better. We are good, but we can be probably better still. The good news is, however, that the mix of the business is such that at least over the last years, we more or less could maintain the size of the overall book, even though we lost on average, last five, six years, a good 300 to 400 of traditional reinsurance. Not all because we're not happy with the price. Sometimes it was demand driven, less of a demand. Sometimes it was large quota shares that were ended because they were meant to run for two or three years only. But nevertheless, this is a midsize company each year. So far, we managed to refill the pipeline both on the traditional and more so even on the risk solution side. Moreover, we do see room also in the traditional book when it comes to either regions that are just not yet really fully insured, but also in industrialized countries, we see plenty of room. Torsten Jeworrek will talk about it, where risks are either just not insured at all or severely underinsured. So risk is not the problem. There is plenty of them out there. Life reinsurance, of course, had a little bit of a hiccup and up and down over the last years. A hiccup certainly last year. We stick and maintain our EUR 400 million technical result target. I remember many have asked us in the last years why we do not increase it. With the benefit of hindsight, luckily we did not. If we normalize the last years, then we would be pretty much there, maybe even slightly north of it. However, out of five years, we would have to normalize four, and that is the bad news here. There were too many smaller and bigger surprises. I feel quite comfortable unless Joachim changes my understanding later on, because we did not acquire portfolios or companies on the life reinsurance side in the past. Nor are we active in these huge deals where you shift an entire book with all that comes with it, asset administration, what have you, to us as a reinsurer. Our feeling always was, whenever we were in the data room, that the prices were a little bit too offensive. Of course, it takes time to come up for the bad news. But we just feel we should not do that to our shareholders. Too much of a risk. I am not sure who, by the end of the day, will have been right or wrong. But the signals we see from many of those acquisitions, some of them we do know quite well ourselves, do reinforce what we decided back then. The other maybe, as I see it at least, good news, but again here, it is a matter of philosophy, is that we have not such a strong footprint in longevity. We do have one market where we do longevity business because we do not want to be left out completely. But we still feel this is a huge risk, which is mostly not priced appropriately. But more on that, of course, later on with Joachim. A quick view. I jump, of course, to sort of warm you up to the different topics. ERGO. ERGO, of course, let me start with the right side here of that slide, of course, is challenged. Severely challenged by what goes on the life primary side, specifically in the German book. I do have to add that, of course, Austria is better, but also challenged. Also in Belgium on the life side, we have one or the other issue. But Germany is at the heart of the interest rate related challenges. Here we do indeed a lot and have done a lot. You see it on the right side, those points. Right from the start in 2005, we tried to hedge at least part of the reinvestment risk. We had a not pleasing for our sales forces, a very conservative declaration bonus policy in place. We tried to develop products that, in terms of risk capital consumption, are much more sensible. The problem, however, is at that low interest rate level, whatever you come up with, it is hard. It is very hard to make that an interesting product to both the insured and the shareholder. So there is a point in time, if there is no interest rate anymore left, how can you sell a product that saves money? Very difficult, indeed. The good news, if there is good news on that one, is that we, and I personally, do think that whatever comes up there, as long as the interest rate does not continue to fall and fall, the problem size-wise is absolutely manageable for the group. It is manageable. We, and it is a consequence of being active in reinsurance too, we have seen big losses, not only by natural catastrophes. If that, over time, will cost us some money, it is certainly manageable and this is not of a dimension that marginalizes or even dwarfs single losses or serial losses we had of events in reinsurance. Because sometimes that sort of gets detached from what we do elsewhere and is creating or is building a momentum in terms of this is a huge problem, unsolvable. It is maybe unsolvable for the time being, but it is certainly digestible for us and nothing we have to run away from just for the sheer size of it. If we could run away from it, I wouldn't hesitate, but this is not easy as we all know. Let's put things into perspective a little bit and not make a problem bigger than it in numbers really is, provided, I have to repeat that the interest rates do stop someday to fall. Because the convexity, of course, is such, even we try to hedge even the convexity, that of course, once you're at a certain point, all the risk and all the downside is with the shareholder. And of course, we are close to that point. The other two are more pleasing. In a sense, we, on the international and the German side of our P&C book, are deeply into the combined ratios that we think we should be in. We think even we could perform a little better on the German side still. However, we should also make ourselves aware of there is a balance of the lower the combined ratio, the less of a growth you can produce. So we have to balance that sensibly. On the international side, we didn't show the combined ratios before 2009, which were not all north of 100. So this looks like it went down only, and if you extrapolate it backwards, you think we came from God knows where. So there were better times, but we think these five years is enough. We are moving into the right territory, and the international book is more and more of a pleasing book for us. One last detail, which I forgot to mention, and Torsten Oletzky will later on talk about, is the shape of our portfolio on the life side in general in Germany. I only make that point now and leave it up to him to go more into detail. But you see how quickly we move now into the right territory. I admit, and this goes more to me, maybe to Jörg to some extent, and much less to Torsten Oletzky, this probably should have happened 10 years back. Talking Munich Health quickly. Munich Health had a little bit of a roller coaster too over the last years because we had issues in the U.S. with acquisitions, more so with the older one than with the younger one. This is sorted out now. We had a reshuffle of top people managing that entity. If I had a choice to make where with these three pillars they are, with most of their activities, they are in the middle right now. The left side, pretty much a lot has been done. They are now in the middle, and they start to move into the fun part of their daily work, and this means into cautious expansion. That is, as it is said here in the first place, the Middle East, where a lot has been put up already, and they will from there move into other markets. But it is a little bit of a, if you like, relaunch. A quick word on Solvency II and then I am finishing. Solvency II, as you know, we always wanted to have, and we still do want to have it because we think it comes close to what we think is the right way to look at our business. I am not saying that everything of Solvency II is perfect. Far from it. Some things are extremely onerous and did cost us, as it does with others, a lot of money. But now we are getting close to the point where we finally start to live in the new world. More, of course, on all that comes with Solvency II later on from Bernhard specifically. But we think also that Solvency II for us overall has more upside than downside. As you may have seen, whenever a certain parameter of Solvency II was fixed by EIOPA, it mostly for us was rather an upside of our solvency ratio than a downside. That is obvious because we moved on the spectrum of possibilities to the really fundamental or extreme end. Therefore, almost any change of the parameters of EIOPA for us means a relief so that the risk of dropping of our solvency ratio whenever more parameters get fixed is relatively small. It is not unthinkable, but it is very unlikely. It may also bring us, but we are very more cautious here in coming up with numbers. It may bring us markets on the primary side, maybe on the product front, on reinsurance in terms of capital relief. Wait and see. But we think overall, Solvency II for us is more up than downside. Then we have this chart which mixes two pieces of information. One is what are we really working on these days? Where do we think is on mid and longer term an upside for the group and for you as shareholders? Well, a lot of energy, of course, has to go right now into the German life book. I mentioned it, managing what we can manage on the back book on making sure we do not do anything wrong for the new business. That, for the time being, meant shrinking. But the middle piece is, of course, much bigger and much more promising. Here we have to be wary of not doing the wrong thing now when markets are under pressure. But either we are very disciplined, shrink maybe a little bit but preserve profitability, or we just must get things right as with Munich Health. But this is being managed. But you see most of these arrows are green and move upwards. We think all those businesses are pretty much promising businesses. There are two pockets where even today, not disregarding the market conditions, but being detached from most of the market conditions, we can grow now. That is, of course, where we focus on. The one above the bar, these four steps is what I consider homework. Nothing special. That is what we do day and night anyway. Now coming to the outlook for the current year. Let me start by saying so far so good. We had a good start into 2015, also on the large loss side in reinsurance. The targets, I think, will not be surprising to you that we came up with a span rather than with a specific amount with regard to the net result has to do with that enormous amount of uncertainty around us. That is why we rather preferred not to come up with one single amount. Also, to not have whoever in the company feeling like he has to use substance to specifically come up then by the end of the year with the result. That leaves us also and makes it clear to everyone in the company we are not going for that one specific result. We would rather wait and see what happens. If things turn ugly, the result will be a lesser one. Be it as it were. Overall, I would end by saying we, and certainly I am, relatively optimistic that we will manage that year. I said it is, to some extent, interesting times maybe a little bit too much in this environment, and we are not standing with the back against the wall. We have options. We will use the options, but we will not do silly things. That being said, Jörg, you are up. Since I have to leave the more intelligent stuff to Bernhard, I have only a very simple message that is we have temporary pressure on earnings, but our strong balance sheet will help us to bridge this gap for a while. I might say for a very long while. Here you see the overview of the numbers you already know. More or less, it all confirms what we published already on the 5th of February, and therefore, there is no need to repeat them. Our strong balance sheet will continue mitigating this short-term pressure. Here the most prominent examples are disposal gains, claims reserve releases, and our tax reserves. You can rely on the fact that whatever issue we detected during the last decade or even more, we immediately faced it with set-up reserves, and we tend to put ourselves more on the conservative side. With regards to the low interest rate, there are two sides of the coin. One is the very worrying one that our running yield is more or less constantly going down unavoidably. On the other side, our unrealized gains go through the roofs at the same time, currently EUR 31 billion. In 2014, we only harvested some 15% of the new unrealized gains. That is absolutely not an aggressive gain taking. Therefore, you see that we try to preserve these reserves as good as we can. Unlike companies with a shorter asset duration, we will have the bonds with high coupons for longer and will realize gains on disposal before maturity. All these reserves will slowly develop down according to our duration profile. Talking reinvestment yield. Our new money yield is burdened by the sharp decline of interest rates. We have been quite successful. You see it on the right-hand side here in our reinvestment activities in 2014 with a good mixture, not too aggressive, not too risky. We achieved 2.4% on average. It is no wonder that the first half of the year was higher than the second half. In 2015, in the first couple of months, we remain below 2%. Therefore, it could well be that the attrition of 20 basis points for 2015, which is mentioned here on the left-hand side of that page, might be somewhat higher. But the unknown is how many disposal gains we will realize. As Niklas said, we do not see any sense in showing what is currently already capital in the P&L. This is, in my view, good justification for this time showing a lower end of reasonable profit range, EUR 2.5 billion. Then a range above it, which is more or less dependent on the level of our investment management activities. The more we reshuffle the portfolio for other reasons, the more there will be realization of gains. On claims reserves. Looking on the left-hand side of that slide here, you see the IBNR to premium ratio. It increased from 106% to 128%. At the same time, the duration of our reinsurance book decreased. This is visible in the decline of case reserves to premium ratio from 129% to 96%. We see it as one indicator for our consistently prudent reserving approach. At the start, when claims happen, we tend to reserve in a conservative way, which is on the right-hand side here demonstrated with this illustration of 4 percentage points. Which over time show up in reserve releases, and there can also be more of that. We react immediately to bad news and give good news time to manifest. Over time, the impact of prudency on current and prior contract years will offset each other, and we therefore expect a positive run-off as a normal. We monitor it. You know that chart from the last couple of years. There is a very rigorous monitoring process in place. Here we show the usual comparison of actual reported losses to the expected numbers, and all points are on the green side of that graph. Left according to exposure years and right according to lines of business. This is the usual triangle for the group P&C business, including primary insurance. We had large run-off profits, mostly from reinsurance. EUR 1.178 billion of releases, of which 34% were due to major losses. So this is 6.9% of net earned premiums. And if we take into account the commission effect, the adjusted number is 5.3%. As you know, we are more responsive in the short tail property lines and more cautious with the longer tail lines, and this was also true in 2014. So assuming an absence of bad news and ongoing low claims inflation, a reserve release of more than 4% in terms of loss ratio for 2015 is not totally unlikely, to put it mildly. Our IFRS capital went up. You saw it by EUR 4 billion. And on the left-hand side, you see here the numbers from our economic capitalization, which Bernhard will describe in more detail later on. It's a decline of 15 percentage points, which is mainly due to the change in interest rates and the impact from primary insurance. Also you can see the same on the right-hand side with a comparison of market consistent embedded values with a quite substantial decline in primary insurance, which doesn't come unexpectedly after you saw the sensitivities during the last couple of years. The increase in reinsurance is mainly also due to the decline in interest rates plus foreign exchange effects. Capital management. This has become routine at work. Therefore, in my view, it wasn't even necessary to make an ad hoc announcement this morning because it has become part of our normal distribution policy. Logical consequence, we do not see opportunities for growth which are attractive enough in reinsurance as in M&A. And even more not in the investments where the current spreads do not provide us with an adequate consideration for the risk we have to take. Therefore, high dividend. Therefore, ongoing share buybacks. And our local GAAP situation allows for it. You can see here the development on the left-hand side of the distributable earnings between end of 2013 and end of 2014. What used to be a kind of bottleneck in the past is now in a very good position. And especially the replenishment of the equalization reserve has already been almost finalized. And for 2015, after the WTC loss will fall out of the 15-year observation range for the maximum limit of the reserves for fire business and for aviation. We even expect release of equalization reserve. And in the 2 years 2015 and 2016, the increase in the equalization reserve should be lower than it had been in the last couple of years. So we are in very good shape here with our distribution capabilities. And without an extreme loss here, we expect that we can continue with the current level of very high distributions. And our advantage, you shouldn't forget, is that our parent company is the giant reinsurer. So there is no need of having very high dividends from subsidiaries because the reinsurer is producing cash and is producing capital to an adequate extent. That doesn't say that we do not want to see more dividends from subsidiaries, but we are not as dependent as others who run with a holding company at the top. So far from my side, I hand over to Bernhard now. Yeah. Good afternoon to all of you. I will now guide you through the wonderful world of risk management. Before going through the regular information package, allow me a few words about what is important to keep in mind concerning our environment and how this is driving our risk position. You all know, of course, the macroeconomic developments and what were the drivers there. But coming back to low interest rates, what does this mean? It started somewhere back in the financial market crisis, and then in the years after central banks took action. The Fed already starting to end their quantitative easing. The ECB just started it. But even in the U.S., we saw a drop in interest rate level of more than 80 basis points last year. Still, the level is, of course, an order of magnitude higher than in the Eurozone, where the ECB is just about to start their program. So in 2014, sharp decline in interest rate levels around for the major economies. Also the euro weakening or the strengthening of U.S. dollar, Canadian dollar, British pound against the euro was also, of course, coming into place because of the action, especially the European Central Bank took. This is mainly driving the valuation of our technical provisions. This is also mainly driving our risk assessment and the risk capital. This also then goes into topics which are relevant for our risk strategy that on this slide I just summarized in the bottom of the slide. We definitely see the effects in our economic solvency ratios, but we also are very transparent about the indirect impact that we see in the reinsurance cycle already in our profitability and reserving numbers. Perhaps more transparent than some of our peers. Niklas already talked about we are not following the hunt for yield. Especially because we see that low interest rates are combined with not adequate risk premiums. We see this for many asset classes and also as the world economy is not really a growth story currently. Still there are many companies out who have growth targets. M&A activity is high, but we are sticking to our very careful assessment of M&A targets. So even in this environment, or especially in this environment, no need to adjust our risk strategy. On page 29. Now with this in mind, it is easy to understand also where the changes in our risk profile are coming from. We see higher risk capital need for our P&C, for our life and health, and for our market risk categories, mainly driven by low interest rates or lower interest rates and depreciation of the euro. We also have not really changed our business mix or our investment strategy. So these are really more passive driven changes that we saw in 2014. About on the topic on retrocession, I will come back in more detail later on. So what also came with now especially life and health risk going up is that our diversification benefit in the group went up. How is this translating into numbers? So the economic risk-based capital on page 30, we see an increase to EUR 26.9 billion as economic risk capital for Munich Re Group. An increase of 3.2 billion. Highest increase we saw in the life and health risk category with 3.2 billion. We saw an increase in property and casualty of 1 billion, market risk going up 0.9 billion, and credit risk 0.4 billion. All categories more or less driven by interest rates and foreign exchange effects. Operational risk went up EUR 0.3 billion. This is mainly caused because we introduced a dependency between the driving op risk scenarios that until now we assumed to be independent, so that led to this increase. On the other side, diversification benefit also went up. We now have this 2.6 billion of diversification, additional diversification benefit, and are now at a ratio of 33% diversification. Meaning that also with this increase in life and health risk, we have an even more balanced risk profile, which is leading to better diversification. Now, I will jump into the three major risk categories in more detail. Let me start with P&C risk. The breakdown of the P&C risk into basic and large losses that you see in the middle of the right-hand side of the slide, illustrates how capital intense, especially our nat cat business and the business driving accumulation scenario is, compared to the exposure that is resulting from the business, which we classified as basic loss risk. If you see now that risk capital increased in 2014, at first glance, this seems not to be intuitive, because as Niklas already pointed out, we gave up business, especially in the nat cat area. Especially in the category that is consuming the most risk capital, in the P&C world. What were the dominating drivers? The dominating drivers here were the stronger U.S. dollar, stronger Great British pound or Australian dollar. This means in euro terms, the exposure to natural catastrophes are higher. On the other hand, we reduced retrocession cover. This was a trade-off between our very strong capital position, and of course, in such a market, the opportunistic use of retrocession. But this led to a decrease also in the retrocession cover that we applied. But still, even if we adjust for foreign exchange effects, we see that our top scenarios are not much changed in 2014. This is also driven by, for example, the request from clients for cover, which is resulting in new business or change in structures. But also one driver that the risk capital for P&C risk went up. And of course, we also stepped into new business, like cyber risk or also weather risks, which also drove the risk capital higher. Now for the risk category that showed the highest increase in 2014, life and health risk. 3.2 billion was increased up to EUR 9 billion, which we now allocate for life and health risk. 60% of this increase, roughly coming from primary insurance, 40% from reinsurance. Major drivers, again, low interest rates, and weakening of the euro. In addition, in this case, higher interest rate volatility, which drives time value option guarantees in the German life insurance business and also then resulting in higher stress scenarios. How does now low interest rates and this foreign exchange effects work their way into the numbers in primary insurance and life insurance? For primary insurance, story is simple, that lower interest rate means risk bearing capacity of the primary life insurance companies comes under stress. To support the guarantees, which are still around 3% in the back book of our German life insurance companies, you need no math to know that this is a difficult environment. If you apply now a stress on the future profits for the shareholder, which are coming from lapse or from other insurance risk type, then there is not much loss-absorbing capacity left, which means we see higher stress scenarios and we see higher risk capital need for these insurance type of risks. In the reinsurance world, it is a different effect. It is because our Canadian, U.S., also U.K. business simply now shows higher present values in EUR terms, coming from the foreign exchange effect, but also from lower interest rates in these markets. Simply the stresses are again, higher in EUR terms. We also had some model enhancements, resulting, for example, from the same analysis that also are now transparent in the IFRS numbers for Australian business. So this also drove risk capital for the reinsurance life book. If you look at the risk categories for life and health, longevity seems to be the category with the highest risk capital allocation. This is mainly again driven by the primary insurance life book because now stresses with respect to lapse, but also behavioral risk we classify as being longevity. So most of the increase in longevity risk comes from primary insurance. There is also some increase from real business that we did in the additional business that we did in the U.K. market. But the stresses mainly were dominating in the primary insurance world. Third category I want to dig deeper into is market risk. On a standalone basis, we allocate EUR 12.5 billion of economic risk capital for market risk. This is an increase of EUR 0.9 billion compared to last year. Again, main driver, low interest rates, and the foreign exchange effect. Please take a look first on the bottom side of the slide where you see the DV01, so the sensitivity to a parallel shift of the yield curve by one basis point on our economic surplus. You see that we are closely matched in the reinsurance book, but also for our primary insurance operations and especially, even though in 2014 interest rates in EUR were going down or increasing by more than 100 basis points. Still the duration gap is quite stable. We also have some model change in the numbers which drove up the liability duration a little bit. That means you can see that also we are managing the convexity of the business in the way that we are managing interest rates, to also be protected against any kind of interest rate movement. On the top of the slide, you see that over the last five years, we also decreased the contribution of general interest rate risks. So interest rate sensitivity to market risk. We are now with credit spread risk, general interest rate risk, and equity risk more or less on the same level for the market risk categories, leading also to a higher diversification compared to last year. Also, this is something actively managed. The increase over the last five years from 7.0 to EUR 12.5 billion in market risk were driven by mainly two aspects. One is that more than half of this comes from market developments. If market value goes up, of course also the risk goes up. Strong performance also in equity markets, but also especially in the credit that we bought some years ago led to a higher market risk capital allocation. Also our investment managers took the chance to use the room for maneuver within the limits that we more or less kept unchanged over the years. Just also deployed the limits that were available. Now after going through what is required, what are the drivers for the required capital. Now a look on what happened on the available financial resources side. Our available financial resources went up to EUR 38.8 billion. We distributed EUR 2.7 billion in 2014 back to our shareholders via dividends and share buyback. But we also had economic earnings of EUR 3.2 billion. On the right-hand side of the slide, you see a very rough profit and loss attribution of the economic earnings. Starting with the capital management action on top, resulting in EUR 2.66 billion. Then the economic effects from changes in interest rates, currency, equity, and so on, resulting in EUR 1.4 billion. You see interest rates led to a decrease of our available financial resources of EUR 1 billion in total. On the other hand, we have a positive effect from currency of EUR 1.4 billion. Currency is driving risk capital as the euro is declining, as I also explained before. But also our available financial resources goes up because we also structured our surplus in a basket that is equivalent to our international business needs, which just gained in value over 2014. Strong technical results, also 1.8 contributed then to the economic earnings of EUR 3.2 billion. How do these EUR 3.2 billion fit into our track record over the last years? Also in 2014, we had, from an economics earnings perspective, a strong performance, especially as the economic effect from falling interest rates are reflected in the economic balance sheet and in our available financial resources, which is different to the IFRS world. Compare the EUR 3.2 billion to the EUR 24 billion that we were able to increase our available financial resources over the last eight years, so average EUR 3 billion per year. You also see that EUR 17.1 billion were distributed to shareholders until the end of 2014, leading also to the net increase of AFR to the end of 2014. Still, there's a gap which remains. If you look at our share price or market capitalization and our available financial resources, end of 2014, around EUR 10 billion. Definitely some room for the share price to catch up with our economic value of the business. Now putting available financial resources and economic capital requirement together, resulting solvency ratio is 138% at the end of 2014. This is still high above relevant thresholds that we see in our internal intervention scale. The sensitivities on the right-hand side of the slide, I want to point two sensitivities. One is foreign exchange and sensitivity. You see that our economic solvency ratio is not moving because of the effect I explained before. Falling euro, for example, means higher risk capital, but also high available financial resources. The one that we are most exposed to is interest rate risk still, so further falling interest rates or spread risk if suddenly credit markets would go back to levels perhaps in the 2008 or 2009 years. These are the main sensitivities to watch out for. Still, if you compare us to our peers or our competitors, this is in a range which we also saw in the last year. It's not changed, even so we are at a much lower interest rate level currently. Also we here show the 100 basis point sensitivity. Some of our peers now show only a 50 basis point sensitivity, and you can be sure that after the 50 basis points, if you apply them another 50 basis points from the current level, this is even more hurting. We also apply the risk tolerance value at risk 99.5% with the 1.75 multiplier to capitalize for a double A rating category. This, and also the results of the stress scenarios, gives us also the comfort that we see no restrictions for further capital management action. Now, this is good news, I think, for you. Even better news is that moving into the Solvency II regime will not really change our strong capital position for Munich Re Group. The 242% we showing on slide 37 is mainly now applying the Solvency II risk tolerance. Not our internal, but the value at risk 99.5%. In addition to just changing the risk tolerance, we also have to go through some changes with respect to the change from our available financial resources to the basic own funds within Solvency II and also the economic risk capital to the solvency capital required under Solvency II. But also, like Niklas indicated, we, in most cases, were very conservative in our approach. So changing into the Solvency II regime, we see that our solvency ratio will go up, as the indications are at the end of 2014. As for example, for available financial resources, we have to take into account also a positive effect from shifting to the EIOPA interest rate curve, and no longer using swap rates. Also, we will include then surplus funds for primary life insurance business, or also making other changes, for example, to the risk capital, where we will allow also the loss-absorbing capacity of taxes, which we currently have not applied. Or there's also the fungibility restrictions that there are definitely with respect to capital fungibility. We currently apply them in the risk capital, so we allow them to restrict or to show up in our economic risk capital. In Solvency II, we have to remove them, which means our diversification benefit will go up. We have to include them in the basic own funds, but it's not such an order of magnitude effect compared to the economic capital requirement where we currently applied. These are the kind of changes that we will go through. We always already capitalized for the default or migration or credit spread risk of government bonds also in Europe. That will not change our numbers. Also our ultimate forward rate assessment, in the way of that we stress the ultimate forward rate, which no longer has to be applied in Solvency II, is something where we expect also our numbers to go up. All of this, of course, is depending on the approval of our internal model by our regulator, BaFin, and the Core College, but this we hope to get through during this year. Now, these were all numbers on group level. Last topic I want to touch is going to the legal entity level. By the way, group level numbers means this is really group level. So aggregating the whole group and consolidating this so we do not make use of equivalents or other kind of aggregating mechanisms that are also possible under Solvency II. How does the world look like also in the coming Solvency II regime on a legal entity level? For P&C companies in our group, we see no major issues. Primary life insurance companies are, of course, in this low interest rate environment, under pressure with respect to their economic solvency ratio. You may have noticed that we also publish for German life business negative embedded value numbers. But if you also go into the Solvency II world, funds financing future business, surplus funds, and also the positive effect from the EIOPA yield curve, all of this has to be taken into account, which also leads our primary insurance life companies, also in Germany, to quite reasonable numbers at the end of 2014. So, also take this as some sort of advertising block for our risk management, as also regulators like FINMA, where we already got approval for our internal model that we use for the Solvency test, but also Standard & Poor's sees our processes and risk modeling as state-of-the-art. You can be sure that we can react and also manage new kind of risks like cyber in an appropriate way. To sum it up, no need to change our risk profile. Also in the current environment, risk management, we are very happy to support the business when they turn into new opportunities. Thanks very much. Let's now have the first Q&A cession. Two requests, please. First of all, please refer your questions to those presentations that have been just held, because there are still three other presentations pending. So please, questions on the group only. Second request, a maximum of two questions per person. Please, Michael Huttner. Thank you very much. I actually have one question, which is on equalization. Can you give us the figures for 2015 and 2016? You had EUR 1.4 billion, and if it drops to EUR 1 billion and then EUR 0.5 billion, does it mean that we have an extra EUR 400 million for dividends this year and EUR 500 million next year? It would not be reliable enough and therefore we do not disclose these numbers. It is tight during the two years. If it gets too tight, then we would have measures to deal with it. You should not be worried at all. Midterm outlook for the equalization reserve is it is going down, and therefore we are not worried at all about it. That should be the general message. Andrew Ritchie, please. Hi, there. It is Andrew Ritchie from Autonomous. Nicolas and Jörg, I think you both had in your slides, you used the word temporary. Both of you used the word. I am just curious to understand what you think of as temporary. Is that two years, three years, five years? What is it that you think is the main cause of your earnings depression being temporary? Is it because you think the rating environment is likely to change, or the interest rate environment is likely to change, or you will just find enough organic growth to improve the earnings power? I am just curious to know why you have both chosen that word. The second question, a technical question for Bernhard. On longevity risk has gone up massively. Is that one of the reasons why you would not be that keen on doing more longevity business in the life re business? Because you are implicitly taking quite a lot of longevity risk in the primary business. I know it is different kinds of longevity, but I guess in your risk model it is the same. I am just curious to know, does that restrict you? Thanks. Let me start on the question of tempering or the environment we work in. I think the most important message is we are not expecting anything for the time being in the sense that we position ourselves because we know what will happen, be it in the reinsurance market, be it in the capital market or elsewhere. We just act, we call it in our prognosis, even naive prognosis. We just act as if everything would go on like it is. That shields us also from being on the wrong foot. It, of course, makes us, on the flip side of that coin, we will not ride any wave to the benefit of the shareholder because we just act or react swiftly, nimbly, hopefully, but maybe a little bit too late sometimes in that regard. If we have signs, reliable signs, for example, take our currency position on the dollar, there we feel very comfortable. Even you might say this is a bet. It is not a big one, but it is one where we feel that the dollar for the foreseeable future will be the place to be rather than the euro, then we take that position. In terms of markets, maybe Torsten Jeworrek later on will give his flavor of that as regards P&C, for example. It is very difficult to predict. The key for us is we have no limit in terms of giving up business. If that goes on for longer, then we only have one critical question on our table. Is that just cyclical or are we observing something structural here? Then the second one is the more difficult one because it could mean that we have to go back to the drawing room and rethink part of how we do the business. It could be about models. It could be about other questions. As long as it is cyclical, it could, in the extreme, mean that we have to leave an entire block of business forever. That's why I don't want to be coming up with any kind of prognosis. Also, when it comes to interest rates, I don't know. In 2007, more than half of the people said this will be a matter of two years. We don't think so because there is structural change also going on. If we see more productivity gains as a consequence of digitalization, there is basically a lower inflation rate and there will be a lesser interest rate going forward. Even so there is growth, but that will eat into the interest rate because there's productivity gain. We can live with that as well. It's just a different game. We have seen it in some markets in the past when there were these huge jumps in productivity that we had deflationary tendencies. That is normal. That doesn't mean that like the ECB, you have to jump in both feet first in creating extra liquidity to get the business going. That's why, again, there, either way, we even protect ourselves against inflation. A long answer to a short question. We don't know. We prepare for everything. Inflation, deflation, interest rates going up, going down, markets moving up, down, whatever it is, we don't know. The answer in many of our businesses to that level of uncertainty is an extra effort to create new businesses. Businesses that weren't there, that have not been under attack, that we can do ourselves because hopefully we do know better. In a way, we try to do the same on the asset side of the balance sheet, but with much less emphasis because we do not consider ourselves as being the one on the asset side who knows it all. But infrastructure is a side there because we do it ourselves. We do not have other funds managing our assets there because we feel we can do it ourselves by combining the know-how from both sides of the balance sheet. But this is probably one of the few exceptions on the asset side where we can do it. So overall, we don't know. I don't know the answer. If anyone here at the table thinks he knows it, then he should talk. The longevity is yours. There are two aspects on the question on longevity. First one is, it's really more a clustering issue by presenting the numbers. Main driver from primary insurance is, like I said, lapse and behavioral kind of stress risk that we just put under the heading of longevity. So it does not really eat up limit that we have for our longevity business. That we are cautious on longevity in the reinsurance business has another reason, which is more coming back to, is this business profitable? Is it something where we can assess the risks properly in a way? So these are more the drivers that make us being a little bit reluctant with respect to longevity risk. But, this increase in what we call or what we now publish as longevity, does not really have an impact on our steering of the business. Let me add one thought, even though I have answered long, that is important to me. I said it in my presentation. We are not running out of risk. The question is how fast will the colleagues from the business field be to create new businesses with those risks that are not covered yet? Mid and long term, even so the market environment will not change. We are positive. That is why I also ended with an optimistic view. I think there is so much business out there for us to do that even if earnings are now temporarily coming down, we might be able over mid and longer term to refill. However, of course, if the cyclical goes on and goes on and there are a lot of structural, it will be more difficult. But as it looks today, we feel that mid and long term we can refill the pipeline. That is why we take that kind of optimistic view and use the word temporarily, which you refer to. Michael Hyde, please. Thank you very much. Just one question about your net profit target. I wonder how to read that. Is it that you take the EUR 2.5 billion as a base without any capital gains and no excess reserve releases? Then on top of that, you expect some excess or higher than normal reserve releases, some capital gains, maybe even from fixed income, which are trading currently at negative yield and so on? Or is it that we should read the net profit target as EUR 2.5 billion to EUR 3 billion, and we should probably take the midpoint as the best estimate? What kind of euro, U.S. dollar exchange rate you have factored in here? To make it clear, in our internal plans, the 2.5 will only be achieved with some reserve releases and some disposal gains. That means some of that has already been included even in the lower limit. The logic of this range was exactly what you expressed here. We do not know how much restructuring of our assets will be necessary due to market reasons, but the more, the higher we will have disposal gains. That makes it, in my view, very tangible that it does not make sense in the current environment to say this is a point which we want to achieve. Like Nicolas said, we do not want to say to our asset manager, "Now you have to realize EUR 500 additional millions." We also do not want to make them sit there with bound hands because they are no longer allowed to realize gains and to touch the portfolio. That is the logic here. To your second question with regard to the FX, definitely a stronger euro than we have at the moment. There should be a slight impact to the positive from the strong US dollar, especially at the moment. There was a question from William Hawkins. Hi, thank you. Nicolas, I want to come back to what you were saying about capital management, because when you were talking about the consistency and the stability of the buyback, you do not want to increase it one year only to have to decrease it the next. Is not that kind of just copying your approach to the ordinary dividend and undermining one of the key points of a buyback, which is meant to be opportunistic and flexible? So if you really want to have a stable outlook for the buyback, are not you actually saying you should have a higher ordinary dividend? On the other hand, if you have got the strength you are talking about and you genuinely believe your share price is below the intrinsic value, as Bernhard said, you should be more aggressive in buying back shares. Just wondered if you would come back to say how you are distinguishing between a buyback and an ordinary dividend. Then secondly, hopefully more pragmatically. Jörg, you talked about hopefully this year the positive runoff being above the 4% long-term level in the combined ratio. Given your 98% guidance, is your comment about reserve development implying that hopefully you can do better than 98%, or is the hope for better development included in the 98% guidance? The latter. Sorry, the 98- Yeah. The 98 includes more than a 4% reserve releases, because on adjusted level, we were already at 98 in 2014, and there is definitely still the tendency for some decline. Let me make one comment as regards combined ratio in general that we always make, and we think should make it again because someone may not have heard it. Combined ratios are wonderful for those who try to understand what we do. We, however, must admit this is far from exact science. We sometimes do math backwards to come up with a meaningful number. I take them with a pinch of salt, but I'm not taking them overly seriously because it is not exact science. So a percentage point up or down is easily done. With a good start and with a little bit of luck, it can be again different. It is not so easy to predict also for the longer tail business what exactly will happen. That's why I'm so cautious. But what is important is what Jörg said. The 2.5 includes a bit of both realization of capital gains and a reserve release somewhat above 4, but just somewhat. The first question is a right one because what used to be the dividend, that was the one we said is close to our heart. We never changed them. We said the flexible tool is the share buyback, and now we start wording it as well, the billion we did it so many times, it becomes something of a more stable nature. You're right, but I would say we do not see enough of an excessive capital and all the other ingredients of our decision that we feel we should go way above a billion. Of course, it doesn't make sense to go EUR 200 million above. It would be at least half a billion to make a difference. We don't feel we work in an environment where this is what we should be doing now to convince whoever about whatever. We rather feel way more comfortable sticking to the EUR 1 billion. The uncertainty is of such a nature right now. We don't know what will happen in Greece. We don't know what will happen with Russia. This first-order effect will never be serious for us, but the second-order effect will be serious also for us because we are invested all over the place, and we will get affected. So why would I create an issue maybe for us going forward now by just adding half a billion to create an impression which we think we don't need to create now? If the money is still around the next year, we will rethink the question. Maybe one or the other crisis is solved by then. Then let's be more generous seeing with the eye of a shareholder, but we think this is not the time to do it. Thomas, please. Yes, good afternoon. I have got one question relating to the solvency capital position of ERGO. How has it changed over the year 2014, and how much closer we are from a situation where obviously you will be forced to inject some capital into the company? Thanks. Guarantees are going down. Do you have the quantification, Torsten? Perhaps you can deliver it later. With regard to the capitalization, it depends on the interest rate level. We do not exclude applying for transition rules because that is a very convenient way. But there are also other alternatives in place. Highly unlikely that we do a straightforward injection of capital, because this is not necessary. Guarantee levels are on slide 44. If the numbering is still correct, because I have an old printout on that one. But you have average guarantee levels, and it went down to 3.0%, including the ZZR effect in 2014, and we should expect a further reduction in 2015. James Shuck, please. Thank you, sir. James Shuck from UBS. I had two questions, please. You mentioned you had no limit when you are managing the P&C rebook. Surely at some stage, as you manage that portfolio down, you are going to have to revisit your expense base. Because you need a certain degree of flexibility. There are other things to consider as well, such as the loss of diversification credit or the relationship impacts that you may be damaging. Could you just talk a little bit around how much flexibility you actually have to manage down in reality? Then secondly, just on the ultimate forward rate. Bernhard, you mentioned about Solvency II using a 4.2% rate and the stressing of that number is different in your internal capital model versus Solvency II. Are you using 4.2% in your own internal capital model, and could you talk a little bit around those stresses? Very quickly, just also, are you anchoring when you show 100 basis point reduction on your economic capital, is that being anchored at zero? Thank you. Well, your first question, of course, is absolutely right. The point that we try to make is to avoid that internally, the organization thinks there is a limit. Because once you do it, a sort of unconscious kind of arbitration will start. Arbitraging will start. If people do know, underwriters who know, no one, of course, has the numbers on a daily basis dynamically on the table, except maybe for some managers. So no one knows exactly where we stand. But if you feel I am the one that crosses a certain threshold where some things will be triggered, you will not be doing the right thing anymore. As I said, I worded it, I think we are not falling off a cliff anytime soon. We have a lot of room still to go. Do not forget, some of the underwriters could work on primary insurance. If you are a facultative underwriter, you can turn around and do industrial business on the primary side as well. There's many skills and capabilities that you could use elsewhere as well in the group, be it reinsurance alone or even primary. Not easy to move people around. We know all that. But we really try by all means to avoid that someone tries to pre-think in the company, we even come up with a number and people position themselves and saying, "This is now the end of it." The more we can create of new businesses in that pipeline that we talked about, of course, the less we take the pressure off. But no reinsurer ever has become serious problems for the cost ratio. That's why we have it relatively relaxed to you. As regards diversification, so far, we were actually benefiting from it because we cut back exactly on those risks that were the most risk intensive. So it created another problem that we even were capital richer than we were. But we are not in a position yet where the taking off of those risks hindered us from putting the right prices up because diversification was getting so bad, let's put it in the first place, that we had to price ourselves out of the market. Actually, rather the contrary right now. Torsten. Maybe a few comments. When you just look at the expense ratio in total of non-life reinsurance, for instance, then you see we are above 30% now. However, the majority of these 30% is commission and broker commission related expenses. That means that's a function of the premium income and has nothing to do with our own admin expenses. Our own admin expenses and traditional reinsurance, so forget risk solutions for the time being, is about 6%. 6% of our non-life premium. In total, including risk solutions, is 8%, around 8%. Why? Because the Hartford Steam Boiler, AMIG type insurance business is inspection sensitive and therefore has higher expense ratio. So 6% is the figure we should look at. When we reduce our premium volume and our business because of cyclical changes in the market, then nevertheless, we need the risk expertise to deal with the risk properly. It would be a wrong decision, let's say, to save money here and then to get risk into the portfolio, which we cannot assess or judge in a proper way anymore. That was a positive thought. Here, I fully agree what was said already. However, what we expect from our organization is, of course, flexibility. Flexibility means we have a very different development in the various markets. France, some European markets, for instance, are on a sustainable reduction of premium income in our portfolio. So here we ask ourselves, has that to do with the structural nature in terms of reinsurance buying behavior? So where we have to react. We expect flexibility from our organization to go into those segments or those international organizations where we can grow the business or where we need the expertise. If we come to the conclusion, which is not the case, but if we should come to the conclusion that some of the changes we see in the market are not only of cyclical nature, but have, let's say, a structural, deeper reason, then we would have to react and change our cost structure, too. Only because of the cycle, we think it's a good promise to our organization. Stay disciplined. Don't look at our expense ratio and write premium volume to keep that in good shape. That would be the wrong purpose, and the rest will be managed by us. On your question on ultimate forward rate. The story is we are using still swap rate and using it not only for 20 years, where, for example, in the Euro zone, the extrapolation starts with respect to the EIOPA yield curves, but we go out to 50 years, as there is still some liquidity in the swap market. Our current curve is very much below the EIOPA yield curve also for the years 20 to 50. We stress also our ultimate forward rate that we also choose in somewhere at 100 years. This is an additional stress we consider, which you do not have to apply under Solvency II. The second part of the question on negative interest rates. That's a tricky one. Yes, we allow negative interest rates, for example, in our risk model, but also the valuation model. If you have negative interest rates, then the asset prices are adjusted in a way that you would have the market values just representing also negative interest rates for your fixed income portfolio. But in the technique of then value in the technical provisions, there are some topics about how really you modeling negative interest rates. Something we definitely can discuss during coffee because it will take some minutes. Okay, next question. There was a question from Thomas Jacquet. Hi, good afternoon. My question is on the MCEV. I am sorry, I am quite new to negative MCEVs and negative yields. If I want to forecast this negative MCEV one year down the road with unchanged economic assumptions, will it be a more negative number or a less negative number? The MCEV is already projecting all future cash flows coming from the in-force book and assuming, of course, also that the interest rate environment stays as it is currently. If you now want to roll forward the MCEV to the next year, you have to apply then your view on changes in interest rates or whatever, and use the sensitivities that are also published with the MCEV to know where the MCEV will be. For example, if you assume interest rates go up 100 basis points, you see the MCEV sensitivity of, I do not know, EUR 1 billion to EUR 2 billion, then you have to add this up, and then you have the MCEV of the next year. Maybe I may add a little bit of a lighter comment first. If you did follow up for longer, then you would have seen negative MCEVs already in the past. I am afraid to say you will not see them in the future because we will not publish MCEV anymore. This is it. The last time you had the chance to see one. So enjoy it. The fact is that, of course, the way we calculate it, and then Bernhard did not go into detail there, of course, makes it much more likely that you show a negative MCEV. But we always felt also for the internal side of our business, for the people who deal with those businesses, we should not try to smoothen it or make it look better because the message should be straight and clear that we have issues, serious issues in some parts of our business and why smoothening things. We always put footnotes into our MCEV and saying, "This is a very conservative way to calculate it." For the swap rates and whatever we use, those footnotes sometimes were forgotten or overlooked, be it as it were. But we stick to that. It will change however going forward when Solvency II is up and running. So no more negative MCEVs. Next question was from Frank Kopfinger, please. Frank Kopfinger, Commerzbank. I have a follow-up question on your new guidance. in 2014, you significantly also benefited from tax provision releases. Could you comment on whether this will have also an impact in 2015, how you see this, and what impact this will have on the tax rate? 2014 was extraordinary because we had an accumulation of positive effects from tax inspections, plus a jurisdiction in Germany, which was very favorable when losses on realized mutual funds of 2001 and 2002 were tax deductible due to two court rulings. Therefore, this is a situation which will not be copied. But there is a high probability that the setting of our tax reserve is still very generous. Therefore, our guidance is rather in the order of 20% than higher. There was a question from Andy Broadfield. Yeah. Hi, thanks. I'm still a little confused about how you view your capital position. Bernhard, you went through a very long list of things where there's conservatism in your Solvency II calculations as they stand today, as you've presented them. I think that probably tells us how far we've traveled from the original intention on Solvency II to where we are today for pragmatic reasons, I guess. But I get the sense that you have a lot to come back to the Solvency II numbers, so that when you report that in 12 months time, we should see probably quite a much higher number and notwithstanding macro events. I guess I'm trying to understand why there's not a little bit more sense of urgency from you or comfort from you that you could perhaps do more around capital return. I'm not saying it's necessarily the right thing, but it feels like there's such a big buffer there relative to where your Solvency II position's coming out. Is it an S&P thing? Is it something else? If so, would you look to work on those metrics in particular? Okay. Perhaps start to your perception on that our solvency ratio will go through the roof. I just said that it will be higher. Not meaning that it will double or so. We have some facts that I pointed out that will definitely lead in this direction. But from this perspective, by shifting into Solvency II, we have no constraint in the way, or we have no other view on the world to our capital position than the position that we see now and publish today. That was mainly what I was referring to. The restrictions with respect to capital management stay the same. As Jörg already mentioned, they are mainly rooted in the local GAAP balance sheet of Munich Re AG. That's more the topic that is driving capital management issues. I would like to add, we have non-discounting of loss reserves currently under local German GAAP. Debatable whether that makes sense. In my view, not. We have this equalization reserve rules, which are also somewhat exaggerated in our view. With both aspects, I would expect from the future legislation to give us more relief than more stress. Maybe one, because we might have indeed confused what I said about what will Solvency II mean to us and how much of an upside is there. My main message was there's less downside. Because we have seen many who had to change the solvency capital ratios when they finally applied Solvency II instruments. In our case, the message pretty much is not much of a downside. It does not necessarily mean huge upside. The other thing is we should also be aware of one thing. I am personally, at least, not yet convinced that we might not be confronted with a twin peak approach. In our business model, the distance between an internal model Solvency II capital requirement and the standard model capital requirement is huge. It's a huge difference. Can we rest assured already today that the regulators will not shy away or be shocked by the distance and then do something in between or whatever, say, for the first year, please, we have to understand all this new, we have the banking experience, models were discredited to the extreme, and therefore, please, and so forth. That's why this is another matter of uncertainty in that context, why the expectations as regards to capital management for the time being should please not grow through the roof. We take a cautious approach there. That may change once we all have settled in, feel more comfortable with the system, both us and regulator, and the local GAAP things are under control. As you mentioned them, fine. We have no issue whatsoever in holding back capital. This is not the problem. That we want not to let capital go, which sooner or later we find out we should rather have kept. Thomas Winzer, please, from DZ Bank. Thanks. I had probably a follow-up question to this temporary question that we had before. On page 12 of the presentation, you seem to indicate that the midterm outlook for the traditional P&C reinsurance business is positive. On another page, you also argue that your cost of equity are currently around 7%, which is probably a number that is going down for your cost of equity. At the same time, the industry still earns return on equities, double digits at least. Munich Re also. This would indicate to me that there is no way but downwards for the traditional reinsurance business because it is close to capital markets business. I wonder why you think that the midterm outlook should be positive. The question is, what is traditional? My main argument that Torsten can then either counter or add something, whatever is innovative is not innovative forever, and it turns in a way to traditional. This is a pipeline that I have on my mind. Once the innovative business turns traditional, of course, it will refill the traditional pipeline as well. That is why this is not necessarily the end of all traditional, because what we consider traditional may not be traditional for the others, and we see it. The alternative markets or younger players always enter from the end of the, what I call, one-dimensional business. Very easy to handle because you buy the model, you buy someone who at least knows more or less how to handle it, and you need the money, and then you go. That is the kind of business which is under a hell lot of pressure. Where does the traditional end? Very difficult to define that. We probably could define it, but our definition is not holding true for anyone else out there. That is why we think the cyclical part may swing back. If we create enough of an innovative book, we add new business at the other end of the pipeline, making it traditional, and therefore, there is still enough traditional to live on. That would be that part of the answer, but Torsten. First, I would tend to agree with your view. The profitability of our industry is still too good. Therefore, exactly for that reason, I don't see an immediate change in the pricing or in the renewal behavior of our industry, of our peers. Second, the profitability is now my thesis. The profitability is not in reality, when you look from an economical view, not as good as you would think. The calendar year view is decisive and drives all the market behavior. But this financial year view is very much supported and driven by reserves, which we all have earned 10 years ago or even earlier. We should not forget that. And therefore, to some extent, we can repeat. It also depends on the question, how long can financial years be supported by the fat which was built in the past? You can argue now, let's say, will that pot be empty soon? Or is even there in this reserve pot be a structural change that the reserves will hold longer, or the reserve releases will hold longer because we live from low inflation environments now? Maybe to some extent, both might be true here. So in that respect, I think it much depends on the question, how much support do we have to look good? When you look at the pricing, and we do that drives our underwriting decision or our underwriting policy. It's not a financial year view. Then we see that the pricing has changed, but the financial year still looks okay. Second remark, I can only support what Niklas said. When we look at our portfolio, we report about the renewal dates, January, April, and July in traditional reinsurance. We do not report about risk solutions. There's no renewal date. And in between, there is a lot of negotiation and business decision about sort of traditional business, which is concluded or underwritten in a nontraditional way. And this is the tailor-made stuff. That has nothing to do with this more standardized business, which comes up for renewal and which is then celebrated or communicated to the market and compared between the peers. So there are two kinds of business, the business which is up for renewal and the other one. And for the other business, which is more tailor-made and usually often only placed with a few reinsurers, we don't see these extreme movements in the cycle. Olivia Brindle, please, and then Thomas Seidel. Yes. Hi there. It's Olivia Brindle from Deutsche Bank. The first question is expanding on that point about innovation. You've made the argument, I think, quite rightly, that innovation is very important going ahead. But I was just wondering if you could say whether you think you're doing enough on that front in terms of new product lines, new ways of working with alternative capital, pushing to access new pools of risk. It feels like maybe some of your smaller and more nimble competitors may be a bit more active on that front. You, with your very large scale, and also with your generally conservative approach, do you think that actually that gives you a bit of a disadvantage on the innovation front? Also, be interested in your thoughts on that for the industry as a whole. Do you think the industry is doing enough to push for innovation and to sort of access some of that new business? Then the second question, sort of related, I guess, is just on the structural versus cyclical point. You said that if you see signs that there is a structural challenge as well, you would maybe look to make some changes. I mean, how do you assess what's structural versus cyclical? What's the criterion that you would apply, and how long would you wait to see, basically, and to decide that? Thank you. I answer them because I will try to answer them on a generic basis so far. Later on, of course, when it comes to innovation, each deck of slides of both Torstens specifically will go into more details and very living examples, tangible examples even of the question of innovation. In general terms, I would say we run for the sheer size and the tradition that is built and baked into our business, of course, in the classical traps that everyone probably can fall in. Will the system, will the inertia of the company of our size allow people at all to be innovative? We think we have a little bit of an advantage here for two reasons. One is that within AG, we always had one entity that marched at the front end of innovation in parts of the business, and reinsurance being so much of a sort of handmade, tailor-made business, also always needed minds that were open to new things. We have invented over the term of our history, many new lines of business, and we probably wouldn't be even around anymore if we hadn't done that. So that's why I'm relatively positive that we can do it. But we have to sort of, to some extent, restart the engine, push it more. What we will not do is throw big time money at the problem, because you have here or there sometimes seen big numbers put up, and we feel we don't know what they do with that money. We wouldn't even know what to do with the money in the first place. Let's rather wait for the people asking for specific amounts of money. And experience tells us that those amounts are relatively small normally. So it's not so much a matter of big time money, it is rather about building the right context, building the right culture. And the culture building starts with us. By the way, by the end of this week, we will have another workshop on that, just the executive board. And we will not stop here. We have a good track record in the past, but we probably have got a little complacent in that regard and too slow. And the industry is pretty much the same size, as you rightly refer to. That's not helpful in that context. From incubators that you have to build, and which we will build, to smaller entities, we will draw on anything that will make the life of those who we want to be innovative, easier. As regards to structural changes, and maybe we can split the work here too. Of course, this is difficult. It's very difficult to differentiate between what is just cyclical in nature and what is already structural, because even a cyclical movement can sooner or later turn into something structural. I would dare to say that some of the demand developments tend to be structural today, because Solvency II as just one very recent example, does make people rethink reinsurance. So they take a much more economic view, and that in some cases, means less reinsurance. In other, however, and that goes for mid-size or monoline companies, it will more reinsurance. So there is an up and down, but this is a structural change. And there's other examples, and maybe Torsten, if you would like to add one or the other, but this is also about the industry as the ultimate buyer of insurance or the individual. How do they look at their risks? And do they, with the internet, for example, a crowd financing of insurance is a structural change. It's not unthinkable. We are not yet there. But if we see a disruptive innovation in that regard, a kind of a remutualization of insurance, and that could happen in reinsurance. We saw that. We had the old captive pools. This is nothing entirely new, but maybe with digitalization, it will be redone, rethought, and could turn into something structural. What we will try to make sure is prethink to the extent we can and be part of it where we think it is of interest to us. And that's the beauty of size. We have the financial means, and we have the width and the breadth of the intellectual potential to be close enough to understand in time, to react, and then do it. But it's very difficult to differentiate between the two. And Torsten, anything you would like to add? I only would like to make a remark in what direction we pursue innovation. You were referring to innovation in a way that you said, if I may repeat your question, are we not a bit in a disadvantageous position that we started to deploy alternative capital later than others or so? It is probably true. When you have plenty of excess capital, why do you need an additional source of capital behind you? We do not depend on retrocession or additional capital sources. But when you look into the question, is it a structural change or is it innovation? That might be a structural change. I would not exclude that some of that capital will stay in the market forever. The more qualified pension or hedge funds might stay in the market even after losses, might stay in the market even if interest rates should increase in a couple of years from now. That is possible. On the other hand, what does it mean for a player like Munich Re or an insurance company or one of our peers to have this capital source available? It means you might have a higher flexibility to manage the cycle. Definitely, the source of capital is cheaper than the current equity to some extent. It might mean in the long run, if you can build partnerships or can extend the value chain and that can bring a lot of that business into that market, in theory, into the pension fund market, that maybe you reduce the cost of capital vis-à-vis equity forever. Maybe. But what it does not mean is you do not create new business for our industry. And that is the difference. So one is a sort of very important game, but maybe an efficiency game in terms of flexibility and capital, cost of capital. The other one is the question for our industry. How do we respond and react to new risk and generate business? And that has something to do with another kind of innovation that we have to find new ways how to ensure intangible risk and values. And that is for us, the bigger construction site, if I compare these two. And you are right, the industry, including us as Munich Re in the past, have not done enough here. Okay. We have time for one last question, sorry, Michael, before the break. It is from Thomas Seidel. I hope it is a short one. Then we will go for the break. The question may be short, yeah. On page 18, basically, you show that the reinvestment yield actually has been growing over the last three years. I think in the context of rapidly falling yields around us, this is not a small feat. At the same time, you say you are not chasing yields. So what exactly have you done to achieve this? This is part one. Part two is, with QE, more headwinds. You mentioned the reinvestment yield now below 2%. Should we expect Munich Re to reconsider its investment approach, like some peers are announcing to go into more exotic asset classes, go more cross-border and stuff like that? Thank you, Thomas. There is no miracle in it. It is going down drastically from 2011 to 2012. Then it is going up because in 2013, we had higher interest rates than in the preceding year. Then it is going up again because we took a little bit of more risk. But it is just technical movements. It is not a major change here. Duration, yes. Duration constantly going up more or less. Yeah. In line with the duration of our liability side, which is an effect of the, how is it called? Sorry. No, the reaction to decreasing yields with a longer duration. Convexity, yes. Result of convexity, but we also increased the duration of the asset side. Excellent. Thank you. Let's go for a break of exactly 30 minutes. Please be back at 4:00 sharp, and we will then start with the second part of the presentation. Thank you. Interest of those following this conference on the Internet, we should start again. Now time for the second slot of presentations. It is on the business areas now, starting with the primary business. Torsten Oletzky, please. Welcome from my side as well. I have the pleasure to present to you the ERGO set of numbers as well as some of the more recent developments within ERGO. When we look back at 2014 in ERGO, we look back at a year with an overall good, decent IFRS result in a rather difficult interest rate environment. That you will see is reflected in some of our economic results. We do see stagnating or declining premiums in Germany, mainly in life, while we are growing in the international business and we see some good progress on some of our strategic initiatives, and I will talk about them. There was a question regarding innovation and digitalization, and we have something on that in the presentation as well. On the next slide, I would like to start with the top line. You see that the top line is stable from 2013 to 2014. This is coming from a reduction in premium in the German business and a good growth, thank you, from the international business. On the profit side, we have two numbers for 2014. One is the ERGO standalone number, and there we have a significant increase to EUR 620 million. Then if you look at the number in the Munich Re books, you see that there is only 169, and that has to do with the depreciation of goodwill you heard about before. I would like to explain to you how we came to the 620. There are basically positive contributions from different areas. One is the technical result. You can see on the combined ratios that the combined ratios improved in Germany and the international business as well. I will talk about these in a bit more detail on the following slides. Then there was a positive tax effect, which goes back to a court ruling at the end of the year where we basically get back taxes which we paid in 2001 and 2002. This court ruling was in favor of the entire insurance industry, but ERGO is one of the companies which is benefiting most from it, because at that time, we had a very conservative accounting on taxes, and that means that we are getting back more than others this year. A bit counterintuitive is the positive effect of the decreasing interest rates on our IFRS results. In the end, it's not that counterintuitive because we have hedging programs with swaption notes which partly go through the IFRS P&L. That means that decreasing interest rates lead to an increase in value of these instruments and part of this increase is reflected in the increase of our profit number. In the long run, obviously, the decline of interest rates is not good for us. We already had a discussion on MCEV, and you see that the total MCEV of ERGO has declined significantly from 2013 to 2014. This is due to the adverse interest rate development. Return on investment is up from 2013, which has to do with the hedging operations with the swaption, and it has also something to do with realization of profits to finance the local GAAP set at asset CCR. When it comes to the depreciation on goodwill, I think Jörg Schneider has covered that. If you still want to hear more about it, you just ask it in the Q&A session. That brings me to the life and health business. We have, in the new segmentation, three segments. The first segment is German life and health. You see the top-line developments on this slide split by life, health, and our ERGO Direkt business. The direct business is entirely booked in the life and health segment. You see that the premium on the life side was declining by about 4%. The health premium was declining just a bit, by 0.7%, while we have an increase on the ERGO Direkt side. The net result of the segment increased significantly due to the same reasons I just mentioned, when I was talking about the overall result, and that is from the hedging as well as from the tax refund. Obviously, we're not happy with the declining premium in life when it comes to financing of our sales force. On the other hand, we do believe that when it comes to profitable growth, the current environment is not such that we could grow in life with measures like higher bonus rates and still be profitable. So we do believe that even though from an organization standpoint, from a sales force standpoint, this doesn't look nice, it is the right steering not to force too much on the life side here. On the health side, we have a stagnation, which also has to do with very moderate price increases last year. We will also have a moderate price increase in this year. This doesn't help the top line, but it's good news for the customers and for the private health products. The relatively high price increases of the past have been a problem for the industry because this did hurt the reputation of this type of product. So we are relatively happy that the price increases are down to historic lows at less than 1% last year, but that also has an impact on the top line. That brings me to our business mix on the life side. What we are showing you here is how we are steering our new business portfolio away from traditional guarantee portfolio to our target portfolio. The target portfolio includes basically pure risk products. It does include unit-linked products without guarantees, and it does include our new life product, which has a non-traditional guarantee. A guarantee which is hedged in the capital markets. Usually, it does take a while until you change such a portfolio mix in a long-term business like insurance. I do think that we have seen quite good progress here. We have decreased the share of the traditional business from 70% in 2010 when we started with the development of the new products to less than 50% last year. And we expect to be at less than 20% two years from now. This has something to do with how we introduce the new products in different segments of the market. We have started by introducing in 2013 the product in the non-subsidized so-called third layer segment. This was the easiest way to bring the new product because in that segment you don't have to make compromises in product design due to tax rules or subsidy rules from the government. We have this year also implemented the product in the subsidized group business. So it's now available in two areas, which automatically will lead to a higher share on the new product and a lower share of a traditional business. Therefore, I do believe that until 2016, it is very realistic to achieve this new product mix we are aiming for. Obviously, the new business is not our biggest problem in the life insurance. The bigger problem is the back book. And there the question which was already asked is what is the average guarantee? The average guarantee was, as mentioned before, at 3% in 2014, and that does include the effect of the so-called ZZR where we're basically reserving for the old portfolio so that the effective guarantee which you have to earn with your investments is reduced. The reinvestment yields were declining over the last two years in the primary business. They are slightly higher than the group investment yields, and that has to do with the longer duration of insurance we buy on the primary life side because we have a relatively long duration on the passive side of the balance sheet here as well. The decline of the reinvestment yield was still relatively modest over the last two years. With the latest developments on interest rates, the speed of the decline might increase in 2015. The average yield, which is still at 3.6%, is above the average guarantee, and the reinvestment yield is above the guarantee for the new business, which in traditional business is now at 1.25%. But as I said before, we are trying to steer the business away from traditional guarantees at all. So managing the back book and especially making sure that we can honor the guarantees we have sold in past years is the biggest challenge we have on the German life insurance side. One aspect which is discussed quite intensively in the German industry is how the so-called ZZR does help or does hurt us solving the problem. And this graph shows you how it has basically helped us to bring down guarantee levels from a reference rate here for a 4% portfolio. And now the question is how the ZZR will develop. Even with increasing interest rates, which I do not expect over the next couple of years, you would see that the reference rate for the ZZR would still decrease because it's an average over a long period of time. That would mean that we would have to build up additional ZZR volumes. Right now, there is quite a bit of lobbying of changing the rules of a ZZR because in local GAAP, the huge amounts of ZZR which have to be built up do pose a challenge for the entire industry and for individual companies. I can understand some of the lobbying. On the other hand, I do believe that the mechanism of a ZZR in terms of making sure that we bring down the effective guarantees in the back book is a very important one in terms of making the industry crisis-proof. That brings me to the P&C business. Here you can see a good development for our German P&C book. We have managed to bring down the combined ratio from last year's 96.7% to 95.3%. This is not the ERGO standalone number because we are still in Munich Re logic here. That means that the effect of reinsurance contracts ERGO bought at Munich Re is added to the combined ratio. The standalone combined ratio for ERGO, which would be the number you would use to compare us with our competitors in the German market, would be 93.9. In other words, the reinsurance division lost some money on us in 2014, which is not the usual case. Usually, there is a profit on that. But that brings our combined ratio in this view to a 95.3, which is a bit too high. We believe that the ERGO book, usually on the German side, can manage to be run at around 93%, and with a 93.9, which we have on ERGO standalone, we are not that far away. It was a bit bad luck that those reinsurance contracts which were underwritten by Munich Re were not that profitable in 2014. Other reinsurance was relatively profitable. One reason for the good combined ratios and the stable combined ratios compared to the market, obviously, is the business mix. We have talked about that in conferences in years before, therefore, I don't believe I have to be too long on that one today. I would rather turn your attention to the development of our P&C business international. There, the combined ratio is at 97.3% for 2014, which is a very good number for our international business. In the international business, we have a large share of motor business across several countries, and bringing that portfolio to a 97.3% is a very good job by our international management team. Even though there's some support from reserve releases in countries where we were extremely high in reserves, like Greece and Netherlands. Even if you would factor this out, we would still have a combined ratio which is significantly below 100%. Here we are now in the target range. This is very good news because three, four years ago, we were having discussions on whether the international business of ERGO would be profitable, whether we would be able to manage to make this portfolio profitable. You can see that we have achieved that. Unfortunately, in the Munich Re numbers, you don't see it on the sub-segment level because all of the goodwill depreciation was booked on the international segment. Therefore, the positive result of EUR 164 million turns into a negative EUR 276 million in the Munich Re books. On the top-line side, we have been very careful during the time of turning around the portfolio. We have given up premium in the years 2012 and 2013. Now that the turnaround has been managed, we have allowed the international business to grow again on the P&C side. You can see that we are almost back to 2011 levels. If we would adjust for FX rate movements, we would slightly exceed the 2011 numbers. We are basically back to the top-line levels three years ago, with a profitability which is much nicer than it was three years ago. On the international life side, there is a positive. Sorry, here we still have P&C. You see that the combined ratios for the major regions and countries we have here, Poland, Baltics, Turkey, Greece, and the joint venture in India, as well as for the legal protection portfolio, that they are all in a good range. The only one which is a bit higher than expected is Turkey, which is still in the range of 108-110. On the other hand, in Turkey, we have significantly higher interest rates than in other areas where we do P&C business, so that the overall result from Turkey was more or less plus/minus zero. The turnaround in Turkey, even though there's no further improvement you can see on the combined ratio side, has been managed quite well. That brings me now to the international life side. On the international life side, we had a significant growth in 2014, which comes mainly from two markets, from Poland and from Austria. In Austria, taxation rules have been changed. A few years ago, the taxation rule was changed that you would have to buy at least life insurance for 15 years to get a tax benefit after 10 years before. Now they have changed it back to 10 years, which led to a significant increase in new business and an increase in total premium, especially with our bank insurance partners of UniCredit and Volksbanken there. On the Polish side, we also have new bank insurance partners, so there is a significant premium increase. The new business margins are down in 2014, but it is still profitable business. The change in the margin here has also something to do with the change in the portfolio and with new contracts, which have a positive profit contribution, but not the same margin as the old business. That brings me to some of the initiatives we have started. I will not go through the entire slide here in the interest of time. We just wanted to give you a short overview of what we have done when it comes to innovation on product side. The life product we have discussed quite intensively in conferences before. On the health side, we have modified our products. On the P&C side, we are especially trying to explore niches in which we have not done business yet, like art insurance, where there is less competition than in mainstream lines like motor insurance as well. On the sales side, we are trying to utilize benefits from bringing our ERGO Direkt sales techniques together with the traditional techniques in the agency sales force. We have seen some very nice first results, and we hope that this will help us to get back to some growth in the German business, even though we do not expect the German business to grow anywhere close to where the international business is growing. On the back office side, we have invested in our new COO department and in process efficiency, especially in a market which is stagnating and a business which is stagnating like our German business. Cost efficiency is definitely one key to success, and therefore, it has been very important that we made the planned progress here. So far, when it comes to our cost position, we have achieved all targets. One example for innovation from our colleagues in India, from our joint venture, HDFC ERGO, is the so-called Office in a Bag, which basically allows our agent in rural areas to carry his office in a backpack in areas where you do not have any infrastructure and still sell micro-insurance products. Even though this sounds a bit unusual from a perspective of an industrial country in Central Europe, it has helped us in India to bring this joint venture from the smallest P&C company in the Indian market to number 4 last year. We assume that we will be number 3 this year among the privately owned P&C insurers. Not just growing, but also profitably growing. One further aspect I would like to shortly mention are initiatives on the digitalization side. We do believe that our business models will have to change, even though on the insurance side, there is less change from digitalization to be seen today compared to other industries. This, in my view, has mainly to do with customers which are not surfing through the internet or using mobile devices to research on insurance products. There are other products which are more fancy to customers, and that means that there is not the same pull to innovate business models like in other industry. On the other hand, we are still seeking for business models where we can use the push which we use today via agents, in a digital way, so via mobile devices, via internet. I do think that we are in a relatively good position in the German market here with ERGO Direkt. ERGO Direkt is our innovation center for all online sales and service processes, and we are now transferring these ideas back to the traditional business. We are also investing in Berlin, which is the hotspot for all kind of new business activities, digitalization. So we have different teams on the ground there in our ERGO Digital Lab, as well as in cooperation with accelerators. Unfortunately, the new business models which are developed there will take quite a while until they are significant and can be seen in our numbers. Which brings me to a short summary of the numbers and the presentation you have seen on ERGO. The operating business is on track. The results in this year are a bit distorted by goodwill depreciations, tax effects, and others. We keep our midterm target of a profit of EUR 600. The target for 2015 is EUR 500 million, and I do believe that this is achievable. On the life side, the challenge is in shifting the new sales to less interest rate sensitive products, as well as managing the back book. On the P&C side, we are basically continuing to do what we did to achieve our combined ratios. On the international side, after we have managed the turnaround, it is now time to keep the profitability and find new growth. With that, I will turn it over to Torsten Jeworrek. Yeah. Thank you, Torsten. I would like to guide you through the reinsurance part and concentrate on non-life reinsurance as Joachim will cover the life part. We have discussed already in the first part of the discussion today that non-life reinsurance environment is a bit challenging. I wanted to start with a positive statement here and wanted to promise something which is now a bit damaged by my colleagues. What is it? Usually, the colleagues in the first part exceed a bit their time limit with their presentation. That is a rule. I wanted to promise I save up some of the time which they exceeded. That did not happen. The first part is taken away from me. I concentrate on figures and numbers and go into the nitty-gritty stuff now. Figures now, that is usually the more boring part which is done and covered by Jörg Schneider. No, no. Yeah, go on. Thank you. I deserve it. Thank you, friends. First, view backwards 2014. When you look at the gross premium written here in the left part, you see a decline of the premium by 3.5 percentage points. Question is, where does it come from? It might surprise you, it does not come, or not mainly come from the non-life part, from the cycle. It comes to roughly 50% due to foreign exchange rates, particularly the Canadian dollar, in the first six to nine months. In the other part of the premium decline, we gave up or had to give up some of the larger quota share treaties in life and in non-life, which either did expire or where the cession was reduced. As far as the results are concerned, technical result life, Nicolas mentioned already we have an ambition in place of EUR 400 million per year, which was not achieved last year. Two major reasons, which Joachim will explain in more detail. One was further reserve strengthening of our disability income or business in Australia. That is something which had to do with our back book. The future business is in good shape, what we write here. The other reason was the recapture of a larger treaty in the United States, which had a negative impact on our IFRS result, but helps to improve our embedded value for that business. That means it's a release of future negative developments in the future. As far as life reinsurance is concerned, Nicolas mentioned it, we keep our EUR 400 million target in place. Nicolas was optimistic. I am even almost bullish, I would say, that you guys in life will achieve that in the future. Non-life a very satisfactory 92.7% combined ratio, which is a slight deterioration versus last year's 2013. That looks very good and you could argue, does it reflect the challenging market environment? When you look a bit deeper, of course, you see that has to do. We had again a below average year in terms of large losses and nat cat events. Usually expectation is here 12% of our non-life premium. In reality, it was only slightly above 7%, so we did save 4.5 percentage points here. Our reserve releases were slightly higher than our expectation of 4%. All in all, a satisfactory year, I would say, 2014. How is our position in a challenging environment? I do not go into detail here, but it has not changed that the value proposition of Munich Re is not about to be the cheapest in the market. What we try to be is to serve value, to add risk knowhow, to provide our clients with tailor-made solutions instead of competing only for price. The preferential access to our clients has not changed. We mentioned that already last year, that about 50% of our business in non-life is placed on a base of differential terms. Two third of the business is written and done on a direct basis, so without any broker in between. Particularly the natural catastrophes and non-proportional business, I come to that later, which is under this most severe price pressure in markets when you compare the various segments. This business also for the Munich Re comes mainly through brokers into our portfolio. The next two slides give only a bit further insight into the January 1 renewal. We reported about the renewal already a few weeks ago. Here on that slide, you see roughly a comparison how the markets or the segments developed in the last renewal. It is not surprising that the biggest price erosion took place in the non-proportional CAT business. So the second pillar here in that chart on the left side. The positive part is right, the next pillar, that is the proportional casualty business. That is for our portfolio, particularly motor and shorter tail casualty business. So it is not this extreme long tail business, workers' compensation stuff. So it is more motor business, more general liability business, and a lot of this business comes into our portfolio because of financial relief type quota share business, which particularly in the emerging market, includes the cession of motor. There was a lot of discussion also by brokers to what extent the terms and conditions have deteriorated or not. Is it just a price game or do we see a qualitative deterioration of the portfolio? The answer is twofold. We do see increasing pressure on terms and conditions. Clients expect from us and from the market to come up with non-standard terms and conditions for their portfolio. But the final outcome is not as bad as reported. What has changed? What could be defended? We saw changes in terms of the hours clause under catastrophe business, particularly in the U.S. Here, there is a sort of new market standard that is now a rule that the hours period to cover one specific CAT event has increased from 96 hours before to 120 hours now, particularly for hurricane business. So that means the time the clients can aggregate their losses has increased now. Is it good or is it bad for the reinsurance market? It depends. For smaller events which affect larger regions, of course, it is to the advantage of the clients. They have more time to aggregate an event, to aggregate, accumulate their losses, and therefore to make use of their CAT cover. On the other hand, when the CAT cover, the coverage is not sufficient and there is a spillover the CAT cover, then, of course, the client cannot immediately make use of a reinstatement in the same event unless, so to speak, if not the first hour period is exhausted. It has good and bad sides for both parts here. Where we could, and that is my second message, successfully defend the softening of the market terms is where the client just wanted to open the coverage for free. Expansion of coverage, extension of coverage to include terrorism, to include cyber risk and all these things. That could be defended. That means the coverage is still as good as before in that respect, or alternatively, we did offer alternative covers for extra money to meet client demand here. On that side, we give you further insight here into the line of business split of the January renewal. You know already the figures, 9.5% volume reduction in the January renewal, but only 1.3% rate deterioration. From my perspective, that is a very good outcome that underlines our discipline. I mentioned already, when you look at the 9.5% volume reduction, about 50% of this 9.5% come from disciplined cycle management. Here we gave up business for profitability reasons, and approximately the other 50% have different reasons. Here, larger quota shares were reduced by the client. The cession was reduced or the retention was reduced. This part of the business was not available anymore. That has, to some extent, also to do with the structural change. A few treaties, particularly from the Chinese markets, where the clients decided not to cede the same volume to the market anymore, affect or are in anticipation of the introduction of the new solvency regime in China. Because of the new solvency regime, the capital demand for motor business and other businesses will reduce, and therefore the demand to support that business with reinsurance will come down. It is a bit of both what you see here. When you look at the rate changes, in addition to the property CAT segment, there is a very big change on the marine side. You see we gave up here or reduced our premium volume by 22.1%, but the rate change was only -1.7%. You can ask why that, when the rate change doesn't look too bad, why did we give up so much premium? One has to do with the other, of course. The 22% are to one extent, a result of our cycle management in marine, particularly the offshore business came under pressure. The other effect was that our Lloyd's Watkins syndicate, they buy significant amount of retrocession of reinsurance to cede some of the offshore business into a secondary market. That explains this 22% here in total. When you look now at the portfolio composition, and I come now to our future positioning, then you see here on that slide, first of all, what we have to expect in the coming renewals, and there are two future renewal dates ahead of us in this year, April and July. Good thing is, in relative terms, the premium volume, which is up for renewal, is relatively small. However, the relative portion of the CAT business in these coming renewals, April and July, is much higher than in the January renewal. That means the impact, whatever the outcome will be, the impact will be very digestible for our portfolio. However, we might see higher rate reductions because of the CAT impact. What is our expectation? Market environment per se is unchanged, so similar competition as in the years before. However, because we saw already in these markets, Japan and United States, at least two seasons, two years of rate reductions, we do expect that the rate reduction, the speed of the rate reduction will slow down. That means, yes, rate reductions, but probably and hopefully not to the same extent as we have seen it last year. Here, a split of our total non-life P&C book. On the left side, the EUR 17 billion. And it's remarkable that in the meantime, already 25% in the upper left part come from risk solutions. That is our specialty insurance part. And then you see in the middle here, when you look into the traditional reinsurance book, the EUR 13 billion, that the share of the CAT business has reduced from 12% to 10% in the meantime. And at the same time, we have significantly increased the share of our casualty book. That is the motor business, that is mainly proportional business, which is written here. Here we benefit from a very favorable primary rate environment, and we benefit from the demand for capital relief transactions. On the right part of the slide, risk solutions, EUR 4 billion, exactly EUR 4.2 billion. Nikolaus von Bomhard mentioned that we try to write a business here which is not affected to the same extent from price changes, from price pressure, like the traditional reinsurance book. It's a bit immune. What are the two parts in that portfolio which depend on the global cyclical market pattern? That is Watkins, and that is Corporate Insurance Partner. These two segments follow the global price patterns here. That means these two are under price pressure. And here we have exactly the same pricing and cycle policy in place like in traditional reinsurance. The other parts, specialty markets, American Modern, Hartford Steam Boiler, and what is mentioned under other here, Temple in Canada, Great Lakes, Australia, and this stuff. That is very much local business, and it follows the local primary market, and to that extent, pretty much disconnected from the global price cycle, which immunizes our business to some extent. I would now like to cover traditional reinsurance before I switch to risk solutions. On the traditional reinsurance side here, you see a short split between proportional and excess of loss. Interesting enough, after a trend in the last decade that the non-proportional segment did increase, we see now a reverse trend. Proportional business becomes stronger again. And particularly for the proportional business, the direct and the very close contact to the client is very helpful and very important for successful underwriting. There are a lot of discussions, how do we see the traditional segments in our portfolio? We gave a presentation already last year by line of business. Here now you see on that slide the change from last year to this year. What happened now is in our portfolio there are two major changes where the profitability reduced significantly, that is the property nat cat segment in the upper part of the slide. Last year more on the right side, this year more on the left side. The other part affects the marine business here in the middle, the small bubbles. The big proportional segment are pretty stable in our book. Why? Here in the proportional segments, we see two trends. One is on the primary side. Original primary rates are the major driver for the profitability under these treaties. They are either stable or even slightly improved. This improvement in the primary rates is partially offset by higher commissions under these treaties. In property CAT and under marine, we see a deterioration because of the market pressure. All these segments in our portfolio have profitability expectation above 7% or 8% capital cost. That is good to know. That means there is a relative deterioration of profitability, but not to an extent that these segments are already completely underwater, so to speak. That is not true for the market. When you go into the worldwide market in CAT business, you find a lot of treaties in the market where the profitability is already below 7% or 8% capital cost. But for our portfolio, that is still profitable. However, I admit it comes from profitability levels after the Japanese earthquake and hurricane or Windstorm Sandy three, four years ago, where this bubble was far above the 50% target work which we had in place. The relative deterioration is severe, but in absolute terms, they all deliver above 7%, 8% minimum capital cost. Here, the same slide by region. Here it is only maybe remarkable that the biggest change in terms of profitability took place in North America, but this is very much in line what you know from the broker communication. Next slide, split of our business. I mentioned it already, the premium volume, particularly for casualty business, went up and you see here the distribution, what is included in this casualty business here. The biggest portion is, of course, motor proportional business. That has to do with our strong involvement in the Admiral in U.K. and worldwide. It has to do with our big participation in capital relief transactions. What has changed here compared to maybe 10 years ago, we have not much business in the portfolio, which might cause this bodily injury type 2 of losses, which are exposed to medical inflation and cost of care, which caused a problem 10 years ago in the United States under workers' comp business. Is this business good or bad? What you see here is our pricing view. Do not mix it up with our reserving view. This is our pricing view now. That means it does not include any loadings we put into our reserve when we write a business for the first year. You see here on the left side, casualty share has increased to the 45%, what I mentioned already. On the right part of the slide, you see that the combined ratio for this casualty book is around 100%. That is a decent, let's say, outcome in the current environment. First, despite the increase of the share in our portfolio, we have not written the business at the expense of worse margins. That is a good thing. Second, when you look where the business comes from, large portions come from Australia, come from China, then we have to take into account that in the local currency, the local interest rate are much higher than in Europe. That means 100 combined is roughly okay for that business. You could see it from a negative view if you want. Of course, considering the development of interest rate over the last five to six years, you theoretically need an improvement in the combined ratio to compensate for this deterioration in interest rate. That was not achievable. So that is a negative part of this picture, but economically, the business is in very reasonable shape. Now I switch from traditional reinsurance to specialty, to risk solutions. You see here on the left side, the steady development of our volume of our premium income. The business which we have developed over the last years is partially organic, is partially because of acquisitions and takeovers, particularly American Modern and Hartford Steam Boiler, which could be acquired five, six years ago. But the direction is clearly up, and that is positive. What is the strategic rationale of this segment here? That is a bit different when you compare this primary business with the primary business strategy of some of our peers. We do not want to buy or to write business just for sake of volume. Our rationale is we go into the specialty market here, where the availability of knowhow of risk expertise makes the difference and is a success factor. That is the first thing. Second is, when we look into acquisitions, then exactly this strategic consideration would drive our appetite to look for further acquisitions. Does a future company fit into such a segment? So that means does it bring something to the table which improves our capabilities in terms of data, in terms of risk expertise, in terms of access to new clients? Second, is the price okay? So that means I would not completely exclude that we would consider further acquisitions in the future as long as the strategic rationale is met and as long as the price is not completely unrational, which is these days, of course, not the case. When you look at the profitability on that slide, you see that we have now a pretty decent performance around the 90% combined ratio, in some years even below. My expectation is that we continue with such a range also in the future. Before you ask the question, why is this share of risk solution in the underwriting result, this blue line on the right side, not shown for the years 2009, 2010, 2011? That has to do with the negative performance of the traditional business because of earthquake Japan and this stuff in these years. So that means risk solution was so good that the division of these two would not have made sense. It was not that we did not want to show it. Next slide is now more the innovation part. As we have discussed it already, therefore no, first, before we go into innovation, retrocession. That is one part of the innovation. It was mentioned, were we not a bit late in terms of these sidecars and alternative capital vehicles? I mentioned already that is for us a capital management opportunity. We have developed various of these sidecars, particularly in Eden Re and in Eden Re one and two, to make use of alternative capital and to make our own capital a bit more efficient. Also, with the idea, in case of a sustainable availability of such capital resources, we would like to build partnership and to make use of it in the long run. We wouldn't need it for a pure capital release only. We are strong in our capital base. No, for us, it's more strategic consideration. Can we build partnership with other capital partners for the long run, for the longer future? In terms of retrocession, you see here that we have, in 2015, so far at least, reduced our external retrocession a bit. That is probably not the final picture because reason behind this, yes, we spent less money because of good market environment. Second is, we wanted to see first how our risks do develop in our traditional portfolio to see and to find out how much retrocession is needed to have a similar protection level in place as in the past years. So it might be that we complement the retrocession in the coming months before we go into the renewal season. The other part of innovation, and that has to do with product development, which is from our side, certainly more the important part. I think it should also be the more important part for the insurance industry, because that part is the only, let's say, approach to generate new business, to find new business which is not in our market yet today. On the other hand, to meet client demand in terms of risk protection and risk transfer solutions for those risk for which they could not find an alternative partner on the insurance side. The space of new risk is huge. We see it on a technology side, environmental side. There's an under-penetration, under-insurance of climate risk, of weather risk. We see it on the political side and in many other parts of the world. We have dedicated solutions in the reinsurance segment, particularly our risk solutions carriers who have direct contact and direct access to original customers. We consider innovation as a collaboration with them to find out where is the demand, for which risk transfer product is there a willingness to pay money from their side, and to have close contacts with the client to find out how do the risk might behave. Therefore, that happens through special relationship on the reinsurance side and through our special carriers. Here, particularly here, the cooperation with our colleagues from the ERGO is so important because they have, of course, huge access to original customers and therefore are an ideal partner for product development for us. Volume for us so far from these exotic innovation products is EUR 250 million in reinsurance. History profitability excellent. Of course, sometimes you see surprises, but loss ratio is very low. Margins in that business are good if you do it in a controlled and reasonable way. One specific product which I would like to highlight is cyber insurance. Here we see a very strong trend, particularly in the U.S., strongly increasing demand for cyber insurance products. We estimate that the original, the primary market, has now a premium volume in the order of $2 billion US, the primary market. Only part of that, of course, goes into reinsurance. We think that our reinsurance share is currently 20% in that business. There are various sources, including own extrapolations, and we do think that the premium development will go up to a level of $6 billion-$8 billion US by the year 2020. That is within five to six years from now. Therefore, we better prepare for that. Here, there is new business available. You can ask now, if there is such a strong demand and that starts in the United States but spills over to Europe and to other continents, why is there not more capacity in the market? Why is it not written by many more of the insurance companies worldwide? Because that is not easy business, of course. We think you need specific knowhow. You need probably collaboration with IT companies really to understand the underlying IT technology, the underlying IT software. That has nothing to do with an actuarial approach where you collect some data and then you calculate some distributions. No, there is a high diversity in the underlying architecture, IT architecture when you compare, for instance, my private PC or your private PC with power plant equipment or with an oil platform offshore somewhere. Can they be affected by the same virus? No one has an idea, so we have to find out. Accumulation problem and third-party losses, reputation losses are a big issue and an increasing issue, and particularly these large losses as far as when accumulation is concerned, we think the reinsurer is an ideal partner. Here at this stage, I would like to finish early. 31 minutes. Early. That is surprising. With my key takeaways, the market is challenging, but we delivered a strong profitability and continue to do so. Traditional portfolio, we would not like to change the horses now. Discipline underwriting and cycle management remains key. At the same time, tailor-made solutions for our close clients, for our key clients, are very important, and risk solutions and innovation is very high on our agenda. Thank you very much. I hand over to you, Joachim. Thank you, Torsten. Ladies and gentlemen, colleagues, good evening from my side. Before I walk you through the slides, I try being quicker than I thought. I perhaps highlight how was 2014 in life reinsurance. In a nutshell, you can conclude life reinsurance continues to be a key contributor to both the reinsurance segment and the group. We have seen pleasing results both in terms of in-force and new business. Even in the U.S., where in the previous years we had reported and discussed altogether also in this round that there were, from the effects that we have already discussed, like the old issue ages, et cetera, some strains. In 2014, it has developed as expected end of year 2013. There is one exception. This is the one that I wanted to highlight. This is Australia. It is Australia, and you see this effect across all the accounting regimes, be it the MCEV, be it IFRS. Whatever financial KPI you look at in 2014, Australia explains it. The market to anticipate this, the market there in Australia still is not great, but there has been progress, and going forward, there is hope. Now some more details. The slide 71 in front of you shows you the most important MCEV KPIs and how have the operating earnings been. Had Australia not been, they would have been very good. Actually, they have been EUR 322 million, which is disappointing. If we look into the components, then we see a value added of new business of EUR 453 million. This is very pleasing. It is lower, though, than the years before. However, if you just take the financial parameters like the currency exchange rates 2013 or the interest rates back then, this number would have looked 522, then well in that already nice range of the previous years. Very pleasing. Then you look experience variances. How has 2014 developed? It is all okay. It is according to expectations. You look into the assumption changes, which is just the sum of some upward noise, some downward noise, very pleasing. Other operating variance, though, this is the Australia effect. This is not okay. I would like to say already here, the Australia effect accounts for more than EUR 400 million in terms of MCEV. This explains the whole gap. Next slide tells you how the IFRS picture looks. Premiums have come down. The two reasons why they have come down is foreign exchange rates, which is one part of the explanation. The other is that very large transactions either expired or expired but then got renewed or just partially renewed. It is a little bit less weight in the very large transactions. The technical result was already mentioned, and the gap was also mentioned by you. It is Australia, and it is the recapture effect that we already reported back in the third quarter in the U.S., which accounted for around EUR 50 million. But there is also an interesting fee income, which we should mention, of EUR 63 million. Fee income because it is both non-technical because it is low risk transfer, financially motivated business. I skip this slide for the sake of time. I think it is self-understanding. This map here is perhaps new as an illustration. It makes our exposures in the regions transparent, exposures that we run with regard to mortality but also morbidity risks. This is all in terms of present value of claims. What this would highlight typically is that the size of the bubbles naturally is the largest in the Anglo-Saxon markets because the primary markets there simply are the largest. But it also highlights where mortality risk simply is of the highest weight or is dominant, like in the U.S. On the other side, it would also highlight where morbidity risk is in the center of reinsurance takings, like in Australia. The next slide then, 75, tells you, and this is a qualification of how we consider the risk-return profile of the life RE portfolio. How should you read it? We have centered the bread and butter traditional mortality business into the middle of this matrix, right? This is the benchmark, and this makes transparent, relative to this business, you would see to the right up corner, the financially motivated business and the asset protection business with the most interesting risk-return profile. These are the businesses where we have been growing since five years, and this is the business where, going forward, we expect to further grow. But you would also see to the lower end of this matrix, where some of the businesses produce relatively unattractive or even absolutely unattractive returns. The colors of the bubbles, they indicate whether this business is under or overweight compared to our global market share of 25%. Green means we consider this a uniqueness in the reinsurance arena. Now, four slides that highlight how our business focus areas have been developing and have been doing in 2014. I start with the financially motivated business. What you actually see is that in terms of new business activity, you know that it is a bumpy business. We had said, I think in the previous year, that the run rate of VNB is something around EUR 50 million. You see that in 2014, it is EUR 73 million. This is very pleasing. In any case, it continues to make massive contributions, and this is going forward where we expect to continue growing. Asia, next slide, 77, continues to offer good opportunities. Yes, there is competition, even in Asia. There is also rate competition, but still overall, rates and conditions and terms at which reinsurance is placed, they continue making sense to us. We continue growing there. The weight of the Asian portfolio already is around 20% in our books. Longevity, I just highlight this. It is not a growth area that was set today. But 2014, as you can see in this slide, there is a relatively significant rise. It does not mean our risk appetite has changed. It does not mean anything other than we have concluded quite a big transaction, the Aviva swap, which was also communicated in the press. Otherwise, our risk appetite has not changed. We are reluctant. We just write it because we believe mixing it into our mortality long portfolio makes sense to stabilize overall results. The asset protection business for which we have built what we call the hedging platform, so quite a significant and material investment from our side, has been developing slowly but nicely. These would be my words. And it has reached a point now where it covers the relatively high investment cost and the relatively high and fixed maintenance cost, which is good. Going forward, we see an increasing demand. We see an increasing demand mainly coming from Solvency II. We see another one coming from Basel III requirements from banks, and we see more demand coming from companies asking us for support for sort of modern or new type of savings products, and hence the regional focus as described on this slide. Now, perhaps a slide where I should invest a couple of minutes. What you see here is two areas. It is the U.S. mortality business, and you see the Australian disability. Why the two ones? Because these were the areas where we reported last year very comprehensively on. So I start with the U.S. mortality business. In a nutshell, we can say 2014 developed as expected. There is no news from that. It does not mean everything all of a sudden is good. No, but it is not worse than it was 2013. It is not better either. It is as expected end of year 2013, so no news on that. Australian disability, there is news. So what is the news? The cleanup process that we have been going through there has reached a level where we say there is no other single player in the Australian market, neither on the primary side, less so even on the reinsurance side, who has now that depth and that granular insight, data insight, data intelligence, and understanding of the business than we have. The sad story of that is it comes at a cost. And what we had to realize in this process is that the gap that we thought back 2011 and a little bit 2013, which was around EUR 200 million in sum, the gap is larger. And the gap is larger, and we have therefore strengthened our reserves very materially in Australia. That said, there has been progress. So we have concrete cases where we have achieved increasing rates. In other cases, we have simply quit the participation and so exited the new business. We also have, and this is an important message, we have alignment in new business now in the reinsurance structures. There were some elements which we had to consider in the past, were not sufficiently aligned to mitigate the moral hazard risks embedded in the primary products. So when I say alignment, it is like we do not take too high quota shares. So we make sure the balance between reinsurance and retention is healthy. We do not grant any, it would not be correct, any material discount on original rates, and we only continue doing business under the one condition, that is robust rate adjustment treaty wordings. So this should just highlight you what we are doing going forward is not comparable to what we have built into our books. This is why I say there has been progress. There is hope. What I do not want to send out as a message is the market already is great. The primary market really hasn't changed fundamentally. We have seen some rate adjustments. We consider it a first step, but we are hopeful that our main clients will accompany us on further consolidation. Last slide from my side, and then we can go into the Q&A. Christian, if you agree, is what is our outlook going forward? There is no reason not to stick to our VNB outlook of EUR 450 million. The technical result outlook, we stick to the EUR 400 million. You have seen this dotted adjusted line, which indicates we could have reached it, but we didn't. We would consider it more ambitious than it perhaps was, but it is achievable. Where does the confidence come from? Niklas said it's not an organic growth, so it's organic growth that we know. Torsten just said he's bullish because he likes life. I say how we write the businesses in the problematic areas, like in Australia, is different from how it was built into the books. And I could add the same things for the U.S. business. So the U.S. new business is a sound one. Thank you very much. Thank you, gentlemen. Now for a second round of Q&A. As always, my usual request, please a maximum of two questions per person. Cameron, please. Hi. Just got two questions. First one's on the ERGO German P&C business. What gives you the confidence that you can get to the 93% combined ratio for 2015? It wasn't entirely clear whether that's price or business mix change or a little bit more color on what would drive that decrease would be helpful. And the second question is just on the casualty business. Just looking at the charts that you set out on the combined ratios over the last few years. Combined ratio is better in 2010. Investment returns were better then. Why was it not attractive then, but it is now? Thanks. Okay. Let me start with the ERGO question. What you see this year is a 95.3% for the ERGO P&C combined ratio domestically in Germany, including the reinsurance contribution. The net combined ratio is at 93.9%, and it's more or less accidentally that on the Munich Re reinsurance contracts, there was a loss in 2014. Usually, this is not the case. I would assume that without any operational change, we are already in an area to produce a combined ratio of 93.89. Then, I do believe that in some areas where my CFO tells me not to say that we are very conservative in reserving, but where since we had pretty good results from other areas, we seemed to be relatively conservative in 2014. I do see us pretty close to the 93% number if I take 2014 result without one off effect. I don't think that we have to change a lot to get there. I do see the challenge that we have to do quite a bit to keep the good numbers. Because obviously the competition in the P&C segment in Germany is increasing because quite a few of our competitors like to do more P&C and less life, for obvious reasons. Therefore, the price competition in Germany is quite significant. I do believe that in underwriting as well as in cost management, we have to do a continuously good job to keep the good numbers. I don't think that even though in the Munich Re set of numbers, there's a 95.3%, that for 2014, we are far away from target. But the true challenge will be to keep the good levels. I would try to answer the second question, if I understood it correctly. Question, higher interest rates in the last two years or last three years, why was the business not more attractive already at that time? It is true, or at least to some extent. It has to do with two developments. Some of the business which is today available was not available in the past years. This is particularly that part which comes from capital relief. We have written some very large treaties in the U.S., in Australia, and in China. That is casualty in its nature, but the purpose of the transaction is not a regular treaty which once has been there forever and will there be forever. No, that was bought for a very specific purpose to support the capital base of the client. Will that business be available forever? Probably not, but for a number of years. So it's in that sense transactional business, and we responded to a new demand here. But you could see it from a positive side, because of our close client proximity and knowledge about the market, the business was offered to us or was available for us, and we took advantage of that. That's the first thing. Not everything was available. Second, in some markets, for proportional casualty or proportional business in general, you need, let's say, basically a reasonable underlying profitability of the primary business. You cannot manage everything by adjustment of commissions. So you need some reasonable underlying profitability. In various markets, the primary rates and therefore the profitability of the underlying business and therefore the profitability of the quota shares have improved. It is true for the U.S., primary rates casualty. That is true, for instance, for the German motor business, which came from combined ratios in the market in the order of 108%, 109% is now at or below 100%, and is also true for some other markets. So in some respect, primary rates are the driver for a change in the profitability assessment. Yes, and there is also business, of course, which was more profitable a few years ago, where business was available, where primary rates have not changed, and where the original local interest rates were at a higher level. You are right. Jochen Schmidt, please. Thank you. Jochen Schmidt from Metzler. I have one question on your cyber portfolio, which seems to be set for considerable growth in the next years. What are your assumptions for the average combined ratio or for the average duration of the technical liabilities in this relatively new line of business? Could you give us any idea on that? That's my question. Thank you. No expectation for combined ratio at all. Like for all the other new innovative business, let's say, the first challenge is to find an access to the business, also in a knowhow sense. That means to find an approach which ring-fence the risk in one or the other way which makes it reasonable or feasible from the customer side to pay money for the product, and from our side to feel somewhat on the safe side to entertain it. To make it very clear, this business, be it cyber, but be it also this reputational stuff, what I mentioned here, is not business where we have already a comprehensive actuarial database in place to make the actuarial pricing approach. That is not the case. I mentioned it today in the press conferences like, a couple of hundred years ago, where the marine business started and where the first, let's say, mutual organizations were in place to mutually insure the loss of ships or of sailing boats also, which went over the ocean. That was also at a time where data was not available to price for the product. That is same here. The question is then, however, how can you be sure that you do not have to fix a severe problem in the future? That is your next question. I know that already. You are right, and that is an issue. I cannot exclude that we might see surprise losses here. But what we try to do is to replace the non-available actuarial data and knowhow in the first phase of our product policy with, let's say, technical qualitative knowhow. In case of cyber, our approach is, we have and further build a team of internal cyber specialists. These are IT guys. IT guys who give us an idea how exposed is in Windows environment and SAP environment, how exposed is an oil platform with a completely different IT technology. Is it available through the internet, and can it be hacked from someone outside or not? These type of questions. And then the spectrum of different underlying IT technologies, comparing my private PC, a hairdresser environment, an oil platform. On the other side, all this nuclear power plant in Iran where we had the Stuxnet in the past. That is so broad that we cannot even build all the expertise internally. That means, in addition to our internal core expertise, which we have built and will build further, we have various cooperation agreements and permanent partnerships with such IT companies who have specific knowledge in a specific individual case. So this qualitative knowledge helps us to ring-fence the risk, to get an idea of the risk, and then to structure a policy and determine a limit which is digestible for us. And to be very honest, we start with these products from the lower end. That means we do not start with couple of hundred millions or billions policy limit for the very large clients. We start in the small commercial sector. And then this allows us to digest losses and at the same time to build data in a traditional way. That is our approach here. How long is the tail? Cyber is a very undefined product. Actually, it contains or includes various products. It includes the own business interruption and data corruption loss, so the own loss for a company, for a customer. This also includes a third-party loss, if in case of third-party data are hacked or stolen on, in case of reputation issues or whatever. In case of third-party losses, there is a liability element, right? It is typical, what we call a catastrophe type liability element. That means it is not comparable with bodily injury, where if you have a loss that you have then 20, 30, 40-year development pattern of the loss, and during this development time, you are exposed to medical inflation, cost of care and all this stuff, and changes in the legal environment. It is his business here. No, this is usually catastrophe type loss. That means it is third party liability. If it happens, it can be large in nature, but the payment pattern is then very short. The good thing is, and I think I mentioned that already, what is all needed here has to do with knowhow, and that is more our strength. We are never the cheapest player, but I think we are quite good to bring knowhow to the table. I gave this comparable example a couple of years ago, how we made our approach to the solar panel insurance, where we gave guarantee against degradation of solar panels. Which is a long-term risk if you want. The investor expect to make a certain return over 20 years once they invest into a solar panel. Here we didn't have data either. But what we did is we built a cooperation with the Fraunhofer Institute, which is a scientific institute in Germany, and they made hundreds and thousand tests already before for different purpose, but gave comparable data to calculate failure and deterioration of such panels. That is usually the way how we approach the business. Michael Huttner, please. Thank you very much. On the German Life, I just wondered if you have that lovely chart on slide 45 with the interest rate, reference rate going down. I just wondered, can you say how much you will be adding to the ZZR in those years? I calculated 2013, you added EUR 400 million, 2014, EUR 600 million. Sorry, my maths is wrong. EUR 700 million. I just wondered what's the path of that addition, and would it mean that at some stage you report German GAAP losses at ERGO? Maybe you can give us a figure for 2018. Then, separately, on Mr. Jureck, you sounded so optimistic on non-life reinsurance, saying it's profitable. I just wondered if you can give us a figure in terms of the RORAC, the average RORAC you are writing business at the moment, and if you could specify whether that's before the reserve release or reserve addition or whatever. Thank you. Well, since our ERGO CFO was complaining in the break that he never gets a question, I will hand over the ZZR question to Christoph Jurecka. I am so thankful for that. Thank you very much. Well, I think we have it on slide 45. We think we are going to add to the ZZR, the expected accumulated ZZR is EUR 2.4 billion in 2015. And obviously depending very much on the interest rate development going forward for the next couple of years. So the scenarios you see on 45, of course, would have very different impacts on the ZZR. In any case, amounts will be huge. That is clear. Even in case interest rate would go up because the ZZR would still be needed to fed. So this is clear. Now, the question if this would lead to any local GAAP losses. Well, again, depending on the interest rate development, we cannot completely rule that out. But it is very difficult to predict, because, as I said, depending on the interest rate environment. Also, maybe on slide 44, what you see is that this parallel movement of the guaranteed interest rates, it is a very nice development because it still shows this positive margin. And of course, this is fed by the ZZR, and that is how it works. You have to keep in mind that the ZZR is calculated over 15 years, whereas the in-force has, at least for many of our products, a longer duration than that. So this is also something which you have to keep in mind looking at that graph. The lobbying of the German life insurance industry on changing the rules for the ZZR obviously is coming from a risk that the industry will write local GAAP losses if the deterioration of a reference rate goes at that speed. With what we see, at least at the beginning of 2015, we would probably see a significant drop in the reference rate, and that means a significant increase in accumulated or new ZZR. Therefore, there is such a risk, but not just in FMR, but for all German life insurers. I will definitely not give you precise figures by segment. Then I have either our clients or the peers on my table at next renewal. But I give you an indication where we stand now. First of all, when I give an indication, please don't try to compare that. You might get different indications or figures from peers or from clients, of course. Why? Because when we talk about RORAC, expected profitability in terms of RORAC, we're not talking about the profitability but divided by the capital. The capital is, of course, a function of how much capital you have in total available or in place for the portfolio. So how secure or safe do you want to be? On the other hand, how diversified are you? That means how much capital do you need per unit of risk or per unit of premium income. Therefore, that is a very individual figure and very individual approach, but from our perspective, the only economic way to measure the business. What we have seen is for the total non-life portfolio, we internally stick to our pricing approach, which is a 15% RORAC target. This is on a portfolio basis, non-life in total, not achievable anymore. So for the first time, I report that it is not achievable anymore. For the whole portfolio, we are below that level. We are, however, well above the 7% or 8% capital cost with the portfolio. Of course, now when you go on a treaty or client basis, then you find clients which are in 20 and others which are only 5 or so, but the portfolio is below 15. The segment which is closest to the capital cost today, and I mentioned that indicatively already, is the catastrophe business here in particularly North America. In North America, again, for two reasons, because we saw severe price reductions. Yes, that is reflected in our RORAC measurement. On the other hand, the U.S. CAT business is, in terms of peak exposures, one of the highest exposures, Bernhard Kaufmann mentioned that in his report, in our total portfolio. That means it consumes the highest amounts or gets the highest allocation of risk capital compared with other segments. What is the way out here? If that should continue, and again, I have a bit slightly more positive view that there is at least not an acceleration, maybe a slowing down in the speed of the deterioration. But we have two possibilities to respond here. One is either we give up business and avoid such business if it falls below capital costs. The other possibility is if we give up the worst part of that segment and reduce the total exposure of such a segment in the overall portfolio, then of course, we free up capital on one hand. On the other hand, the diversification becomes better, and the relative capital charge to the reduced segments improves the relative profitability. Do you know what I mean? Therefore, by active portfolio management and cycle management, by giving up business, you do something good for the remaining part in the portfolio. You improve your competitiveness. Thank you. There was a question from Daniel Bischof as far as I remember. Okay, thank you. Olivia, please. Hi. The first question, I just wanted to understand better the guidance on the 98% combined ratio. Maybe I misunderstood what you said earlier, but I think you said that already factors in a slightly higher prior year reserve development, let's call it 5 percentage points. So you're actually saying the underlying is 103. Is that sort of broadly what you're saying? First of all, if so, that seems quite high. Are you happy to run at a clearly above 100% underlying? Also, if you could talk us through where that sort of roughly 5 percentage points of deterioration comes from, how much is business mix, how much is rate, and so on. Then the second question, just wanted to understand the asset protection business on the life side that you mentioned. You split that out from the traditional FinMoRe business. Is that a part of the business where you're taking on asset risk explicitly and not just biometric risk? If so, how do we think about the capital intensity and the sort of sensitivities in that business? Is that a kind of exposure that you want to be increasing? Thank you. With regard to the combined ratio, 103 is unrealistically high. We come from an adjusted basis for 2014, 98%. It is slightly higher. Above 98, it is due to random effects, has to do with currency and so on. Let us take it in a Deterioration of rates, the spillover effect from 2014 into 2015, plus the experience from the latest January renewal, both add up to 2 percentage points. We should not adjust for all reserve releases, because in our theory, which is a very careful one, 4 percentage points is the ongoing conservatism on the reserve setting. Therefore, let us say, the only thing one can adjust is the difference between 4% reserve release and the actual reserve release. Here we could see some more than the 4%, if we look at our current numbers here. I take your asset protection question. The bread and butter business is mortality, morbidity, perhaps longevity business. The Fin Re business contains those, and potentially, mainly the credit risk. For example, you do financing, so you pay out money, and if you do not earn that back, you run a credit risk. The asset protection business, in addition to all those, will potentially also take market risk. As we have no appetite to simply grow our market risk on a group level, because we already have some sitting on the primary side, we do this under the condition that we find capital market instruments to immediately transfer the market risk back into the capital market, and we do this on a market consistent basis. So it is not like the cheap solution, it is a market consistent solution. With regard to capital intensity, this is the lowest possible capital intensity, because we immediately transfer the market risk back into the capital market. Thank you. Andrew Ritchie, please. First question on ERGO. Have you worked out what the minimum reinvestment rate is that you can tolerate to meet all future guarantees? I think one of your neighbors down the road worked that out at 70 basis points. Obviously, allowing for the stock of unrealized gains, the use of the RfB, the ZZR. I am curious to know what you think the minimum reinvestment rate you can tolerate in ERGO is. Second question for Joachim. Morbidity. I appreciate the morbidity problem has been mostly Australia. Have you done a thorough review of morbidity risks outside Australia? Are there any similar characteristics? Or maybe tell us why it is quite different for other blocks of morbidity. Because I think a few of your peers have discovered some morbidity issues in other markets as well. Thanks. Do you take this one? I will take it. I am relatively quick because I do not want to give you a number. That is for a simple reason. It depends on so many assumptions. The question what reinvestment rate we need. It depends on an assumption on whether we write additional new business, and if we do so, whether we write that with guarantees and at which level. It depends on assumptions whether we have any losses from other events. We have seen that there were quite a few negative surprises in investments in the last few years. I just do not think that it would be very helpful if I would say, okay, we could survive 70 basis points as well if nothing else happens. An environment in which nothing else happens is just theoretical. Therefore, you could probably calculate for the existing book of business a number if you do not write any new business, if nothing else happens. But we just do not believe that this is a meaningful number. Therefore, I would just not like to start a competition with the colleagues from the other side of the street. Andrew, I take your DI question. Have we studied whether the DI phenomenon could also happen perhaps outside Australia? Yes, very clearly, we have done so. Not only compared DI in Australia with DI in non-Australia, but we go further, and we compare DI in any market with non-DI in any market. So why should, for example, DI be so completely different from perhaps some health elements of a business or from critical illness? It is not the same, right? But the higher level you look at it, the easier you perhaps see some similarities in terms of product design, primary product design that we reinsure, and the reinsurance structures that we are using. These lessons we have learned, and they have already led in some markets to adjustments without being hidden on the result side. Where would the markets be that there are similar characteristics? The similar characteristics we would mainly see in the reinsurance structure side. With regard to how far is the disalignment tolerated, it is less on the primary product side. I start with the latter, with the primary product. Australia DI, the individual DI is quite unique. It is quite unique for the following reason. It is not the benefit design that is also very far reaching and really attracting to a high extent moral hazard risk. You would see that in other markets. However, it is a YRT product. That means every year, these policies get renewed. You start early ages, you start low rates, and as you age, the rates go up. Then you have the typical incentive for the healthy lives, perhaps to move on to some other competitor or to a new tariff, and you might be staying then with the unhealthier lives. This moral hazard risk, this is embedded in the primary insurance market. We fundamentally wouldn't see this to any significant extent in any other markets. Reinsurance structures were too generous in Australia, and there were some others in other markets which we have adjusted, and they are across the regions. Across doesn't mean all the markets, but you would see them here and there. It wouldn't be like hotspots that I should mention. Okay, three more to go. William Hawkins, the first, then please, Thomas Jacquet, and last but not least, Michael Hyde. Hi, thank you. For Torsten Jeworrek, coming back to what you were saying to Michael's question. Can you talk a bit more about your view of walk away returns on equity for the P&C business? There's been a lot said by companies, including yourselves, that once ROE hurdles start to get breached, that'll put a floor in the market. You're now acknowledging that you're below your RORAC figure. I've never heard you talk about 7%-8% as an acceptable ROE before. Whilst it's good that you're above that and not loss making, Nicolas was talking about Munich Re being a double digit ROE company in the first part of the presentation. I'm just a bit confused. On the one hand, there is this confidence about a floor in the market from walk away ROEs. On the other hand, I really don't know what that number is. Both is right. In the current time, we cannot deliver the 15%. It's not available in the market. You could always say, okay, are there not any treaties or relationships yet? There are probably a few or so. But it would mean you give up, let's say, between cost of capital and RORAC business, which delivers value at the end. The question is then, how do we steer that? We don't have a segment steering mechanism or approach in place by line of business or so. Our, let's say, profit center, which we try to optimize is, and then in this conflict between short-term and long-term, the client at the end of the day. Of course, when you look further at the spectrum of profitability, you find treaties, single treaty, or let's say layers, which have maybe a RORAC of 3%. That is thinkable, it's possible. But justifiable as long as the client relationship gives enough, let's say, compensation business or business which is negotiated as a package to move the whole profitability for that client up to as close to 15% as possible. That the first approach, client total portfolio management is for us, the size of here. The second question is then, do we differentiate by client? Yeah, of course, we do. We have a few clients, or we have clients where we start early to get off and to cancel business, depending on how opportunistic, how long long-term our relationship has to be seen or how do we or the client consider that, and we have others where we lower that a bit further in a strong expectation that is a pre-investment or that we benefit both from a long-term relationship. So that's basically our approach. But all would have difficulties or profit centers to justify client relationship close or even below capital cost. That is a very strong hurdle for us. In hindsight, you can never completely exclude it because sometimes you have a surprise loss. But when you start a business, when you look into the future, make a decision, what do I expect from a business? We have two approach. We don't change our conservative pricing approach. I mentioned in the break, probably in hindsight, that is also reflected in the reserve. We were on the pricing a bit too conservative. Probably we left a bit business on the table, but we would not like to change the horses now. That would be the worst time. On the other hand, client profitability in terms of an expected value must deliver positive contribution in terms of the total relationship. Thomas, please. You mentioned that credit spreads are too low for you to invest massively in this asset class. Are they low enough for you to issue some debt, as you've proven very opportunistic and timely in the past? Maybe could you link your answer with your economic solvency ratio sensitivity? There is a big sensitivity to credit spreads. How worried are you of these kind of scenarios where risk-free rates would not move and credit spreads would widen? Thank you. This is really a dangerous scenario where credit spreads go up and risk-free rates stay at the bottom. For us, it shouldn't be dangerous because we have so much space before it goes to a level which is really critical for us. With regard to the issue of debt, when you see our capital structure at the moment, it doesn't make sense. Why should we take on more, let's say, subordinated debt, which is applicable for Solvency II purposes at a time where the bottleneck is rather on the local GAAP side where this wouldn't contribute anything? In other words, if we took on more debt, we wouldn't be able to repatriate, make more capital at all. Therefore, the free capacity for debt is good if we have to finance a huge acquisition, which will not happen. But therefore, for the time being, I do not see any attraction in issuing debt. Bernhard. Yeah, I think the credit risk spread or sensitivity with respect to our credit

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