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Viewing cable 09MUNICH261, Insurance Capital Munich - Industry Experiences Delayed

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Reference ID Created Released Classification Origin
09MUNICH261 2009-10-16 07:12 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Munich
VZCZCXRO1610
PP RUEHIK
DE RUEHMZ #0261/01 2890712
ZNR UUUUU ZZH
P 160712Z OCT 09
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4938
RUEKJCS/SECDEF WASHDC
RUCPDOC/USDOC WASHDC
RUEHZG/NATO EU COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE
UNCLAS SECTION 01 OF 02 MUNICH 000261 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV EINV EUN GM
SUBJECT:  Insurance Capital Munich - Industry Experiences Delayed 
Crisis, Rethinks D and O Coverage 
 
MUNICH 00000261  001.2 OF 002 
 
 
SUMMARY 
------- 
 
1.  (SBU) Germany's primary insurance firms experienced the economic 
crisis with a delay.  Profits from classic insurance business and 
international investments are decreasing, and high sums have been 
paid out after insured businesses have gone bankrupt.  Layoffs seem 
inevitable, as the life insurance business in particular is in the 
red.  On the positive side, German insurance companies were on the 
whole not overly exposed to the collapse in the credit default 
business.  Notably, insurance companies saved significant amounts of 
money after negotiating lower payouts on their liabilities arising 
from the Siemens bribery scandal.  The Siemens settlement could 
become a precedent for changing how insurance policies are written 
for firms and their managers, with both assuming greater liability 
for their mistakes.  End Summary 
 
Sour Investments Pressure Major Insurance Carriers 
--------------------------------------------- ----- 
 
2.  (SBU) Allianz and Munich Re, Germany's major insurance firms, 
based in Munich, are experiencing serious downturns in some sectors 
one year after the outbreak of the financial crisis.  In several 
recent conversations, Consulate contacts pointed to three problem 
areas.  First, the life insurance sector was the most exposed. 
Insurers invested hundreds of billions of Euros earned from life 
insurance premiums or similar products in the equity market.  "The 
profit margins of these investments during the recent slump melted 
away and hardly cover the fixed interest rates for life insurance," 
a market strategy manager of Munich Re said.  Second, the classic 
insurance business has become more difficult, since clients have 
become increasingly thrifty.  Third, the increasing number of 
business insolvencies has led to higher payouts on so-called 
guarantee insurance contracts. 
 
3.  (SBU) The industry anticipates a difficult 2010, with a negative 
impact on employment.  Allianz has laid off 4,700 employees since 
the beginning of the crisis.  Munich Re's subsidiary "Ergo" 
reportedly plans to eliminate 1,800 jobs by the end of 2010 and will 
need new capital infusions from its parent, but no government 
bailout, our contact assured us.  Although Munich Re recently 
announced a 2009 profit of 2.5 billion Euros, in part thanks to the 
absence of major hurricanes in the U.S., they expect much of this 
money will go to cover subsidiaries' anticipated losses. 
 
Cutting D and O Losses: The Siemens Case 
---------------------------------------- 
 
4.  (SBU) Our contact at Munich Re told us that the background hum 
in the directors and officers (D&O) business had gotten louder in 
recent months as insurers adopt a stricter view on the personal 
liability of senior managers for costly business errors, like 
bribery or faulty financial products. The limit of liability for a 
single manager under most policies does not exceed 250 million 
Euros, but considering how many managers may become involved in a 
company's crisis, this could still cause insurers serious problems. 
For example, Siemens and a group of insurers led by Allianz recently 
agreed on reduced payments on liability policies that kicked in 
after the bribery scandal had already cost Siemens over two billion 
euros in fines.  The parties settled for a payment of 100 million 
euros by the insurers, instead of the 250 million euros initially 
claimed by Siemens.  Now, Siemens is trying to recoup some of its 
losses from the responsible former managers, who believed their D 
and O insurance protected them absolutely. The case is being 
interpreted as symptomatic of a changing view on managers' personal 
liability. Turning to the banking sector, the Munich Re D and O 
expert told us, "Unlike the Siemens corruption case, most cases in 
the banking sector are not quite as clear.  Insurers are now 
concerned about a possible wave of sentences against managers."  He 
added that in the Siemens case, Munich Re had hoped Allianz would 
withstand the pressure and not pay anything at all. 
 
COMMENT 
------- 
 
5.  (SBU) Munich Re and Allianz boasted in the past that their "core 
businesses were risky enough" so they "stuck to staid investments" 
and "avoided racy things like credit default swaps." This approach 
had "earned them the mockery of their peers in the past but now made 
them look like brilliant and profitable managers."  Today, they are 
taking this conservative approach one step further by looking harder 
at directors' and officers' insurance policies.  The question is, 
how big a mistake can directors and officers make before they risk 
losing their liability insurance? The Siemens settlement could point 
the way to a major re-think of insurance as banking sector problems 
deepen worldwide.  In the future, managers and their companies may 
not be able to avoid responsibility just by signing an insurance 
 
MUNICH 00000261  002.2 OF 002 
 
 
policy in Germany. 
 
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