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Cablegate: Insurance Capital Munich - Industry Experiences Delayed

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.

Tribble

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