Munich Re Creates a Stir With Reserves Announcement

August 5, 2002

Munich Re, the world’s largest reinsurer, announced several measures to strengthen its reserves in order to anticipate possible additional claims related to the WTC attacks, and to bolster the capitalization of its U.S. subsidiary, American Re, and both the stock market and various ratings agencies reacted strongly. The company, however, remains upbeat in its forecasts for the reinsurance market.

Responding to Munich Re’s announcement that it would strengthen reserves at American Re and for the WTC attacks by a total of $2.5 billion, Standard & Poor’s put the triple “A” rated insurer on “CreditWatch with negative implications,” while A.M. Best affirmed its “A++” rating, and stock markets plunged despite the company’s upbeat profit forecasts.

In its announcement, Munich Re also confirmed a 4.7 billion ($4.6 billion) capital gain from the unwinding of its cross shareholdings with Allianz. That transaction, combined with the general upward trend in premiums, is likely to produce “a high net profit for the 1st half year 2002,” said the company.

“The CreditWatch placement follows Munich Re’s announcement on July 10, 2002, that case reserves and claims incurred but not reported will have to be strengthened as per June 30, 2002, at the level of core subsidiary American Re-Insurance Co. (American Re) by $2 billion,” said S&P. It also noted the additional $500 million in provisions for WTC claims, which bring Munich Re’s total loss estimate to around $2.5 billion.

S&P indicated it was concerned over “American Re’s earnings and capital adequacy, and their impact on the Munich Re group overall,” and stated that it planned to meet with company representatives to review the situation. It also warned of a possible downgrade of American Re.

A.M. Best by contrast said that the moves would have no affect on the Group’s ratings, “reflecting its superior level of capitalization, historically excellent profitability and global market profile as the largest reinsurance organization in the world.” Best’s announcement added that the company’s strong results in the first half” are more than sufficient to absorb these charges.”

The stock markets, however, voted with their feet as shares in Munich Re lost 5.35 percent in value on the Frankfurt Stock Exchange to close at 230 ($226.50), while shares in Allianz slumped by 7.3 percent. Insurance stocks suffered an average 4 percent drop in London.

Much of the money from the Allianz transaction will go to strengthening reserves. Munich Re announced that it “has added $ 500 million to its provisions for losses that may be incurred in the longer term from the terrorist attack of 11th September 2001.” It indicated that the move was made necessary by “the unique complexity and magnitude of the WTC event,” particularly in relation to “workman’s compensation, liability and also business interruption, which may arise in time even though not yet reported and which are thus difficult to estimate.”

Around $2 billion will go to shore up the eroded capital base at American Re, following a company wide review of the U.S. company’s situation, that revealed the need to increase reserves to cover potential liabilities, particularly in the workers’ compensation market.

The bulletin stated that, “Munich Re will furnish American Re with sufficient with funds calculated on a basis that ensures superior positioning to take advantage of future business opportunities as a function of its strong capitalization.”

It also expects results. Dr. Hans-J├╝rgen. Schinzler, chairman of the Board of Management, put it bluntly, stating: “After the fundamental realignment I expect American Re to start generating significant profits immediately. Seldom has the market situation for such improvement been better than now.”

John Phelan, CEO of American Re since March and a member of Munich Re’s Board of Management since the beginning of April, assured his boss that the company was ready to perform. “In terms of leadership, organization, cost reduction and target markets, we have completely realigned American Re over the last few months,” Phelan stated. “This has included the signalized review of our entire portfolio with regard to claims development and provisions. The measures taken illustrate our resolute business policy and Munich Re’s support for American Re.”

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Insurance Journal West August 5, 2002
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