Munich Re Strengthens Reserves, Confirms Positive Outlook

July 12, 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, but it remains upbeat in its forecasts for the reinsurance market.

The company 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.

A lot of that money 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.”

The added provision brings reserves set aside for Sept. 11 to around $2.5 billion, but the company indicated that it did not anticipate having to set aside any additional amounts.

Another $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-Jürgen. 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, which will now be able to take full advantage of the upturn in its home market.”

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