Munich Re Optimistic Despite $847 Million Q3 Net Loss

November 28, 2002

Munich Re reported that its net profit for the first nine months of 2002 reached 3.24 billion Euros ($3.2 billion) despite a net loss of 859 million Euros ($847 million) in the third quarter.

The company noted that the figures for the nine-month period had been “significantly influenced by capital gains realized in the first half of the year [the 4.7 billion ($4.64 billion) it received from unwinding its shareholdings with Allianz], by the strengthening of provisions for its US business in the second quarter, and by writedowns on securities in the second and third quarter.”

Dr. Jörg Schneider, a member of the Board responsible for accounting and controlling, stated that “The capital market situation will affect our result in the fourth quarter as well, but the net result for the year will nevertheless be higher than last year. Despite the losses from the succession of weather-related natural catastrophes since July, we are making good progress in our underwriting business; this will be positively reflected in the results for 2003 onwards.”

The numbers are impressive. Munich Re announced that Group premium income was up by nearly 15% from 25.8 billion Euros ($25.5 billion) to 29.6 billion Euros ($29.2 billion), “attributable mainly to the dynamic performance of the Group’s reinsurance business.” The Group’s 3.2 billion Euro consolidated net income as of Sept. 30 stands in stark contrast to the 85 million Euros ($83.8 million) it posted last year in the wake of the Sept.11 attacks.

The company indicated that it expected positive overall results for 2002 through further “organic growth.” It expects premium income to show an increase of 10% to around 40 billion Euros ($39.5 billion), “due especially to the price improvements (some substantial) in all business sectors.” The capital gain from the transaction with Allianz seems to have somewhat offset the additional reserves Munich Re posted to cover claims stemming from the WTC attacks, which now total 2.5 billion Euros ($2.467 billion), and the 4.3 billion ($4.25 billion) writedown in the value of its equity investments which had an impact of 2 billion Euros ($1.975 billion) on its nine-month earnings.

As the world’s largest reinsurer Munich Re is in an extremely good position to profit from the current hard market conditions. Board member Stefan Heyd, whose responsibilities include corporate underwriting, commented that “The continuing distinct upswing in reinsurance marks the end of a market phase lasting several years which produced considerable losses. Risk management is booming everywhere. Private individuals, businesses and industry need to make provision for future risks and are becoming increasingly receptive to the idea that security and insurance coverage are valuable commodities that are only to be obtained at appropriate terms and conditions;” a polite way of telling cedants they’re going to be paying more money.

The January, April and July renewal season saw the company achieve double-digit price increases and improvements in conditions. In the third quarter of 2002 the Group’s reinsurers wrote gross premium of around 6 billion Euros ($5.92 billion). “Their share of Group premium rose in the first nine months of the year from 55.4% to 58.9%.” Munich Re sees overall reinsurance growth at approximately 13% for the year to around 25 billion Euros ($2.467 billion).

Heyd also indicated that “We rate the rise in the quality and profitability of our portfolio even higher than the growth in premium income. We have withdrawn from consistently poor business and have achieved better prices and conditions for in-force and new business. Both measures will significantly improve our reinsurance results.”

The announcement indicated that, “Barring any exceptional developments before the end of the year, the Board of Management will propose allocating an amount to the revenue reserves and paying a dividend of Euro 1.25 ($1.185) per share, as in the two previous years. ”

“For 2003, major imponderables continue to lie specifically in the performance of the capital markets,” the bulletin noted. “However, after Munich Re’s organizational restructuring and the realignment of American Re, the Munich Re Group sees itself as even better positioned to take advantage of the reinsurance upswing for substantial improvements in prices and conditions.”

Dr. Schneider put it as follows: “Given the general parameters, the upward trend in our underwriting business is set to continue in 2003, especially in reinsurance. And after the burdens of 2002, the primary insurers in our Group will also show considerably better development again, with strong growth. In their European markets, and especially in their home market of Germany, the need for private provision has now become clear to all.”

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