Diversity, Investment Gains Save Munich Re’s Q3 Profits; $605 Million

It pays to be big, and it pays to invest. That’s the lesson one takes away from Munich Re’s third quarter earnings bulletin. Despite the heaviest catastrophe losses in the industry’s history from Katrina and the other hurricanes, the world’s largest reinsurer managed to post a €513 million ($605 million) profit during the period, compared to €386 million ($456 million) in the same period of 2004. The company actually achieved its 12 percent ROE target and is even cotemplating increasing its dividend.

In his presentation of the quarterly figures Jörg Schneider, member of the Board of Management, commented: “Although natural hazard events caused losses far in excess of what was to be expected, we are able to post a high profit for the exceptional quarter from 1 July to 30 September. In view of the excellent investment result in prospect and the generally good performance of our underwriting business, we should reach our annual target of a 12 percent return on equity after tax. The precondition for this is that there are no more completely exceptional major losses in the last seven weeks of the year and that the capital markets continue to develop normally.”

The bulletin also noted that Munich Re has become a reinsurer that reinsures. “The results for the first nine months of this year were also marked by very positive experience in the Group’s basic reinsurance and primary insurance business,” it continued. “Hurricane Katrina additionally demonstrated the key importance of a prudent retrocession policy: the Munich Re Group had purchased retrocession covers for extreme peak risks, enabling it to cede a substantial portion of its gross loss burden to its retrocessionaires. It sees retrocession — alongside budgeting and liability limits — as a significant component of its risk management.”

Positive results from Munich Re’s primary insurance division, the ERGO Insurance Group, also helped the profit picture, posting a €137 million ($162 million) profit and a 91.4 percent combined ratio. The big boost came from investment results a “very good” €3.078 billion ($3.63 billion) compared to €1.667 billion ($1.967 billion) in the same period of 2004. The figure includes a €563 million ($664.5 million) gain from the sale of Allianz shares. “Written premiums remained almost unchanged compared with the same quarter last year, totaling €9.2 billion [$10.85 billion],” said the bulletin. “Shareholders’ equity* shows a rise of €1.9 billion [$2.24 billion] to €22.7 billion [$26.8 billion] since the beginning of the year.”

Concerning the hurricanes, Munich Re noted: “The tropical cyclone season in the Atlantic started uncommonly early this year in mid-July, when Hurricanes Dennis and Emily, the first of an unprecedented series of major losses, gave rise to a claims burden for the Munich Re Group of around €30 million [$35.4 million].

“Hurricane Katrina, with wind speeds reaching peak gusts of 350 km/h, was one of the severest tropical cyclones of the past 150 years in the Gulf of Mexico and in the Louisiana and Mississippi region. However, retrocession covers will significantly limit the claims costs for the Munich Re Group, with the net burden of just over €800 million [$944 million] before tax being considerably lower than the gross burden (€1.2 billion [$1.416 billion]).

“With a comparable strength and track to Katrina’s, Hurricane Rita had a similar loss potential but did not hit such high concentrations of values. Therefore it ultimately caused significantly lower losses. At present, the Munich Re Group anticipates losses from this event of around €260 million ($306.8 million] before tax.

“Altogether, the Group’s burden from the Atlantic cyclones in the third quarter of 2005 was €1.5 billion [$1.77 billion] before retrocessions and €1.1 billion [$1.3 billion] after; the post-tax impact on the result was around €750 million [$885 million].”

Flood losses in Europe and Asia, particularly the floods in central Switzerland, resulting in the largest-ever natural catastrophe loss in Swiss insurance history, and floods in Mumbai, India added to the total losses in the third quarter. As a result Munich Re stated: “The total cost burden from natural catastrophes for the third quarter of 2005 is thus far above average, amounting to €1.2 billion [$1.416 billion] net before tax — almost 33 percent of net earned premiums — and reflected in an exceptionally high combined ratio of 124.6 percent (105.8 percent in 2004).”

“The heavy cost burdens, not least from the hurricanes, will be compensated by the excellent investment result,” Schneider observed. “The underlying earnings strength in our basic underwriting business is also impressive. If there are no further negative surprises, our result target of 12 percent return on equity after tax is within reach. That would also make a higher dividend possible.”

The entire report and further comments can be obtained on the Group’s Website at: http://www.munichre.com.