Munich Re Chairman Sees Improving Results in 2009

By and Michael Wei | December 1, 2008

In an interview with Reuters, Munich Re’s Chairman, Nikolaus von Bomhard, expressed his hopes that fatter premiums would make 2009 more of a “normal” year after Munich Re’s likely failure to meet profit targets this year.

He said annual premium renegotiations now under way are likely to lead to a marked rise in its combined ratio, a key measure of underwriting operations that adds up an insurer’s costs and losses and measures them against net earned premiums.

“We should on average see a 2 to 3 percent combined ratio improvement,” von Bomhard said in an interview this weekend in Beijing. “It looks small, but it’s a lot.”

Like other financial firms, Munich Re has struggled with the fallout from the global credit crunch. Weakness in capital markets and payouts for Hurricanes Ike and Gustav meant its consolidated profit target for 2008 of €2 billion [$2.53 billion] was unlikely to be met, Munich Re said in releasing third-quarter figures on Nov. 7.

So far this quarter, Munich Re’s claims business had been “absolutely normal” with no major natural catastrophes or man-made disasters, von Bomhard said. But he remained cautious on fourth-quarter asset performance, citing a murky outlook for interest rates and, especially, stocks. “I wouldn’t dare to come up with any prognoses yet, because the markets are extremely volatile still.”

While 2009 was likely to be a year of recession, von Bomhard said, “For insurers and reinsurers, it doesn’t have to be end of the world. Next year could be a good year for us.”

His guarded optimism is due in large part to an assessment that the cycle is turning in reinsurance. Munich Re, which provides insurance to insurance companies, is eyeing double-digit growth in global rates as contracts are renewed for 2009.

Munich Re’s combined ratio in reinsurance stood at 100.2 percent for the first nine months of the year, up from 98.0 a year earlier, and at 101.3 percent for the third quarter alone, up from 97.1 in the same period of 2007.

A ratio below 100 percent shows an insurer is making an underwriting profit; a ratio above 100 percent means it is paying out more money in claims than it is receiving from premiums.

Von Bomhard cited several reasons why he expects increased renewal rates to boost the combined ratio:
— surplus capital in reinsurance has evaporated;
— primary insurers’ shrinking capital has diminished their capacity to retain risk;
— the cost of capital has gone up;
— return on assets has fallen, due to declining interest rates, which bites into net income and thus capital.

“Security is the last issue,” he said. “We are the safe harbor. If you add all these arguments up, logic tells you more or less that there will be some movement (in premiums).”

Swiss Re is also seeing a pick-up in rates, Chief Executive Jacques Aigrain said in an interview published on Saturday.

The one question mark about premiums, von Bomhard said, was that companies are squeezed for cash. “All those who are chasing cash flow now, of course, are not that price-sensitive as they should be in a market environment like today. So we have to see how that balances out.”

Munich Re has expressed interest in parts of the embattled American International Group’s sprawling Asian life insurance business [See IJ web site –] to strengthen its presence in the region, which accounts for just 5 to 6 percent of the group’s total income from reinsurance and primary insurance.

He added that splitting up AIG’s Asian business would take time. “It’s difficult for them because the AIG group was a relatively complex organization. To disentangle it partly to then be ready for sale is not easy.”

Von Bomhard repeatedly cautioned about the risks inherent in setting revenue targets. “It’s very dangerous to go for size in reinsurance,” he said.

He ruled out tapping the German government’s financial stabilization fund and said the reinsurer had no need to raise capital — a judgment he said was reflected in Munich Re’s credit default swaps. These were the lowest in the sector.

For several years, some investors had criticized Munich Re for being underleveraged. Now, its conservative balance sheet was seen as a source of strength. “We got punished for it, but now in the crisis it proves to be right,” von Bomhard said.

Munich Re’s share price has climbed about 32 percent in the last month.

( Editing by Kim Coghill)

Topics Reinsurance AIG Munich Re

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