Munich Re Posts $633 Million Q1 Profit Despite Nat Cat Losses

May 10, 2010

Munich Re achieved a consolidated profit of €485 million ($633 million) in the first quarter of 2010, slightly ahead of the €437 million ($571 million) in the same period last year. The earnings bulletin explained that “large gains from the disposal of investments were the basis for the good quarterly result, whereas the natural catastrophe burden was unusually high.”

CFO Jörg Schneider pointed to two different factors which shaped the result for the first quarter: “It was an eventful start to the financial year 2010, with earthquakes, storms and volatility on the capital markets. The natural catastrophe losses were offset by high investment profits. Overall, I am very satisfied with our result for the quarter.”

Munich Re also announced a further share buy-back program, indicating that before the next Annual General Meeting on April 20, 2011, shares with a volume of up to €1 billion (app. $1.31 billion) are to be repurchased. However, the bulletin cautioned the “buy-back is conditional upon no major upheavals occurring on the capital markets or in underwriting business.”

It also indicated that, “on the basis of the current share price, around nine million shares or approximately 5 percent of the share capital would be bought back. The repurchased shares are to be retired, and the buy-back is scheduled to start shortly.” Schneider added that the program would “return unneeded capital, and would “benefit all shareholders.”

Since November 2006, Munich Re has carried out share buy-backs with a total volume of €5 billion ($6.53 billion). The share buy-backs, excluding the current one, were launched as part of Munich Re’s Changing Gear program in May 2007, which has now been completed.

The bulletin summarized the results of the first three months as follows:
— From January to March, the Group recorded an operating result of €770 million [$1.006 billion] (€736 million [$961 million] in Q1 2009.
— Compared with year-end 2009, equity rose by 4.1 percent to €23.2 billion [$30.3 billion]. Annualized, the return on risk-adjusted capital (RORAC) amounted to 10.7 percent and the return on equity (RoE) to 8.5 percent.
— Gross premiums written rose by 12.4 percent to €11.7 billion [$15.28 billion] (€10.4 billion [$13.58 billion] in Q1 2009).
— If exchange rates had remained the same, premium volume would have increased by 11.0 percent compared with the previous year.

Although the Group’s reinsurance business was impacted during the first quarter “by the considerably greater burden from major losses,” it remained profitable. The operating result decreased to €605 million [$790 million] from €857 million [$1.12 billion] in Q1 2009. The bulletin also noted that “thanks to a satisfying investment result of €935 million [$1.22 billion], reinsurance contributed €424 million [$553.4 million] to the Group’s overall profit.

The combined ratio for the first quarter was 109.2 percent (97.3 percent) of net earned premiums, with natural catastrophes accounting for 20.8 (5.6) percentage points. Approximately five percentage points of the originally projected annual loss ratio of 6.5 percent for natural catastrophes thus occurred in the first quarter of the current financial year.

“Claims costs for natural catastrophe losses totaled approximately €700 million [$913.6 million],” compared to only €187 million [$244 million] last year). For Winter Storm Xynthia, which caused significant damage in Europe on 27 and 28 February 2010, Munich Re said it “anticipates a reinsurance claims burden of around €70 million [$91.3 million]. Provisions of around €160 million [$209 million] have been established for the two hailstorms that occurred in Australia this March.

“The devastating earthquake in Chile on 27 February was responsible for the largest individual loss in the first quarter due to the high insurance penetration in commercial and industrial business. It impacted the result with around €500 million [$652 million] in the first quarter.”

Torsten Jeworrek, Munich Re’s Reinsurance CEO, stressed: “Carrying losses from catastrophes is not just one of our functions as a reinsurer – natural catastrophe covers are among Munich Re’s profitable lines of business and we calculate risk-adequate prices and write business on that basis alone.”

Munich Re said its “premium income in the first three months was up 9.7 percent on the same period last year, rising to €5.9 billion [$7.7 billion], from €5.4 billion [$7.04 billion] in Q1 2009. It also noted that “€149 million [$194.2 million] of this was attributable to the US subsidiary Hartford Steam Boiler, which was acquired in 2009. Adjusted to eliminate the effects of changes in exchange rates, premium volume would have increased by 8.4 percent in the first three months.”

Jeworrek indicated: “The renewal seasons this year were not easy, but thanks to our financial strength and our expertise, what we achieved was impressive: We have succeeded in maintaining the profitability of our portfolio at virtually the same level.”

Munich Re said it “envisages a combined ratio of around 97 percent of net earned premiums over the market cycle as a whole. However, the latter figure is likely to be exceeded in 2010, since the long-term estimate is based on an average major-loss burden of only 6.5 percent from natural catastrophes.

“The first quarter of 2010, however, was already affected by very severe accumulation-loss events, whose costs of around €700 million [$912.4 million] alone accounted for approximately five percentage points of the loss ratio. The month of April was also impacted by further major losses.

“As a consequence of the sinking of the oil platform Deepwater Horizon in the Gulf of Mexico, Munich Re anticipates a material-damage burden of approximately €60 million [$78.2 million], and claims in the liability segment, which cannot be predicted accurately owing to their complexity. Overall, Munich Re expects its claims burden to amount to a low triple-digit million euro amount at most.”

“By contrast, in primary insurance, the 2010 goal is another combined ratio within the long-term target of 95 percent. Outlook for 2010: Profit target of over €2 billion [$2.6 billion].”

In conclusion the bulletin said Munich Re is aiming at another profit of over €2 billion in 2010. However, CFO Schneider explained: “Given the high loss burdens, this target is increasingly ambitious.” Munich Re continues to assess its medium- to long-term business opportunities as positive. “That is why we are adhering to our target of a 15 percent return on risk-adjusted capital over the cycle”, Schneider emphasized.

Source: Munich Re

Was this article valuable?

Here are more articles you may enjoy.