Munich Re managed to avoid the falling equity values and rising reserve costs that bedeviled many insurers last year.
On Thursday the company reported provisional figures showing Group premium growth of 10.8% to 40 billion Euros ($42.6 billion), “driven by an upswing in reinsurance business.” Profits for the year quadrupled in comparison to 2001 to around 1.1 billion Euros ($1.7 billion); earnings per share rose to 6.08 Euros ($6.475), compared to 1.41 Euros ($1.50) in 2001.
The company noted that it had achieved these results “despite the stock market slump worldwide.” The company began last year with a successful renewal season, and then produced strong growth. It explained that, “The persistently strong demand for high-quality reinsurance cover contrasts with a substantial reduction on the supply side in the last three years. Losses from investments in equities, burdens from the WTC loss, the reserve strengthening that has been necessary mostly in the US, and the withdrawal of a number of market players, have led to a decrease in capacity which has been far from offset by the influx of new capital.
“Munich Re intends to take advantage of this favourable situation to further strengthen its position as a much sought-after risk carrier worldwide.” In order to do so the company plans to raise as much as 5 billion Euros ($5.325 billion) through the issuance of subordinated bonds, announced last week. The hybrid securities “will achieve a significant increase in the Group’s shareholders’ equity, currently standing at 14.5 billion Euros [$15.44 billion],” said the announcement.
In a telephone conference with the press, Dr. Jörg Schneider, member of the Munich Re’s Board of Management, commented: “2002 was even more difficult than 2001. The insurance industry was mainly hit in the area of investments and equity capital. Munich Re had to cope with substantial writedowns on securities totaling 5.7 billion Euros [$6.07 billion] in its investment result. But in our income statement we were able to more than compensate for these writedowns and the appreciable burden from strengthening reserves for US losses. This was because before the stock market crash we had reduced individual shareholdings and thereby realised high capital gains.” Among the biggest gains was the 4.7 billion Euros ($5 billion] Munich Re pocketed from the sale of a portion of its shares in Allianz.
The company noted strong gains from its core reinsurance “largely due to organic growth.” Premium income rose by 14.6% to 25.4 billion Euros ($27.05 billion) in 2002, achieving a 2.6 billion Euro ($2.77 billion) profit before amortization of goodwill, compared with a loss of 700 million Euros ($745 million) in 2001. The bulletin nonetheless noted that “Despite the better situation as regards both premiums levels and terms of trade, the need for further improvements is underlined by the adjusted combined ratio of 106.5% (112.7%), which though considerably reduced is still not satisfactory.”
Dr. Nikolaus von Bomhard, member of Munich Re’s Board of Management did not commit himself to a forecast for the current year, but drew attention to the very pleasing improvements in prices and conditions at the beginning of 2003 from the reinsurer’s point of view: “As things stand at present, it looks as if income from investments will not reach the level of the last few years. We have therefore geared our treaty renewals in non-life reinsurance to a combined ratio of under 100%. The prices and conditions we have achieved will significantly improve our profitability in operative business.”
The announcement noted that “Natural catastrophes contributed a comparatively high 3.3 (1.5) percentage points to the adjusted loss ratio of 79.9% (82.1%). The main loss event for the Munich Re Group was the August flooding in Central and Eastern Europe, which cost it around 500 million Euros [$532.5 million]. This event provided renewed confirmation of the major impact of windstorm and flood losses on income statements in the insurance industry. In 2002 they were responsible for 99% (92%) of the insured natural catastrophe losses.”
Munich Re’s primary insurance group, ERGO and related companies achieved an above-average rise of 5.6% to 16.6 billion Euros ($17.68 billion) in premium income, but due to the sharp falls in investment values and earnings ended up posting a 700 million Euro ($745 million) loss for the year, compared with a profit of 600 million ($639 million) in 2001. However the group’s combined ratio in property-casualty insurance, improved to 99.1% (101.4%) despite the burdens from natural catastrophes. “This improvement was due mainly to a lower loss ratio of 62.7% (64.9%) but also to a slightly more favourable expense ratio of 36.4% (36.5%),” said the bulletin
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