Munich Re Posts $280M Q1 Loss on Investment Writedowns

Munich Re posted a 238 million euro ($280 million) after tax first quarter loss, due to writedowns and losses on investments of 2.3 billion euros ($2.7 billion), despite improvements in its operating profits and combined ratio.

Comparisons with the first quarter of 2002 are largely meaningless, as the company realized a huge $4 billion plus capital gain on the disposal of a significant portion of its investments in Allianz and related companies last year. The loss figure, while disappointing, is considerably less than the 2.2 billion euro ($2.585 billion) loss it recorded in the fourth quarter of 2002, and there are some encouraging signs.

“Compared to the first quarter of 2002, premium income increased only slightly, rising by 0.8 percent to 10.8bn euros [$12.7 billion],” said a company announcement. “This was because the strong euro had the effect of substantially reducing the euro value of premium written in other currencies, especially the dollar. Excluding the effects of currency translation and acquisitions, premium rose by 6.8 percent.”

Munich Re said it “took advantage of the continuing positive trend in its reinsurance business to return to the profit zone,” in the first quarter. Its “operative result (before amortisation of goodwill) rose to 123m eiros [$144.5 million], following -1.6bn euro [-$1.88 billion] in the preceding quarter. Its underwriting policy in reinsurance succeeded in bringing the combined ratio down below the 100 percent mark for the first time in a long while – it decreased to 96.8 percent.”

Dr. Hans-Jürgen Schinzler, Chairman of the Board of Management, put a positive slant in his outlook for the rest of 2003, stating: “We are making good progress, despite the uncertainties regarding capital market trends. Provided we are spared exceptional loss events, the advances we have made in operative business will have a noticeable impact on our overall result for 2003.” Board member Dr. Jörg Schneider, the company’s CFO, indicated that, “Despite the loss, the wind has clearly changed. The first three months show that, notwithstanding the after-effects of the weak capital markets, we have put our business on a sound footing again.”

Munich Re said that its reinsurance premium volume for the first quarter amounted to 6.5bn euros [$7.64 billion] (6.9bn) [$8.1 billion] before consolidation “after the renewals and terminations.” Without changes in exchange rates, “growth compared with the same period last year would have been 6.7 percent (32.0 percent). Premium volume in the life and health segment remained stable at 1.6bn euros [$1.88 billion]. In its property-casualty reinsurance business, Munich Re achieved rate increases averaging over 10%. Here, however, it declined by 6.9 percent to 4.9bn euros [$5.75 billion] owing to currency translation effects.”

The bulletin added: “Another pleasing factor is the progress of American Re, by far the largest reinsurance subsidiary in the Group, which reduced its combined ratio from 114.2 percent in the first quarter of last year to 98.0 percent in the first quarter of 2003 and showed a profit of US$ 152m.”

The company said its reinsurance operations “contributed 29m euros [$34 million] to the Group result in the period under review, even though their investment result of 527m euros [$619 million] was heavily affected by writedowns and losses on the disposal of investments totaling 522m euros [$613 million].

Unfortunately the writedowns may continue. According to a report from Dow-Jones Newswire Dr. Schneider indicated in a teleconference call discussing the Q1 results, that even if the capital markets stabilize, Munich Re expects to make further writedowns, but “they won’t reach the level of the first quarter.”

The report also noted that Munich Re had lowered the stock portion of investment portfolio from 18.1 percent at the end of December 2002, to 14.5 percent at the end of March 2003. It intends to reduce it to around 10 percent in its primary insurance portfolio, and slightly higher in its reinsurance holdings.

“As things stand at present, premium volume for the current year should reach the same high level as last year, even taking changes in exchange rates into account. Ultimately, however, the crucial factor is the improved quality of the business,” said the announcement. “In reinsurance, the trend towards better conditions and risk-adequate prices has continued. Munich Re achieved marked progress in the past renewals and will adhere to its return requirements. In its operative business, it has thus created the basis for a satisfactory result in 2003.” Schneider indicated, “If claims costs for major losses remain normal, the combined ratio for the renewed business should remain below the 100 percent mark in the current year.”

“In primary insurance, the Munich Re Group considers itself well positioned to participate to an above-average extent in the growth of private provision for old age and healthcare, thus expanding its business in life and health with their stable earnings. In primary insurance premiums are expected to increase by almost 6 percent, which is far above the market average, and once again a satisfactory underwriting result for the business year 2003. Additionally, the ERGO Insurance Group intends to further reduce its expense ratio with an efficiency enhancement programme,” the bulletin continued.

“The Munich Re Group anticipates that premium growth – without the influence of exchange rates – will total around 5 percent. The strong euro will significantly affect premium translated from other currencies but will only have a moderate effect on the Group’s result, thanks to Munich Re’s policy of currency matching its assets and liabilities. Owing to the uncertainties on the capital markets, a result forecast is not possible at this early juncture, according to Dr. Schneider. Munich Re expects further strengthening in earnings from the forthcoming renewals of reinsurance treaties at July 1 in several markets,” the earnings announcement concluded.