S&P Comments on Munich Re 2004 Results

Standard & Poor’s Ratings Services has said that the 2004 results announced by Germany’s international reinsurer Munich Reinsurance Co. (A+/Stable/–) and its related entities–collectively Munich Re—”were in line with expectations, and consequently have no immediate impact on the ratings or outlook on group entities.”

The group announced a net profit of 1.833 billion euros ($2.44 billion) for 2004, compared with a loss of 434 million euros ($578 million) in 2003 (See IJ Website March 16). S&P noted that the improvements came primarily from three sources: a reduced tax burden, an improvement in the investment result and a falling amortization charge. “Despite net earned premium reductions of 1.1 billion euros [$1.465 billion], mainly in non-life reinsurance excluding health, the result before amortization of goodwill improved to 2.9 billion euros [$3.86 billion] from 2.0 billion euros [$2.66 billion] in 2003, largely due to expense reduction and increased investment income,” stated S&P credit analyst Stephen Searby.

S&P noted that the “reported combined ratio for the non-life reinsurance business deteriorated to 98.9 percent (96.7 percent in 2003). Within this combined ratio, however, 4.5 points (1.6 points in 2003) were accounted for by natural catastrophe activity (compared with 3.0 points for an average loss year), thus representing a slight like-for-like, year-on-year improvement.

“The primary non-life operation turned in a strong result, recording a combined ratio of 93.0 percent (96.4 percent in 2003), but this is a relatively small part of the group. The ROR of the non-life operations (primary and reinsurance combined) was 9.7 percent (8.7 percent in 2003).

“There were also improved results reported for the primary life and reinsurance life businesses, with ROA of 0 percent and 1.5 percent, respectively (negative 0.8 percent and 0.8 percent, respectively, in 2003).”

Overall, the group achieved a 7 percent increase in reported shareholders’ equity and a ROE of 9.4 percent. “While the net profit reported is a material improvement on the past few years, it is still unclear at this juncture whether, based on longer term trends and comparative industry data, the 2004 results are a definitive indication of a sustained improvement in operating performance,” Searby observed.

S&P singled out its “uncertainty as to the continuing drag on the group of American Re–comprising American Alternative Insurance Corp. (A/Watch Neg/–), American Re Corp. (BBB/Watch Neg/–), and Princeton Excess & Surplus Lines Insurance Co. (A/Watch Neg/–)–and the need for further improvement at the primary life operations.”