Munich Re to Raise Dividend by 55% Despite Increases in 2005 Cat Losses

In a year that will go down as the costliest ever for the insurance industry, it seems paradoxical that Munich Re, the world’s largest reinsurer – at least until Swiss Re completes its takeover of GE Insurance Solutions – should not only meet its target results, but also contemplate raising its dividend by 55 percent. Paradox or no, that’s what the company has just announced.

Munich Re’s bulletin notes: “The year 2005 began with the world still reeling from the tsunami which on 26 December 2004 had destroyed the coastal strip and human settlements along many thousand kilometers around the Indian Ocean.” Two major events dominated 2005 – “the catastrophic earthquake in Kashmir on 8 October, and record losses for the insurance industry of over US$75 billion.” According to Munich Re’s estimates, Hurricane Katrina alone caused insured losses of some around $45 billion, “forcefully underlining the increased risk from windstorms.”

However, Munich Re said that despite “the large volume of delayed Katrina claims notifications,” it can “still achieve its target result for 2005 and aims to increase its dividend by 55 percent to €3.10 [$3.67] on18 April 2006: The centenary of the San Francisco earthquake.”

Munich Re acknowledged that the hurricane related claims continue to increase. “Since the last estimate on 7 November, there has been a constant flow of further claims notifications and reports from loss adjusters,” the bulletin continued. ” The impact of these storms on the consolidated result after tax is now nearly €1.5 billion [$1.778 billion]. That figure — adjusted to eliminate the net burden from Wilma, which affected the 4th quarter — is roughly €500 million [$592.5 million] more than that announced in the reporting on the first three quarters.”

The Group currently anticipates that loss claims – before tax and after retrocessions – will be “just over €1.6 billion [$1.896 billion] from Katrina (= €815 million [$965 million] more than the previous estimate), an unchanged burden of more than €250 million [$256 million] from Rita, and around €330 million [$391 million] from Wilma. The ultimate outcome is an impact of almost €2.3 billion [$2.725 billion] before tax and after retrocessions. However, this figure also includes more than €600m in IBNR reserves (provisions for incurred but not reported losses which Munich Re has established specifically in view of the continued uncertainties).”

That was the bad news. Then came the statement that despite those substantial losses “the Board of Management intends to propose to the Supervisory Board and the AGM that the dividend per share be increased by €1.10 [$1.30] to €3.10 [$3.67]. Board Chairman Nikolaus von Bomhard commented: “We have decided on this substantial increase in the dividend because we want our shareholders to participate in the good result. The results of our basic reinsurance and insurance business have been good, our primary insurers have maintained their positive development, and further derisking of investments has led not only to the desired improvement in the portfolio composition but also to gains on disposals.”

Munich Re is recognized as a leader in forecasting potential losses from different natural catastrophe scenarios. So it’s not surprising that the exceptional losses of 2005 have had a significant impact on the reinsurer’s future contingency planning. Torsten Jeworrek, member of Munich Re’s Board of Management noted: “We are gearing our business more than ever to the new risk situation and to these enormous loss potentials, as we recognize the additional business opportunities they offer. Our products and our services are urgently needed. We will take advantage of the business opportunities but, in doing so, will only accept risk-adequate prices and conditions.”

That has been the Group’s standard for the last four years. As a result it has seen its gross premiums written decrease (from $24.674 billion in 2003 to $22.203 billion in 2004, according to Standard & Poor’s). They may be expected to decrease further as Munich Re continues to emphasize quality over quantity.

The full report, which gives further details about 2005’s catastrophes as well as some predictions for the industry, may be obtained on the company’s Website at www.munichre.com.