Munich Re announced that 2003 resulted in its first net loss since 1906, the year of the San Francisco earthquake. The world’s largest reinsurer lost 434 million euros ($533 million) last year, but said that the result “draws a line under three difficult years.”
Although the loss wasn’t good news, it was largely offset by the company’s increase in underwriting profit to 2 billion euros ($2.46 billion), the reduction of its combined ratios to 96.7 percent in reinsurance and 96.4 percent in primary insurance and solid forecasts of future profits. Analysts and investors chose to look at the upside, as Munich Re shares rose sharply following the earnings announcement.
Management was pleased as well. “With the net loss for 2003, we are drawing a line under three difficult years impacted above all by the bear market on the stock exchanges. As the underwriting result for the year under review showed, we are gearing our operations closely and consistently to profitability in all fields of business,” commented Jörg Schneider, member of Munich Re’s Board of Management, who presented the provisional figures.
Munich Re’s gross premium income increased slightly to 40.4 billion euros ($49.61 billion). That, combined with the reduced combined ratios, which the company attributed to “the successful outcome of consistent underwriting policy in both business segments,” should have produced a profit. But the weak stock market throughout most of 2003, combined with a 1.8 billion euro ($2.21 billion) tax bill produced the loss instead.
The company’s announcement noted that the tax payment had had “a disproportionate impact on the result, given the Group’s pre-tax earnings of 1.3 billion ($1.6 billion).” It also noted that “expenses were booked for adjustments of goodwill in the case of the Group’s Italian primary insurance operations, for the strengthening of reserves in the USA, and for the writedowns and adjustments of goodwill for HypoVereinsbank as a Munich Re associated enterprise.”
Commenting on the results, A.M. Best Co. said that the company’s financial strength rating of A+ (Superior) “remains unaffected following the release of year-end 2003 results in line with expectations.” Best also noted the combined ratio improvements, but noted that “earnings from the primary life segment remain under pressure from the volatility of equity markets and relatively high minimum guarantees.” The rating agency said it would “closely monitor Munich Re’s achievement of its profitability targets during 2004.”
Munich Re is also well ahead in implementing the International Accounting Standards (IAS) which are due to become compulsory next January. Schneider indicated that they provide a “better insight into the earnings performance of our Group. The capital market will respect this prompter and more informative reporting. That’s what happened when Munich Re was also among the first companies to switch its consolidated accounting from German Commercial Code to IAS back in 1999.”
In discussing the results of its reinsurance operations, Munich Re said premium income fell by 2.6 percent to 24.8 billion euros ($30.45 billion), due primarily to “changes in exchange rates; in original currencies it increased by 9.8 percent. Before amortisation of goodwill, the reinsurance group achieved a pre-tax profit of 2.7 billion euros ($3.31 billion).
“With a combined ratio of 96.7 percent, the Group’s reinsurers fully achieved their goal for 2003, even though they were affected by a number of large loss events,” the bulletin continued. ” The combined ratio improved by 9.8 percentage points compared with the previous year’s figure adjusted to eliminate special factors. The loss ratio of 69.6 percent includes 1.6 (3.3) percentage points for natural catastrophe losses. A series of tornadoes in the USA gave rise to claims expenditure of 90 million euros ($110.5 million) for Munich Re; the wildland fires in California cost almost 50 million ($61.4 million). Hurricanes Fabian and Isabel, and Typhoon Maemi, together produced a claims burden for Munich Re of 110 million euros ($135 million. On top of this, there were considerable expenses for man-made losses, such as the blackout in North America (50 million euros) [$61.4 million] and the explosion in a Canadian oil refinery (over 60 million) [$74 million].”
Munich Re also noted that it had “substantially improved prices and conditions in its non-life reinsurance business,” last year and had improved the quality of its portfolio. Board member Torsten Jeworrek observed: “Our policy is geared to an improved risk profile with sustainable earnings opportunities. One key factor in achieving this objective is risk-adequate pricing – as shown by our average price increases of 5 percent in the recent renewals. But conditions that limit our loss potential are also important.”
The company’s primary insurance group also improved the performance of its underwriting business in 2003 posting a profit of 248 million ($304.5 million) “before amortisation of goodwill and tax.” The sector “had to absorb (like the insurance industry as a whole) writedowns and losses on disposals from the preceding bear market, especially in the first half of 2003; for the business year as a whole, these burdens totaled 3.1 billion (3.8 billion).”
Munich Re also noted that the primary group “increased their premium income by 6.3 percent (market average: 4.7 percent) to 17.6 billion ($21.61 billion), representing 44 percent of the Munich Re Group’s overall premium volume.”
The company also pointed out that owing to the decrease of the stakes held by Allianz and HypoVereinsbank in Munich Re to under 10 percent the “free float” of its shares has now passed the 80 percent mark. The number of Munich Re shareholders has risen from 122,000 at the beginning of 2003 to a current level of 187,000.
The shareholders’ investment seems to have been well timed. Munich Re’s shares have under-performed the market over the last three years, but now look set to rise. The company reiterated its 2004 targets of achieving a 12 percent return on equity, and implementing further cost cutting measures.
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