Munich Re Posts $2.44 Billion 2004 Group Net Profit

March 16, 2005

Germany’s Munich Re Group celebrated its 125th anniversary year in style, recovering from a 434 million euro ($578 million) loss in 2003 to post 2004 net profits of 1.833 billion euros ($2.44 billion) despite a series of weather related catastrophes that cost the company 713 million euros ($950 million). The amount was slightly above the Group’s revised forecast of $2.34 billion issued last February (See IJ Website Feb.15).

“I am more than satisfied with the result of this mixed year. We are well on the way to achieving sustained profitability and thus regaining our former strength”, stated Nikolaus von Bomhard, Chairman of the Board of Management, when presenting the full results. “I am optimistic for the current year 2005. We were very successful in the renewal of most of our non-life reinsurance business at 1 January. And the new structure that ERGO has adopted will enable our primary insurers to exploit market opportunities even more effectively.”

In addition to the solid profits, earnings per share climbed to 8.01 euros ($10.67), compared to a minus 2.25 euros (-$3.00) in 2003. The combined ratio rose slightly from 96.7 percent to 98.9 percent in reinsurance, and 93 percent in primary insurance. The Group plans to raise its dividend to 2 euros ($2.675) per share from 1.2 (euros ($1.60) in 2003. It also targets a 12 percent return on equity for 2005.

Von Bomhard stressed the company’s continued commitment to solid underwriting and creativity. “There is no progress without innovation,” he stated in the earnings announcement. “Our primary task is to identify, understand and evaluate known and, above all, new risks, and to offer future-oriented insurance concepts. Seen as a whole, Munich Re’s history is a success story. I am delighted that the anniversary has coincided with one of our best-ever annual results.”

The bulletin noted that in Munich Re’s core reinsurance sector “disciplined and selective underwriting paid off.” The positive result stabilized at a high level of 1.7 billion euros ($2.26 billion) compared to 1.6 billion euros ($2.13 billion) in 2003.

The result is all the more remarkable give the natural catastrophes and ongoing demands to increase reserves. Munich Re said that nat cats “contributed no less than 4.5 percentage points, almost three times as much as in the previous year (1.6) and well above the ten-year average of 3 percentage points. The exceptional series of natural catastrophes in the second half of the year cost Munich Re 713 million euros [$950 million] (hurricanes and typhoons in the 3rd and 4th quarter: 613 million euros [$816.5 million]; earthquake/tsunami in the 4th quarter: 100 million euros [$132 million]).

The company also noted that “2.5 percentage points were due to the strengthening of reserves for US business: US$ 180 million for asbestos-related claims dating back many years and US$ 302 million for losses stemming mainly from other US liability business written prior to 2002.”

It also pointed out that “premium income in this segment declined – primarily owing to Munich Re’s profit-oriented underwriting policy – by 9.7 percent to 22.4 billion euros [$29.8 billion],” compared to 24.8 billion euros ($33 billion) in 2003, “of which 2.8 percentage points were assignable to changes in exchange rates. In property-casualty reinsurance, premium income decreased by 17.1 percent to 14.9 billion euros [$19.8 billion], partly because of the termination of non-profitable treaties and also as a consequence of exchange-rate fluctuations. Premium income in life and health reinsurance grew by 9.7 percent to 7.5 billion euros [$10 billion].”

Munich Re’s primary insurance group, mainly ERGO, also did well last year, returning to the black with a 261 million euro ($347.6 million) profit, compared to a 1.091 billion ($1.45 billion) loss in 2003.

The report noted that the “underwriting business had produced a positive result in 2003; in 2004, with a result of 615 million [$819 million] (2003: 212 million euros [$282 million]) before amortisation of goodwill, this almost trebled. Premium income in primary insurance fell slightly by 0.6 percent to 17.5 billion euros [$23.3 billion].” The combined ratio in the primary insurance segment, which was not burdened by major losses, was 93 percent, compared to 96.4 percent on 2003.

Munich Re’s investment figures also showed improvement increasing to 8 billion euros ($10.65 billion) from 7.1 billion ($9.45 billion) in 2003. “Included in this figure are writedowns on real estate totaling 459 million euros ($611 million) and HVB’s special writedown, which had an impact of 459 million euros [$611 million].” HBV (HypoVereinsbank) is still troubled, mostly by the sluggish German economy and over capacity in the country’s banking sector. Munich Re decreased its shareholdings in HBV last year from 25.7 percent to 18.4 percent. It also reduced its stake in Allianz from 12.2 percent to 9 percent.

“The high profit for 2004 shows that we have focused on the right areas, von Bomhard noted. “Our work in a turbulent year proved very successful. We intend to continue this work in order to gain more strategic scope to secure lasting success in the future. The Munich Re Group has adopted the following programme for the coming years:
— Risks are to be actively diversified. Progressive derisking (reduction of concentration risks) will enhance the quality and mobility of the Group’s capital. Earnings potential will be strengthened by extensive accumulation control designed to limit losses per event, and also by efficient asset-liability management.
— With its core-business focus on risk assumption and risk management, Munich Re takes a holistic approach to risks, so that it is immaterial whether the risks stem from reinsurance or primary insurance. The Group unites the two segments in an unparalleled way, giving it opportunities and synergy potentials that competitors cannot realise. Munich Re’s aim is to develop new risk fields and to obtain a lead on the competition by occupying these with know-how and products, thus growing profitably as a result of its competitive edge. This growth is to be achieved on the solid basis of unique risk knowledge and technique. In its 125-year history, Munich Re has set standards in the market with its innovations (such as engineering insurance, risk-based rating in life insurance, or its work in geo risks research).
— Optimised methods and tools will enable the Group to steer the selection and assumption of risks dynamically and profitably. Data resources for analysing, managing and controlling the business will be continually improved. Transparent objectives, clear accountability and effective performance incentives are core components of Group management, which are constantly checked for their effectiveness by means of performance reviews.
Discussing its targets for 2005, Munich Re said it “puts profitability before growth. In the recent renewals of non-life reinsurance treaties at the turn of the year, its underwriters were able to achieve risk-adequate prices and conditions. Munich Re expects similar success in the forthcoming 2005 renewals in Japan and South Korea, as well as those in sections of the Australian and US markets and in Latin America.

“Group premiums for 2005 are expected to total around 38.5 billion euros [$51.3 billion], with a slight decrease in reinsurance and a moderate increase in primary insurance. In reinsurance business, the aim is to outperform the combined ratio target of 97 percent, given normal claims experience, whilst the objective in primary insurance is a combined ratio of 95 percent. Altogether, the Munich Re Group is looking to achieve an ambitious return on equity of 12 percent after tax, based on average Group shareholders’ equity (including minority interests).”

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