Munich Re Posts $2.1 Billion First Half Profit Despite Credit Crunch

August 8, 2008

The Munich Re Group recorded a profit of €1.4 billion ($2.123 billion) for the first half of 2006, a decline from the €2.1 billion ($3.18 billion) recorded in the same peiod of 2007. However, given the ongoing turmoil in the financial markets, it was a notable achievement.

Although Munich Re has lowered its overall earnings forecasts for 2008, it still expects profits for the year to “be well above €2 billion [$3.03 billion], notwithstanding strict application of IFRS impairment rules.”

The Group is also “adhering to its medium-term objectives: by 2010, more than €8 billion [$12.13 billion] is to be paid out to shareholders through share buy-backs and dividends, and earnings per share are to increase to at least €18 [$27.30].”

Nikolaus von Bomhard, Chairman of the Board of Management, stated: “We identified the challenges of the future in good time. With our integrated business model and our risk management, we are earning a solid profit – even under the difficult conditions on the capital markets and the growing price pressure in reinsurance.” He also noted that Munich Re is “driving ahead with profitable business initiatives, such as expansion in specialty segments of US primary insurance.”

Standard & Poor’s Ratings Services reacted to the earnings announcement with a vote of confidence (See related article). The rating agency said its ‘AA-‘ long-term counterparty credit and insurer financial strength ratings on Munich Re “are unaffected by the recent reduction in its forecast earnings for 2008,” while the outlook remains stable.

Munich Re said that in the first six months its operating result, which excludes capital gains/losses, was €2.2 billion ($3.34 billion), a 23.7 percent decrease from the €2.8 billion ($4.25 billion) it posted in the same period last year.

However, the earnings statement noted: “The marked price losses on the stock markets and the fall in the dollar impacted on the investment result, which fell by 42.2 percent to €3.3 billion [$5 billion],” from €5.6 billion ($8.5 billion). Equity capital declined to €21.5 billion ($32.61 billion) since the beginning of the year from €31.12 billion ($47.2 billion).”

CFO Jörg Schneider observed: “Given the turmoil on the financial markets, those are satisfactory results. Of course, we had impairments of equities and low gains on disposals, but thanks to our balanced investment portfolio, we have done relatively well.”
Owing to negative currency exchange effects due to the strong Euro, gross premiums written reduced slightly by 0.4 percent to €18.9 billion [$28.68 billion]. If exchange rates had remained the same, premium volume would have increased by 4.4 percent in the first half-year.

Expanding on the “negative development of the [securities] market,” Munich Re said it had already made write-downs in its equity portfolio totaling €1.332 billion ($2.02 billion)” in the first quarter. Despite a brief rise in share prices, the Group wrote off an additional €889 million ($1.348 billion) worth of write-downs in the second quarter of 2008.

The Group “aims to achieve a return of at least 15 percent on risk-adjusted capital (RORAC) over the cycle,” said the bulletin. “In the light of depressed share prices, Munich Re expects a profit of well over €2 billion for 2008, equivalent to a RORAC clearly exceeding 10 percent.”

Munich Re anticipates that its gross premium volume in the reinsurance segment will range between €20 and €21 billion (around $32 billion). “It said the slight year-on-year decline is attributable to exchange-rate developments and the softening reinsurance market. “That is why we are keeping firmly focused on profit-oriented underwriting and are still prepared to sacrifice business volume,” von Bomhard explained.

Gross premium income of €17.5 to18 billion (around $27 billion) is forecast in primary insurance, with a consolidated figure for the whole Munich Re Group of €36 to €37.5 billion (around $56 billion), slightly more than in 2007.

“The Group is targeting a combined ratio for reinsurance of 98 percent (6.5 percentage points of which are budgeted for natural hazards),” said the bulletin. “After the high random major losses in the first quarter, this objective can only be attained if claims costs from such events remain below expected values during the rest of the year. In primary insurance, the combined-ratio target for 2008 is again under 95 percent. A sustained 4.5 percent return on investments is aimed at – based on their average market values. In view of the continuing adverse situation on the capital markets, Munich Re expects an RoI of below 4.0 percent for 2008.”

The full report and access details to the earnings conference call mat be obtained on the group’s web site at:

Source: Munich Re

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