Canadian Underwriter

S&P downgrades Munich Re despite EUR1.1 billion profit for 2002

March 27, 2003   by Canadian Underwriter

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A jump in profits last year was not enough to spare Munich Re from rating agency Standard & Poor’s, which downgraded the world’s number one reinsurer.
The downgrade follows release of Munich Re’s 2002 results, which saw the group bring in profits of EUR1.1 billion (Cdn$1.7 billion), nearly four-times that of 2001, when September 11 losses hit the group. Earnings per share are EUR6.08 (Cdn$9.50), versus EUR1.41 (Cdn$2.20) in 2001, with the company expecting a dividend payout of EUR1.25 (Cdn$1.95) per share.
Group premium growth year-on-year was 10.8%, driven largely by stronger pricing and terms in its reinsurance business. Combined ratio for the reinsurance business was 106.5%, versus 112.7% the year prior, although the company notes that the investment downturn should see it aiming for a combined ratio less than 100%.
The group’s primary insurance operations saw a combined ratio of 99.1% last year, with premium income up 5.6% year-on-year.
The company was not immune to plummeting stock markets, taking a securities write-down of EUR5.7 billion (Cdn$8.9 billion). It also suffering from reserve charges related to its U.S. operation, American Re and September 11th reserves, totaling EUR1.8 billion (Cdn$2.8 billion). Among the moves made to reduce the group’s investment exposure was the sale of long-term shareholdings in Allianz Group, which realized a profit of EUR4.7 billion (Cdn$7.4 billion).
“The persistently strong demand for high-quality reinsurance cover contrasts with a substantial reduction on the supply side in the last three years,” states a Munich Re press release. “Munich Re intends to take advantage of this favorable situation to further strengthen its position as a much sought-after risk carrier worldwide.”
However, S&P is not so confident of the group’s ability to restore its capital levels to their historically high levels.
It has lowered Munich Reinsurance Co.’s long-term ratings on financial strength and counterparty credit to “AA-” from “AA+”, lowered the same ratings for American Re to “A+” from “AA-“, and lowered the ratings of subsidiary ERGO Versicherungsgruppe AG to “A+” from “AA”. Outlook on all ratings is negative.
The downgrades reflect “the group’s disappointing overall earnings performance for 2002”, with S&P noting “the group’s capital base has weakened substantially”. The group’s exposures in U.S. reinsurance and German banking are noted as negative factors. “Based on 2002 results, S&P believes that Munich Re’s ability to meet the previously expected combined ratio of 104% over the cycle is questionable.”

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