Munich Re Full-Year Profit Drops 62% on Writedowns (Update2)

By Oliver Suess
Bloomberg News
February 4, 2009


Feb. 4 (Bloomberg) -- Munich Re, the world's biggest reinsurer, said profit declined 62 percent last year following writedowns on investments.

Full-year net income before minority interests fell to 1.5 billion euros ($2 billion) from a record of 3.9 billion euros in 2007, the Munich-based reinsurer said today in a statement on its Web site. Earnings missed the 1.7 billion-euro estimate of Bernd Mueller-Gerberding, an analyst at UniCredit in Munich.

Munich Re cut its earnings outlook twice last year as a 42 percent decline in global stock markets forced insurers and reinsurers to write down the value of their equity investments. Reinsurance rates in January, when two-thirds of the property and casualty portfolio was up for renewal, rose by 2.6 percent, less than the double-digit increase the company targets for this year.

"Additional writedowns in the fourth quarter were a burden for net income," Mueller-Gerberding, who recommends buying the shares, wrote in a note to clients today. "Regarding the renewals, Munich Re did not fully meet its own, bullish ambitions."

Munich Re fell 4.60 euros, or 4.3 percent, to 102.88 euros at 10:32 a.m. in Frankfurt. They have lost 7.3 percent since the beginning of the year, giving the company a market value of 21.2 billion euros. The shares' performance compares with a 12 percent decline of the 35-member Bloomberg Europe 500 Insurance Index this year.

'Not Fulfilled'

The fourth-quarter profit was "around" 100 million euros, Munich Re said. That compares with net income before minorities of 589 million euros reported for the year-ago quarter.

The company, which is scheduled to report detailed fourth- quarter and full-year earnings on March 3, reiterated it will pay an unchanged dividend of 5.50 euros per share for 2008.

Premium volume in the January renewals of property and casualty reinsurance contracts fell by about 3 percent to around 8 billion euros, Munich Re said.

"Certainly not all our expectations were fulfilled," said Torsten Jeworrek, Munich Re's management board member responsible for reinsurance. "The development of the economy has not yet led to a situation in all markets where the players recognize the need for prices, terms and conditions that are consistently risk- adequate."

Hannover Re, Germany's second-biggest reinsurer, said yesterday that this year may be the second-most profitable in its history as insurers hurt by investment losses turn to reinsurers to help them shoulder risk. The Hanover, Germany-based reinsurer had to scrap its 2008 dividend as it heads for its first full- year loss following writedowns on equity investments last year.

Hannover Re

Reinsurers renew the vast majority of their property and casualty reinsurance contracts annually. They have forecast reinsurance rates to rise this year as primary insurers need to buy more cover to replenish capital depleted by the financial crisis and higher losses from catastrophes.

Munich Re reduced its equity risk after hedging to 1.7 percent last quarter from 4.6 percent at the end of September. It won't return to the "old levels" of equity holdings, Chief Financial Officer Joerg Schneider said on a conference call with journalists today.

Writedowns on equity investments were cushioned by gains booked on derivatives in the quarter, especially equity-hedging instruments, it said. The company also wrote down fixed-income securities by 400 million euros in the quarter.

"Naturally, as an investor of about 175 billion euros, we too had to absorb large losses on our risk-oriented investments," Schneider said. "But we are not taking old baggage into 2009," he added on the call.

Munich Re said on Nov. 7 that full-year profit won't reach a previous target of more than 2 billion euros. That was the second time the company lowered its earnings outlook for 2008. It first reduced the target on July 25 from as much as 3.4 billion euros.

Schneider declined today to give an outlook for the full year as the situation on capital markets is still "very difficult."

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