- Increased expenditure of Euro 0.4bn for the Munich Re Group due to high reserve strengthening of US subsidiary
- Group's profit target for 2005 confirmed nevertheless.
The Munich Re Group's result for the second quarter will be reduced by Euro 0.4bn. The starting point: American Re has increased its reserves mainly for the accident years 1997 to mid-2002 by US-Dollar 1.6bn (after deduction of relief from extra-Group retrocessions). The impact of this additional expenditure will only be partially felt at Group level, where general provision had already been made for long-tail losses.
The Group's envisaged target of 12% return on equity after tax for the business year 2005 still stands, says Nikolaus von Bomhard, Chairman of Munich Re's Board of Management.
Reserve strengthening at American Re
As reported by Munich Re on various occasions, over the past few weeks American Re has carried out an in-depth review of its losses not yet settled. The outcome was subsequently checked by Munich Re specialists and the international auditing firm KPMG. With effect from the second quarter of 2005, American Re is consequently adding a total of US-Dollar 1.6bn to its reserves after deduction of relief from extra-Group retrocessions. This allocation is particularly for losses from liability and workers' compensation business incurred between 1997 and mid-2002 and for asbestos and environmental claims, mainly from liability covers written decades ago. With its reserve strengthening, American Re is taking prompt account of current developments in its clients' loss reporting; at the same time, it is applying a particularly prudent approach to determining reserves for losses that have been incurred but not yet reported.
Capital strengthening and improved retrocession cover for American Re
To counter the reduction in American Re's equity capital resulting from the reserve strengthening, Munich Re Group will finance a capital increase to underpin its US subsidiary's competitive position. Munich Reinsurance Company will make a capital injection of around US-Dollar 1.1bn from existing resources, thus increasing American Re's equity capital to a total of US-Dollar 3bn. Besides this, internal Group financing of US-Dollar 1.6bn for two intermediate holding companies will be converted into equity capital. For the purposes of efficient capital management, the parent company will continue to provide retrocession cover, which will be expanded for active business and extended to reserves for losses from the accident years prior to 2002, so that the opportunities and risks from the run-off of the reserves are raised to the top Group level. These measures are subject to routine approval – where applicable – from the responsible supervisory authorities.
The relevant figures for the Munich Re Group in detail
There will be the following effects on the Group's result:
| Expenses for strengthening reserves for American Re
for own account as per US GAAP |
US-Dollar 1.43bn |
| + Munich Reinsurance Company's share of retrocessions |
US-Dollar 0.20bn |
| = Subtotal for American Re and Munich Reinsurance Company
or in balance sheet curency |
US-Dollar 1.63bn |
| (excenge rate US-Dollar/Euro1.2588) |
Euro 1.29bn |
| - Already covered by long-tail provisions at Group level |
Euro 0.90bn |
| = Net Group expenses before tax |
Euro 0.39bn |
In relation to expected earned premiums for own account in non-life reinsurance, the Group's expenses amount to around 2.7 percentage points for the whole of 2005 and 10.7 percentage points for the second quarter. The extent of any tax effects will only be definitively ascertained in the course of accounting operations for the second quarter financial statements. Munich Re will report on this issue further when it publishes its half-year figures, as announced, on 4 August.
Munich, 19 July 2005
Münchener Rückversicherungs-Gesellschaft
Aktiengesellschaft in München
Königinstraße 107
80802 München
Deutschland
Disclaimer:
This announcement contains and refers to statements relating to the future. Such forward-looking statements are based on current expectations, estimates, forecasts and prognoses as well as assessments and assumptions of the management of Munich Reinsurance Company. Such statements contain in particular comments regarding plans, strategies and outlooks. Words such as "expect" and similar expressions characterise such forward-looking statements. These statements are no guarantee that results will actually materialise in the future and they are subject to risks, uncertainties, and assumptions that are difficult to foresee. Therefore, actual consequences and results could deviate substantially from those anticipated in these forward-looking statements.