Munich Re Doubles Pretax Katrina Loss Estimate

Munich Re has been forced to revise its catastrophe loss estimate for 2005 upwards for the third time, driven mainly by Hurricane Katrina and other storms.

Munich Re has been forced to revise its catastrophe loss estimate for 2005 upwards for the third time, driven mainly by Hurricane Katrina and other storms. Despite the bad news, higher profits from the sale or swap of investments will allow the company to reach its aim of around a €2.6 billion ($3.1 billion) profit for 2005, according to the German reinsurer’s management.

Investors, which rewarded Munich Re during 2005 with a 30% rise in stock price, have so far not reacted negatively. But their attitudes are beginning to change. Neil Manser, analyst at investment bank Fox-Pitt, Kelton, downgraded Munich Re from outperform to in-line. Manser says renewals have been uneven, with large price rises in U.S. catastrophe business but moderate changes elsewhere.

In a report, Manser also called the long-delayed announcement of the higher Katrina loss “a disappointing episode, following a period of improving communication”.

In its annual catastrophe survey for global market losses, published on Dec. 29, Munich Re said it expected its Katrina losses to be more than €1.6 billion before tax and after retrocession. “This is €815 million more than our earlier estimate,” says a spokesman for Munich Re. The company believes the total industry insured loss from Katrina will be €45 billion, and the economic loss $125 billion.

At the beginning of September, soon after Katrina struck, Munich Re tried to calm investors by announcing that it expected a gross loss of €400 million from the hurricane. When the company released its third-quarter figures, it indicated a loss of €800 million after retrocession and before tax for Katrina alone.

For all storms together, Munich Re expects losses of €2.3 billion before tax and after retrocessions. Included in this is €600 million set aside for incurred but not reported claims.

The Munich Re spokesman says there is a good explanation for the increase in Katrina loss estimates. “New Orleans was literally closed down until the beginning of December,” he said. This made it impossible for loss adjusters to get into the city.

In addition, many companies could not conduct business as usual because of the after-effects of the hurricane. This has resulted in big business interruption losses. “A large part of the losses that have so far become known have come from business interruption policies,” said the spokesman.

The revisions raise questions about Munich Re’s risk and loss estimation models. As early as November, board member Torsten Jeworrek had admitted that there was room for improvement in this field.

So far, however, investors are reacting favourably to Munich Re. This is partly because, at the same time as the bad news of the Katrina losses, Munich Re announced that it would increase its dividend by €1.10 a share to €3.10. It also said that despite the losses, it still expects to hit its targets for 2005. The company aims to achieve a return on equity of 12% after tax. Given that its shareholders’ equity is €22.7 billion, the company would require a net profit of close to €2.6 billion to hit this target. In 2004, it earned €1.8 billion.

Profits from the sale and exchange of shareholdings should reach €2 billion. Munich Re made a profit of €1.15 billion from the exchange of its shares in German bank HypoVereinsbank alone. It swapped the shares for those of Unicredit, the Italian bank that acquired HypoVereinsbank. Added to this will be sales of shares in Allianz, Man, Commerzbank and BHW.