News

November 25, 2008

Munich Re 08 Profit Warning As 3Q Net Profit Plunges

By Ulrike Dauer,Of DOW JONES NEWSWIRES

FRANKFURT (Dow Jones)--Munich Re AG (MUV2.XE) Friday issued its second profit warning since the summer after impairments and hurricane costs all but wiped out third-quarter earnings.

But its shares moved sharply higher in early trading because it maintained its dividend and promised it would still return over EUR8 billion to shareholders.

Munich Re, which is one of the world's largest reinsurers by gross premiums along with Swiss Re Co. (RUKN.VX), said after-tax profit before minorities, "will probably not reach EUR2 billion, or earnings-per-share of EUR10." Market volatility left it unable to give a reliable full-year profit forecast, it said.

Munich Re first warned on full-year profit late July, saying it expected it to be "well above" EUR2 billion, but lower than its previously estimated profit range of EUR3 billion-EUR3.4 billion. The company uses a profit after-tax, pre-minorities measure as its main target.

Nonetheless, Munich Re said it will keep the dividend payout for 2008 at EUR5.50 a share, unchanged from 2007, and remains committed to raising EPS to at least EUR18 by 2010.

It's also sticking to its goal of returning more than EUR8 billion to shareholders by 2010 through share buybacks and dividends. It aims to achieve a return on risk-adjusted capital of at least 15% over the cycle.

Quarterly net profit, after minorities, fell to EUR7 million from EUR1.20 billion in the same period a year earlier, below an average forecast of EUR114 million from 13 analysts surveyed by Dow Jones Newswires. It reported EUR674 million in net investment income, down 66% from EUR1.99 billion.

Landesbank Baden-Wuerttemberg analyst Robert Mazzuoli said net investment income was the main disappointment, EUR100 million lower than he forecast.

However, he said it had been obvious that full-year profit guidance would be lowered, pointing to several positives, such as the unchanged dividend, share buybacks, that the company lowered the stock portion in its portfolio in the third quarter before the crisis widened, and that hurricanes and other disasters had a lower impact than for peers Hannover Re (HNR1.XE) and Swiss
Re.

Quarterly gross premium income rose 1.3% to EUR9.27 billion from EUR9.15 billion, above the forecast EUR9.15 billion.

Munich Re didn't use recently eased accounting standards related to the reclassification of financial instruments, which was approved by the European Union, and doesn't plan to do so, "as long as this practice doesn't cause any serious competitive disadvantages," it said.

Its business relations with insolvent U.S. investment bank Lehman Brothers ed to EUR115 million in write-downs. Meanwhile, the spread of the crisis to companies such as American International Group Inc. (AIG) and Washington Mutal "has had no notable impact" on results as yet, it said.

Munich Re also said the targeted combined ratio of 98% in non-life reinsurance can only be reached if the bill for hurricanes and other large losses remains below budget in the fourth quarter. In the third quarter, the combined ratio was 101.3%, up from 97.1% in the year-ago quarter, reflecting the higher costs for hurricanes and other large disasters.