News

November 25, 2008

Munich Re Sees Reinsurance Opportunities
from Financial Crisis

Insurance Journal

A bulletin on Munich Re's web site (www.munichre.com) opens as follows: "The financial crisis has sent stock markets plunging around the world and resulted in growing levels of risk aversion. Stringent risk management and transparency are increasingly important. Lower investment returns have placed pressure on primary insurers' capital. Together with restricted refinancing options on the capital markets the significance of reinsurance as a direct capital substitute is growing. This has prompted immediate change in the reinsurance industry, with demand swiftly increasing."

That statement, coming from the world's second largest reinsurer, presents a pretty accurate picture of the current global havoc caused by the crisis in the financial sector. Can reinsurance provide some of the stability the markets Need? Munich Re thinks so.

"We are certainly seeing a trend where insurance companies are looking to shift risk away from their books as they simply don't have the capital strength to support high risk exposure," explained Ludger Arnoldussen, member of the Munich Re Board of Management, speaking in Hong Kong at the East Asian Insurance Congress. "This is benefiting strong reinsurers like Munich Re, as primary insurance companies attach increasing importance to a reinsurer's financial strength, stability and risk management capabilities."

Arnoldussen added that while Munich Re cannot fully escape the wider effects of the crisis, which includes falling equity markets and the implications of a worldwide recession, the Group will emerge stronger from the turmoil. It will benefit from rising reinsurance prices, the expansion of profitable business and opportunities for acquisitions, as well as its conservative investment strategy and core skills in risk assessment.

Munich Re's financial strength would seem to back up that conclusion. The bulletin points out that the reinsurer's capital base "remains solid." As of Sept. 30 it "it totaled €21.5 billion [$27.6 billion] - the same level as after the first six months of the year, despite the market turmoil.

"The Group reported a net income of €1.4 billion [$1.8 billion] for the first nine months on 7 November 2008. Munich Re also reiterated that it plans to pay a dividend of at least €5.50 [$6.48] per share this year, matching the payout for 2007.

Arnoldussen noted that Munich Re's reinsurance group will continue to focus on organic growth in the region. Asia and Australasia accounted for around 10 percent of Munich Re's reinsurance premium volume in 2007. The Group operates in all major countries in the region. "We view the current crisis as an opportunity for
Munich Re in Asia-Pacific and believe our strong capital base and risk management skills will continue to prove a very attractive value proposition," he stated. "The demand for highly rated reinsurance will increase as the greater risk environment produces a flight to quality."

Munich Re also indicated that it "expects a significantly higher reinsurance price level and differential terms for the upcoming renewals in January throughout Asia. This projection is based on the increased cost of capital, growing demand for reinsurance, shrinking capacity of the reinsurance industry in general and the changed risk environment."