Munich Re Boosts Reserves, WTC Provision

Munich said the reserve increase is principally for incurred but not reported claims during the 1997 to 2001 accident years.

In addition, Munich Re has raised its group provision for the World Trade Center loss by $500 million, which brings the estimated total to approximately $2.7 billion, a Munich Re representative said.

Despite these factors, Munich Re Group is likely to show a high net profit for the first half of 2002, the company said, attributing the favorable result to large capital gains from Munich Re's shareholding transactions with Allianz and positive pricing trends in its reinsurance business.

Regarding the situation at American Re, John Phelan, the new chief executive officer of the Princeton, N.J.-based company, said the company has been completely realigned over the last few months. This has included a review of the company's entire portfolio with regard to claims development and provision, Mr. Phelan said.

American Re will now be able to take full advantage "of the upturn in its home market," he said.

"After the fundamental realignment, I expect American Re to start generating significant profits immediately. Seldom has the market situation for such improvement been better than now," said Hans-J?rgen Schinzler, chairman of Munich Re's board of management.

A wide-ranging review of the reserve situation of American Re was conducted to ensure "both foreseeable and possible market and loss developments, especially in liability, but also as regards [workers'] compensation were fully dealt with and provided for," Munich Re said.

Munich Re said the increase of $500 million to its provisions for the World Trade Center losses should be "seen against the background of the unique complexity and magnitude of the WTC event."

"With this adjustment, Munich Re has made provision for possible claims which may arise in time even though not yet reported and which are thus difficult to estimate. This applies in particular to [workers'] compensation, liability and also business interruption," the company said.

With regards to the Allianz share transactions, Munich Re said it has completed the reorganization of shareholdings, so that both companies no longer hold shares in insurance subsidiaries in each other's groups.

As of June 30, Munich Re has acquired Allianz' 36 percent holding in Karlsruher Lebensversicherung AG, thus increasing its stake to 90.1 percent. In return, Munich Re has sold all its shares in Frankfurter Versicherungs-AG (just under 50 percent) and Bayerische Versicherungsbank (45 percent).

Munich Re said the profit from the recent sales come to about 900 million euros ($894.3 million). In the first half of 2002, the company said it recorded capital gains of 4.7 billion euros ($4.7 billion).

Discussing the upward trend in the reinsurance sector, Mr. Schinzler said: "In view of the progress in the reinsurance market, we continue to expect double-digit growth in the group's premium income for the current year. Given further normal development in our non-life reinsurance business, I expect the [second half of 2002] to show a very good combined ratio of under 100 percent."

Wolfgang Rief, a director at Standard & Poor's Financil Services Group in Frankfurt, said the rating action reflects, "heightened concerns about American Re's earnings and capital adequacy, and their impact on the Munich Re group overall."

The ratings on the core subsidiary, American Re, "could be lowered if the company is not adequately recapitalized," Mr. Reif said. S&P said it will meet Munich management in the near future to discuss the company's financial situation.