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Munich reports low cat/sub-prime exposure

In a further sign of the relatively low impact of June's UK floods on the major reinsurers, Munich Re reported a second quarter hit from major losses of EUR111mn as it posted flat net profits of EUR2.1bn for the half-year and raised 2007 earnings targets.

The German company said its largest loss in the quarter came from the severe Australian storms, which cost it EUR53mn.

Last week, Hannover Re reported second quarter natural cat losses of EUR46.3mn, including the UK floods, and storms in Australia and the Arab region.

The impact contrasts with some of the proportionately high losses from the events reported by specialist Bermudian reinsurers, such as IPCRe.

Half-year combined ratio was 98.4 percent in Munich Re's reinsurance division - against 91.6 percent in the prior-year period - including 8.1 percent for natural catastrophes.

The majority, or 5.7 percentage points, was caused by exposures to winter storm Kyrill, with an estimated EUR450mn pre-tax burden.

Munich Re said its estimate for the storm remains unchanged, "even though loss estimates for Germany have now seen significant upward adjustment in the market".

The reinsurer also commented on its exposure to the US sub-prime mortgage market.

It revealed a total figure of EUR0.6bn, including EUR0.2bn in collateralised debt obligations and EUR0.4bn in asset backed, of which 79 percent is rated AAA or AA, 8 percent A, and only 13 percent BBB and poorer.

The disclosure led analyst William Hawkins of Keefe, Bruyette & Woods to estimate immediate risk of less than EUR100mn, with a second quarter charge "in the EUR30mn range".

"While there are always outstanding questions, the formal nature of the disclosure reassures us both quantitatively and qualitatively," he said.

Munich Re added that it expects third quarter losses from the Japanese earthquake, July UK floods, and the Brazil air crash, will result in a claims burden in the "double-digit million euro region" each.

Commenting on the results, the reinsurer's chairman Nikolaus von Bomhard said profits targets had been raised from a range of EUR3bn-3.2bn to EUR3.5bn-3.8bn as a result of better-than-expected progress on its "Changing Gear" strategy, which included the acquisition of London market broker Bell & Clements and the execution of half of its share buy-back announced in May.

"We have made such good progress to date that we are increasing our profit guidance and, with the one-off income resulting from the tax reform, are even setting our sights on a new record result," said Von Bomhard.

German tax reforms, including the Annual Tax Act 2008, will positively impact the company's results by around EUR400mn in the third quarter.

Gross premiums were marginally off by 0.7 percent to EUR18.9bn at the half-year stage with EUR11bn from its reinsurance business and EUR8.8bn from its primary segment - before the elimination of intra-group transactions.

Bolstered by a strong investment return, profits were up 9.5 percent in the company's reinsurance business to EUR1.9bn, as the division's head Torsten Jeworrek spoke of markets that "remain attractive", but require a "selective underwriting approach".

Net profits in its primary operation, however, were EUR410mn, marginally down on the prior-year figure of EUR446mn.

The company continues to target a return of at least 15 percent on risk-adjusted capital for 2007, with Von Bomhard proclaiming: "We want to be the most profitable reinsurer worldwide. As a primary insurer, we intend to exploit business segments and markets with major growth potential, particularly abroad."

But Collins Stewart analyst Tim Young described the results as "something of a yawn".

"Nice superficially but nothing particularly great about these figures," he said.

"Premiums are down, investment is down, combined ratios are up, and earnings growth is principally a function of [the] lower tax charge," he continued.

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