INTERVIEW: Munich Re CFO Says Insurers Not As Risky As Banks

Germany's Munich Re AG (MUV2.XE), one of the world's largest reinsurers by gross premiums, said Thursday it rejected suggestions that the insurance industry could pose the same level of risks as the banking industry to the general economy.

"The insurance industry... is a relevant factor for the real economy because it allows the spreading of risks. Therefore, it's a highly useful industry. From that angle, it is systemically relevant, but it's nothing compared with the big banks. So, there's no domino effect or things like that from insurers," Munich Re Chief Financial Officer Joerg Schneider told Dow Jones Newswires.

The comments reflect the defense that other major insurance companies have been raising in previous months against being lumped with banks in terms of the riskiness of their businesses.

Schneider's remarks were made in reaction to European Central Bank President Jean-Claude Trichet, who said Wednesday that large insurers should be considered "systemically relevant" by financial regulators.

Trichet also said that the traditional view that insurers and pension funds aren't generally potential sources of systemic risk "needs to be challenged."

Schneider said: "Most politicians don't regard the insurance industry in itself as being particularly dangerous. The big insurers and reinsurers are investors and financiers in many areas, but not in the same amount as the big banks. That's why nobody talks about the 'living will' of insurance companies because their winding down is not an issue."

A so-called "living will" is a company-generated document which identifies how a firm would wind itself down in the event of considerable stress or failure.

Schneider said that "one cannot draw conclusions" from the failure of American International Group Inc. (AIG) and apply overly strict rules on the rest of insurers. He noted that AIG invested in derivatives and financial products, "which were not so dissimilar from banking activities" and which had "nothing to do with traditional insurance."

Munich Re Chief Risk Officer Joachim Oechslin said: "Liquidity risk is a problem that can cause a bank to fail within one or two days, and that is not by any means the same in the insurance industry. The funding of an insurer is much more sticky, so we don't have that same liquidity risk. We are much more stable."

Schneider also said Munich re is open to buying insurance assets to beef up its operations.

He noted that sellers of insurance assets "didn't seem to be under a lot of pressure" in the past 18 months or so to sell assets despite the financial downturn.

But he said "this could change" because the European Commission is making it clear that financial institutions which received hefty financial support from governments would need to dispose of some of their assets.

He said ING Groep NV (ING) and Royal Bank of Scotland Group PLC (RBS), which have agreed to spin off assets to satisfy EU concerns over state aid they received, are good examples of businesses that are being forced to divest of their insurance entities.

He declined to say whether the company is looking specifically at ING's and RBS's insurance assets, but said: "We are looking at everything, but at the moment, it's not highly probable that we will buy big companies very soon."

He said the company is "still bottom line oriented," indicating that it will not overpay for target assets.

Last year, Munich Re bought Hartford Steam Boiler Co., an engineering insurance specialist, from AIG for $739 million, less than what AIG had paid for the business several years earlier.

Schneider also said the company is on track to hit its target combined ratio of 97% this year. "But the winter storm season is still ahead of us, so it's too early to celebrate 2009."

A combined ratio is a measure of premiums against claims and any measure below 100% indicates an underwriting profit. A lower number indicates higher profitability.

Schneider said the company will also likely hit its target 15% return on risk-adjusted capital. In August, Schneider said Munich Re needs an after-tax profit of EUR1.4 billion in the second half to reach that goal.

-By Vladimir Guevarra, Dow Jones Newswires; +44 (0) 2078429486, vladimir.guevarra@dowjones.com