Munich Re's profits hit by $2bn bailout of US division

Munich Re, the world's largest reinsurer, yesterday revealed plans to pump $2bn (£1.4bn) into the reserves of its ailing US business to cover higher claims, as it hinted it might miss its profits targets for this year.

Joerg Schneider, the chief financial officer of Munich Re, said American Re this year "will be deeply red – it will be a very negative full-year result".

Munich Re's American division has been hit mainly by spiralling asbestosis claims, which are decimating the US insurance market after the country's courts gave a very wide interpretation of who is entitled to make an asbestosis-related claim on their company's insurance.

American Re, called the "problem child" by Munich Re's chief executive, Hans-Juergen Schinzler, had already needed a $1bn bail-out from its parent last year to fill gaps in its reserves for risks it underwrote between 1997 and 2000. Munch Re expects American Re to be profitable in 2003.

Analysts were expecting Munich Re, which bought the business in 1996 for €2.5bn (£1.6bn), to announce a further injection of cash, but the expectation was that the sum would be less than $2bn. Munich Re's shares fell as much as 5 per cent.

Investors' confidence was also shaken by an separate announcement that Munich Re would set aside a further $500m to cover payouts from the 11 September attacks on the World Trade Center, bringing its total claims forecast to €2.7bn.

The company also indicated its 2002 target of €1.7bnin profits before exceptional items appeared to be increasingly difficult to achieve because, like other insurers, it suffers from weak investment earnings, outweighing sharp increases in reinsurance premiums.

Mr Schneider said: "I would be happy if we can achieve 1.7 billion given the weak capital markets."

Munich Re tried to assure the market about its prospects, saying this year's results would be underpinned by rising reinsurance prices.

It will also make a one-off gain of €900m from unwinding cross-holdings with insurer Allianz. Munich Re has booked €3.8bn in proceeds from Allianz share sales in the first three months of 2002, bringing total takings from the deal in the first half to €4.7bn.