Picking Up the Pace at Munich Re

Hans-Jürgen Schinzler turns the giant reinsurer into a player

A cautious executive in charge of a conservative company. That was long the reputation of Hans-Jürgen Schinzler, chairman since 1993 of the management board of Munich Re, the world's largest reinsurance underwriter. While other reinsurers expanded, diversified, and acquired, Schinzler kept his powerful, publicity-shy outfit loyal to the vision of Carl von Thieme, the man who founded Munich Re in 1880 as simply an insurer for insurers. In many ways, Schinzler was the embodiment of a Munich landmark--the deliberative Walking Man sculpture that stands outside the company's main office on the Leopoldstrasse. "He moved us along at a solid, you could even say stolid, pace," says a senior colleague. "He didn't get sidetracked."

Now all that has changed. In the face of tectonic shifts in European finance, Schinzler has in the past three years seized the initiative to push Munich Re deep into new markets and businesses. Indeed, the AAA-rated company has suddenly emerged as a diversified financial-services group. It's become a major life insurer, boasting a 91.7% stake in Ergo, Germany's second-largest insurance company, following a series of multibillion-dollar asset swaps with its neighbor, insurance giant Allianz. In 1999, it set up an asset-management unit that already tallies more than $110 billion on its books. And in December, Schinzler unveiled plans to cross-sell banking and insurance products through an alliance with Hypovereinsbank, the Munich bank in which Munich Re owns a 25.7% stake. Just as significant, last month Munich Re disclosed that it had built a 10.4% stake in Frankfurt-based Commerzbank, spurring a wave of speculation that it planned to take it over. "The quiet giant has awakened and is on the move," says Brian Shea, who follows the company for Merrill Lynch & Co. in London. "And it has plenty of money to throw around."

At the same time, Schinzler has started marketing Munich Re's core reinsurance products more aggressively. In many cases the company is sidestepping its traditional customers, the insurance companies, and selling reinsurance directly to corporations. That's something other reinsurers, such as arch-rival Swiss Re, have been successfully doing for years. But the change of tactics has irked some old customers, though analysts say it reflects changes in the way the reinsurance market functions.

The new strategy is brightening Munich Re's bottom line. The group posted earnings of $2.1 billion for 2000, up 53% from 1999. Last year's earnings, though, were hurt badly by the September 11 attack on New York, which cost Munich Re an estimated $1.9 billion, its largest-ever insurance loss. So analysts now project 2001 profits at around $1 billion. Schinzler expects profit growth to resume this year; he assumes the HVB alliance alone will produce $280 million a year by 2006 in savings and new revenues.

Perhaps Schinzler's most intriguing move is the buildup of Munich Re's stake in Commerzbank, suggesting it might ingest the bank in the same way Allianz did Dresdner Bank last April. Schinzler denies any such plans. "[Our] strategy does not include taking control of a bank," he says. "Unlike Allianz and Dresdner, Munich and HVB have decided to enter into a cooperation agreement. So why should we pursue another strategy [with] Commerzbank?"

However Schinzler plays his next card, little in his 33-year career at Munich Re suggested the 61-year-old would some day boldly revamp the company. People who know him say Schinzler was spurred to chart a radical course by the consolidation in the insurance industry and by signs that Allianz wanted to weaken its relationship with the group. "I think he realized we could no longer hide behind the relationship with our bigger sister," says a colleague.

A key part of Munich Re's new course is a sudden willingness to court investors. Having once given analysts only limited access, Munich Re now hosts them at regular meetings. In 1999, the group began publishing its accounts in accordance with international standards. And last year, the group started publishing quarterly earnings for the first time.

But Schinzler's quest to remake Munich Re won't be easy. Managing insurers requires different skills than managing reinsurers--as Swiss Re discovered in the mid-1980s when its effort to move into primary insurance ended in a hasty retreat. Attempts at finding synergies between banks and insurers have rarely been successful, and in this case the managers at Munich Re, Ergo, and HVB have limited experience to draw on. Some skeptics think that to make the alliance work, Munich Re needs majority control over HVB, since a minority stake doesn't give it enough sway in its partner's boardroom.

Munich Re's new dynamism is largely a response to the powerful trends that are transforming financial markets across Europe. As governments cut back on social-security programs, Europeans are rushing to save more for their old age--hence Munich Re's buildup in asset management. Also, banks are merging with each other and with insurers to boost their profits by exploiting economies of scale and cross-selling opportunities. At the same time, reinsurers are under pressure to diversify so they are less dependent on the notoriously cyclical reinsurance market. "Munich Re intends to play an active role in the growth, consolidation, and convergence of the financial sector," says Schinzler.

As the group amasses a war chest to barge into new markets, it's benefiting from Germany's Jan. 1 abolition of capital-gains taxes on the sale by listed companies of stakes in other listed companies. On Jan. 17, it completed a complex deal announced last April in which it unraveled part of its long-standing cross-shareholding with Allianz, off-loaded its stake in Dresdner Bank, and strengthened its hold over HVB and Ergo. The $10 billion transaction--which led to Allianz taking over Dresdner--also gave Munich Re more than $600 million in what Schinzler calls "surplus liquidity." Analysts reckon the tax change will allow Munich Re to build up $3.5 billion in cash by the end of 2004, so much that it will have little choice but to go on a buying spree. "Our financial strength gives us the ability to consider strategic moves," says Schinzler. "This growth can be organic or via acquisitions."

As Munich Re becomes increasingly adventurous, it is posing a bigger threat to other financial-services conglomerates. For example, its once-sisterly relationship with Allianz is turning into a fierce rivalry in fund management and retail insurance, even though the two companies still have 20% stakes in each other and Allianz Chairman Henning Schulte-Noelle sits on Munich Re's supervisory board. "The fact is that Munich Re is now competing more energetically in more markets," says a board member from a rival European insurance group. "We take them far more seriously." Indeed, it may soon be time to commission a new work of art for the main office--a sculpture of a furiously running man.

By David Fairlamb in Munich

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