Munich Re warns it anticipates lower underlying earnings in 2017

Munich Re said it anticipates lower underlying earnings in 2017 compared with the €2.4 billion estimated for 2016, despite noting that rates in property/casualty are stabilizing and other supportive drivers.

In the first nine months of 2016 Munich Re has generated around €600 million in net profit in each quarter normalized for one-offs, which suggests a €2.4 billion normalized full year net profit.

But, on a November 9 analyst call, CFO Jörg Schneider suggested that a similar figure might be too optimistic for 2017.

“For 2017 there are clearly some items which direct downwards,” Schneider said, pointing to pressure on investment income due to the current low interest rate environment and spillover effects from the 2016 decline of reinsurance rates into 2017.

Rates in property/casualty have been under pressure in recent years as the low interest rate environment pushed investors into the business, creating excess capacity and contributing to a soft market.

Technical results in Munich Re’s property/casualty reinsurance business declined to €1.64 billion in the first nine months of 2016 from €1.87 billion in the same period a year ago. Munich Re’s combined ratio in the first nine months was 99.9 percent.

Schneider said that around one third of the 2016 business ‘spills over’ to 2017, which in this case is set to negatively affect underwriting profitability.

“The question is how much it will be compensated by the effect of Munich Re’s strong balance sheet,” Schneider said. He noted that Munich Re has “very strong” claims’ and other reserves and a “huge amount of unrealized gains which is now in the order of €36 billion in total.”

And “there are clearly stabilizing factors at the moment to be observed,” Schneider said. “I am personally mildly optimistic that we could see a real stabilization [of rates] because companies have to make money and in this low yield environment there is a very clear pressure from investors in the right direction,” he said.

In addition, Munich Re has, according to Schneider, found ways to mitigate the impact of competition through tailor-made large transactions and innovation.

“There were a couple of major proportional treaties which served the purpose of capital optimization for clients and we are confident that we will see more of that kind of tailor-made business,” Schneider said. At the same time he believes that Munich Re’s ‘bread and butter markets of the past’ will stabilize. “It’s not an endless downturn we see here,” he added.

Unlike the property/casualty business, Munich Re’s life reinsurance business has looked more positive recently as the technical result in the first nine months reached €318 million compared with €247 million in the same period a year ago.

The results have been helped by the deconsolidation of Munich Re’s Italian life subsidiary, Schneider said, noting that he is confident that its €400 million target for the full year can be achieved and potentially even exceeded.