Q1 will be “well below our expectations”: Munich Re CEO

The first-quarter of 2016 will see global insurance and reinsurance firm Munich Re report figures which are “well below our expectations” and below those announced for Q1 2015, according to the outgoing CEO Nikolaus von Bomhard.

Perhaps reflecting the challenging job of running an insurance and reinsurance business in 2016, Munich Re today warned on its profit target for the year at its annual general meeting.

Factors set to hurt Munich Re’s ability to meet the €2.3 billion to €2.8 billion profit target include “major expenditure for implementing ERGO’s programme for the future” the company said today.

This major expenditure was expected, however some analysts had factored it into the profit target and it now seems that perhaps this isn’t the case, with Munich Re explaining today that this expense will be “communicated in the second quarter” of this year.

Additionally, the company gave an early forecast of its Q1 2016 results, which will be formally announced in full on the 10th May.

CEO von Bomhard, who steps down from his position and the Board on the 26th April, explained that in the first-quarter of 2016 “the incidence of major losses was once again low.” However, the initial estimates made by Munich Re show that Q1 results will “remain well below our expectations and the result for the first quarter of 2015,” von Bomhard said.

He cited volatility in the capital markets, falling share prices and an expectation that Munich Re “will be posting write-downs,” suggesting that the major impact to first-quarter results will come from the investment side of the business.

Naturally, such a warning was not particularly well received by analysts and the markets today, but it has to be noted that Munich Re are far from the only firm to have been hit by higher expenses and pressure on the investment side of the business.

Expense is a key issue at the moment, as companies spend more in an effort to navigate the challenges being thrown at them. For Munich Re the implementation of a strategy for ERGO to move forward with should be money well spent, given the primary platform it is establishing.

On the investment side, it will be interesting to see how much of a hit there is, but again other re/insurers have faced similar difficulties on their portfolios in Q1. Every company differs here, depending on just how much of a total return strategy they are following and how conservative they’ve been.

Of course, when financial markets are volatile and share prices decline there is also an element of luck in terms of positions held. We certainly wouldn’t expect Munich Re to be the only firm hit in Q1.

Perhaps the most interesting element of Munich Re’s forthcoming results to watch for though, will be its underwriting performance and whether declining premium rates have also contributed to the expectation of lower Q1 results.

The soft reinsurance market is certainly evident in other re/insurers results for Q1, and being among the very biggest players in the market its unwise to assume large re/insurers like Munich Re are immune from the structural changes we’re seeing.