Munich Re Q1 profit down 45% as investments hit result

Global reinsurance firm Munich Re has adjusted its forecast for 2016 profit downwards to €2.3 billion, from its previous target of €2.3 billion to €2.8 billion, as investment portfolio write downs and financial market volatility hit the firms equity positions.

Munich Re demonstrated this quarter that it is not just the hedge fund or investment oriented reinsurance firms that can suffer in the volatile capital market environment we’ve seen in recent months, even a more conservative, traditional, underwriting profit focused company can be hit when markets test them.

First-quarter 2016 net profit fell by 45% to €430m, down from €790m a year earlier, largely due to investment results at its business units with the company’s equity portfolio responsible for considerable write downs of positions.

The reduction in guidance for 2016 profit also factors in costs of turning around primary insurance arm ERGO, with a new strategy set to be released in June. ERGO

CFO Jörg Schneider commented; “The result for the first quarter is below our expectations. The first three months of the year were marked by a below-average random incidence of major losses. However, we had to cope with significant strains on our investment result.

“The decrease in profits in the first quarter has dampened our optimism with regard to the annual result. It is looking more and more likely that there will be high costs for implementing the strategy programme at ERGO. The amount is not yet definitive, but it is unlikely that ERGO will post a positive annual result this year. In view of these strains, we now envisage a consolidated result of €2.3bn, which is at the lower end of our predicted profit guidance.”

Analysts have cited slight declines in underlying performance at Munich Re, aside from the investment decline, with the normalised combined ratio higher due to the reinsurer having released higher levels of reserves in the quarter. A trend of higher reserve releases is expected to continue through the year.

Munich Re reported annualised return on risk-adjusted capital (RORAC) of 7.3%, which is well down on 2015 which saw a full-year average of 11.5%. The return on equity (RoE) is reported as 5.6%, again down on 2015’s 10%.

The decline in first-quarter numbers had been expected, with Munich Re having released a profit warning in April. It’s to be assumed that the investment write downs are one-offs and the investment portfolio should recover from the declines.

Reinsurance contributed €445m (down from €668m due to the investment issues) to Munich Re’s quarterly result. Gross reinsurance premiums written decreased by 3.9% to €6.733 billion (down from €7.009 billion).

Munich Re wasn’t negatively affected by losses from first-quarter catastrophes and weather events and its property casualty combined ratio actually improved to 88.4%, compared to 92.3% in Q1 2015 and much better than the targeted 98%.

This was helped significantly be lower than expected development on prior year losses, enabling Munich Re to release reserves of around €250m, or 6% of the combined ratio.

But despite good results across the reinsurance business Munich Re said that the investment result and planned ERGO strategic program would reduce profits for this year.

“Expectations for 2016 have changed,” the company explained, adding that planned expenditure on ERGO will make the insurance unit less profitable for the year and hurt overall profits for the group.

However the benign loss environment and Munich Re’s prudent reserving of recent years will help to boost the company, with its forecast combined ratio dropping to 95% (from earlier forecast of 98%) as the company now expects to be able to release 6% of reserves, rather than the 4% forecast.

Munich Re said that there were few major losses through April, which suggests it does not expect a major hit from the U.S. severe convective weather, the Texas floods, the Japanese earthquakes, or other events up to that date. It will however be interesting to see what its catastrophe losses are like for Q2, once the Fort McMurray wildfire is also factored in.

Munich Re’s experience in Q1 is a reminder that when financial markets are volatile even the most conservative of re/insurers can see their investments hit.

It’s also clear that the effects of the financial market are not even across the market, with experience in Q1 varying depending on specific positions, although not necessarily on the level of risk taken when investing, as conservative companies have suffered at the same time as the more active investors.