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Munich Re Quarterly Profit Falls 35% on Disaster Claims

Munich Re, the world’s biggest reinsurer, said second-quarter profit fell 35 percent, missing analysts’ estimates, as claims from natural disasters rose.

Net income dropped to 529 million euros ($702 million) from 808 million euros a year earlier, the Munich-based company said in a statement today. That trailed the 557.1 million-euro average estimate of eight analysts surveyed by Bloomberg.

Total claims from the June floods in central Europe were about 230 million euros. Munich Re, led by Chief Executive Officer Nikolaus von Bomhard, kept its full-year earnings target of “close to” 3 billion euros after profit reached 1.5 billion euros for the first six months of the year.

“It is likely that the group will deliver on its 3 billion-euro net income target, but this is mainly due to far below long-term average natural catastrophe losses and tax rates,” Thomas Seidl, an analyst at Sanford Bernstein in London, wrote in a note to clients. “The underlying performance suggests group income will trend down the coming years.”

Munich Re fell as much as 4.7 percent and was down 4.3 percent to 146.1 euros at 1:38 p.m. in Frankfurt trading, valuing the company at 26 billion euros. That pared this year’s gain to 7.5 percent, compared with an 18 percent advance for the Bloomberg Europe 500 Insurance Index and a 23 percent increase for Swiss Re Ltd., (SREN) the world’s second-biggest reinsurer.

Difficult Environment

“Unlike the first quarter of 2013, the second quarter was significantly affected by major losses,” von Bomhard said. “The business environment remains difficult, owing to the low interest rates.”

Reinsurers, which help primary insurers such as Allianz SE (ALV) and Axa SA (CS) shoulder risks in return for a share of the premiums, face challenges from low interest rates and an abundant supply of capital. Even with the recent European flooding, catastrophe claims remain below average, weighing on demand for reinsurance coverage.

Munich Re said it released about 150 million euros of reserves in the second quarter as funds set aside for projected losses remained “significantly above” the level of claims.

“Reserves realized so far in the first half are 250 million euros and last year some 900 million euros were realized,” Fabrizio Croce, an analyst at Kepler Cheuvreux wrote in a note to clients. “No wonder management is confident on the around 3 billion-euro net profit target.”

Major Losses

Flooding drove the reinsurer’s burden from major losses to 605 million euros in the second quarter, up from 452 million euros a year earlier. For the first half, major losses were still below Munich Re’s projections, falling to 711 million euros from 716 million euros a year earlier.

Losses from natural catastrophes totaled 338 million euros for the first half, with 314 million euros of that total occurring in the second quarter.

Allianz said last week that the June floods cost Europe’s biggest insurer about 330 million euros, with the burden beyond that covered by its reinsurers.

Allianz also expects losses of about 200 million euros from a hailstorm that hit parts of Germany at the end of July. Munich Re said today that while it’s still evaluating claims from the hailstorm, the figure isn’t expected to exceed the second quarter’s flood claims.

While flooding in May and June was “by far” the most expensive natural catastrophe in the first half, resulting in insured losses of more than 3 billion euros, total insured losses in the period of about $13 billion remained below the 10-year average of $22 billion, according to estimates by Munich Re published last month.

Prices Decline

Munich Re, which renewed about 13 percent of its property-casualty reinsurance business on July 1, said prices declined about 0.9 percent from a year earlier.

The rates reinsurers charge may remain under pressure throughout the year because of an influx of capital to alternative forms of disaster coverage, such as catastrophe bonds, reinsurance broker Guy Carpenter & Co. said in a report last month.

The reinsurance industry accumulated a record $515 billion of capital by the end of the first quarter, up from $505 billion at the end of last year, according to broker Aon Benfield.

Munich Re CEO von Bomhard said today that the reinsurer will consider a share buyback and will comment further when it reports third-quarter earnings in November. The reinsurer scrapped its latest share buyback plan in 2011 after the record earthquake and tsunami in Japan triggered the firm’s first quarterly loss since 2003.

Combined Ratio

Profit at Munich Re’s reinsurance business declined 43 percent to 378 million euros in the quarter. The property and casualty reinsurance unit’s combined ratio worsened to 99.3 percent from 96.9 percent a year ago. A ratio above 100 percent means claims and costs exceed premium income, leaving a loss from underwriting. Munich Re targets a full-year combined ratio of about 94 percent of net earned premiums.

Profit at Munich Re’s primary insurance unit, which mostly consists of Ergo Versicherungsgruppe, was 148 million euros in the quarter, little changed from 150 million euros a year ago. The unit’s claims from the floods totaled about 50 million euros.

Munich Re’s income on its 209.4 billion euros of investments dropped 14 percent to 1.56 billion euros in the quarter. The return on investments of 3.2 percent for the first six months of the year trailed its full-year target of about 3.3 percent.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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