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March 12, 2013 6:09 pm
It is hard to get insurance investors excited. Munich Re said on Tuesday that the profits target this year would be €3bn, or 7 per cent ahead of what analysts were expecting. The response? Its shares barely moved.
Like other reinsurers, Munich Re is grappling with falling claims and investment returns. The former helps profits, which rose from €700m to €3.2bn last year as the disasters of 2011, such as the Japanese earthquake, were not repeated. The drawback is that reinsurers – and their clients in the primary insurance sector – came into 2013 with lots of capital. According to Aon Benfield, there was $500bn of capital in the reinsurance sector last September, up a quarter on 2009. That rising supply and potential for falling demand suggests price pressure, and Munich Re expects gross reinsurance income to fall slightly to €27-28bn. The investment outlook is also tough. More than half of its portfolio is in fixed interest, so high yielding investments are gradually being recycled into lower yielding ones. Munich Re expects its investment return to fall 60 basis points to 3.3 per cent this year.
The company is not powerless in the face of these trends. Profitability targets for the reinsurance business have been increased. Reserve releases of perhaps €600m will give a shine to this year’s numbers. And Munich Re also wants improvements in its primary insurance business and its troubled US health operation.
But these efforts will only limit the decline in profits rather than provide the basis for growth. A better outlook for rates or investment returns would reverse the trend. On 9 times forecast earnings, Munich Re is not priced for excitement. And the 10 per cent stake held by Berkshire Hathaway will comfort some investors. But, as is often the case with Warren Buffett’s investments, this is not the sort of company to attract thrill-seekers.
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