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Crimped by Low Interest Rates, Reinsurer Munich Re Turns Challenge into Quarterly Profit

  • Why it matters

    Why it matters

    Insurance and reinsurance companies have long complained that low interest rates are hurting investment earnings, but you cannot blame low interest rates for everything that is going wrong.

  • Facts

    Facts

    • Despite low interest rates Insurance and reinsurance companies are gradually adjusting to the new environment.
    • Income of the world’s largest insurer Munich Re rose as the value of its interest-rate hedge investments appreciated, as overall rates continued to fall.
    • While the company had made some improvement, the shares price is weak because the combined ratio of underwriting profits and investment returns are actually not that great.
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    Audio

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Von Bomhard CEO Munich Re. Source Reuters
Munich Re, the Munich Re CEO, has criticized the low-interest rate policies of global central banks but the reinsurer has managed to profit in part from the situation. Source: Reuters

 

Insurers and reinsurers bemoan low global interest rates, which crimp their investment earnings, but on Thursday Munich Re, the world’s second-largest reinsurer, showed it could profit from the new environment too.

Second quarter results released Thursday show consolidated profits up 41.7 percent to €769 million, driven in part by a surge in investment income from its portfolio of interest rate swaps, which has appreciated as global rates head lower.

Munich Re’s profit, however, was lower than what many investors had expected, and its shares traded in Frankfurt fell on the report by 3.2 percent.

In the three months through June, Munich Re reported a surge in the volume of its investment portfolio, the so-called “net write-ups,’’ which grew by €156 million. In the same period a year earlier, Munich Re had net write downs €342 million. But this year, the income rose as the value of its interest-rate hedge investments appreciated, as overall rates continued to fall. In “an environment of falling interest rates, the market value of interest-rate hedges appreciated significantly,’’ Munich Re said in a statement. The reinsurer’s total investment portfolio grew in the quarter by 3.7 percent or €7.8 billion to €217.3 billion.

 

“The underwriting profits are the bread and butter of what a company does. They’re a genuine reflection of the business you are undertaking. ”

Tom Carstairs, Analyst, Berenberg

“Of course in general higher interest rates are better for insurance sector but a sudden rise in rates right now will not necessarily help us,” she said.

“Higher interest rates devalue assets, but often their liabilities are set by the market so remain the same. This will ultimately have a negative effect on capital,” she said. Ms. Frey said a large part of the insurance market was still in long-term fixed rate products that would not be affected by rising rates.

Fukshima Tsunami Nuclear Reactor Seen Burning. Source REUTERS
Munich Re said it profited in the second quarter from a drop in natural disasters across the world since the collapse of the Fukushima power plant in Japan. Source: Reuters

 

But Tom Carstairs, an analyst at Berenberg, said Munich Re’s results showed that while the company had made some improvement, but was still too slow in readjusting.

“The reason the share price is weak this morning is because the combined ratio of underwriting profits and investment returns are actually not that great. The underwriting profits are the bread and butter of what a company does. They’re a genuine reflection of the business you are undertaking. With Munich Re’s combined ratio at a reported 101.4%, I can tell you that the quality of the numbers is just not that good,” he told Handelsblatt Global.

Research by Morgan Stanley shows that European insurers currently derive between 60-70 percent of their earnings from investment income and around 40 percent of that is under threat unless the sector develops new strategies to deal with the low interest rate environment.

Munich Re’s chief executive officer Nikolaus von Bomhard has said on the past that the low interest rate environment is depressing investment returns and pushing down profits and said the government needs to support companies that are suffering from central banks refusal to raise rates.

But Astrid Frey Deputy head of economic research at Swiss Re, said the insurance industry should not overstate the negative effects of low interest rates.

 

Munich Re said its numbers were helped than lower than expected claims from natural catastrophes in the first half of the year, but analyst disliked the way it had reported claims from a snowstorm in Japan in February.

Munich Re said its numbers were helped than lower than expected claims from natural  catastrophes in the first half of the year, but analyst disliked the way it had reported claims from a snowstorm in Japan in February.

“The €180 million impact from storms in Japan were only reported in Q2 even though the storm occurred in Q1. Munich re claims it wasn’t informed until Q2, even though you would have thought that they might have learned about it earlier,” said Carstairs.

 

 

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