Solid Profits

Surprising Stability From Munich Re

Der Vorstandsvorsitzende der Münchener Rück, Nikolaus von Bomhard, kommt am 16.03.2016 in München (Bayern) zu der Bilanzpressekonferenz seines Unternehmens. Der weltgrößte Rückversicherer Munich Re stellt sich wegen der Niedrigzinsen und des Preiskampfs in der Branche 2016 auf den dritten Gewinnrückgang in Folge ein. Foto: Sven Hoppe/dpa (Zu dpa "Munich Re rechnet 2016 mit merklichem Gewinnrückgang") [ Rechtehinweis: usage Germany only, Verwendung nur in Deutschland ]
Outgoing Munich RE CEO Nikolaus von Bomhard, who has led the company for 12 years, had a nice little surprise for investors this week.
  • Why it matters

    Why it matters

    The outgoing CEO of Munich Re has presented better-than-expected financial figures for the world’s largest reinsurer. Despite a difficult year filled with major losses, the company has performed better than rivals Allianz and Axa.

  • Facts

    Facts

    • Second-quarter profits were lower than last year but twice as high as analysts had expected.
    • The company managed to offset the costs of major losses with financial gains, such as €340 million in exchange rate profits.
    • CEO Nikolaus von Bomhard expects the company’s profits to shrink to €2.3 billion this year.
  • Audio

    Audio

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He isn’t a man who seeks the spotlight. During an industry event, Nikolaus von Bomhard can often be found mingling with the public and raptly listening to the presentations on the podium.

Nevertheless, his presentation of quarterly figures this week must have given the 60-year-old head of Munich Re, the world’s largest reinsurer, a quiet sense of triumph.

Mr. von Bomhard managed to deliver a positive surprise. While it’s true that major losses from disaster payouts have dragged down earnings, it turns out Munich Re is in better shape than many expected, and healthier than many rivals that are struggling under the weight of payouts and record low interest rates.

Still, the man who has headed the Munich-based giant for the last 12 years remains as cautious as ever.

“We are very, very satisfied,” Mr. von Bomhard said in presenting the results on Tuesday. “But we assess the situation in a realistic and conservative manner, as is our custom.”

That’s partly because, even if things are better than expected, they’re not great. The company has already had to adjust to the idea that this year will not be one of the best in its more than 130-year history.

The company’s top manager, with his thinning hair and intellectual-looking glasses, who is leaving next April, could be refused what most CEOs like to see when turning over the reins to someone else: the opportunity to deliver a company that is in excellent shape.

“You know how we are. We're cautious people.”

Nikolaus von Bomhard, Munich RE CEO

The Munich reinsurer lowered its profit target for 2016 back in May. Since then, Munich Re has only aimed at the lower end of its target range for a net income of between €2.3 billion and €2.8 billion ($2.56 and 3.12 billion), which would be down from €3.1 billion last year. It would mark the third decline in annual profits in a row.

That’s hardly just down to Munich Re. The entire insurance industry has struggled to keep profits up with interest rates being pushed to record lows by the European Central Bank, something Mr. von Bomhard has criticized sharply. Regulators are worried that insurers’ troubles increasingly pose a threat to the broader system: Financial regulator BaFin on Tuesday warned that German life insurers needed to raise €12.3 billion to meet tough new reserve requirements by the end of next year.

By comparison, Munich Re remains healthy, and its half-year results have given investors new hope that Mr. von Bomhard will offer up a surprise, after all, in time for the changing of the guard.

Unlike fellow insurer Allianz, Munich Re managed to exceed expectations with its quarterly figures. The second-quarter consolidated profit of €974 million was 9 percent lower than last year, and yet it was twice as high as analysts had expected. Profits for the first half of the year came in at €1.4 billion.

The world’s largest reinsurer benefited from its intuition for financial deals. Munich Re raked in about €340 million in exchange-rate profits, because the giant had bet on the yen and the dollar and not on the British pound, which collapsed in the second quarter after Britain voted to leave the European Union. In addition, the sale of capital investments raised €900 million in profits. In contrast, the ongoing restructuring of insurance subsidiary Ergo was still a strain on the balance sheet.

Mr. von Bomhard now believes his company is well on its way to achieving its (lowered) profit target of €2.3 billion this year. However, many investors already sense an opportunity for more.

Even Mr. von Bomhard has hinted at that, telling investors Tuesday that “it would not be presumptuous” to extrapolate the first-half profit of €1.4 billion to the entire year, which would put the reinsurer at €2.8 billion for 2016. But he added: “We still face enormous uncertainties, both political and economic.”

For this reason, Mr. von Bomhard added, Munich Re is remaining cautious and is not changing its expectation that the company’s profits will shrink to €2.3 billion this year. “You know how we are. We’re cautious people,” he said.

033 Munich Re WTB 2015 Neu 2016-04-14-01

Many investors were not as reserved. Munich Re’s shareprice helped lead the Germany’s blue-chip DAX index to a new 2016 high on Tuesday, with its shares gaining more than 5 percent.

That makes it increasingly likely Mr. von Bomhard will manage to leave the company on an optimistic note. In the second quarter, the reinsurance giant coped with natural disasters and the radical restructuring of its Ergo subsidiary far more effectively than anticipated.

“All hell broke loose in the second quarter,” said board member Torsten Jeworrek. “We had a lot of major losses, which became costly.”

Forest fires in Canada alone cost Munich Re about €400 million, yet the company managed to partially offset those losses with its financial deals.

There was also some luck involved. Munich Re fared better than Allianz, which announced a drastic drop in profits a few days ago, mainly as a result of the many floods and storms in Germany and France where the latter is more active. French rival Axa and Hannover Rück have also faced rising costs due to forces of nature.

Still, Munich Re continues to struggle with homemade legacy issues. The company posted an important share of the Ergo restructuring costs – €400 million – to its April to June figures, and it expects to invest a total of €1 billion in the coming years. With these large investments and the painful downsizing of about 1,800 jobs, new Ergo Chief Executive Officer Markus Rieß hopes to pull the Düsseldorf insurance company back into the black.

Annual gross cost savings of about €540 million are expected beginning in 2020, and the company plans to see income of €500 million by no later than 2021.

Munich Re still has a long way to go. Ergo posted a loss last year, and it still expects to be in the red in 2016. Mr. von Bomhard is optimistic that the strategy program will transform the insurance into “a strong contributor to revenue again” by 2020.

It isn’t just a promise, but also a clear standard Mr. von Bomhard is handing to his successor. In light of the difficult interest rate environment, Mr. von Bomhard has also made himself very clear in another respect.

“Next year will not be easier by any means,” he predicted. His successor, Joachim Wenning, must have had mixed feelings when he heard this.

 

Carsten Herz leads Handelsblatt’s asset management and insurance coverage and is based in Frankfurt. To contact the author: herz@handelsblatt.com

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