Munich Re generates third-quarter profit of €525m in a challenging environment

Munich Re posted a consolidated profit of €2.4bn for the first nine months of 2015 (same period last year: €2.4bn). In the third quarter, the Group realised a profit of €525m (736m). For the current financial year, Munich Re is still aiming for a profit of at least €3bn.

CFO Jörg Schneider summed up the figures: "With a quarterly profit of €525m, we remain on course for another gratifying result for the year." As regards the developments in the third quarter, Schneider said: "The capital market turbulences have left their mark on the investment result, with below-average realised gains on disposals, write-downs of equities, and losses from derivative hedging instruments."

In the third quarter, the operating result was below the figure for the same quarter last year at €579m (908m). The amount posted under "other non-operating result" totalled –€97m (–127m). Overall, the result for the third quarter was marked by one-off effects that were negative on balance, particularly with regard to investments. These negative effects were offset by a below-average random incidence of major losses in reinsurance and tax income of €101m (11m). Compared with the year-end 2014, shareholders’ equity remained stable at €30.0bn (30.3bn), with a decrease in the third quarter being due primarily to the reduced balance of unrealised gains and losses in Munich Re's portfolio.

Since the Annual General Meeting at the end of April, shares with a volume of around €496m have been repurchased as part of the share buy-back programme announced in March.

The annualised return on risk-adjusted capital (RORAC) in the first nine months amounted to a good 11.8%, and the annualised return on overall equity (RoE) totalled 10.1%.

Gross premiums written increased in the third quarter by 3.6% to €12.5bn (12.1bn). If exchange rates had remained the same, premium volume would have fallen by 1.5% year on year.

In reinsurance business, the operating result for the third quarter came to €424m (603m). The reinsurance field of business accounted for €379m (531m) of the Group consolidated result for the third quarter. The deterioration was mainly attributable to the low investment result owing to losses on strategic derivatives and write-downs on equities. Reinsurance business contributed €1,889m (1,928m) to the consolidated result for the period from January to September.

The technical result in life reinsurance developed positively in the third quarter at €114m (55m). The chief reason for this was overall claims experience being within the range of expectations across the whole portfolio.

Property-casualty reinsurance accounted for €330m (497m) of the result for the third quarter. The combined ratio totalled 94.5% (91.3%) of net earned premiums; the figure for the first nine months was 93.4% (93.2%). As claims notifications for "basic losses" from prior years remained appreciably below the expected level overall, in the third quarter Munich Re was able to release reserves in the amount of €200m, corresponding to 4.8 percentage points of the combined ratio for the third quarter. For the first nine months, Munich Re thus released reserves totalling €500m, or approximately 4.0% of net earned premiums. Munich Re is also continuing to aim to set the amount of provisions for newly emerging claims at the very top end of the estimation range, so that profits from the release of a portion of these reserves are possible at a later stage.

Overall loss expenditure for major losses totalled €386m (257m) in the third quarter, and €847m (914m) for the period from January to September. Natural catastrophe losses in the third quarter amounted to €62m (100m) and man-made major losses to €324m (158m), representing 1.5% (natural catastrophes) and 7.7% (man-made) of net earned premiums respectively. The highest natural catastrophe expenditure for the third quarter resulted from a severe earthquake off the coast of Chile in mid-September, for which Munich Re anticipates net major-loss expenditure of €45m. Munich Re expects net expenditure of €175m for the largest man-made loss for the third quarter, namely the explosion disaster in the port of Tianjin, China.

Gross premiums written in the reinsurance field of business climbed in the third quarter by 5.7% year on year to €7.1bn (6.7bn). If exchange rates had remained the same, premium volume would have fallen by 3.0%. In the life reinsurance segment, gross premiums written increased in the third quarter by 3.6% to €2.5bn (2.4bn), while premiums in property-casualty reinsurance showed a total increase of 6.9% to €4.6bn (4.3bn). If exchange rates had remained the same, premium volume in both reinsurance segments would have declined.

The operating result for the ERGO field of business fell to €113m (254m) from July to September. The consolidated result for the third quarter declined to €100m (152m). The reduction was mainly attributable to weaker results posted by ERGO Life and Health Germany and ERGO International. ERGO generated a result of €418m (416m) for the period from January to September.

The combined ratio for Property-casualty Germany deteriorated to 96.1% (93.5%) in the third quarter, and the figure for ERGO International worsened to 104.1% (100.0%).

Total premium income across all lines of business decreased by 1.0% to €4,262m (4,303m) in the third quarter, and gross premiums written fell by 1.2% to €3,970m (4,017m) in the same period. In the Life and Health Germany segment, gross premiums declined by 4.6% to €2,298m (2,409m), whilst in the Property-casualty Germany segment they were slightly up on the previous year at €698m (682m). In the ERGO International segment, gross premiums increased by 5.2% to €974m (926m).

Markus Rieß, the new Chairman of ERGO, commented as follows: "In order to make ERGO more competitive across the board in future, we will be reviewing the entire value chain. We are currently discussing and developing initial ideas in conjunction with staff and the Board." A specific action programme is likely to be ready at the beginning of the second quarter of 2016.

Munich Health’s operating result in the third quarter was €42m (51m); the consolidated result was €46m (53m). For the period from January to September, Munich Health contributed a consolidated result of €84m (95m).

The combined ratio amounted to 98.5% (96.7%) for July to September and to 99.6% (98.5%) for the first nine months.

Munich Health's gross premiums written for the third quarter showed a year-on-year increase of 6.9% to €1,393m (1,303m) due to positive currency translation effects.

With a carrying amount of €235.4bn, total investments (excluding insurance-related investments) as at 30 September 2015 were almost unchanged from the year-end 2014 figure of €235.8bn.

For the period July to September 2015, the Group's investment result (excluding insurance-related investments) showed a year-on-year decrease of 8.3% to €1.5bn (1.7bn). The investment result represents an overall return of 2.6%.

Changes in the value of derivatives had an adverse impact of €160m in the third quarter, which was significantly more negative than in the second quarter of the year (€133m). Owing to the decline in commodity prices and decreased inflation expectations, the third quarter saw high losses posted on commodity and inflation derivatives, especially in reinsurance. By contrast, in primary insurance the decline in interest rates in the third quarter had a positive impact on interest-rate hedging instruments, and equity-based derivatives also saw a price-related increase in value.

The balance of gains and losses on disposals excluding derivatives was €514m in the third quarter. Owing to temporarily sharp setbacks in prices on the stock exchanges, gains on the disposal of equities were relatively low in the third quarter. Gains realised on fixed-interest securities were also lower than in the previous quarters.

Munich Re's equity-backing ratio at 30 September 2015 fell to 4.2% (31 December 2014: 4.3%) including equity-linked derivatives. With a share of around 88% at market value, fixed-interest securities, loans and short-term fixed-interest investments continued to make up the largest portion of Munich Re's investments.

CFO Jörg Schneider commented as follows on the investment result: "In view of the low-interest-rate environment, we are very satisfied with the 3.3% return on our investments for the first nine months of the year.”

The Group's asset manager is MEAG, whose assets under management as at 30 September 2015 included not only Group investments, but also segregated and retail funds totalling €13.8bn (13.9bn).

In the first three quarters, some reporting segments saw results that varied from the forecasts, which also have an impact on the annual result – for example, random fluctuations in the incidence of major losses, or the investment result. Munich Re is amending its forecast as follows with respect to the figures stated in the half-year report published in August 2015:

Gross premiums written should be around €50bn, which is the median of the range of €49–51bn previously projected. Of this figure, around €28bn relates to reinsurance, €16.5bn to ERGO (previously: €16–16.5bn), and slightly over €5.5bn (previously around €5.5bn) to Munich Health.

In property-casualty reinsurance, Munich Re is aiming for a combined ratio of around 95% (previously: 96%) of net earned premiums in 2015. ERGO is expected to achieve a combined ratio for property-casualty primary insurance of 96% (previously 95%) in Germany, and 101% (previously 99%) internationally. The combined ratio for the Munich Health field of business should be around 100% (previously: around 99%).

After business development fell below expectations in the second quarter in particular, Munich Re now anticipates a technical result in life reinsurance of around €300–350m. The technical result for future financial years is expected to be in the region of €400m again.

Munich Re now projects a return on investment of around 3.0% (previously: around 3.3%); the lower expectation is due to negative impacts in the third quarter as mentioned previously.

Munich Re is aiming for a consolidated result of at least €3bn, subject to claims experience with regard to major losses being within normal bounds and to its income statement not being impacted by severe currency or capital market developments, significant changes in tax parameters, or other exceptional factors. CFO Schneider stressed that, as in previous years, a review of Munich Re's loss reserves, tax provisions and intangible assets may result in substantial income or expenses in the fourth quarter of the year. Existing uncertainties in forecasting the result mean that in the ERGO field of business the risks outweigh the opportunities, whereas in reinsurance it is the opportunities that predominate.