Analysts cast doubt over Munich’s capital standing

Munich Re’s capital position has been called into question by analysts after the reinsurer reported significantly lower growth than its competitors for the first quarter.

This is despite posting an after-tax profit of €782m (£625m) for that period, against a loss of €948m in the first quarter of 2011, owing to lower claims costs from natural catastrophes and higher investment income.

Munich Re reported an operating profit of €1.2bn for the first quarter of this year, compared with an operating loss of €1.38bn in the same quarter a year ago. Gross written premium rose 2.2% to €13.3bn and return on equity was 13.1%.

But analysts said that while the results were in line with expectations, Munich Re reported declines of -2.7% in property and casualty (P&C) reinsurance premiums, implying 6% volume growth, which were in contrast to the 20% growth reported by SCOR and Swiss Re, and the 10% at Hannover.

“At a time when peers such as Lancashire, Hiscox and larger Euro reinsurers are discussing better-than-expected pricing in Japan, we question why Munich Re are pulling back,” wrote Espirito Santo Investment Bank analyst Joy Ferneyhough in a research note.

“Coupled with a €1.35bn issue of new sub-debt in the quarter, taking leverage up 2.5% to 20.8%, we continue to be unconvinced by Munich’s assertion on their very comfortable capital position.”

Ferneyhough added that Munich Re’s P&C combined ratio of 94.6% was also higher than its competitors, with higher-than-average man-made losses and 2% of prior-year catastrophe deterioration.

“However, with growth experience and prospects looking dislocated from peers, we prefer to own other reinsurers ahead of Munich, as we would expect those other names to be able to participate more effectively in the event of further opportunities in the market.”

JP Morgan analyst Michael Huttner also queried the reinsurer’s decision to reduce natural catastrophe exposure at a time when pricing and margins were rising.

Munich Re’s chief financial officer Jörg Schneider said: “With few major losses and more favourably disposed capital markets, we have posted a healthy profit.”