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Munich Re eyes profit jump as contagion risk fades


MUNICH (Reuters)—Munich Reinsurance Co. is on course for a net profit of €2.5 billion ($3.28 billion) this year as the risk of further painful writedowns on eurozone government bonds diminishes, it said on Tuesday, pushing its share up by more than 3%.

The world's biggest reinsurer expects earnings to more than triple this year after it paid out billions in damage claims for natural disasters in 2011 and saw its investments hammered by the eurozone debt crisis.

The bond swap deal struck between Greece and its private-sector creditors and political moves to help the beleaguered Mediterranean state were steps in the right direction, said Munich Re Chief Executive Nikolaus von Bomhard.

"I see the risk of contagion as substantially lower than a year ago," he told a news conference.

Earlier, Munich Re said it expected only a minor hit to 2012 results from a deal over the weekend in which Greece swapped its privately held bonds for new, longer-maturity paper with less than half the nominal value, a move that cut Greece's debt by more than €100 billion ($1.31 billion).

Munich Re took writedowns of €1.2 billion ($1.58 billion) on its Greek bond portfolio in 2011, heightening the pain from unusually large natural catastrophe payouts for earthquakes in Japan and New Zealand, floods in Thailand and a hurricane strike in the United States.

The company, which competes with Swiss Re Ltd. and Hannover Reinsurance Co., also said it expected reinsurance prices to rise in the months ahead in the wake of the disasters and predicted group earnings should continue growing in 2013.

JPMorgan Chase & Co. analyst Michael Huttner said Munich Re's focus on its underwriting was encouraging.

"We believe the quality of earnings will improve more than we believe the market estimates," Mr. Huttner said in a note to clients, adding that he sees net profit at more than €2.8 billion ($3.67 billion) this year.

Analysts' consensus forecast according to Thomson Reuters I/B/E/S is in line with the company's €2.5 billion ($3.28 billion) guidance.

Munich Re's shares rose by as much as 3.3% and were up 2.4% at €111.30 ($146.06) by 1345 GMT, outpacing a 1.4% gain in the STOXX Europe 600 insurance index.


Data from StarMine, which weights analyst forecasts according to their track record, showed Munich Re trading at 7.8 times 12-month forward earnings, a discount to Swiss Re's multiple of 8.9 but a slight premium to Hannover Re at 7.5.

The company had already released its headline financial results for 2011 on Feb. 2, including net profit and expected dividend.

Despite the lower risk of contagion from Greece, financial market uncertainty and low bond yields would continue to hamper investment income, Munich Re said.

"We do not anticipate any rapid and significant increase in capital market interest rates; regular income from our investments is therefore likely to be relatively low—at just under 4% overall—for the financial years 2012 and 2013," the reinsurer said.

To counter the drag from low interest rates, the reinsurer is diversifying its investments, trimming its exposure to government bonds in developed countries and raising its holdings of corporate and emerging market bonds, commodities and possibly equities.

It is also investing in renewable energy and plans to pump around €1.5 billion ($1.97 billion) into transport, utilities and communications infrastructure projects in the medium term.

Low interest rates are hurting life insurers, who have sold policies with guaranteed returns to customers and are now finding it hard to earn enough from investments to meet their promises.

"Life insurance is not built for low interest rates," Mr. von Bomhard said in response to a question on the group's ERGO insurance unit.

"The situation is definitely not acutely difficult for us because we take a long-term view of the business, but under risk-return considerations it is the weakest link in the chain right now," he said.