Munich Re Blames Profit Drop On Market Turmoil

Munich Re today issued a “more cautious” profit forecast for 2008, saying its results will be lower than “previously envisioned.”

The firm said it now expects a consolidated profit this year of about EUR600 million ($942 million), compared to EUR1.15 billion ($1.80 billion) for the same period last year.

The reinsurer said the estimate is based upon “very provisional” key figures.

Munich Re said in a statement that because of capital market turmoil–steep falls in share and bond prices–it expects its profit to be below an expected range of EUR3 billion to EUR3.4 billion ($4.71 billion to $5.34 billion) to about EUR2 billion ($3.14 billion).

Munich Re said its longer-term goals would remain unaffected by the reassessment. Chief Financial Officer Jorg Schneider said of the revised profit guidance: “We have always stated that our result forecasts are conditional on normal capital-market fluctuations and claims burdens. Now a strong fall in share prices has occurred.”

He continued, “As one of the most significant investors in our industry, we cannot escape the current capital market turmoil But thanks to our balanced investment policy, we have succeeded in achieving quite an acceptable half-year result in this difficult overall environment.”

He said that in the second half of 2008 the company will “also achieve a substantial profit, even assuming that the capital markets remain difficult. Should the capital market situation show a considerable improvement, our profit guidance would also increase again.”

Munich Re said that since the beginning of 2008, share prices have fallen substantially, with the European stock indexes EUROSTOXX50 and the DAX showing changes of between negative 20 percent and negative 24 percent, up to June 30 of this year.

Fixed interest securities and currency parities also have been exceptionally volatile. As an investor with assets of about EUR166 billion ($260 billion), Munich Re Group said it has naturally been hit by these developments.

The group added, however, that its economic exposures to equities amounts to just under 7 percent of its overall assets. Nevertheless, it said, substantial write-downs have been made for this equity portfolio, adding that net gains on disposals have remained well below the previous year's figure.

Write-downs of fixed interest securities were only small in scope, Munich Re said, with the group benefiting from its policy of “restraint with regard to higher risk investments in this category.”

If price levels stay the same, the company said, further write-downs of equities would be necessary of the rest of the year.

Mr. Schneider stressed that the medium term outlook was positive and that the share buy-back program will be continued.