Strong gains on investments helped Munich Re AG’s second-quarter profit rise 3.5 per cent despite the impact of the oil spill in the Gulf of Mexico, the reinsurer said.
Net earnings for the April-June quarter were up to euro709 million ($937 million) from euro685 million a year earlier, defying analysts’ expectations of a drop. Its operating profit was up 5.5 per cent to euro1.45 billion from euro1.37 billion, and Munich Re said it was maintaining its full-year outlook.
The April 20 explosion of the Deepwater Horizon oil rig and the subsequent oil spill were the quarter’s most expensive event, Munich Re said. It added that it is “currently reckoning with expenditure in the low three-digit million euro range.”
The reinsurer said its share of the property loss from the sinking of the rig itself was “relatively easy to quantify” at some C60 million.
“By contrast, the liability losses cannot yet be gauged with reasonable certainty, since issues need to be clarified regarding the cause of the disaster – a complex process, especially given the large number of parties involved,” it added in a statement. It said that it “has made adequate provisions for this.”
Reinsurers sell backup coverage to other insurers, spreading risk so the system can handle large or widespread losses.
`”Painful as the consequences of Deepwater Horizon are, it is now essential to reassess the issue of adequate insurance covers and retentions for large engineering projects and the liability risks involved in such projects,” said Torsten Jeworrek, the CEO of Munich Re’s reinsurance division. “This should also have positive effects on the future development of pricing.”
Second-quarter operating profit at the reinsurance division slipped 0.6 per cent to C1.09 billion. The reinsurance combined ratio, a key measure of profitability, was up to 103.8 per cent from 98.4 per cent; a higher ratio means that a business is doing worse.
However, the company was helped by a much-improved result from investments as equity markets did better.
Munich Re earned euro2.62 billion from investments in the quarter, a 19.7 per cent increase.
For the whole first half, the investment result improved by 42.8 per cent to euro5.08 billion. The company pointed to “gains realized on careful portfolio reallocations,” particularly from disposing of shares, government and corporate bonds, and derivatives.
The January-June period was heavy in terms of losses from natural disasters _ notably the Feb. 27 earthquake in Chile, a country where business is well-insured.
Munich Re estimated its total costs from the quake at nearly $1 billion and said that made it the third most-expensive loss in its history after the Sept. 11, 2001 attacks on the United States and Hurricane Katrina in 2005.
The company’s first-half net profit was up 6.5 per cent to euro1.19 billion from last year’s euro1.12 billion. Its operating profit rose 5.2 per cent to euro2.22 billion from euro2.11 billion.
Munich Re said it is still aiming for net earnings this year of more than euro2 billion.
“Following the major losses in the first half-year, this target remains ambitious, but given normal loss experience and continued strong investment results it is certainly achievable,” the company said.
Munich Re shares initially rose, but were down 0.1 per cent at euro108.65 in afternoon Frankfurt trading – still better than the DAX index’s slide of 0.4 per cent.
“Its overall results are a testimony to its resilient performance, sound business operation, conservative risk management and strong financial condition,” said Luis Maglanoc of UniCredit. Analysts had predicted a fall in second-quarter net earnings to C436.6 million.