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Munich Re disappoints analyst despite strong Q3 underwriting

Munich Re is on course for a full-year profit of EUR2.2-2.5bn after a significant improvement in its investment result pushed third quarter consolidated profit to EUR651mn, compared to just EUR2mn in the prior-year period.

But the headline earnings figures were described as "disappointing" by analyst William Hawkins from Keefe, Bruyette & Woods (KBW). He said that despite impressive underwriting performance - particularly in reinsurance - the full-year outlook was below their forecast of EUR2.7bn profit for the company.

The third quarter operating profit figure of EUR1.211bn was actually EUR0.3bn ahead of the KBW projections. However, an increase in the headline tax rate to 41 percent - compared to the analyst's expectations of 23 percent - contributed to Q3 2009 net profit coming in EUR138mn below their estimates.

Shareholders' equity continued to grow during the quarter - although the EUR22.5bn figure at 30 September was below KBW estimates of EUR23.3bn - and the German giant reiterated its commitment to capital management.

It said that it had already repurchased EUR176mn of shares under the new EUR1bn share buy-back programme unveiled at the beginning of last month.

Munich Re CFO Jörg Schneider was optimistic that the company will reach its "ambitious" 15 percent target for return on risk-adjusted capital after tax for the full year.

For the first nine months of the year, the reinsurer reported profits of EUR1.8bn - up from EUR1.4bn. These included a 47.5 percent increase in its investment result to EUR5.8bn, representing an annualised return of 4.3 percent.

Gross written premiums rose by 10.4 percent - or 9.9 percent at constant exchange rates - to EUR31bn in the period. The rise was driven by a series of large-volume quota share surplus relief-style treaties written in its life and health reinsurance arm earlier in the year.

For the full year, the company said it expects to write EUR40-42bn of gross premium across its business.

Overall, Munich Re's reinsurance unit performed strongly on an underlying basis, with operating profit of EUR2,995mn up 7.9 percent on the first nine months of 2008.

A combined ratio of 96.3 percent for the year to 30 September compared favourably with the 100.1 percent ratio recorded at the same stage last year - the latter included the impact of heavy single risk losses and hurricanes Gustav and Ike.

The third quarter combined ratio of 93.4 percent was a significant improvement on the prior-year 101.2 percent, as natural catastrophes contributed just 0.8 percentage points compared to 10 percentage points in Q3 2008.

Indeed, the quarter was hit by under EUR100mn in natural hazard event losses, three-quarters of which come from Windstorm Xystus in central Europe. Munich Re said claims in its recession-hit credit and surety business amounted to EUR343mn for the first nine months of the year.

But the bottom line was hit by tax on the non-life reinsurance business, with a rate of 45 percent compared to a normal figure of 30-35 percent, according to KBW.

"We understand that the group has taken a cautious stance with regards to tax in the US," explained Hawkins, noting that higher-than-expected underwriting and investment returns in the division had been offset by the higher-than-expected tax charge in the quarter.

Shares in the reinsurer were trading down 2.74 percent at EUR104.94 in Frankfurt at the time of writing.

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