Munich Re, the world’s biggest reinsurer, will continue buying back shares as declining prices and lower investment income undermine earnings.
Munich Re plans to repurchase an additional €1 billion ($1.056 billion) of its own shares before its 2016 shareholder meeting, it said in a statement Wednesday. That comes on top of a €1 billion program ending in April. Net income will probably decline to a range of €2.5 billion [$2.64 billion] to €3 billion [$3.17 billion] this year, compared with €3.2 billion [$3.38 billion] reported for 2014, the Munich-based reinsurer said.
The company, led by Chief Executive Officer Nikolaus von Bomhard, is buying back stocks and raising its dividend as it contends with declining prices for reinsurance coverage, down in 7 of the past 10 years.
Pressure on interest rates on fixed income investments and on insurers’ investment returns is increasing as the European Central Bank embarks on a bond-buying program worth at least €1.14 trillion [$1.2 trillion].
“The comparatively wide spread of the result guidance is due to the unchanged high level of political and economic uncertainty,” von Bomhard said in the statement. “The flood of liquidity in important markets means that Munich Re must expect declining returns on its investments again in 2015.”
For the current year, Munich Re expects a return on its investments of “at least 3 percent.” That compares with a return of 3.6 percent in 2014. The combined ratio in property and casualty reinsurance, a measure of underwriting profitability, is expected to weaken to about 98 percent this year from 92.7 percent in 2014, Munich Re said.
Shoulder Risk
Reinsurers and the primary insurers whom they help shoulder risks in exchange for a share of the premiums, are increasing payouts to investors as strong balance sheets and lower-than- average losses from natural disasters leave them with a surplus of capital and limited options for growth. Warren Buffett’s Berkshire Hathaway Inc. is Munich Re’s biggest investor with an 11.6 percent stake.
Hannover Re, the world’s third-biggest reinsurer said Tuesday it will pay a special dividend after fourth-quarter profit climbed more than analysts estimated. Swiss Re, the world’s second-biggest reinsurer, said last month it will revert to share buybacks to return cash to investors after three years of paying special dividends.
Munich Re shares have gained 14 percent in Frankfurt trading so far in 2015, giving the company a market value of about €33 billion [$34.86 billion. The Bloomberg Europe 500 Insurance Index rose 15 percent over the same period.