CFO Jörg Schneider hasdefended the company's decision to cut its 2016 profit forecast to €2.3 billionfrom between €2.3 billion and €2.8 billion.
He blamedhigher-than-expected costs related to the restructuring of loss-making unitERGO Group AG.
"Thesituation at ERGO is that projects are underway and it has become obvious thatthere will be some burden on the result," he told analysts on a May 10conference call to discuss first-quarter earnings. "It is no longerprobable that ERGO will show a positive result … I don't think [the estimate]will move from here provided that major losses and the development of thecapital market stays within reasonable range. I'm confident that we can keepthat €2.3 billion [target] going forward."
ERGO,Munich Re's primary insurance division, has been hit by low interest rates,which makes it difficult to earn enough to meet commitments to policyholders.
Schneiderdefended increased spending on restructuring the unit, saying that "if wewere not convinced that it is worth investing here then we wouldn't do it.Therefore you can rely on the program having a very positive impact on expensesand earnings in the future."
ERGOreported aconsolidated loss of €25 million, compared to a year-ago profit of €102million. It will report a new strategic plan in June.
Overall,the Munich Re group booked a first-quarter consolidated result attributable toequity holders of €430 million, down from the €790 million booked in the sameperiod a year ago. EPS dropped to €2.65 from €4.71.
MunichRe said it projects a P&C reinsurance combined ratio of about 95% of netearned premiums, down from an earlier expectation of 98%.
Therewas a below-average incidence of major losses, but also strains on theinvestment result owing to the extremely loose monetary policy.
"Thegeneral environment for investment remained challenging in the first quarter of2016 owing to the development of the stock and bond markets," Munich Resaid.
"Long-terminterest rates fell again considerably from their already low level at year-end2015. Whilst the decline in yields leads to higher prices for fixed-incomebonds, the lower interest rates diminish regular income from reinvestments. Ourregular return on investments was 2.8%, and was thus down 0.2 percentage pointsyear on year."
Grosspremiums written came to €12.51 billion in the first quarter, down from €13.04billion in the year-ago period. Net earned premiums declined to €11.34 billionfrom €11.86 billion in the first quarter of 2015.
KamranHossain, an analyst with RBC Capital Markets, said in a note to investorsshortly after the publication of Munich Re's results that the change in theprofit forecast does not materially shift his long-term view of the quality ofthe business.
Hepointed out that, in any restructuring situation, the charges are likely to be aone-off and should yield benefits in later years.
Also,he said, the weaker investment result driven by the impairment of equities haslittle impact on the 2017 result, and that the €856 million of new businesswritten at the April renewals should add to the bottom line in 2017.
InMarch and April major losses came in far lower than expected, Munich Re said,along with provisions for claims from prior years. The firm increased itsexpected reserve releases for such claims to 6 percentage points from 4 percentagepoints as a result.