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Munich Re could go shopping with €7.5B capital surplus, but will tread carefully

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Munich Re could go shopping with €7.5B capital surplus, but will tread carefully

Munich Re would not rule out using a €7.5 billion pile of surplus capital for acquisitions, but any deal would have to come at the right time and be a strategic fit, the company's CEO said Aug. 9.

Joachim Wenning, who took over the helm of the world's largest reinsurer by premium volume earlier in 2017, said market prices for potential acquisition targets are very high and that Munich Re is not putting itself under any "time pressure" to acquire another company.

"We are looking for an opportunity if it arises," he told journalists following publication of the company's second-quarter results. "More volatile times could be in the coming and then we will be ready ... to pounce but of course it must also be a strategic fit."

An acquisition of a broad reinsurance provider would be unlikely, he added. In the meantime, he said Munich Re would be interested in tie-ups with other companies, especially in financial technology or the broader technology industry, or with regard to new business models.

"We do not exclude cooperations and we do not exclude them right now, but we do not want to subject ourselves to pressure," he said, adding that such tie-ups would be the right thing to do if the timing for potential acquisitions were not right.

CFO Jörg Schneider noted that the reinsurer's solvency ratio stood at 261% as of June 30, well above the target of 175% to 220% and representing excess capital of €7.5 billion. But he said that did not mean the company would use excess capital for acquisitions, and that it was concentrating first and foremost on generating profitable growth.

He also said the company needed to use its own cash to pay for dividends and buybacks, according to Germany's commercial code.

"We can grow organically, we can potentially make acquisitions, we have got those options, but we do not have the option in order to use it stupidly or unwisely," he said.

Munich Re reported a 25.1% drop in second-quarter profit to €729 million. The group's gross premiums written for the quarter slipped to €11.80 billion from €11.93 billion.

The company's reinsurance business booked a second-quarter result of €629 million, compared to the year-ago €991 million. The property and casualty reinsurance unit contributed €517 million to the total, down from €778 million a year earlier, while the life and health reinsurance division's result declined to €112 million from €213 million.

Prices for reinsurance have gradually fallen over recent years amid a relative lack of natural catastrophes and intense competition as investors search frantically for decent yields in a low-interest-rate environment.

As well as pushing more capital into the reinsurance market, low interest rates have contributed to a decline in reinsurers' investment income, as the assets they hold in reserve can no longer achieve the same yields as in the past. Munich Re's second-quarter return on investment was 3.2%, down from 3.6% in the first quarter.

Munich Re maintained its full-year profit guidance of €2.0 billion to €2.4 billion and Wenning said he was "optimistic" that the company would reach its targets. He added that despite the soft market, reinsurance offered "business opportunities" for the future.

He declined to give any target for 2018, but said the company hoped to stabilize profit in 2017 and gradually raise earnings in future years.

"Everything is based on the profit and revenues of 2017 and then we will try to raise things step by step," he told reporters.