Munich Re raised its 2007 earnings target on Monday on the back of lower taxes and said its cautious investing largely insulated it from problems in the US subprime mortgage market.
The world's second-biggest reinsurer said it expects net profit of 3.5 to 3.8 billion euros ($4.84-5.26 billion) this year, up from its previous forecast of 3.0-3.2 billion euros, helped by a 400 million euro windfall from a German tax reform.
"We are increasing our profit guidance and, with one-off income resulting from the tax reform, are even setting our sights on a new record result," Chief Executive Nikolaus von Bomhard said. Munich Re made a record 3.5 billion euros last year.
Low taxes also helped it post a 2 percent rise in net profit in the second quarter, against market expectations of a decline. Munich Re has unveiled a clutch of measures to boost productivity and capital efficiency, after critics said it would struggle to grow as the prices reinsurers charge insurers for risk cover begin to weaken in the absence of major storms like Hurricane Katrina which devasted New Orleans two years ago.
Chief Financial Officer Joerg Schneider said the "Changing Gear" programme was helping Munich Re stabilise long-term results and predicted net profit of more than 3 billion euros in 2008, which would not see a repeat of this year's tax windfall.
The company's shares, like other financial sector stocks, have been hit as investors worry about widening credit risk problems stemming from the US subprime mortgage market. But Munich Re played down its subprime risk, with about 600 million euros or 0.33 percent of its total 179 billion euros of invested assets exposed to the segment. About 42 percent of the exposure is rated "AAA," 37 percent is rated "AA," 12 percent is "BBB" and 1 percent is sub-investment grade, the company said.
"Even the latest market turbulence is not causing us sleepless nights," Schneider said, adding that a "worst case" loss for Munich Re in the subprime segment would be around 100 million euros. It wrote off 35 million euros in the first half.
Investors gave the performance the thumbs up, with Munich Re shares trading up 1.1 percent by 1205 GMT, against a flat DJ Stoxx index of European insurance shares. "With shareholders' funds broadly in line and sub-prime disclosure that we believe reflects well on the company's risk management, we reiterate our 'outperform' rating on this undervalued share," said Keefe, Bruyette and Woods analyst William Hawkins in a research note. Lower taxes also helped the company deliver second-quarter net profit of 1.158 billion euros, above the highest forecast of 1.132 billion in a Reuters poll of analysts.
It benefited from tax-free dividends and capital gains, and also from lower taxes at its Munich Re America unit due to tax measures initiated last year. Storms in Australia resulted in 53 million euros in claims in the second quarter, while in the third quarter, it expects claims in the tens of millions of euros each from an earthquake in Japan, floods in Britain and an air crash in Brazil.
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