Munich Re: A Reinsurer With Cushion to Withstand Hurricane Damage

Hurricanes Harvey and Irma will hit profits among reinsurance groups, and

Munich Re
,

MURGY -3.88%

one of the world’s largest, is among the first to warn about the pain it will feel. But investors shouldn’t fret.

The Germany-based group said recent storms were likely to mean a loss for the third quarter, so it could miss full-year profits guidance of €2 billion ($2.39 billion) to €2.4 billion for 2017.

Insurance stocks in general have rebounded strongly after it became clear that the strongest winds from Hurricane Irma would miss the most heavily insured and valuable properties around Miami in Florida, although the damage and disruption to much of the state is still severe.

Munich Re is the world’s third-biggest listed reinsurer after European rival

Swiss Re

and

Berkshire Hathaway

of the U.S.—although Berkshire does a lot more than reinsurance and said it would stop writing catastrophe reinsurance in late 2015 because of weak pricing.

Hurricane-related profit warnings from other reinsurers are likely to follow, especially from some of the smaller, Bermuda-based groups that have more concentrated exposure to catastrophe risk, such as Everest Re.

Allianz
,

the Germany-based life and property insurer, has said combined losses from the two storms could be up to €440 million, but even that upper amount would only knock about 4% off its expected 2017 operating profit.

Munich Re is best prepared to weather big losses. It has the largest cushion left among European peers against expected losses from major storms or earthquakes for the year, although different groups will have different levels of exposure to different kinds of catastrophe.

Its so-called catastrophe budget is €1.138 billion for the second half of 2017, according to Jefferies, which compares with $900 million for Swiss Re and more than $800 million for

Hannover Re
,

another German reinsurer.

Munich Re also has the biggest pile of excess reserves from earlier years, due to a more conservative policy on holding back cash until claims are fully settled. Investors like the industry for its consistent dividend payments and stock buybacks—both Munich Re and Swiss Re have a dividend yield of about 5%. But Munich Re’s reserves means it has more ability to continue releasing cash even in bad years.

And it has room on its balance sheet to borrow funds to back more future business if prices start to rise.

There are risks of further big storms in this year’s hurricane season, which runs into November, but investors can take weakness in Munich Re’s stock as a chance to buy.

Write to Paul J. Davies at [email protected]

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