Munich Re CFO Sees More Writedowns in Third Quarter

Munich Re expects more writedowns on its equity holdings in the third quarter but took account of likely losses in lowering its profit forecast for 2008 last week, its chief financial officer told Reuters.

The world’s second-biggest reinsurer roiled markets last week and sent its own share down by more than 12 percent by saying it expected to miss its full-year target of earning €3.0 billion to €3.4 billion ($4.67-5.29 billion) as financial market turmoil ate into its investment result. Joerg Schneider said Munich Re’s strict application of accounting rules requiring writedowns when shares in its investment portfolio fall 20 percent below their acquisition price or fall below the purchase price for six months left it no option but to issue a profit warning.

“In an unchanged capital market scenario, I will have more writedowns in the third quarter because there will be other stocks that will fall into the category of six months under water,” Schneider said in an interview on Friday.

“In Q2, it was the 20 percent rule that bit. In Q3, it will be more the six-month rule,” he said, declining to give an estimate of the size of the expected writedowns. “But all this has been built into our modified forecast for the full year.”

Schneider said he was confident of the reinsurer’s new guidance of achieving net profit of “well above” €2 billion [$3.13 billion], even if markets should see some further downturn.

“We have a buffer for further declines. You can imagine we did not go to the edge because I don’t want to come out each week with such a statement,” he said.

“For any normal movements in the market, I don’t have any concerns. I don’t have any sleepless nights over our portfolio,” Schneider said, adding that he was “mildly optimistic” about financial market developments in the second half of the year.

Munich Re’s share, which had been trading up 1.7 percent before the interview’s release, eased 0.2 percent to €106.61 [$166.30] by 1425 GMT. The DJ Stoxx insurance index slipped 0.8 percent

The reinsurer is due to report second-quarter results on Aug. 6.

OPERATING FOCUS
Munich Re’s profit forecasts include income from often volatile capital markets, but Schneider said the company would increasingly focus next year on operating results, which were more within management’s scope of influence. Details would be released at the turn of the year, once they are finalized.

“It would seem to be wise to give the forecast on the operating level after the experience of this year,” he said. “On the other hand, we are paid by our shareholders for delivering bottom line results and not some fancy figure.”

JP Morgan analyst Michael Huttner said he would welcome greater focus on operating results because it would make comparison with peers easier. “Investors I speak to are always complaining because other insurers use operating and Munich Re doesn’t,” Huttner said.

Munich Re’s shares had been seen as a safe haven by many investors amid jittery financial markets and had outperformed the sector in recent months. They are still down more than 8 percent since the warning, while other insurance stalwarts, such as Allianz and Hannover Re, are also down.

Schneider said Munich Re’s disclosure obligations and desire to be transparent made it a clear choice to issue last week’s profit warning, which was released while markets were open.

“What we missed in our press statement was saying more clearly that there was nothing more behind it, that we don’t have any serious operating problems,” he said. “We were obliged to go out with a statement, because we were among the very few companies that gave such a precise range for the full-year target.”

(Editing by Erica Billingham)