Munich Re may beat its 2007 earnings target and has little risk from its remaining subprime investments, the reinsurer said on Monday after lower taxes helped it post a strong rise in third-quarter net profit.
The world's second-biggest reinsurer said it was increasingly confident of reaching its full-year target of making up to 3.8 billion euros ($5.50 billion) in net profit after hitting 3.3 billion euros in the first nine months.
"We could even slightly surpass our profit target for the year," Chief Financial Officer Joerg Schneider said.
Munich Re said it faced little additional risk from its investments in the market for risky mortgages in the United States, after writing down 150 million euros in the first nine months, including 115 million in the third quarter.
"For us, the subprime issue is harmless," Schneider told a conference call with journalists, noting subprime assets made up only 0.2 percent of its capital investments.
The group still had about 374 million euros in subprime exposure, mainly in "AAA-" and "AA"-rated securities from 2005 and earlier, and had completely cleaned out its more recent and riskier subprime investments, it said.
Dividend on Track
Share prices of banks and insurers have suffered in the last few months as investors worried about the extent of losses on these investments, particularly after banks like Merrill Lynch and Citigroup unveiled billions of dollars in extra write-downs recently.
"The exposure to subprime remains low and we expect earnings should prove resilient," Bear Stearns analyst William Allen said in a research note, adding that Munich Re stock was trading at about 1.1 times embedded value compared with a multiple of 1.4 for the sector as a whole.
The company said it was on course with plans to return at least 8 billion euros to shareholders through dividends and share buybacks by 2010, and stuck to its 2008 forecast for more than 3 billion euros in net profit.
Analysts said they were somewhat disappointed with Munich Re's performance in the third quarter. The share was trading down about 1.7 percent at 128.36 euros by 1133 GMT, in line with European insurance peers.
Munich Re reported net income before minorities of 1.216 billion euros in the third quarter, above the 1.123 billion euro average in a Reuters poll of analysts, but which was helped by a 400 million euro gain from a change in the German tax code.
Operating profit fell 13 percent to 1.132 billion euros and was below expectation, hit by higher insurance claims from disasters like flooding in Britain and damage from Hurricane Dean, which battered the Caribbean and Mexico.
Floods Hit Operating Profit
The decline in operating profit was entirely due to higher claims from natural disasters compared with a year earlier, the company said.
Munich Re is aiming for net profit of 3.5 billion-3.8 billion euros this year, which has seen some medium-sized damage claims but no disasters on the scale of the hurricanes that struck the United States two years ago.
Munich Re gross written premiums rose 1.5 percent to 9.148 billion euros in the third quarter, against analysts' expectations for flat top-line growth.
The company has said it is prepared to see a shrinking top line and is keeping its focus on profitable underwriting.