Insurance Woes Keep the Money Under the Mattress

Nikolaus von Bomhard, the outgoing head of Munich Re warns that the European Central Bank’s monetary policy has dangerous consequences.
Concerns are spreading about the ECB's policy to stimulate the economy.

 

Munich Re’s outgoing chief executive Nikolaus von Bomhard lashed out at the European Central Bank’s decision to cut interest rates to zero, and warned that the whole principle of monetary policy was being undermined.

While announcing the company’s annual results earlier this week, Mr. von Bomhard said that "Everything is out of control here," He added: "This is the official end of monetary policy."

The insurance sector has been up in arms about the European Central Bank's decision last week to reduced the base rate from 0.05 percent to zero. The bank approved additional bond purchases and a negative deposit rate of minus 0.4 percent for banks. The step is especially detrimental to insurers and reinsurers, which need to invest their customers' money profitably in the capital markets.

Other industry leaders, like Allianz Chief Executive Oliver Bäte, have also criticized the move. Mr. von Bomhard, a man not known for losing his cool, was unusually direct in his criticism of the move.

Mr. von Bomhard said the company began storing gold and a significant sum of cash, in a safe a while ago.

The measures announced by ECB President Mario Draghi would have "devastating side effects," said the longstanding manager of the reinsurance giant, which also owns the Düsseldorf-based ERGO Insurance Group. He predicted that the policy would lead to a "massive redistribution from poor to rich," and that the intended positive consequences would not materialize. "A government cannot simply allow this to happen!" he added.

He backed the German central bank governor Jens Weidmann, who had criticized the European Central Bank measures, and said the German government should act: "Of course the independence of central banks must be protected, but a federal government should speak out instead. I think it's extremely disconcerting that we are hearing nothing from the German government," he said.

Saving banks in Bavaria have also reacted to the European Central Bank’s decision with an internal discussion on whether it may be more cost-effective for its members to keep their money in a safe instead of depositing it with the European Central Bank.

Munich Re has already done just this. Mr. von Bomhard said the company began storing gold and a significant sum of cash, in a safe a while ago. He noted that storing cash this way is not ideal: it can be stolen or go mouldy but the fact that it was being considered, “should tell you have serious the situation is."

Low interest rates have already affected the reinsurance group's business figures. The net profit declined to €3.1 billion ($3.48 billion) in 2015, even though the company benefited from the "luck factor," meaning that there were few natural disasters, which translated into fewer claims on Munich Re policies. Management expects profits to decline to between €2.3 and €2.8 billion in 2016. This is "certainly an ambitious goal" in light of the current situation, said Mr. von Bomhard. The more than €215 billion the company has invested in capital markets are likely to generate lower returns.

Nevertheless, shareholders can expect to see a generous dividend of €8.25 per share for the past year, and the company also continues to buy back its own shares on the market. The next buy-back program will begin after the annual general meeting in April. Munich Re plans to buy back shares for up to €1 billion by April 2017.

That is when the company will reach a major turning point. Mr. von Bomhard, who turns 60 this year, will step down after 13 years in office. This week, the supervisory board appointed Joachim Wenning, the head of Munich Re's life insurance business, as his successor.

 

Kerstin Leitel covers banks and insurance companies. To contact the author: [email protected]