Analysts fear a vulnerable European market makes this a bad time for reinsurers to let go of capital

Munich Re, the world’s largest reinsurer, has agreed to buy back up to €1bn (£862.3m) of stock from shareholders after posting a first-quarter profit of €485m.

The reinsurer will repurchase the stock before its next annual general meeting on 20 April 2011.

The shares will be retired following the buyback, effectively concentrating the company's remaining shares and maximising value for existing shareholders.

Based on the current share price, around nine million shares, or 5% of Munich Re’s total share capital, would be bought back.

The company said the repurchase is conditional on the lack of “major upheavals” in the capital markets or the firm’s underwriting business.

Some analysts have expressed concern about the release of capital in a time of economic turmoil in Europe.

“The fragile capital market environment is certainly a serious threat to insurance companies, which are significant sovereign bond investors,” wrote DZ Bank analyst Thorsten Wenzel in a research note. “Against this background, we believe Munich Re should keep its excess capital on board for the time being.”

Munich Re had €2.2bn exposure to Greece at year-end 2009, according to French bank Société Générale’s cross-asset research division.

But J.P. Morgan analyst Michael Huttner pointed out that the reinsurer has given itself almost a year to buy back the shares.

“The fact that they are relaunching the buyback now doesn’t mean they will do it all now,” he said, adding: “The hurricane season is yet to come.”

Huttner also contended that the reinsurer wants to ensure it keeps excess capital to a minimum. “Munich Re is keen to use the buyback to maintain discipline in mergers and acquisitions, and pricing in natural catastrophe insurance and reinsurance,” he said.

Munich Re’s €485m Q1 profit came despite heavy catastrophe losses. The reinsurance segment’s combined ratio was 109.2%, compared with 97.3% for the same period in 2009, of which 20.8 percentage points were attributed to natural catastrophes, including Windstorm Xynthia and Chile’s earthquake in February.

Munich Re chief financial officer Jörg Schneider said the catastrophe losses were offset by investment profits.

Munich Re reiterated its €2bn profit target for the full year of 2010.