"The great expectations associated with the heralded private investments in public infrastructure projects are likely to be dashed if confidence in the reliability of government action is dented," Nikolaus von Bomhard, Munich Re chairman, has said in a letter to the company's shareholders introducing the first-quarter results.
He said there has recently been a trend towards "favouring debtors over creditors – just think of the central banks' interest-rate policies. Particularly worrisome are cases where public debtors retroactively amend the terms and conditions to their own advantage, thereby worsening their creditors' legal position."
He gave two examples: Greece legally engineering a restructuring of its debt in 2012 and, much more recently, the Austrian province of Carinthia not honouring the guarantees it gave for a large share of the debt of Heta (a banking group formerly named Hypo Alpe Adria).
These cases threaten "to trigger a further erosion in public debt ethics," wrote von Bomhard. "Retroactive adjustments to conditions like the ones that have regrettably been made in several southern European countries – for example, in the case of renewable energy projects – may jeopardise the funding of long-term projects in general."
Spain, Greece and Bulgaria are among the countries to have retroactively reduced government subsidies for renewable energy.
He stressed that Munich Re is prepared to invest up to €8bn ($9bn) in infrastructure in the coming years. "However, this will depend on the suitability of the projects and the reliability of the terms and conditions involved."
For long-term projects of this kind, stable terms and conditions are indispensable if insurers are to commit themselves financially.
"Legal certainty is being undermined, and the protection of vested rights and trust is being called into question. As a long-term investor, we regard the situation with a fair amount of concern."
Munich Re has around €240bn invested in the capital markets via its asset-management subsidiary MEAG. A large share of this money belongs to primary insurance customers, who have taken out insurance to secure their income when they retire or to protect themselves financially against high costs of illness or long-term care.
"They are the ones who will bear the brunt of a subsequent and retroactive disadvantaging of creditors – not some anonymous financial speculators," von Bomhard emphasised.
He added that, because of Munich Re's conservative and prudent investment policy, and its broad diversification, "our investments have performed well overall."
The return on the strongly increased market value of the portfolio was 3%. Fixed-interest securities, loans and short-term fixed-interest investments continued to make up the largest portion of Munich Re's investments, with a share of around 88% at market value.
Munich Re had to post a write-down of €104m gross (around €30m net) on its investments in Heta in the first quarter. "Of course, we are looking into the option of filing legal action, taking due consideration of the associated costs," explained von Bomhard.
He said Munich Re earned €790m in the first three months – "a result that is an important step towards achieving our profit guidance of €2.5bn–3bn for the year as a whole."