One of the concerns with negative interest rates is that consumers will stash their cash under their mattresses instead of paying to keep it in a bank, and it turns out that Munich Re, a large Germany-based reinsurer, is doing the business equivalent of that. The company is stuffing bank notes into a vault to avoid paying out money to let a bank hold its cash because of the negative interest rates imposed by the European Central Bank.

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Munich Re stashes cash

According to Bloomberg, Munich Re plans to keep at least $11 million in two different currencies in its own vaults so that it won’t have to pay so that it can gain access to that money on short notice. CEO Nikolaus von Bomhard also said they will be looking for other strategies to avoid paying negative rates by watching to see what others do. The move is a response to the European Central Bank’s move to push overnight deposit rates even further into negative territory, which then slices into returns on investments.

A finance professor at Munich’s Technische Universitaet, Christoph Kaserer, told the media outlet that stashing cash may become a common practice, particularly if interest rates become “low enough,” although he said it’s unclear exactly where that will be. He added that large institutions may be more included to resort to the practice more quickly than smaller businesses. If this happens, the ECB’s negative interest rate policy will be undermined, and he suggested that regulators may respond by limiting cash or carrying out other countermeasures.

Of course with storing cash comes greater risk and logistics needs plus higher insurance costs, so institutional investors and other big firms must weigh the benefit of avoiding the negative interest rates to see when it becomes worth the time and extra money to take the steps necessary to do so.

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Munich Re’s solvency is strong

Munich Re held its Investor Day this week, and multiple firms remarked on the strength of the reinsurer’s solvency. The company didn’t adjust for volatility when it reported a 302% solvency level, which JPMorgan analysts called “outstanding,” noting that if it had adjusted for volatility, its solvency would be higher by 17%.

Further, if including sensitivities like an Atlantic hurricane, a 50 basis point reduction in interest rates and spreads that are wider by 100 basis points, Munich Re’s solvency would fall to 225%, which is still higher than the given range of 175% to 220%. Deutsche Bank analysts note that the 302% solvency rate reflex an extra €10 billion over the 220% high end of the target range.

Dividends and buybacks look sustainable

JPMorgan analysts believe the €2.3 billion in dividends and buybacks is sustainable for now as Munich Re’s German HGB profit amounted to €2.6 billion in fiscal 2016, which more than covers that amount. They expect this to increase to €2.8 billion this year and €3.4 billion next year due to the “likely swing to positive releases from the statutory equalization reserve.” They did trim their fiscal 2016 earnings projection by €100 million, however, mostly due to the ERGO restructuring costs. Munich Re management guided for between €2.3 billion and €2.8 billion in net income for fiscal 2016.

RBC Capital Markets analysts also remarked on the solvency rate, adding that while management’s conservative guidance is a little lower than expected the balance sheet is much stronger. As a result, they said Munich Re is still their “preferred” reinsurer. The company guided for ERGO of €250 million to €350 million, although RBC noted that this reflects “higher combined ratio assumptions in Germany and the impact of lower interest rates.”

Not all analysts are positive on Munich Re, however, with UBS remaining concerned about long-term earnings trends, which they said are “increasingly gapping below the headline number.” They note that the profit guidance of €2.3 billion to €2.8 billion for this year is a big lower than last year because of pressure from yields and pricing.