The world’s largest reinsurance firm Munich Re is not weathering the soft market environment as well as analysts at RBC Capital Markets had expected, with the reinsurer now not expected to hit its stated profit target of €3 billion for the year.
Munich Re has been reiterating the €3 billion figure at every quarterly earnings this year and analysts had agreed that the target was a realistic one until now. Expectations have changed, as the pricing environment now looks set to soften even further at the January renewals and with Munich Re’s push into lines of business such as casualty resulting in a higher combined ratio, RBC analyst Hossain Kamran now believes the firm cannot hit the target this year.
Confidence is waning in reinsurers, not just in the small, property catastrophe focused players which have been under pressure all year, but now also in the large and globally diverse players as well. Munich Re has been saying itself that its push into large, specialist risks, insurance and reinsurance, would insulate it as well as an increased focus on casualty lines.
We forecast that Munich Re’s 2015E net result will fall to €2.6bn from the 2014 guided level of €3.0bn. We now assume that the combined ratio deteriorates to 97% as a result of both price declines and changes in business mix towards casualty business that is typically written at a higher combined ratio. Looking back to previous guidance, as recently as 2011, Munich Re’s guided combined ratio was 97% with a net result of €2.4bn. Consensus expectations currently imply relatively flat earnings year on year, a scenario that we view as highly unlikely given the worsening price environment in reinsurance.
RBC is now forecasting 2015 as being 11% below consensus estimates, which is a significant difference, noting that unless pricing declines reverse or Munich Re is unexpectedly profitable in certain areas the scenario is the likely result for the firm.
RBC had previously expected that Munich Re would have better and more resilient earnings than its peers, due to its higher level of proportional insurance business, but the perception has now changed in 2014.
Management stated earlier this year that their underlying combined ratio is running between 96-97% for 2014E, well above the 94% targeted at the beginning of the year. We expect further price declines to emerge at the January renewals in the same order of those that we saw in January 2014 (Munich Re -1.5%) and these reductions should only serve to add further pressure to Munich Re’s combined ratio.
RBC has been keeping track of the market sentiment in Monte Carlo at the reinsurance Rendez-vous and says that both brokers and reinsurers pessimism on the markets prospects validates their thesis that pricing will continue to fall.
With an uptick in combined ratio due to a changing business mix and further upticks as pricing declines and expenses add pressure, the large reinsurers may find this kind of negative message becoming the predominant way they are discussed by analysts as we near the fourth-quarter.
We’re sure reinsurers like Munich Re will seek to dispel these sentiments at their third-quarter earnings announcement, but if analysts such as RBC Capital Markets do not see a real chance of improvement we expect others to turn their rating of the firm. RBC Capital Markets now has Munich Re at ‘underperform’ which is not a place where the executive team at the reinsurer will want it to be seen.
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