The world’s largest reinsurance firm Munich Re continued to pull back on property and casualty reinsurance underwriting at the key January 2015 renewals, writing almost 10% less business, and the firm sees no sign of market conditions changing this year.
The reinsurer has been pulling back on property and casualty risks over the course of 2014, placing an increasing focus instead on its Ergo primary insurance unit and its ability to supply large, complex solutions to big corporations instead.
The firm has consistently cited the overcapacity in the reinsurance market as a key reason for its reductions in premiums underwritten in P&C and this January was no different, with competitive pressure continuing to be noticed by Munich Re.
Torsten Jeworrek, the firm’s head of reinsurance activities, explained; “Munich Re was able to stand its ground in this challenging environment. Overcapacity and a relatively low number of major natural catastrophes in 2014 added to the competitive pressure, above all in catastrophe business.”
However, as we’ve noted before, the scale and diversity of Munich Re’s operations allow it to shift its focus and capacity to areas where the potential returns are more attractive and the competition less fierce.
Jeworrek continued; “But Munich Re’s broad diversification across lines of business and markets, bolstered by stable client relationships, paid off for us.”
Munich Re commented on the January renewals; “As in the previous year, the renewal negotiations were marked by an oversupply of reinsurance capacity and good capitalisation of most market players.”
Munich Re notes that the pressure on pricing and terms did not increase, but also did not decrease, as the softening effect of superabundant reinsurance capital and low levels of losses, as well as growing competition from alternative capital and ILS, kept the pressure on.
The firm continued; “The downward pressure on prices, terms and conditions remained stable in most classes of business. Only programmes affected by major losses, e.g. in aviation, saw price increases. The demand for reinsurance cover was largely stable.”
At 1st January 2015 over half of Munich Re’s non-life reinsurance portfolio comes up for renewal, representing premium volume of around €9.4 billion, making this a key market juncture for the firms success over the coming year.
Munich Re said that 13% of its portfolio (around €1.2 billion) was not renewed, as the firm felt the business concerned no longer met its profitability requirements. More positively, Munich Re underwrote new business with a volume of around €0.9 billion. Altogether, the amount of business written at 1 January dropped by 9.5% to around €8.5 billion, while prices across the portfolio fell by 1.3%.
“Munich Re provides its clients with substantial high-security capacities. However, we always ensure that the price we obtain is commensurate with the risk assumed. Consistent cycle management is key in this competitive environment,” Jeworrek commented on the firm’s underwriting discipline.
Jeworrek continued, placing an emphasis once again on the firm’s ability to provide large and complex re/insurance solutions; “In addition, we offer innovative risk transfer solutions even for very complex risks, a fact that is becoming more and more important for companies in this globalised economy.”
Looking ahead, Munich Re said it will proceed through 2015 on the assumption that there will be no change in the market over the coming renewals, suggesting that the reinsurer does not foresee any improvement in market conditions in reinsurance, unless “extraordinary loss events occur.”
For 2014, the reinsurers results over the full year were only slightly down on expectation and the prior year, a strong performance considering the markets challenges. It reported a consolidated result of €3.2 billion, compared to €3.3 billion for 2013.
However the fourth quarter perhaps shows the difficulties that can be faced in a market where capacity and capital is being shifted from line to line as appetite allows, with Munich Re reporting €700m of profit, compared to €1.2 billion in the fourth quarter of 2013.
CFO Jörg Schneider summed up the result, although these figures are preliminary; “With this good result, we have once again demonstrated our robust earnings strength. It is especially pleasing that all business fields have contributed to this success again in the past year.”
The firm has also increased its dividend to investors, which will please shareholders.
Schneider explained; “With an increased dividend of €7.75 per share, our shareholders are receiving an attractive and also reliable return on their investment in Munich Re in comparison with other German and international companies, and this despite strong growth in the share price in recent months.”
Reserve releases contributed to the firms P&C reinsurance results, with a net effect of 5.3% for the year and 9.1% for Q4. Property and casualty reinsurance contributed around €2.5 billion of the consolidated result for the full-year, demonstrating the continued importance of this business to Munich Re, despite the pulling back.
Of course, helping the result is the fact that major losses continue to be so low, with Munich Re reporting just €1.2 billion of losses in 2014, compared to €1.7 billion in 2013. However, the deteriorating price of reinsurance business soaks up the majority of any gain here and the reserve releases also contribute to maintaining profits in this line.
Munich Re continues to be capable of navigating the challenging market environment through the leveraging of its various arms and shifting of capacity to different lines and areas of the market. It will be encouraging for the firm that it has not seen profits slide particularly in 2014, despite the Q4 result coming in a lot lower.
These large global reinsurers continue to be able to profit and return capital to investors, thanks to the low loss environment and despite the decline in reinsurance pricing. Whether that can continue indefinitely will depend on how long reserves can continue to boost results in a low loss environment and then how the market reacts to the losses that will happen in the future.
The impact of competition from alternative reinsurance capital and insurance-linked securities (ILS) will be felt by Munich Re, it will be competing directly with many of the largest ILS managers. But the firm has also begun to utilise more alternative capital itself, particularly evident in its upsizing of the various Eden Re collateralized sidecar vehicles this year.
Will Munich Re stand true to its promise and continue to increase its use of alternative reinsurance capital to help it to grow? If market conditions don’t improve, as the reinsurer expects, it may find that upsizing the amount of third-party capital it manages provides a valuable source of lower-cost capacity to deploy alongside its own.
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