With the challenging and softening reinsurance market expected to persist, the world’s largest reinsurer Munich Re warned this morning that the current market environment will show which firm’s are taking their return-on-equity targets seriously.
This morning Munich Re reported its annual results, with net profit coming in above target at EUR 3.2 billion. Beating the target set last year by EUR 200m is a good result in the current environment and the level of capital return also announced perhaps demonstrates just how profitable a business insurance and reinsurance still is, but also reflects the reduction in capital deployment opportunities.
Munich Re announced EUR 1 billion of share buybacks to come over the next year, as well as an increased dividend, both of which are certain to please shareholders in the reinsurer. Looking ahead the firm has lowered its target for 2015, but also widened the range, to EUR 2.5 to 3 billion of profit.
Commenting on the results CEO Nikolaus von Bomhard said; “Looking back, 2014 was a good year for Munich Re despite widespread uncertainty. We were able to surpass by almost €200m our original result target of €3bn.”
“We are targeting a consolidated result of €2.5–3bn in 2015,” von Bomhard continued. The firm sees risks due to liquidity in capital markets, potential pressure on investment returns and of course the ongoing excess capital in the reinsurance market, causing greater competition and ongoing softening.
Munich Re expects lower investment returns in 2015, as well as a higher combined ratio on its underwriting, which will naturally result in lower overall profit levels. The reinsurer remains focused on maintaining return-on-equity though, as well as the importance of cycle management through the soft phase.
Munich Re expects both capital and reinsurance markets to remain challenging, with “fierce competition” anticipated to continue through 2015.
“Rigorous cycle management and underwriting discipline, and excellent client service, will therefore still be extremely important,” von Bomhard commented. “This requires great determination from our staff and management to let go of even substantial levels of business where it is no longer possible to maintain adequate prices. This soft market phase will show just who takes their return-on-equity targets seriously.”
Just who has been disciplined remains a great unknown in reinsurance right now. With excess capital so high, and losses remaining below average, it’s very difficult to see who might have been wielding the pen with less discipline, or giving away more than they should on terms and conditions.
The chance that some reinsurers are shown not to have been taking their return-on-equity targets seriously increases the longer the soft reinsurance market continues. Whether we’ll see a turning point, caused by large losses, which bring any undisciplined behaviour to light remains to be seen, but the chance of it happening is certainly increasing as time passes.
Munich Re, interestingly, also noted the structural change that is occurring across the insurance industry, which on top of the intense competition in reinsurance and the adoption of new technologies and a digital-first approach are set to change the industry dramatically.
In reinsurance Munich Re reported that the operating result was down slightly, while gross premiums written declined by EUR 1 billion, however some of this is due to exchange rates so not all from the reinsurer pulling back.
Diversification is becoming increasingly important though for large reinsurers and Munich Re is no different. It is the combined result across reinsurance and insurance that is delivering the ROE for the firm right now, where in the past the reinsurance business often drove the results.
Torsten Jeworrek, Munich Re’s CEO of Reinsurance commented; “We continue to focus on our profit-oriented underwriting policy and offer our clients individual solutions. And we benefit from our diversification into primary-insurance-based and specialised market segments.”
For 2015, Munich Re would expect a combined ratio across its property and casualty reinsurance of 98% if loss levels return closer to normal, which is up 5% on the number achieved in 2014. This shows the positive impact that low levels of losses has been having, as that 5% boost on reinsurance has made a huge difference to many firms.
von Bomhard expects that; “Not only the capital markets but also the reinsurance markets will remain challenging in 2015. We have to be prepared to face continuing fierce competition, which is being fuelled by excess market liquidity.”
However continued opportunities are expected which will allow the reinsurer to maintain ROE. von Bomhard said; “Much of this business potential lies at the interface between insurance and reinsurance. With our strategy of combining primary insurance and reinsurance under one roof, we are well positioned to move into previously untapped fields of business.”
That suggests a continued focus on areas such as its large corporate risk solutions department and its weather unit, which it has been integrating more deeply into the firms insurance and reinsurance activities in recent years.
The ability to create the largest insurance and risk transfer solutions, on a customised basis, for the biggest corporates around the globe is an area that the large reinsurance firms have been seeking to gain advantage in recent years.
Capital management continues to be as important as discipline in underwriting, in the current soft reinsurance market. With opportunities to deploy excess capital diminishing, reinsurers like Munich re continue to return huge sums to shareholders.
This strategy is helping reinsurers to continue to look healthy in the current market, but the question still remains as to how the results will look when loss experience rises and combined ratios increase? At that point the return-on-equity will become increasingly important and just how disciplined the underwriting has been may become more clear.
This is perhaps what Munich Re means, that the soft market will show up those who aren’t taking their performance seriously or conservatively protecting their ROE. With a number of years of excess capital now behind them, when capital gets drained by large losses some reinsurers may no longer have a buffer to protect their returns.
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