Swiss Re Insurance-Linked Fund Management

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Munich Re boosted by reserve releases, which offset €80m Jebi creep


Global reinsurance giant Munich Re has demonstrated the benefits of having enormous prior year reserves that have been prudently stashed away each year, reporting its highest quarterly result in four years, thanks to strong reserve releases that more than offset loss creep from events including typhoon Jebi.

Munich Re signFor the second-quarter of 2019 Munich Re reported €993 million of profit, up from €728 million in the prior year.

“We are delighted to have generated our highest quarterly result in four years. And we are confident that we will reach our profit guidance of €2.5bn for 2019 and €2.8bn for 2020 as set out in our multi-year ambition for 2018–2020. At the halfway stage of this programme, Munich Re is both strategically and financially on track,” commented the reinsurers CEO Joachim Wenning, Chairman of the Board of Management.

That contributed to an operating result of €1.569 billion for the quarter, up from €997 million. in Q2 of 2018.

Equity rose significantly, thanks to such a strong result, to over €29.54 billion, up from the €26.5 billion at the start of the year, as Munich Re’s strong reinsurance earnings boosted equity capital.

As a result, the annualised return on risk-adjusted capital (RORAC) in Q2 reached 15.5%, and 12.7% for the first-half. Return on equity (RoE) reached 13.6% for Q2, and 11.5% for the first-half.

An impressive result, as forecast recently by the reinsurer here when it pre-announced an expectation of around €1 billion of profit for the second-quarter, far above analysts estimates.

Making a significant contribution though were the fact major losses remained low so far this year, while reserve releases from prior years were far above previous quarters, boosting the overall result significantly alongside a good investment return of 3.1%.

Munich Re released around €360 million of reserves from prior year basic losses, roughly 7.3 percentage points of net earned premium.

That’s far above the 4 percentage point target for the full-year and took half-year reserve releases to €560 million, or 5.7 percentage points of net earned premium, which shows that releases had been below target in Q1 of this year.

Munich Re explained that the strong releases were, “Attributable in part to the successful conclusion of portfolio transactions and the release of corresponding reserves. A further contributing factor was the very favourable claims development in a number of classes, thanks to which a share of the conservative reserving could be released without diminishing the overall strength of reserves.”

It’s made a huge difference to the results this quarter, turning what could have been a relatively ordinary set of results into something far more impressive and satisfying for the reinsurers shareholders.

Without those releases the property and casualty reinsurance combined ratio wouldn’t have been so impressive either, coming out at 87.7% for the second-quarter, compared to 102.2% in the prior year period.

For the first-half the P&C reinsurance combined ratio came out at 92.8% for H1 2019, better than the prior years 95.5%.

However looking at the figures, it’s clear the ability to release reserves in such numbers has been critical to Munich Re’s impressive results, again underscoring the flexibility that part of the business model provides to the major global and line of business diverse reinsurance players.

The reserve releases also helped to offset loss creep that Munich Re suffered, as the reinsurance firm also added to typhoon Jebi loss reserves during the second-quarter.

For the quarter Munich Re only reported major loss costs of €202 million and €680 million for the first-half of 2019.

These major loss costs include run-off profits and losses for large claims from previous years, including an additional roughly €80 million of loss creep from Typhoon Jebi that was booked during the second-quarter of this year.

That’s much better than the EUR 267 million Munich Re added to its typhoon Jebi reserves in Q1, but reflects the fact that the industry has almost without exception continued to strengthen reserves for the typhoon through the second-quarter.

Reinsurance overall contributed €858 million to Munich Re’s results this quarter, with property and casualty reinsurance contributing €704 million of this, while life and health reinsurance was again a little weak due to the result in Australia being below par again.

Munich Re said it is working with its clients to “rehabilitate the existing portfolio” in Australia as a result of this.

Because of the weak Australian life and health reinsurance and other factors affecting that side of its business, such as asset impacts due to shortening durations in the portfolio, Munich Re has warned that it now may not meet its €500 million life and health reinsurance target for 2019.

But the property and casualty reinsurance side of the business continues to deliver and Munich Re has also expanded, like every other major reinsurer, taking advantage of better pricing available in the market.

P&C reinsurance premium volume rose to €4.842 billion, up by over 200 million Euros for the period.

At the July 1st reinsurance renewals in particular, Munich Re has reported premium volume rising by 8.9% to €3.5 billion, with “attractive new business in the Americas” a particular driver of the reinsurers expansion this year.

Like so many others, Munich Re will likely have a little more U.S. catastrophe exposure on its book following the renewals, but again like others the use of retrocession and third-party capital no doubt rose as well.

Munich Re noted a “marked improvement in prices for reinsurance cover in the markets affected by natural catastrophes” as well as some “increases in loss expectations and stable renewals in unaffected regions and markets” at July 2019.

As a result, the overall risk-adjusted price increase for the entire July renewals came out at 0.5% for Munich Re, excluding price increases which were offset by higher claims expectations.

Like so many other major reinsurers the lack of catastrophe activity or other major losses, the better rates available and improved market conditions generally in reinsurance, have helped the firm boost its capital position significantly in 2019 so far.

Questions may lie over whether reinsurers like Munich Re can replenish reserves as quickly as they release them these days, something we won’t fully understand for some years to come.

But for now the model of prudently reserving and releasing capital when you can is clearly working.

Of course the insurance-linked securities (ILS) market cannot play this card in the same way, as over-reserving too much simply depletes available returns for investors.

It’s one of the more challenging aspects of the job for ILS fund managers, who must still reserve, create side pockets and allocate capital to one side to pay for expected losses, but at the same time not over-reserve or risk eroding portfolio returns.

Large reinsurers tend to over-reserve on purpose, knowing they will be able to release at least something (in the vast majority of cases) in years to come.

Of course, sometimes events like hurricane Irma and typhoon Jebi burn through even the most prudently set reserves, which then need adding to, and as we’ve seen even the very biggest players in the world are not immune to this when complex losses occur.

Munich Re has maintained its targets for the year, hoping for consolidated profit of around €2.5 billion.

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