Munich Re raises profit guidance, sees reinsurance price stabilisation

The world’s largest reinsurance firm Munich Re has raised its profit guidance for the full year saying it aims to achieve at least €3 billion (up from a target of €2.5bn to €3bn), while also noting that it has perhaps seen the first signs of price stabilisation emerging.

Munich Re, like the other large reinsurers, continues to demonstrate that a large, globally diverse insurance and reinsurance underwriting operation can be a very profitable venture in an environment where major loss experience remains low, despite the recent steep price declines.

CEO Nikolaus von Bomhard looked back on a successful second quarter for Munich Re, saying “Despite a persistently uncertain environment, including ongoing competition in reinsurance, the profitability of our core business remains remarkable.”

While the reinsurance market remains highly competitive, with new entrants, growing influence from alternative and lower-cost sources of capital, hedge fund and investment oriented players, it is still possible to turn a good profit.

“Our profit of around €1.9bn in the first half of the year was so high that we are likely to exceed our profit guidance of €2.5–3bn for the year if claims experience remains within normal bounds in the second half of the year. We now expect to achieve an annual profit of at least €3bn,” von Bomhard continued.

The reinsurer reports an operating result of €1.818 billion for the second quarter of 2015, which is significantly higher than the €1.137 billion reported for Q2 2014.

Unlike the other large global reinsurers, Munich Re has not gone for massive growth on the premiums written side of the business in recent months, preferring instead to try to maintain its portfolio and make it more profitable through diversification and adding value.

Gross premiums written are reported as up by 5.2% in Q2 to €12.5 billion, compared to €11.9 billion a year earlier. However, if exchange rates had remained the same, Munich Re’s premium volume would actually have dropped by 4.7% year on year.

This is a differentiation in strategy, compared to key competitors Swiss Re, Hannover Re and SCOR, who have all increased overall gross premiums in the quarter, in some cases quite significantly, even on an exchange rate adjusted basis.

Achieving much higher profit even without massively increasing the business underwritten is impressive and could be down to the quality of business underwritten in previous quarters and what is flowing through from prior years as well for Munich Re.

However, von Bomhard cautioned; “As gratifying as these figures may be, the fierce competition in reinsurance remains a challenge.”

Munich Re achieved an operating result of €1.435 billion in reinsurance, up from €845m. Property and casualty reinsurance saw a result of €790m, up from €505m.

The reinsurance combined ratio helped, dropping to 93.3%, from 101.4% for Q2, and 92.8% from 94.1% for the first-half. Also assisting was 3.1% of prior year reserve releases in the quarter, 3.6% for the first-half. The reinsurer says it continues to reserve prudently at the upper end of loss estimates.

In reinsurance premium growth was evident, but again not at as high a rate as the core competitors have seen. This could be due to Munich Re having a more catastrophe exposed book than some of the other large reinsurers, but will also be due to its conservative approach.

Encouragingly for the whole reinsurance market, Munich Re notes that it may have seen the first signs of price stabilisation at the July 1st renewals.

“Pressure on prices, terms and conditions remained high, in particular for natural catastrophe covers, which accounted for about 20% of these renewals. The decline amounted to 2.1% (previous year’s renewals as at 1 July 2014: –3.6%); this could be the first indication of a stabilisation in prices,” the reinsurer explained.

Many of the reporting reinsurers have cited stabilising prices across property catastrophe reinsurance in particular, so this does appear to be a trend that we will likely see moderate the declines into the key January renewal period.

However, the reinsurer noted; “In property-casualty reinsurance, we are currently experiencing unrelenting competition.”

With the “ongoing availability of alternative capital in the US market: institutional investors, such as pension funds, increasingly favour insurance securitisation and other forms
of reinsurance-like transactions,” resulting in “appreciable surplus capacity on the supply side.”

However, another encouraging note from Munich Re is that pressure on terms seems to be relenting, perhaps another sign of the market approaching a floor; “The prices, terms and conditions for reinsurance cover are therefore under pressure across the board, albeit with decreasing intensity.”

Munich Re said that it continued to non-renew some business that it felt did not meet its risk-return hurdles, but that it also saw opportunities in some markets, helping premium volume remain relatively constant.

Torsten Jeworrek, Member of Munich Re’s Board of Management and heading up reinsurance, commented; “Thanks to our strict cycle management, our portfolio remains profitable even after the price falls in recent renewal rounds.”

ERGO on the primary side saw another positive quarter as well, although on international business the combined ratio deteriorated to above 100. However this unit too increased profits and made a greater contribution to the Munich Re results.

As a result of the strong results and perhaps better than expected profits, Munich Re has increased its profit target for property casualty reinsurance to at least €2.5 billion, up from at least €2 billion.

For the company as a whole, the new overall profit target of at least €3 billion, up by around at least €500m, is a clear demonstration of the effect of low loss experience in the major catastrophe lines, combined with a disciplined approach and a scale that enables the portfolio to be adjusted to avoid the worst of the market.

Perhaps this is what smaller to medium-sized reinsurers are all looking to merge or acquire for? To get to a point where profits can be grown, despite an overall depressed reinsurance marketplace.

Munich Re continues to note “fierce competition” in many reinsurance markets, making its business more difficult and requiring it to focus on making the most of its diversified business model and innovation.

The fact that Munich Re has also cited price declines as slowing across some of the reinsurance market will be seen as encouraging for other underwriters. The firm says that price decreases continue to be driven by catastrophe excess of loss programs, however, so the areas that ILS and alternative capital has been focusing, showing that pressure still exists for these big reinsurers due to the capital markets players.

For Munich Re, the new business opportunities it can hunt out in the market are enough to compensate for losing business due to managing the cycle, it says.

The reinsurer notes that it is both traditional as well as alternative reinsurance capital that continue to grow, leaving the industry over-capitalised for the set of opportunities as you see them today. Hence innovation and finding new ways to put capacity to work, through complex or tailored solutions remains key to the firm.

For all of the major reinsurance firms though, loss experience is going to be the key driver of profits at the moment. If major losses remain well below average, as they have in the last two years, then we can expect to see strong full year profits for 2015.

It may only take one major storm, or loss event, to alter the profit direction though and as soon as the catastrophe loss environment returns more towards historical levels we will then be able to assess just how disciplined companies have been over the last two or so years of pricing decline.