Munich Re sees bottom of the reinsurance market cycle approaching


Global reinsurer Munich Re believes that the bottom of the market cycle is approaching and that only one more quarter similar to Q1 2017, with many smaller loss events is required for pricing to hit the bottom. The reinsurer also said today that the profitability of its reinsurance book is still “way above cost-of-capital.”

Having reported quarterly results today and said that it believes it remains on track to meet its profit targets for the 2017 year. However, underlying reinsurance results in property and casualty risks deteriorated a little, due to a higher level of attritional weather losses and also some man-made loss events.

Munich Re continues to turn down business in P&C reinsurance where necessary and deemed unprofitable, but remains confident in the overall reinsurance portfolio the firm has underwritten, saying today on a conference call that the underlying profitability remains “way above cost-of-capital” of its capacity.

JP Morgan analysts reported that Munich Re said that this view of the underlying profitability of Munich Re’s reinsurance book is not apparent from the outside, but the reinsurer is confident in its ability to manage the cycle and continue to achieve targets.

New CEO Jörg Schneider commented; “We continue to focus on our disciplined underwriting policy, responsiveness to clients’ needs, and the systematic tapping of new business opportunities in primary insurance and reinsurance.”

Munich Re continues to see highly competitive market conditions although notes some easing, saying that; “Pressure on prices, terms and conditions remained intense in the renewals as at 1 April 2017, although there was a slight easing.”

The reinsurer believes that the market is approaching the bottom though and comments made today suggest that the company is getting increasingly bullish about reinsurance pricing reaching a floor sooner rather than later.

The company said on its analysts call today that it expects that only one more quarter like Q1 2017 is required, where a higher frequency of smaller losses cause industry-wide attrition (such as U.S. severe weather activity) for the cycle to bottom out. It added that it believes a major industry loss is not required to cause prices to find their floor.

Looking ahead to the mid-year renewal season, Munich Re said that competition is expected to remain high.

“Munich Re expects the business environment to remain competitive provided the market is not affected by major loss events,” the company explained.

However and again signalling growing confidence that the bottom of the market cycle is approaching more rapidly now, Munich Re also said that if mid-year renewal pricing remains around the -0.5% mark, as it saw during April renewals, this would be a sign of the market being relatively disciplined.

The attritional loss rate in the first-quarter of this year has been high, particularly due to the aggregation of smaller reinsurance losses from the U.S. severe weather activity. This activity has continued through April and currently shows no sign of slowing down, so another quarter of attrition could happen very soon.

Whether that will be enough to see the market hit the absolute bottom on pricing remains uncertain, but with reinsurers like Munich Re increasingly confident that the bottom of the market approaches, it seems there is little room now for any more than a slight price decline.

But with pressure from ILS and catastrophe bond pricing likely to weigh on property catastrophe reinsurance pricing at renewals, calls for a bottom to the market may be too early still.

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