Munich Re sees U.S. driving growth, will keep catastrophe risk in-line

Reinsurance giant Munich Re is planning to grow its business significantly in the United States, targeting regional accounts as a lever for growth but at the same time planning to maintain its conservative risk profile, keeping catastrophe risks in-line with the size of its balance-sheet.

This suggests that Munich Re may continue to use an increasingly large amount of alternative capacity from the capital markets as a retrocessional tool to help it manage its exposure to natural catastrophes, while growing its overall footprint and global market share.

Munich Re targets growing its non-life book significantly over the next decade, as it aims to increase its U.S. market share from the roughly 6% it is today, up to 12% to 13% to bring it in-line with its global share, according to analysts.

JP Morgan’s analysts attended a recent sell-side dinner held by Munich Re CEO Joachim Wenning, at which the subject of future growth plans were discussed.

Munich Re’s growth plans are for consistent and steady expansion of the portfolio, with specialist lines such as cyber one avenue, as well as growth in its primary Ergo division.

But the real drivers of non-life reinsurance growth in the decade to come are expected to be U.S. regional accounts, alongside large quota shares, whole account arrangements and structured deals.

Munich Re aims for the lower risk, U.S. regional non-life reinsurance accounts to be a significant driver of growth, calling this its “bread and butter” and aiming for a doubling of its U.S. market share, from 6% to 12%-13% over the next ten years.

Munich Re finds this an area where pressure on pricing and terms and conditions is not as evident and sees growth into this market as recovering market share, rather than expansion into something absolutely new.

While these U.S. regional counterparties reinsurance towers typically come with an element of natural catastrophe risk, Munich Re is adamant that it will not increase its cat risk exposure. Instead promising that it will remain conservative and only grow its natural catastrophe risk exposure in-line with the growth of its balance-sheet.

This suggests that retrocession will become increasingly important, as a way to moderate the increasing cat risk its book will naturally pick up through U.S. growth. Which also suggests that its own quota shares and sidecar arrangements are likely to expand as a result, providing opportunities for the capital market investors who already work with the reinsurer.

Munich Re can safely grow into this middle-market type U.S. business, while utilising third-party capital to moderate its exposure to natural catastrophe loss events.

That way Munich Re can earn income for the underwriting and a share of profits, while allowing ILS funds and institutional investors to take the peak catastrophe risk exposure off its hands.

Munich Re has been increasing its use of ILS structures and third-party capital, using its sidecars and private quota share arrangements more, while reducing its use of traditional retrocession.

This has happened alongside a significant expansion, as the firm took advantage of rates over the first-half of 2018 to grow its book considerably.

Hence, if further growth into the United States is forecast and this is likely to come with an element of catastrophe risks, then we can perhaps expect this de-risking trend to continue, to the benefit of ILS investors.

Of course this would mean Munich Re becoming increasingly reliant on a third-party capitalised balance-sheet, used in tandem with its own equity balance-sheet as a lever for de-risking alongside growth, allowing the reinsurer to expand its footprint without affecting its conservatism.