Munich Re has bucked the expected trend for quarterly reporting from the major global insurance and reinsurance firms, pre-announcing an expectation of around €1 billion of profit for the second-quarter, which is far above analysts estimates.
Analysts seem to have been in the main estimating quarterly profits of around €600 million to €750 million as being a more typical figure for Munich Re to report this quarter, but the company said that thanks to a low level of losses during Q2 and some reserve improvements, it anticipates a much higher consolidated result.
Munich Re said that while work on its half-year financial report is ongoing, it anticipates the much better than expected result thanks to “low major-loss expenditure and high reserve releases for basic losses in reinsurance from prior years.”
No mention is made of reserve development for major losses from recent years, such as typhoon Jebi, but it is possible that Munich Re has managed to absorb most of this within the reserve it had originally set for the event.
The reinsurance firm does note however that because of “uncertainty concerning developments in major losses and the capital markets during the rest of the year,” its target profit for full-year 2019 remains unchanged at €2.5 billion.
There had been a wide-spread expectation that major re/insurers would be reporting reserve strengthening at the end of the second-quarter, as loss creep continued to be reported with typhoon Jebi, as well as some from hurricane’s Irma and Michael.
Munich Re does seem to have bucked that trend for now, although its warning of uncertainty on major loss development over the rest of the year could suggest its just holding back on something for now.
However, analysts at J.P. Morgan note that full-year guidance now looks conservative after this bumper quarter, suggesting they believe Munich Re could be on track to surprise even more, if major loss activity remained within budget.
In property and casualty reinsurance underwriting alone, the better than expected Q2 result could be equivalent to as much as 10% reduction in the combined ratio, which if that proves to be the case is impressive to say the least.
Of course, it also begs the question of where loss creep from typhoon Jebi and the like have disappeared to, as it’s hard to believe that Munich Re saw the creep that practically everyone else has missed.
Could loss creep have been absorbed by retrocession, or third-party reinsurance capital partners? It’s possible, but it’s as likely that Munich Re has just been conservative enough with its reserving for those creeping events that it has escaped major impacts over the second-quarter.