Reinsurance prices to hold up better at mid-year renewals: Munich Re

The world’s largest reinsurance firm Munich Re said reinsurance pricing was a factor when it reported lower first quarter results this morning, however the reinsurer said it expects pricing to hold up better at the upcoming mid-year reinsurance renewals.

Munich Re has now reported its first quarter 2014 results, reporting a quarterly profit of €924m, down 5% from the €970m recorded a year earlier with lower reinsurance pricing a factor.

Overall the results from Munich Re are unlikely to concern analysts or shareholders as they remain on target for their full year results and there is also evidence of continued diversification and expansion within them. A contributing factor to the drop was exchange rate factors, which impacted premium growth during the quarter.

CFO Jörg Schneider commented; “Our operating earnings are robust. In addition, we were largely spared major losses. Despite negative currency effects, we almost matched the outstanding result of the first quarter last year. After this good start, we are optimistic of achieving our profit target of €3bn for the year.”

The reinsurance segment reported a result of €750m, down approximately 10% from €828m in the first quarter of 2013. Gross reinsurance premiums written at Munich Re were also down slightly, by 1.6%, to €6.9 billion for the quarter. However, had the Euro exchange rate remained the same reinsurance premium volume would have increased by 4.5%, said the reinsurer.

Interestingly, life reinsurance premiums fell by 3.6% during the quarter while non-life reinsurance premiums only fell by 0.4%. Premium volume benefited particularly from the conclusion of new large-volume reinsurance treaties and increased shares in existing ones in Australian and Chinese motor business, which helped Munich Re to record attractive organic growth for the quarter.

Torsten Jeworrek, Munich Re’s Reinsurance CEO, said; “Thanks to our solution competence and client proximity, such customised, large-volume transactions have become a regular part of our business.”

Pricing has also been a factor and Munich Re was not immune from price reductions at the April reinsurance renewals. Jeworrek said; “Despite the price erosion, the profitability of our portfolio remained at a good level, above our return expectation.”

Munich Re is confident that pricing remains attractive enough for it to continue to underwrite catastrophe reinsurance business. With the mid-year renewals approaching, the reinsurer said that it does not expect the competition to let up but does not expect pricing falls as steep as seen at recent renewals.

The reinsurer said of the mid-year renewals; “Munich Re expects the environment to remain competitive, if the market is not affected by major loss events. But as these renewals were already affected by pressure on prices last year, Munich Re expects the price erosion for natural catastrophe covers to be less than in the renewals at 1 April 2014.”

That’s interesting as other reinsurers and analysts have been forecasting reinsurance rate declines at the mid-year renewals of 10% to as much as 25%, particularly on property catastrophe lines, but Munich Re does not expect this as prices had already fallen at this renewal a year earlier.

During the reinsurers media call this morning Jeworrek reiterated that alternative capital from investors such as pension funds remains a highly competitive force in the reinsurance market. However Munich Re’s strategy of diversifying and growing its large single-risk or tailored cover business is helping the firm to maintain profits. Jeworrek said that the firm is also ready to give up premiums where they do not meet the firms technical profitability targets.

Jeworrek commented; “Munich Re is maintaining its clear, profit-oriented underwriting policy. With customised solutions and a rising number of private placements, we can limit the impact of the negative market trend on our own portfolio.”

Jeworrek said that prices declined more in April than Munich Re had expected on non-proportional reinsurance business in Asia and Japan, although its proportional business was in line with expectations. Munich Re saw a reinsurance price decline of -8.4% across its book, but with some programs down as much as -17% or -18%. However the programs which dropped the most steeply were coming from a good pricing levels, so still remained acceptable.

Jeworrek also said that the current softening market is comparable to the one seen around 15 years ago. He doesn’t expect it to worsen at this time, but said there is no sign of capacity leaving the market and he sees no reason for it to.

Looking ahead to July, Jeworrek said that the environment has not changed and even a major catastrophe event may not be enough to make capacity leave the market at this time. He reiterated that mid-year reinsurance price declines are not expected to be as steep as April as we are now into the realm of year-on-year reductions.

Jeworrek said that capacity will remain abundant at the mid-year renewals, but price attrition will be lower and that pricing on U.S. property catastrophe reinsurance has already reached the technical level below where it cannot afford to fall much further, in his opinion. So while price declines are expected, Munich Re does not expect a repeat of January or April at the June/July reinsurance renewals.

Jeworrek acknowledged that the majority of pension funds, hedge funds and institutional investors entering the reinsurance market are responsible and understand the risks they are assuming. However he said there are some ILS investors in the market who are less knowledgeable and who may disappear with their capital after the industry faces major catastrophe losses.

Munich Re also said that it has reached the threshold point where it is able to remain profitable, which suggests that any steeper decline in pricing than expected at the mid-year reinsurance renewals could see quarterly results eroded going forwards. However, price pressure alone is probably not enough to make Munich Re miss its targets, it could take a few large losses, investment result issues or inflation issues as well to make that happen.

Given the globally diverse nature of Munich Re’s reinsurance book it is perhaps no surprise that it suffered from the price declines in April. Also, given the fact it has been actively adjusting its book in recent quarters, perhaps reducing its exposure to U.S. property catastrophe price declines, perhaps its forecast of lower price declines for its book at the mid-years may be accurate.

Also read our article from yesterday: Large, globally diverse, reinsurers continue to avoid the worst.