Reinsurance News

Analysts expect Munich Re to raise Ukraine/Russia reserves in future quarters

11th May 2022 - Author: Luke Gallin

Global reinsurer Munich Re’s Q1 2022 loss provisions for the ongoing war in Ukraine were lower than its peers and will rise further in the second-quarter of the year, according to analysts at CFRA Research.

Munich Re logo on a signWithin yesterday’s results, Munich Re, one of Europe’s major reinsurance companies, revealed a positive result of €608 million despite its financials being “severely impacted” by the war between Russia and Ukraine.

Across its underwriting, the firm posted expenditure related to the war of more than €100 million in some specialty lines. On the asset side the impact was more severe, with gross write-downs of almost €700 million (net write-downs of €370m) on Russian and Ukrainian bonds, which pushed the investment result down to €987 million.

According to Jun Zhang Tan, equity analyst at CFRA Research, Munich Re’s “loss provisions for Ukraine/Russia were lower than its peers and we expect the amount to increase in Q2 2022.”

With the war ongoing, there’s widespread uncertainty around the potential ultimate loss for the re/insurance industry, especially with areas like aviation and the fate of stranded planes. So, it’s certainly plausible that additional reserves will be booked by carriers as the situation develops.

When compared with the other major European reinsurers, Munich Re’s Q1 2022 provision for the conflict between Ukraine and Russia is lower than both Swiss Re’s and Hannover Re’s, but slightly above SCOR’s.

Starting with the highest total, Swiss Re reserved USD 283 million (approx. €268m) for the war in the first-quarter, which includes a provision for potential aviation losses.

Germany’s Hannover Re said that it had established an additional general provision in the low triple-digit million euro range, explaining that this is roughly 3% of net premium earned, so close to the €150 million mark.

French reinsurer SCOR actually reported the lowest Ukraine/Russia reserve of the quarter, at €85 million.

Both SCOR and Swiss Re fell to a net loss in the opening quarter of the year, and while this wasn’t solely down to the situation in Eastern Europe, it added to an active period for catastrophe activity and further COVID-19 impacts on the life side.

Hannover Re did still turn a profit in Q1 2022 despite major losses exceeding budget, but income of €264 million is down 14% year-on-year.

In this context, Munich Re’s slightly improved profit of €608 million seems impressive. Although, analysts at CFRA Research suggest this could be down to a lower loss provision related to the war when compared to its peers.

All in all, Munich Re’s net income increased by 3% in Q1 2022 against the prior year period, beating consensus estimates by 4%.

“The beat was driven mainly by lower major losses,” says Jun Zhang Tan. “However, we believe that the lower major losses were probably due to seasonality and the normalized COR of 94.8% was quite in line with its full-year target of 94%.”

In light of an expectation of additional reserves for the war in Q2, CFRA has maintained its hold opinion on shares of Munich Re, but has cut the 12-month price target by €12 to €245 per share, which implies a 1.1x 2022 consensus P/B with a 12% return on equity (ROE). Analysts note that this is in line with the company’s five-year mean and peers’ at 1x with 11% ROE.

“We adjust our 2022 EPS to EUR22 (from EUR24.40) to reflect the impact of the conflict, but keep 2023 forecasts unchanged,” say analysts.

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