Global reinsurance giant Munich Re has delivered relatively conservative profit guidance for 2017, targeting a range of EUR 2 billion to EUR 2.4 billion, as it sets itself up to navigate expected challenges and softness in the market.
The mid-point of the firms 2017 profit target is below the consensus expectation of industry analysts, but as Kamran Hossain of RBC Capital Markets says; “Munich Re has a strong track record of under promising and over delivering, and we see the 2017E guidance as being no different.”
Munich Re’s guidance has become more conservative in recent years, as the reinsurer adjusted its business model to better navigate the challenging and softened reinsurance market environment. The guidance for 2017 is down on the EUR 2.6 billion of profit the reinsurer announced for 2016.
But it remains strongly capitalised, in fact it has an excess of capital that it cannot always profitably deploy given current market pricing and margins, leading it to return capital to its investors.
Chairman of the Board of Management, Nikolaus von Bomhard, explained; “With a profit of €2.6bn for 2016, we have clearly met our most recent forecast of ‘well over €2.3bn’. On the basis of this result, we are able to propose that this year’s Annual General Meeting raise the dividend to €8.60. Our dividend policy thus remains shareholder-friendly.”
Those returns are set to continue, with the announcement this morning of another EUR 1 billion share buyback programme, with shares set to be re-purchased by April 2018.
Through continued conservative forecasts, which it tends to achieve, while returning capital to its shareholders, Munich Re is well-positioned to continue to adjust its business model to cope with reinsurance market pressures.
von Bomhard said that the rest of 2017; “Is set to be a challenging environment.”
“Digitalisation is changing client demand, allows for the development of innovative business models, and requires us to set up partnerships that would previously not have been considered,” von Bomhard continued, “More than ever, Munich Re is a company embracing change – as demonstrated by our innovation schemes, the ERGO Strategy Programme, and the recent decision to adopt a new set-up in the global health markets.”
Munich Re is more than a reinsurer of course, providing its capacity at all levels in the risk to capital value chain, from primary along. But reinsurance remains its core and historically has been the cash-cow for all the major firms, hence it remains an important component of its business.
Torsten Jeworrek, member of Munich Re’s Board of Management in charge of the reinsurance division, commented; “Competition in reinsurance remains intense. Prices softened further in various markets during the January renewals, though to a much lesser extent than in the previous year. Munich Re was able to hold its own by means of skilful cycle management.”
Navigating the market is increasingly key and Munich Re continues to use cycle management to adjust its portfolio to meet its appetite, based on the market’s offerings at the time.
Jeworrek explained why this is important; “It withdrew from business that no longer met profit expectations, but was able to expand on or write new profitable business. Overall, Munich Re was mostly able to retain the profitability of its renewed portfolio, and price erosion was only 0.5%.”
Going forwards we can expect the reinsurance giants to become increasingly focused on two things, differentiation and getting paid for the depth of their expertise. That means more tailored solutions business, where it is hard for smaller players and the capital markets to compete as strongly.
“Customised, individual solutions and innovative business ideas allow Munich Re to successfully set itself apart from the competition,” Jeworrek said.
Primary insurance is also increasingly key, with the ERGO unit being coaxed back into profitability by Munich Re and set to provide an increasing contribution. Of course by writing primary risk reinsurers can access premiums closer to the source, increasing margin and making their capacity more efficient. The recovery at ERGO is going well, so far.
Markus Rieß, ERGO’s CEO, explained; “For our company, 2016 was dominated by the ERGO Strategy Programme. We have made good progress in bringing ERGO back on track. As from 2021, ERGO will contribute around €600m to the consolidated result of Munich Re.”
Stable and conservative investments are also a key component of the reinsurance business model and Munich Re has worked hard in recent years to broaden its asset class exposure, while not taking on undue levels of risk.
That appears to be working, with the investment result a reasonable contribution to its results despite market forces and low rates.
Chief Financial Officer, Jörg Schneider, explained; “An investment return of 3.2% – the result of our balanced, prudent and long-term investment strategy – is most satisfactory in the current interest-rate environment.”
Munich Re’s target for 2017, while conservative and achievable, is of course subject to loss experience and other factors. Interestingly the reinsurer raises other issues that could impact its profitability in 2017, citing “severe currency or capital market developments, significant changes in tax parameters, or other exceptional factors,” possibly a response to the less certain political climate.
In reinsurance the a consolidated result of EUR 1.8 billion to EUR 2.2 billion is expected, while life and health reinsurance should contribute another EUR 450 million.
Interestingly, the company is targeting a relatively high combined ratio of 97%, saying that a low level of major losses to the end of February result in that target figure for P&C reinsurance.
That doesn’t leave a great deal of room to maneuver should catastrophe losses ramp up or a major loss event occur in 2017.
The primary business, ERGO, is expected to contribute around EUR 150 million to EUR 200 million, with a 99% combined ratio in Germany and 98% internationally. Again, not much wiggle room.
Overall the results, which you can read in full here, and the forecasts are conservative, but Munich Re is right to be so, as the reinsurance market is expected to continue to be challenging, characterised by high levels of competition and ongoing softness in rates.
By setting itself up for a continued evolution of the business model as well, as it focuses heavily on insurtech and digitalisation, Munich Re is hoping to unlock new revenue streams that come with consumer loyalty, while making its own capacity more efficient.
