J.P. Morgan has maintained that reinsurance giant Munich Re will beat its conservative full-year 2017 net profit target and also increased its full-year 2018 and 2019 profit estimates for the reinsurer, driven by an expectation of continued cyber growth.
The German domiciled reinsurer announced in March a 2017 profit guidance of between €2 billion (US$2.18bn) to €2.4 billion (US$2.62bn), confirming after its first-quarter 2017 results announcement that it’s still on track to meet this target.
J.P. Morgan had said previously that it felt the profit guidance from Munich Re is conservative, and has again said that it expects the firm to beat its estimate and report a 2017 profit of €2.5 billion (US$2.82bn).
At the same time, J.P. Morgan has increased its full-year 2018 profit guidance estimate for Munich Re from €2.5 billion to €2.55 billion (US$2.88bn), and also increased its full-year 2019 estimate from €2.5 billion to €2.6 billion (US$2.93bn), in response to expected cyber market expansion.
“The reason we are confident that Munich’s earnings will be above the target range for FY17 is the group’s very disciplined underwriting, resisting price cuts as much as as possible.
“We raise our forecasts only to reflect increased cyber estimates, with an extra €50m net profit for FY18e and €100m for FY19e,” says J.P. Morgan.
Analysts at J.P. Morgan note that reinsurer Munich Re had $263 million of premiums in cyber in 2016, a figure it predicts to grow by 40% a year, reaching $700 million by the end of 2019.
New cyber regulation scheduled to be implemented across Europe in 2018, The General Data Protection Regulation, is one of the reasons analysts expect Munich Re to expand in the cyber marketplace.
“We estimate an underwriting margin of 35% as the business has relatively low claims, and although costs are high the overall margin is relatively high,” explains J.P. Morgan.
Furthermore, analysts explain that Munich Re’s expected cyber growth, which will drive overall profit increases at the reinsurer, will also be driven by relatively high margins, strong premium growth, and strong rise in profit contribution.
“We estimate FY16 cyber provided €73m net profit, and that this will rise to €174m FY19e, adding €100m to our 2019e net profit forecast for the group,” says J.P. Morgan.
Cyber is viewed as both a huge opportunity and challenge for the insurance and reinsurance industry, with the market predicted to grow at a rapid pace as firms continue to develop adequate and effective solutions to address the constantly evolving cyber risk landscape.