Financial services company Jefferies has reviewed German-based, global insurance and reinsurance group Munich Re’s prospects against a backdrop of weakening reinsurance prices.
Jefferies has maintained its Hold recommendation on Munich Re but cut its price target from €600 to €550. The company said the revised valuation reflects a higher level of execution risk as underwriting conditions deteriorate. Its assumed cost of equity has increased from 11.8% to 13%.
Munich Re’s share price stood at €512.60 when the report was published, leaving the new target 7% above that level. Jefferies values the company at 10.3 times its forecast 2027 earnings.
The central issue identified by Jefferies is the direction of the global reinsurance market. Pricing has begun to move away from the unusually strong conditions seen during the hard market. Jefferies said reinsurance management teams had spent much of the past 18 months arguing that prices were softening rather than entering a fully soft market.
Analysts now consider the pace of deterioration to be more pronounced than industry management commentary had suggested. Jefferies expects pricing pressure to increase at the January 2027 renewals and forecasts a further acceleration in the decline during 2027. It expects the rate of deterioration to begin easing in 2028, with pressure subsequently shifting towards policy terms and conditions. Jefferies expects pricing and terms to reach a floor in 2030.
Despite this market backdrop, Jefferies does not expect Munich Re’s earnings performance to deteriorate to the same extent as industry pricing. The firm points to reserves accumulated during the stronger part of the cycle as one source of support. It expects Munich Re to release these reserves over time, while managing the pace of releases in an effort to moderate fluctuations in reported earnings.
Jefferies cautioned that reserve releases are a less sustainable source of earnings than underlying underwriting performance. However, analysts believe they could help smooth Munich Re’s results as market conditions become less favourable.
Diversification is another factor highlighted by Jefferies, noting that Munich Re has a broad mix of businesses across insurance and reinsurance, with ERGO now providing a more dependable source of cash generation than during the previous soft market. Jefferies considers this diversification relevant to Munich Re’s ability to pursue its longer-term financial objectives.
The valuation picture remains dependent on how investors assess the company’s strategic targets. Jefferies noted that a valuation of about 10 times earnings could be viewed in the context of Munich Re’s capital returns and its target of more than 8% annual earnings per share growth through to 2030.
