Reinsurance giant Munich Re reported a decline in its second-quarter profits this morning, as lower reinsurance profitability eclipsed improved performance in its Ergo primary division. However the reinsurer beat analyst expectations and remains on track for its 2017 targets.
Pressures in the reinsurance market continue to be evident in the largest reinsurers, as they report their Q2 and first-half 2017 results.
Munich Re is no different, reporting €733 million of consolidated profit, down from €974 million in Q2 2016. For the first-half profits came in at €1.290 billion, a decline from €1.411 billion for H1 2016.
That beat most analysts expectations though, surpassing the consensus of some by around 13%. A steeper decline in profitability had been expected, however Munich Re has benefited from a lower level of losses than anticipated in the quarter and a better than anticipated combined ratio as a result.
Joachim Wenning, Chairman of Munich Re’s Board of Management, commented on the result; “Both the quarterly result and the half-year result are very pleasing overall. Munich Re is well on track to reach its 2017 profit guidance of €2.0–2.4bn.
“We have the right strategy, and we can concentrate on implementing that strategy by writing profitable new business. Both of our fields of business offer many opportunities in this regard. The bundling of our competencies in reinsurance and primary insurance allows Munich Re to continue driving digital transformation consistently across the entire value chain.”
The technical result at Munich Re has helped significantly, boosted by the lower level of major losses experienced, coming out at EUR 762 million for Q2 2017, beating the EUR 529 million from Q2 2016 easily.
However the investment return was significantly lower, €1.889 billion for Q2 2017, compared to EUR 2.75 billion in the prior year, which had it been repeated (although last year’s was largely due to one-offs) would have seen Munich Re far exceed expectations.
The combined ratio across the reinsurance business of 93.9% was much lower than the 99.8% reported in the prior year quarter, while for the first-half a combined ratio of 95.5% is just slightly up on the prior years 94.3%.
But the reinsurance business is clearly much less profitable, as Munich Re reported that it contributed €629 million to the Group consolidated result for the second quarter, down from €991 million in the prior year.
This despite the lower combined ratio, which implies a generally lower return per unit of premium written than before reflecting soft reinsurance market conditions. The operating result for the reinsurance business was €896 million compared to the prior year €999 million.
Torsten Jeworrek, member of Munich Re’s Board of Management, commented; “We see potential for profitable growth not only in innovative solutions or new digital business models, but also in traditional areas of business. The insurance gap is considerable even in developed markets. So there are also opportunities to write profitable business in the current market environment.”
Life and health reinsurance saw the result dip from last year, leading Munich Re to reduce its profit target for that segment for the full year from €450 million to €400 million.
Again reflecting the softened reinsurance market, the property-casualty reinsurance unit at Munich Re contributed €517 million in the second quarter, down from €778 million in the prior year. This despite a much improved combined ratio for Q2 of 93.9%, significantly better than the prior years 99.8%.
Reserve releases of €240 million or 5.7% of the combined ratio boosted the quarters result.
Losses were far below 2016, with Munich Re reporting just €253 million, down from €542 million, for the quarter. Although for the first-half they remain in-line, at €656 million, slightly up on last year’s €643 million.
Man-made losses were the driver in the quarter, at 4.5% of the loss impact, while natural catastrophe losses accounted for just 1.6%, with the most expensive natural catastrophe of Q2 2017 a severe thunderstorm in the USA at the beginning of May, which Munich Re says it will pay around €25 million for.
Premiums written in reinsurance declined by 2.1%, reflecting the need for Munich Re to remain disciplined in the soft market environment. This ongoing pull-back is most evident in property and casualty reinsurance underwritten premiums, which declined by 8%, while life and health reinsurance actually increased by 6.3%.
This shift will eventually change the business mix at Munich Re and could have the effect of making it gradually a little more resilient when the largest catastrophes occur, as more of its book fits into life and health reinsurance, as well as its Ergo primary business.
Ergo reported a profitable quarter, with a result of €104 million far exceeding expectations and beating last years loss of -€17 million soundly. This turnaround has pleased the analysts and suggests a higher profit contribution from the primary business, which will help to make Munich Re a little less reliant on the reinsurance side going forwards.
Markus Rieß, ERGO’s CEO, commented; “The ERGO Strategy Programme that was launched about a year ago is progressing well. We are on target as regards implementation and increasing our result as envisaged. ERGO remains committed to its target of contributing a sustainable profit of over €600m annually to the consolidated result by the time the Strategy Programme ends in 2021.”
Looking forwards, Munich Re maintains its profit targets for the year, believing that €2 billion to €2.4 billion remains in sight, with better than expected ERGO performance helping to offset the reduced life and health reinsurance target.
Joachim Wenning forecast; “We have the right strategy, and we can concentrate on implementing that strategy by writing profitable new business. Both of our fields of business offer many opportunities in this regard. The bundling of our competencies in reinsurance and primary insurance allows Munich Re to continue driving digital transformation consistently across the entire value chain.”
Full Munich Re results can be accessed here.