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Munich Re beats target for year, but misses consensus, combined ratio in Q4

7th February 2017 - Author: Steve Evans

Global reinsurance giant Munich Re has achieved its full-year 2016 profit target, reporting a EUR 2.6 billion result, compared to its guidance of above EUR 2.3 billion, but for the fourth-quarter major catastrophe losses hit the firm and it missed target and the P&C reinsurance combined ratio was 101.9%.

In the fourth quarter Munich Re reports profit of EUR 0.5 billion, which is down slightly on EUR 0.7 billion from Q4 2015. But this year’s figure missed analysts consensus, which was for around EUR 0.6 billion of profit from the quarter.

CFO Jörg Schneider said: “We are satisfied with the result for 2016. Thanks to our strong market position, client proximity and successful investment management, we were largely able to counter the effects of low interest rates and intense competition in the reinsurance markets.”

Major losses hit the reinsurance firm in 2016, with €232 million for Hurricane Matthew and €251 million for an earthquake in New Zealand among the most notable in Q4. However, despite catastrophe losses being well up on the prior year, Munich Re said they are still lower than it had anticipated.

The profit is enough for the reinsurer to increase its dividend for the year, Jörg Schneider said; “Munich Re is sticking to its shareholder-friendly and sustainable dividend policy. We are sure that we will be able to maintain this level of dividend and continue the trend of raising it in future.”

For 2016 the reinsurers operating result was EUR 4 billion, down from EUR 4.8 billion a year earlier, with Q4’s EUR 0.8 billion well down on the EUR 1.4 billion from a year earlier.

Key indicators return on risk-adjusted capital (RORAC) was 10.9% (down from 11.5%), whilst the return on equity (RoE) was 8.1% (down from 10.0%). For Q4 Munich Re saw an annualised RORAC of 8.2% (down from 10.8%) and an RoE of 6.1% (down from 9.6%).

Gross written premiums were also down, with the company seeing a reduction due to the sale of ERGO Italia. Premiums came in at EUR 48.9 billion, down from EUR 50.4 billion.

The reinsurer achieved an investment return of 3.2% for the year, which it termed “relatively high.”

Reinsurance is where the real issues appear, with an operating profit dropping to EUR 2.8 billion, down by EUR 1.3 billion on the prior year. Gross premiums for the year were down by just EUR 400 million, so not significant but showing continued cycle management.

Property and casualty reinsurance saw a result of EUR 2 billion, down from EUR 2.9 billion in 2015. For the fuill year the combined ratio came in at 95.7%, up from 89.7%, but for Q4 it was 101.9% as the impact of severe catastrophe losses hit the reinsurance firm.

Without reserve releases the result in P&C reinsurance would have been considerably worse, with EUR 1.1 billion released for the year (5.5% of combined ratio points) and EUR 400 million for Q4.

However the reinsurer continues to reserve prudently, saying it has been able to raise loss reserves again in 2016 which will help it in future years and shows the importance of reserve releases in the currently challenging reinsurance marketplace.

Major losses for the year amounted to €1.5bn (1.0bn), of which €0.6bn (0.2bn) was from Q4. Natural catastrophe losses hit €0.9bn (0.1bn) for the full year, while Q4 saw €0.5bn (0.0bn). Fort McMurray wildfires were the biggest loss of the year at EUR 404 million.

Torsten Jeworrek, member of the Board of Management of Munich Re, commented on the company’s January reinsurance renewal results; “Market conditions for the renewals were once again challenging, even though the trend towards price reductions had continued to slow. So skilful cycle management is still extremely important, and Munich Re was once again able to react with flexibility in relation to changes. We withdrew from business that no longer met profit expectations – for instance, in China – and built up or expanded profitable business, either through new acquisitions or by strengthening existing client relationships.”

So Munich Re saw ongoing price pressure on reinsurance at January 1st and the company said it does not expect a significant change in pricing direction. However the price erosion seen at 1/1 was at a slower rate, around half, of the prior year which could be seen as encouraging.

Given the challenges that major reinsurance firms face, the results are not unsurprising. The miss on consensus in Q4 and the higher combined ratio just shows that large reinsurers are exposed broadly to events that occur and it is no surprise to see Munich Re take its share of losses.

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