Reinsurance giant Munich Re has lifted its guidance for 2018 slightly over the prior year, as it anticipates higher profits on the back of improved pricing conditions, along with continued progress from its primary arm ERGO over the coming year.
Munich Re forecasts profits of between €2.1 billion and €2.5 billion for 2018, up from the €2 billion to €2.4 billion it had targeted for 2017.
Of course the profit target was missed last year due to the impacts of major catastrophe loss events around the world, but Munich Re still managed to report an operating result of €1.241 billion and profit of €392 million for the full-year.
Joachim Wenning, Chairman of the Board of Management, commented on the reinsurers annual results this morning, “Munich Re is again poised for growth. Our target for 2018 is slightly higher than the profit guidance for the previous year. ERGO is making steady progress with the Strategy Programme, and our growth initiatives in reinsurance are benefiting from tailwinds as prices rise. We are investing heavily in digitalisation and are cutting costs to prepare for digital transformation and make Munich Re fit for the future.”
The profit guidance for 2018 is subject to major loss experience, of course, but it will also be subject to the ability of the reinsurer to secure the rates it needs at the mid-year renewals to produce a higher underwriting return, particularly in its P&C reinsurance business.
In fact, the property and casualty reinsurance business is actually anticipated to only just turn an underwriting profit, with a combined ratio of 99% forecasted for this segment of Munich Re.
As the core profit driver, P&C reinsurance appears to be struggling to break-even, on an underwriting profit basis, leaving investments to take up the slack and relying on increasing releases of reserves to boost profitability.
Forecasting a 99% combined ratio, based on a normal level of losses, does not leave much room for loss experience before the core underwriting turns unprofitable in 2018, something to watch as the year progresses.
In its life and health reinsurance business, Munich Re forecasts a technical result of at least €475 million in the year ahead.
For primary arm ERGO, Munich Re forecasts a consolidated result of €250 million to €300 million, with a combined ratio in the ERGO Property-casualty Germany segment of around 96% and in the ERGO International segment a combined ratio of around 97%, as long as losses remain within expected bounds.
Investments may help, to a degree, in the year ahead with Munich Re expecting interest rates to increase slightly in 2018, especially in the United States where much of its reinsurance business is transacted.
As a result, Munich Re expects that its reinsurance business will see an end to the falling running yield in 2018, but also notes that increasing interest rates would reduce valuation reserves and generally lead to lower gains on disposals as well.
Munich Re forecasts an investment result of slightly more than €7 billion, which represents a return on investments of about 3%.
For the 2018 financial year, Munich Re forecasts gross underwritten premiums of between €46 billion and €49 billion across the group.
This is expected to be made up of €29 billion €31 billion of gross premiums for the reinsurance division and €17 billion to €18 billion for the primary underwriting arm ERGO. Total premium income for ERGO is expected to amount to €18 billion to €19 billion in 2018.
Munich Re remains strongly capitalised, although equity capital did decline slightly in 2017 on the back of the major catastrophes, declining by €3.6 billion to €28.2 billion.
But still the reinsurer is returning capital to shareholders and today announced a new €1 billion share buyback for the coming year.
The company feels it is positioned for further growth beyond 2018 and forecasts improving combined ratios for the ERGO business, as well as increasing profits for the reinsurance business through to 2020.
CFO Jörg Schneider commented, “Munich Re’s capitalisation continues to be very strong. We have a high solvency ratio and low debt leverage. This gives us the financial strength we need to pursue profitable growth.”
It’s unusual for Munich Re to forecast ahead, it tends to just forecast profits on a year-to-year basis, but this time around the company has so many growth and efficiency initiatives on the go that it feels it can forecast profit targets further out.
Munich Re is forecasting that its profits in 2020 will be €2.8 billion, with €500 million coming from the ERGO business and €2.3 billion coming from reinsurance.
Both of these targets reflect €250 million of profit growth coming out of each side of the business, primary insurance and reinsurance.
Assisting here is the expectation that rates are going to be better in reinsurance markets through the coming year and perhaps beyond. Munich Re seems keen to continue to hold up pricing where it can beyond 2018, although this will be difficult without further major catastrophe events.
Torsten Jeworrek, member of Munich Re’s Board of Management and responsible for reinsurance, commented, “Reinsurance prices increased at the January renewals, particularly in the markets affected by natural catastrophes. We expect this trend to continue in the renewal rounds yet to come.”
Munich Re also targets growth initiatives and cost savings in the reinsurance business over the years to 2020, as well as improving earnings in property and casualty reinsurance as it hopes the combined ratio comes down.
“We want to grow profitability in reinsurance with our own initiatives. We will be resolute in seizing opportunities for profitable business. In some selected markets, we will increase our willingness to take on risk without compromising our underwriting principles. At the same time, we will vigorously pursue new markets in uninsured or under-insured risks. One good example of this is the partnership we struck with the World Bank and the World Health Organization last year to cover pandemic risk in developing countries,” explained Chairman of the Board of Management, Wenning.
For ERGO, Munich Re hopes for better profits and growth as well, investing heavily to position ERGO as a leading insurer and embracing cost saving initiatives as well.
Markus Rieß, Chairman of the ERGO Board of Management, said, “ERGO is well on its way to becoming fit, digital and successful. The Strategy Programme is steering the right course, and progressing at the right speed. It makes me feel confident about the challenges lying ahead.”
Wenning added and looked even further ahead, “We still have a lot of hard work to do until the Strategy Programme is successfully completed. Our aim is still for ERGO to contribute at least €600m to the consolidated result for the year as from 2021, and lay the strategic foundations for a successful future.”
Munich Re is laying the foundations for continued growth, but with its 42,000 employees around the world the reinsurer is likely to also find cost efficiency a key driver for future profits and hence the embrace of digital transformation at the reinsurer as well.
The forecasts through 2020 will please shareholders and analysts alike. The question will be how the company performs in an environment where pricing of risk remains relatively flat over the coming years and whether it can stay ahead of the constant changes in risk transfer and re/insurance.