Global reinsurance player Munich Re has been reported to be on the verge of offloading some of its primary life insurance units that are in run-off, with a legacy disposal or reinsurance to close transaction the most likely outcome.
It’s been reported in the German media and by Reuters that the two run-off life units, Ergo Leben and Victoria Leben, are being touted to run-off specialists.
Analysts at J.P. Morgan Cazenove called the move “significant” explaining that these two units contribute very little in the way of net profit, but are a significant drag on capital, accounting for as much as 33% of the group’s required capital base.
“Almost any positive value for the deal would significantly boost Munich’s group Solvency 2 ratio and we believe there is no significant impact to earnings as these life units do not currently contribute significant profit to the group,” the analysts explained.
Offloading the two life run-off portfolios could help Munich Re shift from a required capital level of EUR 15.3 billion, down to a much lower EUR 9.1 billion, the analysts explained, a significant reduction in capital drag.
The resulting increase in solvency capital ratio would be significant, leading the analysts to call the reported disposal “potentially a very significant development for the group.”
At a time when the reinsurance market faces pressure due to low pricing, plus the burden of growing 2017 catastrophe losses, making a significant move to enhance capital efficiency could be seen as very positive for Munich Re.
Reuters reported that an Ergo spokesperson said the two in run-off life insurance units, Victoria Leben and Ergo Leben, were subject to a pre-sale process where Munich Re is garnering interest in the units from the market.
The run-off life insurance portfolio at Ergo features policies of 6 million customers and totals assets of EUR 56 billion, it has been reported.
With interest rates low, servicing these policies can get more costly which could lead Munich Re to deem their disposal a more effective use of its resources and a benefit due to the solvency reasons explained above.