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Munich Re’s Q1 profit falls as COVID-19 losses reach €800mn

7th May 2020 - Author: Luke Gallin

Reinsurance giant Munich Re has reported COVID-19 related losses of roughly €800 million in the first-quarter of the year, leading to a 65% year-on-year decline in net profit to €221 million.

Munich ReAt the same time, Munich Re’s operating profit declined from the €771 million recorded in Q1 2019 to €397 million in Q1 2020, while the other non-operating result amounted to -€11 million.

The steep decline in net profit for the period reflects declines in both the reinsurer’s Life and Health (L&H) and Property-Casualty (P&C) reinsurance businesses, underpinned by a significant level of major losses over €10 million each.

Overall, Munich Re’s reinsurance operation contributed €149 million to the consolidated result in the first-quarter of the year, compared with €548 million a year earlier. At €298 million, the operating result declined from the €633 million posted a year earlier, while gross written premiums (GWP) jumped to €9.3 billion.

By segment, and P&C reinsurance contributed €141 million to the overall result in Q1 2020, which is down significantly from the €367 million reported in Q1 2019. Premium volume did increase to €6.2 billion, but the unit’s combined ratio deteriorated 97.3% to 106% of net earned premiums, thus ending the quarter in unprofitable territory.

Munich Re’s first-quarter 2020 result includes €1.181 billion of major losses of more than €10 million each, which is a huge jump from the €479 million the reinsurer reported last year. These figures include gains and losses from the settlement of major losses from prior years, and, at 21.1% of net earned premiums, was far above the long-term expected value of 12%.

The reinsurance giant highlights that the majority of its large loss burden relates to man-made major losses, which totalled a considerable €973 million in the period, and which is mostly attributable to losses stemming from the cancellation or postponement of major events as a result of the COVID-19 pandemic.

The unprecedented impact of the ongoing pandemic has resulted in the postponement of the Tokyo Olympic games until 2021, and Munich Re warned previously that it has some exposure to this event.

Major losses from natural catastrophes also increased year-on-year for Munich Re, reaching €208 million in Q1 2020 against €195 million in Q1 2019.

In addition, the reinsurer notes that loss reserves of approximately €224 million were released during the quarter for basic claims from prior years, which translates to 4% of net earned premiums.

Turning to the company’s L&H reinsurance business, and Munich Re has reported that this segment produced a profit of just €8 million in Q1 2020, down from the €180 million in Q1 2019. At €3.1 billion, gross written premiums within this segment increased from the €2.9 billion recorded in the prior year quarter.

Munich Re attributes the lower result to negative developments in North America that it says are “altogether unrelated to the coronavirus pandemic.” Adding that the lower result was actually driven by higher-than-anticipated mortality in the U.S., which it says is a catch-up effort owing to delays in claims reporting, and premium refunds.

Despite the L&H unit producing a poor result in Q1, Munich Re says that it is confident it will achieve its annual target of a technical result of €550 million.

“The impact of the coronavirus pandemic on lives and economies is on our minds every day. We express our sympathy for the victims and their families. Munich Re is doing everything it can to protect the health of its clients, staff members and their families.

“The high losses due to COVID-19 are financially manageable for Munich Re. Thanks to our strong balance sheet and our prudent risk management, we remain a reliable partner to our clients – even in these challenging times,” said Christoph Jurecka, Chief Financial Officer (CFO).

Discussing the April reinsurance renewals and the company’s experience, Munich Re says that it was able to increase written business volume by almost 26% to €2.1 billion, as the company took advantage of growth opportunities in Asia. However, the reinsurer also decided to selectively discontinue business including third-party liability in the US, which failed to meet risk/return expectations.

The reinsurer notes divergent pricing trends at the renewals dependent on line of business and geography, but says that all in all, prices for the Munich Re portfolio increased by 3%.

“Munich Re anticipates that the market environment will improve year on year in the next renewal round in July, as was the case with previous renewals in the current year,” explains the firm.

Turning to the reinsurer’s Ergo unit, and quarterly profit here reached €72 million, which is down on the €85 million recorded a year earlier. The operating result fell from €138 million to €99 million in Q1 2020. The unit’s combined ratios improved year-on-year and are at very pleasing levels, says the reinsurer.

Despite the volatility of financial markets, Munich Re’s investments performed well in the quarter, with the investment result increasing to €1.92 billion. While its investments performed well in the quarter, the impact of COVID-19 on financial and equity markets did result in equity declining slightly from the end of the year, to €29.1 billion.

At the end of March, Munich Re announced that it had decided to withdraw its 2020 profit guidance amid the uncertainty and disruption being caused by the current crisis. In its Q1 announcement, the reinsurer says that it will not specify a new target at this time, and notes that it has also withdrawn its profit guidance for its reinsurance business and also the combined ratio for P&C reinsurance.

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