Munich Re can manage nat cat and inflation to stretch rate gains and growth into 2023

Munich Re can handle the nat cat risk and adjust for higher-for-longer inflation to stretch rate gains and premium growth into 2023 and keep its forecasts for 2025 very much alive, officials indicated Wednesday (February 23).

“The flight to quality of this renewal phase was beneficial to us and 14.5% [volume growth] means we were well positioned for further business growth,” chief executive officer Joachim Wenning told a press conference following publication of Q4 and FY’21 earnings.

January renewals showed “the upward trend continued with regard to prices” driven by continued increases in claims assumptions, a “flight to quality” that put upward pressure on select rates, increased demand amid tightened alternative capacity, ever-lasting low interest rates and ongoing inflation pressure.

Rate gains could and should continue through the April and July renewal deadlines, with pricing calculus still “heavy on the major losses”. The pricing move “could become even more apparent as various capacities are in short supply,” Wenning said.

“If you look to a strong 1.4 and a strong 1.7 … I have this little tiny hope that in 2023 we are going to have a relatively positive market environment for Munich Re.”

Munich Re claims a 0.7% rate increase at the January renewals after adjusting for risk levels and business mix. That is down from 2.3% gain at the 2021 renewals and 1.8% the year prior.

Volumes at the January renewals rose 14.5% following what Munich Re considers “strong but select growth” alongside “targeted exposure limitations and risk mitigating features” now in contracts. Mark structured quota-share business up in the portfolio structure, the nat cat share flat.

“The flight to quality of this renewal phase was beneficial to us and 14.5% [volume growth] means we were well positioned for further business growth,” Wenning said.

Cyber was key amongst rate drivers, if not volume. Premium growth comes from rates, but “hardly” from any expansion of business, Wenning said. The segment offers “pleasing levels of profitability despite dynamic risk landscape,” management said in its earnings presentation. The view to cumulative risks is updated nearly 24/7 internally, management insists.

The rough and ready Wenning gameplan:  reach for organic growth opportunities, take benefit from the cycle, maintain leadership in cyber where new solutions are being put on the table and take increasing benefit from investments in digital solutions to hit the 2025 goals, Wenning told reporters.

Some of those 2025 goals are in the bag:  Reinsurance operations hit the upper end of the 2025 profitability range already in 2021 with a 13.5% ROE final tally.

Bumps on the road focus on volatility and inflation, but Munich Re claims to have an effective response in place. Economic inflation has been focused on insurer-sensitive elements and social inflation “is definitely not over yet” despite the lull in some headline figures in the US.

Inflation is feeding into pricing for new P&C business, has resulted in heavy reserve creation in 2020-21 for the existing P&C portfolio and is driving more inflation hedges into the investment book, officials claim.

“So there isn’t any reason for major concern,” Wenning said.

Munich Re has hiked its estimate of major losses from 12 to 13% of premium, but waves off the significance of the move and stands by its to-date models and its to-date business profile.

“Insurance of nat cat is not only the core of our business model, it will also be a profitable business venture in the long run,” chief financial officer Christoph Jurecka (pictured) said.

Munich Re’s threshold for major loss has held firm at €10 million since 2006 despite 15 years of inflation and the rise in Munich Re market share. And the shift in the public estimate from 12 to 13% is really just a question of whole round numbers: the internal thinking is smaller, CFO Jurecka claimed.

But volatility will be addressed with changes to the business mix:  Core P&C reinsurance “will be reduced over time,” the presentation notes, while the risk solutions segment, life & health reinsurance and the Ergo primary carrier business will all rise in the earnings structure.

Munich Re’s 2025 targets include sustainable ROE  at 12 to 14%, a roughly 95% combined ration in P&C and approximately 5% growth in gross written premium.

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