New Munich Re CEO sees profits lingering for a while

Munich Re posted a consolidated profit of €733 million for the second quarter of 2017 compared with €974 million in the same period a year earlier.

In property/casualty (P&C) reinsurance, Munich Re continues to shed business as rates remain under pressure.

“We are reacting to the global price pressure in P&C, particularly in the non-proportional segment, and we are prepared to shed (more) business,” said Torsten Jeworrek, board member responsible for reinsurance, during the reinsurer’s Aug. 9 second quarter media presentation.

Gross premiums written in P&C in the second quarter were down 8 percent year on year at €4.22 billion in the second quarter. While the reinsurer discards less profitable business, the combined ratio in the segment improved to 93.9 percent from 99.8 percent in the same period a year ago.

Nevertheless, net results in P&C reinsurance were down 33.5 percent year on year at €517 million. The results were impact by negative foreign exchange rates but also investment results fell to €487 million from €754 million in the second quarter of 2016.

Another contributing factor was an “elevated” expense ratio of 33.5 percent in the second quarter, according to the presentation.

“These costs are essentially provisions,” Jeworrek explained. These are a bit higher in a soft market than in a hard market, he noted.

In life and health reinsurance, net profit fell 47.7 percent year on year to €112 million in the second quarter.

The results were impacted by a cancellation of a large single contract in the US by around €60 million, Jeworrek explained. Due to negative development expectations, this cancellation will, however, benefit the results over the next 10 to 30 years, he added.

But Munich Re will continue to speak with clients over further cancellations of life reinsurance contracts in the second half, which is likely to significantly impact earnings, CFO Jörg Schneider warned.

Munich Re has reduced its full year technical results expectation for the life and health reinsurance business to around €400 million from previously €450 million.

In addition to the challenges in the reinsurance business, Munich Re is facing headwinds from the current low interest rate environment in its investment portfolio. Investment results were down 28.8 percent year on year in the second quarter at €718 million. The reinsurer is investing in lower-duration assets which normally offer smaller returns in order to be able to seize better opportunities in case interest rates go up, Schneider explained.

The outlook for the rest of the year does not look particularly reassuring either. After a group net result of €1.3 billion in the first half, the second half is likely to come in lower, Schneider noted.

For one, there are the expected costs for cancellations of life reinsurance contracts. Also, primary insurance subsidiary Ergo is likely to deliver lower results, Schneider noted. In the first half, Ergo benefitted from one-off tax effects which drove net profit up to €195 million from a net loss of €30 million in the same period a year ago. Such tax effects are unlikely to be repeated in the second half. In addition, investment costs will increase in the second half, so that Ergo profits are likely to come in at around €50 million in the second half, Schneider noted.

And then there is the hurricane season which traditionally impacts the insurance industry in the second half of the year, Schneider continued. The climatic conditions are not great meaning that it is likely that there will be strong hurricanes making landfall, he noted.

In addition, Munich Re booked capital gains on disposals in the first half which are not planned for the second half.

Overall, the 2017 full-year net results are expected at between €2 billion and €2.4 billion. This would be below the €2.6 billion earned in 2016, and even further away from the earnings of around €3 billion in 2015 and the years before.

“The main factors are low interest rates and the rates in the P&C reinsurance business,” CEO Joachim Wenning said. “These factors cannot be controlled by any company strategy,” Wenning noted.

Instead, Munich Re wants to try to compensate the impact of these factors in order to stabilize profits around the 2017 level, Wenning continued.

Ideally, at some point profits will again move slightly upwards, Wenning said. Such a recovery could be supported by Munich Re’s primary insurance business Ergo, which is going through a strategic overhaul with an emphasis on digitalisation.

And, despite the soft market, there are in the reinsurance business some attractive opportunities, Wenning noted. In life reinsurance for example, Munich Re was able to complete some larger deals in Asia, Australia and Canada during the first half of the year.

Another opportunity may lie in the cyber business. Currently, Munich Re has a share of around 10 percent in a cyber market worth between $2.5 billion to $3 billion in premium.

Munich Re expects the cyber market to triple in size over the next five years and it believes it can grow its business at a similar pace.

And, Munich Re is investing in insurtech start-ups via its subsidiary Digital Partners by providing capacity to allow the new ventures to grow the business.

Munich Re has, for example, in November 2016 partnered with app-based insurance provider Wrisk, an insurtech venture, to become its exclusive carrier for business underwritten in the UK, Europe and the US.

The reinsurer is also funding California-based insurtech start-up Trov which offers on-demand insurance, enabling users to buy insurance for specific products, for specific amounts of time through their smartphones. Users can turn insurance on and off with a swipe and also file claims through the app.

But such partnerships are likely to take quite some time to become a notable business for Munich Re, if at all.

“It is rather and experiment which brings new insights, sometimes also some premium, but essentially it increases the pace and strengthens the transformation of the insurance business,” Wenning said.