Munich Re CFO sparks optimism in 2018 outlook

After record insured losses in 2017 particularly due to hurricanes Harvey, Irma and Maria (HIM), market participants had predicted significant rate increases not only in the impacted regions.

Munich Re achieved price increases of around 0.8 percent in the January renewals after they had fallen by 0.5 percent on average in all 2017 renewal rounds.

“When I saw the 0.8 percent I was very disappointed,” Schneider admitted during a Feb. 6 results presentation. But he added that overall the renewals went satisfactorily and proved that the pricing trend has turned.

“In the regions and lines of business close to the catastrophes we have reached double-digit rate increases, sometimes also doubling of premium,” Schneider said.

“The trend reversal has arrived in an unspectacular, but in our view, definitely sustainable way,” Schneider commented.

Despite the lower-than-expected rate increases in the January renewals, Munich Re increased the volume of business written at Jan. 1 by 19 percent to around €9.9 billion, due partly to new large volume treaties in the US and Australia.

“With 19 percent, which is significantly more than €2 billion in premium volume, we were able to expand the business considerably,” Schneider noted.

A large portion of the new business is proportional, allowing Munich Re to participate in the contributions and premium growth of the primary insurer. “These are very diversified large portfolios. There, increases of under 1 percent can already have a major effect because of the large volumes involved,” Schneider explained. A large part of the deals is casualty business but it also includes property business.

“They are fairly priced,” Schneider noted. “We are very glad that we got these deals.”

For Munich Re, 2017 was an unusually tough year. The contribution of the reinsurance business to Munich Re’s consolidated result dropped to €120 million in 2017, from €2.54 billion in 2016. Due to high natural catastrophe losses the result in property/casualty (P&C) reinsurance fell to a loss of €476 million compared to a profit of €2.03 billion in 2016. The combined ratio for 2017 deteriorated to 114.1 percent of net earned premiums in 2017 from 95.7 percent in the previous year.

A normal year for Munich Re would entail large losses of around €2 billion. In 2017 they were more than twice as high at €4.3 billion.

In addition to the losses from HIM, wildfires in California hit the reinsurer.

Californian Wildfires caused Munich Re almost €500 million in losses, almost equally divided between North and South California.

Several wildfires in Northern California in October 2017 were followed by others in the southern part of the state in December. Overall, the wildfires destroyed more than 32,000 homes, 4,300 businesses, more than 8,200 vehicles, watercraft, farm vehicles, and other equipment.

Insurers have received nearly 45,000 insurance claims totalling more than $11.79 billion in losses from the wildfires that burned across California in October and December 2017.

Schneider is partly optimistic about 2018 because he expects to see further rate improvements in the upcoming renewals. In the January renewals the share of nat cat business is relatively low with 10 percent for Munich Re. In April renewals the share amounts to 25 percent and in July it is 19 percent.

“There we will see a relatively stronger effect from the recent natural catastrophes,” Schneider said. Munich Re’s underwriters are therefore optimistic that the market environment will improve further during the year.

In addition, Munich Re faces tailwinds from higher interest rates which are set to have a positive effect on its investment returns. Historically low interest rates have been pressuring the investment side of the reinsurance business in addition to low prices. But interest rates are now expected to climb particularly in the US and increasingly also in Europe.

For Munich Re this would mean a profitability boost from higher interest rates in short and medium-duration investments in the reinsurance business.

As a result of higher prices and interest rates, Schneider expects Munich Re to get back to profitability levels in 2018 similar to past years without exceptionally high catastrophe losses. While definitive profit targets for 2018 will be published later in the year, Schneider guided for a result of between €2.0 billion and €2.4 billion, the same range Munich Re had given for 2017. “Maybe something on top particularly because of the yield in the investment business, as well as the consolidation and performance improvement at [primary insurance subsidiary] Ergo,” Schneider noted.

But that’s not all. Munich Re also wants to work on the cost side to become more competitive while making changes to its portfolio.

A relatively high share of Munich Re’s business is customised solutions which is gaining in importance, Schneider noted. “Here we are in a very competitive position not least because of our know-how. But we also want to be competitive in the broader business where we cannot benefit from a more differentiated know-how and this requires us to have the costs always under control,” he explained.

“We need to benefit from rationalisation of processes particularly after major IT investments.”

And, Munich Re is mulling over taking more risk on the underwriting side of the business as it adapts the portfolio. “Taking more risk would be possible without a paradigm change,” Schneider said, suggesting that a stimulating impulse could be beneficial especially in areas where the firm has a superior database and feels comfortable with the risk due to its know-how.

“I am very optimistic that this will result in a new momentum that will move us ahead,” Schneider said.