Munich Re management feels soft market is unlikely in near-term: Jefferies

Munich Re believes that a soft market is not likely to happen in the near-term, the reinsurer’s management shared with Jefferies in a recent meeting.

According to analysts, in Munich Re’s view, “it takes a globally material reinsurer (i.e. the top five reinsurers) to start the process, and that once started, it is almost impossible to stop.”

They even acknowledged that they shared at least some degree of responsibility for the last soft cycle.

In the meeting with Dr. Joachim Wenning, CEO of Munich Re, Jefferies felt the tone was “bullish”, mainly given the reinsurer’s strength of earnings and capital.

Jefferies said: “In the context of net income and underlying earnings materially outstripping consensus expectations over the past few years, it was inevitable that the outlook would be top of everybody’s agenda.

“The key question remains, how much of this remarkable underlying development would become visible, relative to adding prudence to other balance sheet items (e.g. redundant reserves or asset marks).”

When analysts asked whether earnings had risen unsustainably fast, management replied with a definitive no, but did acknowledge that expectations of €7bn in near-term earnings would be too high.

Analysts asked whether earnings had risen unsustainably fast, management denied this but admitted that expectations of €7bn in near-term earnings were too high.

On the point of how the reserve buffers (which have been rebuilt) will be used, Munich Re emphasised that these would not to be used to drag out a soft market, as the group would manage the business economically, and exit poorly priced business if required.

With a Solvency II ratio of 287%, one other crucial question, according to Jefferies, regards to the group’s intended deployment strategy of their excess capital.

Analysts stated: “Earlier this year, Munich Re’s CFO said that he could not envisage asking the board for more than an extra €500m in the dividend and the same again in the buyback. On this occasion, the CEO was less explicit, noting that excess capital was a cushion to protect shareholders from outsized catastrophe losses and that the dividend would be set with sustainable growth in mind.

“Notably absent from this was a clear view on how much buybacks could be used to bridge the gap between how much of a catastrophe cushion is needed, versus how much can be sustainably added to dividends.”

The other use of capital, according to analysts, could be an acquisition. Munich Re mentioned Global Specialty Insurance was mentioned as a market that the group found attractive.

Jefferies noted that this reiterates previous remarks, and follows naturally from the ongoing work of separating this business out in the segmental split.

Regarding the market condition, Munich Re believes the current market structure is logical, noting that with frequent claims, low layers are not economically viable for reinsurers. While at high layers there are extreme risks with premiums too small to justify pricing efforts.

In US Casualty lines, the 2015-2019 years are already being dealt with by the market and for 2020-2023 Munich Re does not “see any negative indications… but remains technically cautious”, according to Jefferies.

During its talk with the analyst, the reinsurer also stated that proportional risk is well-priced, especially as it is benefiting from the underlying insurance price rises to the end customer.

It was also noted that German motor insurance could be underpriced by 15 percentage points, resulting in a lengthy process of regaining adequate profitability.

Aggressive pricing strategies aimed at rapid recovery may inadvertently induce anti-selective behaviours among policyholders, analysts concluded.

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