Company Reports

Munich Re is the largest reinsurance company in the world, but that size has its drawbacks. We think the company has some really nice and moaty business lines that seem almost unrivaled, yet the impact that those lines can have on the overall business is not enough to sway it into moaty territory. Munich has a strategy to drive growth in its global specialty insurance and cyber lines. In the context of the property and casualty reinsurance division, gross premiums written in these two lines are growing faster than the underlying traditional reinsurance. In our opinion, Munich’s expansion of an inspection-based model combined with insurance yields superior underwriting results. And we believe its traditional area of expertise in providing these inspection-based services utilizing historical records and specialized industrial engineers is probably the most moaty way the business has been able to develop good underwriting earnings. There are likely underwriting benefits to be had in developing that model into the Internet of Things. We think Munich is one of the few reinsurers developing specialist insurance and reinsurance with this combination. However, when we think more broadly about the competitive dynamics of that approach versus an engineer-based model, we think the new IoT model holds lower barriers to entry and is more replicable. While Munich may be able to gain insights from these peripheral technologies and may have a first-mover advantage in rollout and integration, we see little reason another reinsurer could not replicate this. We think a purer focus on research and development of proprietary technology would be a more durable way to develop an underwriting-based competitive advantage.

We think Munich Re has reported a very solid set of results for 2023, delivering EUR 33.88 in EPS. The company has raised the dividend to EUR 15 per share. Both these numbers are ahead of our estimates of EUR 30.31 and EUR 12.12 respectively for EPS and dividends per share. They are also ahead of company-compiled consensus of EUR 33.6 and EUR 12.6 in EPS and DPS respectively. Overall, Munich Re has delivered EUR 4.600 billion in net income, outperforming guidance by EUR 600 million that it set at the beginning of the year. The firm has also announced a new buyback of EUR 1.500 billion to be completed by the annual general meeting next year. It also raised guidance to an expectation of EUR 5.000 billion in net income for 2024. The results on Feb. 27 mean that Munich Re has delivered a 15.7% return on equity to shareholders and economic profits for the second consecutive year.

Munich Re is the largest reinsurance company in the world, yet that size has its drawbacks. We think the company has some really nice and moaty business lines, that seem almost unrivaled, yet the impact that those lines can have on the overall business is not enough to sway it into moaty territory. Munich has a strategy to drive growth in its Global Specialty Insurance and cyber lines. In the context of the property and casualty reinsurance division, gross premiums written in these two lines are growing faster than the underlying traditional reinsurance. Munich’s expansion of an inspection-based model combined with insurance yields superior underwriting results, in our opinion. And we believe its traditional area of expertise in providing these inspection-based services utilizing historical records and specialized industrial engineers is probably the most moaty way the business has been able to develop good underwriting earnings. There are likely underwriting benefits to be had in developing that model into the Internet of Things. We think Munich is one of the few reinsurers developing specialist insurance and reinsurance with this combination. However, when we think more broadly about the competitive dynamics of that approach versus an engineer-based model, we think the new IoT model holds lower barriers to entry and is more replicable. While Munich may be able to gain insights from these peripheral technologies and may have a first-mover advantage in rollout and integration, we see little reason another reinsurer could not replicate this. We think a purer focus on research and development of proprietary technology would be a more durable way to develop an underwriting-based competitive advantage.

Munich Re has reported a strong set of results for the first 9 months of the year with a net income of EUR 3.59 billion, so far. Management has also raised its guidance to nearly EUR 1.2 billion per quarter, so EUR 4.5 billion in net income for the full year, quite a bit above the EUR 4.2 billion in net income that we forecast for this year. The numbers reported on Nov. 8 mean that Munich has generated a return on equity of 13% as of the end of September and is probably going to generate a return on equity above 15% for the full year. Both these numbers are quite a bit above the company’s 11% cost of equity.

Munich Re is the largest reinsurance company in the world, yet that size has its drawbacks. We think the company has some really nice and moaty business lines, that seem almost unrivaled, yet the impact that those lines can have on the overall business is not enough to sway it into moaty territory. Munich has a strategy to drive growth in its Global Specialty Insurance and cyber lines. In the context of the property and casualty reinsurance division, gross premiums written in these two lines are growing faster than the underlying traditional reinsurance. Munich’s expansion of an inspection-based model combined with insurance yields superior underwriting results, in our opinion. And we believe its traditional area of expertise in providing these inspection-based services utilizing historical records and specialized industrial engineers is probably the most moaty way the business has been able to develop good underwriting earnings. There are likely underwriting benefits to be had in developing that model into the Internet of Things. We think Munich is one of the few reinsurers developing specialist insurance and reinsurance with this combination. However, when we think more broadly about the competitive dynamics of that approach versus an engineer-based model, we think the new IoT model holds lower barriers to entry and is more replicable. While Munich may be able to gain insights from these peripheral technologies and may have a first-mover advantage in rollout and integration, we see little reason another reinsurer could not replicate this. We think a purer focus on research and development of proprietary technology would be a more durable way to develop an underwriting-based competitive advantage.

We believe Munich Re delivered a reasonable set of results. In delivering net income of EUR 2.425 billion, or EUR 17.75 in earnings per share for the first six months, the company is tracking slightly ahead of consensus for EUR 31.85 in full-year EPS, as collected by Refinitiv. Munich Re’s earnings today imply a EUR 35.50 full-year EPS number, slightly better than the EUR 33.31 we forecast. Based on these results versus what Munich Re has historically delivered, we believe the company is capable of delivering full-year net income of around EUR 4.74 billion, slightly ahead of our EUR 4.54 billion forecast. That "capable" estimate implies EUR 34.81 in EPS, ahead of both us and consensus. First-half results were mainly affected by lower reinsurance and higher primary insurance results. Underwriting in the core property and casualty reinsurance division has deteriorated since last year, primarily as a result of higher natural catastrophe and human-made losses in the second quarter.

We believe balance sheets have been an underappreciated element in insurance and that prior accounting rules and economic conditions have left property and casualty-orientated insurers in unenviable positions. Even before the coronavirus pandemic, as interest rates remained low, traditional reinsurance capital became elevated as the fall in interest rates led to rises in the value of fixed-income assets. Couple this with the rise of alternative capital as pension funds and hedge funds sought to diversify their returns into an asset class with little correlation to financial markets, and reinsurance capital available for deployment increased to new heights. That meant the pressure on pricing increased as the number of claims related to climate change rose.

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, we mean carving out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while we identify the occurrence of this dynamic, we also see the implementation of innovative technology as key to the ongoing strategic positioning and development of the business. What we think we are witnessing is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that we believe this transfer has taken place, we have seen an improvement in divisional operating metrics.

We believe that, for the first quarter of 2023, Munich has delivered strong results despite the higher losses that have affected it. Net profit so far this year has come in at EUR 1.27 billion, and the business has confirmed its full-year guidance of EUR 4.0 billion. There has been quite a marked walkdown in this target net income as the business has made the IFRS 17 transition. That is primarily a result of a higher claims liability discounting unwind that has come about because of the movement from fiscal 2022 to fiscal 2023. Our full-year net income estimate stands at around EUR 4.5 billion and we continue to include a buyback of EUR 1 billion. We raise our fair value estimate to EUR 380 per share and maintain our no-moat rating.

When looking at the exposure of insurers to the unfolding banking crisis, we believe this is limited. The main impact of the crisis currently seems to be contagion, so investors are selling shares cheaply. However, exposure to United States bonds is either in government bond securities, or exposure to Credit Suisse, Silicon Valley Bank, and other U.S. regional banks is immaterial, which is 50 basis points or less of their investment portfolio. Some do hold larger bank debt holdings of up to 5.5% of shareholder investments, but nearly all that debt ranks as senior. AT1 debt tends to be very minimal or there is no exposure as a policy with board-level approval. The vast majority of corporate debt held is investment-grade. We maintain our fair value estimates and moat ratings across our European insurance coverage. Allianz remains our Best Idea. Admiral is one of our top picks.

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, we mean carving out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while we identify the occurrence of this dynamic, we also see the implementation of innovative technology as key to the ongoing strategic positioning and development of the business. What we think we are witnessing is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that we believe this transfer has taken place, we have seen an improvement in divisional operating metrics.

We are maintaining our EUR 285 per-share fair value estimate and no moat rating for Munich Re. While full-year results are impressive, we remain cautious about them.

Munich Re reported net profit of EUR 1.9 billion for the first nine months of the year. This includes a net result of EUR 527 million for the third quarter and means it looks like Munich will roughly achieve what we are forecasting, give or take a little. However, management is still guiding to a consolidated result of EUR 3.3 billion. Given commentary and numbers we anticipate there is likely to be significant harvesting and one-offs in the fourth quarter to meet this.

Many European insurance companies have fallen into 5-star territory year to date. However, we still like and support our preferred picks of two primary firms. In our personal lines subindustry, we still like Admiral. That is because we believe the business is adept at growing its customer numbers ahead of peers and the market. Though we do anticipate slower motor insurance growth over the immediate time frame, coupled with a fall in home insurance volumes due to lower U.K. completed home sales, we still believe in the prospects for Admiral’s long-term growth. Yet, while the business clearly outstrips the competition in terms of expansion, its development is not aggressive. Admiral has grown its U.K. motor market share by 5 percentage points over the last 10 years.

Munich Re reported strong first-half 2022 results, continuing with the strong underwriting and poor investments reinsurance story. While top-line growth has been buoyed by currency, even accounting for this there is double-digit organic growth within Munich’s largest business—reinsurance of property and casualty. The performance of investments has been the headwind because while Munich’s regular income has risen to EUR 3.258 billion, the write downs on investments in this half amounted to EUR 2.030 billion. Versus the gains that the business generates usually, this means Munich is looking at an investment result for the full year that is lower by close to EUR 3.2 billion, the majority from fixed-income and equities.

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, we mean carving out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while we identify the occurrence of this dynamic, we also see the implementation of innovative technology as key to the ongoing strategic positioning and development of the business. What we think we are witnessing is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that we believe this transfer has taken place, we have seen an improvement in divisional operating metrics. For the business unit in question, we calculate this as operating profit over gross premiums written.

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, we mean carving out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while we identify the occurrence of this dynamic, we also see the implementation of innovative technology as key to the ongoing strategic positioning and development of the business. What we think we are witnessing is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that we believe this transfer has taken place, we have seen an improvement in divisional operating metrics. For the business unit in question, we calculate this as operating profit over gross premiums written.

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, we mean carving out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while we identify the occurrence of this dynamic, we also see the implementation of innovative technology as key to the ongoing strategic positioning and development of the business. What we think we are witnessing is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that we believe this transfer has taken place, we have seen an improvement in divisional operating metrics. For the business unit in question, we calculate this as operating profit over gross premiums written.

We think that Munich Re has reported a good start to 2022. The rhetoric from reinsurers so far this quarter has been one of much higher major loss expenditure. However, the impacts to Munich’s balance appear to be more muted as losses of over EUR 10 million have totaled EUR 667 million for the business and that includes EUR 100 million in relation to the Russia-Ukraine war. This has been offset by a EUR 100 million release in relation to major losses in prior years and brings Munich’s major loss expenditure for the period to 9.2% of property and casualty net earned premium, only bettered by Hannover Re during these three months. The strong 91.3% reported combined ratio has been aided by a total of EUR 291 million of releases from reserves.

We think Munich Re has reported strong full-year 2021 numbers. Net income for the year came in at EUR 2.9 billion and that is a bit ahead of our expectations. This has exceeded the company’s own profit target and Munich is still targeting a 12% to 14% return on equity by 2025. The results have led management to announce a EUR 1 billion share buyback to be completed by the annual general meeting next year. The annual dividend has been raised by 12% to EUR 11 per share.