Munich Re is back in growth mode

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FrankfurtSome relief is to be noted. "We are on course," exulted Joachim Wenning in March of this year, given the provisional figures. The chief executive officer of the world's largest reinsurer knows that the pressure to succeed on him after the difficult catastrophic year of 2017 had increased significantly. In the past year, the turnaround had to come from the Dax Group.

After all, Wenning had succeeded Nicholas of Bomhard two years ago to halt the erosion of profits with a cautious expansion of business. By 2015, the reinsurer had regularly made profits of three billion euros and more.

But since then, earnings have been falling, mainly due to low interest rates and falling reinsurance prices. In 2017, a series of natural disasters even cut earnings to 392 million euros, the lowest level in 14 years.

Profit despite major losses

All the more relieved is the top management that it achieved a surprisingly high billion-dollar profit for the past year despite again expensive large damages. The bottom line was the Dax 30 Group with its 41,000 employees for 2018, a surplus of about 2.3 billion euros.

Surprisingly well, the insurance giant has beaten in the life and health insurance as well as the long-standing problem field Ergo. All in all, the difficult year 2018 is almost a six-fold increase in net income for the year.

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Munich Re is also benefiting from a more favorable claims experience compared to the catastrophic year of 2017. In 2018, costly cyclones and devastating forest fires in California resulted, which cost the city of Munich at the cost of major losses of just under 2.2 billion euros. In 2017, it had been over 4.3 billion euros because of the severe cyclone season.

Better than the Swiss

Munich Re is doing better than its direct rival, Swiss Re. The Swiss again earned only 421 million dollars in 2018 – a result that was well below expectations. In addition to renewed catastrophic losses, this is mainly due to the weakening industrial insurer Swiss Re Corporate Solutions and a change in US GAAP.

Nevertheless, the catch-up of the Munich in comparison looks much more impressive. The primary insurance subsidiary Ergo surprised with a positive surplus of 412 million euros. Thus, the Dusseldorf are significantly above the originally planned 250 to 300 million euros.

Next year, the number three on the German market is now expected to generate a net profit of 530 million euros. For the current year Ergo expects only with a stagnant result of around 400 million euros, after they had exceeded their intermediate target in 2018. Since 2016, Ergo has undergone a major renovation and conversion program. However, Wenning always gave up speculation about selling the daughter.

Stagnation in the core

In contrast, Munich Re is making very slow progress in its own core business. Gross premium income stagnated in 2018 at around 49 billion euros, roughly matching the previous year's level. In property-casualty reinsurance, the city of Munich also only has a combined ratio of around 99.4 percent, putting it close to the critical 100 percent mark.

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Explanation: The combined ratio shows simply whether an insurer earns money: At more than 100 percent this is no longer the case. In the current year, the reinsurer wants to target now 98 percent. Big jumps are therefore not to be expected, because this business still has immense importance for Munich. The division contributes around 81 percent to total profit and 63.8 percent to sales.

Nevertheless, Wenning's management team wants to get a little higher this year. The surplus is expected to reach about 2.5 billion euros in 2019, said the insurance giant as the target. After years of profit slump, the Dax Group promises to stabilize its turnaround. For in 2020 it should already be 2.8 billion euros. For the time being, the reinsurer would have fundamentally stopped its continuous profit meltdown.

More return in the portfolio

Wenning wants to change the strategy in case of a weak point in the group. This is because the important investment result fell by 14 percent in 2018 compared to 2017. Even in the fourth quarter, it was even 16 percent. Instead of more than three percent as in summer last year, the return was only 2.8 percent.

In the future, Munich Re wants to get more out of its € 217 billion portfolio. After the investment return had fallen further last year, the Management Board wants to raise the number 2019 back to around three percent. That would correspond to an investment result of 6.5 billion euros.

The plus in the current year should also be borne by savings and the core business of reinsurance. Following a result of around 1.9 billion euros last year, Munich Re is now aiming for a profit of 2.1 billion euros in this segment in the current year.

But the market remains difficult. Price increases can only be enforced in the regions where major natural catastrophes have recently occurred. Elsewhere, hardly anything happens. There, the market is still very competitive, so that there is little prospect of noticeable growth here.

In the meantime, Munich Re has recorded a significantly higher level of business than before. The risk thus increases in absolute figures. "But it does not get riskier," says Wenning. However, investors will only be able to assess this in a few years, if it becomes clear how good the new contracts were.

view in the future

But what is the overarching vision of the future Munich? On appropriate questions, the group is rather closed. "Internally we know exactly where to go," emphasizes Wenning. However, for competitive reasons, the group does not want to clarify in which direction the company is developing. Munich Re remains loyal to its rather defensive public image even under Wenning.

The approaches are quite promising. In the cyber growth segment, the insurer has a promising position. He is expanding his holdings in small and medium-sized insurance companies and now ventures into other business areas.

In 2018, for example, he bought the Berlin start-up Relayr, which specializes in sensor technology, for about 300 million euros. For Munich Re, sensors in machines, buildings and vehicles are the key to the digital future of the industry. With Bosch, Kuka and Porsche, the reinsurer is also developing solutions for the production of the future.

The fact that Munich Re's investors are confident in the change is shown by the performance of the share price. The paper could not defend its highs in 2018, but did not rustle as deep as the Dax 30 into the basement and reached in the current year temporarily the highest level in 17 years.

Many analysts consider the potential of the stock to be exhausted for the time being. Top managers seem to see it similar. Torsten Jeworrek, for example, sold its own shares in March of this year for more than € 1.7 million. However, the Group considers itself well positioned for profitable growth. In the future, a well-known face will again watch over it at a decisive point.

Significant payout since 2005

There will be a reunion with Wenning's predecessor Nikolaus von Bomhard for shareholders at the Annual General Meeting. The manager, who led the reinsurance company from 2004 to 2017, is to succeed Bernd Pischetsrieder as supervisory board chairman.

The 62-year-old is considered a guarantor of a traditional course. It does not have to be bad news for investors. From 2005 to 2018, Munich Re paid a considerable total to its shareholders: around EUR 27 billion, which corresponds to around 85 percent of the current market capitalization.

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