Munich Re's H1 profit drop bucks improving trend for Europe's Big 4

Munich Re was the only one of the Big Four European reinsurers to report lower group profit year on year for the first half of 2023.

The world's biggest reinsurer reported net profit of €2.42 billion in the period, down 20.9% on the €3.07 billion it made in the same period of 2022.

One reason for Munich Re's lower profit was a bigger bill for large non-life reinsurance claims. Large claims added 12.8 percentage points to the reinsurer's property and casualty reinsurance combined ratio in the first half of 2023, up from 9.3 points in the first half of 2022 — although the two numbers are not directly comparable because Munich Re raised its major loss threshold to €30 million from €10 million on Jan. 1, 2023.

Munich Re's property and casualty reinsurance combined ratio, which measures underwriting profitability, worsened by 9 percentage points to 83.5% from 74.5%. Property and casualty reinsurance is the largest part of Munich Re's business, accounting for 55% of the first-half profit.

The story was different at the other three of the four largest European reinsurers. Swiss Re AG, Hannover Re and Scor SE all reported increases in group profit, lower combined ratios and lower large loss ratios. Scor did not provide a comparable natural catastrophe loss ratio for the first half of 2022 under the new IFRS 17 insurance reporting regime, but the ratio for that period under the old accounting rules was 10.5%.

A lack of claims and reserves for the Russia/Ukraine war, which were a drag on 2022 underwriting profitability, has improved the picture. Recent changes to insurance contract terms and structures, designed to limit reinsurers' exposure to smaller, more frequent natural events, have also helped lower the natural catastrophe portion of large loss ratios. Insured losses from natural catastrophes increased to $50 billion in the first half of 2023 from $48 billion in the first half of 2022, according to Swiss Re estimates. Swiss Re suffered no material natural catastrophe losses in the second quarter, CFO John Dacey told journalists on an earnings call. This was not because of a lack of events, but because of recent underwriting changes, "where we have removed ourselves from the higher-frequency layers," the CFO said.

Another year of increases

Munich Re's lower profit has not pushed the company off track. The 12.8% major loss ratio was lower than its generally expected level of 14%, and its first-half combined ratio was below the 86% it is expecting for the full year. The €2.4 billion group profit, while lower year on year, means the company is more than halfway to hitting its €4 billion full-year profit target.

The reinsurer's share price increased 2.26% on Aug. 10, the day its earnings were announced, despite missing analysts' expectations for some metrics in the isolated second quarter. And S&P Global Ratings revised its outlook on Munich Re's ratings to positive from stable shortly after the reinsurer announced its earnings, praising its "sound operating performance."

The results come amid generally favorable operating conditions for reinsurers. Higher prices and tighter terms in property and casualty reinsurance are allowing reinsurers to underwrite more profitably. These conditions are expected to persist. "We do expect rates to continue rising in 2024," Ali Karakuyu, a director at S&P Global Ratings, told journalists at a recent press conference. A reinsurance buyer survey conducted by fellow rating agency Moody's reached the same conclusion. Munich Re CEO Joachim Wenning has gone further, telling analysts on an earnings call that good conditions for reinsurers "will probably sustain into 2025 as well."

In addition, Munich Re, Hannover Re and Scor, which now report under IFRS 17, all saw benefits from the introduction of claims discounting under the new accounting regime, with Munich Re reporting the biggest boost. Swiss Re, which reports under US generally accepted accounting principles, will shift to IFRS 17 in 2024.

Reinsurers' life and health businesses have now largely shaken off the effects of COVID-19, which continued to be a drag on underwriting performance in 2022. All four companies reported improved underwriting results in this area. And, thanks in part to higher interest rates, investment returns are improving. Of the four largest European reinsurers, only Hannover Re's return on investment was flat, but its 3% return is still ahead of its peers.

The Big Four European reinsurers all reported a return on equity of above 15%, and Swiss Re, Scor and Hannover Re all surpassed 20%. This is in keeping with improving returns in the reinsurance industry more broadly after years of poor performance. The top 20 reinsurers' collective 9.3% return on capital in the first half of 2023 exceeded the 8.4% weighted average cost of capital, according to S&P Global Ratings, and the rating agency expects returns to exceed the cost of capital this year and next. The top 20 had failed to earn their cost of capital in four out of the past five years before.

Continued caution

Although conditions are positive, reinsurers continue to be cautious. All four built additional prudence into their claims reserves in the first half of 2023. Continuing macroeconomic and geopolitical uncertainty, inflation and increasing frequency and severity of natural catastrophes are holding reinsurers back from making more bullish predictions about their future performance, particularly with the bulk of the North Atlantic hurricane season still to run. While noting that Munich Re achieving 60% of its profit target in the first half made hitting or beating the goal more likely, Wenning said the company sees "no sufficient reason" to raise its target.