Munich Re Co. has not sacrificed its profitability standards by growing premium volume 19% at the crucial Jan. 1, 2018, reinsurance renewals, CFO Jörg Schneider told analysts Feb. 6.
The world's biggest reinsurer announced with its preliminary 2017 results that it had written €9.9 billion of business at the Jan. 1 renewals, compared with the €8.3 billion that was up for renewal. Although roughly €1.2 billion of the business did not renew, the company wrote €2.3 billion of new business, which it said came mainly from some large-volume treaties in the U.S. and Australia.
The growth came despite relatively modest price increases across Munich Re's book of 0.8%, prompting questions from analysts about whether the reinsurer had sacrificed profitability for volume.
Reinsurance prices have been depressed for several years amid a relative dearth of large catastrophe losses, but there had been hopes in the market that this trend might begin to shift after a series of disasters in the second half of 2017, including three major hurricanes in the U.S. and the Caribbean. Those hopes went largely unfulfilled, however, with average increases broadly in the single digits.
UBS analyst Jonny Urwin noted that Munich Re's growth seemed quite high given the "fairly limited" improvement in pricing, and asked Schneider: "How can you be sure that it is the right time for being more aggressive after being fairly conservative throughout the soft market?"
Schneider said: "I would fully agree [that we had been more aggressive] if our underwriters had swarmed out into the market and written 20% more premium across the board, but this is not what happened."
He said the company won the "handful" of large proportional treaties after long negotiations with clients. "Across the board we continued with our very much risk-aware and somewhat conservative stance. There is not a general change here."
He added: "I can confirm that in selected areas we want to grow — especially selected areas where we feel more comfortable with the respective risk, where we have better data, and where we have superior knowledge. But [we do] not [want to grow] in a January renewal across the board by lowering our profitability standards."
Munich Re reported a profit of €538 million in the fourth quarter of 2017, up 10.7% on the €486 million it reported in the same quarter of 2016. But its full-year 2017 profit took a sharp dive to €392 million from €2.6 billion in 2016, because of the run of natural catastrophes in the third quarter of 2017.
The company is expecting further rate increases at the upcoming renewal dates of April 1, which is dominated by Japan, and July 1, when the U.S., Australia and Latin America renew much of their reinsurance.
Schneider declined to give a projection for rate increases, but he said they would be above the 0.8% seen at Jan. 1 "because there is a stronger element of non-proportional business and natural-catastrophe-oriented business — double what we had in January."
With proportional reinsurance, reinsurers pay a fixed percentage of all claims an insurer incurs. With non-proportional, or excess of loss, reinsurers pay out once a covered insurer's claims bill hits a certain point.
Schneider added that it was too early to say how market dynamics would influence rates at the upcoming renewals, but said he was confident that price improvements would continue.
"We are confident that it has really turned and this was not only, as we say in Germany, a short spring," he said.
Munich Re shares fell more than 5.3% on Feb. 6, more than double the 2.3% fall posted by Germany's benchmark DAX and the biggest drop among the 30 companies in the index.
RBC Capital Markets analyst Kamran Hossain wrote in a note the same day that fourth-quarter 2017 income had missed consensus expectations by 6% and said a flat dividend of €8.60 per share, also below consensus forecasts of €8.80, would be "viewed as disappointing," particularly given the company's strong solvency position.
