Munich Re

A Giant Struggles to Grow

Munich re river m2
Growing pains.
  • Why it matters

    Why it matters

    With record low interest rates, Munich Re is struggling to find investments offering decent returns at acceptable risks.

  • Facts


    • In 2014, Munich Re saw both sales and profit sink.
    • The low interest rates are also pushing other investors into the reinsurance market.
    • The company is sitting on an equity cushion of roughly €30 billion.
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You have to have thick skin to run a reinsurance company.

Take Nikolaus von Bomhard, chairman of Munich Re, who frequently receives reports about deadly airplane crashes, tornadoes destroying entire towns, or the dangerous effects of fires at chemical factories. But such is the daily business of the world’s largest reinsurer – making money by assuming the major risks of other insurance companies.

“It’s occasionally sobering, what you see. But on the other hand it’s also a fantastic job eliminating risks from the world at a price interesting for customers,” Mr. Bomhard recently told Handelsblatt.

Still, the 58-year-old executive admitted it was sometimes hard to remain an optimist. “It’s probably true that you become deformed professionally,” he said.

With the reinsurer sailing into troubled waters, the annual general meeting in Munich on Thursday is sure to test his optimism.

Munich Re enjoyed a long period of profitability, but those times appear to be over. In 2014, the company saw both sales and profit sink.


Ever the optimist, Munich Re's Nikolaus von Bomhard. Source: DPA
Ever the optimist, Munich Re’s Nikolaus von Bomhard. Source: DPA


The reinsurance giant last year had gross premiums of €49 billion ($52.8 billion), down some 4 percent from a year earlier. Profits dropped to €3.2 billion from €3.3 billion.

And 2014 for a reinsurer was actually a good year: There were few catastrophes around the world.

Total damage of €1.16 billion was “not only below the previous year value” of €1.69 billion, “but also below our expectations,” wrote Munich Re in its annual report.

Still, the 35-year-old group is coming under pressure on many fronts.

“The primary factor (are) interest” rates, said Mr. Bomhard at a press conference in March, which since the collapse of the global economy and ensuing pump-priming by U.S. and European central banks, have plummeted to record lows, even to negative territory.

The yields on the 10-year German bond, once a favored investment for Munich Re, have never before been so tiny.

Munich Re, like all insurers and reinsurers, has depended on lucrative yet safe investment opportunities to invest its customers’ money – especially fixed-interest securities such as bonds.

But since the European Central Bank cut interest rates to the record low of 0.05 percent to stimulate growth amid the E.U. debt crisis, such securities offer minimal or even negative returns. The yields on the 10-year German bond, once a favored investment for Munich Re, have never before been so tiny.

Munich Re’s returns have tanked accordingly.

In 2014, its return on investment fell to 3.2 percent from 3.5 percent a year earlier. Though Munich Re is still profiting from having fixed-interest securities with longer maturities, it is harder to find similarly lucrative investments when these older investments from a bygone era come due.

The firm emphasizes it is not making riskier investments to offset lower interest rates. But that means its profits are shrinking, which is pressuring the reinsurer to generate the kinds of returns that will allow it to pay the reinsurance losses of its customers and generate a healthy profit for shareholders.

“Our investors know that they’re riding in the same elevator with us,” Mr. Bomhard has said, referring to how Munich Re’s profits fall with interest rates. Those are likely to rebound when interest rates rise again – but that isn’t likely in the foreseeable future.


033 Munich Re WTB 2014 new


In the meantime, the reinsurer is gutting out the downturn. The company failed to meet is return on capital target of 15 percent: In 2014, return on risk-adjusted capital was only 13.2 percent.

The low interest rates are having another effect: They are pushing other investors into the reinsurance market. Some are developing specially constructed securities offering reinsurance protection against natural disasters. The new rivals are creating a competition for customers and forcing traditional reinsurers such as Munich Re to offer better terms.

That, in turn, is hitting its revenues and profit.

The outlook for 2015 is anything but optimistic: Lower profits of €2.5 billion to €3 billion are expected from gross earnings of €47 billion to €49 billion. No growth is forecast in either the core reinsurance division or other units such as primary insurers Ergo and Munich Health.


Draghi Schäuble-dpa
Reinsurers pay out during natural disasters. But it is the flood of euros emanating from the European Central Bank’s €1.1 trillion quantitative easing program, led by ECB President Mario Draghi, left. (seen here with German Finance Minister Wolfgang Schäuble), which has pushed interest rates to rock bottom, pressuring Munich Re’s bottom line. Source: DPA


Ergo is also suffering from lower interest rates. In Germany, the largest market for the Düsseldorf-based subsidiary, revenues have sagged. Adjusting for tax effects and profits from interest rate hedging, Ergo still managed to add €169 million to Munich Re’s bottom line in 2014. But sales of life insurance in Germany have stagnated and there’s no improvement in sight.

When will things get better for the Munich giant? “I’d also like to know that,” answered Mr. Bomhard at the earnings press conference. “But it will still take some time.” That’s not good news for investors.

But Mr. Bomhard still has a few tools at his disposal: One is the firm’s solvency ratio, which shows how much capital is available to cover risks. The higher the ratio, the better, and Munich Re currently has a ratio 138 percent. Though this figure dropped last year, it is far above the mandated norms.

The company is also sitting on an equity cushion of roughly €30 billion, which Munich Re is using in part for stock buybacks and to pay dividends to its shareholders.

For 2014, Munich Re is boosting its dividend from €7.25 to €7.75 per share. “Our dividend policy is based, like our business, on the foundation of sustainability,” Mr. Bomhard said. “We only raise the dividend to a level that we could maintain after a bad year, as well as still allowing us to finance profitable growth and innovation without difficulty.”

That’s a promise that is persuasive for investors. Since the beginning of the year, the reinsurer’s DAX-listed stock has gained some 20 percent. If 2015 doesn’t turn out to be a big year for catastrophes, perhaps the outlook for shareholders won’t be so bad after all.


Munich Re Hannover Re Swiss Re market cap solvency price to earnings ratio return on equity Source Companies Bloomberg Reinsurance Rivals-01


Kerstin Leitel is a Munich-based editor for Handelsblatt who writes about insurance companies and banks. To contact her:

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