Last year was painful for the world's insurers. A string of natural catastrophes – earthquakes in New Zealand and Japan, tornadoes in the US and floods in Australia and Thailand – left insurers nursing an estimated combined loss of $100bn (£63bn). Yet, for investors, that's not quite the disaster it seems to be. True, those events hit insurance companies' profits in the short term. But catastrophe losses also allow underwriters to hike their premium rates, meaning good news for longer-term earnings. And few insurers are as well-placed to benefit from firming rates as German insurance giant Munich Re.
- Catastrophe-related premium rates rising fast
- Reasonable investment performance
- Nice dividend yield
- Shares undemandingly rated for the sector
- Hit hard by 2011's catastrophes events
- Non-catastrophe outlook remains uninspiring
As a business that's dominated by reinsurance – insuring other insurers against the losses they sustain – Munich Re is unavoidably exposed to catastrophes. And 2011's were certainly painful for the group – its losses from natural catastrophes reached an eye-watering €4.54bn (£3.75bn) and meant that the reinsurance arm, which generates over half the group's gross premiums, paid out almost 14 per cent more in claims than it received in premiums.
But, crucially, heavy losses are already driving up premium rates. Munich Re's bosses point out that events in Australia and the earthquake in Japan pushed up the price of cover for natural hazards 50 per cent in 2011, while US natural catastrophe business delivered rate improvements of around 10 per cent at July's renewal stage. Moreover, management reported last month that rates at the reinsurance arm rose 2 per cent during January 2012's renewal period. The parts of Munich Re's business most closely focused on catastrophes performed better still – property business within that segment saw rates rise 9.6 per cent, while rates on catastrophe-related casualty business increased 4.7 per cent. Management thinks these trends will continue in 2012, and broker Jefferies estimates that the reinsurance operation's combined ratio of claims to premiums will return to a decently profitable 95 per cent by the end of 2012.
MUNICH RE (MUV2) | ||||
|---|---|---|---|---|
| ORD PRICE: | €112.8 | MARKET VALUE: | €20.2bn | |
| TOUCH: | €112.7-€112.8 | 12-MONTH HIGH/LOW: | €118 | €78 |
| DIVIDEND YIELD: | 5.8% | PE RATIO: | 7 | |
| NET ASSET VALUE: | €129 | COMBINED RATIO: | 114%† | |
| Year to 31 Dec | Gross premiums (€bn) | Operating profit (€bn) | Earnings per share (€) | Dividend per share (€) |
|---|---|---|---|---|
| 2008 | 37.8 | 3.83 | 7.7 | 5.50 |
| 2009 | 41.4 | 4.72 | 13.0 | 5.75 |
| 2010 | 45.5 | 3.98 | 13.1 | 6.25 |
| 2011 | 49.6 | 1.18 | 3.9 | 6.25 |
| 2012* | 50.7 | 4.60 | 15.5 | 6.56 |
| % change | +2 | +290 | +293 | +5 |
*Jefferies estimates Beta: 0.9 †Reinsurance operations only £1=€1.21 | ||||
Munich Re isn't just a play on reinsurance. The group's German-focused primary insurance unit, which operates through its ERGO brand, offers cover for virtually every class of business – except credit insurance – and generates 35 per cent of its gross premiums. That reported a profitable 98 per cent combined ratio in 2011. Meanwhile health insurance, which generates 12 per cent of gross premiums, remained just profitable last year with a combined ratio of 99 per cent. However, the outlook for premium rates for these operations is modest. Management describes demand at the non-reinsurance operations as "stable", with generally unchanged or just marginal price increases.
Munich Re's investment book also looks in good shape. At the year-end, its portfolio was dominated by high-quality, fixed-income securities, representing 58 per cent of the total, with another 26 per cent in loans, mostly to banks, companies and governments. While financial market volatility and low interest rates haven't helped, the portfolio generated an investment return of 3.4 per cent in 2011, despite being hit by a €1.2bn writedown on Greek government bonds. That's rather better than returns being achieved by most of the UK's listed insurers – Amlin's 2011 return, for example, reached just 0.9 per cent, while Beazley managed just 1 per cent.
The dividend yield is attractive, too. Based on Jefferies' estimated payout for 2012, the figure is almost 6 per cent. True, shares in some insurers yield more. Based on forecasts from broker Numis Securities, shares in RSA yield a prospective 9.7 per cent, while Amlin's offer 7.6 per cent. But Munich Re's yield is far from the lowest – Hiscox's prospective yield is just 4.4 per cent – although it is paid in euros.
