P&L Check Why Munich Re Must Re-form

The world’s largest reinsurer is one of Germany’s most profitable companies. But a steady erosion of its earnings is forcing Munich Re’s new CEO to fix a long list of problems.
Pulled in different directions. Sculpture by California artist Jonathan Borofsky outside of Munich Re's headquarters.

Joachim Wenning isn’t exactly a household name in the German business community. What he has going for him is that he probably knows his company better than anyone else does. The unassuming new CEO has spent his entire career with Munich Re. That means he knows what’s working and what needs to be fixed. And there’s plenty of the latter. Munich Re may be the world’s largest reinsurance firm -- an insurer of insurance companies -- and one of Germany’s most consistently profitable companies, but it’s also been on a downward trajectory for several years.

Mr. Wenning will take the reins on Thursday, one day after the insurance giant located near Munich’s English Gardens holds its annual meeting with shareholders. And the numbers that outgoing CEO Nikolas von Bomhard will be presenting at his last meeting in charge won't be pretty. Earnings have been steadily declining (see chart). Profits stood at €2.6 billion ($2.79 billion) last year, about 17 percent lower than the year before. Mr. von Bomhard is expecting a further drop this year to somewhere between €2 billion and €2.4 billion.

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Mr. Wenning’s predecessor is unapologetic. “When I leave, I will do so upright and without regret,” Mr. von Bomhard, who is stepping down after more than a decade in charge, said at the company’s annual results press conference in March. At most he admits there’s some unfinished business: “Some of what I began 13, 14 years ago did not pan out.”

He does have some reason to be proud. While profits may be down, Mr. Wenning is being handed a healthy company on solid financial ground. Munich Re has a solvency quota – which describes the financial health of the company – of 267 percent, which is better than that of its main rivals. Munich Re also boasts a return on investments of 3.2 percent, which is outstanding given low interest rates and volatile markets. Even rival Hannover Rück, often held up as a more profitable competitor, only has 3.0 percent. This stability is down to Mr. von Bomhard, who has studiously avoided taking excessive risks.

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But stability is not enough, and Munich Re lacks a realistic plan to boost earnings. Many factors are a drag. Some are home-grown, such as a costly and ongoing restructuring of its primary insurance subsidiary Ergo, which contributes more than a third of Munich Re's revenue. Others include losses from failed ventures in the United States or New Zealand.

There are also industry-wide challenges. For the third year in a row, premiums have been sinking. Mr. von Bomhard blames a vicious price war currently raging in the reinsurance segment. An increasing number of new digital competitors are also moving into the space, putting established brands like Munich Re, Swiss Re and Hannover Re on the defensive. And yet shifting blame to the industry only goes so far: Some rivals have shown that things can still be done better than at Germany’s segment leader (see graphic below).

For example, Munich Re trails its main rivals, Swiss Re and Hannover Re, in return on equity. It also lags behind Hannover Re in operating margins, the ratio of operating profits to gross premiums, while its losses as a share of premiums are higher (meaning worse), at 95.7 percent to Hannover Re's 93.7 percent.

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So Mr. Wenning, who will only be the ninth chief executive in the 137-year history of the company, takes over during a tricky period. “Von Bomhard was always synonymous with reliability. But at headquarters, they never really understood the primary insurance business. And with acquisitions, they weren’t so lucky,” said Ingo Speich of Union Investment, one of Munich Re’s top 10 shareholders. Mr. Wenning’s job will be to “trim things down for more efficiency, and push forward with innovation and digitalization while developing new areas of business,” Mr. Speich said.

Some first steps have already been taken. Like rivals, Munich Re is offering more tailor-made policies in lieu of bulk business and is on the lookout for new profit opportunities. It is targeting markets such as cyber insurance, as increasingly more companies are looking to protect themselves from network attacks by hackers. In fact, Munich Re already has gross premiums of $263 million in the sector and sees itself as the market leader.

Meanwhile, the restructuring of the primary insurance subsidiary Ergo, while painful, is making progress. New boss Markus Reiss is supposed to lead the Düsseldorf-based daughter firm back to break-even this year. He also wants to launch the first fully-digital automobile insurance company in Germany later this year under the name of Nexible. After losing €40 million in 2016 Ergo is aiming at making a profit of €150-€200 million this year. For the year 2021, Ergo’s objective is to earn over €600 million. But before that can happen, about 1,800 people still have to be laid off.

Ergo’s reorientation – and that of Munich Re more broadly – will demand patience from investors. So it's a good thing that Munich Re’s management knows the value of a generous dividend. On the German stock exchange, Munich Re stocks have a long history of paying out to their shareholders. That’s one tradition Mr. Wenning probably won’t want to mess with.


Carsten Herz leads Handelsblatt's asset management and insurance coverage and is based in Frankfurt. Christian Schnell primarily covers the auto industry and is a former member of Handelsblatt's investment team in Frankfurt. To contact the authors: [email protected] and[email protected]