Stormy Results Munich Re Wins Some, Loses Some

The world‘s biggest reinsurance company had a week of victories and losses. Earnings fell at the end of 2016 due to payouts for storms and natural disasters, but the company was able to pay a high dividend to shareholders anyway.
An earthquake in New Zealand impacted Munich Re's results, after payouts of around €250 million.

Munich Re's shareholders are breathing a sigh of relief this week – sort of.

The reinsurance company announced Tuesday that its stock would be paying out a higher dividend yield this year than any other company trading on Germany's blue-chip DAX. Yet still there was disappointment in the markets. The Munich-based company's stock was the biggest loser among Germany‘s top 30 companies as it posted results Tuesday morning, before recovering most of the gains again in the afternoon.

Welcome to the confusing world of Munich Re. The world's biggest reinsurer is caught in a huge overhaul right now, both in public and internally.


Low interest rates in Europe, digitization and increased competition from encroaching hedge funds are all creating pressure. Internally, its leadership is expected to change after an annual general meeting in April. After more than a decade at the helm, Chief Executive Nikolaus von Bomhard will be followed by Joachim Wenning.

It should be a smooth transition, considering Mr. Wenning has been with the company since 1991. Munich Re will need it, as the company has struggled to adapt to changes in the insurance industry.

Munich Re must adapt to a new reality in the insurance industry.

The reinsurer earned €2.6 billion in the last fiscal year, 16 percent less than the year before. Natural disasters such as Hurricane Matthew and an earthquake in New Zealand impacted heavily on the numbers.

Dividends were raised anyway: At €8.60 ($9.20) per share, the yield was around 4 percent above last year’s record payout. Given the company's current stock price of around €176, that translates into a yield of about 5 percent.

Yet better earnings results are possible, as shown on Tuesday by competitor Hannover Re. The German industry's third-largest player generated a group result of €1.17 billion, an improvement on 2015, mainly due to better earnings in damage reinsurance.

However prices in the industry remain under pressure, a situation that's been going on for years. At Munich Re, premiums are in decline, although less so than in previous years.

“But there are signs of stabilization,” said the company's chief financial officer, Jörg Schneider, who foresees the trend changing soon. Price levels fell by only half a percentage point in so-called non-life insurance policies – that is, general insurance like home or auto insurance – that were up for renewal on January 1. A year ago, the fall in price levels was by a whole percentage point.

Mr. Schneider remained cautious about providing a forecast for a year which has only just begun: “There is no reason to believe that we will exceed last year's earnings of €2.6 billion,” he said.

Another challenge: There's no sign that interest rates, set by the European Central Bank, will be going up any time soon.  The company did generate 3.2 percent in current income last year, similar to 2015, but it's only earning a paltry 1.8 percent on reinvested funds. As older high-yield securities mature and there are fewer of these to redeem, the pressure on this side of the business will only increase.

One positive: The insurance company Ergo, which is owned by Munich Re, is expected to achieve positive results this year after incurring losses for years. At this point in 2016, the company was in the red slightly, by €40 million. By the fourth quarter though, Ergo had generated €70 million thanks to good returns on investments.

A new strategy, announced last summer that would cut jobs and expand digitization, is expected to result in more positive results this year. For Munich Re, digitization is also at the top of the list of tasks.

Mr. Schneider said that the company remains deeply invested in reinsurance, but that this may show up in different formats in the future. Natural disasters will continue to play a big role and in the future, topics like the managment of balance sheets and data as well as potential acquisitions in specialized areas of direct insurance will also become more important.

Mr. Schneider sees the company‘s consistent dividends in recent years as an indication of the capital market’s reliability. “If we needed money for a major acquisition, we would get it,” he said assuredly, adding that if the company was to consider fresh ventures it could afford to do so in any case.


Christian Schnell writes about markets and covers the auto industry. To contact the author: [email protected]