Munich Re manages expectations with buyback and cautious guidance

Munich Re will buy back up to €1 billion of its own shares by April 2016 as it looks to return capital to shareholders that it feels it cannot use profitably in the tough market conditions.

The world’s largest reinsurer also moved to manage the expectations of its shareholders by revealing that it expected its net profit to drop to between €2.5 billion and €3 billion in 2015. This would compare unfavourably with the €3.17 billion it made in 2014 and the €3.33 billion net profit it posted in 2013.

It said the large range in the forecast reflects the political and economic uncertainty in the world.

The buyback would amount to 5.3 million shares or 3.1 percent of shares based on the current price. Purchases would be completed at the annual meeting of shareholders in April, 2016.

Munich Re had already released primary results for 2014 but it has now also released these in full. Its net income fell slightly compared with 2013, as did its gross written premiums (see separate story).

Nikolaus von Bomhard, the chief executive of Munich Re, spoke openly about the tough market conditions the company is facing while also remaining upbeat. He said that 2014 was a good year for the company. It beat its original profit target of €3 billion and the company is proposing an increase in the dividend to €7.75 per share “in order to allow our shareholders to participate commensurately in Munich Re’s success”.

But he also highlighted the substantial challenges facing the business. A flood of liquidity into important markets means that Munich Re must expect declining returns on its investments again in 2015, he said, meaning the company must continue to base its profitability primarily on the technical result achieved in its insurance business.

The fierce competition will continue in underwriting as well, however, he noted. "Rigorous cycle management and underwriting discipline, and excellent client service, will therefore still be extremely important," said von Bomhard.

"This requires great determination from our staff and management to let go of even substantial levels of business where it is no longer possible to maintain adequate prices. This soft market phase will show just who takes their return-on-equity targets seriously."

In addition to the current intense competition – particularly in reinsurance – he also noted indications of structural changes in the insurance industry. In particular, significant changes are expected in the context of increasing digitalisation.

"Here it is good to know that throughout our history we have already seen many ground-breaking changes and mastered them successfully. In our core business – the assumption of risk – we are focused on innovation, and digitalisation is now a part of this. Thanks to the inventiveness of our 43,000 staff across the world, we are well placed to take on structural challenges and generate profitable new business with innovative products.”