EUR 850.00 For Business Accounts Only

Morningstar | Munich Re's 1Q in Line; Stock Fairly Valued

Munich Re reported net income for the first quarter of EUR 635 million. This is slightly below our expectations and below the EUR 830 million in the comparable period a year ago. The market expects something in the region of EUR 2.5 billion for the full year. We think the sell-off after the results release is generally because the first three months are typically some of the best in terms of natural catastrophe for reinsurance businesses, and the market has been long this stock because of perceived higher quality. We still think 1.2 times book value is a justified multiple for this business, and we maintain our EUR 205 fair value estimate and no-moat rating.

We think ERGO is ultimately what catalytic investors focus on. This has been one of the most problematic areas for Munich Re across all three units, and these results have not instilled a lot of confidence in that turnaround story. Premium is down in international, and that has been accompanied by an EUR 8 million net result. This puts our expectations for the ERGO international business result for over EUR 200 million for the full year into question.

However, the main driver of this lower result has been nontechnical: lower performance on derivatives as well as losses on disposals. Pitting against this, the core or underlying result seems robust and stable. It has been affected by a discontinuation of a banking agreement in Central and Eastern Europe along with higher health insurance claims in Spain. We think a normalised number for ERGO international is EUR 65 million per quarter, and our modelled forecasts roll out to this on an annualised basis. That’s a rough 97.0% combined ratio.

ERGO property and casualty Germany has been somewhat of a softener. While premiums are up around 650 basis points and the technical result is in positive territory, the combined ratio of 98.1% is, for the first quarter, disappointing. This has been affected by above-average large losses; we think that versus the EUR 23 million technical result, EUR 55 million a quarter is more likely to be a better long-term number. This equates to around a 96.5% combined ratio. The quarterly result for ERGO property and casualty Germany is roughly flat, slightly affected by some higher private equity dividends. We don't think that source of profit will significantly change for the P&C Germany unit.

ERGO life and health Germany is typically the largest source of ERGO profit. This quarter did not meet our expectations. The technical result was again decent, but the investment result has been affected by equity derivatives. We ultimately think ERGO life and health Germany in the long run can earn around EUR 600 million.