Munich Re, the world’s biggest reinsurer, said premiums will increase this year as primary insurers hurt by the financial crisis take out reinsurance contracts to bolster capital.
“The financial crisis is opening up new opportunities for us,” Joachim Wenning, management board member responsible for life reinsurance, said in an interview in Munich. “Numerous insurers are currently short of capital and selling new shares or raising debt has become very expensive, so reinsurance is a competitive alternative to replenish capital.”
The company closed nine so-called capital-relief transactions this year, which may add more than €2 billion ($2.7 billion) to gross premiums annually, or about 40 per cent of last year’s life reinsurance premiums. The new large-volume contracts helped Munich Re increase its forecast for this year’s gross premium income by about 4 per cent to as much as €41 billion.
“While we don’t expect to be able to continue at that pace throughout the year, more deals in the range of up to €100 million could be anticipated,” Wenning said. “It’s not a question of volume for us. We could more than double the volume of such transactions, if our profitability criteria are met.”
Insurers, hurt by more than $220 billion in losses from the credit crisis, are seeking ways to protect capital to avoid selling new shares at depleted market valuations.
Opportunity from crisis
Aviva Plc, the UK’s biggest insurer, in March increased its capital surplus by 25 per cent to ease investor concern about its ability to withstand further declines in its investments. To do so, the London-based company reinsured some UK life-insurance policies and sold so-called hybrid debt, bonds that have characteristics of both debt and equity.
“Munich Re has more capital available than other reinsurers and it was a wise decision to put share buybacks on hold for the time being,” said Stephan Kalb, a Frankfurt-based analyst at Sal. Oppenheim, who recommends buying Munich Re shares. “They might be well advised to keep some of their powder dry as conditions might even be more favourable towards year-end as many insurers will realise capital strains only after a certain time-lag.” While reinsurers’ capital declined by about a fifth last year, Munich Re has a capital buffer of about €7 billion available for its life, health and property and casualty reinsurance units, Wenning said.
Make more money
Munich Re has said it will put plans to repurchase as much as €2 billion worth of its own shares by the 2011 shareholders meeting on hold for now to preserve capital and allow it take advantage of opportunities that may arise from the economic crisis.
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“Reinsurers that have capital available right now can make more money than they previously could,” Wenning said.
The nine recently concluded capital-relief deals are largely from North America, with some smaller-volume contracts coming from Asia, Wenning said. They focus on transferring insurance risks and not capital market risks.
The company’s life reinsurance premiums fell 11 per cent to €5.28 billion last year as it cancelled older high-volume contracts, leaving the unit with about a fourth of Munich Re’s overall reinsurance premiums. After the recent transactions, the unit’s premiums are expected to grow “significantly” this year, Wenning said.
US growth
Munich Re is concen trating on expanding its existing business in the US, the biggest market for life reinsurance, even as the financial crisis creates opportunities for acquisitions.
“While we are No 1 or 2 in most markets, we are only No 5 in the US, and we plan to change that carefully as the market is very competitive,” Wenning said.
Munich Re is more interested in buying packages of life reinsurance rather than whole companies, as it already has a presence in all major markets, Wenning said. “But currently there are no major deals on the table.”
In January, Hannover Re, Germany’s second-biggest reinsurer, expanded its US business by acquiring life reinsurance contracts from ING Groep NV that are expected to contribute $1.2 billion to premium income this year. Hannover Re said profit from the transaction may make 2009 its second-most profitable year.
“We took a detailed look at the ING deal as well and decided not to pursue it,” Wenning said.
Swine flu
Munich Re said it’s prepared for a swine flu pandemic. Even an outbreak of the dimensions of the 1918 Spanish flu pandemic wouldn’t threaten Munich Re’s existence as “according to our calculations such a worst-case pandemic would not exceed the volume of claims from a big natural catastrophe,” Wenning said. Still, the swine flu outbreak “doesn’t give any reason to assume it would turn into a major pandemic,” he said.