Analysts are expecting further positive effects on the reinsurer’s papers, above all as a result of the change in accounting standards.
(Photo: Bloomberg)
Munich Munich Re shareholders will face a number of changes in the coming year. With the introduction of the new international accounting standard IFRS 17, the world’s largest reinsurer expects more profit and a higher return on equity.
However, the turnover that will replace the previously reported gross premiums is likely to be significantly lower. “With the new accounting standards, our economic earning power is better reflected,” says Chief Financial Officer Christoph Jurecka, assessing the conversion process.
This is one of the biggest change projects that listed insurers in particular have experienced in decades. For well over 20 years, the industry has been concerned with how the previously applicable standard IFRS 4 can be presented more consistently, clearly and transparently.
With the introduction of IFRS 17 from next year, weaknesses in the old standard should be eliminated.
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At Munich Re, more than 700 employees have driven the changeover over the past five years. More than a hundred units worldwide, in which more than 50 million insurance contracts are located, as well as capital investments of around 240 billion euros had to be adjusted accordingly.
Record profit expected next year
The result of this process is a forecast that promises a record profit of four billion euros when IFRS 17 is applied for the first time next year, as the Dax group announced on Wednesday evening.
Compared to the current year, in which Munich Re expects 3.3 billion euros according to the old accounting, it would be an increase of 700 million euros. Jurecka is not yet able to say exactly how much of this will come from the changeover and how much from the operative business.
“Most of the profit increase comes from operational improvements, for example because prices went up,” expects the CFO. However, the range of fluctuation is also increasing. The expected return on equity up to the year 2025 should now be 14 to 16 percent after previously 12 to 14 percent.
>>Read here: High claims, strong business – Munich Re is benefiting from rising demand for insurance cover
Much of this also has to do with methodological changes in the new accounting. In the future, risks will have to be explicitly assessed in terms of their uncertainty, level and point in time. Losses from contracts must be booked immediately, profits are distributed over the term. This makes the profits that an insurer expects from fulfilling a contract over its term transparent.
Aside from the impact on earnings, the introduction of sales numbers is the second big change investors need to brace for. Previously, the gross premiums written were shown here. For the current year, Munich Re expects 61 billion euros here, in the coming year it would probably have been 70 billion euros.
Instead, this is where the expected turnover of 58 billion euros will be in the future. One of the reasons for this is that in the case of contracts with primary insurers, commissions flow back there that were previously offset in the gross premium.
profitability increases
This also affects profitability, which is particularly evident in reinsurance in the area of property and casualty insurance. The combined ratio here is expected to be 86 percent in the future.
For insurers, the lower the rate, the higher the profitability. “Of course we are not ten percent more profitable now,” CFO Jurecka puts it in a nutshell. Such a number would have been unthinkable in the old IFRS4 world.
The change in accounting also has an impact on Munich Re’s traditionally high portfolio of investments. According to the old accounting, this is currently around 230 billion euros, according to IFRS 17 it should be 240 billion euros. The main reason is that the immense portfolio of securities, real estate, investments and derivatives is now reported at market values in a much more up-to-date manner.
Munich Re has been soaring on the stock market for a few weeks and since the end of November has been trading above the EUR 300 mark for the first time in over 20 years. In the past few days, the papers were slightly below.
However, analysts expect further positive effects, above all from the change in accounting standards. Kamran Hossain from the US bank JP Morgan recommends overweighting the share and considers a price target of 350 euros to be realistic.
More: Munich Re raises its profit forecast for 2023