Munich Re SWOT and PESTLE Analysis

Strength

1.Strong capitalization allows attractive shareholder returns: Munich Re has strong capitalization which is reflected in its IFRS statements and Solvency II ratios. The Solvency II solvency ratio of 244% that is well above target capitalization emphasizes Munich Re’s financial strength, which is in line with the Solvency II standard. Its ROE exceeds the cost of capital with ROE standing at 10% while the cost of capital levels at 8%.Its debt leverage stood at 10% which is one of the lowest in the insurance industry. The balance sheet is also well positioned regarding prudency of claims reserve and tax provision. The dividend per share growth reached 8.6 Euros as compared to 3.1 euros in 2005. Munich Re’s subsidiary, ERGO insurance group, delivered commendable results, its profit of €273m outperformed guidance for fiscal 2017, which was already raised halfway through the year. ERGO pegged a premium income of €19.0bn. Riding on the wave of strong finances, the Company has strength to expand through acquisitions, but especially through organic growth. The profit estimation for fiscal 2018 is pegged in the range of €2.1–2.5bn, which is a slight increase on the profit guidance for 2017.

2.Excellent credit ratings over the years: The financial ratings for an insurance player gives an assessment of its ability to meet its obligations towards the policyholders. Munich Re has consistently enjoyed top credit ratings over the years by leading agencies. Its ratings as of 2017 according to Fitch is AA (Very strong); A.M. Best is A+ (Superior) and according to Moody's is Aa3 (Excellent). Fitch describes Munich Re’s reinsurance business as a select group having global scale, diversity and financial capabilities to get top quality business in the reinsurance sector.

3.Development of digital capabilities through teams: Munich Re is a company undergoing transformation through digitization. Digitalization has changed the way the insurance industry operates and the company is going through a comprehensive reorganization to meet the customer needs and demands. To help leverage the digitization of economies on the product side and also to help the clients, teams have been set up across the Munich Re Group for these purposes. Contact has also been established with the start-ups and the small and the large companies to tap into these business opportunities. Munich Re already employs over 200 data specialists and more than 300 staff work in innovation. The strategic plan for Munich Re’s group company ERGO will cover all the material activities ranging from sales, products. ERGO will invest up to the tune of €1bn till 2020 which will modernize the company’s IT systems and help it undergo a digital transformation to enable it to become a customer centric organization.

4.Good asset quality: Munich Re possesses a relatively conservative investment portfolio. The Group’s overall asset quality is viewed as very good. High risk invested assets (HRA, i.e. investments in equities alternative investments, non-owner occupied real estate, affiliates, non-investment grade/unrated fixed-income securities) as a % of equity (which for all asset metrics includes Group free RfB and Terminal Bonuses) increased to a relatively high 70% at YE2016 (YE2015: 71%) excluding equity derivatives. Munich Re's level of HRA relative to shareholders' equity is somewhat elevated relative to its peers, however this is mainly due to inclusion of its primary life insurance operation, which inherently has higher asset leverage than a typical reinsurance balance sheet. Adjusting for the primary insurance business, it is estimated that Munich Re's ratio of HRA to equity would be closer to 50%.

Weakness

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Opportunity

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Threat

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Political

1.Uncertainty around Brexit negotiations may have negative implications for Munich Re: Munich Re has considerable UK exposure across insurance segments. Motor insurance is a major business segment in UK. A “Hard Brexit” may further cause depreciation in the UK Pound and even a short term recession in the UK economy. There may also be some regulatory changes which may impact insurers. Thus the uncertainty prevailing around Brexit is slowing down investment decisions and may hurt Munich Re’s UK market growth.

2.Negative effects of Eurozone conflicts: Political risks in the Eurozone continue to exist owing to discord caused by the conflicting national interests of the individual member states. The reduction in the stimulus provided by the European Central Bank’s monetary policy could cause borrowing costs to rise for some countries. Though progress has been made recently in the exit negotiations between the EU and the United Kingdom, the possibility of a disorderly outcome (hard Brexit) with corresponding consequences for individual EU countries cannot be excluded. A number of Munich Re insurance and reinsurance units conduct business in the United Kingdom, and the country’s departure from the EU will have implications for that business.

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Economic

1.Global Insurance markets are expected to grow strongly in 2018: The global economic condition is a key driver for the insurance markets. It is expected that overall insurance premiums will develop as strongly as the worldwide economy in the following two years, at a normal rate of 4.5% (2.9% in real terms, i.e. balanced for inflation), compared with 3.0% (2.9% in real terms) in 2016. Overall premium volume is probably going to grow from nearly €4.18tn in 2016 to over €4.56tn in 2018. Economic recovery in various developing markets ought to be a noteworthy development engine for the insurance business, specifically for worldwide property-casualty business.

2.Low-interest-rate environment globally posing a challenge to insurers like Munich Re: The worldwide low-rate financial condition kept on presenting incredible difficulties for investment by insurers. Yields on ten-year government bonds in Germany and the USA fell toward the beginning of the year. In July it hit authentic lows of – 0.19% and 1.36% separately due to feeble worldwide development, low expansion, free money related approaches, vulnerability after the Brexit vote, and a trip to place of refuge speculations. With an objective to expand its market, the company had an expectation that interest rates would increment in the USA, and portfolio development would enhance after the decision of the new US President, however the revenue did not begin to climb again more emphatically until last year. The delayed low-loan fee stage and lazy economies in a large number of the European insurer’s key markets had some effect on customers in a similar fashion and thus there was a controlled interest for reinsurance.

Social

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Technological

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Legal

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Environmental

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