Munich RE: Slowing Down, Time To Get 'Out' As Of October 2024

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I am selling my remaining shares in Munich RE due to expected growth slowdown post-2024 and overvaluation at €480/share.Munich RE's valuation is too high to achieve a 15% annualized RoR, with ...

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When it comes to global P&C, given both the geopolitical and environmental macro - as I am writing this, we're talking Hurricanes in Florida - should be fairly clear. Traditio","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"MURGY":"Muenchener Rueckver Ges","BK4019":"再保险","MURGF":"Muenchener Rueckver Ges"},"translate_title":"慕尼黑回复：放慢脚步，到了2024年10月“退出”的时候了","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"MURGF":0.9,"MURGY":0.9},"content_text":"I am selling my remaining shares in Munich RE due to expected growth slowdown post-2024 and overvaluation at €480/share.Munich RE's valuation is too high to achieve a 15% annualized RoR, with significant risks in its traditional and cyber insurance segments.Despite strong 2Q24 results and a solid capital position, Munich RE's size doesn't translate to superior profitability compared to peers like Hannover Rueck and Swiss RE.I maintain a price target of €365/share and a \"HOLD\" rating, seeing more risks than rewards at current valuation levels.   Anne Czichos Dear readers/followers, Going neutral on a company like Munich RE (OTCPK:MURGY) is never an easy decision. I will say very clearly that from the period of COVID-19 to 2022, 2023, and some 2024, I made excellent profits off of Munich RE - but as of the 2024 period, I am mostly out of the company, and as of this article, I'm selling my last shares in Munich Re. So why am I doing this? It's not that the company is currently massively overvalued, nor has the company seen a significant increase in risk. But I do believe that post-2024, we're going to see the company's growth really slow down for a minimum of 2-3 years. While 2024E is expected to be a good year, that's not necessarily the case for the years after. And that's what I am, aside from 2Q23, and a 2024E preview, going to provide here. It's fair to say that Munich RE has performed far better than I expected it when I invested in it in the first place. It's a company that has found a way to really move into certain lines or business areas that weren't originally, or even when I started writing about the company, part of its lineup. But it has done so successfully - and that growth might continue at the very least for this year. But every company has its risks, and every company can get too expensive. I believe that Munich RE has reached this point. Here's why. Munich RE - The company's valuation is now too high to see a 15% annualized RoR, with 2Q24 in the bag Scale is not always a positive. It's mostly a good thing, but being the largest reinsurance company on the planet does have its challenges. There's no doubt in my mind that the company has some very good business arms, some businesses that are likely to continue to see growth - but the company still has a lot of challenges to drive things into long-term growth. Munich RE's strategy for the past year and a bit more has been to move its specialty insurance and cyber insurance segments and business - and by move, I mean work with. When we look at P&C reinsurance trends, the premiums here are growing much faster than the rest of the industry or the company's business. But why is this? There are a few reasons for it, but whenever reinsurers are making more premiums, you need to ask yourself what risk they are seeing. When it comes to global P&C, given both the geopolitical and environmental macro - as I am writing this, we're talking Hurricanes in Florida - should be fairly clear. Traditional RE operations have taken a back seat, but this is not necessarily a positive. The company's new model has earned both the respect of analysts as well as sector specialists, as it has resulted in sector-outperforming underwriting results for the company. It's also worth mentioning that I believe Munich RE to be the only company with the size and means to really work with the IoT/Cyber areas with a specialized RE segment - and this is an operational advantage (though in my opinion, with increased digitization, the likelihood that competition will find a way to replicate this success is not unlikely). As I have said before, I'm not thrilled about Munich's decision to include traditional insurance in the form of its Ergo segment. While this has, so far, worked out well, I think it poses significant risk not only due to the capital-intensive nature of its business but also because of market risk. I've already noted where it has pulled down this company's overall rates of return, and that's not even talking about the risks of the company's inherent business risk and policy risk. There's also the fact that one of Munich RE's largest advantages is its scale. Not its profitability. I've covered this before as well. Munich RE is not in any significant way, more profitable than its peers. In fact, Hannover Rueck is one of the sector leaders here. So what the company has is volume, and this is less attractive as the valuation inflates more and more as well. Thirdly, and last here with me talking about overarching risks, and why I am leaving this investment behind for greener pastures, the company's focus on moving into partnerships for new areas, rather than like many other insurance companies work on these areas themselves. You'll recall that my latest PT was closer to €365/share. I will already tell you now, that I am not changing this price target at this time - and that makes the company incredibly inflated here, if we're looking at a conservative 15% annualized RoR. For 2Q24, the results were as follows: The company is good at not delivering a whole lot of surprises. Ergo improved its trends, with a 21.3% RoE and a net result of over half a billion Euros, while Reinsurance continued \"chugging along\" at an RoE of almost 25%. Again, this is not market-leading, but given the company's overall size, it's very solid.   Munich RE IR (Munich RE IR) The company is well on track to deliver on its 2024E. I have very little doubt that the company will manage to do just this - that's not why I am somewhat negative/cautious on the business. What's also positive for the company is the better contribution from less cyclical business segments, which the company does need here. The company is leveraging the current P&C cycle, but even Munich RE acknowledges that earnings here are prone to major losses if catastrophes happen - though it should be \"when\", not if. The company's specialty insurance business is growing, and also less cyclical, but as we've said before, the focus on partnerships for the company here is not necessarily a long-term net positive for profitability.   Munich RE (Munich RE) RE insurance for renewals was positive. The fact that the cycle is longer than the typical one, makes it possible for Munich RE to maintain a very good level of overall profitability here - and it allows for plenty of portfolio optimization and overall growth. The outlook for the full year has the company managing south of €60B in insurance revenue coming in at a 7-9% net margin, with a RoI of around 2.8%. This is very good for a major player like this, and the positivity that the company has for its own results and potential for the full year is justified. The company's capital position is also not in any sort of danger. Debt leverage is at 11.2%, which is higher than the past few years, but not at any worrying level, and the company's Solvency II has moved to 287%, which is well above the regulatory requirements for the business. The company manages a €236B investment portfolio that manages a 4.7% 3-month reinvestment yield and that is mostly based on government bonds, corporate bonds, and covered bonds - in short, very attractive risk-reward. The company has been moving into more illiquid investments as well to drive returns. Its current yield means that it's almost 2% above the company yield, which currently stands at the lower 3% mark here. It's not an impressive yield, even with an AA credit rating, and even with all the safety that I have mentioned for this company. Let me show you the core of my hesitation and care here. Munich RE - Leaving the investment behind at over €450/share The fact that Munich RE is close to €480/share for the native means that the company, for me, is very clearly overvalued here. I maintain my price target at €365/share, which means that we're currently around 30%+ overvalued to my target. My main reasoning for this estimate is that Munich Re does not outperform in the sector. It's larger than its peers, but it's not better than its peers at what it does. Ergo, it should not be allowed a massive premium to its peers either. As I am writing this, I view the peers to Munich as primarily Hannover and Swiss RE. Both of these companies are undervalued next to Munich RE, with Swiss also managing a 5.4% yield, which is solid. I view Swiss Re as the favorable play in this segment at his time, given that the current price is around 115 CHF, and I give the company a PT of close to 130 CHF. This has to do with sales multiples, book multiples, earnings potential, and earnings multiples, none of which has seen the company outperform. On a price-target basis, I give the company an 11x 2024E P/E. I discount more than others for the cyber division because I believe the risk of cyber-attacks and business interruption which call for insurance/Re services will increase, and will not stay as low or rare as some estimate. Renault factories experienced a good example here with the ransom worm, as well as FedEx (FDX) and other European and international firms. I also do not think that it is all that attractive. Over the past 5 years, it has managed a 1% RoE overall, and a near-100% combined ratio (less is better), which is significantly below its peers. Yet Munich Re continues to trade higher, not lower. For these reasons, I continue to stay neutral on the company here. Despite a growth rate of around 5% per year on average, I believe this will most likely be in 2024 where we'll see much of the gross premium and P&C growth, and this will slow down in 2025-2026E. For this reason, 10-11x P/E is the highest I'm willing to go here, and I expect not 30-40% EPS growth in 2024, but closer to 28%. This turns the 11x P/E into single digits for 2026E, and the current share price is too expensive by far. What Munich Re has going for it is size - but aside from that, at this price, I see more risks than I'd like in terms of valuation. In order to really see 15-16% annualized here you have to forecast at over 12.5-13x P/E, and insurance companies are cheaper than that on average. Because of this, and for other reasons of valuation, I'm sticking to my target of €365, and selling what remains of my stake here. My thesis on the company is as follows. Thesis  Munich Re is the largest reinsurance company in the world, and also one of the most conservative in existence. It has a double-A credit rating and a set of fundamentals and titanium-clad underwriting processes that make the company a no-nonsense leader in the business. The earnings results are good, but not great, and I reiterate my PT here and my stance on HOLD. The yield is down to less than 3.3%, and I no longer believe you're in a good position to outperform the market. I would give the company a PT of €365/share here, updated for the latest quarterly and outlook. That makes the company overvalued, and I would maintain my \"HOLD\" rating here. An upside is theoretically possible - but I have rotated my shares and invested in more undervalued stocks back in 2023, and this is my updated thesis for October of 2024.  Here are my criteria and how the company fulfills them (bolded).  This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansion/reversion.  Munich Re is no longer cheap or has a sort of realistic upside of 15% or higher based on a price or margin of safety that I would look for. Because of that, it's a \"HOLD\".  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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