Munich Re: Despite Sustainable Dividend, Its Earnings Outlook Is Not Great

seekingalpha10-12

Munich Re's sustainable dividend and strong capital position make it a solid long-term income play, despite recent hurricane-related earnings risks.H1 2024 performance was strong with a 55% YoY net ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nMunich Re: Despite Sustainable Dividend, Its Earnings Outlook Is Not Great\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-10-12 05:52 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4726301-munich-re-despite-sustainable-dividend-its-earnings-outlook-is-not-great><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Munich Re's sustainable dividend and strong capital position make it a solid long-term income play, despite recent hurricane-related earnings risks.H1 2024 performance was strong with a 55% YoY net ...</p>\n\n<a href=\"https://seekingalpha.com/article/4726301-munich-re-despite-sustainable-dividend-its-earnings-outlook-is-not-great\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"MURGY","symbol_name":"Muenchener Rueckver Ges","start_time":0,"source_url":"https://seekingalpha.com/article/4726301-munich-re-despite-sustainable-dividend-its-earnings-outlook-is-not-great","article_id":"2474602063","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2474602063","pubTimestamp":1728683565,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Munich Re's sustainable dividend and strong capital position make it a solid long-term income play, despite recent hurricane-related earnings risks.H1 2024 performance was strong with a 55% YoY net in","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"MURGY":"Muenchener Rueckver Ges"},"translate_title":"慕尼黑再保险：尽管股息可持续，但其盈利前景并不乐观","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"MURGY":0.9},"content_text":"Munich Re's sustainable dividend and strong capital position make it a solid long-term income play, despite recent hurricane-related earnings risks.H1 2024 performance was strong with a 55% YoY net income increase, but H2 2024 faces potential downward revisions due to high catastrophe losses.The company's Solvency II ratio of 287% indicates robust financial health, allowing it to maintain its dividend growth target despite short-term challenges.Current valuation at 2.2x book value appears high compared to historical averages and peers, suggesting limited share price upside in the near term.Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (OTCPK:MURGY) is an interesting income play over the long term, but its earnings outlook in the short term is not great due to recent catastrophe events in the U.S. As I've covered in a previous article, even though Munich Re's dividend yield is not among the highest in the reinsurance sector, it's a good income pick due to a sustainable dividend over the long haul. As I've not covered the company for some time, in this article I analyze its most recent financial performance and update its investment case, to see whether it remains a good income pick or not in the reinsurance industry. Financial Overview Munich Re released, a couple of months ago, its earnings related to the first half of 2024 (H1 2024), which were above expectations, both at the top and bottom lines. This was supported by improved pricing across the property & casualty (P&C) industry, which was key for strong profitability in its reinsurance segment. Indeed, strong pricing improvements of past years were maintained in both January and July renewals, as competition from both alternative and traditional players remains subdued, boding well for pricing power from large players in the reinsurance market, such as Munich Re. This was positive both for the company's price changes in recent renewals and higher volumes, even though the company has recently decided to reduce its exposure to proportional casualty business, leading to lower overall volumes in July renewals. Moreover, catastrophe losses were below estimates during the first half of 2024, leading to a combined ratio of 79.6% during this period, which is a very positive outcome and leads to a strong underwriting profit in the P&C segment. In other segments, the operating momentum was also positive, both across life reinsurance operations and traditional insurance activities in its ERGO business unit, being supportive of overall earnings growth. Additionally, due to higher interest rates, its net financial result improved significantly to €862 million in H1 2024, up by 137% YoY, being also strong support for a higher top-line in the period. Its operating result in the first half of 2024 was €5.1 billion, up by 54% YoY, and its net income amounted to more than €3.7 billion (+55% YoY). This big jump in earnings also led to a significant improvement in its profitability given that its return on equity ratio, a key measure of profitability in the insurance sector, was 24.3% in H1 2024 (vs. 17% in H1 2023). ROE ratio (Munich RE) While its operating performance was quite good in the first half of the year, this is likely to change in the second half, as natural catastrophe events are seasonal and usually are more frequent during the second half of the year. Indeed, there were two major hurricanes quite recently in the U.S., which are expected to lead to significant insured losses. While it's still early to know how high losses are going to be related to hurricanes Milton and Helene, there are some estimates to put these events (combined) at the top of costliest hurricanes to insurers, which does not bode well for earnings in the industry ahead. According to some estimates, hurricane Milton can surpass insured losses of $50 billion, potentially making it among the most costly hurricanes in history. This is likely to impact Q4 earnings for the reinsurance industry in a great way, something that was not expected some weeks ago. Hurricane insured losses (Statista) This means investors should take Munich Re's guidance to reach an annual profit above €5 billion with some caution, as the company's guidance, which was confirmed a couple of months ago, did not take into account catastrophe events with such large insured losses. While this hit will be particularly negative for Florida specialist insurance companies, such as Citizens Property Insurance which has a great market share both for personal and commercial lines, the reinsurance industry is also expected to have meaningful losses related to recent hurricanes. This is not particularly a surprise for Munich Re, as the company has a great understanding and data analysis related to catastrophe events and provides state-of-the-art catastrophe research, and was expecting an exceptionally active hurricane season in North America this year. This means that to some extent Munich Re's provisions for catastrophe losses should already be higher than usual, as the company's outlook for activity in the hurricane season was cautious, but insured losses probably will be higher than the company was expecting as the combination of hurricanes Helene and Milton insured losses are quite high. According to Verisk, insured losses related to Helene can range between $6-$11 billion, while those related to Milton can go up to $50 billion, according to Fitch. Investors should be aware that these are estimates and ultimate losses can be even higher, which is likely to impact the reinsurance industry profit level in a significant way in Q4. Showing how big the impact of natural catastrophe events on Munich Re's bottom line can be, investors should be aware that the company reported a net profit of only $375 million in 2017 due to higher than usual catastrophe losses, during a period in which its 'normal' annual profit was about $2.5 billion. Thus, there is a significant risk for downward revisions of its quarterly earnings in the short term. Indeed, its net profit in Q2 2024 was $1.6 billion and is expected to be above $2 billion in Q3, but current consensus expects a decline to about $1.1 billion in Q4 2024. Some months ago, the consensus was for a Q4 profit of about $1.7 billion and there haven't been revisions in recent weeks, according to Bloomberg data. Thus, I think there is a high risk of downward revisions ahead. Earnings estimates (Bloomberg) The full ultimate costs of these hurricanes will take some time to be known. Thus, I don't expect Munich Re to report a net profit of ~$1.1 billion in Q4, as the street currently seems to expect, and most likely the company may well report a loss in the current quarter. Nevertheless, its capital position is quite strong as the company reported a Solvency II ratio of 287% at the end of last June, well above its internal target range of 175-225%. This means that Munich Re has an excess capital position and is financially in a strong position to accommodate potential higher losses from recent catastrophe events, while having the capacity to maintain its capital return policy at the same time. Indeed, Munich Re's management says that its excess capital position works as a cushion to protect shareholders against higher than expected catastrophe losses. Thus, it's likely that Munich Re will be able to grow its annual dividend by its target, of at least 5% compared to its previous one. Its last annual dividend was €15 per share, up by 29% YoY, supported by strong earnings growth and the company's strong capital position. Its dividend payout ratio was only 44%, which is a conservative level and shows that Munich Re's dividend seems to be sustainable over the long term. According to current street estimates, its dividend is expected to grow to around €16.73 per share related to 2024 earnings, up by 11% YoY, which at its current share price leads to a forward dividend yield of about 3.3%. Its dividend growth target related to 2024 earnings was easily achievable considering its H1 2024 earnings momentum, but I think there is some downward risk to earnings in H2 2024 and the company can potentially be more conservative regarding dividend growth related to 2024 earnings, which can negatively impact investor sentiment toward its share in the coming months. Another potential headwind for share price upside is its valuation, considering that Munich Re is currently trading at about 2.2x book value, at a premium to its historical valuation of around 1.5x book value over the past five years. Compared to its closest peer Swiss Re AG (OTCPK:SSREY), this valuation also seems to be relatively high, given that Swiss Re is trading at 1.9x book value. Thus, Munich Re seems to be slightly overvalued right now. Conclusion Munich Re offers a sustainable dividend over the long term supported by its leading position in the reinsurance industry and an excess capital position, but its dividend yield is not much higher and recent hurricanes in Florida may lead to higher than expected catastrophe losses, which does not bode well for earnings momentum and its share price in the short term.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2474602063"}