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Munich Re — My Value Idea Contest Submission

Munich Re – My Value Idea Contest Submission

Munich Re (MUV2.DE, MURGY.US) is the world’s leading reinsurance company. As the name implies, the company headquarters are located in Munich, Germany, though the company does business worldwide. There are more than 47,000 employees with over 13,000 in reinsurance, 33,000 in primary insurance and 800 in asset management.

The three main divisions of Munich Re consist of reinsurance, primary insurance and Munich Health. The group's €193 billion worldwide assets are managed by MEAG.

Almost all of Munich Re’s primary insurance premiums are derived in Europe (99.3%) with nearly all of the reinsurance premiums coming from North America (+- 43%) and Europe (38%). Further exposure comes from Asia, Australasia, Latin America and Africa, as well as the Near and Far East.

The flagship business is the reinsurance property and casualty (P&C) business providing about 60% of gross written premiums

Competitors

Major European reinsurance competitors include Hannover Re (HNR1.DE), Swiss Re (RUKN.VX) and SCOR (SCR.PA). However, Munich Re is easily the largest company compared on both a net asset and written premium basis. Furthermore Munich Re sets itself apart from its competitors by utilizing an insurance/reinsurance model which, in 2009, was split approximately 50/50. Economies of scale also factor as an advantage for Munich Re, as smaller businesses may not get access to lines of business and treaty layers that Munich Re has access too.

It is worth noting that Munich Re outperformed its competitors during the financial crisis.

The Bad and Ugly

Warren Buffett, whom incidentally owns over 10% of MUVR2 shares, likes to purchase shares in solid companies when storm clouds are looming over a business. Currently there are storm clouds aplenty in the European (re)insurance sector. During the start of 2011 Munich Re got stung by a wave of disasters in Japan, Australia and New Zealand. In Q1 the company lost €948 million alone though the company still expects to record a profit for the year, according to its first quarter 2011 press release. With the onset of the US hurricane season this loss figure could rise further resulting in a loss figure for the year. CFO Jorg Schneider said that Munich Re had "the most difficult start to a financial year we have experienced for a long time."

Recently, industry quotes for disaster protection in Florida varied by as much as 15% below the average and 16% over the average as opposed to the usual variance of around 3%. This fact suggests that (re)insurers don’t really know the value of their capital. It also suggests that some reinsurers are raising their rates, which would lead to a boost of returns at the expense of primary insurers and their customers.

Facts also came to light over the last few months that the company rewarded top salesmen with foreign trips on which they were rewarded by the services of prostitutes. Apparently this type of reward is not too uncommon in German business circles. The organizer of such escapades was a manager in the company’s ERGO division and he has left the company since organizing these parties.

A Positive Side

However, the positive side for the patient investor is that the above problems are temporary which has led to a weakening of the share price. Volatility abounds aplenty in Munich Re’s share price action and for this reason the shares have been a favorite trading share of mine for around the last two years. I have been purchasing shares at around the €100 level and selling out north of €110. Currently, at time of writing, the shares are trading at around the €100 level having fallen from the €125 level reached at the end of February last.

A New Image

Munich Re introduced a new insurance brand in early 2010. There was absolutely no need for another insurance brand in the market however there was a need for an agent to listen to its clients. After surveying over 6,000 clients, in order to find out how, and what, clients think of insurance companies, Munich Re set up the ERGO division replacing the Hamburg-Mannheimer, Victoria and KarstadtQuelle brands.

The DKV (health insurance), ERV (travel insurance) and DAS (legal expenses insurance) brands remain unchanged as these brands target specialist lines of business. Non-life insurers Hamburg-Mannheimer, Victoria and DAS have been merged and Victoria’s life operations are closed for new business.

Through Ergo, now Germany’s second largest primary insurance group, the company hopes to increase its share of primary business outside Germany through a Bancassurance partnership with UniCredit S.p.a. which currently serves Germany, Austria and Poland. Central and Eastern Europe are the first targets of expansion.

As with lines of credit in the banking industry, and perhaps even more so (as banks have non-interest income), the (re)insurance industry relies on writing profitable business. During 2009/2010 MUV2 disposed of weakly priced business in its reinsurance division resulting in lower premiums. However a short term decline due to trimming exposure is more favorable than running weak exposure for larger declines in the future. Management in this regard is very shrewd.

Exposure trimming occurred in the motor business of Germany, China and Eastern Europe as well as credit reinsurance and US casualty business.

Management

Nikolaus von Bomhard is Munich Re CEO. Von Bomhard joined Munich Re in 1985, after earning a doctorate in law, and was appointed CEO in 2000. He is 55 years old.

Munich Re has eight other board members each with considerable experience in the industry. All members except for two have at least five years experience in their current role.

Risks

Certainly there are risks, apart from the usual insurance underwriting risks, etc., when investing in Munich Re.

First on the list are the claims pending from the disasters earlier in the year especially those from Japan. If claims are higher than anticipated it will leave Munich Re with a smaller capital buffer which in turn would offer lower protection for other possible cats later in the year. This in turn could threaten solvency if a perfect storm of mega cats arrive. If this scenario occurs it will not only be Munich Re that will be in trouble but rather the whole (re)insurance sector will be in turmoil. Currently only preliminary loss estimates have been given but the final numbers are still uncertain.

A possible sharp rise in longer term bond yields could also spell trouble for Munich Re as this would lead to market-market losses on the company’s fixed income portfolio. Risks from lower grade government bonds, such as from the peripheral European countries, is said to be manageable as exposure is fairly limited.

It is likely that the US will see a higher rate of inflation than Europe. This plays into Munich Re’s hands as US bond exposure is less than 10% of total bond exposure. German and other European bond exposure accounts for over 30% of total bond exposure. Of this amount around a third is comprised of PIIGS exposure.

Germany’s (re)insurers are seeking an exemption to rules governing their holdings of Greek government bonds. The (re)insurers are hoping to avoid a forced sale of these bonds since the bonds were downgraded by credit rating agencies. Munich Re holds around €1.1 billion of Greek government debt.

New insurance risk-capital rules, named Solvency II, are due to come into effect in 2013.

Valuation

We must understand that Munich Re is the strongest capitalised reinsurer in the business and it is this strength that allows the company to forecast a profit for the year after embarking on a terrible start for 2011.

At the time of writing, Munich Re’s market capitalization is €18.2 billion, which is an 11% discount compared to the equity figure found in the 2011 first quarter report of €20.5 million. Historically it is rare for Munich Re to trade at a discount to book value.

2011 will be deemed an exceptional year for Munich Re, so a valuation method based on a multiple is not appropriate. At a push we could take normalised earnings of 15 Euro on a conservative multiple of 10 in order to achieve a target price of 150 Euro. Other earnings-based methods are not appropriate either, unless they are based on historical average figures being projected forwards, as the resultant figure will be wide of the mark due to low exceptional earnings on a large equity base.

Looking at the dividend over the last 10 years we can see that in 2000 the payout was €1.25 per share. In 2010 the payout was €6.25 per share with a slightly larger amount of shares in issue in 2010. Note that dividends weren’t increased every year but in some years they were maintained. The dividend was never lowered in any year. An estimate based on the above could see another dividend payout for 2011 of €6.25.

Combine this dividend yield of 5.5%-6%, depending on the price at which the shares were purchased, with share buyback schemes the company has embarked on, and the annual return to shareholders exceeds 10% excluding any capital gains.

The buyback programme for the year 2011 has been scaled back due to the poor start resulting from the fore-mentioned tragedies.

The Oracle of Omaha himself, Warren Buffett, bought his initial Munich Re shares at much higher prices (I estimate the most he paid was around €125-130) so at €100 the shares must be good value. Indeed, Mr. Buffett holds 100,000 Munich Re shares in his personal portfolio as well as a significant holding through Berkshire Hathaway. The Oracle has mentioned that he would be happy to buy more shares. At current prices I would bet that he is adding.

Also, when Buffett talks about earnings volatility he is talking about (re)insurance companies. The current year for Munich Re is a prime example of earnings volatility. If you buy now, or lower, and sell when the sun is shining you are sure to make a profit, although it may take a little patience.

Tweedy Browne and Blackrock have both recently added Munich Re stock to their portfolios.

The best method of valuation for Munich Re is without doubt a float based valuation.

I calculate it as follows: add float to tangible equity which gives Euro 61.5bn. Market capitalisation equals around Euro 18.5bn. This figure gives over 3X upside based on float valuation. No doubt a declining reinsurance market and taxation on investment returns accounts for much of this gap. However it still looks like the shares are significantly undervalued. JP Morgan's target price of Euro 145 is realistic I think though I would love to see how they derived at that figure.

Perhaps the current storm clouds will darken further allowing entry, or an addition, at less than €100 per share.

Please see page two, in the link below, of the 2010 annual report for a review of the consolidated figures as well as divisional figures:

http://www.munichre.com/publications/302-06773_en.pdf

Outlook

Reinsurance gross written premiums should come in between €25 billion and €26 billion in 2011. Likewise total primary insurance premiums should total approximately €17.5 billion. Munich Health is expected to write €6 billion of gross premiums. Total consolidated premiums, if exchange rates stay stable, should equal between €47-49 billion.

A return of just under 4% is expected from Munich Re’s investment portfolio.

A profit is expected for 2011 even if further catastrophic losses occur. Any major cat losses in the property-casualty reinsurance division can be partly counter balanced by the life reinsurance, primary insurance and Munich Health divisions.

Munich Re sees its medium to long term business opportunities as positive.

Recent News

Though the company has not named any specific targets Munich Re is looking for US acquisitions. Torsten Jeworrek, board member and CEO of Munich Re’s reinsurance division, noted that the company is disproportionally represented in the US. Furthermore, Jeworrek sees potential in Asia and Latin America.

JP Morgan (JPM) has a price target of €145 for Munich Re:

http://www.aktien-meldungen.de/Analysen/Kaufen/JPMorgan-belaesst-Munich-Re-auf-Overweight-Ziel-145-Euro-9652013

Calendar

30 June – London Roadshow

20 July – Munich Re Capital Markets Day 2011, New York

4 August - Interim results till June 30, 2011, and half-year press conference

Conclusion

Munich Re is not the cheapest stock that you’ll find on the markets. However, at the current price of around €100 the stock is worth buying for a good trading opportunity, a large dividend and a recommencement of the share buyback program once current troubles are behind the company.

If Warren Buffett holds Munich Re in his personal portfolio so, perhaps, should you.

Munich Re is a solid long term stock which is definitely suitable for a "widow and orphan" portfolio.

Usually I would make an alternative recommendation. A prime example is the La Farge article which I wrote for "Analysis on Demand." I analyzed the positives and negatives then I valued the company. I knew that West China Cement (HK:2233) was a superior company in many aspects so I recommended not purchasing La Farge but buying West China Cement stock.

However, I don’t see a listed substitute for Munich Re. The company is definitely the market leader with a strong capitalization and can take advantage of this fact to pull in more business, especially as smaller rivals go to the wall. Perhaps a private reinsurer, on par with Munich Re, would be General Re which made a nice profit in first quarter 2011 due to dividends from subsidiaries.

However, one must purchase Berkshire Hathaway stock to gain exposure to General Re. As most investors know you will also create exposure to many other businesses when you buy Berkshire stock so for pure reinsurance exposure Berkshire is not an option.

Further Reading

Apart from the company’s website found here:

http://www.munichre.com/en/homepage/default.aspx

There are also a number of excellent Much Re articles by GuruFocus contributor Juan Ramon Velasco Barros as detailed below:

Juan’s reasons for buying Munich Re: http://www.gurufocus.com/news/133888/i-initiated-a-position-in-munich-re-at-almost-the-same-price-as-berkshire

How does inflation affect (re)insurers: http://investing.kuchita.com/2011/05/26/how-does-inflation-affect-insurers/

Disclosure: I own Munch Re stock and plan to purchase more as the price falls.

About the author:

Liarspoker
Stockbroker @ www.market-swings.com

Visit Liarspoker's Website


Rating: 3.6/5 (29 votes)

Comments

kfh227
Kfh227 premium member - 3 years ago
Everyone knows what insurance is. But re-insurance? Could you give a one paragraph explanation of what it is? Thanks.

Also, what is the best way for a US investor to invest? Why? In my personal case I use Ameritrade if that limits my options any. And on top of this, I have never bought a foreign stock so I am a bit apprehensive over buying my first. This seems as perfect of an opportunity as any though.

"The Oracle has mentioned that he would be happy to buy more shares. At current prices I would bet that he is adding."

Not a bad guess. In his last 13F there was a note that some information was withheld. I suspected USG accumulation but maybe it is Munich Re.
rajeev_agr
Rajeev_agr - 3 years ago
A few questions:

  • Does reinsurance have different economics than insurance companies where most insurance companies loose money in underwriting?
  • If the return on investment is only 4% where do you expect the big return on investment will come from?
  • It was very difficult to understand your main rationale for the stock - is it dividend yield, is it lower than book value or is it that Buffett has bought it>


Thx.
MarcelBarkhuysen
MarcelBarkhuysen - 3 years ago
A few further questions:

1. How does MRe's share price compare to the current value of its insurance float? Is it undervalued on that basis as well?

2. At what cost is the insurance float available to management, i.e. what is the historic underwriting performance of the company?

3. What is the expected impact of the European Solvency II capital requirements regime on the capital base of the company? MRe is well capitalised but it might strain profitability if the new capital regime requires additional capital raising to comply with new capitalisation requirements.

Liarspoker
Liarspoker - 3 years ago
Kfh227 - thanks for reading the article and leaving a comment.

Basically reinsurance companies insure insurance companies. It is a very complicated area and underwriting has to be very astute in order for reinsurance companies not to receive back the risk that they themselves transfer.

I just wrote and submitted a short basic article on reinsurance which should be available to read on GuruFocus very soon.

Unfortunately I can not give advice on how best to buy Munich Re ADRs in the US as I am based in the Republic of Ireland however Juan Ramon Velasco Barros who wrote the articles at the bottom of my own article has bought Munich Re ADRs. I am sure that he will help you should you send him a PM.

I also noticed the withheld information on the 13F. Time will tell what the company is.

Also I have been pondering whether Buffett would like to purchase Munich Re outright. At a push I would say he would do so but perhaps regulatory restrictions make it impossible for him to do so.

Hi Rajeev - also thanks for reading the article and leaving a comment.

First of all I must state that I am not an expert on (re)insurance matters but I am certainly enjoying the learning curve.

As I understand it the economics and processes for reinsurance underwriting is different than the same for a vanilla insurance operation.

First of all reinsurance underwriting is more careful, as explained above, as reinsurers don't want long-tailed transferred risk back on their books. Also reinsurers have a better view of the industry as they work with multiple insurers across multiple sectors. This compares to some insurers whom have limited in-house underwriting capacity.

I will ask Munich Re directly what the average industry precentage figures for losses on underwriting are. I will get back to you once I receive a reply.

Unfortunately due to writing the new Reinsurance Explained article and having answered some questions above I am now short on time but I hope to answer more questions this evening ( Irish time ).
Liarspoker
Liarspoker - 3 years ago


Marcel - Also thanks for reading the article and leaving a comment.

Rajeev - all the points in your third question are attractive features of Munich Re. However I do admit to a mistake in that I left out the float valuation. I was editing the piece last night and emailing it to a few people that somehow the crux got left out. Thanks to Marcel to posting the question which made me reread the whole piece.

The valuation crux is this:

Based on float the company is trading at approximately a 70% discount.

I calculate it as follows: add float to tangible equity which gives Euro 61.5bn. Market capitalisation equals around Euro 18.5bn. This figure gives over 3X upside based on float valuation. No doubt a declining reinsurance market and taxation on investment returns accounts for much of this gap. However it still looks like the shares are significantly undervalued. JP Morgan's target price of Euro 145 is realistic I think though I would love to see how they derived at that figure.

I will answer more questions this evening.
kfh227
Kfh227 premium member - 3 years ago
Liarspoker,

Thank you for all the responses!
Liarspoker
Liarspoker - 3 years ago
No problem Kfh227 - here is the basic reinsurance article:

http://www.gurufocus.com/news/136671/reinsurance-explained
Jose Vasquez
Jose Vasquez - 3 years ago
I bought several times the ADR MURGY each unit is valued in dollars and represent one tenth of the German stock. I have also bought the stock in Germany but I have to pay more commissions for it so I rather buy the ADR which gives me a chance also to get rid of the dollars I have left on my interactive brokers account.

Here are some posts I wrote for Munich which follow my recent buying history: http://investing.kuchita.com/tag/munich-re/

Disclosure: long - www.kuchita.com/view/sumo.php

Congratulations on your post Liarspoker, you wrote it certainly at a time when the stock is not expensive. I have never seen the top reinsurer trading at 85% book value and just after all this disasters the equity is already low. If disasters revert to the mean and with current reinsurance primes more expensive they will build back equity fast and this could prove a unique buying opportunity.

Cheers!

Juan
gurufocus
Gurufocus premium member - 3 years ago
How do you compare Munich Re with Swiss Re, which is also a Buffett holding?

thanks!
buynhold
Buynhold - 3 years ago
Hi Liarspoker,

Thanks for the article - it was a nice read.

I am not sure I understand your valuation comment based on float (below) - could you elaborate on the logic here? I have never seen anybody adding float to equity and using that as intrinsic value - seems wrong to me. I understand looking at the long-term return on float (taking into account the historical cost of float) and getting an idea on the possible long-term book-value growth feasible and basing your return expectation/intrinsic value on that, but this is new to me.

The valuation crux is this:

Based on float the company is trading at approximately a 70% discount.

I calculate it as follows: add float to tangible equity which gives Euro 61.5bn. Market capitalisation equals around Euro 18.5bn. This figure gives over 3X upside based on float valuation.
Liarspoker
Liarspoker - 3 years ago


Ok, I'll continue from where I left off. This way the questions and answers will stay in a nice order.

Rajeev - I am not sure that a large return can be had on a reinsurers investment portfolio. 4% is a pretty good yield especially on a mainly diversified bond portfolio. However the company is planning to moderately increase their exposure to the equity and commodity markets, prudently increase their credit exposure and marginally reduce their government bond portfolio in order to generate larger returns.

Furthermore the company is making investments in the renewable energy sector given appropriate profitability prospects. The company is also looking at real estate investments in emeging markets.

The commodity investments will be made largely as a hedge against inflation.

Marcel - I have refered your second and third questions to the company in order to receive correct answers. The need for risk capital will certainly increase through the implementation of European Solvency II regulations. Businesses must identify factors that affect risk capital but don't add long term value. These can then be adjusted, restricted or terminated. But until the end of 2012 when the final regulatory draft is due we won't know exactly what capital requirements will be. I await Munich Re's response to your questions with pleasure.

Juan - thanks for the kind words. I agree with your post especially the final paragraph.

GuruFocus - Interesting question. I'd better write an article on it as the comparison would take up too much space here. I'll write the article over the weekend.

Buynhold - it's a technique that I learned from an actuary in the UK. Strong companies should achieve a valuation of approximately float plus equity. The Progressive Corporation ( NYSE:PGR ) is one. PGR trades at over twice asset value and around float plus equity.

The Munich Re equity figure used includes figures from the large life and health businesses so is conservatively calculated.

Lothario
Lothario premium member - 3 years ago
What is the difference between MURGY.PK and MURGF.PK?

I also look forward to your comparison of Munich Re and Swiss Re.
ken_hoang
Ken_hoang - 3 years ago
Thanks Liarspoker for the post. Munich Re seems like a good company. How was the growth of Munich Re float over the years? There are some other smaller insurance companies which gave the investors long term consistent growth in capital gains as well with the growing float, low costs of funds with good investment income

For reinsurance, based on the request for deep value analysis, I have done the research and valuation on PartnerRe, one of the player in the reinsurance industry in this gurufocus link http://www.gurufocus.com/news/136777/partner-re-pre--a-conservative-stock-in-reinsurance-industry
Liarspoker
Liarspoker - 3 years ago


First of all apologies but I have not had time to write up a proper Swiss Re comparison as I was home alone over the weekend with the kids. I am also going on holidays next weekend so I must tie up a few loose ends, amongst other things, before then.

Very briefly though:

Buffett bought a 3% stake in Swiss Re, in 2007/8, in conjunction with a deal that allowed Buffett to earn 20% of Swiss Re's property & casualty business for the next 5 years. This deal suggests to me that not everything was rosy within Swiss Re as, once again, Buffett got advantages terms.

Then Buffett stumped up an additional $2.6bn to prop up Swiss Re during the crisis. No doubt Berkshire had a large exposure through its (re)insurance holdings. Swiss Re is on record as saying, back then 2008/9 that they may tap the market for an additional $2bn.

This is in sharp contrast with Munich Re whose business came through the recession in best shape of all competitors.

The above few lines speak volumes about the strengths of the businesses.

Swiss Re currently has an asset base which is about twenty percent smaller than Munich Re's asset base but during Q1 2011 Swiss Re 'only' lost Euro 465m compared to Munich Re's Euro 948m loss.

Both companies see a profitable year barring major cat occurance.

From my personal point of view being based in Europe I like the fact that Munich Re is denominated in Euro where's Swiss Re is obviously denominated in Swiss Francs. Given what is occuring in the Euro zone now, especially since I reside in a peripheral country, Swiss Franc exposure might now be such a bad idea.

Both companies pay good dividends with 2011 yields forecasted as: Swiss Re - 5.2%, Munich Re - 6.1%. Note that Munich Re's dividend has either been maintained or raised annualy over the last five years but that Swiss Re's dividend record is more volatile. No dividend was paid in 2007 and the 2009 dividend was cut sharply.

Of course there is much more to compare but that is all I have time for now.
kefa
Kefa - 3 years ago
Munich RE has maintained its dividend (never cut) since 1969.

Dividend withholding tax in Germany is ~ 27%, in Switzerland it is 35%.

Munich RE wins hands down.
clemensm
Clemensm - 3 years ago
I calculate it as follows: add float to tangible equity which gives Euro 61.5bn. Market capitalisation equals around Euro 18.5bn.

[i]Thank you for your intere
sting article! I live in Germany an I like Munich Re, too. For me key question for valuating the stock is how to calculate amount of float! You said float + tangible equity = Euro 61.5bn. That means float is Euro 41.0bn (tangible equity Euro 20.5bn as you wrote). How did you calculate this float of Euro 41.0bn?

Thank you an sorry for my bad Englisch![/i]
maclaren12
Maclaren12 - 3 years ago
Part of this article is based on an article I wrote for Actuary magazine on float-based valuations. This is available at _http://www.theactuary.com/875497.

Munich Re is a complex conglomerate with substantial life and health businesses. So it is not easy to value using simple methods. I derived the float from the non-life reinsurance and insurance segmental accounts. The life and health businesses were valued at book value, which is less than their value based on the market consistent embedded value disclosed by Munich Re.

An issue with using float-based valuations for insurers is that most of them do not earn as good a return on their investments as Berkshire Hathaway. So one needs to be cautious.

Argonaut
Argonaut premium member - 3 years ago
Couple of questions:

Does anyone know if the US Murgy ADR pays a dividend? I understand the overseas actual stock is now up to 7% which seems great...

I am wondering about the foreign exchange risk of overseas too...

seems like it should be an even better buy now?
Argonaut
Argonaut premium member - 3 years ago
Also, is there a depository service fee for the US ADRs and how much does that amount to?
Pavel
Pavel - 3 years ago
First of: thanks to all participants here for having this high quality discussion on Munich Re - not even in a German board did I find such discussion yet.

I personally agree that that Munich Re is a great investment - it's by far my largest single investment.

Few comments:

- the reason for the recent sharp price drop is the sovereign debt crisis. A banker even wrote me to sell Munich Re because of PIGS exposure. I personally believe this is blown out of proportion. First: we know from the last quarterly report that Greek exposure left is just about 0.5 bn EUR. Italy is the biggest PIGS position with about EUR 4bn in government bond exposure. Spain and Ireland are together about EUR 1.5bn and there is hardly any Portugal exposure. This crisis never really spread to Italy or Spain and it is not likely that it will (Spain being a country with managable debt to GDP and having had budget surpluses just a few years ago; Italy planning a balanced budget in 2-3 years). Instead, Ireland is making good progress and having no history/mentality of excessive spending and a default would anyway never be accepted unless Ireland would lift its corporate tax rate which it is defending to the bone. But in any case, we are looking at a max exposure of EUR 6bn - a loss Munich Re can absorb over 2-3 years easily. As a matter of fact, reinsurers are by their very nature designed to survive mega catastrophes how they happen only every 100 years going far beyond what happened in Japan in March and there are heavy provisions made for such disasters that the current financial/debt crisis looks small against. That's why I find the current price drop so overdone. How sustainable do you guys see Munich Re's asset portfolio?

- there is just one thing I hate about Munich Re: there timing with their equity exposure. Both into the 2002 and the 2008 bear markets they went with relatively high equity exposures (2008 was a bit less as they learned a bit from the prior crisis but still) and then in the crisis they get scared by the losses and cut the equity positions close to zero - at the worst possible moment realising losses. When markets go up again, only then they used to start building up equity exposure again - just to get hit by the next crisis the same way. That's the complete opposite from Buffet who uses a bear market to increase exposure, Munich Re is doing it the worst possible way: sell when prices are low and buy when prices are high... at least so far!! Now for the first time I hope they learned their lessons. Their CFO said in a recent newspaper interview that they reduced end of June equity exposure from 3.5% to 2%. This would be brilliant, they would have sold close to a multi year high (at least as the German DAX is concerned) and he even said they are looking at increasing the exposure now again after shares dropped - for the first time in over 10 years of me following this stock, they would have done it right! But following this why are the documents for the 2nd quarter end 30 June still showing an equity exposure of 3.5%, then they could have reduced exposure end of June how the CFO claimed. Hope they did not do it too late. If they really cut the exposure as stated in the interview, they would have avoided EUR 500m in losses (25% that European markets dropped from EUR 2bn reduced equity exposure) - nice move.

Liarspoker: you seem to have a contact to Munich Re IR team - any chance you could clarify the timing of the share exposure decrease?

Pavel

Pavel
Pavel - 3 years ago
some interesting developments today:

1) in a German newspaper interview one of Munich Re directors announced the target to grow the US business in the next three years by 40% and profits even more. With the US accounting already for about a third of group business, this by itself is a pretty nice growth ou†look for the entire group level

2) We now see a significant insider buy published today: a supervisory board member bought for over USD 100k shares @ 88.213. In Germany, board compensation are much lower than in the US or even the UK and insider buying is also not as common - therefore this can be considered quite a meaningful purchase.

3) huge price drop today - we are testing the lows from early 2009!
Argonaut
Argonaut premium member - 3 years ago
Where can we go to see the Munich Re's regulatory filings?

e.g. Munich said they "filed" somewhere when Buffet bought in...

I checked the USA Sec.gov site and see the ADR filings but nothing recent...

does anyone know where to look in europe or usa for their filings?

btw - here is their USA ADR info:

http://www.adrbnymellon.com/dr_profile.jsp?cusip=626188106

though the amount they list for the dividend at .61 is different from the .90 that Fidelity shows?

Pavel
Pavel - 3 years ago
Argonaut:

the filing system is quite different between Europe and the US and with Munich Re being only listed as ADR it is not subject to the standard SEC filings.

For a German company, there are only standardised filings for director dealings and certain voting right transactions which can be looked up in public databases. For instance: http://www.dgap.de/dgap/static/Companies/?companyId=81&companyName=ircenter_dgap&language=German&id=1010&companyDirectoryName=muenchener-rueck (unfortunately a German web page with certain documents available in English)

More importantly, listed companies are required to publish annual and interim reports that need to meet certain standards set both by law and the Frankfurt stock exchange. These are in English and can be downloaded here:_[www.munichre.com]

Munich Re also publishes presentations made for analysts and you can reply latest analyst conference calls:

http://www.munichre.com/en/ir/publications/presentations/default.aspx
Pavel
Pavel - 3 years ago
more interesting developments today, again coming from a weekend newspaper inteview given by board member Tomas Jeworrek:

- still optimistic to conclude 2011 with a profit

- all depends on mega insurance events to remain in the 2nd half of the year in line with the allocated EUR 1bn (good news: so far they did and we approach the end of the 2nd quarter)

- dividend likely to remain at its present level, no cut is planned unless something dramatic happens

- confirmed again that recent market turmoils had hardly any impact on the company's assets as equity exposure was reduced ahead of the market crash (great news in my opinion - they did it right the first time in decades)
HG2001
HG2001 - 3 years ago








  1. Hi everybody, interesting comments on the MR. Thank you for it. I am German and my english is quite poor, however i like to participate on this threads since i have different - lets say more conservative view - on the MR.

    First of all i also do stock analysis according to grahams suggestions in the books security analysis or intelligent investor.I never look at warren buffets portfolio, respect him for what he has accomplished ( i even read his biography). However, i do think i should use my own ideas and approaches.

    I do basiclly two way of analysing stocks: (its basiclly written in the two books mentioned) a) balance sheet analysis. Using price book value as first selection, however, i normally ajdust the book value as graham sugest in security analysis (i think is call liquidation value). I also look at cash flows and current ratios and debts in general (i dont like high debt levels), b) i do normally DCF calculation. I use my own formula and also sometimes graham formula (but normally not since the calculation method seems to be to agressive for me). I use normally 10 to 11 years average net profits and divide them by todays number of shares. I apply normally no growth rates or very low for the first 5 years (1-2%) and for the next 20 years never more than 1%. Very very seldon i use higher growth rates. Risc discount 10%. So i dont care too much if the future of a industry is great. good or decent/stable is ok for me. I anyway dont know what will happen in the future so i dont want to bet my money on this.

    My margin of safety is around 40-50% - than i buy. However, i add sometimes dividend yields to the margin of safety to evaluate my downside potential.

    So i can say i am very very conservative.

    I believe that, Reinsurance companies or insurance companies are very tricky to evaluate - even more difficult than banks - since the do have not only incertainties in the active side of the balance sheet (asset management) but also on the passive side (claims reserving). So my view is that i am somehow not able to to evaluate whether the company has a good balance sheet or not. Price book value gives muy some margin of safety but final risk remains from my point of view. Its still a random guess and the believe that the management is excellent and conservative. (i believe MR management is excellent and integer).

    I used with the MR DFC calculation. I used 11 years average net profits and divided them by 2011 number of shares. Based on my approach i do not buy MR shares at a price of around 100.The intrinsic value i calculated is around 115 to 120. But i did buy today at a price of around 79 Euro. I had a margin of safety of around 38%, including dividends of around 7% I decided its good enought for me. I enter with 1/5 of my total money. I do expect that this year and maybe the upcomming year will not be very good for the company (natureal deseasters in 2011 and low bond rates next years), however i believe that MR will recover. MR will continue to pay high dividends which is good for my cash flow. If the stock goes below 79 (which might happen considering current situation in Europe) i will increase my position to 2/5 of my total money.

    This i my thoughts and basic of evaluations. Lets see hope i will be ok in the future and my investment will pay off. I hope also that Europe will be fine...

    Take care

    Holger

Argonaut
Argonaut premium member - 2 years ago
Looks like there may be another entry point shortly for Murgy. Thoughts Liarspoker?

Also for USA investors, there was a hefty foreign tax and service fee but even after that the div was over 5% and I think we will get some credit back for the taxes pd?

Liarspoker
Liarspoker - 2 years ago


Any entry sub €90 will yield a good profit over the longer term I'd say. After lasts years episode it looks like Munich Re are back on track. I must have a look at what their portfolio contains these days though I am sure that it's well hedged as MUV2 is a very conservative company. The dividend wil provide a nice income while you wait for the price to correct back to fair value.

am receiving a large dividend, and some smaller ones ), in July and I would be willing to invest those dividends in Munich Re if the price is right.

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