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Munich Re – Creating Lasting Value for Shareholders

November 21, 2011 | About:
AQJ

AQJ

Author's Website
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Munich Re Group (MURGY) is one of the largest reinsurance and insurance companies in the world with headquarters in Munich, Germany. Reinsurance is insurance that is purchased by an insurance company (insurer) from another insurance company (reinsurer) as a means of risk management. The reinsurer and the insurer enter into an agreement which details the conditions upon which the reinsurer would pay the insurer’s losses (in terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium and the insurer issues insurance policies to its own policyholders.

The main reason for reinsurance is to transfer risk from the insurer to the reinsurer. Munch Re has more than 4,000 corporate clients (insurance companies) in approximately 160 countries. It assumes part of the risk covered by these insurance companies, as well as providing comprehensive advice on the insurance business. Munich Re’s primary insurance operations are mainly concentrated in the ERGO Insurance Group. ERGO writes all types of life and health insurance and most types of property and casualty insurance. Outside of Germany, ERGO is present in more than 30 countries around the world, servicing 40 million clients.

It is the objective of Munich Re management to analyze risks from every angle, and to assess and diversify them, thereby creating lasting value for shareholders, clients and employees. Their value-based management philosophy and focus on a sustained increase in Munich Re’s share price is most evident in their commitment to generating a 15% annual rate of return on risk adjusted capital (RORAC), consistent repurchasing of common stock, the payment of an attractive annual dividend to shareholders (6.25 euro) and an objective to keep their combined ratio (net expenses for claims relative to net earned premiums) as low a possible.

Nikolaus vom Bomhard, chairman of the board, recently commented, “It [2011] was an exceptional accumulation of major losses (floods in Australia, tsunami in Japan and earthquake in New Zealand), but that is precisely what reinsurance is for. After all, a well-developed and functioning reinsurance business and insurance program helps to overcome disasters of this scale. Primary insurance provides stable earnings and balances the burdens that occur in reinsurance due to high claims costs.”

Munich Re is an attractively priced global insurance business, selling at a discount to its tangible book value of approximately 100 euro, paying a dividend yield of 6.5% with a management that is committed to creating value for shareholders over time.

A.Q. Johnson & Co. is long Munich Re.

About the author:

AQJ
Arthur Q. Johnson, CFA is founder and President of A.Q. Johnson & Co., Inc., a registered investment advisory firm that manages the Mundoval Fund, (www.mundoval.com) a no-load, global value equity mutual fund, as well as individual portfolios for high net worth and institutional clients. He is a Chartered Financial Analyst, a member of the CFA Institute and San Diego Society of Financial Analysts with more than twenty five years of investment experience.

Visit AQJ's Website


Rating: 2.0/5 (9 votes)

Comments

Topwine
Topwine - 3 years ago
How much European Sovereign debt does Munich Re. own? Is it marked to market?
Liarspoker
Liarspoker - 3 years ago
Topwine - my latest figures are as follows:

* €1bn write down on Greek bonds

* Strong gains on German and US bonds

* Italian bonds reduced by €1.4bn ( Allianz is leaving their Italian exposure unchanged which shows that Munich Re is acting according to its cautious investment model )

* 3% of government bond positions are from Portuguese, Irish and Greek issuers - no doubt these positions have been wound down further so a rough estimate maybe a value of between €2-€3bn

Hope that helps.
Topwine
Topwine - 3 years ago
What about other European exposures? Exactly how much? Which Sovereigns? Gross or Net ?

Are your 3% PIG exposure, gross or net ? The thing is, many of these financials appear cheap on a balance sheet basis, but you just can't trust any of these accountants anymore. I certainly don't.
Liarspoker
Liarspoker - 3 years ago
The 2010 annual report does not give a breakdown of exact European fixed interest exposures only that €26bn of €112bn constitute 'Rest of EU' which does not include Germany.

If you read the 2010 annual report then on page 165 you will find the relevant valuation write ups.

BTW Buffett mentioned in a recent interview that there's a European company that he's buying stock in today, tomorrow, next week and next month. My bet is that it's Munich Re though I wouldn't put money on it. :O)

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