Introduction: Munich Re (MUV2.DE, Financial)(MURGY.US, Financial), headquartered in Munich, Germany, is the world’s largest reinsurer in terms of both revenue and equity. Its shares were first admitted to trading on the stock exchange in Munich on 21 March, 1888, and there are more than 47,000 employees with over 13,000 in reinsurance, 33,000 in primary insurance and 800 in asset management.
Reinsurance companies basically insure insurance companies as well as their competitors (known as retrocession). Insurance companies cede risk to reinsurance companies in a variety of ways however these are beyond the scope of this article. Reinsurance economics basically mirrors insurance economics. Those companies that underwrite using incorrect policies will make an underwriting loss. Munich Re prides itself on writing solid policies on prices that make sense. If prices don’t make sense they walk.
Property-casualty insurance, and reinsurance as well as health reinsurance consist of short-term lines whereas life primary insurance and the bulk of health primary insurance offer longer-term tails.
A five-year key figure summary is shown in the following table:
Group activities encompass life reinsurance (19% of premiums), property casualty reinsurance (33 %), life primary insurance (12%), health primary insurance (12%), property casualty primary insurance (12%), Munich health — basically primary health outside of Germany (12%) — and asset management. The group’s worldwide assets which amount to just under €200 billion are managed by MEAG.
At the end of 2010 fixed-interest securities were worth €112.35 billion and non-fixed-interest securities came to €9.77 billion. Carrying amounts were as follows:
As at the third quarter 2011, €1 billion was written down on Greek bonds, and Italian bond exposure was reduced by €1.4 billion. German Insurance company Allianz (AZ) has left their Italian bond exposure untouched suggesting that the Euro crisis is blown out of proportion. Either way Munich Re’s move shows their cautious operating approach. By my estimation MUV2 still has around €3 billion Italian bond exposure though I wouldn’t be surprised if more bonds have been unloaded recently. Strong gains were made on German and U.S. bonds during the third quarter.
Three percent of total government bonds are from Portuguese, Irish and Greek issuers. Again, I would not be surprised if these positions were wound down further.
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. Munich Re is looking to extend its activities in India, South Korea and China.
The flagship business is the reinsurance property and casualty (P&C) business providing about 60% of gross written premiums. Sales channels consist primarily of the group’s strong sales organizations, broker relationships, extensive marketing cooperations and collaboration with the Unicredit group.
A five-year history of segment combined ratios follows:
Reinsurance (Property Casualty)
Primary Insurance (Property Casualty)
Munich Health
Munich Re reports under IFRS except for underwriting which is reported under US GAAP.
With 177,588,750 shares in issue the market capitalization of MUV2 at €83.50 equals €14.82 billion. There were 140,000 shareholders on the share register at the end of December 2010. The share register is broken down per location as follows:
On a personal note I am currently residing in the Republic of Ireland and have no problem investing in strong German companies. Several friends who reside in the U.S. have expressed their desire to spread their investment risk from the US dollar to the euro and other denominations. Germany is the strongest industrial sovereign in Europe which continues today as shown by Merkel’s stance when dealing with other euro leaders in order to solve the euro debt crisis.
Management
Nikolaus von Bomhard is Munich Re's 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, including Jorg Schneider (finance director) and Torsten Jeworrek (chairman of the reinsurance committee), each with considerable experience in the industry. All members except for two have at least five years experience in their current role.
Management is strong and conservative.
There are 20 members of the supervisory board. More information on management can be found here: http://www.munichre.com/en/group/management/board_of_management/default.aspx
Competitors
Major European reinsurance competitors include Hannover Re (HNR1.DE), Swiss Re (RUKN.VX), General Re (part of Berkshire Hathaway (BRK.A)(BRK.B, Financial) 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 to.
As detailed elsewhere in this article, Munich Re is denominated in euros and sports a dividend which was only lowered once (in 1969) since 1952. Swiss Re is currently trading on a multiple of 7.4 for 2012 with a yield of 6.9%, and Hannover Re is sporting a multiple of 6.5 and a yield of 6.2% for 2012. The multiple for Munich Re is just 6.0 and the yield is 7.48%. (All forecasts derived from www.digitallook.com.)
Munich Re’s integrated business model covers large sections of the value chain in the risk market and the group leverage synergies in revenue and costs whilst reducing the risk-based capital requirement through better diversification.
The following table shows the largest five companies categorized by net reinsurance premiums written:
Of the main listed reinsurance companies, Munich Re weathered the 2007/9 storm the best. Swiss Re needed a capital injection of around US$2.6 billion which was provided by Warren Buffett after Buffett bought a 3% stake in Swiss Re during 2007/8. In addition, at the same time, Buffett made a deal with Swiss Re that Berkshire Hathaway, of which Buffett is chairman, would receive 20% of property-casualty premiums for the next five years whilst incurring the same risk.
Furthermore in comparison of Swiss Re and Munich Re, since both have Buffett on the register, the German dividend withholding tax is 27% against 35% for Switzerland.
Terrible Year and the Future
2011 realized Munich Re's fears by providing the company with its worst operational year ever. The Japanese floods and tsunami together with Australian floods heralded a tough start to the year with tornadoes in the U.S. having a large impact on underwriting as well. Further catastrophes, such as floods in Thailand and an earthquake in Turkey, continue to depress profits. However, the group expects to make a profit for the current year subject to more catastrophes occurring. The dividend for 2011 is likely to remain stable from 2010 when the payout equaled €6.25 per share.
Natural catastrophes are not the only fly in the ointment at Munich Re. The current economic turmoil is affecting the investment result. For example, Munich Re wrote down €1 billion on Greek bonds, low interest rates continue to hamper returns and Italian bonds were reduced by €1.4 billion presumably at a loss. The discrepancy between yields on stronger sovereigns and peripheral countries within the eurozone shows that uncertainty is ongoing. For the first nine months of 2011 Munich Re’s investment returns are €4,815m (2010: €7,281m) or 3.3% annualised. However lower returns, under 4%, were forecast in the 2010 annual report. Corrected forecasts now stand at a return of just under 3.5% for 2011.
Of course Ergo, Munich Re’s primary insurance business, has also been featured in the press in less than favorable terms when it emerged that senior management and several intermediaries were taken on an incentive trip to Budapest in 2007 and rewarded with the services of prostitutes. These subjects were addressed head-on by Nikolaus Von Bomhard, Munich Re chairman, in the 2011 interim report.
So what will the future bring apart from uncertainty? Well it is a characteristic of (re)insurance companies to have a successful year after a bad year. The period following 9/11 is a prime example of this. When catastrophes occur (re)insurance companies can increase their prices in-line with the industry price increases (there is no real pricing power, outside of the industry, as the product is of a commodity type). However, a double whammy occurs as people become aware of these catastrophes and take out insurance. The result is an increase in volume and price which leads to a successful outcome for the (re)insurer.
For the current year till end of the third quarter the group made a net profit of €80m. The New Reinsurance Company Ltd. and Ergo paid dividends of €366m to Munich Re but were eliminated in the accounts due to the intra-group consolidation process.
Gross written premium income is expected to come in at approximately €49-€50 billion. Munich Re is forecasting a profitable end to 2011 for the year as a whole. The dividend is expected to remain stable at €6.25 per share.
Float
I am including this heading as I will be asked about Munich Re’s float in the comment section. Presently I am unable to calculate Munich Re’s float from the balance sheet. Over the last month I have asked many people for their calculation, after showing them mine, but I have not received one decent response.
For what it is worth my calculation is as follows:
Based on the 2010 Munich Re Annual Report:
Unearned Premiums (Reference C I on liability side of B/S) = € 7,879
Plus
Provisions (Reference C I & II under liabilities) = € 104,413 + € 49,501 = € 153,914
Plus
Other Technical Provisions (Reference C IV) = € 9,555 (not sure if I should include this line)
Total = € 171,348
Less
Net Deferred Acquisition Costs (Reference G on asset side) = € 9,093
Less
Deferred Tax Assets (Reference H) = € 5,959
Total = € 15,052
Therefore Float = € 171,348 less € 15,052 = € 156,296
This figure looks too high to me. Please comment below if you can calculate float from the balance sheet.
Munich Re's reply to my float calculation is as follows:
"Please understand that we cannot judge your calculation, since Warren E. Buffett’s “float” model is just one way of many others to evaluate a company, a partial reflection from only this perspective (no matter which figures one applies) distorts a fair and therefore applicable value. This better is represented by the consolidated cash flow statement and following commenting notes you can find in our annual report, page 156. Thank you for your attention."
Valuation
Dividend:
Munich Re’s share price was €83 today in Europe. Such a price will yield 7.53% if the 2010 dividend is maintained. Munich Re has raised or maintained the dividend since 1969. In fact 1969 is the only year in which there was a dividend reduction since 1952.
In conjunction with the dividend, Munich Re returns excess cash to shareholders via a share buyback scheme. The following table shows the weighted average number of outstanding shares:
As can be seen, over 22% of the outstanding shares have been repurchased over the last six years. Currently the repurchase programme is on hold due to the challenging year. Munich Re intends to resume the programme when appropriate.
Multiple and Equity (Book Value):
On current forecasts for 2012, Munich Re trades on a multiple of just 5.9.
Table of 2012 Forecasts:
The average five-year earnings per share, from 2006-2010, for Munich Re weighs in at €13.326 per share which suggests that when placed on the five-year average multiple over the same period (9.52) we can calculate a fair value of €127. This figure suggests the shares are discounted from fair value by 35% (or inverting this there is 53% upside).
Furthermore, the share price is trading at a large discount to net asset value.
Historically the share price has traded above book value as shown below:
Currently equity, taken from the third-quarter results equals €23.03 billion versus a market capitalization of €15 billion. This represents a discount of 35% to book value (or upside of over 50% to reach book value valuation). This mirrors the earnings valuation.
On page 55 of the 2010 annual report it states that assets which are traded on the capital markets are valued on the basis of the market values observed at the valuation date. A breakdown of asset valuation methods can be found on page 164 of the same report under the heading ‘B // Investments’. Fixed-interest security valuation methods are shown on page 165 with a detailed table covering all pricing methods on page 166. These pages are essential reading if working with the book value figure.
Based on the above valuation the shares could be termed a bargain. In "The Intelligent Investor," Benjamin Graham suggests "that an issue is not a true ‘bargain’ unless the indicated value is at least 50% more than the price" (p82, Portfolio Policy: The Positive Side).
The Oracle of Omaha
At the end of 2010 Warren Buffett owned a 10.244% stake in Munich Re broken down as follows:
According to a letter Buffett sent the company, the intention is to increase his passive shareholding in Munich Re throughout 2011.
Due to stock repurchases I estimate that Buffett’s holding at the end of 2010 (19,259,600 shares) is now worth 10.84% of the company. The estimated average purchase price of those shares is around €107 against a trading price of €83.50 at time of writing. Just last week Buffett mentioned that he is buying a European stock ‘today, tomorrow, next week and next month,’ at current prices my guess is that this share is Munich Re. However we will find out at the start of February, 2012.
Buffett’s presence on the share register brings forward an element of safety for smaller investors. Reinsurance companies insure each other through a process known as retrocession. This basically means that reinsurance companies have an interest in other reinsurance companies. Should Munich Re need capital aid then I am sure that Berkshire Hathaway, Buffett’s holding company, will come to the rescue. I hasten to add that Munich Re escaped the 2007/8/9 crash without any external aid unlike Swiss Re. In fact Munich Re proved to be the strongest (re)insurance company during this trying time.
Risks
The majority of risks for Munich Re echo those of other (re)insurance companies. These include underwriting risk which contains premium and reserve risks, market risk which includes equity, interest rate, currency and property risk, credit risk as well as operational, liquidity, strategic and reputational risks.
Risks are controlled, if possible, by a variety of committees. The Group Committee, Group Risk Committee, Group Investment Committee and the Reputational Risk Committee are all affective at group level. At segment level these include the Global Underwriting and Risk Committee, the ERGO Risk Committee and the Munich Health Risk committee.
The risk report starts on page 116 of the 2010 annual report which can be found on the Munich Re website listed below under the "Further Reading" heading.
Latest News
Munich Re subsidiary Windsor Health, which was acquired in October 2010, is set to create 80 jobs at two new offices in Atlanta, U.S. Sixty-five people will be employed at the executive offices in Buckhead whilst a further 15 people will gain employment in a satellite office in Duluth.
The above development is in line with Munich Re’s desire to grow the U.S. business by 40% over the next three years as U.S. profits grow at a higher rate. The U.S. makes up around a third of the company’s business so good growth is forecasted.
Conclusion
The prime valuation tool utilized should be the large discount to book value but of course other value measurements also work at these distressed prices. For example, the yield is historically high and the multiple is historically low. Munich Re is a very well-run machine which generates excess cash and has the backing of Warren Buffett.
Calendar
29-30th November: Roadshow Benelux
6th December: UBS ‘Senior Investor Day’, Munich
8-9th December: Roadshow Geneva/Zurich
9th December: Roadshow London/Zurich
2nd February: 2011 Preliminary Figures
26th April: AGM, Munich
27th April: Annual Dividend Payment
Further Reading
The Munich Re website can be found here: http://www.munichre.com/en/homepage/default.aspx
For those interested in purchasing ADRs or gaining exposure to Munich Re from the U.S., please read the comments at the bottom of the following article:
http://www.gurufocus.com/news/133888/i-initiated-a-position-in-munich-re-at-almost-the-same-price-as-berkshire
There is an excellent article regarding float and Munich Re here: http://www.theactuary.com/actuary/feature/2092013/insurance-float-valuations
Disclosure: Long Munich Re and am looking to add if the share price falls more.
Reinsurance companies basically insure insurance companies as well as their competitors (known as retrocession). Insurance companies cede risk to reinsurance companies in a variety of ways however these are beyond the scope of this article. Reinsurance economics basically mirrors insurance economics. Those companies that underwrite using incorrect policies will make an underwriting loss. Munich Re prides itself on writing solid policies on prices that make sense. If prices don’t make sense they walk.
Property-casualty insurance, and reinsurance as well as health reinsurance consist of short-term lines whereas life primary insurance and the bulk of health primary insurance offer longer-term tails.
A five-year key figure summary is shown in the following table:
2010 | 2009 | 2008 | 2007 | 2006 | |
Gross Premiums Written € billion | 45.5 | 41.4 | 37.8 | 37.3 | 37.4 |
Operating Result €m | 3,978 | 4,721 | 3,884 | 5,573 | 5,877 |
Consolidated Result €m | 2,430 | 2,564 | 1,579 | 3,923 | 3,519 |
Investments € billion | 193.1 | 182.2 | 174.9 | 176.2 | 176.9 |
Return on Equity % | 10.4 | 11.8 | 7.0 | 15.3 | 14.1 |
Equity € billion | 23.0 | 22.3 | 21.1 | 25.3 | 26.3 |
Net Technical Provisions € billion | 171.1 | 163.9 | 157.1 | 152.4 | 153.9 |
Group activities encompass life reinsurance (19% of premiums), property casualty reinsurance (33 %), life primary insurance (12%), health primary insurance (12%), property casualty primary insurance (12%), Munich health — basically primary health outside of Germany (12%) — and asset management. The group’s worldwide assets which amount to just under €200 billion are managed by MEAG.
At the end of 2010 fixed-interest securities were worth €112.35 billion and non-fixed-interest securities came to €9.77 billion. Carrying amounts were as follows:
Fixed-interest Securities | € billion |
Government Bonds | |
Germany | 7.59 |
Rest EU | 26.6 |
USA | 11.19 |
Other | 9.23 |
Corporate Debt Securities | 47.14 (over half are pfandbriefs) |
Other | 10.58 |
Non-Fixed-Interest Securities | |
Shares | 6.03 |
Investment Funds | |
Equity Funds | 0.5 |
Bond Funds | 1.96 |
Real Estate Funds | .54 |
Other | .73 |
As at the third quarter 2011, €1 billion was written down on Greek bonds, and Italian bond exposure was reduced by €1.4 billion. German Insurance company Allianz (AZ) has left their Italian bond exposure untouched suggesting that the Euro crisis is blown out of proportion. Either way Munich Re’s move shows their cautious operating approach. By my estimation MUV2 still has around €3 billion Italian bond exposure though I wouldn’t be surprised if more bonds have been unloaded recently. Strong gains were made on German and U.S. bonds during the third quarter.
Three percent of total government bonds are from Portuguese, Irish and Greek issuers. Again, I would not be surprised if these positions were wound down further.
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. Munich Re is looking to extend its activities in India, South Korea and China.
The flagship business is the reinsurance property and casualty (P&C) business providing about 60% of gross written premiums. Sales channels consist primarily of the group’s strong sales organizations, broker relationships, extensive marketing cooperations and collaboration with the Unicredit group.
A five-year history of segment combined ratios follows:
Reinsurance (Property Casualty)
Year | 2010 | 2009 | 2008 | 2007 | 2006 |
% | 100.5 | 95.3 | 99.4 | 96.4 | 92.6 |
Primary Insurance (Property Casualty)
Year | 2010 | 2009 | 2008 | 2007 | 2006 |
% | 96.8 | 93.2 | 90.9 | 93.4 | 90.8 |
Munich Health
Year | 2010 | 2009 |
% | 99.7 | 99.4 |
Munich Re reports under IFRS except for underwriting which is reported under US GAAP.
With 177,588,750 shares in issue the market capitalization of MUV2 at €83.50 equals €14.82 billion. There were 140,000 shareholders on the share register at the end of December 2010. The share register is broken down per location as follows:
Country | % |
North America | 29.9 |
Rest of Europe | 28.6 |
Germany | 27.3 |
UK | 13.6% |
Other Countries | 0.6 |
On a personal note I am currently residing in the Republic of Ireland and have no problem investing in strong German companies. Several friends who reside in the U.S. have expressed their desire to spread their investment risk from the US dollar to the euro and other denominations. Germany is the strongest industrial sovereign in Europe which continues today as shown by Merkel’s stance when dealing with other euro leaders in order to solve the euro debt crisis.
Management
Nikolaus von Bomhard is Munich Re's 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, including Jorg Schneider (finance director) and Torsten Jeworrek (chairman of the reinsurance committee), each with considerable experience in the industry. All members except for two have at least five years experience in their current role.
Management is strong and conservative.
There are 20 members of the supervisory board. More information on management can be found here: http://www.munichre.com/en/group/management/board_of_management/default.aspx
Competitors
Major European reinsurance competitors include Hannover Re (HNR1.DE), Swiss Re (RUKN.VX), General Re (part of Berkshire Hathaway (BRK.A)(BRK.B, Financial) 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 to.
As detailed elsewhere in this article, Munich Re is denominated in euros and sports a dividend which was only lowered once (in 1969) since 1952. Swiss Re is currently trading on a multiple of 7.4 for 2012 with a yield of 6.9%, and Hannover Re is sporting a multiple of 6.5 and a yield of 6.2% for 2012. The multiple for Munich Re is just 6.0 and the yield is 7.48%. (All forecasts derived from www.digitallook.com.)
Munich Re’s integrated business model covers large sections of the value chain in the risk market and the group leverage synergies in revenue and costs whilst reducing the risk-based capital requirement through better diversification.
The following table shows the largest five companies categorized by net reinsurance premiums written:
Company | Country | Net Reinsurance premiums Written (US$ billion) in 2010 |
Munich Re | Germany | 29,269 |
Swiss Re | Switzerland | 19,433 |
General Re | USA | 14,669 |
Hannover Re | Germany | 13,653 |
Lloyds | UK | 9,762 |
Of the main listed reinsurance companies, Munich Re weathered the 2007/9 storm the best. Swiss Re needed a capital injection of around US$2.6 billion which was provided by Warren Buffett after Buffett bought a 3% stake in Swiss Re during 2007/8. In addition, at the same time, Buffett made a deal with Swiss Re that Berkshire Hathaway, of which Buffett is chairman, would receive 20% of property-casualty premiums for the next five years whilst incurring the same risk.
Furthermore in comparison of Swiss Re and Munich Re, since both have Buffett on the register, the German dividend withholding tax is 27% against 35% for Switzerland.
Terrible Year and the Future
2011 realized Munich Re's fears by providing the company with its worst operational year ever. The Japanese floods and tsunami together with Australian floods heralded a tough start to the year with tornadoes in the U.S. having a large impact on underwriting as well. Further catastrophes, such as floods in Thailand and an earthquake in Turkey, continue to depress profits. However, the group expects to make a profit for the current year subject to more catastrophes occurring. The dividend for 2011 is likely to remain stable from 2010 when the payout equaled €6.25 per share.
Natural catastrophes are not the only fly in the ointment at Munich Re. The current economic turmoil is affecting the investment result. For example, Munich Re wrote down €1 billion on Greek bonds, low interest rates continue to hamper returns and Italian bonds were reduced by €1.4 billion presumably at a loss. The discrepancy between yields on stronger sovereigns and peripheral countries within the eurozone shows that uncertainty is ongoing. For the first nine months of 2011 Munich Re’s investment returns are €4,815m (2010: €7,281m) or 3.3% annualised. However lower returns, under 4%, were forecast in the 2010 annual report. Corrected forecasts now stand at a return of just under 3.5% for 2011.
Of course Ergo, Munich Re’s primary insurance business, has also been featured in the press in less than favorable terms when it emerged that senior management and several intermediaries were taken on an incentive trip to Budapest in 2007 and rewarded with the services of prostitutes. These subjects were addressed head-on by Nikolaus Von Bomhard, Munich Re chairman, in the 2011 interim report.
So what will the future bring apart from uncertainty? Well it is a characteristic of (re)insurance companies to have a successful year after a bad year. The period following 9/11 is a prime example of this. When catastrophes occur (re)insurance companies can increase their prices in-line with the industry price increases (there is no real pricing power, outside of the industry, as the product is of a commodity type). However, a double whammy occurs as people become aware of these catastrophes and take out insurance. The result is an increase in volume and price which leads to a successful outcome for the (re)insurer.
For the current year till end of the third quarter the group made a net profit of €80m. The New Reinsurance Company Ltd. and Ergo paid dividends of €366m to Munich Re but were eliminated in the accounts due to the intra-group consolidation process.
Gross written premium income is expected to come in at approximately €49-€50 billion. Munich Re is forecasting a profitable end to 2011 for the year as a whole. The dividend is expected to remain stable at €6.25 per share.
Float
I am including this heading as I will be asked about Munich Re’s float in the comment section. Presently I am unable to calculate Munich Re’s float from the balance sheet. Over the last month I have asked many people for their calculation, after showing them mine, but I have not received one decent response.
For what it is worth my calculation is as follows:
Based on the 2010 Munich Re Annual Report:
Unearned Premiums (Reference C I on liability side of B/S) = € 7,879
Plus
Provisions (Reference C I & II under liabilities) = € 104,413 + € 49,501 = € 153,914
Plus
Other Technical Provisions (Reference C IV) = € 9,555 (not sure if I should include this line)
Total = € 171,348
Less
Net Deferred Acquisition Costs (Reference G on asset side) = € 9,093
Less
Deferred Tax Assets (Reference H) = € 5,959
Total = € 15,052
Therefore Float = € 171,348 less € 15,052 = € 156,296
This figure looks too high to me. Please comment below if you can calculate float from the balance sheet.
Munich Re's reply to my float calculation is as follows:
"Please understand that we cannot judge your calculation, since Warren E. Buffett’s “float” model is just one way of many others to evaluate a company, a partial reflection from only this perspective (no matter which figures one applies) distorts a fair and therefore applicable value. This better is represented by the consolidated cash flow statement and following commenting notes you can find in our annual report, page 156. Thank you for your attention."
Valuation
Dividend:
Munich Re’s share price was €83 today in Europe. Such a price will yield 7.53% if the 2010 dividend is maintained. Munich Re has raised or maintained the dividend since 1969. In fact 1969 is the only year in which there was a dividend reduction since 1952.
In conjunction with the dividend, Munich Re returns excess cash to shareholders via a share buyback scheme. The following table shows the weighted average number of outstanding shares:
Year | Number of Outstanding Shares |
Q3 2011 | 177,588,750 |
2010 | 185,422,866 |
2009 | 194,692,459 |
2008 | 200,883,490 |
2007 | 215,328,152 |
2006 | 227,568,187 |
2005 | 228,201,627 |
As can be seen, over 22% of the outstanding shares have been repurchased over the last six years. Currently the repurchase programme is on hold due to the challenging year. Munich Re intends to resume the programme when appropriate.
Multiple and Equity (Book Value):
On current forecasts for 2012, Munich Re trades on a multiple of just 5.9.
Table of 2012 Forecasts:
Revenue (€ billion) | Pre-Tax Profit (€ billion) | EPS (€ cent) | Dividend (€ cent) |
49.52 | 3.67 | 1,408.89 | 646.23 |
The average five-year earnings per share, from 2006-2010, for Munich Re weighs in at €13.326 per share which suggests that when placed on the five-year average multiple over the same period (9.52) we can calculate a fair value of €127. This figure suggests the shares are discounted from fair value by 35% (or inverting this there is 53% upside).
Furthermore, the share price is trading at a large discount to net asset value.
Historically the share price has traded above book value as shown below:
Year | Equity (€ billion) | Market Cap (€ billion) | Premium/(Discount) |
2010 | 23 | 21.4 | (6.95%) |
2009 | 22.3 | 21.5 | (3.58%) |
2008 | 21.1 | 22.9 | 8.53% |
2007 | 25.3 | 29.0 | 14.62% |
2006 | 26.3 | 29.9 | 13.69% |
2005 | 24.3 | 26.3 | 8.23% |
2004 | 20.5 | 20.8 | 1.46% |
2003 | 19.3 | 22.1 | 14.5% |
2002 | 13.9 | 20.4 | 46.76% |
2001 | 19.4 | 54.0 | 178.35% |
Currently equity, taken from the third-quarter results equals €23.03 billion versus a market capitalization of €15 billion. This represents a discount of 35% to book value (or upside of over 50% to reach book value valuation). This mirrors the earnings valuation.
On page 55 of the 2010 annual report it states that assets which are traded on the capital markets are valued on the basis of the market values observed at the valuation date. A breakdown of asset valuation methods can be found on page 164 of the same report under the heading ‘B // Investments’. Fixed-interest security valuation methods are shown on page 165 with a detailed table covering all pricing methods on page 166. These pages are essential reading if working with the book value figure.
Based on the above valuation the shares could be termed a bargain. In "The Intelligent Investor," Benjamin Graham suggests "that an issue is not a true ‘bargain’ unless the indicated value is at least 50% more than the price" (p82, Portfolio Policy: The Positive Side).
The Oracle of Omaha
At the end of 2010 Warren Buffett owned a 10.244% stake in Munich Re broken down as follows:
% | Direct Holding | Indirect Holding |
Warren Buffett | 0.053 | 10.191 |
Berkshire Hathaway | 10.191 | |
OBHH LLC | 10.191 | |
National Indemnity Corp | 10.191 |
According to a letter Buffett sent the company, the intention is to increase his passive shareholding in Munich Re throughout 2011.
Due to stock repurchases I estimate that Buffett’s holding at the end of 2010 (19,259,600 shares) is now worth 10.84% of the company. The estimated average purchase price of those shares is around €107 against a trading price of €83.50 at time of writing. Just last week Buffett mentioned that he is buying a European stock ‘today, tomorrow, next week and next month,’ at current prices my guess is that this share is Munich Re. However we will find out at the start of February, 2012.
Buffett’s presence on the share register brings forward an element of safety for smaller investors. Reinsurance companies insure each other through a process known as retrocession. This basically means that reinsurance companies have an interest in other reinsurance companies. Should Munich Re need capital aid then I am sure that Berkshire Hathaway, Buffett’s holding company, will come to the rescue. I hasten to add that Munich Re escaped the 2007/8/9 crash without any external aid unlike Swiss Re. In fact Munich Re proved to be the strongest (re)insurance company during this trying time.
Risks
The majority of risks for Munich Re echo those of other (re)insurance companies. These include underwriting risk which contains premium and reserve risks, market risk which includes equity, interest rate, currency and property risk, credit risk as well as operational, liquidity, strategic and reputational risks.
Risks are controlled, if possible, by a variety of committees. The Group Committee, Group Risk Committee, Group Investment Committee and the Reputational Risk Committee are all affective at group level. At segment level these include the Global Underwriting and Risk Committee, the ERGO Risk Committee and the Munich Health Risk committee.
The risk report starts on page 116 of the 2010 annual report which can be found on the Munich Re website listed below under the "Further Reading" heading.
Latest News
Munich Re subsidiary Windsor Health, which was acquired in October 2010, is set to create 80 jobs at two new offices in Atlanta, U.S. Sixty-five people will be employed at the executive offices in Buckhead whilst a further 15 people will gain employment in a satellite office in Duluth.
The above development is in line with Munich Re’s desire to grow the U.S. business by 40% over the next three years as U.S. profits grow at a higher rate. The U.S. makes up around a third of the company’s business so good growth is forecasted.
Conclusion
The prime valuation tool utilized should be the large discount to book value but of course other value measurements also work at these distressed prices. For example, the yield is historically high and the multiple is historically low. Munich Re is a very well-run machine which generates excess cash and has the backing of Warren Buffett.
Calendar
29-30th November: Roadshow Benelux
6th December: UBS ‘Senior Investor Day’, Munich
8-9th December: Roadshow Geneva/Zurich
9th December: Roadshow London/Zurich
2nd February: 2011 Preliminary Figures
26th April: AGM, Munich
27th April: Annual Dividend Payment
Further Reading
The Munich Re website can be found here: http://www.munichre.com/en/homepage/default.aspx
For those interested in purchasing ADRs or gaining exposure to Munich Re from the U.S., please read the comments at the bottom of the following article:
http://www.gurufocus.com/news/133888/i-initiated-a-position-in-munich-re-at-almost-the-same-price-as-berkshire
There is an excellent article regarding float and Munich Re here: http://www.theactuary.com/actuary/feature/2092013/insurance-float-valuations
Disclosure: Long Munich Re and am looking to add if the share price falls more.
