Munich RE (MURGY, Financial)(MURGF, Financial) had a year when premiums written, investment returns and losses all moved in negative directions, but the blue-chip reinsurer has been around forever and has an awesome dividend yield.
The stock trades for 178 euros ($190.11), there are 166.8 million shares, and the market cap is 29.7 billion euros. The dividend was raised to 8.60 euros per share. The stock yields 4.83%. Wow! Net income for the year was down 500 million euros to 2.6 billion euros.
Premiums written declined in the year to 48.9 billion euros, down from 50.4 billion euros. The investment portfolio grew to 219.4 billion euros, up from 215.1 billion euros in the prior year.
In Reinsurance, premiums were 27.8 billion euros, down from 28.2 billion euros in the prior year. The combined ratio (losses plus expenses) was 95.7% versus 89.7% in the prior year. In the latest quarter there was a 232 million euros loss for Hurricane Matthew and 251 million euros loss for an earthquake in New Zealand. The operating profit for the year was 2.8 billion euros versus 4.1 billion euros in the prior year.
RE’s insurance division, ERGO, posted premiums of 16 billion euros versus 16.5 billion euros in the prior year. Because the combined ratio was higher, operating income was 1 billion euros versus 600 million euros. The Health Care division wrote 5 billion euros in revenues versus 5.6 billion euros in the prior year. The combined ratio was 98.5% versus 99.9%. Profit is king – income was up to 140 million euros from 90 million euros.
In January, 26% of the reinsurance portfolio was written worldwide, 31% Europe, 22% North America, 17% Asia and 4% Latin America. Munich is very much a global company.
The reinsurance business is pretty tough at the moment. For one thing, interest rates are at an all-time low. An increase in interest rates will help Munich’s massive investment portfolio and add to earnings per share. There may be another share buyback.
Jörg Schneider, Munich’s CEO, recently stated that the company might purchase a traditional insurer if prices came down. That could boost EPS. Perhaps the new company could ride Munich’s AA- (Standard & Poor's) rating. That’s strong.
Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) and American International Group (AIG, Financial) recently did a deal where AIG paid $10 for reinsurance. I’ve learned that Warren Buffett often takes money in deals like this because he thinks he won’t have to pay it back or at least earns a profit while holding it. He took a premium on European put options a few years ago and didn’t have to pay it back when the options expired out of the money.
The industry has faced a lot of competition from CAT bonds. Companies can now offer bonds that will offer reinsurance in the case of catastrophes. The CAT bond market stands at $81.43 billion.
We’ve owned the stock for almost two years and are down about 13.8%. With the dividend, about negative 7%. That dividend really helps. It’s a great blue chip. Munich’s been around forever. It even survived the Nazis. It’s a stalwart of most international blue-chip funds. The dividend alone makes the stock interesting.
Disclosure: We own shares in Munich RE.
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