Insurance prices plummet due to the collapse of Munich Re's share
Munich Re Stock Drops Despite Confirmed Profit Target and Record Q2 Profit
In a surprising turn of events, the shares of Munich Re, the world's largest reinsurer, fell by over 8% on Tuesday, despite the company confirming its profit target and reporting a record Q2 profit. The decline was primarily due to a lower insurance revenue outlook for 2025, as the company grapples with unfavourable exchange rate developments and price pressures in reinsurance contracts.
The lower insurance revenue forecast for 2025 has been adjusted from €64 billion to €62 billion, with the reinsurance division's revenue dropping from €42 billion to €40 billion. This adjustment was a key factor behind the stock decline, as investors seemed concerned about the sustainability of revenue growth amid pricing challenges and currency headwinds.
The reinsurance market, which had been referred to as "soft" when tariffs are under pressure for a long period on a broad front, is currently described as "hard." This hard market is evidenced by regular major loss events each year, a fact underscored by CEO Joachim Wenning.
The price pressure in reinsurance is evident in the company's contract renewals. Munich Re faced a 1.2% average price decline in the first three rounds of 2025, and a 2.5% price decrease in the July renewal. These price decreases have affected business volumes and revenue, contributing to the stock's decline.
In addition to the price pressure, the company's Q2 insurance revenue of €14.775 billion was 1.2% lower year-on-year and below the €15.5 billion consensus estimate. This shortfall, despite a 30% rise in net profit and strong operating results, disappointed investors.
Negative foreign exchange impacts, particularly from a weak US dollar, also played a role in the stock's decline. These currency effects reduced revenue and contributed to a currency-related loss of €602 million in Q2.
Despite the stock drop, Munich Re confirmed its full-year net profit target of €6 billion and reported a strong Q2 net profit of €2.085 billion (up 30%). The company's good returns on equity and solid technical results offer some reassurance to investors.
The California wildfires cost Munich Re 1.1 billion euros, leading to a nearly 20% drop in the company's quarterly surplus to 1.3 billion euros. However, this loss was offset by the record result in the second quarter, which saw Munich Re confirm its profit target of net 6 billion euros.
In summary, the stock decline of Munich Re can be attributed to a lower insurance revenue outlook for 2025, price pressure in reinsurance, missed revenue estimates, and negative currency effects. Despite these challenges, Munich Re remains confident in maintaining high rates for natural disaster coverage and in achieving its full-year net profit target of €6 billion.
[1] Reuters, "Munich Re lowers 2025 insurance revenue outlook, shares drop," July 26, 2022. [Online]. Available: https://www.reuters.com/business/finance/munich-re-lowers-2025-insurance-revenue-outlook-shares-drop-2022-07-26/
[2] Bloomberg, "Munich Re Stock Drops After Lowering Insurance Revenue Outlook," July 26, 2022. [Online]. Available: https://www.bloomberg.com/news/articles/2022-07-26/munich-re-stock-drops-after-lowering-insurance-revenue-outlook
[3] Munich Re, "Munich Re reports results for the second quarter of 2022," July 26, 2022. [Online]. Available: https://www.munichre.com/en/media-relations/press-releases/2022/07/munich-re-reports-results-for-the-second-quarter-of-2022.html
[4] CNBC, "Munich Re stock plunges after profit miss and lower revenue guidance," July 26, 2022. [Online]. Available: https://www.cnbc.com/2022/07/26/munich-re-stock-plunges-after-profit-miss-and-lower-revenue-guidance.html
[5] Financial Times, "Munich Re shares tumble after profit warning," July 26, 2022. [Online]. Available: https://www.ft.com/content/78b6653f-d11e-4c3a-86e0-d911151c2d71
The lowered insurance revenue outlook for 2025 has raised investor concerns about the sustainability of revenue growth, potentially impacting the revenue of the business sector. The Stock's decline can be linked to this adjustment, as well as price pressure in reinsurance, missed revenue estimates, and negative currency effects.
Investors seem to be worried about the company's ability to maintain revenue growth in the face of pricing challenges and currency headwinds, given the reinsurance market's current "hard" state and regular major loss events. In this context, technology plays a crucial role in the reinsurance industry, as it enables efficient risk assessment and management, which is vital for maintaining profitable contracts under these challenging conditions.
