There’s no doubt that 2014 was a challenging year for Münchener Rückversicherungs-Gesellschaft AG (WKN:843002) (ETR:MUV2) (FRA:MUV2). However, are there some bright spots that investors can find?
Let’s find out.
No help from interest rates…
A continuing challenge for insurance companies around the world are the low, low, and… ah… very low interest rates. The reason is simple: When an insurance company takes money from its customers, it holds onto this money until it has to pay it out (to one customer or another). What happens in the meantime, is that the insurer can invest this money to earn some profit for itself. That means that when interest rates are low, the amount of money that the insurers can earn is, well, lower.
There’s little hope that interest rates will be much higher in the near term. However, we could see somewhat higher rates in 2015. The LIBOR interest-rate measure fell slightly through last year, but it had a nice little tick upwards towards the end of the year. We also seem to be hearing more and more from the Federal Reserve in the US about the possibility of higher US rates.
Whether that happens depends a lot on the health of the economy in the US and around the world. Recently “The Bond King” Bill Gross predicted that the US Central Bank would only end up raising rates towards the end of 2015, if at all.
The bright spot for Munich Re: Rates have been low for a long time, and there’s no guarantee that they will rise in the near term. But stronger reinsurers, like Munich Re, can last through these tough times and be well positioned for when rates finally do rise.
No help from too much capital…
Insurance is a cyclical industry, and a part of that cyclicality stems from capital availability. When there isn’t much capital in play, times are good for insurers, since they can charge higher rates. But at times when there’s too much capital, there’s increased competition, and rates have to fall.
Now, and in recent years, there’s a lot of capital in play, especially in the area of reinsurance. Worse, there are also new investment vehicles that are now competing with traditional reinsurers. A prime example of these are the so-called “catastrophe bonds,” which give larger investors the ability to invest in the catastrophe-reinsurance market. As of November, it was expected that the full-year 2014 cat-bond issuance would be nearly 9 billion USD.
The bright spot for Munich Re: A part of the reason that insurance industry is cyclical, is that giant insurable events don’t happen every year. However, an especially bad year for insurers could actually be a good thing for Munich Re, since it would shake out weaker insurers. Higher rates would also help, as that could attract some of the excess capital.
… but we still live in an unpredictable world
Obviously in the near term, there are challenges ahead of Munich Re – and other reinsurers. But when we think about the bigger picture, the view changes. There will always be lousy, unpredictable things that we’ll want to insure against. Maybe more importantly, there will always be new terrible things that we’ll want to insure against. Creative insurers like Munich Re can find good profits these risks.
As just one specific example of that last point, is the rise of the risks from cybercrime. Just think about the past year. In July, the massive US bank JPMorgan (NYSE: JPM) was hit by hackers, and 76 million households were affected. Hackers accessed millions of credit card numbers from US home-improvement giant Home Depot (NYSE: HD). And of course there was the embarrassing Sony (NYSE: SNE) hack, which, among other things, gave the hackers access to the Social Security numbers for Sony employees.
These are expensive events. And what happens as companies increasingly recognize that they need to be protected against these types of things? Well naturally, they’ll turn to insurers like Munich Re.
The bright spot for Munich Re: Uh, did you read the above? That was the bright spot.
2014, a year to… forget?
Based on the above, 2014 didn’t offer Munich Re investors much that was memorable. They stashed some dividends in the bank, but the stock didn’t perform much differently from the DAX. Of course, with the business still running well and reasons to be confident about the future, perhaps this is the best kind of year for long-term investors.
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Matt Koppenheffer owns shares of JPMorgan Chase. The Motley Fool recommends Home Depot. The Motley Fool owns shares of JPMorgan Chase.