In at the deep end

Lift the hood on a successful MGA or syndicate and, more often than not, Munich Re is there. The reinsurer seems to have it all covered. “When you go down through certain lines and threads of business, one way or the other the Munich Re name always comes back into the middle of the equation,” says a source close to the business.

Unlike some of its competitors, Munich Re recorded a healthy profit of €420m (£360m) for the first quarter of 2009, down from the €777m it posted for the same period last year. Gross written premiums, however, were up by 5.9% to €10.4bn.

The reinsurer has a finger in many pies (see box), including Bell & Clements, Three Lions and, more recently, Affinity Insurance Management, the result of its agreement last month to back a trio of senior industry figures to run a commercial insurance company. Capacity is provided by Victoria Versicherung AG, part of the Munich Re Group. Munich Re also has a 10.2% stake in Admiral, which it trimmed down from 15.1% in April this year.

The reinsurer is notoriously reluctant to speak about its plans, but in an exclusive interview with Insurance Times it insists that it does not want to tread on any toes in the primary market in the UK – simply to keep on growing and building strength through diversification.

Members of the Munich Re family seldom talk about their wealthy parent, but many of those that did open up heaped praise upon it. “It’s been an extremely good relationship. It has been very supportive in formulating our strategy, aims and goals,” says one, who declined to be named.

So what is Munich Re’s agenda? Why the secrecy? “Munich Re, being Munich Re, always wants to be in the middle of it,” says another source. “It is equally very conscious of the fact that it has a kind of natural conflict in the insurance market as it doesn’t want to be seen going out advertising too directly what it does in the UK, as it will be in direct competition with the likes of Aviva, RSA, NIG and so on – all of whom, of course, it ultimately reinsures.”

Primary purpose

But Munich Re insists that some primary insurance activity has always been part of its business model, as it is for every other reinsurer. Look closely and you’ll see that it mainly goes after successful niche enterprises and often backs these firms rather than own them.

“When you look at the business model and how it works, it’s simply like traditional quota share where we back up a primary insurance company,” says Munich Re’s head of reinsurance development, Thomas Lallinger. “In the case of an MGA, we give this agent a kind of primary insurance paper, which we call ‘fronting’. So the MGA has access to the clients, the expertise in underwriting the business and assessing the risk, but as it is not an insurance company we provide the policy issuing capacity.” He says that, as fronting is a service, there is no issue of competition.

Munich Re emphasises that its acquisition of niche businesses is by no means unusual, referring to it as an “Anglo Saxon” model because of the focus on UK and US businesses. At present it is most interested in mature insurance markets.

“Of course we will try to establish successful relationships in other markets … there are other MGAs in other countries, but the market is not so mature. For example in Germany the typical customer is used to dealing with an insurance company and not an MGA,” Lallinger says.

But some commentators believe that having its finger in many pies is a form of protection, says one. “Obviously it can’t control who the end-customer is but, if it gets its sums and investments right, it can control every other part – from the underwriting agency, through to the regulated instrument of the Lloyd’s broker, through to owning some of the security.

“It gives it the phenomenal ability to shape the bottom line of that business so that when problems do arise and the claims come along, it has the supply chain to sort those claims out.”

What else is Munich Re willing to back? Perhaps the next step is providing capacity directly to major consolidators, something widely mooted before the recession hit. Lallinger rules out providing 100% capacity to brokers because it would reduce credibility.

“It’s the same as going to a bank where it recommends its own products first. This is when you lose independence and the business model is jeopardised,” he says. “That’s why I don’t think we will do it or request it. Brokers have a powerful position in the market. They have a powerful business model and they would be crazy to end this by giving up their independence.”

Balance of power

How do you get Munich Re’s backing and is it really what you want? Speak to those who’ve experienced the might of the reinsurer and you get the feeling there are pros and cons in dealing with it. First, it can be difficult to get on board. One source says he worked “six to nine months to convince it that we were the right company. But then I got its business, and it is lovely being on the receiving end.”

But being in Munich Re’s clutches can be strenuous too. “It is incredibly controlling. It can get quite demanding so that it gets what it wants out of it,” adds the source.

Another source admits that, to become part of the Munich Re family, you have to jump through plenty of hoops and meet its standards. He says that the reinsurer is “quite rigorous” in its testing of any strategic or financial proposals put to it. “And it monitors these investments, post-acquisition. But all in all I couldn’t speak more highly of the company. I have a lot of contact with people there and they are always focused and accessible. They share our ideals and philosophy.”

Although Munich Re already owns or backs many niche businesses, it is unlikely to stop there. Unlike other reinsurers, such as Swiss Re, AIG and XL, it has not been hugely affected by the financial crisis, avoiding any involvement in exotic instruments such as credit default swaps.

The only credit crisis-related losses, says analyst Execution, are expected in credit, professional lines, D&O and E&O, with lesser impacts on liability lines. But these, says Execution, are likely to be manageable and “one-offs”.

So while the likes of Swiss Re returns to what it does best – reinsurance – Munich Re has a huge war chest to play with. Execution analyst Joy Ferneyhough says the reinsurer has €7bn (£6.1bn) of excess capital, “probably the largest excess capital position of any financial stock in Europe, let alone an insurance company. That obviously offers a lot of comfort and stability to not only investors but also their industry counterparties.”

While other insurance companies have had to find ingenious ways of raising money, Munich Re is able to buy and back its acquisitions with cash.

The company may have a big war chest, but it is hardly aggressive with it and its conservatism has frustrated analysts and investors alike.

‘It sticks to what it knows'

Ferneyhough refers to the “flip side”of it being a company that could be described as “boring”.

“It sticks very much to what it knows, focusing on underwriting, and it doesn’t change its risk profile based on the latest opportunities.

“There is some frustration that, at certain times – such as now with rates in cat business and retro being so attractive – it doesn’t dedicate more of its capacity there to increase returns for investors. Its answer always is, ‘We have our risk profile and don’t want to change that.’ So the excess capital is a double-edged sword really.”

Is Munich Re really looking to dominate the UK and US market? Commentators feel that it’s more about diversification, boosting the bottom line and protecting itself should an avalanche of claims come its way. Certainly, if that’s its agenda, it is going about it in a way that few object to.

“If you take AIG as a similar example, it had a certain reputation and arrogance,” says a source. “People within this industry don’t feel that way about Munich Re. It puts a hell of a lot of intellectual investment into the market, in the way of research, knowledge sharing and funding, so I don’t think there is fear of a cartel.

“It is well connected and liked, and has lots of influences and friends. It plays a nice game, works quite strategically and brings a benefit to the market.” IT

Circle of influence

The Munich Re Group achieved a 2008 profit of €1,528m (£1,320m) on premium income of about €38bn.

Admiral

Munich Re has a 10.2% stake. Produced a pre-tax profit of £202.5m for the year to December 2008. Turnover rose 13% to £910m.

Affinity Insurance Management

Manchester-based underwriting agency with capacity provided by Victoria Versicherung, part of the Munich Re Group.

Bell & Clements

Lloyd’s broker founded in 1987, and bought in May 2007.

DAS UK

Part of Munich-based DAS, which is, in turn, part of the ERGO Group, the second largest German insurance group.

Great Lakes

Specialist provider of insurance services for the Munich Re Group. Produces a gross insurance premium income in excess of £1bn.

MSP Underwriting

In 2007, Munich Re bought MSP, which owns Lloyd’s managing agency Beaufort and Lloyd’s service company Evergreen.

Three Lions Underwriting

Founded in 2002 as a joint venture underwriting agency between Munich Re and Bell & Clements.

Watkins Syndicate (known as Watkins Underwriters at Lloyd’s)

Founded in 1977, acquired by Munich Re in 1997. Produced gross written premiums of £333.3m and profit of £15.4m for 2008.