Munich Re Group (OTCPK:MURGY) is one of the largest reinsurance and insurance companies in the world with headquarters in Munich, Germany. Reinsurance is insurance that is purchased by an insurance company (insurer) from another insurance company (reinsurer) as a means of risk management. The reinsurer and the insurer enter into an agreement which details the conditions upon which the reinsurer would pay the insurer’s losses (in terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium and the insurer issues insurance policies to its own policyholders. The main reason for reinsurance is to transfer risk from the insurer to the reinsurer. Munch Re has more than 4000 corporate clients (insurance companies) in approximately 160 countries. It assumes part of the risk covered by these insurance companies, as well as providing comprehensive advice on insurance business. Munich Re’s primary insurance operations are mainly concentrated in the ERGO Insurance Group. ERGO writes all types of life and health insurance and most types of property and casualty insurance. Outside of Germany, ERGO is present in more than 30 countries around the world, servicing 40 million clients.
It is the objective of Munich Re management to analyze risks from every angle, and to assess and diversify them, thereby creating lasting value for shareholders, clients and employees. Their value based management philosophy and focus on a sustained increase in Munich Re’s share price is most evident in their commitment to generating a 15% annual rate of return on risk adjusted capital, consistent repurchasing of common stock, the payment of an attractive annual dividend to shareholders (6.25 euro) and an objective to keep their combined ratio (net expenses for claims relative to net earned premiums) as low as possible.
Nikolaus von Bomhard, Chairman of the Board, recently commented, “It (2011) was an exceptional accumulation of major losses (floods in Australia, tsunami in Japan & earthquake in New Zealand), but that is precisely what reinsurance is for. After all, a well developed and functioning reinsurance business and insurance program helps to overcome disasters of this scale. Primary insurance provides stable earnings and balances the burdens that occur in reinsurance due to high claims costs.” Munich Re is an attractively priced global insurance business, selling at a discount to its tangible book value of approximately 100 euro, paying a dividend yield of 6.5% with a management that is committed to creating value for shareholders over time.
Disclosure: I am long MURGY.PK. I am president & portfolio manager, Mundoval Fund (MUNDX)