Spoiler: This moderately lengthy publish comprises no actionable funding concepts.
Background:
Hannover Re is a inventory that for some motive I’ve ignored for a while though I think about Insurance coverage shares as a part of my circle of competence. Why did I ignore them ? I used to be all the time postpone from the possession construction. Hannover Re is majority owned by Talanx, which itself can also be listed. Talanx once more is owned ~80% bei HDI, which is owned by …I don’t know.
Trying on the chart, I ought to have thought of them earlier: Over the previous 15 years, Hannover outperformed the bigger and higher recognized friends like Munich Re and Swiss Re by a large margin and ties with Berkshire (earlier than FX):
That is very attention-grabbing, contemplating that Hannover Re is barely the No. 3 international Reinsurer and Berkshire solely quantity 5. Absolute dimension doesn’t appear the drivig issue for shareholder returns within the Reinsurance business.
Deep dive Comparability: Hannover Re vs. Munich Re
As Munich Re and Hannover Re are each German primarily based firms, I assumed it could be enjoyable to check these two , as each should report beneath iFRS and are topic to Solvency II regulation with BAFIN as fundamental regulator. Each, Swiss Re and Berkshire run beneath very completely different regimes and can’t be in contrast so easily-
One small caveat: Whereas Hannover Re is a “pure play” Reinsurance firm, Munich Re through ERGO can also be energetic in major retail insurance coverage. Earlier than leaping into the comparability, let’s simply rapidly summarize what Reinsurance is all about.
The Reinsurance enterprise
Many Warren Buffett followers suppose that (Re) Insurance coverage is a fairly simple enterprise: You acquire the premiums, earn a living on the insurance coverage aspect, which then creates the well-known “float at damaging price” and then you definitely earn much more cash with good investments.
Sadly, in actuality this isn’t really easy. Reinsurance is to a sure extent a “wholesale” enterprise, with the principle commodity that they’re holding in inventory for his or her purchasers, the first insurers, is capital. Primaray insurers “cede” an quantity of their premium for the case that claims are bigger than a major insurer can or need to swallow. Due to this fact the forgive the prospect to earn return on the float.
The idea behind that is in fact diversificaion, I.e. that worldwide reinsurers are higher diversified and have a decrease price of capital and many others. In actuality nevertheless, Reinsurance is a reasonably arcane artwork and much like “structured finance” usually has the principle purpose to make their purchasers “look higher” as an alternative of really transferring loads of threat.
Within the outdated instances, it was commonplace to really give out loans to major insurers and name them Reinsurance. In 2006 as an illustration, even Berkshire was fined with more than 1,2 bn for such “pseudo reinsurance” contracts whose fundamental purpose was to arbitrage insurance coverage regulation.
Reinsurers are usually additionally regulated a bit bit lower than major insurers as a result of their purchasers are “subtle companies”, so guidelines and restriuctions for reinsurers are ussually a bit bit relaxed.
The principle issue for with the ability to develop a Reinsurance enterprise is capital. With out capital, regulators is not going to permit Reinsurance firms to do extra enterprise. So preserving and rising capital is essential for Reinsurers which in flip means the upper the return on capital (fairness) the higher.
Aside from industrial firms, Reinsurance firms will need to have “tangible” Fairness as fundamental supply of capital. Subordinated debt can alos be used as capital however “exhausting tangible fairness” is the principle supply.
Hannover Re vs. Muncih Re – The main points
Let’s begin with a couple of “Compound annual development price” (CAGR) numbers for the years 2006 to 2022 which already present an enormous distinction between the 2:
Just a few first feedback right here:
Hannover Re might enhance their topline by nearly 9% p.a. vs. solely 3,5% at Munich Re. Working revenue elevated “solely” by ~ 6% p.a. for Hannover whereas it declined by -6% for Munich Re.
For Munich Re, solely EPS development is constructive and this is because of a reducing variety of shares excellent. The one class the place Munich Re comes shut is the expansion price in divdends per share.
Curiously, Muncih Re has now much less Fairness than 15 years in the past, regardless of a rising steadiness sheet. General, the 15 12 months numbers clearly present an enormous distinction between Hannover Re and Munich Re.
The query now could be in fact: Why ? Why did Hannover higher ?
Listed below are some extra numbers which may clarify a part of the story:
First we are able to see that Munich Re achieved their enhance in dividends per share principally via a rise within the payout ratio whereas Hannover’s payout ratio remained fixed.
The second set of numbers is much more attention-grabbing: That is the proportion of Fairness to complete steadiness sheet worth. In Hannovers Case, fairness as % really elevated wheres in Munich Re’s case, this ratio nearly halfed. So successfully, Munich Re is leveraging its Stability sheet far more. If we transalte this into leverage multiples: Hannover has decreased its leverage from 14x to 10x, whereas Muncih Re has elevated the leverage from 8x to 14x.
One other attention-grabbing facet is that in each instances, tax charges have declined considerably. That is clearly an impact that can not be simply repeated. The lower in tax charges principally explains the distinction between the EBT CAGR and the Working Revenue CAGR for each of them (roughly 1% p.a.).
Depite the far more conservative steadiness sheet, the common ROE for Hannover Re is ~5% larger over the 15 years than for Munich Re. To a sure extent, that is mirrored in the next valuation for Hannover, each in 2006 and now for 2022. However this distinction is large.
The ultimate two strains have a look at the signifcance and the development of the monetary consequence, i.e. the results of the float.
In each instances, Monetary outcomes are larger than the working earnings which signifies that over these 15 years, each firm misplaced cash with Insurance coverage, i.a. the float was not free.
Nonetheless, in Hannover Re’s case, Insurance coverage almsot broke even, whereas in Muncih Re’s case the Insurance coverage consequence was considerably damaging.
The final line lastly reveals us how a lot of the monetary outcomes consits of “ongoing returns” (dividends, curiosity funds) and what quantity relies on realized good points. Once more, Munich Re’s monetary result’s of decrease high quality
Comparability abstract:
Compared, Hannover Re clearly appears like the higher enterprise. They managed to develop far more, obtain higher ROE’s regardless of having a way more conservative steadiness sheet.
Munich Re in distinction appeared to have centered totally on returning capital to shareholders. This sounds nice in principle however for Reinsurance, the place capital is the principle useful resource for development, it won’t be the optimum technique.
Munich Re has an important overview on their share purchase backs:
So it’s attention-grabbing to see that despit huge purchase backs at costs properly under immediately’s share worth, Hannover Re has created considerably extra worth by retaining capital and rising the enterprise as an alternative.
Is Hannover Re now a “purchase” ?
If I’d be compelled to purchase one of many two shares, I’d clearly go for Hannover Re. Regardless of the slighly larger valuation, in my view the standard of the enterprise is considerably higher.
Nonetheless the massive query is: Is Hannover Re a stand-alone purchase ?
The Reinsurance business is meant to enter a “exhausting market”, which implies growing costs and growing income if there are not any giant Cat losses. As well as, larger rates of interest ought to enhance curiosity earnings over time. Some buyers even think about Insurance coverage shares as one thing of a “no brainer “proper now.
Alternatively, with a trailing P/E of ~18, Hannover Re trades at an traditionally very excessive degree (ex 2008/2009). With regard to Worth/E book, the present degree of two,7x e-book worth, displays a premium of greater than 100% to the historic common.
Hannover Re has clearly been buying and selling too low cost for a few years, however now, the inventory appears to me about pretty valued. The inventory clearly has momentum and will run larger on the again of accelerating income in 2023, however for my typical inevstment horizon of 3-5 years, I don’t see that a lot upside.
Is Talanx a purchase as an alternative ?
Talanx, itself listed, owns 50,2% of Hannover Re. With a market cap of twenty-two,6 bn for Hannover Re, one might in principle deduct 11,3 bn from Talanx’s Market cap to see what one pays for the Main insurance coverage half.
Talanx itself has a market cap of solely 11,3 bn, so one will get the first insurance coverage “without spending a dime”.The inventory additionally has underperformed its main subsidiary considerably over the previous 10 years:
Talanx had a internet earnings of 1 bn after minorities in 2021, which incorporates ~ 600 mn EUR from Hannover Re. This leaves us with ~400 mn of Primaty insurance coverage internet revenue, which might translate to a “truthful” market cap of 4-6 bn for the first insurance coverage enterprise.
At first sight, this could imply that there may very well be a 50% upside to truthful worth for Talanx. Nonetheless, adjusting for the low free float and common holding reductions and an extra 1 bn in debt, the upside could be solely half of that and even much less.
If Hannover Re itself could be undervalued, Talanx may very well be a pleasant approach to play this not directly, nevertheless as I assume Hannover Re is pretty valued, Tlaanx doesn’t look that engaging to me at a supeficial look.
Abstract:
Though this publish didn’t generate any “actionable funding concepts”, I nonetheless suppose there’s a lot to study, no less than I did. My take aways are:
1) Hannover Re is an efficient instance {that a} boring enterprise with a reasonable valuation can generate superb long run returns with comparatively unspectular development charges (~7% EPS development every year)
2) Munich Re is an efficient instance, that share buy-backs should not such a “no brainer” as many buyers suppose, particularly once they come on the expense of development.
3) In the long run, the basically higher run enterprise performs higher. Interval.
4) Hannover Re can also be instance that creating worth in Insurance coverage through the precise insurance coverage enterprise could be simpler than attempting to “spice” issues up with extra dangerous investments.
