Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (MUV2) Earnings Call Transcript & Summary

Good day, and welcome to the Munich Re Half Year Financial Report 30th June 2021 Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Becker-Hussong. Please go ahead, sir.

Thank you, Simon. Ladies and gentlemen, dear friends, good afternoon, good morning, wherever you are. A warm welcome to our conference call on Munich Re's second quarter 2021 results. Pleasure to have you all with us and very happy to welcome our today's speakers. Joachim Wenning, our CEO; and Christoph Jurecka, Munich Re's CFO. The 2 gentlemen will start this call with a short statement based on the slide deck we provide on our website. Afterwards, there will be ample opportunity for Q&A, as always. And with that, I hand it over to you, Joachim.

Thank you, Christian, and good afternoon, everybody. Thanks for joining the conference, and I hope you're all doing well. Let me talk you through some important achievements of ERGO and reinsurance in the first half year on the way to meet our 2021 group earnings commitment. ERGO had a good start into the first year of the 5-year Ambition 2025. Top line shows strong growth in Germany, plus 5%; and internationally, plus 7%. In Germany, we are seeing strong new business development, both in P&C and in life. And the hybrid customer approach responding to on and off-line needs of customers has been effectively supporting this good business development. The strongest growth at ERGO International could be seen in P&C in Poland and in the health business, mainly in Spain. So ERGO bottom line shows very strong numbers so far. As expected, various initiatives targeted to continuously increase the level of process excellence in Germany and abroad contribute to further improve efficiency, and the technical quality of the business remains remarkably strong with stable and attractive combined ratios despite above average major losses. On the reinsurance slide, I'm on Slide 6, just in case, in life and health, we continue to grow our portfolio. And key contributors are a strong new business development in the U.S. and ongoing growth in our financially motivated reinsurance business. And I should also mention the interesting acquisition of GroupHEALTH. GroupHEALTH is a leading TPA in the Canadian group life business, allowing us deeper and broader access into a what we consider low-risk, high-return market. And beside that, it's really shame we cannot see the beauty of the life and health reinsurance development due to ongoing COVID losses, which are affecting this line of business. On the P&C reinsurance side, we seized the tailwind from a hardening market environment by substantially growing both our core and the Risk Solutions business. Growth currently is clearly double digit, and we are actually leveraging our leading market position. However, we aren't rushing. While strongly expanding in attractive markets, we are more reluctant and more selective in other areas like U.S. casualty. At the same time, we are paving the way for future growth by creating and developing new business opportunities, in many cases, based on digitalized models. And of course, I should not miss to add that the investment results have been very strong with attractive returns on investment. In addition to that, our captive asset manager, MIAC, is also progressing well with regard to their TPA -- sorry, TPAM, third-party asset management business. It's been growing, and Morningstar rankings show MIAC in top positions compared to their peers. So bottom line, insurance, reinsurance and investments altogether have contributed to a strong first half year result of EUR 1.7 billion, totally in line with our 2021 earnings commitment. On Slide 7, I would now turn our attention to the 1/7 renewal experience and results so far. Overall, the price change for our book was 2% -- plus 2%, as always, fully risk-adjusted. We benefited from this by growing our book by 11.1%. The most powerful impact was observable in the U.S., there practically in all lines of business; in casualty due to social inflation and low interest rates; and in property due to cat losses. Outside the U.S., so in Latin America and in some Asian markets, we also saw rate increases driven by loss experiences. Against this background, Europe showed the mildest price momentum. Our takeaway from this renewal or I would say, from all the renewals in the course of this year is that the trend of rate increases is unbroken. We do appreciate this in some areas by improving the technical margins, in other areas by compensating for interest rates and loss inflation. However, it's also true that in the [Audio Gap] inflation increasing. With close to USD 1 billion of cyber premium income, we have a global market share of close to 10%. Despite the various attacks with high media attention and primarily since the outbreak of the pandemics last year, our cyber performance is still fully in line with our expectations. Their impact on us was very limited and compensated by price increases. We are well on track to achieve 85% to 90% combined ratio going forward. And going forward, we would also expect demand to grow faster than available capacities. This should create further momentum to increase transparency provided by clients and customers and improving terms and conditions. We will prioritize our capacities towards those areas where diversification is the highest; wordings, the strongest; and interest alignment, the most pronounced. We regard Munich Re as a key driver to further foster resilience throughout the global cyber market. And to accomplish this, we will continue to further invest in expertise, technologies, cyber services and cyber partnerships. Just a few comments on inflation as well. Slide 9. The consumer price index has indeed increased recently, starting in the U.S. and then with a delay and probably at lower levels in other regions like Europe as well. But we aren't worried about it. First, many lines of business, [Audio Gap] and it's true also for the shorter-term property reinsurance businesses. Second, in P&C business, in many cases, index clauses are protecting against inflation. Third, in new business, we always price for the most recent trends. And fourth, with regard to the back book, we are broadly hedged against consumer price index through inflation bonds. That said, CPI however has only limited significance in insurance. There is more specific phenomenon like medical inflation, social inflation and others, which can matter more or less. We take all of these factors regularly into account when it comes to adjusting our pricing and reviewing our reserves likewise, plus we have additional hedging potential available on the asset side through asset classes like real estate, infrastructure, invest, equities and others. With Slide 11, I would like to mentioning ESG. I should remind you of our nonfinancial Ambitions 2025 and above all our climate Ambition 2025 and our social ambition to have 40% female managers by 2025. The necessary governance to reach all of this is set up, and respective execution and monitoring are taking place. And I think that we will report our progress probably on an annual basis and probably starting next year. Yet, I'd like to highlight already today that we are well on track to also reach our nonfinancial targets. Finally, a quick look at the outlook 2021, Slide 12. With EUR 1.7 billion in the first 6 months, we have already earned 60% of the earnings commitment. From a growing book of business, we believe that EUR 2.8 billion earnings this year is still doable, and we are fully confident. This view has not changed. ERGO and reinsurance have grown their top line to now EUR 58 billion, EUR 1 billion more than what we indicated last quarter. And the recent flood event in Germany and the neighboring countries in the Netherlands, Belgium, France and Austria will probably mean a mid-3-digit million euro loss burden to us, still all in line with our expectations for the EUR 2.8 billion result in 2021. I do not want to miss to express my deep sympathy with all people and families affected by this terrible catastrophe and thank for the immediate and extensive support and solidarity from all corners of our society. And with this introduction, I'd like to hand it over to Christoph. Thanks.

Thank you, Joachim. A warm welcome also from my side. It's a pleasure to run you through the Q2 figures today. As usual, I will not go through the presentation as you were able to look at that in advance anyway, but start with a few personal remarks on the development. As already indicated in the preannouncement, we achieved a net result of EUR 1.1 billion and a return on equity of 19.2% in the quarter. While the COVID-19-related claims at ERGO and in P&C Reinsurance were in line with the expectations, we had high mortality rates in some emerging markets, which left their mark on life and health reinsurance. Apart from the good operating profitability in all fields of business, a strong Q2 result was also driven by comparatively low major losses and by a solid investment result. Starting with the investment result. In Q2, we achieved a return of 3.1%. This result was supported by disposal gains from typical portfolio turnover and some sets that are financing as well as seasonal dividend effect. The derivatives we use for hedging made a small negative contribution, while the related positive impact on equities was only partially realized as a profit. So we were able to build up unrealized gains. Additionally, we also benefited from commodity derivatives, as Joachim has just been speaking about the way how our assets are also one way of coping with inflation. The reinvestment yield further increased to 1.7%, thereby somewhat easing the pressure on the yield attrition, but of course, on a very low level. Now turning to reinsurance. The life and health technical result, including fee income of EUR 64 million fell short of the pro rata annual ambition. The higher-than-expected COVID-19 losses of EUR 140 million were driven by the high mortality in South Africa and in India. For 2021, we are now expecting COVID-19 losses of around EUR 400 million. And therefore, the probability of missing our annual guidance of also around EUR 400 million for the technical result plus fee income has increased. Adjusted for the COVID-19, however, the performance, and Joachim was mentioning that, was even better than expected. And this was due, in particular, to retroactively premium increases in Australian disability business and to a one-off effect in a major reinsurance treaty in North America. More generally, overall, the positive experience in Europe and Asia could then largely compensate for the negative experience in the United States, including a few large losses. On the same level as in Q1, the fee income continues to show very strong contribution. Now P&C reinsurance. In property-casualty reinsurance, we posted below average major losses. COVID-19 losses of around EUR 100 million were fully in line with our expectations. So the initial expectation that now over the year the COVID-19 claims would gradually reduce, this trend is still intact. Overall, the combined ratio of 90.1% benefited from a low major loss ratio of 6.8 percentage points. And including the usual reserve releases of 4 percentage points, our normalized combined ratio amounted to 95.3%, fully in line with our full year guidance considering that the number is expected to improve further as we continue to earn through the rate increases achieved in the recent renewals. Now if we jointly look at ERGO. ERGO continued its pleasing financial performance, posting a strong net result of EUR 155 million. If you look at that in the context of the annual guidance of EUR 500 million, you will easily see that that's highly above the run rate. In all lines of business, the underlying performance was healthy across all ERGO operations. And on the corporate side, ERGO was only showing a marginal effect, EUR 6 million, in the quarter. The German Life and Health business at ERGO posted net earnings of EUR 33 million, driven by good operating performance in health and some lower claims also in travel, which contributed to a solid result. In life, a large part of the ZZR has already been funded in the first half of the year. And in this context, also the disposal gains in Q2 were lower than Q1. Now P&C Germany, the combined ratio was 92.6% and came in slightly higher than anticipated. But looking at the large losses and both on nat cat as well as man-made, I think it's still an excellent result. Because what we see is that strong quote and a very good operating performance could nearly fully compensate this above average nat cat and man-made development. But I mean looking at the half year numbers and then also looking at the usual uncertainties plus the flood event Joachim was talking about already, we have to say that it's become more challenging for ERGO to achieve the combined ratio target for the full year. In the international business, there's an ongoing favorable development and a net result of EUR 41 million in the euro which underlines the successful strengthening in our core markets. Again, we had a very strong quarter in Poland and in Greece, which contributed to a combined ratio of 92.2%. The health business was stable with a continuously strong operational performance in Spain. Now some remarks on capitalization. The group's economic position remains strong. Our Solvency II ratio increased to 225% in Q2, slightly exceeding the upper end of our optimal range. If I look at the development, what were the main drivers of the development? Well, on the positive side, we have the strong operating economic performance across all segments, and we have positive market variances. On the negative side, we have an increase of THE SCR, both on the investment as well as on the business side. And of course, the redemption of our subordinated bond from May this year. Now I'd like to conclude with the outlook for 2021. In light of a strong business growth, both in reinsurance as well as in ERGO, we now expect EUR 1 billion higher premiums. Joachim mentioned that already. And the first half year result is now a pretty good basis, a pretty good path towards achieving the net income target of EUR 2.8 billion. As mentioned, the usual uncertainty with respect to large losses and on top of the flood events in July this year make it a little bit more ambitious for ERGO to achieve the 92% combined ratio target. And on the reinsurance life side, the COVID-19 development we saw so far and the expectation for the remainder of the year will challenge the EUR 400 million technical result guidance as given at the beginning of the year. So that pretty much concludes my introduction. Joachim and I are now looking forward to answering your questions. But first, I'll hand it back to Christian.

Yes. Thanks, Joachim and Christoph, for your introduction. I'm aware that some of you out there have technical issues listening to this call. From a technical standpoint, it would be an option to switch to the webcast, at least for those of you who do not intend to ask questions. Otherwise, we hope we can fix the issue soon. Otherwise, just send me an e-mail if you can't ask the questions you would like to ask. So let's try it anyway, and let's go right into Q&A. [Operator Instructions] So please go ahead with the first question.

We'll now move to our first question over the phone, which comes from Vikram Gandhi from Societe Generale.

It's Vik from Soc Gen. I've got 2 questions. One on COVID, the other on renewals. Firstly, on COVID reserves, the IBNR level of 68% looks particularly strong and even more so considering nearly 57% of those reserves are related to contingency lines. If I do a simple math and assume even a theoretical maximum of 100% IBNR for all other lines of business, except contingency, it implies that contingency lines have IBNR of about 45%. So in reality, the IBNR on contingency is probably above 50%, which looks really high for a short tail line of business. So probably you can share with us what's driving that high level of IBNRs. And secondly, on the renewals, not just the midyear, but considering even the April renewals, can you tell us how the PMLs or the peak risks have moved versus last year, not just the U.S. but even Australia and Japan?

Yes. Vik, Christoph here. I'm happy to take both of your questions. First of all, the IBNR level. Indeed, the numbers are still significant, and we are feeling comfortable with that. Given that the run-off of the business or the claims adjustment process, I must say, is still not as quick as I would personally have expected. I think we had the conversation already in Q1. Since then, I think we made some progress in claims adjustment. But if you would have asked me half a year or 3 quarters ago, I would probably have said where we will be much more advanced by now, which we are not. So therefore, we're feeling confident with the level of IBNR we are still having. On the numbers and the calculation you provided us with, I think it's important to notice that we basically have 2 different kinds of IBNR, if you want. One is IBNR, which is already kind of allocated very specifically towards a line of business towards sometimes even a treaty or a client relationship. And on top of that, we have a more general IBNR to cover more general uncertainties. And obviously, this more general IBNR, we call it bulk IBNR. This bulk IBNR -- I mean, the allocation to lines of business is, to some extent, I wouldn't say artificial, but I mean there's a lot of leeway, if you want. And therefore -- I mean, we provide you with the figures that are booked, but I would not overinterpret. I mean probably -- let me put it that way, overinterpret the allocation at this point in time, given the uncertainties which are still around based on the very slow claims adjustment process. The -- that's probably the answer on the first question. The second question, the PML. I cannot give you numbers at this point in time. That's maybe something we could also then discuss off-line. But the growth has not always been sitting in our peak scenarios. I think that's important to know this. So if you own -- look at the growth and are only looking for growth in the peak scenarios, then you would miss substantial part of our growth, which is also growth we're having in our pure re businesses, for example, also growth we're having in some less peak event affected lines, also some proportional covers where we have additional growth. So in that regard, I think independently now of the precise numbers, I think my general answer would be its growth pretty well diversified across the various businesses we are having.

We'll now move on to our next question over the phone, which comes from Will Hardcastle from UBS.

Two questions. The first one, Solvency. We've got a 225% [ TRIN ], which is very strong, and it's beaten consensus by nearly 10 points, I guess. What we're doing wrong from the outside? Or is this stuff that's benefited the ratio that we couldn't have forecast externally? And did these benefits come on the SCR or [ eligible ] funds. And the second one is on the reinvestment yield. Clearly, I guess you've gone up 20 bps Q-on-Q, which is quite sharp. And just trying to really understand what asset reallocation or duration shifts have been taken. And which segment is likely to benefit after -- all through life and health, for example?

Yes. Well, Christoph again here. Solvency, I think outside in, it's pretty hard to predict precise numbers on the Solvency II figures for a number of reasons. First of all, let's focus on the growth. As I mentioned, business SCR increased. What you cannot really see from the outside perspective is the amount of diversification in that growth because it very much depends on also how broadly you distribute your growth across the various lines of business. That's one example where it's really hard outside to come up with the precise numbers. The other topic is also operating economic earnings. As you know, there are certain elements where this economic earnings concept is pretty close to IFRS, but there are other areas where it's completely disjoint to IFRS, where you, for example, account already for the full expected future earnings in the economic earnings in opposite to IFRS, where you only have the first year in your earnings. And these are just elements which are not at all accessible from the outside perspective. On the sensitivities, we also have to say, and I think we had told a couple of times already in the past, and also the sensitivities, they are linear approximations, but there are convexity effects on top of that. So even the sensitivities on capital market parameters are not always 100% precise. That's also something you have to keep in mind, especially in a situation where we also might change hedging strategies and ALM mismatches. Because in all these sensitivities, in this economic world, everything is fully mark-to-market, but then obviously, you very quickly see change hedging approaches. You quickly see ALM mismatches, which are changing. You see different FX exposures. And the sensitivity we provide you with at the beginning of the year, they are obviously based on the status quo back then. So having mentioned all that, if you combine a few of these effects and they all go into the same direction, then you end up with a comparatively big gap, like in this quarter, where the consensus I would agree, is very far away from our 225% we have now been releasing. And let's say, more normal quarter, some of the effects are offsetting each other. And then the consensus estimate is sometimes much closer to where we actually are. But fundamentally, these differences are always the same. The second question, reinvestment yield. Well, I mean, the interest rates, especially in the Eurozone, they increased little, which was helpful in this quarter. But on top of that, what we also did is we again looked into the duration of our reinvestments and also slightly increased the amount of investments into some emerging market bonds versus maybe more covered bonds or more Eurozone fixed income instruments. So I think it's a mix of the both, which led to the fact that the 1.7% is now a little bit higher than the 1.5% we saw last quarter. In any case, I mean, the reinvestment volumes are never huge. So the marginal impact is not massive. And what I said in my introduction is that it's just some easing effect from that 1.7% versus the 1.5% we had last quarter. We shouldn't overestimate that. And again, we are on a very low level. All in all, the investment risk is -- if you compare it to also the insurance risk, so the balance is unchanged and the slight increase of SCR also on the investment side, I've been mentioning before, is fully within the limits of our risk strategy. So fundamentally no change.

Just one very quick follow-up on that. Just I guess if there's a bit of reallocation, a bit of duration, is there more to go? Or have we sort of caught up to the mix that you're looking to achieve here?

I think it's just -- if you want, it's a little bit arbitrary what you invested 1 quarter to the next. And so I would not see any strategic relevance in this volatility from 1 quarter to the other with respect to new investments.

We'll now move on to our next question over the phone, which comes from Andrew Ritchie from Autonomous Research.

Can you just focus, first of all, on the gross premium growth in P&C Re? I mean it was exceptional in Q2, 37%. Was there anything particularly lumpy or unusual about that? Is there the fronting business in there or something? And I guess linked to that, relative to the outlook you gave both at the Investor Day and at the beginning of the year, there does seem to be a lot more growth in P&C Re than expected than you expected, although it doesn't look like pricing is particularly stronger. So what is driving that stronger growth? Is it much more meaningful expansion of risk solutions? I'm just trying to understand what was changed as to why you're seeing a lot more than maybe you thought you would? And the second question on investment income. When I look at the recurring investment income, particularly in P&C Re, there's still quite a sharp decline, 20, 30 bps in terms of yield year-on-year even though I would have expected some recovery in things like dividends, et cetera. Is there anything unusual in that? Or is that level of investment income, the new run rate given where reinvestment rates were obviously very depressed last year?

Andrew, this is Joachim. So with regard to P&C reinsurance growth, is there anything special about the spectacular 1/7 growth. The straightforward answer is no. Nothing special. No underwriting policy has changed. There is no one single large transaction that explains it all. So it's a blend of new businesses or extended client relationships and the rate development. Nothing else, nothing special really. It's just a great growth outcome. You are rightly alluding to our growth expectation end of last year or even last quarter for this year was slightly less bullish. You're right. So what we had to learn luckily this year is that the hardening environment, as we foresaw it last year, actually is at least as strong as we expected it to be. And together with the capacity that we are willing to hand out to the market, we see that also some complementary growth comes with that, if you like, that is higher than what we had expected end of last year. That's true. The second question, Christoph, you take it.

Yes. Andrew, you found it. The technical topic -- sorry, we have a noise here. Okay. I'll go ahead. So Andrew, you found the technical one-off hidden in the investment result of the P&C Re business. What's happening there is that I agree you would have probably expected a little bit higher running yield given also that the dividend season is very much in Q2. The offsetting one-off in here is that we have a lower regular income from associated companies compared to prior year. And that's a nonrecurring effect.

Sorry, can I just ask on the P&C Re growth? There must also be an effect here from Risk Solutions being stronger than you expected because we can see the renewal of reinsurance premium in recent renewals. Okay, there's a timing issue as to when that flows through, I get that, but we can see that 10%, 11% growth. There must still be quite a big impact from Risk Solutions stronger as well. Is that not the case?

Andrew, there is growth coming from the core P&C reinsurance business, but also from the Risk Solutions business. And with regard to the latter, at this point, I wouldn't say that we had underestimated or overestimated the growth outlook back last year. It's rather than already end of last year, we expected this to grow with 10% CAGR. And this is what we have seen to date, slightly more.

We'll move on to our next question over the phone, which comes from Vinit Malhotra from Mediobanca.

So I had 2 questions on growth and investment come to, but I'll just rephrase it a bit. So on the growth side, thank you for the answers on the P&C Re. But from the ERGO P&C Germany as well, when I see the numbers, it seems that this growth in various lines, including in liability lines, now elsewhere, we've heard from you how you're cautious. I know on the U.S. casualty side, but if you could just comment a bit about ERGO's growth as well in this quarter in the P&C Germany area that we view for? Second question is, just could you update us on the derivatives and commodities in particular. So you mentioned how real assets are employed by the group to manage inflation. And then in the P&C investment income, I see a derivative gain of EUR 107 million in 2Q. And it seems to be coming a lot from commodities as well. Could you just help us understand where is it because -- and the reason I ask you is because it used to be a topic a few years ago, but then I thought it was the commodity exposure was lower, but if you could just help us understand.

Vinit, this is Joachim. So I take the first question. Christoph takes the second one. So ERGO's P&C Germany growth, that comes from a couple of reasons. Before I come to the reasons, I would like to highlight ERGO P&C Germany is growing faster than the market. So they are making market share which is a very, very good and strong sign. They did that last year, and it seems continuing to date. Where does it come from? One is new products, which very successful launches, something that ERGO in the very past was slightly weak at. Now they are very strong in that they sell. The second thing is the productivity of the sales forces, both in P&C but also on the life and health side, has been increasing. That's part of the sales approach of ERGO. That's also a result of the [ high-rate ] customer strategy of ERGO, which integrates off and online approaches of one and the same client. It's this. It's not like on the reinsurance side, the market environment. It's this. And with regard to the casualty business of ERGO in Germany, I would suggest you cannot possibly compare it at all with U.S. casualty business. It's totally different market. It's totally different market dynamics. I would say the German casualty business is plain vanilla business.

Yes. Vinit, your question on derivatives on the commodities, first of all, I can confirm that there is a significant positive result impact from commodity derivatives. That's something I mentioned already in my introduction to give you an order of magnitude. It's a very -- it's a high double-digit million euro numbers. And this is part of our overall investment strategy where we try to hedge inflation as much as we can. Of course, there's always some basis risk. But we really look into our liability position also from an innovation perspective and then set up an asset portfolio, which as much as possible really hedges then this inflation exposure. And to do that, we are relying on various asset classes. You were mentioning real assets, and equities are also part of that. But also, obviously, commodities and one way to invest into commodities is by using derivatives. But then it's also inflation-linked bonds, for example. That's also part of that investment universe we are using for this inflation kind of hedges. In the reinsurance portfolio, altogether, it's about 25% of our assets, which are inflation sensitive to give you an order of magnitude.

Sure. And Christoph, sorry to ask, is there -- has there been an increase in commodities recently because of inflation? Or was it just stable and now we are seeing the result?

I mean this commodity position is not a static position per se. So in that regard, we are always looking into opportunities and then also -- and given on the opportunities, we see on an opportunistic base, increasing the portfolio if we think it's the right environment to do so. So as it does not tell the hedge, I'm a little bit -- I'm struggling a little bit what is the basis for comparison. But indeed, we have been benefiting quite a lot this quarter from commodities. Maybe let's put it that way. And I think that's about it what I can say about that.

We'll now move on to our next question over the phone, which comes from Antony Wang from RBC.

Just 2 questions here. So first one on the Life and Health Re. Could you provide some color on the U.S. and non-U.S. fleet of the mortality claims, please? I think it would be helpful to understand like the biggest exposure other than U.S. going forward? And the second question is on P&C Re growth. Given the outlook on price momentum, what -- could you give some comment on business lines where you would think to overweight and underweight in terms of growth going forward?