MS&AD Insurance Group Holdings, Inc. (8725) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you very much for giving me your attention. I'm Robert Wiest, CEO of MS Amlin AG. I will cover 3 points during today's presentation. An introduction to myself, as this is my first time talking to you, so I wanted to give you some background on myself. Then the financial update on where we have been in the last year and, more importantly, then the financial '22 update on how we are trading this year. And then my point of view, the most important point, the strategic actions because that is how we make the company fit for the future. As to myself, the best way to describe myself is I am a 26-year professional in the reinsurance business and nothing else. I'm an engineer by education, and in the last 26 years working at Swiss Re, I have come more or less every position along the production chain of a pure reinsurer. I worked in different markets and spent a lot of time in Asia. So I think I gained a broad set of experiences, which I bring to my current role. The question then is, why would someone like me join MS AAG? Well, that's a surprisingly simple answer, I think. What I bring to the table with my experience and background and the combination of the current situation. First, a strong shareholder. Second, a committed shareholder, which is very, very important. And finally, the potential, which I can see in MS AAG, taking into considering everything that we can achieve within the specific time frame. So it's really the attractiveness of the opportunity. The way MS AAG has been set up makes it a pure breed reinsurance company. And I see a lot of potential in it. Clearly, we will not be at a top ranking before a certain amount of time, that is very difficult because it takes the company a lot of time to get there. For some companies, it took them centuries to get to the leading positions. But we can take a significant step upwards overall in a specific amount of time. Now moving to Slide 4. Let's have a look at the financial year 2021, very clearly a disappointing year. But there are some positive elements in the financial year '21 as well. First, we were tracking ahead of the premiums, growing diversifying non-cat lines. You can clearly see that there were -- that we were overexposed on the cat lines, and that's a point I will come back to you about in the financial year '22 slides. So we were tracking ahead of the plan in the gross written premium. We had a variance of $512 million, $290 million is growth in non-cat classes, primarily in crop, cyber and financial lines. And the remaining relates to intergroup fronting arrangements which support MS&AD Group initiatives. Important to note that these agreements are multiyear agreements, and they have been accounted for in financial year '21, so we won't see that effect in the financial year '22. As I mentioned, 2021 was challenging also for the entire reinsurance industry. '21 was the year with roughly USD 120 billion of losses for the entire industry. We had a COVID situation, which we accounted for in reserving as well. Then specifically for MS AAG, we had a non-cat deteriorations of our reserves of around $119 million, mostly related to the prior year reserve strengthened. Those reserves have been reviewed by now multiple times, so clearly, the auditors went through it. On top of that, we have also engaged a third-party expert to have a dedicated review of the reserves, and all of that indicated that our reserves are now at a level of where they should be. So anything further to that is something that we can take up in the normal management of the company. In the transition from '21 to '22 that is important to note, we increased our margin to cater for the inflation risk. So we acted on inflation more or less at the same point of time when we strengthened the reserves. That is something which I'm sure you will note was a very early move from us on the topic of inflation, certainly much earlier than most other companies in our industry. Now if you draw the line, there are several elements which are, so to say, nonrecurring, and we took care of that in '21 and they shouldn't pop up again in '22 or the following years. So in a sense, '21 was a new starting point or a recent point for MS AAG. Reserves have been strengthened, and I would add that the shareholder has strengthened the entire management team as well. So there have been significant actions to put the company back on a solid basis and back on the right track. Moving on to the '22 business plan update. As I mentioned, the year '21 reserve position is robust. This is supported by various internal deep dives. What we did in the transition from '21 to '22 was also further process improvements with the aim to reduce volatility and better overall governance. We submitted our report to the regulatory supervision in regards of our Solvency II ratio, and we are tracking where we should be. Meaning, for this year, we are at 180% solvency ratio, including all the reserve strengthening. We had our discussions with A.M. Best, so you may know that we're sailing under the S&P rating of MS&AD, but we do have also a dedicated rating from A.M. Best for MS AAG. Actually, 2 ratings: one is the financial strength rating, which has been confirmed as A; and then we have the long-term issue of creditor rating of A+. That was a negative outlook for the time being due to the reserve strengthening, a heavy impact of that on the reserves of last year. But we are optimistic that this will be removed in due course. On the business planning for the current year, we improved our processes. We introduced significantly stricter challenges on the loss ratio reviews. And we took some really specific actions to make the business plan 2022 more robust. One is we worked on our cat budget. We moved away from a medium cat budget to a mean cat budget that introduced about $20 million higher cat budget for this year. And on the non-cat side, removed about $50 million of expected profits by increasing the loss picks despite general positive market trends. So from that point of view, there are about $35 million sitting in the business plan of, call it, conservatism, which we haven't had in the last year. Now when you look on the slide, you clearly see the variance between 2021 and 2022 on the top line. The $2.2 billion versus the $1.8 billion. As I mentioned in the previous slide, intergroup multiyear fronting arrangement was taken care of in 2021. So you have to take out the $377 million coming from that agreement. Otherwise, the '22 premium is red, which might be a surprise to you relative to '21 because the premium and the rates are increasing. But in our business plan, we have catered for a reduction in our cat business because we were overexposed. And we clearly have reduced our U.S. casualty business. Those 2 lines work against the rate increases in the other lines or classes of business. In reality, as of May, we are actually tracking about $100 million ahead of the plan, and we expect the variance to grow bigger throughout the year. The latest forecast suggests that we are about $140 million for the full year ahead of the plan. As I mentioned, we do see rate increases in the market at this point in time. We believe we are about 3% ahead of the plan aggregated across all lines of business on the bottom line, the entire portfolio, including all geographic regions. Important to note as well, I talked about the cat reduction. We planned for a 20% reduction in the stand-alone cat and we are currently at this 20%, most probably even slightly ahead of this reduction. So in every renewal which we went through, which was 1 1, 1 4, 1 6, we reduced the cat. Notably, Florida, we reduced by more than 75% of our prior existing cat portfolio. You see in the slide as well, the acquisition ratios are slightly higher relative to the last year. One reason is the change in business mix because the portfolio is moving away from the cat, but then there are some specific effects going back to the last year as well. All in all, we are tracking along the plan. The only manage element, which I have to kick in as a special thing, is the innovation of Russia to Ukraine. That has, of course, an impact. We have taken account of it in our political violence book in Q1. So the exposure we are carrying in terms of that region is political violence and political risk. Our political violence book is also of a limiting exposure. We have been taking care of that pulling up IBNRs. Our political risk is something that plays out for years. And at this point of time, we have not received any loss notification. So that remains still a big situation at this point in time. I would like to add a few comments on our underwriting portfolio. You see on Slide 6 that we actually repositioned our portfolio. As I mentioned, we are reducing our property portfolio, and more specifically, our cat exposure. Then we grow in financial lines, cyber, crop and other diversifying lines of business, which, of our 3-year cycle, should lead us to a much better balanced portfolio. We have put in some specific actions to reduce the volatility by taking care of the correlations amongst the portfolios, and also by ensuring that we have a clear view on the capital consumption, respectively, on the return of capital. That remains still very much progress -- a work in progress throughout this year. At this point in time, we don't have yet all the tools in place to be 100% of where we should be. So it remains clear work in progress and will move also with us into the next year. We should have a good handle on the capital consumption, return on capital per class of business and, therefore, also how that contributes to an overall reduction in volatility and effective usage of our capital sometime early next year. Moving to the last part of my presentation. I would like to talk about the strategic actions which we are taking at MS AAG. As I mentioned at the very beginning, we are sitting here in front of a unique opportunity. but we need to put in a lot of hard work to get this company into a proper shape. The good message is we have clients. We do have a running business, which is growing. We have short-term actions in place. We have a clear brand and we have a strong shareholder. So this, today, already allows us for business coming to us. At this point in time, this flow is not managed in the most efficient way, which is why we have defined a program addressing these inefficiencies and helping us to improve the way how we deal with our business going forward. We have developed a 5-year program. We call this the New Strategy, and that program is composed out of 2 phases. One is the phase we are in now over the next 2 years. We call it the Fix It phase, Fix It and Solidify the Foundation phase. We should address all the elements which we believe we have to improve in order to come to something what I call the best-in-class reinsurance. It won't be perfect at 100%, but it certainly will be a market-leading reinsurance platform from its efficiency point of view and market positioning point of view. Beyond that, we believe that we managed -- if we manage to do that all, we have then earned the right to grow, which is why we call the second phase Right to Grow. And from then on, it's really about expanding our footprint in the market. That is the reason why we call it the Right to Grow. It is important to point out that the next 2 years will be extremely busy. There's a lot of work which needs to be done. At this point in time, MS Amlin is clearly operating below its true potential. If you take the 2021 as a starting point, the discount to our peers and peer groups is significant, and we have to catch up for which we have this transformation program. Our Fix It phase is composed of 12 transformation projects. They are all bundled under one vision and are bundled with one transformation program. There are 4 initiatives targeting to address the weaknesses in our business model, and there are 8 initiatives targeting the weaknesses in our operating model. If we bundle them all together, we should have, at the end of this exercise, at the end of the first phase, what I call the best-in-class reinsurance company, allowing us to expand our footprint in an efficient way. And therefore, allowing us to get to the second phase. But more importantly, you will see this on my last slide, it will be a company which can consistently deliver solid profits. We should also be able to deliver a return on equity over a cycle of about 12%, which means that in good years, it can be significantly higher; and in bad years, it can also drop to single digits. We believe the combined ratio of 93%, and we believe this is achievable, and also, the according gross written premium, which goes along with those KPIs. Our focus for the next years is on '22 and '23, and we are already halfway into '22 with the transformation program to put us on solid foundations. And from '24 onwards, we would like to show you an expansion of our footprint on that basis. With this, I would like to close my presentation. Thank you for listening, and I'm more than happy to take any questions. [Foreign Language]