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Good day, ladies and gentlemen. Welcome to the Munich Re Quarterly Statement Q1 2018 Conference Call. At this time, for opening remarks and introductions, I'd like to turn the conference over to Christian. Please go ahead.
Thank you, Catherine. Good afternoon to everyone, and welcome to our Q1 2018 earnings call. Today's format is pretty simple and straightforward. We will go right into Q&A with Jörg Schneider, our CFO. And I would just like to add to my usual housekeeping remark. Please limit the number of your questions to a maximum of 2 per person. That's it from my side. And I'll give it back to Catherine, and then please go right into Q&A. Thank you.
[Operator Instructions] We'll go first to Michael Huttner with JPMorgan.
Good afternoon, everybody. This is Jörg Schneider speaking. Michael, are you there?
So I had two questions. One is the reserve releases, so you've got 4.1% and then the kind of 1.7%. Is this the first time you've published it like this? And when you talked about the combined ratio going forward, the 97% for 2020. Is the assumption that maybe even with stable basic combined -- runoff of it, we would have also this kind of extra coming through from nat cat reserve releases? That's my first question. Then the second one is, the life reinsurance is going from strength to strength and you still haven't tapped the kind of profit, the risk level, I guess, what it would be going forward in U.K. and the U.S. And I just wondered what -- how much bigger it would be if you were to kind of unlock some of those reserves?
Mike, the second one is a difficult one because life reaccounting is a very strange animal in some areas. It will change with IFRS 17 drastically. So as of 2021, we will have totally different accounting system. Up to now still the unlocking will, I assume, not be visible until 2020. So until the expiration of the current accounting regime and then we will have to complete reset and totally different reserve, that is my best guess. So more or less, a stable situation. On your first question, property-casualty reinsurance reserve releases, we had 4.1% of net on premiums for basic losses and another 1.7% for major losses. This 1.7%, I would call it rather random or perhaps a clear consequence of our overall rather conservative reserving practices. That can show up, from time to time, but we do not include that in any estimation of future profits.
Our next question will come from William Hawkins with KBW.
Briefly, picking up on Michael's question, the large losses, the positive development, can you be a bit more specific about where that came from? Was it one of the U.S. hurricanes last year? Or something more legacy than that? And then secondly, could you give us a bit more clarity on the drivers behind the unchanged Solvency II ratio? It sounds like you had positive operating performance offset by markets. And I wondered if you could kind of give us a rough quantification of those for the available and required capital. I just kind of directionally, if you're kind of comfortable, you might have hoped that as yields started to rise, ERGO would kind of skew the market performance to the upside, but clearly equities and spreads haven't helped this quarter, if you could just talk a bit about that.
Thank you, Michael. On the large losses and the reserve release this year, nothing from Harvey, Irma and Maria. Its little bit older losses and they come from a couple of events. So none of that I could even remember when I saw it. So therefore, a mix of various things, but nothing big in it, with regard to the natural catastrophe losses. Then the drivers behind the development of the eligible own funds were currency effects, quite strong. For the economic solvency ratio, this is more or less compensated then by the same decline in the solvency capital requirement with the respective -- for the respective elements. So that is more or less neutral. We had strong operating earnings and unfavorable developments in capital market parameters. So overall, FX effects were quite strong, but in the same direction for numerator and denominator. And the main driver for the negative impact from capital markets came from the equities. There is perhaps one element, which is not visible from outside that is reinsurance shortened the duration of the portfolio is no longer long assets. And that means, whereas in the past, we had a very positive diversification effect for market risks, meanwhile, this diversification effect has diminished and therefore, that is something which is not visible from outside. But therefore -- so nothing spectacular here. That completes the answer to that question. Then with regard to the impact of rising yield on ERGO, it was a pretty tiny effect for the euro. And euro is important for ERGO, that is the explanation for this.
We'll continue on to Guilhem Horvath with Exane.
Two question please. The first one is can you elaborate a little bit on this regular investment income performance? It looks like you've had a little bit of a drag here compared to what you had last year and despite the fact that, I think we were expecting something -- kind of, a stabilization at least in reinsurance. So can you elaborate on that, please? And the second is on the common ratio guidance for 2018, and if I compare the P&C Germany -- ERGO P&C Germany, your guidance and the P&C reinsurance guidance, it looks to me that you're taking a little bit of good luck in consumer insurance but you are not particularly factoring in the bad luck you had in Q1 '18 in ERGO P&C Germany. So can you explain if I'm correct and why?
Yes. So first, regular investment income. We expected some 2.8% stabilization there and the stabilization happens, but on a slightly lower level. The reason is the following. We will fall a little bit short of the expectation for a couple of reasons. First is, we have a different FX mix. Second, our program of reinvestments in illiquid investments works a little bit slower than anticipated. We had a somewhat shortened duration, which I mentioned before and even we kept some cash. And altogether, added to a small effect, and in addition to that, you have the usual seasonality that is our dividend income mostly concentrates on the second quarter. So some 0.2% are missing and that is the whole explanation. But we stick to the basic message that is the decline of the run yield has come to an end, at least as long as capital markets do not move drastically again in the low yield direction. Second, combined ratio. Primary insurance Germany was hit by the storm Friederike, which was a very strong one for parts of Germany. And the whole loss for ERGO is included in the combined ratio for Property-casualty Germany, even for the part which is internally transferred to the reinsurer, to Munich reinsurance. Therefore the effect for ERGO P&C is quite large. When we look forward for the whole year, then we do not expect a repetition of that. And also there are some seasonal technical effects why our combined ratio in the first quarter is always higher than in the following quarters, and these will level out in the course of the year. Therefore, we are still confident that we can reach our combined ratio target for ERGO Germany of 96%. For reinsurance combined ratio, we had this low major loss occurrence. And if we compare that to our average major loss ratio of 12%, the difference is 10.5% or so. But in reality, our expectation for first quarter is lower because major losses, which are weather related tend be higher in the second half of the year. Therefore, when we do this calculation internally then the effect for the full year of our good luck in first quarter is roughly the 2% with which we lower our combined ratio expectation for 2018. And so therefore, we are confident that this 97% is now our best guess. It can be volatile as you know, but this also takes into account the seasonality effect. Does this answer your question, Guilhem?
Yes. Perfectly.
We'll now hear from Kamran Hossain with RBC.
Just one question for me. You've managed to create this top line in ERGO P&C. Can you talk a little bit about the success or I guess, the performance of how nexible has done. Obviously, that was launched in October. We heard from them in November, just interested in, kind of, how that's getting on and actually whether this shift of ERGO P&C business overtime shifts kind of more towards motor as a result?
Yes, Kamran, that is an interesting observation. The last number I saw was like 40,000 contracts or so, a couple of week old. We are very satisfied with the start of nexible but it is still almost not visible in comparison to the whole book. That means short term, I haven't thought about it, but I would not think that currently there is a shift to motor do to nexible. If nexible is very successful, which I'm confident of, then we could see an impact. And we don't mind because we see motor business as being a difficult area with regard to competitiveness, but also promising a necessary area with regard to being very close to the client here. But currently, and for 2018, I exclude that you see a major impact with regard to the composition of our nonlife portfolio.
Our next question comes from Vinit Malhotra with Mediobanca.
I guess, just to clarify, so in 2016 first quarter also we saw a similar kind of effect of relief from the net cat history. And in that year, maybe coincidently, the reserve release guidance was raised from 4% to 6%. So I just wanted to clarify that when you said that we don't normally include net cat reserve in forecast, the kind of 99% we have assumed and then going to 97% has not to be adjusted for any nat cat reserve movement. I just wanted to, sort of, double check that, if you don't mind. And second thing was, on the rate increases, the -- I mean, it's stable on January, but April had, as your data says, 25% nat cat book. And for the rest of the businesses sort of flat or somewhat flat. But would you say that you're a bit more cautious or same as you were in January for rate outlook as well?
Thank you, Vinit. Reserve releases in nat cat are not part of our statement with regard to the reserve releases of 4% versus 6% for 2017. So we do not anticipate reserve releases for nat cat. They tend to show up perhaps because we are here also on the conservative side. But they are not a systematic part of our reserve release expectation, which is 4%, will remain at 4%. And we lowered it from 6% because we also have to be aware of the higher inflation, which we see. So I would be very satisfied if we can keep the 4%, especially if you take into account that if we grow strongly with new business and continue setting the reserves for the new business in a conservative way, let's say, including 4% of net earned premium as a buffer or so, then drain from the new business from conservatism is higher than the releases from the old business. So therefore, I think we would be on a good path if we keep this very reliable pace here. And by the way, I'm personally convinced that our reserve level should be among the highest in the industry. So I feel very comfortable about our loss reserve. Second, on rate increases, it's a continuation from what we saw in January with this 0.8% price increase just by chance, but also because that is how the market dynamics seem to function. There is a lot of demand for reinsurance. But unfortunately, there is also a lot of supply and therefore, it remains a very competitive market. And therefore, we are moderately satisfied about the outcome of the Japan renewal. If I look at our internal numbers with regard to what kind of return on risk-adjusted capital we achieve on the business, then it is really a pleasing and a substantially improved picture I see there. So we hope to have some more improvements in the course of the year or at least can keep the current good momentum of the P&C business.
Our next question comes from Thomas Seidl with Bernstein.
First question, on the staff reduction program, do you have now better visibility how quickly the 900 FTE will go down and also what the costs are to achieve this staff reduction? First question. And second, on HGB, you know there's significant headroom for sort of a capital management. I just wonder, for the next -- each of the next 3 years, what would be the impact of replenishing the equalization reserve for 2017 events, please?
Thank you, Thomas. First, about the speed of reduction, we have a voluntary program ongoing and the reception is quite good. So it will be effective in the course of this year and it will be some 250 or so colleagues which will leave us here. This is then little bit less -- or a little bit more than a quarter. Half is Munich, half is international organizations and there are also included the numbers from planned retirements. And let me underline, we urgently need our colleagues onboard during that time because we still have a lot of work to do on the regulatory side, on the accounting changes and also together with our clients and the handover of the know-how is important. So I'm very happy about the pace of the development, which we see now, which is a relaxed one, I would say. And it's anyway challenging to continue with somewhat lower cost base. But I'm sure that this is the right way we go also taking into account the improved technological possibilities we have, including business process automation and artificial intelligence going forward. So I think, it's a typical Munich leeway on one side, in a responsible way with regard to the employees to our colleagues and on the other side, consistent and reliable. Second, on the German GAAP result and capitalization, the impact from the hurricanes of last year is substantial, especially because our current profitability in the year 2018 is so good. That means since the actual loss ratio is very low and the contribution to the equalization reserve is derived from the difference between the average loss ratio and the actual loss ratio. This, in essence, means the more you are successful in your current business, the more you have to inject in the equalization reserve. So in other words, the over performance due to the low loss occurrence in the first quarter will, in HGB, be shifted into the equalization reserve. That is the easy formula here. In IFRS, you don't see it.
In terms of rough estimates, can you give some rough estimates?
Yes, it will be a mid-triple-digit million number. But it's so difficult, I have a number, yes, but when you take that into one of your calculations, it's absolutely not reliable because it depends then on the development of the business, especially also the major capital relief transactions have an impact on the equalization reserve. Because it's also derived from the premium level in the various lines of business. Therefore, let's take EUR 500 million for the moment. And so it will definitely not be EUR 1 billion unless we have a wonderful IFRS result in the course of this year, which I would very much welcome here. And you can rely on unique redistribution. So let me also emphasize that, because if necessary, we would have ways to somewhat smoothen and moderate the injection into the equalization reserve or compensate it by group internal measures which would create compensating income.
Our next question comes from Andrew Ritchie with Autonomous.
First question on -- the reinvestment rate was flat in the quarter versus Q4. It was a bit surprising given the rise in benchmark yield curves and spreads. Could you clarify what the reinvestment rate was for the reinsurance business, not for the group as a whole? And I think the implication from your earlier comments was that it's temporarily depressed because you haven't done some of your private equity type reinvestments yet, but maybe just clarify what's happening in that reinvestment rate, specifically focusing on reinsurance. Second question, more qualitative on ERGO. It's very hard to get a sense of how things are going from a commercial momentum point of view. I'm talking here ERGO, excluding nexible. Can you give any qualitative comments about how the new products have come down in P&C and in life? Clearly, it's not sort of increased your top line premium yet, but just any qualitative comments at all on the commercial side of ERGO because it is very hard to derive from the data you've given us.
Thank you, Andrew. First, reinvestment rate in reinsurance was 2.1%. So it's higher due to the high share of US dollars and other foreign currencies in comparison to euros. It's a bit shorter due to the shorter duration than we originally anticipated. With regards to the investments in illiquid portfolio, I see an enormous competition there for the very limited number of suitable long-term investments with a reliable income stream and therefore, we do not want to invest at any price, but we are making progress here. With regards...
Sorry. Just on the -- I mean, the 3.1%, is still someway short of the book deal, which is 2.5% across reinsurance. How come you are so confident the running yield is going to stabilize?
Yes. It's only the fixed income part and it excludes -- no, it includes the very short-term cash investments, for example. So in this quarter, for example, we acquired some government bonds to park the money just before the share buybacks and the dividend have to be paid out and the repayment of the GBP 300 million hybrid loan. So -- and this was also part of this average investment rate, yes? So it is higher, yes, so overall...
It is temporarily depressed, I guess, is how you say it.
Yes, in a way. Yes. It's nothing structural behind it, yes? And then with regard to ERGO, this question is not an easy one because we see developments here from the ERGO strategy program, huge numbers, high investments also with a clear impact on bottom line. We see a lot of momentum with regards to improvement of IT. But it's very difficult to describe it in any way, tangible way, yes? So it's clearly and quantumly we are doing this. On the side of the product, we launched further modular product, especially in property-casualty in the recent month. And this is basically the concept on one side, in property-casualty, it's about modularity of the product to have, how's the terms, a simple version, an enhanced version and a luxury version. And this has been well received by our sales forces. So they have now much better product at hand. So for example, in accident, household content, legal protection, residential buildings. So a couple of new product and all with the same kind of structure. Better -- so better, how should I say, differentiation possible according to the needs of the clients. In life, we have a couple of new products. One is occupational disablement insurance, came to the market in 2016. Then 2 new annuity insurances, 1 new product for company pensions and a lot of old-age provision savings product, which are also well received by the sales forces. The numbers are still relatively small, but there is good momentum. So therefore, the initial stage figures looks promising and I hope that in the next couple of quarters, we see even more visible results in the new business number.
It was useful. Maybe can you just clarify, what was the total restructuring/investment spend in the quarter ago?
So there was almost nothing booked as restructuring expenses and it was a mid-double-digit amount, double-digit million amount in gross expenses of which 1/2 goes to the bottom line.
We'll continue on to Thomas Fossard with HSBC.
Two questions on my side. First one will be on the life and health reinsurance. Actually on the Australia book, the experience has been worse than expected. So I think this is not a new issue. You reporting here, but just to get a bit of feel of if there is worse than what you encountered last year, the deterioration compared to initial expectations? Or it's just a continuation of what we saw coming? And the related question to that, it is -- at some stage, could it be -- could it turn into, I would say, a new reserving adjustment as you've done in the past in order to get rid of this, I would say, ongoing drag on the profitability? And the second question would be on the ERGO Life and Health. Obviously, profitability of the health business has been very strong on technical basis in Q1. I was wondering if there were specific explanations for this strong performance at the start of the year.
Thank you, Thomas. First, life and health business in Australia, life and health reinsurance, yes. So we knew about the problem. We've been working quite hard on improvements and we have progressed, but progress is perhaps a little bit slower than expected. So therefore, we had an additional negative impact from this experience in terms of losses. And we also strengthened the reserve. This has been included here in the numbers. The deviation as such was not large, but we continue to monitor the developments in the markets closely and put an ongoing high emphasis on the rehabilitation efforts. I do not expect a major further strengthening of the reserves or one huge step or so. Because when we put this problem area into perspective of the whole life book, then it is not very small, but at least it's by far overcompensated by developments in North America, for example, and more and more also in Asia. So therefore, it can be -- there can be a further drag, but I don't expect it to be big. Second, ERGO Life and Health and here especially, health primary insurance business, we had lower -- we booked lower than expected and lower than Q1 2017 expenses, but this is not sustainable, yes? So it's due to specific more technical effects and I don't put anything sustainable onto that.
Our next question comes from Frank Kopfinger with Deutsche Bank.
I have two questions on ERGO. My first question is on the positive tax effects that we saw in P&C Germany and also in ERGO international, where do they come from? Should we expect that those swing back for the rest of the year? Or it's simply the tax rate for the full year should be expected on a lower level? And how should we see this in context of the run rate that you need to get to your target? Because if I deduct the EUR 37 million of this EUR 77 million, which you achieved in Q1, then obviously, you are not on track for your overall target. And then secondly, also on ERGO, whether you can give an update, and you have some more visibility on the upcoming cost for your joint venture together with IBM to build up this TPA platform?
Yes, thank you, Frank. First, positive tax effect for ERGO in 2 segments that is -- this is true. This was due to tax rate differences of low tax jurisdictions, also due of tax-free capital gains and, especially, for tax refunds for prior years. So none of this will be repeating systematically. But even if I adjust for this, and if I see the same kind of, or not same kind, but a couple of countervailing negative effect, which will also not show up on an ongoing basis. And if I see that claims reserve strength of ERGO is meanwhile on a level which is similar to that of reinsurance, then I'm pretty confident that we will make our profit target. So I'm fully relaxed with that in spite of these special tax effect not being repeated systematically. Perhaps, we could see a little bit more of that because with regard to tax effects also ERGO has a very conservative approach in reserve setting. Second question, visibility of expenses for the joint venture with IBM, what I have at the table, but what I won't share with you is other expenses of the migration of our own life book, which are quite substantial, as you can imagine. This is for us, the #1 priority. And we are very happy that we team up with IBM to improve our approach here and to be on a more certain side with regard to the size of these investments. And then, the second priority is to build up third-party administration functions. But first of all, we have to work on the own portfolio to be migrated to a new platform. And here, we set up a quite high number. It's a fully included in the ERGO strategy program and we are confident that we will be able to stick to what we plan here, but unfortunately, I can't share more with you because that would be then also of a competitive importance here when we enter into competition with our administration capability.
Our next question comes from Jonny Urwin with UBS.
Just one last for me. So could you give us a quick update, please, on claims inflation trends that you're seeing, especially U.S. casualty liability, in particular?
Johnny, I haven't heard anything new after the close of the year. Overall, we continue observing our loss reserves by comparing actually reported losses with our expectation. We are in good shape here. We see inflation -- overall consumer price inflation in the U.S. somewhat increasing. As far as I remember, I read a number like 2%. So this will have an impact. But since we are so well positioned with regards to the level of our reserves with a couple of implicit and explicit buffers, I think, we can digest a lot here.
[Operator Instructions] We'll take a follow-up from Michael Huttner.
Just a very quick question. You know you had this lovely slide, I think Slide 26, which is what you'd call the basic loss ratio in reinsurance. And so, the 53 number [indiscernible] because I think we haven't really quite seen a number that low. How -- can you just talk a little bit about this? And is this a figure you had seen when you made the or when Munich made this forecast or guidance for 2020 of 97% combined ratio?
This is rather random fluctuation. So 55 is fine. So if it's 53, at the moment, it is also due to special effects like currency and things like that. So I wouldn't look too much on the quarterly number. And the tendency is sidewards.
We also have a follow-up from Thomas Fossard.
Just to catch up on the question from Frank Kopfinger on the JV with IBM. Just wanted to better understand, so the cost -- can you remind us the timing of the transfer? I think it's in the course of Q3. And also, so the cost associated to the transfer, is that part of the EUR 200 million of expenses/investment you expect to have for ERGO on a full year basis?
The migration of our life book, Thomas?
Yes.
It will last at least 3 years, yes?
Oh right, okay.
So therefore, I would be happy if it were done in the course of this year.
And the cost associated to that? So that's...
Substantial triple-digit million amount. So it's extremely expensive, but it’s worth the price.
At this time, I'd like to go ahead and turn the conference back over to Christian for any additional or closing remarks.
Thank you to all of you for joining us and for your questions. If you have further questions, please let us know in investor relations and we are very much looking forward to seeing and hearing you next time. Thanks again. Bye-bye.
Thank you, ladies and gentlemen. Again, that does conclude today's conference. Thank you all for your participation. You may now disconnect.