Earnings Transcript for MURGY - Q2 Fiscal Year 2019

Christian Becker-Hussong: Thank you, Mary for the introduction. Good afternoon to everyone listening into our call on the occasion of our Q2 financial earnings 2019. I have the pleasure to be here with Joachim Wenning, our CEO; and our CFO, Christoph Jurecka. Procedure is relatively simple and straightforward this afternoon. Joachim will kick it off with his opening remarks and Christoph will continue with just a few explanations on our Q2 earnings. And afterwards, we will go right into Q&A. Joachim, please.

Joachim Wenning: Thank you very much, Christian and good afternoon, ladies and gentlemen. It’s Christoph Jurecka and my pleasure today to report Munich Re’s half year 2019 figures and to also share our view on the outlook for the full year 2019 and the further outlook into 2020 with you. As you know, we are in the midst of, I would call it, a 3 years race to increasing the Munich Re group result to €2.3 billion last year, €2.5 billion this year and finally to reach €2.8 billion in 2020. And I would like to anticipate the following. Munich Re is fully on track and I would like to add businesses are not only running smoothly, they are evolving quite dynamically and they are growing profitably, which is very important for us and it’s unfortunate, if you like, but it is what it is. The big quarter two news have already been out practically with our ad-hoc communication we disclosed in the quarter two result of €1 billion, that was 3 weeks ago. So since then, naturally, not too much really new has happened. So in any case, I would like to give you some more details if you want to have a look at Slide 3. This highlights that it was almost exclusively the reinsurance business, which has contributed to the extraordinarily positive first half year result 2019. And for the full year, we expect to earn €2.5 billion thereof €2.1 billion from reinsurance and €0.4 billion from ERGO, that has not changed. However, I would like to emphasize that our confidence level with regard to reaching the €2.5 billion this year is clearly higher now after 6 months than it was at the beginning of this year. From Slide 4, you can take if you wish some concrete milestones that we have achieved on the reinsurance side and on the ERGO side to meet our mid-term target. I think on the reinsurance side, it’s worthwhile mentioning that it is very crucial for the earnings increase that the re-insurers are successfully growing into the target lines of business and target regions and this is nothing new to you. We have reported on this many times. So conceptually, strategically everything is as is. However, it is important for you to see and for me, I am happy to confirm that execution and progress in targeted profitable growth in reinsurance is fully, fully satisfying for us. And also important for the reinsurance has been our so-called transformation program, meaning to grow traditional business with less resources, and so to increase the funding potential for creating new business models. And with regard to new business models, we have already reported in the last quarters that this is running quite smoothly and that there is roughly a handful of such business models already productive. So already producing premium income and also results, but still at low scale – they are now scaling up. And it will take some years, realistically, to really report what the full business and earnings potential of these business models will be. ERGO, on the right-hand side of that slide, you can see has finished or completed very successfully and very quickly its so-called divestment program in its international organization, divesting from mainly sub-critical businesses of marginal relevance. And what ERGO has instead achieved is they have strengthened very materially their market positioning in the Indian market. So via purchasing 51% of Apollo Munich Health Insurance, HDFC now is also the partner of ERGO in the private health insurance arena. And if you look into a probable second step of this evolution – so after a merger of these two carriers – then the combined carrier would stand for 8.2% market share in private health insurance in India, reflecting #2 market position and #3, overall, if we also include the P&C business, so health plus P&C, reflecting a 6.4% market share. That’s very, very interesting. Otherwise, the group focus on transforming, digitizing and growing business profitably is paying off fully and delivering increased earnings. And at half time of our 3 years program, we have fully met our expectations so far. And thanks to the, I would call it, the new business and the earnings momentum that has been established in the last 2 years, our confidence level into 2019, but also beyond into 2020 of delivering even further increasing results is higher now, again, than it was at the beginning of the program. This is something that doesn’t easily translate into numbers, but the confidence level is higher. And our ambition is to compare with our international reinsurance peers and our international Europe-based primary insurance peers is such that we are always among the top 3 when it comes to total shareholder return comparison. And when you look at Slide 6 of the presentation then you can see since January 1, 2018, since we look at these numbers and since we have committed to this, we are in the top 3 position. And I admit that this time period is a very short one, what is 18 months, but I will have to hide these numbers for another 5 to 10 years to show you a longer time period. I thought, from now on, we’re going to show it to you. And as it stands, it looks nice. With regard to our outlook 2019, we have kept everything unchanged. And with this introduction, I’d like to hand over to Christoph, who is going to give you more details. Thank you.

Christoph Jurecka: Thank you, Joachim and well good afternoon from my side as well. As usual, I will only give some personal opening remarks, and I will not lead you through the presentation before we go to Q&A. As Joachim already mentioned, after 6 months, Munich Re is well underway to meet its targets for the full year 2019. We did pre-release already a few weeks ago our strong consolidated result of €993 million in Q2, which was helped by low major losses and higher reserve releases in reinsurance. And on top of that, I’d like to underline that also ERGO achieved a very pleasing result. Now let’s look into the details. Starting with the investment result in Q2, the ROI amounts to a solid 3.1% and supports our guidance for the full year very nicely. On top of that, our unrealized gains increased significantly, not only in the fixed income area, but also on equities. We reduced our cash position and continue to actively manage the low interest rate environment and thereby achieved a reinvestment yield of 2.2%, which increased even slightly compared to the first quarter. Nevertheless, we still think that ROI for 2019, achieving the target ROI for 2019, continues to be challenging. And we also think that it’s more likely that we will have to round up to achieve the forecasted 3% than to round down. This is, of course, due to the falling interest rates but more importantly, also due to our current expectations regarding the realization of valuation reserves and also our expectations with respect to the net balance of derivatives. Now let’s go to the Life and Health reinsurance. In Q2 actually, Life and Health we had a weak quarter in terms of the technical result. The ongoing negative experience in our Australian business includes tech write-off due to the recently introduced Protecting Your Super legislation, which has been implemented more widely than we originally assumed when we, for the first time, took a hit on our tech already in Q4 last year. Now we do not expect any further tech write-down from this changed legislation for the rest of the year unless the legislation changes again. Still in Australia, we continue to observe a heavy claims experience in disability business. Our priority remains to work with our clients to rehabilitate the existing portfolio. But for the coming quarters, we must expect an ongoing higher earnings volatility. In Canada, on the other hand, the reduction in technical earnings is caused by the shortening of our duration in the asset portfolio. And this has been now largely accomplished. The mentioned reduction in the technical earnings was more than compensated for by a positive impact on the investment result. So here, we are more speaking about the shift of result than of an actual reduction. Now looking at Life and Health Re overall, depending on the experience in the remainder of the year and obviously also on the outcome of the annual reserve review, we see a substantial risk that we will fall short of our €500 million guidance for the technical result plus fee income in 2019. This risk is less pronounced for the operating and net income due to the mentioned beneficial effect of the Canadian duration shortening on the investment result in the first half. Now looking at P&C reinsurance, here we recorded a very good combined ratio of 87.7 percentage points in Q2. And also, the result has been really very good. This was, as mentioned already, mainly to a combination of very low – large nat cat and also low manmade claims totaling 4.1 percentage points only in the combined ratio. But furthermore, there was also a range of effects resulting in a high release of basic loss reserves of 7.3 percentage points. On the one hand, we successfully disposed of non-core books, which we had conservatively reserved for. And on the other hand, the actual versus expected loss development in some lines of business was so favorable that we felt it would be justified or even necessary to release some of the conservatism into the P&L already now and that’s important, without compromising our reserve strength. On a normalized basis, the combined ratio amounted to 98.9% once more driven by adverse claims development in our North American Risk Solutions business and by seasonality effects. Also this is still above our expectations. This is an improvement compared to Q1, so there’s a positive trend. And then we see the underlying profitability of our growth initiatives remaining sound. We still consider a little closer to 98% to be a realistic ambition for the full year 2019. Now looking at the renewals at 1st of July 2019, the recent market recovery continued. In particular, there was a significant improvement in prices for reinsurance cover in markets affected by natural catastrophes. However, and as you know, the calculation of price changes as we do it takes into consideration increases in loss expectations in all the markets across the globe where we do expect some higher losses in the future. And it also includes stable renewals in unaffected regions of the markets. So overall, prices rose in July by 0.5%, and the premium volume was up by 9%. Looking at these figures, we are very happy that we continue to grow into this hardening market. Now coming to ERGO, with net earnings of €135 million in Q2, ERGO posted a strong result above the expected quarterly run rate. The profit of €220 million for the first 6 months is fully in line with our ambition of €400 million net result for the full year. In Life & Health Germany, the net result benefited from good investment results as well as from a higher shareholder profit participation. In P&C Germany, the segment amounted to a very good 80.6% combined ratio. And large losses remained below average expectations. And on top of that, and that’s something which is even more important in my view, we benefited a lot from the overall favorable claims experience across more or less all of our books. On top of that, we have the usual seasonal fluctuations in premiums in the first half of the year, which regularly leads to a negative impact in Q1 and a positive effect in Q2 and this reversed, as I said, now in Q2, with net earned premiums now being over – having increased over-proportionately. Finally, the international business of ERGO also delivered a combined ratio fully in line with our ambitions of 95% for Q2. And as announced earlier, the sale of our entity in Turkey resulted in a double-digit or concretely, €39 million negative impact on the segment’s net income. For the half year, ERGO overcompensated thereby more than €60 million of negative impact from the now finalized portfolio optimization of ERGO International, which even more shows how strong the €220 million result for the half year of ERGO is. Now I come back to the outlook. As stated by Joachim, the outlook for the remainder of the year is unchanged. So we stick to the figures we had in the annual report 2018. And I’m more confident to achieve this target now after the first half year than at the beginning of the year, given that we already achieved €1.6 billion at half year. With that, I’d like to conclude my opening remarks, and I’m of course, very happy to take your questions in our upcoming Q&A.

Christian Becker-Hussong: Yes, thank you, gentlemen. We can then go into Q&A right away. [Operator Instructions] Thank you. Please go ahead.

Operator: [Operator Instructions] We will now take our first question from Vikram Gandhi of Societe Generale. Please go ahead.

Operator: We will now take our next question from Andrew Ritchie of Autonomous. Please go ahead.

Operator: We will now take our next question from James Shuck of Citi. Please go ahead.

Operator: We will now take our next question from Jonny Urwin of UBS. Please go ahead.

Operator: We will now take our next question from Sami Taipalus of Goldman Sachs. Please go ahead.

Operator: We will now take our next question from Kamran Hossain of RBC. Please go ahead.

Operator: We will now take our next question from Farooq Hanif of Credit Suisse. Please go ahead.

Operator: We will now take our next question from Ivan Bokhmat of Barclays. Please go ahead.

Operator: We will now take our next question from Frank Kopfinger of Deutsche Bank. Please go ahead.

Operator: We will now take our next question from Vinit Malhotra of Mediobanca. Please go ahead.

Operator: We will now take our next question from Edward Morris of JPMorgan. Please go ahead.

Operator: We will now take our next question from Michael Haid of Commerzbank. Please go ahead.

Operator: This concludes today’s question-and-answer session. I would now like to turn it back to your host for any additional or closing remarks.

Christian Becker-Hussong: Yes, Mary, thank you very much. Nothing to add from my side. Pleasure to have you had with us this afternoon. Thanks for your questions and hope to see you all again very soon. Thank you and bye-bye.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect.