Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München

Good day and welcome to the Munich Re quarterly statement as at 30th of September 2021 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Becker-Hussong. Please go ahead.

Thank you, Saskia. Hello, everyone. Good morning and a warm welcome to our call on Munich Re's Q3 earnings release. Today's speaker is our CFO, Christoph Jureka. The procedure is very simple, straightforward. Christoph will kick it off with his introduction. And then we will go right into Q&A. So no time to lose. Christoph, the floor is yours.

Thank you, Christian. Well, good morning also from my side. It's a pleasure to present the Q3 results this morning. Q3 was a heavy nut-cut quarter, which was dominated by two major events, Storm Burnt and Hurricane Ida. These two events accounted for an insured market loss of almost $50 billion, with Ida alone standing out at around $35 billion, according to our own assessment. This fits into a series of above-average major losses, including COVID-19, in the last five years. As a consequence, reinsurers have been increasingly scrutinized by capital markets as regards to the appropriateness of the internal models and partially perceived underestimation of climate change risks. Therefore, before I start with my usual remarks on our quarterly result, I would like to take the opportunity to speak about how Munich Re looks at these topics based on the slide deck included in our Q3 presentation starting on page 19. Climate change is not a new phenomenon for us. Munich Re has been a pioneer in the research of climate change for almost 50 years. We recognized quite early the relation between global warming and the risk of extreme weather-related events. This impact is not uniform, and there are significant differences across regions and powers. To mirror these risks, we permanently incorporate new data into our internal risk and pricing models. And as risks are constantly changing, we also reflect forward-looking findings and incorporate the latest academic research. This in particular holds true for our 35 peak risk scenarios, but also for what we call non-peak risks. In total, as you can see on slide 21, We model more than 100 risk scenarios, albeit the basis for less impactful risks is somewhat less sophisticated compared to peak risks, which are driving our exposure management and economic capitalization. It is important to add here that depending on where we stand in the market cycle, the theoretical prices cannot always be implemented in the market. Therefore, exposure and cycle management as well as underwriting our decisive factors for the profitability of our book. For example, we have been traditionally very cautious with regard to frequency or aggregate covers, and we still are. One example of our peak risks is flood Germany, as shown on slide 22. By the way, a risk which we have been modeling for quite a long time. Even though the flood in July was the costliest nut-cut event in German history, we deem a flood loss of that order of magnitude to happen about once every 50 years. While the aggregate loss is consistent with our model, the regional distribution of losses is much more difficult to model, also due to climate change-driven developments like the increased risk of severe rainfall in local areas. Now, how can we respond? First of all, it's our responsibility to help the people affected and support rapid reconstruction. At the same time, preventive measures have to be taken in addition to stricter rules defining the use of land. As there are still many households without flood coverage, this insurance gap has to be closed with primary insurance and related reinsurance cover, but only at risk adequate prices. Capital to cover these perils is sufficiently available in the market. On page 23, you can see an example for non-peak risk. Wildfire is a risk where the impact of climate change is clearly visible today. As you can see in the chart, there's a positive correlation between global warming and the frequency and severity of wildfires in California. Does this mean we don't ride wildfire risk anymore? No, it doesn't. We have been analyzing this trend for quite a while, investing a lot of effort to improve our internal wildfire model. The increased risk is reflected in our pricing. And in addition, we've adjusted our underwriting approach and have a much more selective risk appetite with a focus on rate adequacy. If you compare the actual nut-cut losses with our expectation, you'll notice that there is a certain fluctuation around the expectation every single year. Looking at the 10-year moving average as shown on page 24, this average meets our current expectation pretty well. Comparing last year to this year, sometimes it's just a matter of a few miles in the track of a hurricane, whether a market loss ends up at 10 billion US dollars or multiple times higher. In the short term, the randomness of events and the specifics of the affected areas are much more relevant for the loss amount than climate change. In this context, it is important that we can reprice most of the cut business annually and thus respond to any change in the risk assessment in a timely manner. In the last couple of weeks, we were frequently asked if our expectation of around 8% not cut losses is still appropriate. given climate risks and the recent uptick in losses. As you can see on slide 25, the 8% is based on a probabilistic bottom-up analysis of our current portfolio, considering the peril-specific impact for man-made climate change and factors of natural climate variability, such as the variation of sea surface temperatures in the North Atlantic Ocean. We also consider changing regulation and social inflation, such as building standards and demand search. Even though we've expanded our nut-cut exposure in absolute terms and permanently redefined our models, the expected major nut-cut loss ratio of around 8% has been remarkably stable. Having said that, we are keeping this under regular review, and we might change it, but only if necessary. Finally, let me look at volatility from a more overarching perspective on page 26. Volatility is inherent to our business model, and we get paid for taking volatility from our students' books. The expansion of less cat-porn and less cyclical businesses like Liferay, Risk Solutions, and Ergo will reduce P&L volatility over time. Our strong balance sheet allows us to cope with volatility already in the short term. Even in bad years, we are committed to paying at least an unchanged dividend. Share buybacks increase the amount to be repatriated when no alternatives generating more value for our shareholders are available. And as you have seen in the third quarter results, diversification between earnings components, like the investment and technical result, and also between segments smoothens P&L volatility in quarters with increased loss activity. As a result, we are fully on track to achieve our IFRS earnings target, despite the large events we have been seeing. This brings me now to our Q3 result. As already indicated in the pre-announcement, we achieved a net result of €366 million, corresponding to an ROE of 6.3%. Year-to-date, the return on equity is a pleasing 12.1%. We are very happy to have achieved such a resilient performance given the high losses from the storm Bernd and hurricane Ida, not to forget the Texas freeze already in Q1. In our view, and as mentioned before, Bernd is the one in 50 years event, while Ida is the one in 10 years US hurricane event. Also in Q3, we benefited from a good operating profitability in all fields of business, but also from a strong investment result and also currency result related to our investments. Therefore, let's start to look a little bit deeper into investment result. In Q3, we achieved an investment return of 3.3%. The result was supported by disposal gains from typical portfolio turnover, but also from outsourcing activities to third-party asset managers. As a part of the disposal gains in Q3, and even more so in Q4, goes back to our share reduction in Admiral. I would like to emphasize that our close business relationship remains wholly unaffected by this transaction, which in no way reflects MiniGree's assessment of Admiral's current or future performance. Due to largely stable capital markets, the derivative result was unremarkable. The reinvestment yield dropped to 1.4% and as a result of investments in shorter maturities and lower interest rates during the quarter. Now turning to reinsurance. The life and health technical result including fee income of 9 million Euro again fell short of the prorata annual ambition. Higher than expected COVID-19 losses of 168 million Euros were driven by a surge in mortality in the United States. as well as an ongoing high mortality in South Africa and India. For 2021, we are now expecting COVID-19 losses of around €600 million. We will not reach our annual guidance of around €400 million for the technical result plus fee income. Adjusted for COVID-19, however, the underlying performance remains strong. In P&C reinsurance, we posted above average major losses, as mentioned. While COVID-19 losses were and are expected to remain insignificant, the combined ratio of 112.8% was burdened by the mentioned events. Given the high amount of nut-cut losses in this year, we will not achieve our combined ratio guidance for 2021. However, the underlying performance remains sound, including reserve releases, the usual amount of 4 percentage points, The normalized comment ratio amounted to 95.2%, which is fully in line with our full-year guidance. In primary insurance, Ergo continued its pleasing financial performance. With a net result of €134 million in Q3, Ergo is on a very good track towards its full-year guidance. I'm pleased that a strong underlying performance with sustainable profitable growth and stringent cost management, as well as a higher investment result could largely offset significant losses from storm burn also for Ergo of around 0.1 billion euros. With negative effects of 12 million in Q3, the COVID-19 impact continues to be marginal. German life and health business posted net earnings of 80 million euros. good operating performance and health, and still very low claims and travel contributed to the pleasing result. In P&C Germany, the combined ratio of 95.6% in Q3 was remarkably resilient. High flood losses were mitigated by ongoing profitable growth, favorable underlying claims development, lower large man-made losses, and stringent cost discipline. Given this earnings power, we are sticking to our full-year combined ratio guidance albeit with increased uncertainty depending on further major loss development. The international business of Ergo posted a somewhat lower net result of 32 million euros affected by COVID-19 related claims in India and large losses in the Baltics and Austria. But the operating performance continues to be strong. The ongoing good development in Poland and Greece as well as a seasonally strong quarter in Spain, contributed to the pleasing combined ratio of 92.3%. Now, a few remarks only on capitalization. The group's economic position is very sound and remains sound. Our solvency 2 ratio increased to 231% in Q3, which is largely attributable to the issue of our green bond, while the change in all the other drivers was rather small. Finally, I would like to conclude with the outlook for 2021. We maintain our group net income guidance of 2.8 billion with unchanged 2.3 billion in reinsurance and 0.5 billion in ergo. Within reinsurance, however, the composition of earnings contribution has shifted. Given the high amount of not cut losses, we expect an increased combined ratio of around 100% in property casualty. And due to COVID-19, we will also not reach the guidance for the technical result, including fee income in life and health. This has been lowered to 200 million euros. On aggregate, the lower underwriting result can be fully compensated for by a strong investment performance, which is expected to continue into Q4. All in all, we are very optimistic to achieve the outlook, which is built on our usual cautious planning approach and reflecting higher than 12% large losses following our usual internal seasonality pattern. With this, I'm looking forward to answering your questions. But first, I'll hand back the question.