Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München

Good afternoon, everyone. Welcome to our earnings call on our fiscal year 2022. This afternoon, the speakers are Joachim Wenning, our CEO, and Christoph Jureka, the CFO of Munigree. And the procedures, as always, you are familiar with that. We will start with a round of presentations and then have ample of opportunity for Q&A. So now I would like to ask Joachim Wenning. to kick it off. Thank you.

Thank you very much, Christian. Good afternoon, everybody. Last year was another year of significant challenges for the whole industry. Against this background, I'm all the more delighted to say that it has been a very good year for Munich Re. In a world that is all out of joint almost, we have remained firmly on track and have even exceeded our full-year profit target with a net income of €3.4 billion. I must underline it. That was not so clear half a year back. So we find this an overwhelming achievement. At the same time, we strengthened our reserves to comprehensively account for inflation risks. We could afford to do so without affecting our financial targets, while, of course, increasing earnings resilience going forward. Nobody, I think, could have known what geopolitical and macroeconomic turbulence 2022 would bring. The Russian war related economic distortions, spiking inflation, the trend upwards in interest rates, heavily fluctuating capital markets. Consequence of all this, our investment result came under pressure. However, and that's the good news, This was more than compensated for by a strong operational performance of all business segments. Simply speaking, diversification and earnings power just working as it should. And we want our shareholders to continue to participate in our strong financial performance. So we propose to increase the dividend from 11 to 11.6 euro. and also decided a new share buyback in the order of 1 billion until the AGM 2024. The next slide that you see is one that demonstrates what I just mentioned. It's the Munich Re diversification benefits. Ergo, with more than 800 million euro delivered a very strong result which compensated for the slightly, very slightly weaker but still very strong reinsurance result. And within our reinsurance business, again, life reinsurance exceeded the target by more than double. In fact, I think the strategic course we've set ourselves as part of our ambition 2025 is already coming to fruition, meaning the greater the profit, contributed by our less cycle-exposed businesses, the more diversified our overall earnings profile becomes. And this is exactly what we have laid down. The achievements we made in 2022 fully support the trajectory towards 2025 targets. With regards to the return on equity, we are already at the level we aim for by 2025, both for reinsurance as well as for Ergo Standalone. And as announced in our investor day last December already, we increased the ROE guidance to 14% to 16% because IFRS 17 rules will just recognize earnings earlier than IFRS 14. With an earnings per share growth of 11%, we are clearly ahead of our guidance. And with 5.5% dividend growth, we also deliver. Our capital position remains very strong. The ratio is well above our optimal range. Reporting the capital management strategy of the Ambition 2020. Every leeway that we may need for further growth. We have the financial flexibility to grow our business, increase the dividend, and execute a share of 1 billion at the same time. Inflation further increased. and persisted at a multi-decade high, as you know. And even though we have seen some signs of easing recently, we here, we do not expect to see pre-2021 levels anytime soon, or to be more concrete, to see inflation rates going down to 2% or lower. The substantial costs from natural catastrophes, also in 2022, were to some extent already driven by those inflation trends. On the positive side, of course, ongoing high net cut losses and inflation are supporting the hard market to persist. On the other side, it's a matter of good risk management to prudently reflect their impact, both in underwriting and in reserving. By thoroughly doing so, our reserve prudency remains largely unchanged. Christoph, I think, is going to give you some more details later on this. I come to the January renewals. They revealed a clear distinction between different client strategies. It's fair to say that Seedon's honored reliable partners, the providers, We clearly benefit from that. Munich re-benefited from just the early, clear and consistent messaging throughout the renewal with regard to risk appetite and return expectations. High nominal price increases we have seen in the markets were necessary to protect margins as these were mitigated by conservative loss and inflation expectations. And the 2.3% price increase that you can see on the slides for our whole portfolio is fully risk-adjusted, considering most recent loss trend assumptions. So this rate change, therefore, is a good proxy for the real margin improvement we expect to be reflected in the combined ratio going forward. Just to be very concrete, it includes material business effects of almost 1% as we have substantially expanded our property non-proportional business. The 2.3% is expected real margin increase after compensation. After compensation. So important, recently we were asked sometimes how is it possible that some of our peers are highlighting double-digit rate increases. Please go back to them and ask if they also expect and commit to double-digit margin increases. In addition, which is also important, is there are material positive changes in terms and conditions which are not fully capturable, of course, in price increases. They, in any case, they enhance the portfolio quality. So this includes wording improvements. It includes clearer definitions of what's included, what's excluded. But also higher attachment points. Pricing of so-called secondary perils make the portfolio more robust. There is one slide where we look into the rate increases and to the volume impacts. Business cautious assumptions as regards loss cost trends. Quite obvious looking into this. Particularly in casualty business, student inflation expectations largely offset nominal price increases. Or in other words, we don't expect margin increase after compensating for inflation. Hence, we reduced our exposure to proportional casualty lines, especially in the US, whereas casualty non-proportional shares benefited from some very material rate increases. The property... we have executed a strategic growth impulse into non-proportional programs, which, together with some specialty lines, provided opportunities that we haven't seen for 20 years. We took advantage of those material rate increases by further expanding our NatCat exposure. But as the non-proportional property programs only account for about 10% of the renewed portfolio in the January renewals, these private improvements are underproportionately reflected in the 2.3% overall price change. However, we are pretty optimistic with respect to the upcoming renewals, the 1.4% but more even the 1.6 and 1.7 renewal this year, which will naturally include higher shares of nut-cut business. This will correspondingly reflect in high. As a consequence of high inflation, we also saw a sharp increase in global bond yields, which can already be observed in the substantial increase of our Solvency II ratio. In our P&L, we see the benefit with some delay. After several years of a declining running yield, 2022 marks a turning point. We are now investing new money at much higher yields, which will increase regular income over time and sustainably. We are even voluntarily accelerating this trajectory by portfolio reallocations to seize market opportunities Deliberately accepting that this will be leading to temporarily unavoidable disposal losses. Going forward, this is going to improve the quality of our investment result. Solution of sustainable income will increase. Let's turn to the other big industry challenge, high net cut volatility. In the general reviews, we have grown our CAD exposure materially and for good reasons. ADCAD is one of our most profitable lines of business despite above-average industry losses in recent years. We have demonstrated that we can manage volatility through diversification, a strong balance sheet, and an excellent capital position. There has been a lot of discussion in the market about model quality in the context of climate change and industry losses of above US$100 billion being the new normal. To reiterate, we deem our model state-of-the-art, reflecting a long data history, recent insights from academic research and forward-looking findings. And within our portfolio management, we incorporate this know-how, taking active measures to contain risk. And when you look at the past five years, on average, actual major net cut losses fully met our expectations, despite industry losses of more than 90 billion US dollars. In 2022, we even came out below budget. And this is not just luck, but the result of diligent risk selection, diversification, and disciplined risk management. In other words, we do not overexpose to any risk, however attractive. And even though NatCut is cyclical, there are business opportunities deriving from the still huge protection gap and increasing risk awareness which are driving demand. However, we do not solely focus on NatCut. One single line of business should not be a dominant driver of earnings. That's why we defined our strategy in the Ambition 2025 with the aim to continuously expand the share of more stable and less cyclical lines of business, thereby improving overall earnings diversification. Aside from further increasing diversification within our core P&C reinsurance business, we will achieve a more balanced composition by further expanding risk solutions, life and health reinsurance, and ergos business. Underline this message, let me provide some more color on the fields of business, primary fields of business. I start with risk solutions, which includes various primary insurance businesses. From this year on, this will be managed together in a new global specialty insurance division, which we call GSI. And the division, as you know, will be headed by Michael Koerner. The aim of this reorganization is to continue to support the very good business performance our primary insurers have seen and to drive forward further expansion in special... ...powerful global payer in this field. The more efficient governance structure will enable us to leverage synergies in underwriting distribution and operations and thus enhance our specialty proposition to the market. Until 2025, we expect this division to grow to some 10 billion top line euro. By then, bottom line of, say, up to 1 billion per annum, to me, wouldn't look totally unrealistic. And then there is Ergo, which has significantly increased its earnings over recent years and has again achieved an excellent net result of more than 800 million in 2022, 600 million of which is sustainable, and 200 million based on a one-off effect. Strong profitable growth across all segments, all regions of around 5% last year was supported by superior underwriting and continued cost discipline. Going forward, Ergo strives for above-market growth in all major markets with further increasing earnings and profitability. And Ergo has proven its ability and determination to deliver since 2016 with no exception. Also, therefore, I am confident that Ergo will continue to sustainably contribute to Munich Re's earnings diversification. In 2022, we've not only made progress in terms of our financial performance, but also worked on our climate agenda. As you can see, our decarbonization pathway is well on track. On the asset side, we achieved a total reduction of CO2 emissions of 46% compared to the base year 2019. Also, on the insurance side, you see material CO2 reduction with regards to coal-fired power plants, thermal coal, and especially oil. And also our own emissions from, you know, business travel got reduced by 22%. As from January 2021, We set ourselves a target of achieving a 40% share of women in leadership positions throughout the entire Munich regroup by 2025. Started with 35.1%. Two years later, end of year 22, we already stood at 38.5%. So 40% is within reach, yet will require every effort as Refilling the pools of female talent will take more time than exhausting them. Our gender ambition has been an important starting point, but it's a starting point only locally and regionally. In the course of this year, we will add more dimensions and also want to be leading in all these aspects. Let me summarize. Our strategy is paying off. A well-diversified business portfolio benefits earnings stability. A very favorable market environment will further benefit our growth and profitability in P&C. The situation is well managed. In the absence of any severe political or macroeconomic shock, confidence in fully delivering on Ambition 2025 will And we are happy that the capital markets, except today, are rewarding our profitable growth path. In terms of total shareholder return, in the past four years, we have outperformed all our leading peers in global reinsurance and European primary insurance. But what is really more important than this to us is in 2022, there is not one significant item I'm aware of, or Christoph is aware of, in which Munich Re hasn't done a better job than the market. This makes me very proud of our people. To the end of my presentation, with the non-change guidance, we are heading for a net result this year, 2023, of 4 billion euro. And Christoph will now lead you through the financials in more detail. Thank you.

Thank you Joachim and good afternoon also from my side. As Joachim just pointed out, 2022 was a very successful year for MiniGree. Based on the strong business growth and pleasing underlying performance in our insurance business, we were able to compensate for a lower investment return, which was still solid against the backdrop of a challenging year in the capital markets. In particular, Ergo and also Life & Health Reinsurance delivered excellent results, exceeding their full-year guidance and once again proving their significant contribution to Munich Group's overall earnings diversification. P&C Reinsurance was very resilient to high industry large losses and to the impact of the spiking inflation. Rising interest rates and a good operating development materially increased our economic capital positions. Required capital decreased noticeably, mainly due to the sharp increase of interest rates, by far overcompensating the effects from business growth. And with a solvency-to ratio of 260%, we are well exceeding our target capitalization, also after deducting the next share buyback, which will be accounted for only in Q1 this year. Economic earnings of 2.6 billion euros came in lower than IFRS. as good operating performance was offset by negative market variances. More details on the sources of economic earnings will be provided with the release of our annual report on 16th of March. The German gap result was more burdened by the higher interest rates compared to IFRS due to high write-downs on fixed income investments recorded in the P&L. Moreover, last year's result reflected a positive one-off from the changes in the setting of the equalization provision. Our high stock of distributable earnings continues to fully support the capital management strategy. On slide 23, before we turn to the full year figures, let's have a quick look only at our Q4 results, which came in above consensus expectations. an ongoing positive underlying performance and lower than expected major losses contributed to strong earnings in P&C reinsurance. All the more remarkable is that net earnings included a noticeable reaction to additional inflation risks. I'll go into more detail later on. Life and health reinsurance posted another excellent result. Q4 earnings benefited from an aggregate positive experience and lower than expected COVID claims. Besides, rising interest rates had an overall positive impact. With almost 100 million euros, fee income continues to be a strong earnings contributor. Also, Ergo has once again delivered a very good operating performance. In particular, the German life and health business benefited from its own technical result. P&C business continued to show a very pleasing combined ratio in Germany, while internationally the combined ratio was somewhat affected by inflation, for example, in the Polish market. The annualized return on investment of 3.6% in the quarter was supported by disposal gains from public and private equity investments. To some extent, these were offset by disposal losses in the fixed income portfolio, which were realized to support the future regular income. When we now look at the full year investment return on page 24, the return on investment of 2.1% was below our guidance. In 2022, as you know, we are facing heavily fluctuating capital markets with a sharp increase in interest rates. As a result, we had to digest significant write-downs in our portfolio. At the same time, we also benefited from higher interest rates and from currency effects. The running yield improved by remarkable 40 base points and is expected to further increase with a reinvestment yield of 3.9% in the fourth quarter, a level which we have not seen for a long time. In the context of our economic asset liability management, we hedged part of the interest rate risks using fixed income derivatives. The first four accounting mismatches led to uneconomic losses of about €1 billion in reinsurance. Finally, I would like to stress that currency is not part of the ROI, albeit part of our investment management process as an asset class in its own right. Including currency gains, we would have almost reached our initial full-year guidance of 2.5%. All in all, we achieved a resilient performance given the very volatile capital markets. Now turning to the 2022 financial development of the two business fields, I'd like to start with Ergo on page 25, and Ergo clearly exceeded, as mentioned, the full year guidance. Within Ergo, all segments contributed to the strong bottom line performance. In life and health Germany, we benefited from a 200 million euros one-off effect related to higher interest rates. In the rising yield environment, the German life back book clearly benefits and shows its value, which is also visible in our economic figures and specifically in the solvency two ratio. The German P&C business delivered again a very strong technical performance with a further improved combined ratio of 90.6%. From my point of view, this is an outstanding result in the competitive German market. The international segment shot pleasing results. Please bear in mind that last year's figures include a positive one-off effect. While P&C business felt the impact of the difficult macroeconomic environment, health business performed better than expected. Turning to reinsurance on page 26. we continue to record strong business growth at a high profitability level of 13.8% return on equity. Life and health reinsurance substantially exceeded the full year ambition based on its very healthy underlying performance. COVID claims of around 350 million euros were offset by the impact of higher interest rates and positive experience beyond COVID. fee income continued to be very strong. I would like to underline that the outperformance in life and health reinsurance is very much driven by the operational performance, which also underlines the very strong conservatism in our outlook 2023 for the total technical result in life free, which additionally, as you know, as it's based on IFR 17, will benefit from methodological changes. Turning to P&Z, with 96.2%, the combined ratio in P&Z was higher than expected, even though major losses were slightly lower than anticipated. We catered for additional inflation risks, which is visible in an elevated normalized combined ratio. This is clearly a one-off effect. As for the future, we fully reflected the inflation in pricing. I'll add more explanation in a minute. On page 27, what you see there is the combined ratio of risk solutions, which was pretty much the same level as the overall P&C reinsurance book, as higher inflation, elevated nut-cut losses also left the mark. Business growth was even higher than anticipated. Premium increased by more than one-third last year. As highlighted by Joachim, risk solutions remains a rapidly growing and profitable segment within P&C reinsurance. Over the last three years, the premiums have almost doubled. We took advantage from the favorable market conditions, expanding our footprint in attractive lines of business. In particular, Hartford Steam Boiler once again delivered excellent top and bottom line results, while Munich Re specialty insurance was impacted by Hurricane Ian. On page 28, I would like to conclude the IFRS chapter with a closer look at our reserving position, which remains rock solid. And this is despite the impact of inflation, which has been consistently reflected in the reserving loss picks at year end, and which I will explain in more detail on the next slide. Overall, the outcome of the reserve review was again very positive. The result of the actual versus expected analysis now has for 11 consecutive years consistently shown very favorable indications and allowed for releasing the usual four percentage points of reserves despite growth and despite inflation. All lines of business have developed favorably, the main drivers being property and motor, while the release for third-party liability was small. This is a cautious reaction due to U.S. casualty where social inflation trends have not abated. An unchanged level of 4 percentage points reserve releases on basic losses despite inflation and growth is a remarkable outcome of this year's reserve review. On that basis, we expect to be able to release the same level of reserves also going forward, which in the language of IFRS 17 will be 5 percentage points. Also, with respect to large loss complexes, we have taken a prudent approach. For the war in Ukraine, we have increased our reserves by another around 200 million in Q4. For COVID, we only released reserves of around 140 million euros at year-end, still holding an IBNR level of around 50%. Given the gradually reducing uncertainties, one could interpret this IBNR level as even more prudent now than a year ago. In terms of inflation, we have taken decisive action, as described on page 29. Our regular reserve review revealed an additional inflation impact of 1.3 billion euros in our actuarial segments, which was distributed in roughly equal parts to 2022 and prior years. For 2022, this corresponds to approximately two combined ratio points, which largely explains the increase of the normalized comment ratio of around 96% compared to the outlook of 94%. As mentioned for prior years, the outcome of the reserve review was overall very positive and even better than I had expected personally at the time of our Q3 analyst call. It not only allowed for releasing those usual four percentage points of reserves despite the growth, Also, the favorable runoff helped to cover the inflation impact. And in addition, we reallocated a specific reserve that had been built in the past for a scenario of economic inflation to the actuarial segment. In essence, despite fully reflecting the unforeseen inflation spike, our traditionally very high reserve potency remains largely unchanged. On the next page, we show the reconciliation of the combined ratio to our outlook of 86%. As already outlined by Joachim, we are benefiting from one of the most favorable markets in P&C reinsurance in many years. Before I turn to the impact this is expected to have on our profitability in 2023, a few words on the starting point of the combined ratio walk, as this has also been heavily discussed today. The underlying performance of P&C reinsurance is very healthy and over the course of 2022 we made progress on our initially expected trajectory towards around 94% based on a continued earning through of the rate increases achieved in 2021 and 2022. As discussed, we reacted to increasing inflation trends early and holistically, most importantly setting loss assumptions cautiously. Still in hindsight and after assessing all relevant data in our annual reserve review, our initial loss picks for the new business in 2022 had to be adjusted by the already mentioned around two percentage points in order to reflect the upward trend in the most recent inflation assumptions. And this is reflected in the normalized comment ratio of 96.2% in 2022. I'd like to emphasize that those two percentage points, they are a one-off. And therefore, this elevated level of 96% should not be considered a starting point for the expected underlying comment ratio for the financial year 2023. On the one hand, for new business in 2023, we have fully reflected the ongoing high inflation levels in pricing. And on the other hand, we cannot just simply deduct the full two percentage points that impacted our 2022 combined ratio, as the resetting of inflation assumptions also affects business written in 2022, but which we will only earn in 2023. If you consider all these aspects, the underlying combined ratio is a starting point of the combined ratio walk on the slide. is around 95%. From here, let's turn to the impact of the January renewals. We were not only able to fully capture the current inflation environment in pricing, we also secured a fully risk-adjusted rate change of 2.3%, as Joachim already outlined. And again, this 2.3% is fully on top of inflation, fully on top of any model adjustments we made for large losses for climate change, for whatever could drive up the claims going forward. So fully risk-adjusted, increased 2.3%. We will earn most, but not the full impact of this 2.3% in 2023. We are very optimistic also for the upcoming renewals. So therefore, we say we would expect the positive impact in 2023 to be around 2 percentage points. And also, given our reserve strength, we do not expect to use the improved margin for reserve increases. In other words, the price increase we achieved will fully translate into a better combined ratio and will fully translate into higher earnings. When we presented our outlook for 2023 under IFRS 17 in December, a similar order of magnitude of price improvement was already considered in the 86% combined ratio guidance, given the strong market environment observed already back then. We also presented the main building blocks of the reconciliation of the combined ratio to IFRS 17 back in December. First, the change in methodology which means the fact that the insurance revenue is much lower than net earned premiums due to exclusion of fixed commissions and NDIC, leads to a lower combined ratio of around 1 to 2%. Then we already quantified the expense reclassification also at 1 to 2%. This counting accounts for the remaining difference to the IFRS 17 number of 86%. While we have to keep in mind that in reality a wide range of outcomes is possible, depending on the actual interest rates. Given that we have set targets under IFRS 917 for the first time, there's an element of caution in here, which clearly goes beyond the usual Munich-Ree conservatism. When disaggregating the 86% combined ratio, the basic losses are expected at around 57 to 58%, expenses at 14 to 15%, and major losses at around 14%. In December, we first quantified these with around 13%, however, subject to the 1-1 renewals. As the share of property XL business has increased in our portfolio, and this business comes with almost no attritional losses, there is a shift from basic to major losses that is reflected in the 14% major loss expectation, based on a large loss threshold of 30 million euros. Accordingly, we are now expecting major and up-cut losses of around 10%, while the expectation for man-made losses has slightly reduced to 4%. Now coming to the economic disclosure on slide 31, Capital generation was very strong, and our Solvency II ratio increased substantially to 260%, benefiting from rising interest rates in some of our books, even over-proportionately. And this is due to second-order effects, like an interest rate-driven change in profit-sharing assumptions at Ergo, or due to deferred tax effects. To remind you, certain parts of our internal model are only updated at Q2 and or Q4. Our capitalization supports both business growth and the attractive capital repatriation. Please note that the 2022 figure already includes the dividend, while the share buyback will be deducted in Q1 only. Even adjusting for the buyback, our Solvency 2 ratio remains well above the upper end of our self-defined optimal range, which is a very good starting point into a year in which we again expect to grow substantially and in which uncertainties continue to be high. On slide 32, you can see that business growth is also reflected in a continuously increasing relative share of insurance risk against investment risks. We have had a stable diversification benefit between all risk categories of more than 30% for many years, based on our prudently calibrated risk models. Our overall risk profile, therefore, continues to be very balanced. Looking into the STR development in 2022 on page 33, it is striking that higher interest rates had a major impact on the overall decline of 14%. In particular, capital requirements for our German life business at Ergo reduced significantly, as financing policyholder guarantees has become a lot easier with higher interest rates. Given the diversification of our global P&C reinsurance portfolio, we were able to expand our business in a capital efficient way, which means required capital growth at a similar order of magnitude as the premiums. Now, on my last slide, let's look at our third capital metric, HGB, or local gap. And this German gap result of 1.1 billion euros mentioned on the slide came in much lower than the 2022 IFRS result, and also lower than the prior year local gap earnings. And this is due to a significant reduction of both the underwriting as well as the investment result. The decline of the underwriting result is mainly driven by the change in the calculation of the equalization provision, which led to a pre-tax gain of 1.6 billion euros in 2021. Excluding this one-off effect, the underlying result has increased. The negative investment result is due to a very large, largely or very largely strong increase of interest rate reflected in quite rigid accounting rules, according to German Gap. So, in other words, significant write-downs on fixed income bonds and derivatives, which don't make sense, really, given that the liability side is not reacting at all to interest rates, according to German Gap. However, and this is, I think, the key message here, distributable earnings remain on a very comfortable level, supporting the capital management targets we outlined, and therefore everything as planned and very much under control. Now, with these final remarks, Joachim and I look forward to answering your questions, but first I'll hand back to Christian.