Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München

Good morning, everyone. Welcome to our analyst and investor call on Munich Re's 2023 earnings release. I have the pleasure to welcome our CEO, Joachim Wenning, and our CFO, Christoph Jureka. We will start with the opening remarks of both gentlemen. Afterwards, there will be the usual time and ample opportunity for Q&A. And with that, I hand it over to Joachim.

Thank you very much, Christian, and welcome everybody to our call today. I must say, 2023 was a very successful year for MiniGree. We have exceeded our profit target with a net income of €4.6 billion. Thanks to very strong operating performance across all segments and the year-end rally in capital markets, we met all our outlook KPIs. We think this is all the more impressive as the result could have been even higher hadn't we taken deliberate measures to strengthen our balance sheet and also future investment income. Given challenging geopolitics, it remains paramount to have a strong capital base. We focus on what we can control. Unigree's resilience is based on broad diversification of business operations and of investment. And the strength of our balance sheet and the prudency of our reserves in particular will protect our capital and earnings going forward. On the other hand, uncertainty provides business opportunities. This includes reducing the impact of volatile natural catastrophe losses, which once again hit the 100 billion US dollar mark last year. As we have not been observing neither significant inflow of new capacity into the market, nor any softening appetite by our peers, we remain confident that the hard market will continue to persist. We want our shareholders to continue to participate in our strong financial performance, so we decided to step up the dividend per share to €15. And in addition, we continue with share buybacks, also on a larger scale of €1.5 billion. Over the last four years, Munich has significantly outperformed its European primary insurance and global reinsurance peers with a total shareholder return of almost 70%. Shareholders can rely on us. We are fully focused to deliver on the targets of our ambition 2025. As regards ROE, we are already now at the level we aim for by 2025. Earnings and dividend growth are well ahead of guidance, and our capital position continues to remain very strong. We have the financial flexibility to grow our business, increase the dividend, and execute share buybacks at the same time. Since we set the targets for our ambition 2025, and we did that end of 2020, a lot has changed in the general framework, which we, of course, could not anticipate at that point in time. I already mentioned geopolitical uncertainties With regard to inflation, the challenge remains to adequately reflect higher claims cost in pricing. This has been working well so far. In addition, we responded to higher inflation risk in a timely manner by prudent setting of reserves. And the positive flip side of higher inflation was the increase of interest rates, which allowed us to reinvest at higher yields and increase investment income. Also, our solvency-to-ratio benefited. So where do we stand now three years into the five years ambition? Munich Re has successfully expanded business without diluting ROE. We've allocated capital to markets and perils that are most attractive. But improving ROE is, of course, also driven by us repatriating a significant share of the earnings via dividends and share buybacks. Over the last 10 years, we have repatriated more than 85% of net earnings to shareholders, in absolute numbers almost €23 billion. Dividend growth is particularly close to our hearts. During the last decade, the dividend almost doubled. We have a track record of more than 50 years of Munich Re not cutting the dividend, even in dire times. And with the rebasing of the 2023 dividend, we give a strong commitment that we are fully convinced that we can finance this level going forward. And to manage excess capital, we make use of share buybacks, which are a very flexible tool as regards size and frequency. We plan this time to increase it to 1.5 billion. The engine of improving ROE and capital repatriation is earnings growth. Over the past years, we have benefited from strong earnings contribution of our P&C region's business. However, we all know that the hard market cycle will not last forever. Therefore, we are strategically growing earnings from less cyclical and less volatile business segments. Over the past years, earnings contribution to Munich regroups result of global specialty insurance, life and health reinsurance, and ergo has substantially increased, and we expect this trajectory to continue. We thereby achieve a better diversification and protection of our earnings profile. In P&C reinsurance, we have seen a continuation of the upward price trend in the January renewals. To us, it was a successful renewal as historically high profitability levels could be sustained. This positive market development enabled us to protect margins while further optimizing the quality of our portfolio. In other words, we participated in the high nominal price increases of the original markets, while on a risk-adjusted basis, these were mitigated by our conservative loss and inflation expectations. Hence, the 0.3% price increase for our portfolio is, as always, fully risk-adjusted, considering most recent loss trend assumptions. And as always, our methodology of calculating price change continues to be a good proxy for the real margin improvement we expect to be reflected in the combined ratio, also under the new IFRS 17 standards. Now, let's have a look at the development per line of business, in particular in casualty business, excluding motor, our prudent inflation expectations more than offset nominal price increases. So, remaining disciplined, we substantially reduced exposure to these casualty lines, especially in the U.S. However, we still considered the business we retained as attractive, and in motor proportional, on the other hand, significant volume increases were driven by growing, partly fastly growing, original rates. And in property, proportional business, we did what we call active management. We reduced the businesses which failed to meet our requirements with respect to price and conditions, while expanding partnerships with good prospects. As NatCat continues to offer very good opportunities and margins, we further expanded exposure. In global specialty insurance, premiums are expected to grow by around 25% over the next two years at attractive margins similar to our core P&C reinsurance business. To accomplish this goal, we bolstered collective steering of the unit as one unified specialty company under the leadership of Mike Koenig, And we established C-suite positions who drive best practices and procedures through leadership that leverages the strength of its individual parts. The aim of this reorganization is to drive forward further expansion in specialty primary business in order to become a powerful global player in this field. In life and health reinsurance, earnings are developing much better than anticipated. Total technical result has grown strongly because the underlying performance of the business has improved noticeably. We see very positive development of what we call the financially motivated reinsurance business, which is driven by ongoing high demand as just seen at the end of last year with very large transactions. Strong new business development also continues to gradually increase the stock of the contractual service margin, which is expected to release around 8% per annum into earnings. So together with the release of risk adjustment, the business generates certainly more than $1 billion of earnings on an annual basis. Our primary insurance unit, Ergo, continued its successful development with a strong net profit in 2023 as well. The good development in 2023 was enabled by the continued focus on three major drivers, really. One, further top-line growth in core markets. good technical performance through underwriting excellence and cost discipline, three, achieving digital leadership and superior customer experience. By continuing to pursue these goals, Ergo will further strengthen its competitive position and steadily increase the contribution to Munich Re's earnings. You will see some more details on growth, underwriting excellence, and digital leadership on the following slide. Let me turn to the international business. The expansion in the Asian growth market is a major driver for growth and profitability at Ergo. Ergo is growing above market, even far above market, in India, mainly non-life, in China, mainly life, and Thailand, mainly non-life. In India, our joint venture utilizes synergies from the bank partnership with HDFC Bank and now holds a top three position among the private P&C insurers in India. And after entering the Chinese life market, again via a joint venture, Ergo recorded strong organic growth and performed a step up to majority last year. Ergo started its business in Thailand in 2016, again with a joint venture, and boosted its market position through organic growth and M&A activities to number one last year while stepping up to majority. I think this is remarkable because in our view, Thailand is one of the most attractive P&C markets in Southeast Asia. And I should add Ergo, has the ambition to, if possible, even further improve its position in this market. Not only the insurance environment has been favorable, also the capital markets have seen some tailwind. We are currently reinvesting new money at around 4.5%, so tremendously better than just one or two years ago. In order to leverage the earnings potential from our investment portfolio, in essence, we use three major levers. We seize short-term market opportunities by monitoring the financial markets. Two, a more longer-term strategy is to earn an illiquidity premium by the continuous expansion of alternative investments. And the third lever refers to implementation of our investment strategies and selecting the best owner in any specific asset class and region to generate outperformance. With these elements, our ambition is to noticeably increase contribution to return on investment through active management. And over the last four years, we added some 10 basis points per year on average And going forward, we should be able to maybe double this. There is a slide on AI. It's on everybody's list. Gen AI has created huge global attention. I should briefly say at Munich Re, we have been actively using what we call traditional AI for more than 10 years. It's an effective tool. It helps us better assess risk, improve efficiency, retain existing and generate new business. The progress of Gen AI arises from the way users can leverage data. While traditional AI has typically been focusing on internal and structured data, the quantum leap with Gen AI is that vast amounts of external data open up new opportunities in the automation of complex processes that traditional AI simply cannot deal with. You should just... take away many degrees well prepared to harvest the potential of Gen AI. We also worked hard on our climate ambition 2025. Bottom line, we have even exceeded our emission reduction targets. And on the social dimension, we set ourselves the target of achieving 40% share of women in leadership positions throughout the entire group. with 39.5% end of last year. We're almost there. So this brings me to the end of my presentation, which I would like to conclude with the financial outlook on 2024. Our guidance is unchanged to the latest update given in last December. We're heading for a net result of 5 billion euro. And with this, I hand over to Christoph for more details. Thanks.

Thank you, Joachim, and good morning also from my side. Let's start on slide 24, and I'll give you an overview over the financial results 2023 first. I mean, Joachim pointed it out already. 2023 was another successful year for Munich Re. A very pleasing financial development across all business segments led to a net result of 4.6 billion euros, which is clearly above our original target of 4 billion euros and then also slightly higher even than the increased guidance of Q3, which was 4.6 billion euros. And we met or even exceeded each single outlook KPI. And in addition to that, and I'm sure we are going to discuss that during this call also, we strengthened our balance sheet significantly, in particular by increasing the reserve prudency even further. Also, the two ratio of 267% remains at a very strong level, even slightly higher than last year, and despite growth, and despite the proposed increased dividend payout. Main driver was, like in IFRS, the strong operating performance, which is also reflected in high economic earnings of around 5.6 billion euros. The German gap result, mirrors the strong performance according to IFRS as well, and increased to 3.9 billion euros. Our high stock of distributable earnings continues to comfortably support the rebased capital return for 2023, and also our capital management strategy going forward. On slide 25, just a few words on our steering approach. The financial result last year clearly reflects our value and risk-based steering. Our result of 4.6 billion euros net earnings not only represents an excellent result level, but also a very solid result quality. We implemented significant financial steering measures, increasing the balance sheet strength, reducing 2023 earnings, and aiming at a steadily increasing future earnings trajectory. Our shareholders will benefit from more predictable earnings going forward. Let's move to slide 26. As the interest rates dropped in Q4 last year, we keep getting questions on our earnings sensitivity to interest rates and also to other microeconomic parameters. As you can see on the slide, the impact of lower interest rates on the investment result is limited, as several countervailing effects largely offset each other. This is also due to management actions, not least our strict asset liability management, which contains interest rate risks. Before turning to the full year figures, now let's have a look at the financial development in the fourth quarter on page 27. Due to various anticipated seasonality effects, we expected Q4 results to fall somewhat short of the high earnings levels of the first three quarters. Now the actual Q4 net earnings of one billion euros came in higher than expected, reflecting a strong underlying performance and a positive tax result. Building on this strong underlying performance we could easily afford to consistently implement the mentioned financial steering measures also in the last quarter. Concretely, we realized losses on our fixed income assets again, and we strengthened the prudency of our reserves. Starting with reinsurance, life and health again showed a very positive development in Q4. The insurance service result benefited from extraordinarily high new business, in-force management, and a positive outcome of the annual reserve review. Experience adjustment were once more negative in the U.S., so mortality business there, but were more than compensated for by positive experience in the remainder of the book. Also, the underlying result from insurance-related instruments remains on a good level, negative currency effects were partly offset by interest rate and other fair value changes. Now, in property casualty reinsurance, the strong underlying profitability of our business also remained unchanged, while the IFRS result was as expected below the level of the quarters one to three, driven by seasonality effects. Let me just name the Q4 buildup of the loss component as opposed to the first three quarters where we saw releases and seasonally higher expenses that impacted both the service result and the other operating result. Please note that the lower result is also an expression of continued prudency. First, this shows in the relatively high buildup of the loss component that was partly driven by lower interest rates. but also by the reflection of weaker than expected performance in a few parts of our book, where we booked the loss component assumptions pre-1.1 renewal, and therefore prudently. And second, we again booked additional reserve prudency for basic losses, but this quarter not being offset by higher than expected discounting benefits. The normalized comment ratio of 89% still looks high, But please have in mind, we don't normalize for the seasonally higher expenses and also not for the extra prudency. And therefore, I would like just to emphasize again, this is by no means indicating any change of the underlying profitability. And then finally, I think the discount effect of only five percentage points in the quarter, in the combined ratio in the quarter, stand alone after we saw nine percentage points for the first nine months certainly also needs some explanation. I think some effect from lower interest rates in Q4 was expected anyway. And we also modified assumptions on the timing of loss occurrence, which are essentially in reinsurance, as we generally do not know when exactly claims did occur. claims expectations for the full year will now be more evenly distributed across the single quarters. This leads to a two-up effect in Q4. The discount effect of approximately eight percentage points for full year 2023 is consistent with guidance. Although this eight percentage point level is a discount assumption also for 2024 is under some pressure given in tendency lower interest rates, This is not at all expected to have any impact on our current ratio outlook for 2024. Just very briefly on Ergo. In Q4, Ergo achieved a net result below the quarterly run rate of the full year earnings guidance. In the last quarter, P&C Germany had to digest seasonally high acquisition costs due to the main renewal of motor business. In addition, large losses exceeded the budget. Based on an ongoing good underlying trend, the combined ratio amounts to 97.5%. In the life and health Germany segment, declining interest rates had a burdening impact on the CSM and the related CSM release. Thanks to a continuation of the favorable technical performance, Ergo International achieved a very good net result with a combined ratio of 89.5%. Back to the group. The investment results came in very high, with an ROI of 4.4%. While we once more deliberately incurred disposal losses aiming at accelerating the increase of future regular income, this time around 100 million euros in reinsurance and 100 million euros at Ergo, we benefited from significant fair value changes. However, the high contribution of the investment result was diluted by a negative currency result of almost 500 million euros in the quarter. And then finally, we posted an unusually high tax income driven by an accumulation of various unrelated positive effects. Coming back to the full year now on slide 28, let me start with the investment result. With 2.5%, the ROI exceeds our guidance of at least 2.2%. By the end of the year 2023, the reinvestment yield had materially risen to 4.5%. Net disposal gains and losses include those losses on fixed income investments we incurred to accelerate the increase of the regular income going forward. The full year 2023 was hardly affected by fair value changes. despite some intra-year fluctuations. Turning to the 2023 financial development of the two business fields, starting with Ergo on slide 29. All three Ergo segments contributed to the strong bottom-line performance and a return on equity of 13.5%. The technical performance of Life & Health Germany remains sound, but is influenced by a reduced CSM release due to lower interest rates. In P&C Germany, the combined ratio of around 89% fully meets the guidance. The strong technical results confirms Ergo's outstanding portfolio quality. The achievements of Ergo International are particularly pleasing. Profitable growth and a significantly enhanced technical performance are reflected in the 90% combined ratio results. also exactly in line with expectations. Let's move to slide 30. Our strategy of back book runoff and growth in capital light and biometric products in life, as well as the shift to short-term health business, will be clearly visible in our IFRS 70 numbers going forward. We expect that the CSM will not grow over the next 10 years as new business in long-term health and growth in life new business will just roughly offset the runoff in our life back book. However, our book of short-term business accounted for as PAA business will grow and contribute a higher share of the increasing technical result. With slide 31, I would then like to remind you that we apply IOPA Solvency II yield curves as interest rates, also for IFRS 17. Only for a few entities, just like in Solvency II, we use an illiquidity premium, concretely exactly the volatility adjustment as in Solvency II. As a result of this choice, in particular the very limited use of this illiquidity premium, We use relatively low interest rates compared to the current market rates, leading to a prudent level of the CSM and a relatively low new business value compared to the CSM release. At the same time, we report a high so-called over-return as a difference between the risk-free and the expected real investment return based on our asset allocation and the investment risk we take. This over-return is recognized year by year in operating changes and in the CSM release. Accordingly, the overreturn is not included in the stock of CSM and not in the new business CSM. In a nutshell, due to the low and thereby prudent interest rate choice, our new business CSM is relatively small compared with the CSM release, which includes the overreturn. Now let's move to reinsurance on slide 32. The reinsurance field of business continued to record strong business growth at a high profitability level of a 16.2% return on equity. Life and health reinsurance substantially exceeds its original net income guidance and finally achieves the full year target that was revised upwards to 1.4 billion at Q3. What I mentioned for Q4 also applies for the full year. Overall, a very strong performance with a CSM and risk adjustment release in line with expectations, with healthy new business, effective in-force management, and a positive reserve review. Also, FinMaurie business developed very favorably. In P&T Reinsurance, we took advantage of attractive market conditions and expanded our business in NotCard and GSI in particular. With 12.6 percentage points in the combined ratio, major losses for the full year were slightly lower than expected, and strengthening of basic loss reserves by adding an extra prudency of €0.9 billion for the full year, more than compensated for the approximately 3 percentage point discount benefit in excess of the 5 percentage point expectation. and also exceeds the around 0.5 billion after-tax difference between discount and e-fee. The headline combined ratio of 85.2% and the normalized combined ratio of 86.5% are both very much in line with guidance, confirming the further improved underlying profitability of our book. On slide 33, just a quick view on global specialty insurance. After an improvement of seven percentage points year on year, the 85.4% combined ratio is on the same level as for the overall P&C reinsurance book. With 10%, growth is substantial based on business expansion benefiting from favorable market conditions. Let's take a closer look on our reserving position on slide 34. Our reserves are even stronger than last year, including the mentioned additional $0.9 billion prudency. This is despite the impact of inflation, which has been consistently reflected in the reserving loss picks at year-end, and our cautious reaction to other trends like social inflation in the U.S. Overall, the outcome of the reserve review again was very positive. The result of the actual versus expected analysis now has for 12 consecutive years consistently shown very favorable indications and allowed for releasing the aspired five percentage points of reserves. All lines of business have developed favorably, the main driver being property, where underlying rate improvements clearly have a positive impact. The release for third-party liability was small. This cautious reaction is owed to U.S. casualty, where social inflation trends have not abated. Having released the aspired 5 percentage points of reserves, despite a substantially growing portfolio and managing potential upcoming loss trends, is a clear statement on the strength of our reserves. Coming to the economic disclosure on slide 35, capital generation was very strong, and our 72 ratio remained at a very convenient level of 267%, benefiting from strong operating earnings and only slightly increased required capital. Please note that the ratio already includes the dividend, while the share buyback will only be deducted in Q1. Even adjusting for the buyback, our solvency two ratio remains well above the upper end of our self-defined optimal range. So our resilience remains very high. Even after significant shock events, we will still be above our optimal range. As you can see on slide 36, we maintained an overall balanced risk profile in 2023, after a continuously increasing relative share of insurance risks against investment risks in past years. Overall, we continue to have a stable diversification between all risk categories of more than 30% for many years, based on our prudently calibrated models. Details of the SDR development are then shown on slide 37. Looking into more detail on the SCR development, the overall level remained largely stable as diversification largely absorbed a moderate risk expansion and the impact of lower interest rates. Given the diversification of our reinsurance portfolio, we were able to expand our business in a capital-efficient way while further optimizing the risk-return profile also through retrocessions. Finally, coming to our third capital metric, local gap, HGB, on slide 38. I can be very brief here, also given the substantially improved result of 3.9 billion euros. Distributable earnings of 7.7 billion provide a comfortable caution for continued attractive capital return. With these final remarks, Joachim and I look forward to answering your questions. But first, I will hand back to Christian.