Muenchener Rueckversicherungs Gesellschaft AG in Muenchen Q1 2021 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Kamran Hossain - RBC Capital Markets, Research Division - Analyst : So my 2 questions, both around COVID provisions. The first one is interested in your comments around potentially the EUR 200 million life and health being a little -- potentially a little bit light. Is it safe to assume that actually P&C probably counterbalances this? You've had EUR 100 million so far of the EUR 300 million. Is it safe to assume that the EUR 500 million for the year, probably, let's say, even if life and health losses are a little bit higher than EUR 200 million? And the second question is, could you update on how the business interruption reserves have moved? I see that the overall level of IBNR has come down on the COVID reserves, but I assume this is contingency. So any updates on that will be very interesting. Christoph Jurecka - Mnnchener Rnckversicherungs-Gesellschaft Aktiengesellschaft in Mnnchen - CFO & Member Management Board Yes, Kamran, thank you for the questions. First of all, indeed, I was commenting in advance that potentially we might go above the EUR 200 million COVID claims in life and health. We -- but I think with the similar probability, we will stay below the estimate for ERGO, where the estimate currently is around EUR 100 million net income effect from COVID-19. On the P&C side, I think it's pretty open at this stage, so I think the EUR 100 million we had in Q1 is fully in line with the EUR 300 million guidance. And then it remains to be seen how the development going forward will develop, where will be. Also depending on vaccination progress and how REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 06, 2021 / 9:00AM, MUVGn.DE - Q1 2021 Muenchener Rueckversicherungs Gesellschaft AG in Muenchen Earnings Call the number of cases will develop in our major markets. And also how quickly, for example, politicians will allow, again, to have large events happening, these kind of things. All in all, and if I look at life Re, P&C Re and ERGO altogether, the COVID-19 impact, I think, is fully in line with our guidance. Now your second question, I think the development of the reserves by line of business, I refer to the presentation, where we have been releasing today. There, you'll see that for business interruption, it's about EUR 1 billion, what we have as a reserve. Now after Q1, I think what I didn't highlight in my introductory remarks, and maybe I can do that now is, interestingly, our IBNR is still at 73%. So far, the uncertainty with respect to the 2020 losses was not resolved but still continues to be there. To remind you at the year-end, we had 78%, now we are now at 73%. So the reduction has been rather minimal. And so we have to live with that kind of uncertainty a little bit also in the future. We expect more clarity towards year-end. Our reserve review is always in Q4. So for sure, we'll have a deeper look into that matter than in Q4. But if you ask me, I'm a little bit surprised. I would have expected the number to go down quicker from 78% to 73%. So personally, I'm a little bit surprised how long it takes.

Question: William Fraser Hardcastle - UBS Investment Bank, Research Division - Analyst : First question is a bit of a big picture question on leverage. I guess you're currently at 15.5%. The debt reduction would take you down to 13%. It's really low relative to peers. I guess what would make you consider raising debt leverage from current levels? Would there be a growth opportunity angle to think about? And second, just regarding investments, you're a bit short asset duration Re liabilities. I guess, just wanting to know, and that came down a bit in Q1. Just really wanted to know the rationale at this point and when we should expect it to move tighter? And perhaps is there a capital charge for this level of mismatch or is it not significant enough at this point? Christoph Jurecka - Mnnchener Rnckversicherungs-Gesellschaft Aktiengesellschaft in Mnnchen - CFO & Member Management Board Yes, sure. Well, thank you. First of all, leverage, I mean, the good news is we have a lot of flexibility. So we are in no position at all that we need to raise any capital, as I've been highlighting the capital strength already before. At the same time, I also would never rule it out. Given where interest rates currently are, it might -- there might be opportunities for relatively low interest financing going forward. So we'll look at that and probably look at also our growth prospects, maybe next couple of renewals, make up our mind. And then obviously, there is room for a higher level of leverage and we would feel comfortable with that. But at no time, there's any pressure to do something. And I think that's a very sweet spot we are in, and we can really act opportunistically going forward. On the asset situation, I'll start with the last sentence of your questions. So yes, indeed, there's a capital requirement related to a duration mismatch. And interest rate risk is one of the dimensions we are looking when looking at our risk capital. But obviously, also credit risk comes with charges or equity kind of risk. So it's all charged by risk capital. So therefore, what we do is that we very diligently and very actively are looking for opportunities where we think the best earnings prospects are, given the capital we deploy in certain asset classes or certain types of investment risk. And into that rising interest rate environment, you're right, our investment management unit, they somewhat opened up the mismatch position, somewhat decreased the situation to maybe a little bit more benefit from the rising interest rates in the current environment. So it's probably a slight position we have been taking here in the current environment, very similar to the increased equity position we're holding currently compared to Q4. So the process and the way we look at it is exactly the same. So it's always about how much capital do we deploy into a certain area and what are the return expectations. And that -- well, that's the way it works.