Muenchener Rueckversicherungs Gesellschaft in Muenchen AG Q1 2023 Earnings Call Transcript

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

Question: Kamran M. Hossain - JPMorgan Chase & Co, Research Division - Analyst : Two questions for me. The first one is on the renewals. The -- I'm just trying to square the 4.7% risk-adjusted rate increase, April versus the kind of just over 2% at 1/1. Just based on the kind of, I guess, the commentary what we've heard, it sounded like actually, January was more positive than April. So just wanted to understand kind of what's the difference between those 2 numbers. Am I missing or is it just kind of you'd already trued up assumptions last year or something at April? The second question is coming back to combined ratio guidance. Obviously, you flagged the impact of Turkey in the quarter as pushing discount rate up a little bit. But I assume even though it's a material loss, it wouldn't have been that huge in the quarter. So should 8% continue as the discount rate kind of going forward for the rest of the year? Or should it look a little bit different? Should it move maybe not back to 5%, but slightly closer to that level? Christoph Jurecka - Mnnchener Rnckversicherungs-Gesellschaft Aktiengesellschaft in Mnnchen - CFO & Member of Management Board Thanks, Kamran. Renewals, I think I have to work on my enthusiasm being the CFO because if there -- I mean, if there was anything to be read into my comments that we were less excited about 1-4 than about 1-1 that would be completely wrong. I think we are equally happy with both results. And if you look into the numbers, they have really much follow the business mix. We have a higher portion of cat business in 1-4 traditionally. And so it had to be expected that the numbers look higher, and the amount pretty much follows the cat portion or the business mix development. So therefore, we continue to be very happy with our renewal outcome and by the way, also continue to be very optimistic for the upcoming renewals, given just the market environment, how it presents itself to us. So again, very happy with the outcome and very good renewal result. The combined ratio guidance or -- I mean the combined ratio, indeed, 5% was in the guidance. Now it was 8%. The full year, though, was also at around 8%. And as you can see, the numbers fluctuate quite a bit. I mean, we gave a range of 5% to 9% in our outlook presentation to somewhat indicates how big the range potentially could be. It depends on a number of factors. It depends obviously on the interest rate environment, that's obviously the major driver. But as you could see with Turkey, interestingly, it also depends on where your losses set because in Turkey, obviously, interest rates are much higher. So you discount with Turkish rates. And interestingly, in the first quarter, this Turkish rate effect did compensate the overall lower yield environment, which we had compared to Q4 last year. Because if you would have looked only at the yield environment, you probably would have expected even a little bit lower discount effect, which then didn't realize. And the main driver for that being that significant part of our losses sits in Turkey this quarter. So there's many drivers. FX could be another driver. And obviously, it has to be closely monitored. We all lack experience, we all didn't see so many quarters yet in IFRS 17. So I think it will be interesting to jointly observe how the development is going to be going forward. But again, there is some deviations always possible only due to the fact that the losses will arise here. And they are in different geographies, different currencies and different interest rate environment.

Question: Tryfonas Spyrou - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : I have 2 questions, please. The first one is on April renewals, obviously, this came in quite strongly, 4.7% rate increase. I guess you previously said that this number is close to what should we expect as an improvement in the combined ratio from Munich Re. If we were to wait that given April to 18% of the total P&C renewals that would suggest another 38 bps or so margin expansion on total sort of 2.3% you reported in January, which over the accounts for a bigger proportion of the book. But is that a fair reflection? Do you know sort of expect some higher margin expansion than before given the strong accrual years? So that was my first question. Second, in term P&C Germany, you mentioned the discounting impact of 5%. I was wondering if you can help us with a similar bridge as it is for P&C combined ratio. For instance, this is in line with what was factored in the guidance of 89%. And I guess, could you perhaps talk a little bit how big the lower large loss impact was if you were to get a better feel for the underlying combined ratio? 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 17, 2023 / 9:00AM, MUVGn.DE - Q1 2023 Muenchener Rueckversicherungs Gesellschaft in Muenchen AG Earnings Call Christoph Jurecka - Mnnchener Rnckversicherungs-Gesellschaft Aktiengesellschaft in Mnnchen - CFO & Member of Management Board Yes. Thank you for the questions. First of all, renewals -- and thank you for the question, it gives me the opportunity to outline our methodology, I think, again. So the numbers, as we show them here, they are all fully risk adjusted, which means that any inflationary effects, any model changes, any reflection of climate change of adapted risk models in whatever line, it's all fully deducted already from that number. So it shows only a margin improvement on the volume which has been renewed at a particular date. So you can basically take the price or the margin improvement, price change as we disclose it, times the volume at renewal. And this will be a real margin improvement, and we fully -- can be fully added to our technical result in P&C Re. So that's how the mechanics work. And if you look historically into these price chain numbers as we communicated them and historically how then after these price changes later on, the combined ratio moved in reality, you will find quite a good correlation between those numbers. Obviously, there's always uncertainty with that. But I think the past gives quite a lot of evidence that we generally are quite good in these estimates. So that would be my remark on the renewals. So overall, we're very happy with that. Margin improvement, very high. And again, for 1-7, we do not have any indication why this should change at all. So we think the environment will continue to be very positive, particularly, of course, in the nat-cat business, Property XL, which was also to a significant extent, the driver this time. Combined ratio, ERGO Germany. Yes, discount 4% here. So first question is, why is the discount in primary business smaller than in reinsurance? There is a number of reasons for that. The most importantly, the business is more short tail and also the amount of reserves you have to hold given the heavier risks are in reinsurance. So the amount of reserves is relatively spoken a little bit smaller, which brings you then to a discount effect, and currencies are different and so on. So the business mix is just different. So therefore, you have rather 4% discount instead of the 8% we saw in reinsurance. How does now the 81% relate to the guidance of 89% in P&C Germany? One of the most significant difference, I think, is the seasonality I was mentioning before in acquisition costs, where a lot of the acquisition costs are expensed in the fourth quarter, where a lot of the book is renewed, and you fully expense the cost, once you write the new policy in the PAA methodology in IFRS 17. That's an option you can choose. You don't have to do it that way, but ERGO chose to do it that way. So you fully expensed acquisition costs at the point of sale. So that's one core driver. Another core driver of the difference is that we had very good large -- very low large losses this quarter, which was another significant driver. And then generally, the performance has been very good this quarter, also when it comes to basic losses and the overall profitability. And then there also has been a certain reduction of the loss component. If you add it all up, it was a very good quarter. But don't take the 81% for granted for the full year as there is the seasonality effect on the acquisition costs, where in Q4, we would expect the combined ratio to be significantly higher, of course.

Question: William Fraser Hardcastle - UBS Investment Bank, Research Division - Analyst : First of all, can you -- I'm sorry, just going over old ground. But can you help me to understand just how we come to that 5% to 9% discount guidance from a bottom-up approach? And what duration we should be thinking about, for example, and the build of risk-free plus what I guess? And would I be right in thinking the Turkey uplift is maybe worth 1 to 1.5 points or so versus your previous guide? And secondly, just thinking in P&C Re, looking at the investment gains on Slide 51 from disposals. What was the EUR 190 million or so related to? And just on that slide, is that 3.1% regular income, a fair run rate, or was it inflated somewhat? 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 17, 2023 / 9:00AM, MUVGn.DE - Q1 2023 Muenchener Rueckversicherungs Gesellschaft in Muenchen AG Earnings Call Christoph Jurecka - Mnnchener Rnckversicherungs-Gesellschaft Aktiengesellschaft in Mnnchen - CFO & Member of Management Board Let me start with the second one. So the run rate is a fair reflection of the regular income. It mostly includes interest on fixed income instruments but always a few dividends as well. But it's really a running yield, which can fluctuate a little bit due to the dividend seasons and stuff like that but not a lot. On the realization, I mentioned already, we realized some losses in the fixed income space due to normal portfolio trading activities, nothing spectacular. On the other hand, there were some realized gains in reinsurance P&C, as mentioned before. And they were in the alternative investment space, so infrastructure and real estate. The first question, the range, 5% to 9%, obviously, is related to different interest rate levels. So it's roughly, I think, a 3% to 5% interest rate range, which is then reflected in the 5% to 9%. Duration depends also always on business mix and -- but there's rule of thumb takes something between 2% and 3%, maybe 2.5%. And then as we saw in this Q1, and it will very much depend on where the losses sit to some extent and currency and interest rate environment and various geographies. And again, the difference between, for example, ERGO, primary insurance and reinsurance is significant. By the way, there's also a methodological difference between GMM approach and PAA approach in IFRS 17, and I stop here. But if you're interested in that, you can ask me. So there's a number of drivers in these discount rates. And I think we'll all get used to it, how much they move in reality. In any case, I would expect them to be much more stable compared to what we experienced last year were due to this unprecedented interest rate change in the environment. As of a sudden, you end up having discounts between 4% and 8%, where in the past, it has all been 0. So clearly, it should be much more stable around the numbers as we see them today.

Question: William Fraser Hardcastle - UBS Investment Bank, Research Division - Analyst : Can I just clarify something on that 8 points of discount and the nat cat load. Is it effectively 8.7% because you've already taken some component within the nat cat number. So Turkey shouldn't actually be affecting that headline. Just trying to understand that if that makes sense in terms of that walk through. The actual question, sorry. You mentioned there's also an adverse development on that prior year cap, I think if I understood your comments. Could you just quantify or state which cat that relates to? And then just thanks for publishing the P&C reserve is always helpful. Can you just guide me where I should see the inflation caution in the motor reserves? Because all the back years seem to be developing pretty favorably across both motor prop and non-prop. I can see that the non-prop '22 loss booking was materially higher year-on-year. Is that where the caution has been taken? Or is that just experience? 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 17, 2023 / 9:00AM, MUVGn.DE - Q1 2023 Muenchener Rueckversicherungs Gesellschaft in Muenchen AG Earnings Call Christoph Jurecka - Mnnchener Rnckversicherungs-Gesellschaft Aktiengesellschaft in Mnnchen - CFO & Member of Management Board So the last one is a little bit too specific that I could spontaneously answer that. So I think we have to take it off-line, sorry for that. On cat, I'm not sure if 100% got the question. I mean, I can only reconfirm the numbers are all discounted, but the discount is pretty stable versus year-end. So that's not a big source of a fluctuation, particularly not in a large loss area where we normalize for. I hope that answers the question. Otherwise, please follow up. PYD, we only would quantify a number like that if there's something really extraordinary what happened there, which is not the case this quarter. So generally, it's up and down every single quarter. So therefore, we refrain from giving any details there.

Question: Tryfonas Spyrou - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Just it relates to Solvency. Christoph Jurecka - Mnnchener Rnckversicherungs-Gesellschaft Aktiengesellschaft in Mnnchen - CFO & Member of Management Board Sorry, we can hardly hear you. Can you please speak a bit louder?

Question: Tryfonas Spyrou - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Yes. So it's on solvency. And I appreciate that you deduct the buyback, which is around 6 points. But I was wondering if you could give a bit more color on the moving parts where I estimate you had around maybe 6 to 7 points of capital generation that would have offset that 6 points from the buyback. So any color on why sort of Solvency looks slightly lower than the full year level, that would be great. Christoph Jurecka - Mnnchener Rnckversicherungs-Gesellschaft Aktiengesellschaft in Mnnchen - CFO & Member of Management Board Yes, sure. So I mean the major driver is reduction of the buyback. I think everybody -- everything else, not very spectacular. We had positive operating earnings as economic earnings in there, which then will were more or less completely offset by some tax effects and some other effects. Seasonality, I think I mentioned that in a different context is different in the economic earnings on the Solvency II space compared to IFRS 17. So a lower portion of the result is realized in Q1, at least in the way how we do the Solvency II calculations. So therefore, probably that might be one of the reasons why the number is not higher. The STI is pretty stable. So all in all, nothing spectacular really.