Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (ETR:MUV2)

Earnings Call: Q2 2019

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Aug 7, 2019

Good day, and welcome to the Munich Re Half Year Financial Report 2019 Conference Call. At this time, I would like to turn the conference over to Mr. Bekker Houssang. Please go ahead. Thank you, Marit, for the introduction. Good afternoon to everyone listening into our call on the occasion of our Q2 financial earnings 2019. I have the pleasure to be here with you, Achim Benning, our CEO and our CFO, Christoph Eureka. Procedure is relatively simple and straightforward this afternoon. Joachim will kick it off with his opening remarks, and Christoph will continue with just a few explanations on our Q2 earnings. And afterwards, we will go right into Q and A. Joachim, please. Thank you very much, Christian, and good afternoon, ladies and gentlemen. It's Christoph Eureka. It's my pleasure today to report Munich Re's half year twenty nineteen figures and to also share our view on the outlook for the full year 2019 and the further outlook into 2020 with you. As you know, we are in the midst of, I would call it, a 3 years race to increasing the Munich V Group result to EUR 2,300,000,000 last year, €2,500,000,000 this year and finally to reach €2,800,000,000 in 2020. And I like to anticipate the following: Munich Re is fully on track. And I would like to add, businesses are not only running smoothly, they are evolving quite dynamically and they are growing profitably, which is very important for us. And it's unfortunate if you like, but it is what it is. The big quarter 2 news have already been out practically with our ad hoc communication, and disclosing the quarter 2 result of €1,000,000,000 That was 3 weeks ago. So since then, naturally, not too much really new has happened. So in any case, I'd like to give you some more details. If you want to have a look at Slide 3, this highlights that it was almost exclusively the reinsurance business, which has contributed to the extraordinarily positive first half year result twenty nineteen. And for the full year, we expect to earn €2,500,000,000 thereof €2,100,000,000 from reinsurance and €400,000,000 from Ergo. That has not changed. However, I'd like to emphasize that our confidence level with regard to reaching the €2,500,000,000 this year is clearly higher now after 6 months than it was at the beginning of this year. From Slide 4, you can take, if you wish, some concrete milestones that we have achieved on the reinsurance side and on the Ergo side to meet our midterm target. I think on the reinsurance side, it's worthwhile mentioning that it is very crucial for the earnings increase that the reinsurers are successfully growing into the target lines of business and target regions. And this is nothing new to you. We have reported on this many times. So conceptually, strategically, everything is as is. However, it is important for you to see and for me, I'm happy to confirm that execution and progress in targeted profitable growth in reinsurance is fully, fully satisfying for us. And also important for the reinsurance has been our so called transformation program, meaning to grow traditional business with less resources and so to increase the funding potential for creating new business models. And with regard to new business models, we've already reported in the last quarters that this is running quite smoothly and that there is roughly a handful of such business models already productive, so already producing premium income and also results. But still at low scale. They are now scaling up and it will take some years realistically to really report what the full business and earnings potential of these business models will be. Ergo, on the right hand side of that slide, you can see has finished or completed very successfully and very quickly its so called divestment program in its international organization, divesting from mainly subcritical businesses of marginal relevance. And what Ergo has instead achieved is they have strengthened very materially their market positioning in the Indian market. So, while purchasing 51% of Apollo Munich Health Insurance, HDFC now is also the partner of Ergo in the private health insurance arena. And if you look into a probable second step of this evolution, so after a merge of these 2 carriers, then the combined carrier would stand for 8.2% market share in private health insurance in India, reflecting number 2, market position and number 3, overall, if we also include the P and C business. So health plus P and C, reflecting a 6% 6.4% market share. That's very, very interesting. Otherwise, the group focus on transforming, digitizing and growing business profitably is paying off fully and delivering increased earnings. And at halftime of our 3 years program, we have fully met our expectations so far. And thanks to the, I would call it, beyond into 2020 of delivering even further increasing results is higher now again than it was at the beginning of the program. This is something that doesn't easily translate into numbers, but the confidence level is higher. And our ambition is to compare with our international reinsurance peers and our international Europe based primary insurance peers such that we are always among the top 3 when it comes to total shareholder return comparison. And when you look at Slide 6 of the presentation, then you can see since the 1st January 2018, since we look at these numbers and since we have committed to this, we are in a top three position. And I admit that this time period is a very short one, what is 18 months. But I would have to hide these numbers for another 5 to 10 years to show you longer time periods. I thought from now on, we're going to show it to you. And as it stands, it looks nice. With regard to our outlook, 2019, we have kept everything unchanged. And with this introduction, I'd like to hand over to Christoph, who is going to give you more details. Thank you. Thank you, Joachim, and well, good afternoon from my side as well. As usual, I will only give some personal opening remarks, and I will not lead you through the presentation before we go to Q and A. As Joachim already mentioned, after 6 months, Munich Re is well underway to meet its targets for the full year 2019. We did pre release already a few weeks ago our strong consolidated result of €993,000,000 in Q2, which was helped by low major losses and by high reserve releases in reinsurance. On top of that, I'd like to underline that also Ergo achieved a very pleasing result. Now let's look into the details. Starting with the investment result in Q2, the ROI amounts to a solid 3.1% and supports our guidance for the full year very, very nicely. On top of that, our unrealized gains increased significantly, not only in the fixed income area, but also on equities. We reduced our cash position and continue to actively manage the low interest rate environment and thereby achieved a reinvestment yield of 2.2%, which increased even slightly compared to the Q1. Nevertheless, we still think that the ROI for 2019 achieving the target ROI for 2019 continues to be challenging. And we also think that it's more likely that we will have to round up to achieve the forecast of 3% and to round down. This is, of course, due to the falling interest rates. But more importantly, also due to our current expectations regarding the realization of valuation reserves and also our expectations with respect to the net balance of derivatives. Now let's go to Life and Health Reinsurance. In Q2, actually, Life and Health Re, we had a weak quarter in terms of the technical result. The ongoing negative experience in our Australian business includes that write off due to the recently introduced Protect Your Super legislation, which has been implemented more widely than we originally assumed when we, for the first time, took a hit on our deck already in Q4 last year. Now we do not expect any further deck write down from this changed legislation for the rest of the year unless the legislation changes again. Still in Australia, we continue to observe heavy claims experience in disability business. Our priority remains to work with our clients to rehabilitate the existing portfolio. But for the coming quarters, we must expect an ongoing high earnings volatility. In Canada, on the other hand, the reduction in technical earnings is caused by the shortening of our duration in the asset portfolio, and this has been now largely accomplished. The mentioned reduction in the technical earnings was more than compensated for by a positive impact on the investment result. So here, we are more speaking about a shift of result than of an actual reduction. Now looking at Life and Health RE overall. Depending on the experience in the remainder of the year and obviously also on the outcome of the annual reserve review, we see a substantial risk that we will fall short of our €500,000,000 guidance for the technical result plus fee income in 2019. This risk is less pronounced for the operating and net income due to the mentioned beneficial effect of the Canadian duration and shortening on the investment result in the first half. Now looking at P and C Reinsurance. Here, we recorded a very good combined ratio of 87.7 percentage points in Q2. And also, the result has been really very good. This was, as mentioned already, mainly due to a combination of very low large nut cut and also low man made claims totaling 4.1 percentage points only in the combined ratio. But furthermore, there was also a range of effects, resulting in a high release of basic loss reserves of 7.3 percentage points. On the one hand, we successfully disposed of non core books, which we had conservatively preserved for. And on the other hand, the actual versus expected loss development in some lines of business was so favorable that we felt it would be justified or even necessary to release some of the conservatism into the P and L already now without and that's important, without compromising our reserve strength. On a normalized basis, the combined ratio amounted to 98.9%, once more driven by adverse claims development in our North American Risk Solutions business and by seasonality effects. Also, this is still above our expectations. This is an improvement compared to Q1, so there's a positive trend. And we see the underlying profitability of our growth initiatives remaining sound. We still consider a level closer to 98% to be a realistic ambition for the full year 2019. Now looking at the renewals at the 1st July 2019, the recent market recovery continued. In particular, there was a significant improvement in prices for reinsurance cover in markets affected by natural catastrophes. However, and as you know, the calculation of price changes as we do it takes into consideration increases in loss expectations in all the markets across the globe where we do expect some higher losses in the future. And it also includes stable renewals in unaffected regions and markets. So overall, prices rose in July by 0.5%, and the premium volume was up by 9%. Looking at these figures, we are very happy that we continue to grow into this hardening market. Now coming to Ergo. With net earnings of €135,000,000 in Q2, Ergo posted a strong result above the expected quarterly run rate. The profit of €220,000,000 for the 1st 6 months is fully in line with the agro ambition of €400,000,000 net result for the full year. In Life and Health Germany, the net result benefited from good investment result as well as from a higher shareholder profit participation. In P and C Germany, the segment amounted to a very good 80.6% combined ratio, and large losses remained below our below average expectations. And on top of that, and that's something which is even more important in my view, we benefited a lot from overall favorable claims experience across more or less all of our books. On top of that, we have the usual seasonal fluctuations in premiums in the first half of the year, which regularly leads to a negative impact in Q1 and a positive effect in Q2. And this reversed, as I said, now in Q2, with net earned premiums now being over having increased over proportionally. Finally, the international business of Ergo also delivered a combined ratio fully in line with our ambitions of 95% for Q2. And as announced earlier, the sale of our entity in Turkey resulted in a double digit or concretely €39,000,000 negative impact on the segment's net income. For the half year, Ergo overcompensated, thereby more than €60,000,000 of negative impact from the now finalized portfolio optimization of Ergo International, which even more shows how strong the €220,000,000 result for the half year of Ergo is. Now I come back to the outlook. As stated by Joachim, the outlook for the remainder of the year is unchanged. So we stick to the figures we had in the annual report 2018 and are more confident to achieve this target now after the first half year than at the beginning of the year, given that we already achieved €1,600,000,000 at half year. With that, I'd like to conclude my opening remarks. And I'm, of course, very happy to take your questions in our upcoming Q and A. Yes. Thank you, gentlemen. We can then go into Q and A right away. As always, my usual remark, please limit the number of your questions to 2 per person in order to give everybody a fair chance to ask questions on this call. Thank you. Please go ahead. We will now take our first question from Vikram Gandhi of Societe Generale. Please go ahead. Hi, good afternoon everybody. A couple of questions from my side. Firstly, it's really pleasing to see you feel confident about the 2020 net income target despite the sharp fall in yields. My question would be, what level of interest rates in your view would start putting pressure on that target? So that's question number 1. Secondly, I appreciate that the results of Ergo International were impacted by the loss on sale of the Turkish business, but it still appears that this is undershooting its target run rate. So it would be great if you can share what could and what would really change going forward on that business? Thank you very much. Vikram, thank you very much for the questions. The interest rate level obviously did reduce a lot. And on the very long run, clearly, this is a concern. On the short and midterm though, and that's, I think, what I already emphasized before as well, we have other levers which much more influenced our ROI and on the net income compared to the reinvestment yield we can achieve in the current market environment. This would be, for example, assumptions how much gains are we able to realize, so how much unrealized gains are we able to transfer into realized gains and then also the result on our derivatives. If you look at our Q2 figures, you will see that, for example, on equities, we nearly benefited at all from the positive market development in the half year because we did not realize the gains, but recorded the losses on the derivatives completely in our results. So if you want, the way we recorded our income in the first half of the year was very conservative. On the other hand, this means that if we would realize a little bit more, of course, we would be able to compensate lower reinvestment yields on the short term midterm as just what I said. And therefore, I'm very optimistic that our target for this year, but also for next year, will be unaffected by the actual interest rate environment. The second question on Agro International. I'm not sure if I completely understood the question. So I mean, Turkey, we are close to closing this chapter. And then on top of that, we are really very optimistic to continue with profitability like what we currently have. This is, of course, depending on the market cycle, where specifically in Poland, we see some signs that the cycle might deteriorate going forward. But other than that, and that's also something you could see if you or what you see looking into our presentation on the Q2 figures, you will see that across the board, the average international books are all showing combined ratio still below 100, some of them even below 90. So that's a very stable and profitable environment we are in. Sorry, if I can just come back. My question really was even after accounting for the loss on the sale of Turkish business in Q2, It appears that the business is still achieving below the target run rate on a quarterly basis. So my question really was even netting out for this one off, it appears as if there's still more to do and more to come most likely from this business and what could those I mean these results already include the very good combined ratio that you highlighted. So that was my question. Okay. Thank you. Now the 95% is completely in line with target when I look at the combined ratio. If you look at net income, you have to keep in mind that it's not only €39,000,000 on Turkey, but also already in Q1, we had a €22,000,000 negative one off due to the sale of other operations in the course of the portfolio optimization. So the negative one off is €60,000,000 roughly, which Argo International had to bear in the first half of the year. If you would adapt the figures for that effect, Ergo International would be clearly in line with our expectations or even a little bit ahead. Okay. Thanks very much. We will now take our next question from Andrew Ritchie of Autonomous. Please go ahead. Hi, there. One easy one and one hard one, I think. The easy one, what is the risk adjusted price change? Sorry, you've given us the risk adjusted renewals rate change. What would be the nominal rate change before taking into account of higher loss costs for July year to date, if possible. On Ergo Life, I guess, we're in a situation now presumably where there could be quite a big divergence in the direction of economic earnings, which are clearly under pressure versus nominal IFRS earnings. Is it actually the case that your IFRS earnings may earnings power of that business may be going higher because you're having to realize more gains now to continue adding to ZZR. I appreciate the ZZR addition is lessened by the new corridor approach, but as interest rates fall, that goes up again. So I guess maybe just some help on the IFRS profit generation of the Life business? And I think it's the case that the run rate may be higher, which obviously feels counterintuitive given where the interest rate environment is. But if you can help us there would be helpful. Yes. Hi, Andrew. Yes, I would completely concur with you that the first one is the easy one, the second is the difficult one. On the easy one, I'm sorry, I cannot give you an answer. We only have in our system these claims adjusted, risk adjusted figures, And we would have to go back into each single treaty to find out what the cost price increase would have been. And that's not something we regularly do. So actually, we don't know, and I'm not able to give you that figure. But you can see how deeply in our DNA this risk adjusted steering and pricing is incorporated that we would not even know the nominal price increase. So maybe this gives you an indication how we look at things. Now coming to agrolife. Agrolife, indeed, there is a disconnect between economic earnings and IFRS. And that is one of the reasons I'm really looking forward to get IFRS 17 because the disconnect can only be smaller. I'm not sure if it will be fully closed, but at least it can be only smaller. What happened actually is that we got a new methodology for the calculation of the ZZR last year, which is called the corridor method. And this change in methodology independently of the interest rate level led to the effect that we now have to build only roughly 1 third of the amount, which we would have to have built given the old methodology. And this effect is much bigger than the change in interest rate. Therefore, we now will realize for our LifeBooks in tenancy less than in the past. Now you'll ask why is the result higher than that. Well, some of the reason is that we did our homework. And in the course of the process, when we discussed if we were to dispose of our live books or not, and I think we commented on that already sometimes, we deeply analyzed how we could improve the in force management, improve the way we manage the book overall. We separated it from the new business. All those activities we implemented came along also with an in-depth analysis how we can increase the shareholder return out of these books for us. And as a result, some of the shareholder ratios could be increased, and we did some of that last year already. And this was done in Q3 last year. So it's not fully earned through yet. So if you compare our figures now compared to prior year, there's still effect from that. On top of that, in Life and Health Re, we had a kind of one off, I'm not sure if one off is really the right word here because we also increased the shareholder share on our health business in Germany. And this is not because some fancy accounting methodology because what's happening there is that we more and more are focusing our business not on supplementary health insurance, where the rules are not that as tight as for the compulsory cover in Germany, which gives you more leeway to give the shareholder higher benefits from the overall earnings amount you're making in that business. And we now were in a situation that we were but given that development, which is ongoing for many years already, but it has been now so pronounced that we now had to also change the IFRS assumptions according to the shift in business mix. Mix. And therefore, an effect of roughly €30,000,000 now in Q2 is maybe kind of 1 off Q2 has changed assumption in health. So overall, yes, life and health continues to be complex. Also, the differences to economic earnings are indeed not easy to explain, not easy to understand. And as I said, it can only get better with IFRS 17. And sorry, just to be clear, you wouldn't anticipate those shareholder participation ratios coming under pressure at least for the next at least for the for your planning horizon, which appears to be 12 months only on the tiny target? As much as we are aware, no, we do not see any pressure there, no. Okay, thanks. We will now take our next question from James Shook of Citi. Please go ahead. Hi, good afternoon. First question around the new money yield, please. So the Q2 reinvestment rate 2.2 percent. What is the current reinvestment rate, please? And can you just shed a little bit of advice on what you're buying and whether you would consider buying negative yielding assets in the current environment? Just looking out to 2020 as well, should we still expect a return on investment of around 3%? Obviously, the current yield will trend down, but would you look to supplement that with realized gains to maintain it broadly at, well, the high 2s or close to 3 kind of level? That's the first question. Secondly, on the nat cat exposure, if I look at your PMLs, at least through 2018, there's been quite a big increase in U. S. Hurricane in relation to your tangible book value. When I look at the renewals, it doesn't seem as if it's really coming through in the PC Re premium, at least when I look at the nat cat premium as a percent of the PC Re level. So could you just shed a little bit of light in terms of what's happening around the U. S. Hurricane exposure? What incremental capital have you actually deployed in that area year to date? That would be very helpful. Thank you. Yes. Well, the most recent reinvestment figure we have actually is the 2.2 for the quarter 2. What did we do to achieve that? First of all, I think it's important to notice that we really do not reinvest a lot of our money short term because our duration is rather long, which clearly helped. Our investment activities are concentrated on diversification. We try to go more into illiquid titles as we did in the past. We have some geographic diversification having some more corporate bonds also. So diversify a little bit more into the investment universe wherever it makes sense. And thereby, we were able to achieve this 2.2%. You also should not forget that we are reinvesting to a certain extent outside of the Eurozone, to a large extent also outside the Eurozone, where the interest rates are also higher, also given our U. S. Investments. So this is basically what's happening there. And going forward, we'll continue to make the best out of a really poor market situation. But I'd like to highlight again what I already said before, don't overestimate the impact of reinvestment on our ROI on a short term, meaning 1 or 2 year basis. Now to coming to Nat Cat and specifically the hurricane exposure and the relation to the renewals. I can confirm that we somewhat increased our hurricane exposure. Order of magnitude would not be big, maybe 5%, something like that. So not a game changer at all. But where we were able to generate very good and interesting rates, we were open to increase our proportion, our stake in the business. Now your question was why don't you see more of that in the renewal figures and in the price change of 0.5%. Well, you have to be aware of the fact that in this July renewal, U. S. Business is, of course, included, but by far not the largest part. We have roughly 30%, even a little bit lower of this renewal in the U. S. And then even in the U. S, it's casualty, it's properties, it's different business lines. Some of them are proportional, other are XL. And therefore, by adding all these different pieces up, there is a relatively large dilution effect. If you compare what we are seeing on nat cat with what you hear from other players, I can confirm you that we see absolutely the same development in the market. So as we I've been commenting before, price increases in loss affected businesses is something we absolutely see as well. But then looking at our overall portfolio, the figure gets diluted, as I said. Can I just very quickly just circle back on the new money yields? The 2.2 in Q2, it must be around 1.5 or so now, what one would think. Are you actually buying negative yielding assets, single A, covered bonds, these sorts of things? Or are you starting to think about alternative asset classes trying to diversify out of that or indeed changing the risk profile? Overall, our risk profile has been stable. And already in Q4, I've been commenting that we feel very comfortable with the overall risk profile. So we have no plans of changing our risk profile overall. Does this I mean, does this mean that we are not at all looking for 1 or the other security with a BBB rating or something? No, we would be looking into these, of course, but the overall risk appetite is unchanged. And yes, of course, we also buy securities with negative yield because in this environment, it's unavoidable, and the overall mix will not change so much. As I said, the reinvestment volume is rather limited, and that's what gives us a certain leeway how to cope with this overall not so pleasing situation. Okay. Thank you very much. We will now take our next question from Jonny Urwin of UBS. Please go ahead. Hi, there. Just 2 for me, please. So one on P and C Re and 1 on Life and Health Re. So P and C Re, it's the usual question about the normalized combined ratio, I'm afraid. So you've not missed that guidance for 8 of the last 10 quarters. And I appreciate that the normalized combined ratio is clearly simplistic and that you often encourage us not to place too much emphasis on this ratio. But given this now a clear and prolonged trend, at what point does this become a concern for you, meaning that you feel the need to take more action, particularly around the North America risk book? And then secondly, on Life and Health III, is the action that you're going to take on the Australian disability book through the rest of this year aimed at bringing you back to sort of run rate of €500,000,000 I'll start with P and C Re, the famous normalized combined ratio. I mean, first of all, what you're saying, like the trend continued, I'm not even sure what trend did you actually mean because at least we have a trend that the normalized income ratio goes down. Admittedly, not down to the level we were expecting before. We are now in Q2 at 98.9%, but at least already there's 98%, which is better than where we were at Q1. Is this of any concern for us? Basically, it has been your question. And in a sense that we are implementing measures, in that sense, it clearly is a concern and has already been for some time, already last year. So actions have been taken. And this is the reason why we are still positive that we will get closer to the 98 until the end of the year. Now what have been the actions? It's different things. If I look at on the reinsurance side, which clearly is also depicted in the normalized combined ratio, There we have various effects. We, of course, have the price changes from the last couple of renewals. We have also growth, which will help by diluting the cost base we're having. We have cost measures, as you know, having been implemented. This all should then help us get normalized combined ratio go down going forward. And then we have the risk solution business in the U. S. And here again also rate increases. We have been working on rate increases quite some time. As you might be aware, there has to be a filing for rate increases in some of the U. S. States at least. So it takes some time until you get the approval, and then it takes some time until you reunderwrite the portfolio. All these measures are underway, but it will take time until they fully take effect in this specific book we are talking about. On top of that, we have also some growth in that area of our business. And in some portfolios, we also took corrective measures in a sense cleaning the portfolio, reunderwriting and various measures of that kind. All in all, this should lead us, as I said, to a combined ratio much closer to the 98%. And I'm as curious as you to see in Q3 and then in Q4 how close we can get to the 98. Okay. This is Joachim. Let me take the Australia question on BuyFree. I think our actions that we are taking now, they are primarily targeted at keeping the gap between actual losses and expected losses very limited, so to manage the downside of this. This is an exercise that is ongoing. And I think purely financially and from a pure accounting perspective between now and the year end valuation, we want to have the best possible understanding of what the most recent legislation would probably or possibly mean in terms of future loss expectations. Now that will be then be taken into account in 20 19. Beyond 2019 then, in 2020, 2021, 2022 and so the Australian run rate should be unaffected by the 2019 one off. And even before the contribution of the Australian LifeBook to the total €500,000,000 of life and health was immaterial. That means once 2019 has cleaned the surface, the effects beyond 2019 should be very limited and the underlying trend in the Life business outside Australia is a positive one like €500,000,000 and then increasing over time. Thank you. We will now take our next question from Sami Chappellis of Goldman Sachs. Please go ahead. Yes. Hi. Thanks for taking my question. Just maybe sticking on Australia for a little while. Was there anything new in this quarter in terms of changes to your actual best estimate view of the situation and the client's development there? Was there any impact on, I guess, on the Solvency II position or the economic position of that business? And also, would you be able to tell us actually how much the drag from Australia was and what the technical result would look without it? It's number 1. And then number 2, slightly bigger picture question. You talked about increasing productivity in the traditional P and C Reinsurance business. Could you just elaborate a little bit on that? Is that just are you just referring to the cost measures that you're taking there? Or are there some other actions as well that you're taking? I don't think you'd report the admin expense ratio anymore separately. So could you just give an update on how you're progressing there? Thank you. Thank you. I'm happy to take both questions. So what's new in Australia Live? Let me start making clear what's not new. So you know that we have a legacy book, which has in 2000 back in 2011 for the first time and then another time in 2013 caused some issues, which we then reflected due to or via reserve strengthening. So that legacy book is still there and is in runoff, if you want. And that runoff now this year has seen higher than expected losses. That's not fundamentally new, but it's, if you like, an adverse development in that current year 2019, and that is one part of the deterioration. What's really new is legislation, and legislation which in a nutshell is facilitating adverse lapsation of policyholders. And to take that into account and to try to quantify of how much this will impact then future losses or reduce the embedded value of the remaining portfolio, That's a very difficult exercise, frankly, with quite some uncertainty into it. And that is exactly the exercise that is outstanding that we want to finish between now and year end evaluation. So at this point, we cannot possibly give you a quantification of its impact. Otherwise, we would have done so. Your second question Okay. Sorry, can I just follow-up on that first one, but just to clarify, so you're actually looking at changing the best estimate numbers? This is not just the usual sort of issue that you get sometimes in life and health reinsurance where you get an actual versus expected that's adverse and ongoing? We are reviewing our best estimates, correct. Yes, okay. Great. To your second question, which is P and C related and production and productivity related. So production means like how is it evolving, how is top line evolving, how is business growth going. And the business growth is there. So the business is growing and more importantly than just growing, it's growing exactly in the targeted regions and in the targeted lines of business. That is so important to us because growing just broadly is not an arts. The arts is to very selectively grow into the areas where you believe that the return for the risk that you take is attractive. So that is nice. That is production increase. Resources. On the contrary, we have been able to reduce resources while we were growing, and this is what we mean by productivity or efficiency gains. I could quantify them. We did that, I think, last year when we said between 2018 2020, we wanted to take out more than €200,000,000 of admin expenses. Okay. I guess that's on track. You're on track to achieve that, yes? Yes. Great. Thank you. We will now take our next question from Kamran Hossain of RBC. Please go ahead. Hi. Two questions. First one is just on the risk solutions. Your commentary in your presentation talks about adverse claims development. Could you maybe give us a little bit more color on the quantum of the impact? And what sounds like it's reserve deterioration kind of quantum and what it involved? The second question, just to come back to normalized combined ratio. At what point do we start to adjust it to increase a level of reserve release, which is above 4%. It sounds from again from your commentary, you're baking in plenty of surplus and the level has been above 4% since 2011. So that to me is a pretty long term trend. So any indications or ideas around that would be helpful. Thank you. Thank you, Cameron. Risk Solutions, I would say the 3 aspects we have to keep in mind. First of all, there's a usual seasonality, which is not critical at all. And that's something we always, for example, see in Q2, some tonnados also. So this is completely in line with our expectations and clearly also no measures are necessary there. Then we have larger losses, but below our threshold of €10,000,000 And some of them are bad luck now, but now after so many quarters, we clearly also and some time ago already started to look in the underwriting and about the business mix and if corrective measure needs to be taken there. That's the second aspect. And then we have some but limited books where also the core profitability is not high enough so that repricing or re underwriting exercises are underway there. So it's a little bit a mix of various topics. But as I said, measures are all been taken, and we should get closer to the 98% as already said before. Now your second question on the normalization of the 4%, and I actually I love that question, I must say. I mean, we had a lot of discussions around this normalization in the calls in the last couple of quarters and then also in meeting with you guys, one or the other at least, also regularly we did have discussions. And my commentary also was that this normalization we're doing is by far too simple to be really meaningful in a sense. But on the other hand, it's transparent enough because all the parameters are also simple to grab. So it's really easy. And the answer I got from many of you and also from other people I've been talking to is please stick to the simple world because it's much more transparent, it's easier to explain anyway. And we anyway will add our judgment on top of the normalization you are doing. And as the 4% is something which is an integral part of this normalization exercise, I do not have at all any tendency to change this 4% right now because you will anyway make out of it whatever you think is appropriate. And talking to you, I think many of you already have quite a good understanding what the 4% mean. We will now take our next question from Farooq Hanif of Credit Suisse. Please go ahead. Hi, everybody. Good afternoon. You commented on the areas that you're releasing reserves in because you just thought they were far too good and you still remain well reserved after releasing. Can you give us some idea of which business areas they are and whether you now feel you're in the right position or there could be, depending on experience, some more fat as it were to reduce? And then going back to the question about your P and C regrowing in the right areas, You seem to also suggest that this reduction in resources in the traditional business is being reinvested into new business areas. So clearly, we're talking here presumably about partnerships or cyber. Can you give us a sense of the growth and the proportion of your business and kind of just a trajectory that you see? At what stage are you going to be talking about this much more meaningfully? Thank you. So I'll take the first question on reserving. Actually, I don't think I can give you a clear answer which books are affected here because there's not a pattern or anything at all to be visible here. As part of our usual quarterly closing process, we over all of our books and we have a very intensive actual versus expected controlling with respect to claims, payments and we're looking into all our books. And this time, the outcome of this exercise was just that in some of these books, we had to take measures already earlier. So we did that. Now going forward, our current assumption is, as always, 4% for the quarters to come. But can I rule out that we will have similar observations like we had in Q2 Q2 now in the other quarters as well, though I cannot rule that out? But clearly, the assumption for the rest of the year is 4%, as the assumption for the full year was already 4%, so nothing has changed there. Yes. And with regard to your second question of limiting or saving resources on the one end, on investing into new business models on the other. So first of all, what is important is, it's not that exactly the amount that we are saving resources on the traditional side is exactly the amount that we are investing divesting on the other side, we are investing. That is the meaning of the transformation program. To be even clearer, if we didn't saw any good investment opportunity, we would also be happy only to resource reduce resources on one hand side and not make any investment. Or if we saw 10 times more and higher investment opportunities, we will be willing to make these investments for the sake of good new business. So just to make clear, it's not an exact one side equals the other. You asked for what type of investments are we undertaking. Well, first of all, the size of the investments per annum, they happen to be around €100,000,000 per annum or above that. So it's not €500,000,000 it's not €10,000,000 either it's €100,000,000 plus I would say for the time being. And part of that money has been going into building an IT infrastructure, a data infrastructure, which we didn't need for traditional, but which we need for new business models. That's one side. The other is for self building value propositions, which we then offer distribution or primary risk carriers to enable their businesses or in partnering with start up companies where we just plug our risk carrier value proposition into their distribution platforms. Broadly, I think that's it. And any sort of sense of kind of the size of this now these partnerships, for example? You mean you said the cyber? Cyber, but also just the size of the kind of volume or the kind of revenues that you're getting from these partnerships, for example? Okay. So if you let me give you rounded figures. So in cyber insurancereinsurance, we have roughly a 10% market share worldwide, and that is a little less than €500,000,000 of premium income per annum. That is where we are standing, and we are pretty much growing with the market roughly with the market share of 10%. It's a little less than €500,000,000 but let's round this figure. And the and some of the other new business models, which are the partnership models, they are roughly producing another €500,000,000 of euros, a little less at this point in time. So if you want to take the sum of all of that, then roughly €1,000,000,000 comes from new risksnew business models, top line. Perfect. Thank you so much. We will now take our next question from Ivan Bokhmat of Barclays. Please go ahead. Hi, good afternoon. I've got a question on the P and C Re and the pricing outlook. What a lot of your peers have indicated that the price momentum has been accelerating through the year. For you, the July renewal showed a bit smaller price increases. And in fact, if I apply the price increases you've gotten at January, April July for 2019, I think the blended increase is smaller than you got last year. So I'm just wondering how you think in that view of the 2020 combined ratio improvement and what should be driving that? And then secondly, perhaps just to follow-up on the first question asked. In terms of this risk adjusted price increase, maybe you can give kind of a qualitative argument or qualitative view. In what regions and lines of business did your view of risk change most? Thank you. Yes, pricing outlook. Actually, I don't think we see a totally different market out there than our peers do. We see a slight upward trend in pricing generally. And given that we have the biggest book and that we are everywhere more or less, you see some dilution effects. And this is kind of natural, so no problem at all. And of course, we enjoy the positive tailwind from that price increase. What happened is that we have various reasons why we think this tailwind will continue also in the upcoming months. That has a lot to do with U. S. Business, also with the primary businesses there. And then the claims experience, we were seeing in that market, specifically the last 2 years, the continued loss creep we have in the Japanese market, for example, all these things, some limitations on ILS, on retro, where capital is still there, but some of it might be locked in. All these kind of things altogether make a market environment, which we think is slightly more positive than it has been a year ago or 2 years ago. But then again, we have a big book. There's a lot of proportional covering it as well. It's not all XL. And then by really having significant increases in some markets, especially the loss affected ones, we end up with a figure which is 0.5% of the overall book. And of course, the good point in that is that the resilience when market would go down again is also higher. But on the other hand, being the largest player, it takes much more time and for us to show higher price increase rates than what we're currently doing. So no concern from our side. And actually, our qualitative assessment is that this renewal has been a very good one. So your second question was with regard to where has our risk view changed. Interesting question, difficult question. I would say broadly, it has broadly, it has not changed And the risk view has not changed. What is, of course, constantly evolving is our view on how attractive or sufficient are the rates being paid for certain risks. And there is a few areas where this has evolved over time. But frankly, I would feel very, very unhappy to talk about that in this broad audience, because this is of quite some competitive relevance. We will now take our next question from Frank Kopfinger of Deutsche Bank. Please go ahead. Yes. Good afternoon, everybody. I have two questions. My first question is also coming back on apologies on the normalized combined ratio. So when you originally introduced your combined ratio target, I think you did not factor in price increases. Now that we saw some price increases last year, we see some this year, you also initiated some cost initiatives in your reinsurance operations. However, your normalized level is still close to the 99% level. And the simple question is how happy can you overall be with this development? And where are really the drivers going forward to push the combined ratio down? And then secondly, on your German Life and Health business, I was surprised to see a negative currency effect there. So it's a German business, which was quite substantial with 45,000,000. Can you comment on where this is coming from? Yes. Thank you very much. Frank, I'll take both of them. To answer the first question, my personal happiness depends much more on our net income than on a normalized combined ratio. So your question was how happy can we be with the normalized combined ratio. I think we can. But anyway, our happiness is not so much relying on the normalized combined ratio. The concept in itself has its flaws, as you know. And so topics like the reserve movement and so on are only, to some limited extent, really correctly captured in that. On top of that, when we defined targets, we always said that the combined ratio has not the same relevance like the net income target. But at the same time, yes, you're right, we did not incorporate any price increases back then when we did the calculation. But as always, there are many moving parts When you make a multiyear plan for a company, we also did not incorporate interest rate movements or equity market developments. So there are many moving parts. And I think we can be very happy where the net income currently stands. And in the normalized combined ratio, also the trend is towards lower figures. So the trend here is also trend is our trend. So overall, I think we are making good progress here. Life and Health, the currency effect. You're right, it's German business. So it can only have to do it has only to do with the investment results these companies are delivering. You know that a major part of our assets is allocated to these 2 segments, and they have some investments outside of the European Union, outside of the Eurozone. And therefore, they are affected by currency movements. Now the flaw we have in the way we do the accounting here is that this currency effect is not shown as part of the investment result where it should have been shown, but very low on the single line in the P and L. And what you also have to keep in mind that the absolute figures looks very big. But if immediately, if you would look on to local GAAP basis into these books, the policyholder share would bear a major part of the currency losses here anyway, but also on the upside. So this is just usual part of the investment activity. Only the way we have to show it on the IFRS is somewhat a little bit strange. Okay. Thanks. We will now take our next question from Vinit Malhotra of Mediate Banker. Please go ahead. Yes. Good afternoon, everybody. Thank you. Several topics I had have been addressed, so thanks for that. Just one topic overall, if I can now ask is, and you mentioned that the one reason why you have confidence about 2020 despite a little low rate, low interest rate, is the use of the balance sheet. Now there is the reserve, there are the underwrite gains. But these come at some kind of a cost, isn't it? I mean, if you, for example, realize too many gains, then you get lower future investment income. So as a management team, how comfortable or how do you view these things? And the reason I ask is because in the past, I remember conversations have been different, have been more like, hey, Munich, why don't you realize more gains? There's so many of them there. And if how do you view this balance sheet levers in order of importance, in order of strategic importance? Or do you think that they are already unnecessary? Just any commentary to help us understand how you view these would be very appreciated. Thank you very much. Well, thank you, Vinit. That's something we could talk about for hours probably, very interesting question. We won't, I can promise. Well, I mean, first of all, I think we never said we were going to use our balance sheet for achieving our target next year. Because you also have to keep in mind, we are looking at a steady state here. So we are also refilling our P and C reserves as we speak and as we release some out of it. And I have been highlighting already before that the reserve strength overall is unchanged this quarter like it was at year end. Therefore, I would also this quarter not speak of the use of the balance sheet, and I would continue to say so also going forward. The yes, the second question, reserves we have on the balance sheet, I mean, I talked about P and C a little. We also have, of course, plenty of them on the asset side. And if you want, now in Q2, we did even build them up further because we could have realized much more gains in equities than we did. But we took only the loss on the derivatives on equities, which we hold to hedge the equity exposure, but we did not realize the same amount of equity. So if you want, we did even build up the reserves on our balance sheet. So it is the opposite of using it. We did not use it, but we really build it up Q2. And I understand your question in a sense like how much buffers do we want to build up. And I mean, I don't think there is a very simple answer to that. But looking at the volatility we have at the equity market at this stage and then the discussion we had before on the ROI and the potential implication on the return on investment going forward, now that the fact that we have negative interest rates in so many geographies already, I feel kind of confident that also on the asset side, we have been not as pushy as we could have been in realizing gains. And yes, I mean, to having the privilege to show a really very good result and excellent result and at the same time having built up reserves on the balance sheet. I mean, there could be any better place for CFO to be at. And therefore, my happiness, to come back to that, very much lies with having a good result and at the same time, a strengthened balance sheet. Thanks. Can I just ask one more because I did have 2 quarter, sorry? On the P and C, so we saw very strong growth in 2018 and we talked about it, the U. S. Initiative on regionals and brokers last year, for example. But this year, the growth has kind of bit mellowed and it could be because of the base effect, but then renewals are still 6%, 7%, maybe YTD, that kind of range, 8%, maybe 7% on YTD volume. When shall we expect this to come in towards the end of the year in the P and C regrowth, please? Vinit, I'm not sure if I understood the question correctly, but I think your point was that growth was a little bit more limited this year compared to last year. And this might have been true that we have been more selective, but we never said that we would just take every piece of business we could potentially take. And therefore, I think that there's nothing specific to comment on here. As I said, with the renewal and plus 9% of premiums, we are very happy. And then on top of that, last year was maybe also augmented to a certain amount by some large deals, but nothing really to be observed here. Yes. My point was the renewals have been running higher this year than the growth we have seen this year in the TWP of PNCB. So maybe there is maybe these will come in later? I'm not sure what will come later. The fact that renewals are running 7%, 8% percent range, but we are only seeing 1%, 2% premium growth now. So we see them next year maybe. Yes. There's always kind of a delay. So yes, you're right. But also the premium level, we are up. So yes, there's a certain delay, of course, yes. Thank you very much. We will now take our next question from Edward Morris of JPMorgan. Please go ahead. Thank you for taking my questions. A couple of things. I just wondered if you could quantify on low rates. I know we've sort of danced around this topic, but can you tell us what the current yield to maturity is on the fixed income portfolio? And if rates stay where they are today, what is this sort of year on year headwind that you face for your investment income or else constant? And the second question is sort of linked to low rates, thinking about it more as an opportunity. Obviously, you have quite significant debt capacity. I wonder if with rates where they are today, does it make you any more likely to think about acquisitions or maybe using some of that debt capacity on your balance sheet to enhance ROE a little bit? Well, Ed, thank you very much for the questions. I think the first question was the attrition If reinvestment yields would stay where they are, how much our eye would potentially go down then? And clearly, there's not a single true answer because the various effects to be kept in mind here. So as I said before, the result of derivatives, the realization we are going to have anyway because the high amount of unrealized gains we now have result in just higher realizations due to the fact that you cannot touch any single security we're having without realizing gains because all of them are carrying unrealized gains now. But in a very simple terms, our duration is around 8, 9, 10, depending on the books we're looking at. And the difference currently between our in force asset book and the reinvestment yield, maybe it's 0.8%, maybe 1 percentage point that order of magnitude. So by doing the simple back of the envelope calculation, you come to an attrition of maybe 10 basis points per year, but which, as I said, will be offset by countering measures like also higher investments in illiquid investments, like other topics we are looking into currently and as I said, the higher realizations. So overall, as I said, short term, a very limited effect and only on the long term, it will have higher impact. Second question is the debt capacity. We have capacity for more debt. That's not new. It got cheaper now, even cheaper than it was already a year ago. On the other hand, we have restrictions on local GAAP equalization reserves and so forth. And so therefore, it's not straightforward to change the financing structure we are currently having. I would be happy to have more depth in case these restrictions would not have been here, but they are, and then I cannot get off the hook from them. Therefore, at this stage, I don't think we'll that there's room for any other action. What continues to be true is that we think we have enough room for strategic opportunities. And if opportunities might come up, then we would be very happy to take them. But that's more or less independently of the interest rates because that was already the case before. Thank you. Very helpful. Thank you. We will now take our next question from Michael Haid of Commerzbank. Please go ahead. Thank you very much. Good afternoon. I have two questions. First question, sorry, I have to come back to the P and Z reserve releases. You kind of made me believe that you actually were forced to release redundant reserves. Normally, I would rather believe you have a lot more discretion to decide to keep reserve buffers on the book and put these into whatever IBNR reserves. Is it fair to assume that on a broader basis, these reserve releases were actually run off profits, so from claims which were actually settled? Or is this a wrong assumption? Asked differently, why did you not try to maintain the reserve to keep the reserve buffers on the book? 2nd question, the combined ratio in Germany, very simple. It was excellent at an excellent level. Any one offs there, anything unexpected because that combined ratio is just extraordinary extraordinarily good. Well, Michael, thank you for the question. First of all, as always, when looking at reserves, it's various effects. And each book is different in its nature and the development is different. So there's not a single two answer. But what is correct that we felt quite under pressure to do something and that we felt it was adequate to react right now and not wait for the end of the year because the indication was so clear. And you're right, there's a lot of discretion. But sometimes, you come to the very end of how far you can go with your discretion. And that's all I will say about that. Ergo Germany, you're right, the combined ratio in Q2 was exceptionally good, and it was the best combined ratio I ever saw as far as I remember at Agro Germany. Reasons, 1st of all, low large losses, which is, of course, given that we had some storms in Germany in the first half of the year, has something to do with luck. But what has less to do with luck is that we have a very sound profitability across various books at Aero Germany, where also the attritional part of the claims development developed very positively. And then thirdly, you know that we have the seasonal shift of premiums between Q1 and Q2 at AGO Germany, which meant that we had higher premiums in Q2 and lower premiums in Q1. So the higher earned premiums in Q2 also supported this exceptionally good combined ratio. So what is then the expectation going forward for the combined ratio in Germany? Well, the year end guidance is 93%. Our run rate after 6 months is 91.9%. So we are clearly below that, but still 6 months to go. So we would not change the outlook now. Okay. Thank you very much. You're welcome. This concludes today's question and answer session. I would now like to turn it back to your host for any additional or closing remarks. Yes. Marie, thank you very much. Nothing to add from my side. A pleasure to have you had with us this afternoon. Thanks for your questions, and hope to see you all again very soon. Thank you, and bye bye. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.

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