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

Earnings Call: Q4 2018

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Mar 20, 2019

Good day, and welcome to the Munich Re Analyst Conference 2019. At this time, I would like to turn the conference over to Mr. Becker-Hussong. Please go ahead, sir. Thank you. Ladies and gentlemen, a warm welcome from my side to our call on Munich Re's financial results 2018 and strategic outlook. Thanks for joining us this afternoon. Before we get started, I would like to express our apologies for the unintended pre-announcement yesterday, which was simply due to a human error. Sorry for any inconvenience. Now let me introduce today's speakers, starting with Munich Re CEO, Joachim Wenning, our CFO, Christoph Jurecka, Markus Rieß, CEO of ERGO, and Torsten Jeworrek, our reinsurance CEO. The gentlemen will start with a presentation based on the slide deck we published this morning. Afterwards, there will be enough time for Q&A, and I would like to ask you already now to please limit the number of your questions to a maximum of two per person. Thank you so far. Now I have the pleasure to hand it over to Joachim. Thank you very much, Christian. Ladies and gentlemen, good afternoon, and welcome also from my side. I am happy to report on a strong result in 2018 and giving you a positive outlook in the years to come. If you are happy to follow me on page 3 of the presentation, I would like to highlight that in essence, it is relatively straightforward which approach we are following. In the group, our strategic focus is threefold. One is reducing complexity, which means increasing efficiency, which means that we focus on business, we focus on material operations rather than immaterial operations from which we would rather divest. When it comes to digital transformation, it is about efficiency increase through automation of processes. It is about sophisticating our core functional excellence, and it is about creating new business models. All of these initiatives, both on the ERGO and the reinsurance side, they help us grow the business in reinsurance, but also make ERGO improve and progress on the program which they have started a couple of years back. In sum, this creates value, this increases earnings, and this increases then our potential for capital repatriation to the shareholders. On page 4, I would like to give you a little bit more detail on what we mean by complexity reduction. Yes, it is taking out cost and resources from the operations, both on the ERGO side and the reinsurance side. On the ERGO side, I think Markus has already reported quite often on it, and he will give you some more detail during his presentation. So I do not repeat this at this point. But also on the reinsurance side, we have run and successfully so the voluntary program in Munich in 2018, taking out 350 full-time equivalents. The same cost reduction is also happening in the international organization, which is going on and well on track. By 2020, as promised, we believe that we will have taken out in the order of EUR 200 million recurring cost. Which then gives us potential to reinvest such money either into digital competencies or directly into digital businesses that we are either buying or that we are creating. On page 5, the digital transformation piece tries to highlight where there are similarities between ERGO and reinsurance and where there are differences. Similarities are there when it comes to the question of automating processes using artificial intelligence or robotics or voice, et cetera. This helps increasing efficiency both on the ERGO and the reinsurance side. Using technology, using data wherever possible and wherever meaningful is happening on both sides and allows us increasing our functional expertise on both sides. But then ERGO is sort of in a complete digital transformation with regard to its total business approach to the sales forces, to the personal intermediaries and the end consumers, improving that interface, and Markus Rieß may shed some more light on that. Whereas the difference in reinsurance is next to the traditional business model, which is still there and which doesn't go away and which in itself is offering growth potential. The reinsurers are adding new digital business models, some of which are highlighted on this page and which are productive already. On page 6, I'd like to just say that the interaction and the interconnection between both businesses, primary insurance and reinsurance, is not only limited to digital transformation, but embraces also various initiatives with regard to strategy, innovation, product development. You see that all on that slide. This slide is only meant to tell you it's quite an intense interconnection. Sure. Not everywhere. Certainly not where it doesn't make sense, but in many areas where ERGO is strengthening the reinsurer and the competencies of the reinsurer is strengthening ERGO. Page 7 emphasizes that the EUR 2.3 billion result 2018 is coincidentally exactly the midpoint of the range that we committed to last year. This is also true both for reinsurance and ERGO in itself. I think it's remarkable that both operations have delivered such a strong result, not only because there has been quite some large loss activity, and particularly so in quarter 2 of last year, but also the capital markets, they made it quite difficult, and most of the asset classes have lost money and not made money like in the years before that. So against this trend, having the strength to show a EUR 2.3 billion result for us is a remarkable positive. Page 8 confirms that our midterm ambition of delivering EUR 2.8 billion in 2020 still is valid. There is no reason to change that. We are confident. We believe in it because we believe that ERGO will carry on delivering on its program. Also we carry on believing and are confident that the reinsurers will benefit from ongoing and further growth potentials. What that means concretely in 2019 is we believe in the result delivery of EUR 2.5 billion, which then divides into EUR 2.1 billion on the reinsurance side and roughly EUR 0.4 billion on the ERGO side. Page 9 is important to us because we want to get the message across that, yes, we write more risk as we are growing our business. This consumes more risk capital, which is available. So we employ it. We make it work for us. We make it produce earnings. This is the way how the bottom line is increasing. But in relative terms, so capital relative to business volumes, you can see by that line that this is flattish. So we aren't doing any riskier business, but just more business, which is good. On the investment side, we can confirm you our ambition is not just investing riskier and then hoping for higher returns. Our CIO, who has joined us this Monday, he is expected to deliver on a superior strategic asset allocation and superior asset selection, or in technical terms, generating over time a higher alpha. On page 10, I have the opportunity to talk about sustainability criteria. This is not often the case in these rounds where we talk more about strategy and financials. However, I understand that this discussion becomes also more and more relevant to you folks. So I'm happy to tell you that it started when it comes to external rankings on this subject. Munich Re since many years is already top positioned. We are particularly proud about our climate strategy, which focuses on enabling the necessary technological transformation in the energy sector, bringing lower carbon technologies into work, or bringing totally renewable energies into work. This requires both an investment appetite, which we have here and there. But more importantly even is that we are prepared to insure related risks, which by nature are new and then more uncertain. So this is what we are reporting on it, and more detail can be given if that is of any interest to you. But there is more than climate strategy. If we just take governance questions like, do we responsibly and in a fair and proper manner lead our operations and our organizations? There is stuff that we are happy to talk about, like how we reskill people or our staff by leading them through what we call our internal digital school, training them to make them fit, to give them the understanding of how digital impacts their daily work life, but also the businesses that they're active in. Also how we have run a voluntary program last year in Munich with no noise produced. Page 11 gives you evidences of a very strong balance sheet, 245% Solvency II ratio, EUR 3.8 billion distributable earnings in German GAAP, and clearly below average debt leverage of 13.2%. You are aware that we intend to increase our dividend from EUR 8.60 to EUR 9.25 subject to approval by AGM. Also we have announced yesterday that we will carry on our share buyback program by buying back up to EUR 1 billion starting, I think, end of next month. In the middle of that page, you see that we're proud of having repatriated in total since 2005, when we started the programs, EUR 27 billion to the shareholders, which at that point when it was calculated, corresponded to 85% of our market cap. Almost our market cap, the totality of our market cap was returned to the shareholder within 14 years. Page 12, to finish my presentation, should say that our ambition is not only to meet internal plans like our IFRS result of EUR 2.5 billion next year or EUR 2.8 billion in 2020. Even more importantly so, it intends to make sure that we will be top ranked in comparison with a defined group of 8 global reinsurers and global primary insurers. 70% of the variable pay of the board members is related to how our total shareholder return corresponds to the total shareholder return of that peer group. If you look into 2018, which is only one year, which we appreciate, we are top ranked. We are proud. Also in this sense, 2018 was a really good year for us. Thank you very much. I will hand over to Christoph. Thank you, Joachim. I would like to start my presentation on page 14. This page basically shows a little bit what we are doing in the CFO department on a day-to-day basis. What we have to do is we have to align the different metrics, due to the fact that not always they are running in the same direction, but in very many cases, it is opposite directions we have to deal with. So it is about finding a balance or a compromise between the different views. The introduction of IFRS 17 might be an opportunity to get some more consistency, but I think we have to be realistic. Certain inconsistencies will remain with us, and IFRS 17 itself is also very complex. So I think the situation will not really improve a lot. The good news though, is that in 2018, the balance worked out quite well. If you join me in going to page 15, what you can see there is that we have been delivering good results according to all metrics. This is despite the fact that, Q4 especially, was difficult. The capital markets the whole year was showing high claims activity. So overall, a difficult year and still in line with our targets according to all metrics. I will not go into any further detail on that slide now. I just would like to highlight or emphasize that the dividend increase we are proposing and also the continuation of the buyback are, in our view, a clear signal of the earnings power we have also going forward. On the next slide, I would like to talk a little bit about also the balance sheet and opportunities we see. With respect to that balance sheet, it is always two things. It's downside protection as well as support of our earnings. What you can see here is that in various areas, we see advantages from that. If you look, for example, on the reserving side, the resilience we have against adverse developments is nicely connected to an ongoing benefit we have been seeing in our results for many years now already. Also on the investment side, where our defensive portfolio was able to deliver 2.8% ROI. We still have EUR 22 billion of unrealized gains, which we could harvest, and to that extent, it's even unavoidable in the usual portfolio management activities to harvest at least some of those reserves. Also, our tax reserve position is quite prudent. We enjoyed tax releases in recent years, driving the tax rate down to around 20% in the past. Going forward, our expectation is more to be around 25%. Still, the tax reserve position is equally prudent as it always was. Our low level of intangibles also, if you compare to other market participants, limits the risk of further downsides substantially. On the next 2 pages, I'll have some more details on 2 of the examples I've been mentioning. One is the reserve position on page 17. As you already know, our reserving practice is more or less to immediately react on any signs of deterioration while we allow positive indications to develop more gradually over time. We consider our reserve position end of 2018 to be equally strong as at the end of 2017, so nothing really happening from that perspective. Part of our reserving process is a very close monitoring across all our reserves, and with a special focus on the so-called reserving hotspots. That's how we named them here. Certain areas of some markets, where more than average risk on the reserves can be observed. As I just said, we try to be very early in reacting on those developments and to let's say, safeguard the resilience of our reserves against adverse development. The prudent setting of our reserve tends to unwind over time. This clearly supports our earnings. In 2018, we had in total releases of more than 9%, and that's without eroding our substance on the P&C side. I think that's quite significant. The basic loss reserve in itself was 4.6%, that's slightly above our guidance again. In absolute terms, the same amount than in 2017. The reduction from 5.2% to 4.6% is only growth and volume driven. Let me summarize the page. This strong reserving position provides us with a lot of flexibility also going forward with regard to our future earnings position. Page 18, some comments on the investment side. Our portfolio is well-balanced and if you compare us to the sector average, we are benefiting from a lower exposure to risky assets as well as from a higher rating quality. Especially in Q4 last year, this helped us very much to protect us against the downside of the capital markets when not only equity markets decreased significantly, but also credit spreads have been widening. Over the years, the prudent risk-taking and also the interest rate decline, of course, they helped us in building up a substantial amount of unrealized gains. Parts of which is being realized just as usual, normal part of our portfolio activity management, part of the usual turnover. Sometimes we actively decide to realize some of it as part of our ALM strategy. We are very cautious when it comes to additional harvesting of our valuation reserves and do that very prudently in order to avoid any erosion of our substance. Of course, these reserves are not only available to shareholders, but also to policyholders. They are also pre-tax. I would like to emphasize that they give us a lot of financial flexibility, which then finally is to the benefit of all the different stakeholders. On the next page, quick comment on local GAAP. The good news is distributable earnings are staying largely stable, so nothing really happening there. The reason for this is clearly that the local GAAP result, the HGB result, is in line with our capital repatriation volume-wise. The equalization provision is a significant driver of the local GAAP result for us regularly. While in claims-affected years, like in 2017, it helps to buffer effect from large claims. You can see that in the reduction of the reserve from 2016 to 2017. The flip side of the coin is that we, of course, have to refill it in years where the claims activity is reduced. So this year, we had to refill it by EUR 800 million, fully financed out of the local GAAP result. So you can see that this also worked out in the year 2018. Let's go to Solvency II on the next page. You can see that our ratio is 245%, so more or less stable and still above our self-defined optimal range, so roughly 25% above. We sometimes, of course, get the questions, why are we not more active in bringing the ratio down? Two reasons, mainly. I think Q4 was a good example why we feel comfortable with that situation. When capital markets are really in an exceptional situation, it makes sense to have this additional buffer. Also going forward, the macroeconomic uncertainty is still significant. More importantly, and the second reason is that we have financial and strategic optionality with that high capital on our books. We could use that either for additional capital repatriations, but also for organic growth, also for M&A. To further illustrate that, let me mention some examples from 2018. In 2018, we saw strong growth, especially in reinsurance. We bought relayr, so we had some M&A activity. On top of that, we repatriated EUR 2.3 billion via dividends and share buybacks to our shareholders. Overall, you can see that all those strategic levers are constantly being managed. If needed, we also repatriate more than our annual earnings and are feeling very comfortable with that. As Joachim also pointed out, of course, our target is to generate more return on the capital we have. On page 21, some details on the development of the Solvency II ratio. You can see that the largest positive contributor was the operating impact. So let's say the profitability of the core business. This has been partially offset by market variances, especially in Q4. Then, of course, capital management, where in these figures here, you have already included the share buyback as well as the dividend, and this is offset by the hybrid debt we have been issuing last fall. Solvency II capital generation on the lower right-hand side of the slide, EUR 600 million. Finally, page 22. On the eligible own funds, again, the main driver has been the strong operating earnings, both in reinsurance as in ERGO. I would like to comment a little bit more on the SCR development because I think that is much more interesting. Overall, the SCR only increased by roughly EUR 300 million. That is something you could see already on page 21. If you look at the different categories on the right-hand side of page 22, you will see that in this year, 2018, and this is the first time in many years, that the insurance risks exceed investment risks. So property, casualty, and Life & Health together is higher than market and credit. Major driver of the SCR development is our growth. As Joachim said, this is in line with the premium growth. On the other hand, our ALM strategy and risk management strategy prevented an increase of the market SCR, especially by the fact that our interest rate risk management has been still very tight. In Q4, we did some de-risking activities, mostly on the equity side. So we could summarize that in the sense that our overall risk profile has improved. The higher amount of P&C risks we are having, the higher volume, it leads to higher level of diversification, and thereby we have a reduced dominance of market risks. This reduced dominance of market risk, I think, is a very good starting point into the year 2019, which still comes with a lot of uncertainties, and I think we are very well-positioned with that. That was my final remark, and with that, I hand over to Marco Zrie's voice report on ERGO. Thank you very much, Christoph. I would like to speak about three subjects regarding ERGO. First of all, I would like to give you sort of a formal overview on where we stand on the technical ERGO strategy program. Then I would like to spend a couple of words on the digitalization trend that Joachim has already alluded to. Lastly, I would give you a very fast glimpse on the various segments that we have. So please follow me on page 24. The numbers you have seen already, I just do not want to read them out to you, but you see each and every KPI that we have set out is either being met or exceeded. That in itself is a positive result. I am also very happy about the investments, because what you see here only on the second instance is that in 2018, we have been able to invest 91 percentage points of all our investments that we had scheduled for 2018. I know that some of you criticized us correctly by saying, in the past, you have this investment program, but you cannot spend the money. That is not the case anymore in 2018 for the first time if you do not account for the last 9%. So that is a very positive message. Also, I would like to positively draw your attention to the tied agent productivity. When we met last in London, I already told you that this is looking very promising. We can now say that we have increased, since the initiation of the program, our productivity of our tied agents by 25% and 20% alone in the year 2018. Also, we can confirm that we are back in the life business with our new products being actively accepted in the market. You see the numbers here. This is all looking very positive. Let me just briefly go into the cost savings and into the FTE reduction. We have currently 1,240 people having left ERGO out of the 2,100. We have agreed with roughly 300 more people to basically leave ERGO by 2021, which basically means roughly 75% of our target staff reduction is already implemented. I am very positive that the rest will develop accordingly. The rest I leave to your reading on page 24. If you take the message away quantitatively, it is really all working very well. Page 25 shows a more qualitative element. Here I would just like to focus on the ambition. What is left to be done until the end of 2020? While we have been very content with what we have achieved so far, I am very grateful to the entire ERGO team that really everybody domestically and internationally contributed to that, lots remains to be done. We need to focus still on execution. The ambition is that we need to continuously increase the agent productivity. I am very happy to report that in Q1 2019, this looks very positive. We have by now, and it is already by the end of 2018, achieved an agent productivity that we have not seen in the last 12 years. That is a very positive signal, but it needs to be even better. The cost savings, you see we have already accumulated two-third of it. But in Germany and roughly one-third of it in international, there is still some things to be done. I am optimistic, but we need to deliver on this. Lastly, on the IT migration that we also discussed very often, I would like to share with you that we did now decommission 44 out of 59 systems. Some of them are small systems, but still they are decommissioned. I am very happy that we are visibly on the way to a more modern, more digitized infrastructure already. Let us have a look on page 26 with regards to the digitalization trend. Joachim alluded to that in his subject. I can only 100% reconfirm on what he said. We are trying to fully digitize the entire business system. We do that by first, it is the upper part of the chart, really trying to do pilot proof of concepts. We try things out in the classical technology trends that we have. We have initiatives in voice, in AI, and in robotics. We have a team of 200 people in digital IT who are readily available. We have systems which allow us to have, in niche areas, six-week time to market in new products. That is already a very nice side of the infrastructure. The most important part on this chart you see in the middle. I would like to reconfirm that. Our digitalization strategy is threefold. First, the digitalization and improving of the existing business model. Secondly, the disruption of the existing business model. Lastly, the establishing of new business models. All of which have to do with digitalization. But our strategy is we jointly follow all of these three tracks and not one and one track alone. We have achieved good results in the existing business model. We have a CRM tool up and running. We have now once a month a campaign. We are currently contacting 100,000 of our customers in Germany with sales campaign based out of this new CRM tool. Our pure digital player, Nexible, in the disruption area has now 50,000 policies with 80,000 risks in the second year after inception. We are now entering Austria and trying to get a new product on the platform in 2019. On the mobility side, we try to become a part of an evolving ecosystem. All of this only grows based on culture. That's why the foundation of this is culture. We work in digital factories, do digital communication formats, and also work with our employees in a transformation at ERGO union-related program. Let me, for the last 2 minutes, just briefly go into the last three slides. You know all of this. That's why I will very touch on it superficially. Life & Health in Germany is working. As you know, the back book is separated. The contract with IBM is working. The migration will start in Q1 2020. So far, the ramp-up is working well, but we will only know after the first tranche of migration. Not before mid-2020. We try to maintain a sustainable profitability, and we try to protect ourselves against low interest rates and Christoph has already spoken to this. On health, we have again defended our strong second place in the German market with a growth in insured persons. Now almost 6 million people have a health insurance with us, and that makes us a very good health player and a clear market leader in the important and growing supplementary health area. On P&C, we are at a combined ratio, which is going down to 96%. We're going to have the next three percentage points in 2019. This sounds ambitious, and it is, but the drivers of it is growth on the top line, a growth in expense ratio, and a growth in the claims ratio. We have very detailed plans for this. Since I know that's going to be a question, I'll tell you right away that from 96% to 93%, it's two-third claims ratio and one-third expense ratio, and from 2019 to 2020, it's more expense ratio than it is claims ratio. We can go into any more detail if you prefer. We have now established a new back book system for our motor product. This enables us to establish a very modern tariff for our motor insurance in Germany. That should enable us to profitabilize and grow this business as well. My last comments are on page 29 for the international business, which has a record combined ratio of 94.6%. The nice thing, which I like most about this, is that this is being driven by all countries. We have finished the consolidation. 30 companies are either sold in terms of signed or closed, and the rest is developing well. We have improved combined ratios in more or less every other entity that we have. Also, our joint ventures are doing well with India and China outperforming our expectations. In summary, the program is well underway. I have highlighted some of the successes that we had, but I'm very cognizant of the fact that we are not through yet. We have 2 more years to go. We will build on the momentum and try to transform the ERGO as we said we would. Thank you very much. Yeah. Torsten Jeworrek speaking here. Good morning. Good afternoon, ladies and gentlemen. I would like to lead you through the reinsurance and start on slide 31. Overview of the results. After the bad year 2017, a very satisfactory result, I would say, in 2018, despite some significant cat and large losses, which we had to digest. Combined ratio in non-life, 99.4%, which is close to our target, and a very pleasing result in Life & Health to EUR 729 million, and particularly the technical results of EUR 584 million, which is above our target. Good is that particularly in non-life, we did not achieve this result by extraordinary reserve releases. They were in line with expectation. It was a very true result, which we show here. Slide 32. Only a short overview to say that the reinsurance segment will contribute to the group ambition and our result target for 2019 is EUR 2.1 billion. This will also be achieved by an improvement of the combined ratio by about one percentage point vis-à-vis 2018. Where does the combined ratio improvement come from? Two-third of this one percentage point come from business, better business, different portfolio mix, and approximately one-third from our cost reduction or transformation program. On slide 33, our expectation for Life & Health. This slide should tell you that Life & Health had a very good year in 2018, very much driven by very good claims development, particularly from North America. The way forward shows that we will be able to gradually, but permanently increase our ambition and what we will deliver to the markets. Therefore, we decided to increase our technical result ambition for 2019 to EUR 500 million from EUR 475 million in the year before. I don't see any reason why this should not continue in the years after. On slide 34, I will skip that. That only shows our setup, Life & Health reinsurance, P&C, and our Specialty Insurance Risk Solutions, and then all our digital initiatives. I will also skip slide 35, which shows our worldwide setup in life, where our strongest market are North America, United States, Canada, and with lot of growth potential, Asia and Europe. I will spend a bit more time on slide 36 now. Slide 36 should underline and show a bit what kind of initiatives we have underway and how we position ourself to achieve growth in the current market environment. When we started our growth program in reinsurance, some of you and some of the colleagues internally challenged ourselves and said, "Is it the right time to start with growth ideas where we all know that the market environment, particularly in P&C, is very bad?" That has not changed since last year. I admit that was a challenge. Nevertheless, we found the right mix, in my opinion, to grow where it's still feasible. We have not changed our profitability targets, our ambitions also. No, we do not achieve it at the expense of weaker terms. But at the same time, we said there are a number of new initiatives and ideas where we can grow into businesses which are not under the same severe competition, like in traditional reinsurance. In the top markets, we have identified ideas, particularly where we are a bit underrepresented in the U.S. regional business. Then we have a number of large initiatives which we published already last year, large transaction for capital relief, mortgage insurance, agricultural insurance. So very new initiatives, which are not under same competition. I am very happy that the organization delivers, and I think we do the right things. We do not give up our cycle management where it is necessary and at the same time identify businesses which are worth to accept. On slide 37, we basically repeat and show what we saw in the last renewal in January. When we compare the January renewal with the coming renewals in April and July, that was my expectation now, the weakest renewal in the year. Why? Because, April is Japan and July 1 is United States and global business. In these remaining renewal dates, those treaties which contributed or delivered the losses come up for renewal. That means I have a strong expectation that our rate change and our outcome will be much better. Slide 38, overview about our large losses. Again, I told you it was an active year, large losses, particularly in the last two quarters. But what I want to show here is that in spite of this large loss activity, I think we managed it quite well and were available to deliver a combined ratio and therefore profitability in line with our expectation at the beginning. Slide 39, risk solutions. This is one of our growth segments where we had made decisions in the last few years to consolidate that. After the decision to get rid of our Australian business last year, we decided to sell Beaufort Lloyd's MSP. So one of our two Lloyd's syndicates. Why? They were subcritical and couldn't deliver the performance or the growth which we wanted to achieve. We came to the conclusion we can achieve the same by using our Munich Re syndicate, the former Watkins. At the same time, we took a decision last year to build a new insurance platform in the United States called Munich Re Specialty Insurance. To achieve that, we bundled three of our existing companies, Specialty Markets, Temple, and Bell & Clements. We opened basically the door or the space for them to go more into the E&S market in the United States. Within the next five to six years, we expect strong contribution to profits, but also strong growth from this new business segment in Munich. Last slide, digitalization. I am on slide 40 now. Here, an overview about our digital initiatives. I come to digital cooperation models and IoT on the upper left part in more detail. One remark about cyber insurance. We are still one of the market leaders in cyber with still very good profitability, maybe a bit luck, but I also think good underwriting and good risk management. Premium volume, still a significant increase by more than 33% to EUR 473 now. You see that now in the middle. That means we have a significant market share in the insurance business, not in reinsurance, only in insurance. We deliver good combined ratios here, usually below 85%. One other remark which supports our cyber activities, we are very active to build cooperations to know what is going on on the technology side, but also to build business models for our customer, usually prevention and response models, technology-based. One of the investments we did last year was an investment in Team8, which is an Israeli company. They are basically from the, I call it the good hacker community and build business models with other industries for cyber protection and prevention. On slide 41, you see an overview about our platform model. I think what remains to be mentioned here is that particularly in the insurance and reinsurance industry, I think Munich Re is the first address for the Insurtech companies. Digital Partners is our company which we founded a few years ago here in that regard. They are very successful. They support the business model by investing venture capital into some of the Insurtech companies. In the meantime, they have achieved, in these various partnerships, a business model volume of close to EUR 100 million. Last slide, our activities in IoT, where you know we bought one larger player, relayr, last year. IoT is for us a technology play where we deviate from traditional insurance and reinsurance. Actually, we combine it, but the basis is technology. We have three pillars we want to grow. One is the small business, the retro fit on the left side, where HSB is our flagship. In the middle part, the SME business where we offer end-to-end solutions, technology solutions done by relayr. Then we have the big partnerships with Bosch, MHP, and KUKA in that regard. Further might come and will come. This together will give us a completely new business model, usable for risk prevention and loss prevention in the future, but also really to build fee-based business models for corporates. Having said that, I would like to finish, and thank you very much. Thank you very much, gentlemen. Now we can start with your questions, ladies and gentlemen. If I please may remind you to just limit the number of your questions to a maximum of two per person. Please go ahead. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Andrew Ritchie. Please go ahead. Your line is open. Oh, hi there. Thanks for the updates today. My first question, you are appointing, in a new role, a CIO, Chief Investment Officer. I guess you have outlined that you feel pretty comfortable with your asset positioning. You do not really want to take much more market risk. So what do you anticipate to be the benefits of this new role? Or, how do you feel you need to slightly change how you think about the asset positioning of Munich Re? I am just curious to know your thinking there. Secondly, for Markus Rieß, I think last year you said that you would come back to us, and when you got a lot more visibility on how new products were being received, how IT revamps were going. You were particularly nervous this time last year about IT revamps. Once those were clearer, you might be more confident about assessing whether your run rate earnings ultimately could be higher. Has any of that happened yet, or are you still kind of reserving judgment? Thanks. Hello, Andrew. This is Joachim Wenning. Good afternoon. Thanks for the first question, which I am happy to take, CIO related. So what we intend to achieve is the following. We believe in the analysis that says if we compare our asset class performance to date to the asset class performance of best peers, then we do see the potential that we could improve that. Now, we would expect that our asset manager, MEAG, focusing on core assets, will, through the influence of Nick Gartside having joined us this Monday, will gradually improve its performance on these asset classes. And there is always some asset classes as parts of the strategic asset allocation, which are subcritical to a player where you have more specialized asset managers, and there is potential that we could partner with them. Altogether, we believe that this will lead to, over time, higher returns. And how that then will feed back into the strategic asset allocation that we could then adjust for our performance potentials in certain asset classes, that needs to be seen. All in all, we see, not immediately, not in year one, not in year two, but maybe in year three from now, we see quite some material potential. Thank you. Okay. Sorry. Andrew, this is Markus. I take the question. Yes, you were right. I was using 2018 to try to get to a personal judgment on whether this will be a successful transformation or maybe if we would need to change some things. I can tell you today quite comfortably and self-consciously that I believe ERGO is very well-positioned for this transition to be successful at the end of the day. Let me talk a little bit about that. I would like to start with the IT dimension that you have. We met last time, a couple of migrations were still underway, and obviously with a program of this magnitude, that sentence is always true. But we have, for example, been able to successfully complete our migration of our motor book in Germany. That cannot be underestimated because we are talking about 7 million policies and the success ratio, i.e. the number of policies that have been migrated successfully is higher than 99.8%. That is actually for such a big migration of 7 million, quite remarkable. Also, it enables us to implement our new risk model, which we have already used for Nexible, for our digital insurer, plus adjusting that for our intermediary distribution channels. I believe this will not only put us into a much better position from an administrative perspective, but also from the way we will be able to calculate and adjust prices in our motor book. Let me remind you that we didn't have that for the last 10 years, and that really is a major step forward. Also, on the life migration. Here, I can't tell you about results, but I can tell you that the ramp-up phase is really going well and that we are currently all green for trying to migrate the first tranche in 2020, which is only one year away. So a year from now, I think we have a better view on this. Then we have now basically closed down 44 out of those 59 legacy systems. I don't want to sound too optimistic, but these are very hard indications in the year 2018 that lead me to believe, and I believe, that we are making significant progress in the IT department. Second dimension is products. You are rightly asking this question as well. So, if you look at what we have been able to achieve so far, we go into the P&C products. You see that we have a significant growth in the corporate side. You see that we have an overall growth in the P&C side of 2.5%. It is a little below market. The market will be around 3.0. I would say it is positively speaking on market level, not yet above market level. But if we did not have good products, that would not be possible. Also, if you look at the sales agent productivity, and I would just like to reiterate that. We have increased the sales agent productivity now by 25%, which is a significant increase in productivity. So in the dimension of annualized premium earnings, we have now basically 25% more sales result per sales set than we had 2016. Let me also repeat again that as long as we have statistics back, which is since 2008, this is the highest number, and it has again risen by a double-digit percentage point in the first quarter. I do not want to oversell that. It is first quarter only, but it very clearly looks like a positive momentum. On life, we have tried out these new products. We have trained the agency sales force, whom we did not really give easy-to-sell products over the last years. Even in this first year, we have more than 40,000 units that were being sold with an annual premium equivalent of EUR 40 million, which is, for us, a big deal. It is +25%, and it shows that the products are making a difference. Also, we have to acknowledge the fact that in a large agency organization, you really have to train people. One important product improvement on life only came about in December. I believe this will also continue to go on. On health, we had one of the best years in the supplementary product range over the last decade, and we have again really significantly increased our supplementary health clientele, and we have much more than 20% market share in this regard. I believe if you look at all of this, always bearing in mind that we need to keep focused on execution and there are still challenges that we have, I feel much more confident than I felt in 2018. Great. Thank you. We will now take our next question from Kamran Hossain of RBC. Please go ahead. Your line is open. Hi, thanks for taking my question. First on dividend. When we look at your dividend growth this year, it is above your normalized earnings growth during the year. When we look out to 2019 and 2020, should we assume that the regular dividend should grow in line with the earnings growth that you are suggesting? So kind of the 2.5 on the midpoint, 2.3 last year, and then the 2.8 on the 2.5. Just thoughts on how we should think about that. Secondly, just on the 2.8 target overall. A little bit of a soft question, but compared to a year ago, could you give us an indication of whether you are more comfortable, less comfortable, or feel like you are exactly on track? Thanks. Thank you, Kamran. This is Joachim. Thanks for the questions. The first question with regard to dividend and the outlook 2019 and 2020, whether you should expect the dividend to grow in line with the result projection 2019 and 2020. I think this is exactly the expression that I myself used some time ago, like, in line with. Let me clarify what we mean. It is not proportional. If we grow results by 10%, you should not, in a mechanical or formulaic sort of way, just say then the dividend will go up 10%. If the result goes up 20%, the dividend will go up 20%. The reason why you should expect an under-proportionate increase of the dividend is because we commit to dividend continuity. Even in years like 2017, where our results were hardly positive with EUR 0.4 billion, if I remember correctly, we paid out an unchanged dividend. If you commit to dividend continuity, you cannot increase it proportionately, but under proportionately. But we want to keep it attractive, which we have seen this year. More or less in line with our current practice, you should have dividend expectations into 2019 and 2020. With regard to the second question, whether after a year into our midterm commitment, whether we feel more or less comfortable or just the same. I think this is subjective. This is soft. I can give you my version. Every year that we develop as expected into a new, pretty high ambition, I feel more comfortable. Marcus Rieß has already shed some light and given you some examples why now he is pretty confident that ERGO will not only deliver 2019, but also into its midterm targets. I can say that is true also for reinsurance. Why is that? We have seen, in the last one and a half years, we have seen the reinsurers growing in a way, selectively, in a disciplined way, exactly into the markets where they wanted to grow into, not into any other markets. And if we look into the results of that growth, then at least to date, it is maybe too early to come up with an ultimate view of it to date of a very good quality. That gives me more comfort now than I would have had a year back. That is brilliant. Thanks very much for the color. We will now take our next question from Vinit Malhotra of Mediobanca. Please go ahead. Your line is open. Yes. Good afternoon, everybody. Thank you very much. So two questions, please, and one quick follow-up, please, on ERGO. The first question is on the risk solutions. I see here the new platform, the Munich Re Specialty Insurance platform. And one of the mentions there is about targeting excess and surplus lines. Looking at some peer results on that line, does not it feel like maybe that is a bit risky here? Or do you think the market is now getting better there? If you could just comment on that, please. That is the first question. Second question is just on the retrocession. When I look at the annual report, the reinsurance recoverable rating quality seems to have moved down a bit. Again, when I look at your slide, it does not show much of a change in retrocession numbers or the coverage. Could you just comment or help us understand whether in your keen desire to manage the risk, has there been a change in your counterparty credit qualities? Last question is just the ERGO follow-up, please. Markus, when we talk about agent productivity in the past, when you met us in London, we've talked about how bringing the motor portfolio back has helped. When I look at the last 3 years, 2016, 2017, 2018, the motor GWP is almost constant in the accounts. Is it just the fact that there's something else going on between the AP and old book and new book on motor, please? Thank you very much. Yeah, thank you. Okay, Vinit, this is Markus. I start with the follow-up. Thank you for giving me an opportunity to clarify that. When it comes to productivity increase, within P&C, motor has a significant proportion, but the momentum comes from we are back in the life insurance, because life insurance carries much more APE than motor insurance. However, I do not have to take back what I said in London, because without a functioning motor book, you don't get the agents in interaction with the clients in such a way that they can really do the cross-sell, and they sell and advise on life insurance products also. One thing does not go without another. You want activity, you need motor for an activity. If you want volume and productivity increase, you need to do it with life. That's how these two lines come together. I hope that clarifies that, Vinit. Thank you. Very clear. Torsten speaking here. Risk solutions. We decided to form the MSI, the specialty insurance. As I said, we opened the space for E&S. Why and why now? Is it manageable and possible for us? First of all, it is not completely new. We know E&S markets and non-admitted markets pretty well in the U.S., both from our non-proportional and proportional reinsurance activities. We have a lot of data and information about that business. The information and know-how does not come from insurance only, that is in-house in the company. Second, we think particularly the E&S market is a market which is built more on know-how than on expenses and distribution success and all these things for the normal bread-and-butter business, which is good for us. Third, when you look at the E&S market, there is a lot of light and shadow in the U.S. market in general. But you have quite a good chance if you play with know-how to be on the better side of the market and to deliver very good performance. In that regard, we are very hopeful, so to speak, and almost convinced, I would say, that this is good for us. Third argument, we also were entertaining a small piece of business in the old specialty insurance unit, which is part of the new one now. Last but not least, of course, we will pick those segments in the U.S., not all, which see the best support in today's market environment from positive rate increases and rate changes. Whether we then change that long-term, that remains to be seen, but there are certain segments which look better than a few years ago regarding the future profitability. In that regard, I am optimistic that this is manageable and a good segment for us at the end. By the way, because it is non-admitted, of course, when you do it in the right way, you can respond to market changes, surprises or whatever it is, in a much faster way. You can apply rate changes in the traditional market. Retro, in our traditional retro program, we basically have the same structure in place like 3 years ago. That means, a traditional program in the traditional retro market, which is relative to our size, maybe not that big, but compared with other markets, maybe the biggest placement in the traditional retro market. That has hardly changed. Why? Because after the severe losses in 2017, last year it was not affected. We did not see the loss into these programs. For that reason, most of the existing players offered similar and unchanged terms, so the outcome was very positive. Same on the alternative side. Here, we basically did and will cancel some of the cat bonds, but renewed and placed our other non-traditional programs, in particular two sidecars. Collateralized volume slightly above EUR 700 million, so also very sizable. After these frictions and a lot of noise in the alternative markets, our players stayed on board, or most of them at least. That is unchanged. I can't see in our traditional and alternative retro, significant changes of the quality of the participants. That is well done and similar quality like last year. Thank you. Thank you. We will now take our next question from Edward Morris of J.P. Morgan. Please go ahead, your line is open. Oh, thank you for taking my questions. The first one is just on cyber. I am just interested to hear about how you think about your risk appetite in cyber. There is a slide in the back which shows your estimates of the market, which looks like it will sort of double over a three-year period. I am just wondering whether we should expect your cyber premium to follow that path. Similarly, how do we think about the level of risk here compared to, say, peak nat cat risks? I appreciate you mentioned it is a lot lower, but could you give us a feel for what kind of risk you are now running in cyber? The second question is just coming back to Munich Re Specialty. Just interested really as to how you are expecting to win the business that you are going for and what really is the driver of growth. Is this business that you are winning on price from competitors or just because you were not tendering for it previously? Just a bit more color there would be helpful. Thank you. Cyber. Torsten speaking here again. How is our risk appetite? How is our strategy? First of all, today, our portfolio grew in line with the worldwide insurance market. That means our market share, and market share means here in the insurance market, not in the reinsurance market. Usually, we have a reinsurance market share. Here, it is in the bigger insurance market, is close to 10%. In the past years, we grew in line with this original market, which we think is now slightly above EUR 5 billion by end of 2018. So we grew to EUR 700,473 or so million. Which was good at the end. So far, we did not lose market share, was exactly in line, and we have many activities underway also to participate in the small but steadily growing markets, particularly in Europe and in Asia. Second, how do we manage risk and risk appetite, and what are our segments? Of course, we have a bit of everything, but our clear focus where we want to grow is in the SME business. It is not the large industrial business. We have some participation in the large stuff, but our core segment is the SME business. So the small and medium-sized enterprises, for various reasons. One is, first of all, from the demand side, we are absolutely convinced these kind of customers, they need our service even more than the large companies. Second, our strategy is not only to sell a financial cyber product and insurance product, in case of a loss or to protect them against a loss. Our idea is, we build either cooperations with external partners or build own technologies, basically software solutions, to help these kind of small and medium-sized customers in terms of prevention and risk assessment of their underlying infrastructure. We combine it, of course, the better the quality of the infrastructure and the risk, the better the terms of the cyber product which we can offer. That is our approach. Second reason for the concentration or focus of SME is that we say we have to manage our capacity. Capacity management means we have to look at the accumulation scenarios, which are obvious in the cyber world, and these are even global scenarios. So more risky, if you want, from a theoretical perspective than in traditional nat cat business. Then we said, okay, how can we nevertheless achieve a kind of diversified portfolio and not by implementing or selling the capacity to 20 of the largest groups in the world, in the U.S. or in Germany here? No, we said we need millions of small and medium-sized customers because then we have a reasonable degree of diversification, even in case of more organized hacker attacks. That is one thing. So SME business allows diversification. Second, diversification is particularly important in cyber because you want to be able to calculate risk-adequate prices. How can you do that? You can't do it in a traditional way by looking backwards and collect data over many years and then to calculate and to fit severity distributions and frequency distributions or the traditional approach, because the old data from 5 to 10 years ago don't reflect the future risk of tomorrow. For that reason, we said, no, that is not an approach. The alternative is if you can't throw the dice, let's say 100 times in an order, then you need 100 dice, to describe it in a good example, 100 dice, which you throw in one year. So that means you need a large number of hopefully independent risk for pricing purposes. That's the idea. With this in mind, I think, and I do not want to oversell this, but over the last 6, 7, 8 years, that's the time where we already entertained cyber business. We have a proven track record in that business. To some extent, you can argue it's also a bit of luck. That is probably true. But in general, we have a very decent performance here. The third part is we have a very tough and strict risk management and accumulation control in place. That means we identify also together with partners, partnerships. I mentioned Team8 in my presentation, this Israeli intelligence company. We identified accumulation scenarios and unmanageable accumulation scenarios like protection of the internet. So the underlying infrastructure of our world will not be covered by us. So that means we cover those parts where we have an accumulation management and risk management in place. So that was cyber. What was the other question? In the meantime, sorry, I talked so much I forgot it. Value proposition and specialty. Our value proposition and specialty. Okay. Specialty business for us is commercial and those insurance segments which require know-how and are not, let's say, based on the value proposition of, let's say, most efficient business for millions of policies. That's not our value proposition. We say it's basically know-how based. In this know-how based space, we focus, and here our strategy differs from many of our peers, particularly among the large insurance companies, but also reinsurance companies. We do not focus on large industrial business here. We have about EUR 600 million, part of EUR 4.5 billion industrial business in the portfolio. The rest is all either small commercial business or even kind of fee type business like the inspection business of Hartford Steam Boiler or so. That means we are here more in the middle space in the market as target groups. That differentiates us. That means the business development takes a bit longer because you can't get the high tickets from the brokerage, which plays a large capacities. You have to develop the business. But once you have the business in the company, it's sort of sticky and delivers good performance. I forgot to mention that when you look at our risk solutions, we didn't have a satisfactory performance in the last 2 years, mainly driven by large losses, by the way, the wildfires and the hurricane losses. But our underlying and expected combined ratio, even for 2019 in risk solutions in general, is still 95%. On a normalized basis, I would still expect that we deliver such kind of profitability in that segment. That's it, I would say. Great. Thank you very much. Thank you very much. Thank you. We will now take our next question from William Hawkins of KBW. Please go ahead. Your line is open. Hello. Thank you very much. First of all, can you help me understand a little bit more about your guidance for economic earnings? So between slides 21 and 45. On slide 45, you've shown us that the outlook for economic earnings is to be north of EUR 2.5 billion. I'm assuming that is implying a EUR 600 million uplift. So the comparable is the EUR 1.9 billion at the bottom of that slide. What are the moving parts for that net EUR 600 million? Because when you give us the very helpful detail, lots of things sort of seem interesting. The new business is very low, but there's a lot of variances and the rest of it. How do we kind of get from EUR 1.9 billion to EUR 2.5 billion this year? Secondly, on slide 19, the claims equalization reserve is now at EUR 8.5 billion. What's the direction of travel for that figure now? Are you still into the phase of building it back up, and if so, to what level? Have you already completed the buildup so you could be releasing again near term? Thank you. Okay. I'll start with the first one. Christoph speaking here. Outlook of the economic earnings. The starting point of the EUR 1.9 billion is distorted due to the fact that the capital markets were quite difficult in the year. In 2018, as you know, our planning assumptions are usually stable capital market assumptions. So a stable environment. We call it internally the naive prognosis. We don't know how the markets are going to develop. Therefore, to compare it with 2018 to the plan, with the 2018 is to a certain extent, let's say it's distorted by the fact that 2018 was really affected heavily by capital markets. Having said that, the assumptions between the EUR 2.5 billion guidance are the same assumptions we have in IFRS as well. So it's the operational improvements we are seeing across all businesses and the initiatives we have in place. Then it translates into this economic earning guidance equally like it translates into the IFRS results. So no really different assumptions behind. On the equalization reserve, good question. We are still in the phase of building it up, and there is still significant room to be filled. So our current estimate is EUR 3 billion to EUR 3.5 billion, which we still need to build up in the next probably couple of years. Thank you. May I just briefly come back on the economic earnings. Would you say that the SCR economic evolution last year was normal, or should it be higher or lower in a normal year? The SCR is, I think, quite normal. It's a fair description of where we stand from our risk exposure. As I've been commenting before, we're very pleased with the fact that market risks, or the investment risks are less than 50% and relatively reduced compared to the insurance risks. This is an integral part of our strategy when we are saying we want to grow our core business to move, let's say, the overall risk balance, the risk portfolio, the diversification into a more optimal direction. Perfect. Thanks, Christoph. We will now take our next question from Jonny Urwin of UBS. Please go ahead. Your line is open. Hi there. Thanks for taking my questions. Just two, please. Firstly, you've helpfully helped us bridge from the 2018 normalized combined ratio guidance to 2019. But could you help us bridge from the 2018 actual normalized of 100.3% to the 98% guidance for this year, please? Secondly, the slide's really interesting that you put up about the global hotspots of claims inflation on slide 17. Could you just go into a bit more detail on that and just sort of give us a bit more color and just explain to us what you're doing to manage the risks. Thank you. Our, let's say, combined ratio is in 2018. Let's put it this way. We have a large loss and cat activity, almost in line with expectation. So almost close to 12%. Then we have a bit higher than expected reserve releases. That's the second factor. You can adjust for that. Then you have a third factor. You don't see in the figures, but you have to adjust for. That is basically some noise from cat and loss events which occurred particularly in our risk solutions unit, which don't exceed this level of large losses and are therefore not visible for normalization. So these three factors. When you take these three factors and particularly take the noise out, then we think the true underlying combined ratio in 2018, is in the order of 99%. That is really our internal best estimate and best view when we assess our business units. The question is now, when you start from there, that is basically unchanged. That's exactly what we said a year ago. Again, a bit of noise in. When you come from that and ask, okay, how can we move downwards from there? What we indicated a year ago, then at least for 2019, we have at the end, three drivers, which will lead to an improvement on a sort-- if everything goes normal, three drivers, which improves this combined ratio. One is, we have a spillover of the price increases which occurred or were achieved already in 2018 for the unearned premium, which will contribute positively to the profitability in 2019. Then, we see, of course, the underlying positive development of various portfolios, not necessarily from those portfolios which were up for renewal so far in January, but from many of the business initiatives, large transactions, mortgage business, agricultural business. Nothing was up for renewal here, which will contribute. These two together, portfolio and price changes, according to our expectation, will help us to improve by 0.6 percentage points, roughly. So a bit more than half a percentage point. Then, we have, of course, we will harvest the cost reductions from our transformation program in 2019 and in 2020. In 2019, we expect again one third of a combined ratio point from that transformation program, which we did finish last year and which still goes on into the coming two years. That will bring one combined ratio point benefit in the coming year. Third remark is, what happens in 2020? Will that continue or not? Bit too early to tell. We do not give up our combined ratio indication, I would say. Not ambition, I would say indication of 97% combined ratio, which we indicated, Joachim Wenning, where you indicated that a year ago, that was based on the assumptions that the business initiatives will deliver and will also lead to a change of portfolio mix more from long tail and more towards shortish tail business segments. I still see that this is still in line with expectation. However, it is always based on this assumption that the business composition develops in that regard. If we should have further transactions and businesses like last year, and remember, we had maybe a handful, very large, pretty large transactions which were bought from the Munich Re for capital management reasons. One of them was IAG in Australia. Big all lines quota share. Then of course, we would always consider that from an economic perspective and would write them if they are under economic considerations positive. But that means if they deliver more long-term business to us, and where interest rates play a role from an economic perspective, then of course, that could change our combined ratio expectation. So combined ratio 97% is not a target, but at this point, I still think we deliver that. Thank you. Yeah. Christoph again. On the reserving hotspots on page 17. First of all, none of them are new, and I think most of them, or all of them, are very well known also in the market. The idea of this slide was more or less to show you that we do not have any issues at all with those. We are feeling very comfortable. I could give you some flavor of some or all of them. I do not know how much time you would like to spend here. I will give you one example. On the Ogden interest rate, for example. There is the expectation that this interest rate is going to be increased again this year. We are aware that some company already did that in the year-end accounts. We did not. So another proof of our cautious reserving approach. Our discount rate is unchanged so far. Similarly, on the asbestos side, our survival ratios are still very comfortable. You can see that also in the backup of our pack where we show them. Or also similarly, U.S. Casualty. There has been a lot of talk about U.S. Casualty recently. We have some reserve increases in small parts of our portfolio and parts of our portfolio. Overall, this is overcompensated by the overall development. So also there, at this stage, we feel comfortable. I hope this gives you some flavor of where we stand here. But overall, this is really to show that our monitoring on the reserve level continues to be very prudent and that we are very well reserved. Thanks very much. Very useful. We will now take our next question from Sami Taipalus of Goldman Sachs. Please go ahead. Your line is open. Yeah. Hi. Good afternoon, everyone. Just a first question on the Life & Health reinsurance business, where you're making steady progress. If you could just focus on the Australian business a little bit. Obviously, there's a few things going on there, and it sounds like you're facing some challenges there. Could you just talk us through how you see the market dynamics there and to what extent that business is a drag on the profitability and how you see that developing over the next couple of years? The second question comes back to ERGO, and market dynamics in Germany. I think one of the major motor players in Germany came out a little while ago and said that they expect motor competition to increase, in the near to medium term. Could you comment on what you see there? On the other hand, it sounds like the industrial lines business is doing a little bit better. I know this is maybe not huge for you, but how do you see the overall environment there? Thank you. Thorsten here. Life reinsurance. Yes, your description is right. If we wanted to find one segment in Life & Health Re, where we still have some concerns about further development, then it's Australian business, particularly the disability business in Australia. That has been ongoing for a number of years. I think it's difficult to forecast how it develops, but I think it will be under stress for many more years in my opinion, for various reasons. It's difficult to estimate how really the claims and losses will develop in the future. Second reason is we see a lot of, let's say, withdrawal from capacity in the original, in the underlying Australian life insurance market, which has led to a kind of picture where insurance companies who are responsible for their business have, let's put it in polite words, a bit lost interest or focus to manage the claims in a very active way, as was led for us to the conclusion that we, in the meantime, decided to take over control over the claims management and we decided to found and to build our own unit in Australia, to really do claims management together with Australian clients, to basically limit the downside exposure for us and for the clients. Maybe the third remark is there are even changes in legislation. There has been or still is new legislation underway, which gives customers the right to, let's say, withdrawal or to cancel policies. It's more the other way around. Old policies will be canceled unless they step in again. This is not approved or not confirmed yet, but what we have decided is we took action and decided to put a reasonable reserve into our 2018 balance sheet already. Basically in anticipation of such changes in legislation which might or might not come this year. Overall, if you ask me, is it over, is it not over? In my opinion, no, I cannot give full confidence that everything is already transparent and digested. But if further adverse developments should come, I think compared with the huge life book, they are easily digestible. Maybe the last remark is, my fourth remark is, in addition to all the activities in Australia, we are very active also to look for the kind of recaptures and alternatives to reduce our exposures, even if it would cost IFRS result. But that is too early to tell whether we can be successful here. I give you, Ferry, my couple of thoughts on the German marketplace. Obviously, as you know, I can't talk about any competitor's behavior in this call. But generally speaking, people have, I think for the last years, anticipated in motor there to be an increased competition. To a limited degree, I'd say that's true. You see some new entrants, especially in the startup scene. But then again, they'll have a couple of thousand, maybe 10,000-20,000 policies. So I don't think this is really changing the landscape significantly. This might be different in the future, but currently I don't see that many new competitors entering the German marketplace. I also, from what we see, do not see that the pricing trend has changed significantly. You know better than I do that both HUK-Coburg and Allianz have a very external communication focus with regards to their motor policy. But if you ask me on the market impression that I personally have, I think on motor, it's more unchanged than the people ultimately create the impression it was. The industrial lines, we are not in the industrial lines business. If you really talk about industrial lines per se, there will be something which would be rather on the reinsurance side if they do it. For us, I look at commercial in the small, medium, and sometimes in large commercial space. And here you are right. We see a good demand there. Our own growth is also primarily from the segment, and the combined ratios are pretty much unchanged over the last years. Like always in this business, it depends on what you write. But believe in the space that we are in, we can do it at a sustainable, attractive combined ratio. Maybe I leave it at that. Thank you. Great. Thank you. We will now take our next question from Michael Haid of Commerzbank. Please go ahead. Your line is open. Thank you very much. Good afternoon. Two questions. First one also on cyber. As you said, you grew significantly and at very profitable terms, combined ratio below 85%. I understand that you grew with many risks with SMEs. Can you share with us how you expect pricing to evolve going forward? I think cyber must attract more primary insurers also. Should we expect more competitive pricing in the foreseeable future? Second, just simply the combined ratio in P&C Re for 2018 and also the expectation for 2019, 98%. Can you provide a breakdown of the combined ratio for traditional reinsurance and for primary insurance out of reinsurance for 2018 and for 2019? Let me start with cyber. Cyber, the picture about the current and future pricing is not clear. You are right. There are more insurance companies who identify or detect cyber as a segment or line of business which they can't ignore anymore and go into that. In my opinion, not only because they believe in the demand or find it so attractive, it has also to do, let's say, to protect the existing portfolio and other P&C segments with the same customer. What you can't do as insurance company long-term is, basically, if there's an increasing demand for cyber, to ignore it and to say, "I write all the P&C business with you, but for cyber, you have to go to a competitor." That is not possible. For that reason, many, although small or medium-sized companies in the meantime, begin to go into that just to be able to offer something, which is good for us, by the way, because particularly those companies as partners of a reinsurance company like us, depend a bit on our support and help here. That is positive. Nevertheless, there's more capacity coming into the market. Here you can say that puts pressure on the pricing mid- and long-term, which is right. On the other hand, the demand increases significantly. You see the underlying growth in the cyber market, in the insurance market. The growth is in the order of 35% every year, in line with our portfolio. This demand, and I'm very optimistic here, will further increase for a couple of reasons. One reason is the increased awareness. The awareness is supported by very prominent and visible large hacker events. Take the Marriott last year, take the NotPetya in the year before, and so on. The more of kind of events make it into the press and TV, the more, of course, the risk awareness begins to increase, and therefore, the demand for better technology solutions, but also the demand for insurance. Second, regulation and new laws also promote and support the demand for cyber business in the U.S., but particularly in Europe now, and maybe in the future, also in Asia. Why? Because when you look at the European data protection laws, then you see that companies are required to do their utmost to protect themselves. Supervisory boards and board members are liable that they consider all kinds of protection. These external regulations, they are significant driver for an increasing demand. I am absolutely optimistic that this demand will at least continue, maybe even accelerate. The question is now, what is now the balance between the two? Demand on one hand, and available capacity on the other hand. For the time being, I think the demand is strong enough to avoid significant pricing pressure in cyber in general. That might be a bit different for single symbolic accounts or so, but in general, I am very positive here. The last remark maybe is, it is of course also a job for an insurance and reinsurance company like ours to have a better risk selection and price differentiation between those risk and customers who have best class of protection in place. Here we offer all the solutions. Those who do not do their job at the end of the day, and that will continue. On the combined ratio. The question was behind 98%, how two are they differentiated between the traditional business and the risk solution business. Torf mentioned already that the 98% is not as much as a target, it is more an indication, and therefore not necessarily very precise. Given the fact, I would like to refuse to give any further details. What you will understand, of course, is that the 98% being then an average between traditional business and the risk solution business, means that one of the two has to be above 98, the other has to be below 98. The one above 98 is the traditional business. So the risk solution clearly is expected to be below 98, and traditional is somewhat above 98. That is our current expectation. But as we said, this is more an indication than anything else. That was also true for 2018. Yeah. Yeah. Thank you very much. We will now take our next question from Frank Kopfinger of Deutsche Bank. Please go ahead. Your line is open. Yeah. Good afternoon, everybody. I have two questions. My first question is a very general question on your 2020 ambition, the EUR 2.8 billion. When I look at your slide 8, then the chart itself rather indicates that the EUR 2.8 billion is probably only the low point of a range. So any thoughts around whether the EUR 2.8 billion is a range and whether there's room for the upside or downside would help in this respect. Secondly, on ERGO, I would be interested here in where you see a normalized profit level for 2018. Also, you beat your original guidance, obviously. However, if I take into account that you had a EUR 170 million one-off, I think from assumption changes in life, and I think there were also a EUR 90 million tax effect to revaluation in Q4. Then your normalized level, how I could see it, would be below your original range. Then with this would open up into a more or less EUR 300 million gap towards your 2020 target. I would be interested on how you see this gap being filled by your three segments, P&C, Life, Germany, and International. Thank you. I will take the first question. This is Joachim again. The EUR 2.8 billion commitment into 2020, this time for 2019, so the EUR 2.5 billion and the EUR 2.8 billion for 2020, we are not building a range. We are talking of around EUR 2.5 billion and around EUR 2.8 billion. We will not offer any range around it, whether it is plus or minus EUR 200 million, plus or minus EUR 300 million. The reason why we do not do it, because we want to avoid any misinterpretation. We mean that point. We mean 2.5, and we mean 2.8. If we offered a range in the past, we understood from some of the questions and the feedback, some were saying, well, maybe they tend to be at the lower end of that range, and others would say they are so conservative, maybe they really mean the upper end of that range. We mean EUR 2.5 billion, and we mean EUR 2.8 billion, and that we are in a volatile business, that when capital markets go completely the other way than expected, and when large losses go completely the other way that is expected, that this means that we can be in excess of that number or below that number. That, as industry experts and professionals, you know anyway. Yeah. Again, Christoph here. On the ERGO normalization of the results, you were mentioning two effects with positive impact, but there also have been a variety of other effects with negative impact. If we sum up all the special effects we had in the year 2018, the sum would be around plus 40, meaning that the normalized result of ERGO would not be 412, but would be 370 or something like that. Therefore, even after normalization for one-off effects, the ERGO is exceeding the original target range substantially. Okay, thank you. Once again, ladies and gentlemen, if you would like to ask a question, please signal by pressing star, then one. We will now take our next question from Vikram Gandhi of Société Générale. Please go ahead, your line is open. Oh, hi. It's Vik from Soc Gen. I've got just one question. Just going back to the economic earnings for 2018, can you help us with what the normalized figure was? For example, you published EUR 2.4 billion for 2017, EUR 2.5 billion for 2016. So an equivalent number for 2018 would be helpful. Thank you. Actually, I have to ask again, what do you mean by normalized economic earnings? If I look at your previous presentations, you kind of published the normalized economic earnings expectations for a given year, and that's something that I'm struggling to locate in today's slides. So it was EUR 2.4 billion for 2017, EUR 2.5 billion for 2016. Basically, if everything works out in line with your expectations, what would the 2018 figure be instead of EUR 1.9 billion that takes into account the large losses above budget, let's say, or the capital market volatility? Yeah. Now I understand. Thank you for giving me that support. The way we present economic earnings figures has changed compared to last year. There has been a working group of the CFO forum trying to align the presentation between different companies. Therefore, we also changed the way we present the figures substantially. Normalized, you mean the expectation. If you look at our economic earnings 2018, clearly the capital market development is not in line with our expectation. When you look at the in-force contribution, there are, in some segments, certain deviations, which are not in line what we expected. Others are, because as you know, we are regularly expecting, to give you an example, 4% of reserve run-off. Overall, without disclosing now the normalization to the same position like what we did in the past. Overall, I'd say normalized expected would be in the area of where we are with the IFRS result as well. Okay. Thank you very much. Once again, ladies and gentlemen, if you would like to ask a question via telephone, please press star followed by one. It appears there are no further questions via telephone at this time. Okay. Thank you very much for joining us. Thanks for your questions. Nothing to add from my side anymore, except saying we very much hope to see you all soon again. Thank you. Bye-bye. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Data Source: Quartr Last updated: Mar 20, 2019

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