Good day, welcome to the Munich Re quarterly statement, as at the 31st of March 2021 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Becker-Hussong. Please go ahead.
Yeah, thank you. Good morning, everyone. Welcome. Very warm welcome to our Q1 earnings call, including the April renewals. Today, our speaker is Christoph Jurecka, our CFO, and as usual, Christoph will kick off the call with his introduction, and then we will go right into Q&A as always. I have the pleasure now to hand it over to Christoph. The floor is yours.
Thank you, Christian. A good morning also from my side. With a net income of almost EUR 600 million in Q1, we had a solid start to the year. Good operational development in both our reinsurance segments mitigated the impact of above average major losses, including the claims related to COVID-19. On top of that, ERGO had a particularly strong performance. Also the investment result was fully in line with our expectations. Our group return on equity amounted to 10.4% this quarter. Let's start with the investment result. The conditions in the capital markets, as you know, were favorable in Q1. Friendly equity markets, rising bond yields, so a really favorable environment, particularly also, of course, in North America. The latter benefited our reinvestment yield, which increased to 1.5% this quarter.
The last two quarters, we were at 1.3%. This is helping our sustainable investment income, obviously. Our running yield amounted to 2.3% this time, and investment return overall was 2.7% and was supported by disposal gains due to the typical portfolio turnover and also due to a set of our financing, which then altogether more than compensated for losses we had on equity and fixed income derivatives we use for hedging. Let's turn to reinsurance. The life and health technical result, including fee income, amounted to EUR 51 million and fell short of the pro rata annual ambition, as expected, I have to say. This is due to the prevailing pandemic and the winter surge of COVID-19 claims in the United States.
In accordance with our assumption that the largest share of claims should be accounted for in the first half of the year, and with a correspondingly high burden in Q1, our COVID-19 losses this quarter amounted to EUR 167 million, which were driven by the United States, but also to a smaller extent, by higher than expected claims in South Africa. As a consequence, we have some uncertainty now as to our loss estimate of EUR 200 million for 2021, which we might slightly exceed, but the best guess is only by maybe some tens of millions, if at all. Apart from COVID-19, the aggregate experience was very favorable in life, health. We, specifically in the United States and also in Europe and in Australia, were benefiting from rising interest rates, which had a positive impact on claims reserves.
On top of that, fee income, once again, was very strong. Altogether, we therefore consider Q1 to be a very promising start to the year for this segment. Of course, we are sticking to our annual guidance of a technical result around EUR 400 million, including fee income. In P&C reinsurance, we posted above average major losses, primarily owing to the winter storm Uri in the United States. COVID-19 losses of around EUR 100 million were fully in line with expectations of EUR 300 million for the full year. The major loss ratio overall amounted to 15.5 percentage points and lifted the combined ratio up to 98.9%.
If you normalize for the large losses and keep in mind that reserve releases are 4 percentage points, or have been 4 percentage points, the normalized combined ratio amounted to 95.4%, which is fully in line with our guidance, considering that the number is to improve further in future quarters as we continue to earn through the rate increases achieved in recent renewals. Which brings me to the April renewals, which featured the same favorable trends we observed in previous renewals. Overall, the price level of our portfolio increased by 2.4%, a very pleasing outcome. This number matched exactly the increase we also saw in the general renewals. At the same time, we were able to expand premium volume by around 17% by exploiting opportunities we found, especially in Japan and India, and as well with global clients.
In primary insurance, ERGO continued its pleasing financial performance, posting a strong net result of EUR 178 million. In all lines of business, the underlying performance was healthy. This was accompanied, with regard to COVID-19, by even a net positive effect this time due to lower claims, especially in travel insurance. A significant part of the ERGO result was generated in the German life and health business and its net result of EUR 94 million, which was driven by lower claims and the lower policyholder participation in health, as well as also lower claims in travel. In addition, as has been usual already the last couple of years, the realized disposal gains for the [ZZR] funding in life were above the pro rata run rate. This brings me to P&C Germany, where we posted a combined ratio of 94.2% in Q1, somewhat higher than anticipated.
Here, the manmade losses were above expectations. On top of that, I may remind you of seasonal fluctuations in claims and premiums, which are very typical for a first quarter at ERGO, and which were only partially compensated for by frequency benefits related to COVID-19 and motor. If you consider all these effects, the underlying combined ratio at ERGO Germany fully supports the full year guidance. In the international business, we also saw an ongoing favorable development and a combined ratio amounting to 93.8%, which underlines the successful strengthening of our presence in the core markets. Q1, for example, was particularly strong in Poland and in Greece. Here again, we have seasonal effects, especially in health. If you take them into account, the underlying combined ratio is also here fully in line with the guidance. Some remarks on capital management. The group's economic position remains very sound.
We increased the Solvency II ratio to 217% in Q1 and are very close now to the upper end of our optimal range, which is at 220%. The main driver for that increase were rising risk-free interest rates. The positive contribution we saw from the operating economic earnings this quarter was then invested immediately into business growth, so into increasing capital requirements related to that growth. Please note that the Q1 Solvency II ratio includes still EUR 1 billion in hybrid debt that will be redeemed on 26th of May, as we have announced recently. Conversely, and that's also only as a reminder, the dividend for the full year 2020 has, of course, already been deducted much earlier, so at the beginning of the year already. I'd like to conclude with the outlook for 2021.
We now expect premiums in reinsurance to be EUR 2 billion higher in light of the strong business growth in P&C reinsurance, which we saw in the first two renewals this year. All other figures in our outlook, especially the ones related to profitability, remain unchanged. Our Q1 result puts us on a pretty good path, in my view, towards achieving our net income guidance of EUR 2.8 billion. Even we have considerable uncertainty still with respect to COVID-19, we assume that the pandemic obviously will improve over the course of 2021 as more and more people are vaccinated.
As mentioned before, we cannot rule out today that the estimated COVID-19 effect in life and health and reinsurance will be exceeded. On the other hand, COVID-19 related losses for the full year could be lower than originally anticipated at ERGO. All in all, the guidance is pretty stable. With that, I'm at the end of my introduction and looking forward to answering your questions. First, we'll hand it back to Christian.
Thank you, Christoph. Let's move on and let's start with the Q&A. As always, my housekeeping remark, please limit the number of your questions to a maximum of two per person. We are ready to go. Who is first, please?
We will take our first question, Kamran Hossain from RBC. Please go ahead.
Hi. Morning. My two questions are both around COVID provisions. The first one, I'm interested in your comments around potentially the EUR 200 million in life and health being potentially a little bit light. Is it safe to assume that actually P&C probably counterbalances this? You've had EUR 100 million so far of the EUR 300 million. Is it safe to assume that the EUR 500 million for the year probably looks safe, even if life and health losses are a little bit higher than EUR 200 million? The second question is, could you update on how the business interruption reserves have moved? I see that the overall level of IBNR has come down on the COVID reserves, but I assume this is contingency. Any updates on that would be very interesting. Thank you.
Kamran, thank you for the questions. First of all, indeed, I was commenting in a sense that potentially we might go above the EUR 200 million COVID claims in life health re. But I think with the similar probability, we will stay below the estimate for ERGO, where the estimate currently is around EUR 100 million net income effect from COVID-19. On the P&C side, I think it's pretty open at this stage. I think the EUR 100 million we had in Q1 is fully in line with the EUR 300 million guidance, and then it remains to be seen how the development going forward will be. Also depending on vaccination progress and how the number of cases will develop in our major markets, and also how quickly, for example, politicians will allow again to have large events happening, these kind of things.
All in all, if I look at life re, P&C re and ERGO all together, the COVID-19 impact, I think, is fully in line with our guidance. Your second question, I think the development of the reserves by line of business. I refer to the presentation we have been releasing today. There you see that for business interruption, it's about EUR 1 billion, what we have as a reserve. After Q1. I think what I didn't highlight in my introductory remarks, maybe I can do that now, is interestingly, our IBNR is still at 73%. So far, the uncertainty with respect to the 2020 losses was not resolved. It still continues to be there. To remind you, at the year-end, we had 78% IBNR, now it's 73%. The reduction has been rather minimal.
We have to live with that kind of uncertainty a little bit, also in the future. We expect more clarity towards year-end. Our reserve review is always in Q4, for sure we'll have a deeper look into that matter then in Q4. If you ask me, I'm a little bit surprised. I would have expected the number to go down quicker from 78% to 73%. Personally, I'm a little bit surprised how long it takes.
That's great. Thanks for the color.
Our next question from Andrew Ritchie from Autonomous. Please go ahead.
Hi there. Two questions, please. First of all, could you just give us a bit more color behind the nature of the growth, in April renewals. Exactly kind of what areas and what type of business did you grow in. Were you surprised that the risk-adjusted rate increase was similar to 01/01? I think most people have seen April lower than 01/01. I don't know if that's an effect of the risk adjustment or the nominal rate increase, but I wondered if you were surprised at that. Our second question, when I look at the normalized combined ratio components, the attritional loss ratio on a current year basis is sort of flattish year-on-year and actually up a bit on the full year 2020.
Obviously the expense ratio is meaningfully down. I'm just a bit surprised at those components. I would have thought more it was a blend of the two. Is there a mix issue there inflating the current year attritional loss, or is it just a booking issue, or maybe just some color around those components would be useful. Thanks.
Sure, Andrew. Well, thank you. First of all, the 17%, it's the usual areas, where we have renewals in 01/04. It's Asia, it's Japan, it's India, it's some global client exposures we have, which are affected. In these areas, it's pretty much across the board. It's property, it's casualty. Nothing really specific to highlight, I think. Regarding your question, why is it the same order of magnitude than in Q1? Honestly, I don't know. That's not really the way we look at it, because we just collect the figures and that's the outcome we were able to achieve. Obviously, we are pleased that it's the same numbers. 2.4%, which we have now overall for the full year, is the best number for probably 10 years or so.
This year continue to really develop in a very favorable way when it comes to renewals. Also volume-wise, I think the + 17% is really a clear signal, that we are able to expand our footprint both with existing clients, so extending our shares, but also have attractive offers for clients where we maybe have not been the number one reinsurer in the past. Extend our business model also into areas, where we currently have not had a proper share. Everything comes together, and you end up with these numbers. Yeah, as I said, we're very happy with the outcome, and I think it really was a promising then for the 01/07 renewal. Your second question on the combined ratio and the attritional losses. Maybe a couple of remarks on that topic.
First of all, mix, obviously, you mentioned it already, plays a role here. Secondly, as you know, we book conservatively and even more in the early quarters of the year. That's also to be mentioned. The renewals, they earn through over time only. In that respect, we can expect improvements going forward. Finally, also when we talk about price increases, you also have to be aware that price increase is something which you should not only look for in the loss ratio, but also in the cost ratio, because commission levels also are changing in hardening markets.
Therefore, when we are talking about, for example, the 2.4% price increase in April or in January this year, you will find an impact from that both in the commission ratio as well as in the loss ratio. It's all over the place, more or less. I think that it's pretty much of everything which plays a role here. That's probably already the explanation then. Yeah.
Okay, thanks.
Our next question from Ashik Musaddi from JP Morgan. Please go ahead.
Thank you and good morning. Just a couple of questions I have is, first of all, you mentioned that solvency ratio is about 217%, and we need to take off the debt redemption that you are planning about EUR 1 billion. It would be about, say, 210%. How should we think about share buyback? Because it is still below your top end of the range of 220%, if I'm not wrong. How do we think about some extra capital return for 2021? Is it the time that we rule it out?
The second is, the running yield is still declining. I think in this quarter it went down to 2.3%. Last year, same time was 2.5%, and last quarter was 2.33%, I guess. Running yield is still going down. Where do you see this running yield going in, say, 2021, 2022? Any thoughts on that would be helpful. I am just trying to get some color because interest rates in the U.S. have gone up. Does that have any support on this running yield not going down anymore? Thank you.
Yeah, Ashik. Thank you for your questions. First of all, yes, 217% is pretty much close to the upper end of our optimal range. The optimal range starts at 175%, so it's a broad range, and it's called optimal because we feel in an optimal situation, really across the whole range. This gives us a lot of financial flexibility and proves that our capitalization is very strong. On top of that, our Solvency II ratio as we show it to the regulator, is even higher because we have some transitional measures on top of that, and our calculation is conservative anyway. To summarize all of that, we have a lot of financial flexibility and our capital strength is unchanged or even slightly increased. Now comes the but. There's a lot of flexibility for capital management.
But in the current market environment, what we see is really very attractive growth opportunities. In 01/01 and 01/04, I think, we're really able to prove that deploying the capital makes a lot of sense in the current environment. You have to make use of the very good cycle, once the opportunities are there. This is now the time to grow, really. Therefore, if not, the situation would change drastically, which I do not expect at all. I think it's not probable at all that there will be another share buyback this year.
Okay. That's very clear. Thank you.
Other-
The next question from Thomas-
Oh, sorry, there was a second question. Sorry. The running yield. Indeed, the running yield is going down quarter- by- quarter. I think what we said last time was around 10 basis points. It obviously depends also on the turnover. How much trading there really is in the fixed income portfolio, so that the 10 basis points are sometimes 20. For example, you can see this quarter. Obviously, the higher interest rates are, the less pressure there is. Therefore, the current development we see in the United States and also in Europe to a lesser extent, I have to admit, is obviously very helpful in that regard.
Therefore, I wouldn't rule out that the negative attrition on the running yield will be less in the future if the development continues as it is. Yeah, I think the current guidance is 10 basis points negative attrition per year. That's the way we look at it right now. Obviously there are ups and downs and so we'll have to take it from there.
We will take our next question from Thomas Fossard from HSBC. Please go ahead.
Yes. Good morning. Two questions. The first one would be on the guidance of EUR 2.8 billion net income for the year. I think that in November and December investor day, you mentioned that EUR 2.8 billion was a stretch target. It seems to be a bit more relaxed. Could you mention if this is the case, apart from pricing, what is coming better than you initially expected? Maybe growth, maybe margins. That would be interesting. The second question would be relating to your loss ratio in P&C , the expense ratio in P&C re.
Which came out at 28.9% in Q1. Could you mention if there were any things specific, one-offs, or if we should expect this 28.9% to further go down since it looks like that you expect somewhat an acceleration in the premium growth in the coming quarter? Should we expect more leverage coming from your expense ratio in the coming quarters? Thank you.
Sure. The EUR 2.8 billion guidance, Thomas, do I sound more relaxed? I don't know. I think what I can confirm is clearly that the initial assumption was that we would have positive renewals throughout the year 2021. That was the assumption which we, I think, clearly spoke about already in December last year. I think the first two renewals this year, I think it's fair to say they have been even better than assumed. On the other hand, we had some claims also in the first year. COVID-19 is fully in line with guidance. The target was stretched from the very beginning. All in all, I think it's fair to say EUR 2.8 billion is still a somewhat stretched target. We are only one quarter down the road, three quarters still to go.
I think it's probably a little bit early to be more relaxed than only three or four months ago. Yes, indeed, the renewals have been very pleasing, and this is obviously supporting also the result. Expense ratio. I wouldn't say there are any one-offs in this quarter in the expense ratio. What you see is, of course, a development where we have favorable developments on the commission side, but also on the admin side. Both areas are developing quite well, but not one-offs in that regard. Relating to your questions for the future, obviously we are focusing on our expense base. It's important for us. Hardening markets continue to support, obviously, also commissions. We always have to be a little bit careful when looking at these ratios because they are very much business mix dependent.
If, for example, we would write a big quota share or something where commission's usually a little bit higher, then these ratios could look different next quarter, but still being favorable. Don't put too much importance to the exact amount in these numbers, because they may fluctuate quite significantly in reinsurance business, with the amount of different types of treaties you are writing. I can confirm that we are pleased with the development, and this lower cost ratio is also clearly a sign of the improved profitability we are seeing in P&C overall.
Excellent. Thanks.
Our next question from Vinit Malhotra from Mediobanca. Please go ahead.
Yes, good morning, sir. My two questions. One is just back on the normalized combined ratio, 95.4%. From some of the peers of reinsurance, we have heard this was additionally a very good quarter. I think you mentioned in another answer to Andrew's question that you do book conservatively in 1 Q. Could I just have a few more thoughts that, is this like a conservatively presented 95.5%, or was there anything else to note in terms of lower attritional that you could flag? In the same light, if I could just have one comment that if there are any disclosures you can provide on the risk solutions as well. I'm sorry if I missed it on the combined ratio normalized. Second question is just on the asset side.
There is a comment that you have increased exposure to emerging market, high yield corporate bonds in 1Q. Then you mentioned the reinvestment, 1.3% going to 1.5%. Could you give a context that, is this pickup in reinvestment yield coming from this higher exposure, or is the exposure increase not really material enough to make an influence on these numbers? Thank you.
Sure, Vinit. Thank you for the questions. First of all, 95.4%. Again, I think I can confirm operationally from the basic profitability of our business, this has been a very good quarter, and indeed, we book conservatively, especially also in early quarters of the year. Having then a reserve review in Q4. That's the usual process. If I would look a little bit deeper into what's going on, I mean, that's not something where I can give you a precise quantitative number or guidance or anything. The impression we had in the first quarter is that claims reporting was even a little bit less than what we would have expected. There we have to continue to observe the situation. If that continues, that would give probably additional support to the message that we have been booking conservatively.
It's probably a little bit early to tell anyway. Many signs are just signaling a good development. Let's put it that way. By the way, not only in the traditional reinsurance, but also in risk solutions. That's also what you ask. They are also operationally really promising results. We do not release combined ratio numbers on a quarterly basis for risk solutions. That's something we do once a year basis only. What I can confirm is that they are also making progress. Yeah, maybe that's the first question. The second one. Yeah, I think it's a mix. Obviously, we have been benefiting from higher reinvestment yields given the higher rates we saw across the board, and that's probably the major effect. On top of that, we indeed have invested a little bit more into riskier assets. We increased our equity exposure a little bit.
Also increased credit a little bit into the strengthening and improving markets in the first quarter. Not to a big extent. I wouldn't say that. Our strategy is to keep the investment risk stable, and especially, we are focusing always on the mix between the insurance risk and the investment risk, that we have a very good balance between the two. That's completely unchanged. Therefore, I would say it's rather marginal changes we're talking about here. All in all the conservativism or however you would call it, of our investment portfolio is fully unchanged.
All right. Thank you very much.
Our next question comes from Will Hardcastle from UBS. Please go ahead.
Morning, everyone. First question is a bit of a big picture question on leverage. I guess you're currently at 15.5%. The debt reduction would take you down to 13%. It's really low relative to peers. I guess, what would make you consider raising debt leverage from current levels? Would there be a growth opportunity angle to think about? Second, just regarding investments. You're a bit short asset duration, the liabilities. I guess just wanting to know, and that came down a bit in Q1. Just really wanted to know the rationale at this point and when we should expect you to move tighter. Perhaps, is there a capital charge for this level of mismatch, or is it not significant enough at this point? Thanks.
Yeah, sure. Will, thank you. First of all, leverage. The good news is we have a lot of flexibility. We are in no position at all that we need to raise any capital. As I've been highlighting the capital strength already before. At the same time, I also would never rule it out given where interest rates currently are. There might be opportunities for relatively low interest financing going forward. We'll look at that. Probably look at also our growth prospects, maybe next couple of renewals. Make up our mind, and then obviously there is room for higher level of leverage, and we would feel comfortable with that. At no time there's any pressure to do something. I think that's a very sweet spot we are in, and we can really act opportunistically going forward. On the asset duration.
I'll start with the last sentence of your questions. Yes, indeed, there is a capital requirement related to a duration mismatch. Interest rate risk is one of the dimensions we are looking when looking at our risk capital. Obviously, also credit risk comes with charges or equity risk. It's all charged by risk capital. Therefore, what we do is that we very diligently and very actively are looking for opportunities where we think the best earnings prospects are, given the capital we deploy in certain asset classes or certain types of investment risk. Into that rising interest rate environment, you're right. Our investment management unit, they somewhat opened up the mismatch position. Somewhat decreased the asset duration to maybe a little bit more benefit from the rising interest rates in the current environment.
It's probably a slight position we have been taking here in the current environment. Very similar to the increased equity position we are holding currently compared to Q4. The process and the way we look at it is exactly the same. It's always about how much capital do we deploy into a certain area, and what are the return expectations. That's the way it works.
We will now take our next question from Iain Pearce from Credit Suisse. Please go ahead.
Hi. Morning, everyone. Thanks for taking my questions. Firstly, on ERGO, I'm just wondering if you could provide a bit more color around the nature of the large man-made losses and seasonal impacts, just considering would you expect some of the frequency benefits to offset those. Then on life and health, I was wondering if it'd be possible to get a split of the losses between the U.S. and South Africa, and if there was any other regions that were impacted from sort of the excess mortality that we've seen in Q1. Thanks.
Yeah. ERGO. Well, first of all, I think the general remark on ERGO would be that usually you wouldn't expect a big volatility there, for a number of reasons. First of all, the type of business ERGO is writing, it's much less prone to large losses than what we do on the reinsurance side. On top of that, ERGO is also a reinsurance buyer to smoothen combined ratio. In this particular quarter, we had two effects. The first effect is that already on a cost base, manmade large losses were significantly above budget. The second effect was that the reinsurance cover ERGO had, a certain portion of that was intra-group. That's not always the case, but often the case. Also in that particular quarter, it was the case. Consolidation we do in our IFRS accounts takes out the intra-group benefit from reinsurance.
Therefore, the volatility you see in IFRS is a little bit bigger than it would be if you look at local GAAP figures for ERGO, due to the fact that we are not allowed to show the benefit from an intra-group reinsurance in the numbers of ERGO. This additionally increased the combined ratio this quarter a bit. Therefore, the impact overall of this volatility is bigger than what we saw in many quarters in the past. That was the reason why we did highlight the effect to that extent. Also to make sure that it's fully understood that ERGO is operationally doing fine and fully in line with the guidance. Could you remind me of the second question?
Yeah, just a split on the losses in the life and health re division.
Sure. Sorry. Yeah.
No problem.
Well, I cannot give you any detailed numbers. The losses in the United States are a number of times bigger than what we saw in South Africa. Many times bigger. If there were other geographies equally affected like the two, I think we would have mentioned them probably. In that regard, those are the two most important this quarter.
Okay, perfect. Thank you.
As there are no further questions at this time, I would like to turn the call back to your speakers for any additional or closing remarks.
Well, thanks a lot to everyone. Thanks for your questions. We are happy to follow up with you on the phone, of course, as always. Other than that, hope to see you soon all again. As the situation improves around COVID, hopefully also in person. Stay healthy and have a nice remaining day. See you soon. Bye-bye.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.