Munich Re CEO targets higher profits through P&C growth, cost cutting and ERGO

The reinsurer seems to already be making headway on that front. Its net profit in the first half of 2018 increased by 20.5 percent year-on-year to reach €1.56 billion.

“With a half-year profit of €1.6 billion, we are most certainly on track to reach our profit target of €2.1–2.5 billion for the year as a whole,” said CEO Joachim Wenning. “We also made progress with the implementation of our strategy: Munich Re is becoming more profitable, more digital and leaner.”

Gross written premiums in its life and health (L&H) reinsurance division shrank by 25.3 percent year on year in the first six months of 2018 to reach €5.17 billion. However, its P&C reinsurance unit expanded, its gross written premiums growing by 13.2 percent year on year to reach €9.94 billion over the period.

Growing P&C reinsurance

“In reinsurance, we are growing in the established markets, particularly in the US in the broker segment, but also with regional clients,” Wenning said during the presentation. “These are segments where we were underrepresented in the past compared to our global market share.”

In the July 1, 2018 renewals, Munich Re grew its premium volume by 42 percent year on year to about €3.3 billion. The expansion was driven by a large-volume treaty in Australia, and growth of reinsurance quota share business in the US. The reinsurer said it is also taking advantage of a moderate recovery of rates in P&C. In July, Munich Re achieved price increases of 0.9 percent overall, excluding the effect from higher interest rates.

“The reinsurance segment is also growing in emerging markets and is engaging in large transactions which, in some cases, reach 3-digit million volume level,” Wenning said. “These transactions are usually driven by capital relief deals and the need of clients to reduce earnings volatility.”

Its net profit in P&C reinsurance improved 7.9 percent year on year in the first half of 2018 to reach €1.22 billion. With a combined ratio of 95.5 percent in the first half of the year, the group said it believes to be on track to reach the envisaged figure of 97 percent for the whole year.

ERGO turnaround

While struggling for some time, Munich Re ‘s primary insurance unit ERGO has returned to profitability after restructuring measures and it now anticipates its contribution to the group’s earnings with grow.

ERGO has been  loss-making for many years. In 2016 ERGO recorded a net loss of €40 million after a loss of €227 million in 2015.

Since then, the situation has improved. In the first six months of 2018 ERGO recorded a net profit of €185 million, a slight reduction from the €195 million net profit in the same period a year ago. The combined ratio of the primary business remained roughly unchanged at 95.6 percent in the first half compared to 95.8 percent in the same period of 2017.

“Ergo has already carried out 75 percent of the planned cost and staff reduction,” Wenning said.

ERGO is expected to contribute more than €600 million in the long term to the annual net profit generated by its parent Munich Re.

“The ERGO international business is focussing on core markets and disinvesting non-core businesses such as Croatia or Ukraine,” Wenning said.

ERGO international boosted its net profit to €107 million in the first six months of 2018 after posting €22 million in the same period of 2017.

ERGO is also investing in digitalisation. The firm has, for example, launched an entirely digital provider called Nexible offering motor vehicle insurance.

“Ergo has landed an impressive coup with Nexible, winning 20,000 new clients with around 30,000 new contracts,” Wenning said. The 20,000 clients were acquired almost exclusively through comparison portal Check24 which cost considerable provisions and provided low margins, he admitted.

Nevertheless, Munich Re is planning to expand into Austria with the Nexible platform.

The digital upgrade

In order to prepare for the digital age, Munich Re is also growing its cooperation with insurtech startups. “Digital Partners is our answer for front-end platforms that need a partner for insurance product development and also underwriting and claims function capabilities,” Wenning said.

Digital Partners is currently working with 20 startups and around 10 additional ones are in the pipeline, Wenning noted. Digital Partners has, via these partnerships, generated a mid-two-digit-million-euro business volume, he said. “This is not much in relation to the Munich Re group, but for something that has been created two years ago, it is substantial and will grow further,” Wenning explained.

But Munich Re’s preparations for the digital era do not end there and extend also to the reinsurance business.

Munich Re has, for example, partnered with technology firms such as engineering and electronics company Bosch as well as with robots and automation solutions provider KUKA to develop new business models for the connected industry.

“We believe that the risks and needs of the manufacturing industry and their businesses will change in a connected world,” Wenning said.

“We as Munich Re are improving our capabilities for early loss detection, for accurate loss estimates in this changing environment so that we can move from loss compensation to loss prevention and towards output insurance, creating solutions for the manufacturing industry,” Wenning explained.

Reducing expenses

Another factor supposed to improve profitability will be lower costs.

“By 2020 the reinsurance business and the group functions at our headquarters will reduce cost by around 12 percent,” Wenning said.

Around 50 percent of the cost cutting will happen in Munich, meaning that around 900 jobs are going to be lost. Another 25 percent of the cost reduction or around 225 jobs, will be carried out through natural personnel fluctuation. The remaining 25 percent will be achieved through a voluntary redundancy programme which is ending in August.

While the voluntary redundancy programme was aiming at between 200 and 250 jobs, three weeks before the end of the programme the number has already reached 300 applications. Munich Re has booked €116 million as restructuring cost for the voluntary redundancy programme.

“We want to create a growing business run with lower resources,” Wenning said.