Investors want to see how innovations translate into figures

Wenning: Let’s begin with the question of our excess capital, a recurring topic in meetings with our Investor Relations team. We increasingly hear “return a bit more capital to the shareholders, or do so a bit faster”. Let’s say we did that, how would it affect the share price?

Engels: That is a good question.

Wenning: My argument is that it would have no influence at all. Perhaps the share price would improve in the short term, but it would soon come back down again - what do you think?

Engels: At the moment, Munich Re is addressing its revenue flows by paying out approximately 100 percent of its profits each year. As shown by the solvency ratio, Munich Re’s capitalisation is well above the upper threshold of 220 percent ... and yet you remain at a cruising altitude above the target range. I think that at least one of two questions needs answering: Why fly so high, or why is the target range defined as it is?
 
Wenning: Yes, I understand. But do you think that the share price would benefit if we dropped down to the 220 percent mark?

Engels: It is hard to say, but at the moment Munich Re is not getting any credit from the market for free options like capital flexibility and low debt. So yes, I do think that a reduction would be good for the share price. That said, security is Munich Re’s most valuable commodity. Capital is a strength that must definitely be preserved.

Wenning: What would I have to do to make a material change to your valuation of the Munich Re share?

Engels: Quite simple: Increase profits. Munich Re has not grown in recent years. Owing to the reinsurance markets, profits were stable to marginally down – ERGO also had a negative impact. Now the market wants to know: “Where will profits bottom out and how will things develop?” It is a matter of getting manageable risks into the portfolio – ones that provide returns – and whether that happens in reinsurance or with PIRI or wherever is secondary. The majority of earnings should still come from insurance business and not from adventurous investments. That is what investors like: it is why they put their money into Munich Re and leave it there long term. Pair that with a high dividend and you have an attractive overall package.

Wenning: And how does the capital market view innovations at Munich Re?

Engels: Munich Re has set out a range of options, but we cannot yet put these into figures. For this one needs imagination, and this is indeed discussed on the market, but innovation cannot yet be reflected reliably in our models. And that is why we investors must now look to the next few years, and see how growth plans take effect and innovations translate into figures. What we can say from today’s perspective is that you have a good history of partnering with young businesses, such as Admiral, which were then successful in their market.

On the one hand, you have to attack yourself through evolution; on the other hand you need to be quicker than the competition in tapping into profitable fields of business. How do you go about this?

Wenning: We concentrate on the value drivers in our business and on how we can reinforce these through digitalisation. In doing so, we have to find differentiated answers. What do I mean with value drivers: Operational excellence and efficiency are crucial in primary insurance. Technology, e.g. artificial intelligence and automation, can help make operations even more cost-effective and competitive. In marketing, we need to use digital means to make the client interface more attractive and interactive, and to tailor products to clients better and quicker.

Engels: What are you targeting in reinsurance?

Wenning: Here, the underwriter’s risk assessment ability has the greatest leverage. We use technology to further bolster our risk intelligence with new sources of data and the latest information. The ease with which data is processed is on the up. This helps us to develop better solutions for customers, e.g. the development of digital services which enable clients and reinsurers to use this data. Data and technology are the common basis of primary insurance and reinsurance and we feel we have a very solid footing in this area as a Group.

Engels: In underwriting business you benefit from your specialist knowledge, and your clients appreciate the service you provide. Could you imagine charging fees for this knowledge in future, and detaching it from the underwriting process?

Wenning: Yes we can imagine doing so – here and there, not across the board yet, we are already running these fee models. There will never be a complete shift in the business model because risks in general are on the rise. The population is growing, economic activity is increasing, complexity and integration are snowballing – and insurance coverage is sought for the associated risks. Service models are supplementary models.

Wenning: Which part of our Group do you find the most interesting?

Engels: I think Hartford Steam Boiler is often described on the market as the optimum acquisition, and one can certainly also say you were in the right place at the right time and acquired the right asset, also because of its expertise and great promise for the future …. That is definitely something the market appreciates.

Wenning: What does the capital market find less attractive? 

Engels: Life reinsurance is marked down by the capital market simply because we generally have difficulties really understanding its value generation. That has an awful lot to do with asymmetrical accounting and the resulting volatilities. The main indicators also make valuation of the business tricky for us – Solvency II values, embedded values, IFRS profits.

Wenning: Would you go so far as to say: “It would be better if you didn’t do these things. Anything you can’t explain will never be rewarded sufficiently.”

Engels: No, and to answer your question in a nutshell: I think life reinsurance makes sense within Munich Re and is a compensating factor which brings about further risk-bearing capacity.

Wenning: What is your take on ERGO? 

Engels: In the past ERGO tended to be valued on the low side. As an investor, one must now see what the future brings. Could it perhaps be concluded from Marcus Rieß’ seat on the board at Munich Re that the importance of ERGO within the Group has risen?

Wenning: Strategically, ERGO has always been a valuable  part of our Group portfolio. In the course of digitally transforming the Group, this value becomes more and more visible within the Group. There is intensive cooperation between both parts of our Group and that is gratifying.