Battered insurer

Ergo Places Faith in Former Rival

MarkusRiess-HBThomasEinberger
Is Markus Riess, Ergo's new CEO, a knight in shining armor?
  • Why it matters

    Why it matters

    Mr. Riess had a proven track record at rival Allianz, and analysts hope he can rapidly improve lackluster profits and growth.

  • Facts

    Facts

    • Ergo’s image suffered greatly in the wake of a scandal involving sex trips to Budapest, as well as various accounting failures.
    • Despite stronger foreign operations, premium revenues in Germany have declined in several segments.
    • Ergo expects profits to decline by €400-500 million in 2015.
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    Audio

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Markus Riess developed his skills as a soccer striker at an early age. He grew up in Paderborn, a provincial city in the northwestern German region of Westphalia, where there isn’t much to do for children and adolescents. He and a few school friends built two soccer goals in a meadow, which became their soccer pitch.

“We played soccer outside after school for years,” Mr. Riess, now 49, said a few months ago at a match between FC Bayern and Mönchengladbach in Munich’s Allianz Arena. He was determined to win and usually tried harder than the other players.

A different kind of match began on September 16, but one where Mr. Riess will urgently need his skills as a top scorer. That’s when the former head of the German operations of insurance giant Allianz will move to Düsseldorf, where he has assumed the top spot at his previous direct competitor, Ergo Insurance.

Ergo has had a massive image problem since 2011, when it was revealed that the subsidiary of the world’s largest reinsurer, Munich Re, rewarded successful agents by sending them on sex trips to Budapest.

But that is far from its only problem. Ergo’s business is also doing poorly, especially now that ongoing low interest rates in Europe have led to a sharp decline in the lucrative life insurance business.

In addition, a rapidly accelerating trend toward digitization creates enormous challenges for sales. Unlike Allianz, the world’s market leader, Ergo took too long to react to changes in the market.

This is why the insurer, with €18 billion ($20.5 billion) in premium revenues, 28,000 salaried employees and 15,000 full-time agents, is is serious need of restructuring . Many believe that Mr. Riess, who is leaving Allianz’s German operations in solid condition, stands a good chance of bringing change to Ergo as well.

“If you look at what he’s done at Allianz Deutschland, it’s clear that Rieß will make important changes,” said JP Morgan analysts Michael Huttner and Rahul Parekh in London.

“Mr. Riess is now being anticipated like a savior.”

Ergo Manager

Mr. Riess needs a lot of money for the broad reorganization of Ergo, partly to be able to invest in new products. This is why the JP Morgan analysts expect Munich Re to strengthen its subsidiary Ergo with a €450 million injection of capital.

The fundamental reorganization of Ergo will be impossible with job cuts. Employee representatives are still in the dark over management’s intentions, but members of the works council in Düsseldorf, which holds sway over employee decisions at German companies, expect “prompt announcements” from Mr. Riess. There is talk among employees that many in the work force are very concerned about possible job cuts. There have already been several rounds of layoffs. In the most recent round, which is still underway, 1300 jobs will be eliminated by 2018, mainly in sales.

According to JP Morgan, there are three major construction sites that the new head of Ergo will have to close quickly. First, he has to create a new basis for the ailing life insurance business by introducing new products to the market. Ergo announced on Monday that it would no longer offer its classic guaranteed-rate policies as of 2016 — a risky move but one that was inevitable in the current interest rate environment.

Mr. Riess also needs to reorganize and slim down the sales department, which is inefficient in parts. In addition, he will likely expedite digitization by investing in technology and new products for web operations.

U.S. investment bank J.P. Morgan expects these major changes could bring rapid improvements to margins and growth.

Ergo posted a slight, 0.3-percent increase in income from premiums in 2014. However, the company would have shrunk without its overseas operations, which accounted for about 23 percent of the total.

In Germany, premium revenues declined by 3.9 percent in life insurance, 1.0 percent in damage and accident insurance and 0.6 percent in health insurance. Net profit was €620 million in 2014, but the 42-percent increase over 2013 was the result of a tax refund. The Düsseldorf-based company expects profits to decline by €400-500 million in 2015.

Mr. Riess’ predecessor, Torsten Oletzky, was hardly idle. For instance, he combined the sales operations of health insurer DKV, life insurer Hamburg-Mannheimer, property insurer Mannheim, travel insurer ERV and legal expense insurer DAS into two companies under the Ergo brand: one for health and life insurance, and the other one for all other types of insurance.

Many an Allianz employee is upset over the fact the company allowed Mr. Riess, with his know-how, to move to the competition.

But most agents continued selling only the products they were accustomed to, and “sales is essentially in bad shape,” said one insider. JP Morgan analysts Mr. Huttner and Mr. Parekh expect that Mr. Rieß will try to correct the problems by making changes to the commission structure.

Mr. Oletzky’s other ideas were well-intentioned but not very effective. In the life insurance business, he launched two new products with reduced guarantees and without a guaranteed interest rate. He introduced a rate check for DKV that allows the customer to calculate his premiums online.

But all of this is little more than half-hearted patchwork compared to what the competition is doing. For instance, Mr. Riess’ old employer, Allianz, brought an entire series of new life insurance products onto the market in the same period, and invested €180 million in digitization.

“Most of the individual measures made sense on their own,” said one person who has been familiar with Ergo’s inner workings for years. “But it wasn’t a convincing total concept, and Mr. Oletzky didn’t consistently see it through.” In light of the many changes and lack of resounding successes, the team is exhausted and worn out.

“Mr. Riess is now being anticipated like a savior,” said a top Ergo manager. This, despite the painful adjustments he will have to make.

Officially, everyone involved at Ergo and parent Munich Re has remained silent on what Mr. Riess will tackle first in Düsseldorf. But insiders report that the new boss has been refining concepts all summer long. Mr. Riess has already bough a house in Düsseldorf. Even though his children will remain in school in Munich for the time being, he apparently wanted to live near company headquarters.

His previous work with Ergo’s biggest competitor offers clues to Mr. Riess’s possible plans.

 

Ergo Is Shrinking-01

 

It was a sunny fall morning in 2014 in Mr. Riess’s office in Munich. With a doctorate in economics, the then-head of Allianz Deutschland had just told employees about an automobile policy that would only be sold online. Now he was passionately explaining why he intended to speed up the switch to digital sales.

“We were unable to provide optimal service to some customers in the past,” he conceded, referring to younger people with moderate income who spend a lot of time on the Internet. “We need to offer them something good now,” he said. The online car insurance product was to be quickly followed by online health and life insurance products.

Even though there were technical glitches here and there, the fast pace and technical expertise with which Mr. Riess promoted digitization provide a sense of what is in store for Ergo. Many an Allianz employee is upset over the fact the company allowed Mr. Riess, with his know-how, to move to the competition.

Before digitization, he took on the company itself. After taking the helm as head of Allianz Deutschland in 2010, he began whipping the battered property insurance business into shape – with resounding success.

 

Mr. Riess is still young and apparently has greater ambitions than merely to serve as chief executive of Ergo.

By 2014, the German operations of Allianz had increased premium revenues by €500 million to €9.5 billion. Mr. Riess managed to more than double operating profits to €1.3 billion.

He brought down the share of premium revenues attributable to claim settlements and costs from 100.8 to 91.5 percent, partly through consistent cost management in administration and a ruthless simplification of claim settlement procedures. About 400 jobs were lost as a result. Mr. Riess spent two weeks every summer traveling to branch offices to monitor progress.

Mr. Riess, who is considered extremely ambitious, now wants to see quick results in attacking at least one of Ergo’s problem areas. The mobilization of sales will likely be the first item on his agenda.

“With the help of joint ventures, with banks, for example, and a more consistent dovetailing of the individual businesses, results could be achieved relatively soon,” said an Ergo insider.

In early August, it was already apparent that sales would be seeing major changes. That was when Ergo announced that its head of sales, Rolf Wiswesser, was leaving the company. For the time being, the job will be handled by a man who headed life insurance sales at Allianz in the early 1990s: Markus Riess himself.

The business suffers from the fact that Ergo, like all insurance companies, had committed itself to guaranteed interest on older policies of up to 4 percent, which has proved to be almost impossible to earn at the current, extremely low levels of interest rates. This is where the new head of Ergo will likely try to offset the problem with other products that provide no guaranteed returns.

Mr. Riess plans to use his charisma to gain workforce support for his goals. With his empathetic manner, the new Ergo CEO, who still occasionally plays soccer with his sons, is adept at winning people over.

“Oletzky thinks solely with his head, while Riess also relies on gut feelings, which makes him more of a modern manager,” said someone who knows both men.

But one shouldn’t be deceived by Mr. Riess, who another associate described as uncompromising and a “man with two faces” – sometimes a chummy companion and at other times an ice-cold hatchet man. He doesn’t shy away from tough decisions, even when it comes to his personal advancement. He is still young and apparently has greater ambitions than merely to serve as chief executive of Ergo.

In Munich, Mr. Riess, who returned to Allianz after a stint with the McKinsey consulting firm in 1997, was seen as a possible successor to chief executive Michael Diekmann. But the job went earlier this year to Oliver Bäte instead, partly as a result of Mr. Diekmann’s insistence.

Now Mr. Riess, unlike predecessor Oletzky, will also be a member of the Munich Re management board. Its chief executive, Nikolaus von Bomhard, turns 60 next year, and his contract expires in late 2016. But Mr. Riess is unlikely to move to the top spot at Munich Re that quickly.

“Instead of taking the second step before the first one, he will first show that he can turn around Ergo,” said someone who had worked with him.

Conveniently, Mr. Bomhard favors one-year contract extensions for the future.

 

This article first appeared in Handelsblatt’s sister publication, the weekly business magazine WirtschaftsWoche. Matthias Kamp is a correspondent based in Düsseldorf. To contact the author: matthias.kamp@wiwo.de 

 

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