When Markus Riess joined Germany’s second-largest insurer last fall, employees should have known what was coming. The new boss of ERGO brought with him a reputation as a tough corporate restructurer.
But the fresh round of job cuts presented Wednesday by the 50-year-old chief executive was more brutal than expected.
“We in the works council are shocked. The extent of the job cuts is severe and will plunge many of those affected into major hardship,” said Marco Nörenberg, a member of the non-executive supervisory board and head of the company’s works council, which represents employees.
“This comes despite the fact that we have already gone through repeated restructuring programs over the last years,” Mr. Nörenberg told Handelsblatt, signaling that the works council is likely to oppose at least some of the plans.
ERGO, a subsidiary of the world’s largest re-insurer Munich Re, announced it would cut nearly one in seven jobs in Germany as part of a drastic restructuring over the next four years. By the end of 2020, some 1,835 jobs out of 14,320 will be cut by the loss-making firm.
“We have to get leaner and more digital,” Mr. Riess said Wednesday in presenting the new plans. Cutting jobs in order to return to profitability was “sadly unavoidable."
I have my doubts that such radical job reductions will lead to growth. The program contains some light and much, much darkness. Marco Nörenberg, Head of ERGO Works Council
The fact that something had to happen at ERGO is borne out by the numbers. A sort of insurance conglomerate, created out of a mish-mash of German insurance firms, ERGO has been the problem child of Munich Re for a number of years.
The company was forced to write down €450 million and contributed a more than €200-million net loss overall to its parent company in 2015. The new plans of Mr. Riess are aimed at saving some €540 million per year by 2020. He promised annual profits of more than €500 million starting in 2021.
For analysts, the restructuring is sorely needed. Christoph Schmitt of the rating agency Fitch said they expect “good progress in the coming years” under the stewardship of Mr. Riess, even if it may take a few years for the new chief executive to show results.
Germany’s insurers in general face a tough environment. Record low interest rates across the euro zone have made life extremely difficult, especially for life insurers that are popular in Germany and offered high guaranteed pay-out rates in the past that can no longer be matched by yields on market investments.
But ERGO’s problems are also of its own making. Both its domestic and its international market have struggled. Its products are widely considered too expensive and antiquated by many experts.
A long-running scandal over a sex orgy organized nine years ago for employees of subsidiary Hamburg Mannheimer in Budapest has also continued to rock the company. Details of the trip first began to emerge in 2011, and a court case over the scandal is only set to begin in July.
Mr. Riess, a former consultant with McKinsey, is convinced that new measures are necessary to rebuild the company and its image.
The combination of ERGO’s various subsidiaries had not been handled with enough vigor in the past few years. His plans now involve combining insurance agencies and bringing together IT services. Some 18 decentralized branches across Germany will be closed, which will probably account for the majority of the job cuts.
“We have numerous operational organizations today and on the whole have an administration full of laborious processes,” Mr. Riess said. “This has raised administration costs. They lie well above the market average at ERGO,” he added.
The insurer will even pull completely out of classic life insurance. Mr. Riess said ERGO will no longer offer new customers life insurance policies with guaranteed rates. Some 6.5 million old policies will be shifted into a special subsidiary managed more cheaply by some 1,000 employees.
All this will cost money before it earns ERGO money. Mr. Riess wants to invest some €1 billion, about half of which will go towards modernizing IT systems. Some of the cash is also dedicated to turning the company into a greater digital player on the market.
Munich Re Chief Executive Nikolaus von Bomhard, who is responsible for bringing Mr. Riess on board from rival insurer Allianz, broadly welcomed the plans and said he expects ERGO to start turning a profit already in 2017.
The restructuring would return ERGO “to a strong profit generator of Munich RE,” Mr. von Bomhard said Wednesday.
But ERGO’s employee representatives, who have the potential in Germany to block key strategic decisions at German companies, remain unconvinced and fear the job cuts will sap the company of its strength.
“I have my doubts that such radical job reductions will lead to growth,” Mr. Nörenberg of the works council told Handelsblatt. “The program contains some light and much, much darkness.”
“Now the negotiations begin. We on the employee side are not going to accept all points in the program,” he warned. While ERGO has gone through a number of structural changes over the last few years, the latest program is “the most extensive restructuring that we have ever gone through,” he added.
Kerstin Leitel covers insurance for Handelsblatt and is based in Munich. To contact the author: [email protected]