Talanx AG (TLX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Talanx Analyst Call 6-month 2021 Results Conference Call. I would now like to turn the conference over to Carsten Werle, Head of IR. Please go ahead.

Yes. Thank you, Stuart. Good morning from Hannover. This is the Talanx results call for the first half of the year. And I'm here together with Jan Wicke, our CFO, who will take you, as you know it, through the results. After this presentation, Jan will be happy to answer your questions. [Operator Instructions] I would also like to hint you to all the documents that you find, of course, on our web page, including the financial data supplement that we published for the second time this quarter. And with these introductory remarks, I'd like to hand over to Jan. The floor is yours.

Yes. Well, thank you, Carsten, and good morning, everyone, and thanks for dialing in. We hope you are all in good health and beginning to get used to being halfway out of the pandemic and halfway back into a normal life for all of us. Let me start with a summary on how our group performed in the first 6 months. If you could turn to Page 2, please. And first of all, I really have to state, I'm really happy to present you such good results, good results in terms of both top line and bottom line. Top line, we are able to -- we were able to grow our business, measured in gross written premiums, by more than 9% in the first half of the year. And we -- and that is -- and there's growth in all segments. And if you would adjust it for currency changes, we could even report a 13% growth rate. Second, the technical performance of our business is strong. The combined ratio is below 96% in the first 6 months, whereas previous year was heavily affected by corona claims. If we adjust for corona, also, we see an improvement in the combined ratio, reflecting the strong technical performance in the group. This then translates to a group net income of EUR 546 million for the first half year, 44% out of the Primary Insurance group. And in terms of our key performance indicator, the return on equity is above 10%, 10.5%, as you can see on the page, and thereby clearly above our threshold of 8%. The solvency ratio is very robust, 210%. And so the question is -- there is a question about the outlook going forward. And with regard to the outlook, we have to take into account that we had a large loss event, flooding event in Germany called [indiscernible], which will impact our net income by roughly EUR 150 million, and we have to take that into account. But even taking that into account and taking some other large claims also into account, we expect the group net income now to be in between EUR 900 million and EUR 950 million. So that's a good news. Let me now run you a little bit through the highlights of our 6-month figures, if we go to Page 4. And first of all, the top line growth, where does it come from? The top line growth is derived from P&C Reinsurance with more than EUR 1 billion and Industrial Lines and Retail International, but also Retail Germany is growing. What you can see here on the page is that the operating result is highly affected by the swing in the technical result P&C. You see we have EUR 481 million positive result whereas the last year was minus EUR 160 million. And this is more than EUR 500 million or more than EUR 600 million swing in the technical results, what you can see here, which has resulted in such a good overall bottom line result going forward. So let's now go a little bit in -- on Page 6 -- to Page 6, where we have tried to give you something like a normalized result for the first half year in -- by the way of excluding extraordinary items. One is still corona. So corona has affected negatively the first half year by EUR 72 million in the bottom line, EUR 222 million in the EBIT. And this was due to corona claims of EUR 278 million and offsetting effect that -- where we account for the lower claims frequencies in lines like motor insurance and so on, which are related to corona. And all in all, this results then in EUR 222 million negative EBIT contribution due to corona. Then our colleagues from Hannover Re have already reported that due to a restructuring of a reinsurance contract in North America, there was a one-off of EUR 129 million positive in the EBIT, which has to be excluded when accounting for our so-called normalized results. What do you have to keep in mind when seeing now EUR 566 million as a normalized result for the first half year? Please keep in mind that, in particular in Retail Germany, we have decided to realize extraordinary gains already during the first half of the year in order to get the contribution to ZZR done. Second, please keep in mind that the ordinary investment income is a little bit overstated in the first half of the year as we had unusual high returns from our private equity book which, unfortunately, will not repeat every quarter, but which has helped us to show a little bit higher figure during the first half of the year. So if we now would go into more detail with regards to the corona claims, I would like to draw your attention to 3 figures on this page. First of all, where are the claims coming from? The claims are coming from excess mortality in Life/Health Reinsurance, which accounted for EUR 263 million during the first half of the year. In the first quarter, these claims were coming from the United States and it was more or less a result from -- the [ death toll ] of Donald Trump's corona policy which had to be paid. In the second quarter, there's less mortality in the United States, so the vaccination campaign of Joe Biden was successful. But there are new claims which are related to South Africa and Latin America, which we see here [indiscernible]. Also worth noting is that the EUR 12 million negative in Retail International as corona plans that EUR 11 million out of this EUR 12 million are related also to excess mortality in Poland and in Latin America. And so all in all, corona is now seen in excess mortality. And if we ask our researchers on pandemic, we're doing research on pandemic situations, then we can see a deep correlation -- a clear correlation between vaccination campaigns and vaccination success in the countries, vaccination quotas and death. So everybody who's now promoting more vaccinations in the population is pretty right, he would find -- we can see that in our figures, too. On the positive side of corona, we have also offsetting effects. Lower claims frequency, which are, in particular, beneficial for Retail Germany and Retail International, as you can see here. And what we calculate here is that we take normal claims frequency and adjust our figures for that one. And then the positive effect overall would be EUR 88 million during the first half of the year. So if we now add up those figures and the overall negative impact, not -- in the EBIT, is EUR 222 million and in the net income, EUR 72 million. If we now go to Page #10. There, you have an overview on the combined ratios of the group. So overall, the combined ratio of the group is 95.9%, which is clearly below last year's figures, which were heavily impacted by corona clients' business interruption, credit protection and event protection insurance, which were the majority of the corona claims. If we were to exclude corona, then there is an improvement from 97.4% to 96.5% during the first half of the year which clearly shows that the improvement of the technical performance is on track and that we see here a positive contribution from rate increases which we had, in particular, Industrial Lines and in Reinsurance during the course of the year. What -- well, with regard to Reinsurance and this very good combined ratio of 96%, I think the colleagues of Hannover Re have explained that already in detail, I do not have to explain that further. With regard to Retail International, there, we can see that best performer in South America is Chile currently with 94.5%. In Europe, it was a little bit difficult given that we had some extraordinary effects in Italy. So I would say WARTA with 92.7 is performing best within our European countries. So let's now go to a little bit to the segment and explain there in more detail what was going on. So first, with regard to Industrial Lines, we see strong growth. And this strong growth is derived from our growth initiative, HGS, HDI Global Specialty with really a very strong growth, but also from growth in liability and property lines. So second, the technical performance is there is a further improvement. In the medium term, we have adjusted our target, that we want to achieve a 95% combined ratio medium term. So year-on-year, an improvement by 1% going forward. So 98% should be achieved this year and should be better than next year and so on. But this is just a rule of thumb. Please keep in mind Industrial Lines business by nature has a certain kind of volatility. And so therefore, by rule of thumb, 1 percentage point per year. The investment income is also worth noting because here we have this impact from the private equity book. So for the whole year, we expect slightly lower investment return also in this segment. We then go to Retail Germany. Maybe we can go already to the next page and start with the P&C in Retail Germany. What we can see in P&C is the growth again, and this growth is derived from the SME growth initiative where we see an 11% increase in gross written premium in the small- and medium-sized enterprises and self-employed and professionals. And we are very proud of that because this growth shows that we have earned the trust of the customers and the brokers, in particular, due to our claims handling during the corona crisis with this business closure insurances where we paid. And now we were rewarded with additional contracts. And so we are very positive and happy about this development. With regards to the overall very, very good results, we have decided for a balance sheet strengthening in the segment Retail Germany and both in P&C and in Life. And if you turn to the next page on Life there, you can see that this balance sheet strengthening is also reflected in an increased Solvency II ratio for the German Life entity, which now stands without transitional measures at 224%, which is a very good result and which underlines one of the targets of the KuRS program, which was to derisk German Life and to bring that into good shape. And the other targets with regard to the KuRS program, achieving an EBIT above EUR 240 million and delivering on a combined ratio below 95%. We really want to confirm both targets or the division is also convinced that they will outperform on those targets. So very positive overall development here. If we then go to Retail International, there we see a strong growth on very healthy technical results. We have 11% growth. I have to admit, if it comes to growth in Life, there's just a rebound from previous year during corona. Due to the lockdown, the Life gross written premium was heavily affected. This was just a rebound effect. But in non life, we are growing and it's worth mentioning the fantastic development at WARTA, but also that we have some positive effect by Amissima integration, which was accounted for us since April also in the figure. But overall, strong growth in both segments. The technical result is also very good. The combined ratio stands at 92.8%, which is obviously also a little bit supported by corona effect. But I think Retail International has a strong track record with regard to technical results. And this is also reflected. But it is worth mentioning that we observed already some effects going forward in claims inflation at Retail International and in normalizing the claims frequency. So you should not have in your spreadsheet 92.8% forever in the combined ratio, given that there is claim frequency increasing and claims inflation taking part. Let's now turn to the Reinsurance business. In reinsurance, I think the colleagues of Hannover Re already have explained that in all details, but just mentioning 2 things. One is the gross figure 10%. And second, if you see the development of the operating result, which is really, really strong. And -- and we are happy to see such a strong profitable growth in Hannover Re. So let's now come to the investment income, which is on Page 19. The ordinary investment income is up 10%, and this is partly driven by significant private equity gains, but also driven by an increased asset under management. Second, we have a strong increase in the extraordinary investment income. And this, I really want to draw your attention to that one, we already did that in the first quarter, it's driven that we have EUR 400 million extra, extraordinary gains in German Life in order to build up the annual ZZR. So this is done now so -- for the whole year. So there won't be so much extraordinary gains going forward in that segment. And therefore, please adjust that in your earnings spreadsheets going forward in order to avoid wrong expectations. So the net return on investment, which you see here in the first half year is 3.3%. For the whole year, we expect it to be around 2.7%. So yes. If you now go now to the next page on the shareholders' equity. We have paid our dividend in the first half year. So the growth is rather small with regard to the shareholders' equity. If we then go on the next page, to the solvency ratio. Current solvency ratio stands at 210%. How can I describe the development from March to now? We have an increase in [ both ] and basic own funds but also in the SCR given that we are growing pretty fast. And this leads to the small reduction, but on a very, very satisfying level, so that I don't have any concerns with regard to solvency. Let's now come to the outlook. The outlook is obviously heavily impacted by the flooding event in Germany. The German Insurance Association, GDV, estimates in between EUR 4.5 billion and EUR 5.5 billion insured loss. Our group will have to cover a gross claims volume of clearly above EUR 600 million, which will then translate, due to our own reinsurance, to net claims slightly above EUR 300 million. And even if the gross claims will amount to EUR 1 billion or EUR 900 million, the net claims will remain at that level as we have a very well thought through reinsurance coverage for the group, for both Hannover Re as well as for the Talanx Primary Group. And this EUR 300 million net claims then translates into a net income effect of EUR 150 million, approximately EUR 150 million. And this is due to the fact that in between EUR 200 million to EUR 250 million of the net claims, Hannover Re has reported EUR 200 million to EUR 250 million net claims, which translates then here in this chart into EUR 100 million to EUR 125 million net claims accounted for minorities. So what you see here is this net claims, EUR 300 million, is also net of minorities. And then we have some tax effects also to be taken into account. So that is then to be translated in a net income effect of roughly EUR 150 million, what we expect currently. Next to that, we had some large losses also. I would just want to highlight that the riots in South Africa which are also taken into account when we have adjusted our outlook. Where did we adjust our outlook due to the very strong first half year, we have adjusted the group net income to EUR 900 million up to EUR 950 million. We expect, therefore, the return on equity in between 8.5% and 9%. Obviously, like always, there is this caveat that this takes into account that large loss will be within our budget and that we don't have turmoils at the capital markets or currency markets going forward. So let me summarize -- let me summarize. We had a very strong first half year. We are improving in terms of growth, with a growth rate above 9%. I think we are also clearly outperforming our peers, and we are proud on that one. And we are proud that we have improved our technical performance also to combined ratio below 96%. So all in all, the management is very confident that we can achieve group net income in between EUR 900 million and EUR 950 million to the end year and show some nice growth figures also. Well, now I'm open to take your questions.

[Operator Instructions] The first telephone question today is from the line of Thomas Fossard from HSBC.

Jan, hope you're doing well. A couple of questions for me. The first one would be on the competitive landscape for motor in Germany. Could you update us some of the trends, having in mind that actually you or the market benefited from significant claims frequency. And I was interested to better understand if this was starting to be recycled into marketing and commercial campaigns from some of your competitors on the ground. The second question will be related to the various balance sheet strengthening measures that you have taken in Q2. We know that actually you're willing to increase your volatility buffers in the Industrial Lines and maybe also in other lines. Maybe you could update us on where you stand currently on your journey. And actually, if you'd be close to being over by the end of the year, given sounds like you are in a kind of acceleration mode on a quarterly basis. And maybe the third and last question will be relating to your reinsurance protection, probably more on the primary side. Can you shed some light or remind us how you covered for -- how you protect it for such a type of event in Europe? And what is your retention?

Yes. So let's start with the competitive landscape in motor insurance Germany. Obviously, competition is increasing due to very benign claims frequency due to the lockdown measures here in Germany. Some competitors have given premium refunds in order to -- which has increased, obviously, the level of competition. So -- but overall, I have the feeling up so far, and it's very early to judge on that, but because the renewal will start in October, so far that the market is rather disciplined. But this may change until October. I think now everybody is making up his plans how to position the company in the renewal. And maybe your question is a little bit early. So up so far. Yes, there is more competition. But overall, from my point of view, it's still disciplined. Second. The various balance sheet strengthening measures, the update. We will give -- with regard to the volatility buffers, we will give an update on our reserving policy at the Capital Markets Day. And this will not only contain what we have done so far, but we also will show what will be the reserving policy going forward. And I'm very confident that we can give you a very good comfort level on where we are standing and what's going on. And you wanted to know how satisfied I am so far with the progress which has been made, I'm very satisfied with the progress which has been made and we will show you on that one. And maybe -- yes, but let's wait until the Capital Markets Day. We will release then some more information during the quarter. With regard to balance sheet strengthening, at the Capital Markets Day, obviously, the main focus is on P&C reserves, what we've done also during the course of this quarter. We have, during the course of this quarter, we have also strengthened the Life balance sheet in Retail Germany. It's in order to get the KuRS program with regard to the risk reduction profile a step further. And so we show now very strong balance sheet also in our Life entities there. The third question was with regard to the reinsurance, which we have in place for our primary insurance. So -- and what are the net -- and what you can see in the presentation, where the overall net claims, they already have the reinsurance protection embedded because it's after reinsurance. And so what is on our own results in Industrial Lines, it will be in between EUR 60 million and EUR 80 million; in Retail Germany, in between EUR 20 million and 30 million. And it's of course many lines which are affected by the floods. And yes, what is else? Well, what we do in the group in terms of processes, we have within the Talanx AG reinsurance company. And there, we have [ short-term ] cover for the group as a whole. And this leads to this overall very good net claims situation given that the gross claims are so much higher. I hope this answers your question. Thomas, okay?

Thomas, we can't hear you anymore. We hope your questions are answered. Thank you very much.

[Operator Instructions]

If you're collecting questions, Stuart, we have some questions via the web. So I would continue. We have questions from Michael Huttner of Berenberg. Michael asked for the Retail Germany result in Q2, which look a bit weaker, EUR 20 million EBIT versus EUR 137 million in Q1. How much should we adjust for additions to reserves and prepayment of the ZZR in these figures? Second question, also the 224% Solvency II ratio for the German Life unit is very strong, up from 169% at full year 2020. What does this mean for potential cash dividends from Retail Germany Life? Third question. The one risk is that the Texas freeze saw latest reserving of EUR 58 million in Q2. Could you say if this could be a risk for large losses going forward? Would you look to adjust your large loss budget to reflect this extra risk? [indiscernible]. HDI Global, the fourth one. HDI Global is growing very strongly, top line. When will we see the benefit in terms of EBIT, please? And fifth question, how much could inflation reduce your excess reserves going forward?