Talanx AG (TLX) Earnings Call Transcript & Summary

Good morning from Hannover to everyone. This is Talanx [indiscernible] for the first 9 nine months and the third quarter of 2022. I'm here together with my CFO, Jan Wicke, who will take you through the results presentation. As Stuart already said, we will do a Q&A after the presentation. And as usual, you'll find all the documents, including the financial data supplement on our IR section at the webcast. And now I'm happy to hand over to Jan. Jan, the floor is yours.

Thank you, Bernd, and good morning also from my side, and thank you for attending this early time our earnings call. Before I go into the details, here's a quick summary of what we think are the key messages from our results after 9 months. First of all, we had strong growth Second, profit is growing too. And in particular, the profit contribution for Industrial Lines in the primary insurance is growing. And finally, despite the heavy large loss burden which we had to deal with in the first 9 months, we confirm our earnings guidance, so we expect a result in between EUR 1.050 billion to EUR 1.150 billion for the full year. And we are very confident to deliver on that one because we are with the majority of our business, which is Reinsurance and Industrial Lines and markets, which are very hard where we can earn nice margins, and this hard market momentum is what we also expect for our numbers. If we now go into further detail, let's start with the top line. So the top line is growing 18.5% during the course of the first 9 months. Or if you see it in absolute numbers, we are growing EUR 6.6 billion or EUR 6.5 billion if we round exactly during the first 9 months on a group level. If we adjust this growth, which is partly driven by currency developments for currency -- if we adjusted for currency, the gross written premium is still up by 14%, which is pretty strong. And we have double-digit growth in all primary P&C segments and a lower growth in the live part of the primary insurance. We are now expecting gross written premiums to be above EUR 50 billion for the full year 2022. And therefore, we have increased also our growth outlook. As you know, we do our growth outlook in a currency adjusted growth rate to be 10% or above 10% for the full year 2022, which is still pretty conservative if you look at the numbers. But it also depends on the development, in particular, the euro-U.S. dollar development. Not only the top line but also the bottom line is growing. It's growing by 8.6%, which is round 9%, from EUR 723 million to EUR 785 million after the third quarter. And this is despite the fact that we had a huge large loss burden, which I will explain in more detail, which accounts for roughly 2 percentage point of our combined ratio, which has increased to 98.6%. Given that we are here in the headquarters, we at least want to draw your attention once in the presentation that also the net income of the corporate operation was improved. And just to remind everyone, contribution of corporate operation is no accounting magic, but real business given that we have a captive reinsurer for the group at the top at Talanx AG. And the operating performance is obviously related to the primary insurance activities. However, we do not report it as a part of the primary insurance activities which, by definition, exclude corporate operations and consolidation. And finally, now let's come back to the more important messages. We confirm our earnings outlook to EUR 1.050 billion to EUR 1.150 billion for the full year. The profitability is up from 9.2% return on equity to a return on equity of 11.5%. As you're already aware of, there are 2 factors, which are driving this improvement: one factor is really that we have operational improvement. Even if we were to adjust for the OCI development, we would see a return on equity close to 10%. But second is also the accounting mismatch. As you all know, assets under IFRS 4 -- sorry, 9 are mark-to-market, whereas liability have a very strong, very stable and strict and inflexible assessment. So where interest rates are not taken into account adequately and therefore, if there is an interest rate increase. As a result, you have less assets, but unfortunately, liabilities do not reflect the interest increase and therefore, you have less equity. And this obviously has equity contribute then to higher return on equity numbers here. But not to miss the message even without this effect, it's an improvement, and we are proud of it. If we now go to the revenue mix of the group. There, we can report a split of 39% for the Primary Insurance and 61% for Reinsurance. And if we go into more detail for the primary insurance than the last bridge 41% of the premiums are from Industrial Lines. Then we have a strong contribution from Retail International. And the third in the row is Retail Germany. If we were to look for IFRS 17/9, the reporting, which you will be -- will come familiar with next year, this trend will accelerate. So in IFRS 17/9, the proportion of Industrial Lines in the primary insurance segment will rise significantly. Retail International will be a little bit less due to the Life books, which we have in Italy and in Poland and Hungary as investment component of the Life revenues is excluded in the insurance revenue. and Retail Germany will be much smaller in comparison as -- Retail Germany as the majority of the business is Life business, and therefore, the deduction of the saving component in the gross written premium really makes a difference. So let's go from the top line now to the bottom line. So we had 39% of the top line derived from Primary Insurance but 44% of the bottom line. And if we then go and have a closer look where the bottom line coming from, then on the first place, there's Retail International, which has -- where we have a proven track record of a stable earnings contribution over the past years. Second place is Industrial Lines with significant improvement. And in the third place, we have Retail Germany. So let's then dig into what I already promised to give you some more flavor or color on what has been the large loss burden in the first 9 months. So in total, we had large losses of EUR 1.867 billion large losses. So we've already exceeded the full large loss budget or the pro rata budget was exceeded by EUR 480 million, which is quite a significant number. And to draw your attention to the 2 most important things on -- in NatCat, large losses and man-made large losses. For NatCat, it's obviously it's the Hurricane Ian. So we have a net loss of EUR 350 million here. If we compare that to our overall market share in the world, it's pretty small, and if you compare that to the competitors as well. And this is due to the fact that we had pricing concerns with regard to the premiums we could receive in Florida and therefore, we have underweighted Florida business. We couldn't get out of Florida business at all because in some program, there's obviously always a share of Florida included. And so EUR 350 million already reflects our assessment of the pricing level there. Second, with regards to the Ukraine, there we have EUR 361 million net losses in our expectations, and we continue there our very conservative reserving approach. What have we done? You're all aware of our reserving after the second quarter. We have just added those claims, which came in and which we perceived as being valid plans to the numbers, which you've seen in the Q2. And so still, the vast majority of the EUR 361 million is IBNR claims, incurred but not reported yet. So these are claims where we believe they have happened, but they were not reported yet. So it's a very prudent reserving approach, but you are all familiar with what we do here in Hannover. And so it shouldn't come as a surprise. If we have a closer look then at the other claims, the large loss claims, which you can see here on the right-hand side, so Hurricane Ian, the floods in Australia, the February storms in Europe or Quiara in France, then you will easily find out, even if you look at the other large losses that we really see the climate change translates in more large loss burdens here in insurance. On the first hand, it seems to be a negative news. But on the second, if you have a closer look at it, it's good for our business because this really also helps us to ask for adequate prices for the future. And in addition, our customers want to have more protection, and this is something which backs our growth also for the future. And therefore, it's just a proof of a development, which is seen over the past period. If we now go into the segments, I'd like to start with the primary insurance segments with the premium development where you can see first Industrial Lines. Overall, we have an increase in the gross written premium by 18% and in the third quarter even by 20%. So we have really a very, very solid growth dynamic in place, and it's driven by specialty business as it was but also the other business is growing quite significantly. To give you just an impression to the specialty business after 9 months is contributing roughly 30% of the total Industrial Lines gross written premium. Second, if we go to Retail International. There, we have a growth of 13% overall after 9 months. It doesn't seem to be so much. But if you go more into detail, the first half to look at the currency adjusted gross written premium growth, which stands at 19.5%. And if we then go into the detail and split it up between the growth in P&C business and the growth in Life business, then we can report a significant growth in the P&C business where we wanted to grow, and a reduction in the Life business, which is driven by 2 factors. First of all, as we told you, we are, from a strategic point, reducing our exposure to Italian Life business. This is a planned reduction, lower single premium business is the result out of it. And second, we have sold luckily our Russian entity before Russia declared war to the Ukraine and were able to receive the money related to it also in our accounts. So these are the 2 factors, which impact the high premium growth negatively. If we then go to Retail Germany, there we have a similar picture like in Retail International. So overall, it's just 0% growth. But if you go into the details, where the similarity comes from, we have 10% growth in the P&C business or 10.3% in P&C business and in particular, in the small- and medium-sized enterprise business where we wanted to grow. We are growing quite significantly, and we have a decrease in the life premiums and the decrease in the life premium is in line with the overall market development where we have significantly lower single premium business. And we are affected by -- as we are a bancassurance player in the life business and the banks are now started to become happy again to have saving accounts with money on it. And so this is what we see here. Positive news from the life side is that we have a good increase in the biometric bancassurance business, where gross written premiums are up by EUR 62 million, which is more or less also a post-pandemic recovery. So to summarize, overall, premiums are growing by 11% for the first 9 months or in the third quarter, 10%. We then go to the results. Then we can see that first Industry Lines overall has an improvement of 12% for the first 9 months and even 29% for the third quarter. And this is despite the fact that Industrial Lines is impacted by EUR 69 million pro rata large loss overshoot. So the development which we have seen on the group level is also here in Industrial Lines. So we have some large losses and just Hurricane Ian it -- the Industrial Lines segment was EUR 73 million. So what we also see then in the results is that we have a further improvement of the combined ratio, and to summarize that, we are really very happy with the result in Industrial Lines attritional loss ratio is at very planned levels, and we have a normalized investment income here. So overall, we are happy with the development. At Retail International, we have a slight increase in the result by 4% to EUR 140 million net income contribution to the group. And this is despite real significant pressure by inflation in some of the markets, in particular in Turkey and Brazil. But the good news is, overall, we have here in Retail International, the majority is short-tail business. So average duration of the liabilities is in between 3 and 4 years here. So -- and we are already partly through this inflation effect. We were able to increase the prices significantly. New claims have been reserved at higher levels. And what goes along with inflation is also higher investment income, which you can see also in the numbers, so the return on investment increased from 2.7% to 3.2%. So all in all, we are satisfied with the results. It's worth to comment that we also used some resiliency reserves planned in this segment due to the very high resiliency reserve level which was not sustainable under IFRS 17. So this is also impacting us a little bit. At Retail Germany, we have a decrease in the results, and this is due to an effect which I already explained after Q1 and Q2. We have a worsening net combined ratio due to some NatCat events at the beginning of the year and the changed reinsurance structure, which has led to a higher self-retention. So despite the fact that the gross loss burden in the last year was higher than in this year, the net loss burden is much higher in the current year due to the higher sales retention. So it was a little bit the wrong bet, which we took with the reinsurance structure up and which is unfortunately now reflected here in the number. In addition, we have quite serious inflation impact in the numbers, which accounts for roughly 3 percentage points. So overall, we need to adjust those -- adjust for the future for inflation much more in the prices, but the division is currently preparing for that one. So all in all, primary insurance contributes quite significantly to the overall profits. Let me give you now some more insights on our investments. And I first want to draw your -- first before I start and to explain a little bit the numbers, I want to highlight that we continue with our low better approach in the investment income. So as we always told you, we want to earn our money on the insurance part of our business and not on the investment part. So we are not taking the big bets. So having said that, I just want to draw your attention to 4 points, which are highlighted on Page 12. First of all, the ordinary investment income. The ordinary investment income is up 13.9%, and this increase is driven by inflation linkers, which contributed EUR 371 million additional gains, which are booked in the ordinary investment income, and we are very happy about it. And I do not want to give you the impression that we were the one who had the right assessment of inflation for a long time of period and we are better in expecting the future than others. But we had this inflation linker which is more than EUR 5.5 billion in our investment portfolio for hedging purposes. As we all know that you cannot predict inflation exactly. We always keep some inflation linkers as we do not want to be the full risk on our balance sheet. And now we are benefiting from it. And this is what you see here in the ordinary investment income. Next to that, we have some more returns from real estate investments. Second, you see a significant drop in realized net gains, losses on investment and the explanation is pretty easy. Due to the rise in the interest rate, there is no longer need for contributions for additional sets that are funding in German Life business. And therefore, we did not have to realize anything there, and we didn't do so. And therefore, we have a significant drop in realized net gains. Third, there is this line asset under management. And this will a little bit come as a surprise. You have never seen that in the last year that we have a drop in the assets under our own management, that it's just 4%. And please compare that to our competitors because this minus 4% is a pretty strong number because it's driven on the one hand side, obviously, by decreasing market values due to the interest rate increase. But on the other hand, by strong asset inflows from our business growth. So it's a very good number. And finally, the net return on investment is at 2.5%. This is where our guidance was standing. And so it's at a normalized level. On the next page, you can see the low-beta investment portfolio. You're always -- there's not much change in it. So I do not want to go into detail here. But I would like to draw your attention now to the capital figures, which are on Page 15. There are 2 ways of looking to the equity. One is IFRS accounting -- and there are 2 options to look at it under IFRS 4 with IAS 39, which we currently have to do till the end of the year. And the other one is IFRS 17/9, which we will do starting from next year. So if you look at it at the current accounting standard, then we have a drop in the equity, which is driven by the increase in the interest rates and the accounting mismatch. If you were to look at it under IFRS 9, I will always already give you a displace, a guidance, but there will be more details on our Capital Markets Day on December. I will give you also the guidance that the equity under IFRS 9 will be higher after the third quarter then after the second quarter. And so you should expect your number also higher than what you see here in the second quarter and a better economic view on our equity or risk-bearing capacity is done if we have a closer look to Solvency 2. If we go to the next page, and there, we can report that the solvency ratio stands stable at 211%. So even above our target range, which reflects the strong resiliency of the group and also reflects our capability to grow the profitable business even further, which we intend to do. So finally, let me summarize it for the outlook. So with regard to the outlook, there's just one change, which is we have increased our growth outlook. The growth outlook stands now that we are expecting a gross written premium on euro basis above EUR 50 billion, which is a record for the Talanx history. And a currency adjusted growth number of 10% or above, which is still a very conservative number, given the growth that we've seen during the course of the third -- 3 quarters. The net investment net return on investment is at 2.5%. Group net income, as I already told you in between EUR 1.050 billion and EUR 1.150 billion, which should translate into a return on equity above 10%. And with regard to the dividend strategy, once again, I would love to invite you to our Capital Markets Day on December 6, then we will explain in more detail what we intend to do there. We already have sent out the expectations that the stable or upwards will remain in place, and we are underlying upwards with regards to the dividend policy. So this is the summary of our outlook. And just a personal comment on why are we so confident. We are very confident with our future earnings potential due to the fact that we are operating in hard markets with the majority of our business. And we believe that we can earn adequate margins in those markets going forward that we are able to adjust the prices for the inflation impact on what is needed and that we have the resiliency to maneuver through this changing times with higher inflation, higher interest rates, very stable also if you compare ourselves with our peers. So having said that, I'm really happy to take your questions.

[Operator Instructions] First question from today is from the line of Michael Huttner from Berenberg.

Congratulations on testing numbers and your lovely confidence and loss -- there's no -- First one is Retail Germany. So the change in management announced and the results may be a little bit weak. I just wondered, can you give an idea of how much of the capital of the group is allocated to Retail Germany and where it sits, whether it's Life and non-Life, clearly Life is doing fine without amazing, 380% something. The second also, I guess, is what is the pricing that you're expecting for the market for yourselves at the motor renewals now in Germany? Third is on the excess reserves. So I think there was a figure of EUR 69 million added in Industrial Lines. Maybe there was a little bit withdrawn in Retail International. Can you give a feel for where you think we might land at the end of the year compared to the EUR 3 billion we had at the start of the year for the group? And then you said a really interesting sorry, on Specialty, how much of the Industrial Lines profit is actually Specialty or is Specialty still around to kind of reinvest all the profit itself at the moment. Sorry for many questions.

No, no, it's okay. Thank you, Michael, for your questions. So to start with Retail Germany, you asked for the capital allocated, and this is a difficult question because it depends on the accounting standard you're looking at, whether you're looking at IFRS or solvency and so on. And therefore, I'm a little bit -- it's really difficult. But what I can say you that with regard to dividend contributions or capital upstream of Retail Germany, this is a segment where we see above-average capital distribution going forward. And this is due to the reason that in Life, given the -- we have now the possibility to pay dividends again because for a long period of time, the regulator didn't want us to pay dividends. And now where the solvency in Life on average, stands clearly above 300% we are now in a position to do so. So I've just got from my colleagues here in the room, the number, if we look at it, under IFRS 4, but we all know the shortcomings of IFRS 4, it's roughly EUR 2 billion of booked equity, which is allocated to Retail Germany. But please keep in mind that under IFRS 17/9, there will be a swing in this number. as in particular, the Life business is revalued. And I believe that the figures under IFRS 17/9 are more adequate than what we see under IFRS 4. So it should be below that one. Second, you asked me for -- I hope this answers your question at least to a certain extent. Second, you asked for the pricing in the motor renewal, what I would expect? I would expect for the whole market something around 10%, yes. At least that is what I personally believe what is needed to reflect inflation adequately. I do not know how good the discipline in the German market is, but this is what I would reflect -- would expect. Third, you asked for the development of the resiliency reserves, which stood at the beginning of the year at EUR 3 billion. I will give you some more insight on that one on the Capital Markets Day, what I expect as general development. But I would believe this resiliency reserve on a group level will be impacted by inflation, so it will be lower, but this is what the resilience of your reserves are for. There should be a volatility buffer in such times where inflation increases unexpectedly. And therefore, I believe that the impact on the earnings streams of inflation within our group is by far not as big as it is in other groups. And finally, you asked for Industrial Lines, what is the contribution of the specialty business in the EBIT, it's EUR 20 million after the first 9 months in the segment, Industrial Lines is derived from HGS. Michael, does that answer your question?

Yes, fantastic.

Next question is from the line of Roland Pfander from Auto BHF.

Could you please touch on the underlying combined ratio in Industrial Lines? Could you provide, for example, the impact of claims inflation for the 9 months and also reserving moves? I saw that you had 2.2% loss overshoot. So what is the actual underlying combined ratio for the segment 9 months, please? And maybe also reserve movements in Retail International for the 9 months.

Okay. Thank you, Roland, for your question. So first, with regard to Industrial Lines, by rule of thumb, but it's just rule of thumb, and -- we have the large loss overshoot is 2 percentage points, another close to [ 2 points ] of the claims inflation impact in Industrial Lines, which we already see in the numbers and which is always reflected in our reserving. So every new client, which we do reserve is obviously this very conservative or much more conservative inflation assumptions. This was the first one. Second, the resilience development in Retail International, Retail International, in the course of the current year, has a planned release -- really I have to underline, planned release of -- with the resiliency reserves due to the fact that auditors in some countries did not except the high level of resiliency reserves for IFRS 17/9. And therefore, we decided that at least we want to show this profit once in the P&L. And so that is a planned release here, which contributes to the results and which has helped the segment already to manage all the things which are due to the inflation in a very good way. So Retail International is really is a forerunner of managing inflation in terms of pricing, reserving and so on. They are really good. Third, what's the third question? Okay. So it's just 2. Will does that answer your question adequately?

Okay.

Next question is from the line of Vikram Gandhi from Societe General.

It's Vik from SocGen. A couple of quick ones for me. The first one is on Retail Germany P&C. I'd be interested in your thoughts on the headwinds for the combined ratio. The reason I ask this is when I look at the combined ratio reported by a couple of your composite peers, their third quarter 2022 combined ratio for Germany stood at 89% on average. And I just wondered what could explain such a large delta versus the more than 100% reported by Talanx today. That's question one. The second one is on Retail International, and I'd like to go back to the combined ratio of 97.6% for third quarter. I just wanted to check on how should we think about the combined ratio for fourth quarter given the inflationary pressure on the one hand, but also the planned release of resiliency reserves that you just alluded to on the other hand. So those are my 2 questions.

Vik, thank you. First question is regard to Retail Germany. There are 2 reasons for these headwinds. One is which is why maybe we are a little bit conservative how we are reserving for new claims. So all in all, we have figured out that there are roughly 3 percentage points in our combined ratio as we do put in very conservative for having -- a very conservative number for every new plan. Second, with regard to the headwinds, it's a reinsurance structure, which we put in place at the beginning of the year. So we increased the self-retention. We even doubled it, and this has led to the result that the gross claims burden compared to previous year is even lower, but the net claims burden is higher due to that fund. So yes, in the hindsight, the reinsurance structure should have been differently. But this obviously also impacts the Retail Germany numbers. And third of all, we are growing much faster than the peers. Second question with regards to Retail International. Well, I would set out the expectation that we could expect the 96% combined ratio also for the fourth quarter. Retail International is a very, very stable earning contributor to the group. And given that they are mainly in short-tail business, also the steering of the volatility in the business is somewhat more easy than compared to other business segments.

Fantastic. Can I just come back to the Retail International bit because I get that there is good amount of resiliency reserves sitting in there. But I'm a touch surprised at what you mentioned in terms of the auditors' thinking because given the inflationary pressure all across the world and especially in some of the LATAM countries, why wouldn't the auditors be cognizant of the fact that resiliency reserves are indeed something that would be needed in such times. But when I hear your comments, it seems they are less comfortable with you holding much more resiliency reserves despite the inflation. So I'm just trying to understand why -- what's their viewpoint there?

So we look at resiliency reserves on each and every country. And you're absolutely right. With regard to LATAM, this is not the region where the auditors are uncomfortable with our resiliency reserves or with a high -- very high level of resiliency reserve. It's related to Europe and here and in Europe, it's Italy and Poland, where the auditors feel that we might have a little bit too much resilience in our reserves and asked us to release something to have more comfort on best estimate levels.

Next question is from the line of Darius Satkauskas from KBW.

Two questions, please. What would you say is the normal Retail Germany P&C combined ratio in the third quarter? And did you book any reserves for inflation on 9 months? And did you book any reserves for inflation in the first 9 months in order to improve prudence beyond what was needed? The second question is, so you're seeing a lot of inflation across most business lines, but I'd like to focus on Retail International. I appreciate it might be difficult to say, but when would you expect to get the combined ratio down to a more sort of normal around 95% combined ratio? And what measures are you taking here apart from the guidance sort of done?

So first of all, to Retail Germany, even normalized the combined ratio would stand currently at around 100%, at least in our perception, so we need some price increases. And this has a little bit related to the strong growth which we have seen at the beginning of the year. and then inflation kicked in. So -- but the long-term target, obviously, for Retail Germany is to bring the combined ratio again down under clearly below 100%. With regard to Retail International, I would expect the combined ratio for the segment as a whole. The target is also clearly, it's around 96% or even below 96%, what they have to achieve for a long-term period. And I'm very optimistic that they can deliver on that one, and this is simply due to the fact that they have already managed significant price increases. If you go to one -- some specific countries, just to give you a highlight, in Turkey, we have filed about 100% price increases in those countries and also the price increases in Brazil and other markets are very, very strong. And they have really also increased the technical pricing. So on the one hand is the price increase which you do in the portfolio as a whole or where there are 4 runners in their market. The second is technical excellence with regards to identifying those parts of the P&C portfolio, which is exposed more to claims inflation. And even at risk of losing that business, you have to increase the prices in those segments higher or cancel it from our side. So -- and they are quite advanced in that one. So I'm optimistic that they can deliver and that they will continue to be a very stable profit contributor to the group results. And the third point, please keep in mind that also, if you look in the figures in more detail at Retail International, you will see an increased investment income because inflation goes along also with higher investment income. We have already seen an increase to 3.2% in the first 3 quarters. There will be further increase. If I look at the reinvestment yields in this particular segment, to be expected going forward. So all in all, the profit contribution should be pretty stable. Is that okay for you, Darius or...

But just to follow up on the Retail Germany, I suppose. What -- is there a risk that it's more of a catch-up and inflation continues where it is we will continue seeing sort of inflated combined ratios. Is it possible to build some prudence there and have you? Or is it more about just price increases in one quarter at a time?

So well here in Hannover, we are very conservative with every new current year claims, how we reserve it. So every new claim, which is booked, will have very, very adequate and conservative inflation assumption in place. But in addition, you obviously, you have certain portfolio effects. And it's sometimes difficult to distinguish in between the 2 effects. So with regard to Retail Germany, every new claim is booked with very conservative assumptions message. Second, they have to increase the prices and they are currently doing so. So we will have price increases in certain lines of business, clearly above 10%, which are due by the end of the year.

[Operator Instructions] The next telephone question is from the line of Michael Huttner, which is a follow-up question.

And just on debt and solvency and capital. So the -- I was looking at your lovely website and account EUR 4.25 billion of sub debt, so EUR 3 billion in Hannover and EUR 1.25 billion in Talanx. And I think some of it you raised recently in Talanx. So my first question is, why do you need more money? And then the second is, you kind of said look at the Solvency 2 capital to get an idea of IFRS 17, I'm clearly not adding things up properly because Solvency 2 fund was EUR 22 billion, take away the EUR 4-and-a-bit billion of sub debt, I guess EUR 18 billion, and I'm kind of thinking, I must be clearly wrong. That's very different from the EUR 7.4 billion. So any kind of, I don't know hint, if you can, I don't know, would be very welcome. That's it.

So to be honest, to answer your question, Michael, right from my mind, that's very difficult. I would recommend that Bernd and his team, you make a follow-up call on that one. But to give you an overview about what we have done. Hannover Re just recently has issued a EUR 750 million subordinated debt, which contributes positively by 1 point-something percent to the overall solvency ratio, but it will be accounted just for the fourth quarter, not for the third quarter. The [ 211% ] I've shown you here in the presentation is for the end of the third quarter. Second, with regard to Talanx, we have issued 2 twin bonds, which have exactly the same conditions, EUR 500 million to the capital market, EUR 750 million was financed by as mutual and exactly the same conditions. So it's 100% at arm's length. And so -- and with regard to leverage ratios, it's only the EUR 500 million to the outside world will count into our overall leverage ratio for the group. And we did that in order to do a prefinancing of the EUR 856 million -- EUR 858 million, which senior debt which are to be repaid in February next year. So what we did is, see, simply a prefinancing given that we expect interest rates to rise further. And in total, in a nutshell, we have decreased our leverage ratio by the senior debt refinancing because we did EUR 750 million out of the own pockets of [indiscernible]. And the other things with this waterpower chart, which you have in your head, you might discuss that with Bernd afterwards and his team.

Next question is from the line of Thomas Fossard from HSBC.

Just had a quick one on German Life. I know that your Life book is pretty different from maybe peers and more recent and different type of distribution. But I wanted to get your thought on the potential implication of higher bond yields and possibly if it could change the profit-sharing rules with your policyholders. We've seen a big positive effect coming in Q3 from ERGO Life. And I just was wondering if it was something that at some stage, could also benefit the bottom line for the German Life business?

So thank you for those questions, Thomas. And you're absolutely right. Life will be a very stable profit contributor for the future in this higher interest rate environment. So this is really a positive. And second, there will not only be a profit contributor in terms of IFRS terms, also under IFRS 17/9. There will also be very, very good for capital upstream as given that the constraints by the solvency ratios are no longer there, there is no reason for the regulator to not to allow a dividend payment. So there are 2 positive news related to the higher interest rate levels here. Does it answer your question, Thomas?

Yes. But no one-off profit to be expected before the end of the year because of the profit-sharing rules we still see?

We will not change -- no, we do not adapt the profit-sharing rules there. And there are no regulatory changes also to the profit-sharing rules in place. So to be honest, and I do not understand the explanation of our competitor here. It must be a company-specific reason then.

Okay. And maybe on the guidance. So actually, guidance flat at Talanx levels -- the Talanx level. Also Hannover Re is now shooting for the lower end of the other initial targets. So implicitly, what should we conclude from there that actually implicitly you're raising your expectations for primary, but anything that you will flag specifically?

But you already have summarized the key base effect, so I know for Re is shooting for the lower end. We, at the Talanx Group as a whole are shooting for the whole range. So if you draw out of that the assumption that the primary business is slightly better off in the terms of the current year, you're right, yes.

Okay. We have time for 2 more questions. And before we turn to the web questions and the next telephone question is from the line of Bhavin from HSBC.

Bhavin from HSBC. Just a quick follow-up on your reserve releases on the international line. Just wanted to understand how should we think about your ability to release further reserves in 2023, given the fact that you've already released with for quite some time in the first 3 quarters of this year? And the second one would be on Retail Germany, in light of the 3% claims inflation that we have seen. Can you just remind us what is the kind of price inflation that you have got till now for this year? And how should we think about this in terms of outlook for next year, i.e., the claims inflation versus price inflation next year in Retail Germany, in particular?

Thank you. Very good question. So first question was whether we believe that there is a resiliency buffer left in the reserve, yes. The answer, clear, yes, given the level of resiliency, which is embedded in our best estimate. So and the second one, it's a very good question. How do we look at claims inflation? Because I do not want to go into too much detail here, but you won't believe it. But on a group level, we have -- we are looking at more than 500 different inflation indicators because claims inflation differ from line to line, from segment to segment. So it's very difficult just to take the CPI development, which we all read in the newspapers and to translate that easily to what we have to expect in the claims inflation. So there is -- unfortunately, therefore, there is not 1 answer to your question. It really depends. So if you go, for instance, to homeowners insurance. There is what we currently see. And to give you a high number is 15%, yes. And now the surprising factor, if we go to medical inflation currently, it's below CPI. We haven't seen that for a long period of time, yes? So it comes with a time delay. So it's really -- it differs from line to line. And you have to manage your technical pricing also accordingly. So it's a lot of detail. So as a rule of thumb, where, obviously, the most discussion is with regard to Retail Germany. And your question is with regard to the motor price increases. There, the market view, at least if I reflect what I've also heard from other people to read in the newspaper is around 10% what is needed to reflect inflation adequately. But you see, I'm -- I cannot give you a detailed answer for overall because it's -- it differs really line by line. Sorry, but I hope it helps and gives you at least some flavor of the facts we are dealing with.

Next telephone question is a follow-up question from Roland Pfander from Auto BHF.

Just 1 follow-up. Coming back to German Life. What actually happens to the debt that are funding target you have? We have much higher interest rates. So is there a possibility to release some of this, or what happens technically to this?

That's a very good question, Roland, and you already have set out what is happening. We have already started to release ZZR and the amount which is a local statutory number, as you know, it's EUR 139 million release of ZZR during the course of the first 9 months in total. And this compares to an increase in the last year of EUR 324 million. So the delta is EUR 463 million if you compare year-on-year.

I would like to turn it over to Bernd Sablowsky to read the web questions.

Yes. Thanks, [indiscernible]. We have 2 questions from Phil Ross from BNP Exane. The first one is, how are you thinking about effectiveness of reinsurance buying for the primary operations overall? You mentioned you took the wrong bet in Retail Germany due to high inflation. But of course, this quarter, you had a much better result from corporate operations captive reinsurance. What does the picture look like in your view? That's question one. Second, on inflation, what has changed since half year Q2? Are you seeing higher or more business in claims inflation in the primary operations? How long will it take push through the price increase you mentioned in German Retail? Those are the 2 questions from web.

So the first thing with regard to our captive reinsurer. This captive reinsurer does pricing at arm's length to the primary insurance business. And given that we are currently in a hard reinsurance market, where we as a group are benefiting from also corporate operations and the reinsurance business in the corporate operations with the primary insurance is benefiting from that one. So therefore, I would also expect this positive trend of corporate operations to continue. Second, with regard to the price increase which is needed in the various lines of business. To be crystal clear, I believe inflation is something which will last, unfortunately. So I do not believe it will be over very -- already during the course of next year. And therefore, we have to adapt always in a normal course of business to the new prices, which are driven by inflation pressures. And to then, second, to give you a little bit more insight in terms of how do we look at the business units. It really has to do with the proportion of the long-tail business which is within the business unit. So for Retail International, the short-tail business there, we believe we are quite far advanced in managing the current inflation trends. Retail Germany does not only have short-tail business. They have particular some long-tail business in the SME part. For instance, if you have professional liability for architects, this is something which is heavily exposed to inflation, and there you will not be able to achieve all the price increases during the course of 1 year, you maybe need 2 or 3 years to adapt to it. So it really depends on the proportion of the portfolios which you have. So -- and to give you the overall picture, I think reinsurance will adapt pretty fast to inflation, Industry Lines as well. We are very happy with the pricing in both segments. Retail International already managed the inflation cycle to at least half of it, and Retail Germany is a little bit lagging but they are very consequently working on that one. And then -- and to -- well, I just got the hint I want to add that. And if you look at Retail Germany P&C, please just keep in mind, we are discussing it now in very detail. On average, let me just figure out they have roughly in between 3% and 4% of the overall portfolio of Talanx. So this is what we are discussing now in every detail. It's in between 3% and 4%. So it's a small proportion, but which you need some management attention there, you're right.

All right. There's time for 1 final question from Michael Huttner.

I think one of your wonderful IR highlighted that normally at 9 months, you provide an outlook for the following year. And of course, with IFRS 17, I can understand that that's not on the cards in your Capital Markets Day. But maybe you can give us flavor of how you see the development, the confidence you have in the current year results. Would it be carried over? And is it carried over a lot, or is it only a little bit into next year?

So thank you, Michael, for your questions. So all in all, we are very confident with regard to the future of the group. And this is due to the fact that the majority of our business is in markets which are currently very hard where we can achieve nice margins. If you look at the 9 months figures there, we had to be the very unusually high large loss burden. And so in total, we would expect a positive development for the next year. The next year will be -- but will be also a year where we have to adapt for 2 factors. One is the change in the interest rate, yes, where we intend to manage our accounts accordingly in order to accelerate a little bit the speed, speed of achieving higher ordinary investment income. And the second one is obviously inflation, where we have to deal with, which we already do in the pricing as I know. So all in all, we are really very confident that we can continue to deliver and that we will be able to monetize our growth with some time delay factors in the future.

No further questions at this time. And I would like to turn back to Jan Wicke for closing comments. Please go ahead.

Yes. Well, first of all, I really thank you for all your questions. We have focused a little bit of the detailed segment -- on the smallest segment in our core. But nevertheless, the group as a whole is developing very positive. And we would like to give you some more insight on the development on the group and on the strategic program from 2023 to 2025 on our Capital Markets Day on December 6, and you're really invited to join our meeting. And we will also give you then some insight on the dividend policy going forward. And therefore, I think there's a lot of things to discuss, and we would love to see you also in person there. So have a good week. And hopefully, let's see each other on December 6.