Talanx AG (TLX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm [ Roberts ] the Chorus Call operator. Welcome, and thank you for joining the Talanx Analyst Call Full Year 2022 Results. [Operator Instructions] I would now like to turn the conference over to Bernd Sablowsky. Please go ahead.

Thank you. Good morning from Hannover. This is the Talanx results call for the full year and the fourth quarter of the financial year 2022. I'm here together with our Group CEO, Torsten Leue; and our CFO, Jan Wicke, who will together take you through the results and where we currently stand. You are aware that we published our preliminary key results in early February already. So today, you will get a clearer picture and a full set of numbers explained by Torsten and Jan, and the annual report is already -- also published on our website today with lots of numbers and more details. All documents, including the financial data supplement, on our web page. So what we do now is Torsten Leue and Jan will take you through a short presentation, summarizing the financial year's results. And thereafter, as usual, you have the opportunity to ask questions. So over to you.

Welcome as well from my side, and let's don't lose time, turn to Page 2. What is the summary? I can see here, we have, as we published the record results of net income growth of 16% and I think this was really remarkable with a 12.9% in equity in a market where you have seen that we have strong headwinds. As the volatility was high, was not just NatCat, Ukraine war but as well inflation, we will go in more details in the lines of business. And therefore, we could basically because of our results, increase our dividends. You know that in the last years, we have promised. At the moment, we have a cash flow increase to EUR 1.5 to EUR 2, we will increase our dividends. And this kind of increase of 25% to the euro is basically fulfilling the promise we have given. On Page 4, this is saying that GWP is increasing by 17%. And I know that our insurance market will be never a growth stock market. But as you could imagine this is really, I would guess, a growth year of a significant 17%. I cannot see many other peers in the market growing with 17%. And the good thing is that the net income is growing basically on the same level as the top line. That brings us to an increase of up to 12.9% return on equity, far above what we have promised with a 10% return on equity. On the next page, you can see that, as I said before, this was a year really with the strong headwinds, and we have had a lot of large losses, actually, the highest level ever since the IPO was EUR 2.18 billion. A good message. So it's here that the large loss budget we have given ourselves is exactly in line with what we have basically calculated. So we could say the steering and the risk management is working. Only to Ukraine war we're not on radar screen at 0.37, basically given as well, there's a lot of IBNR still, and we have to see what will come in the future, but we want to hear as well to be on the conservative side. The next page, you can see that the nice increase of the results is driven as well and mainly by the primary insurance, where we can see that we grow a little bit faster than the reinsurance sector. So the core idea at the end is with a 43% share now we have in the primary insurance is basically to continue a little bit to pass into the region already done in the last years. So that's year-over-year, we can have a reliable increase of earnings. On next page, you see where the earnings on the primary insurance are coming from. Well, what we can see is that we are highly diversified in the group, not just with reinsurance and primary insurance, as you see before, nearly 50-50, but as well when it comes to the lines of business in the primary. So here, we don't talk just about lines of business, but as well regions and business models. So as it's reflected as well now into model diversification is a big plus in our business model. So therefore, it's always good. I think these times which are volatile that you are highly diversified, even comparable to the market. And the second message here is Industrial Lines had some concerns in the past when there was some discussions and it was the main story in the IPO as well as the Industrial Lines, and we clearly can say with the numbers that we are not just 2 years ahead what we have planned, but the cleanup was working, and we are growing really nice in a profitable growth path, including the nice growth initiative of specialty lines. On the next page, as the result, what comes out, and we are considered as we know, as a dividend stock, you can see that we increased up with 25% to EUR 2 now and will be promised to general meeting. As you can see that EUR 0.40 increase is basically increase which we have done in the last 7 years together. So this was really a significantly step up. And I think we are with that kind of number, we are really on a nice comparable basis. And now in -- this path was possible basically because last year, we promised in the strategic cycle, 2018 to 2022, an increase of earnings per share of 5%, actually, and this is mainly driven by the primary insurance for 13.6% earnings per share. So this net earnings brought us to the conclusion that we can increase dividends even higher than we have promised in the past. That is a finish of the year '22 of the strategic cycle and the capital market. We're giving you the new cycle until -- on the next page, you see until 2025. Basically here, you can see that we want to accelerate or even more ambitious targets in all segments, you can see here as well in the capital management and people management. So this is basically inside. We see it was working. The results were okay. So now it's more focused and more, let's say, ambitious targets. What we can see is, and we have the key parameters, return on equity, net income growth and dividends. And this is the next page for the strategic cycle as we have already told you on the capital market, but it shows you again that these targets are really significantly and ambitious and we believe especially as well because of primary insurance improving nicely now in the hard cycle and the reinsurance market going forward and as well Industrial Lines, which is considered to be a hard market in the cycle, gives us very confidence that we will as well fulfill and promise these kind of targets. For this year, we have given you -- the outlook is, return to equity above 10%. The group net income of EUR 1.4 billion. It would be on the basis if you just see the year. This year, it would be 12%, a double-digit growth, but we have as well told you that due to IFRS 17, there's a slight adjustment we have to do, but still on the base of EUR 1,250 million, which we said the basis would be nice growth in this year still with volatile times. And as well, you know that we have the EUR 2 now as a promise and as well the 25% increase of dividends again until '25. So this part is meaning we always say in '25, it will be the EUR 2.50, the path will be defined on this way. Good. With that kind of my opinion, very ambitious targets, I will hand over to Jan.

Thank you, Torsten. Let me provide you with my highlights with regard to 2022. First, to look back to the previous year. On the next page, please. What we can see is that we had both a record in gross written premium and a record in net income. And what are we doing here? We are monetizing our growth what we have -- what we could show in the past years. And we are very happy with that. Was everything wonderful in 2022? Now, we have to admit that we had an increased combined ratio by 1.2% mainly driven by inflationary pressure and large losses. I will come back to those 2 points a little bit later. But all in all, we could show a return on equity of 12.9%, which is pretty good even though it includes an effect of roughly 2.6% relative -- related to the OCI development, which is related to the increase in the interest rates. On the next page, I would like to provide you with some color on our large losses, where are they derive from. So Torsten already mentioned this EUR 2.2 billion in large losses, which we've seen in 2022, where EUR 367 million are related to the war, another 13% to man-made losses and 70% are related to NatCat events. And out of that, 70%, 98% are related to extreme weather events. And out of that, 58% plus 27%, so more than 85% are related to storms and flood events, which have become increasingly expensive. So this is where we've seen the inflationary pressure first. And so this is clear evidence that the climate change is happening if 85% of the NatCat losses are related to that one. And we wanted to give you here some color on that one. Second page -- next page, please. There you can see the large loss development relatively to the net premiums earned over the past year since going public in 2012. What you can see here, on average has been below 7%. So the last year development fits well into the figures here. And so the increase of the large losses, which we had to report for 2022 is heavily related to our fantastic growth, which we were able to show. So -- and one comment also with regard to the large losses, as there were some questions related to that one. In our large loss budget, there is no discretionary buffer built in. So it's an expectation value what we are calculating out of our NatCat models. And the key question is always about the unexpected, unexpected like COVID, like the Ukraine war, whether we should put a buffer in for that or not. We haven't done so far. And therefore, the probability of exceeding the budget is roughly 40%. But all in all, what you can see here, it's well calculated. And if you look at the numbers in the past, it really makes sense the way it's done so far. I would like to provide you on the next page with some insight with regard to the inflationary pressure, which will be reflected in our report on the resiliency, which is embedded in our best estimates, which we have booked in our accounts. So just to remind you, once again, the resiliency embedded, how do we calculate it. We have our IFRS reserves, and then we asked an external actuary to provide us with a second view on our reserving. And if the second view of reserving shows lower numbers, then the difference in between what we've booked, and the lower numbers is what we call resiliency embedded in our best estimate. And we already guided you on the Capital Markets Day that due to the inflationary pressure, we will show lower resiliency reserves as the external actuaries is expected to show a higher number for the liabilities we already have on our book. But I would like to provide you also with the guidance that we already worked against the inflationary pressure also in our liabilities, which is also reflected in the development of our combined ratios. And during the next 2 years, I think we will have, again, a very strong comfort level in our resiliency reserves. So there will be a dip in the resiliency, but we are already in a way of rebuilding it. And we are very confident with the current reserving level, and we will show significant resiliency also in May when we publish those numbers. Coming to the outlook for the next year on the group level. We have a change in the accounting, and this is reflected in some new numbers. First of all, with regard to the top line, we won't have gross written premiums in the reporting any longer, but the insurance revenue. And the insurance revenue, these are the gross written premiums, minus the investment component in those premiums, which are, for instance, cost commissions and reinsurance or the investment component in the life insurance. And therefore, we expect to have a EUR 42 billion insurance revenues in 2023. And you may ask the question, is this still growth? Yes, it is growth and the mission of Talanx to grow its business despite the fact, as Torsten said, we are not regarded as a growth stock. We are growing, and we are growing simply faster than most of our peers and EUR 42 billion is a figure, which also includes this growth ambition. With regard to the net income, we have set out the guidance for EUR 1.4 billion for the next year. And what you can see here on the chart, will be fluctuating around this number a little bit more due to the volatility, which we will have in the numbers as some of our assets are now booked fair value through P&L, which provides a higher volatility compared to the accounting standard, which we had to fulfill in 2022. With regard to the equity, we expect -- we are showing currently in equity of EUR 7.5 billion, and we already guided you at the Capital Markets Day that under [ IFRS 17 ], the number will be higher. And for year-end 2023, we expect the number to fluctuate around EUR 10 billion, which will obviously rise a bar or the return on equity target because this is a divider for denominator for the return on equity. On the next page, you see it is summarized once again. So in total, EUR 42 billion insurance revenues, EUR 1.4 billion group net income, return on equity above 10%. And if you keep in mind EUR 10 billion equity, then it will be clearly above 10%. What we expect to happen during the course of this year, and the dividend will grow. So we will pay for 2022 EUR 2, and we will pay more for 2023. Let me now dig into the segments a little bit in order to provide you some color where the results in 2022 are coming from. First of all, we have 1 chart a little bit introduction to this chapter, which shows you the diversification in both premiums as well as in net income. What you can see here is that the primary group contributes EUR 22 billion to the overall premiums of EUR 53 million and EUR 540 million net income to the overall net income of EUR 1.172 billion what we could achieve. So we are very well diversified in between primary and reinsurance. On the next page, we dig into a little bit into the technical results of those primary insurance and reinsurance in the P&C book. What you can see here that reinsurance was growing in 2022, a little bit faster than primary insurance with 30%, whereas primary insurance was just growing by 24%, which is still a very strong number. But on the technical profitability, we have seen exactly the opposite development. Primary insurance was able to achieve stable or even improved combined ratio where we have quite an increase of 2.2% in the combined ratio of the reinsurance. So the overall increase of the combined ratio on the group level by 1.1% is derived from the reinsurance book. On the next page, we would like to dig a little bit more into what we've seen in our 3 business segments in the primary insurance. So first of all, Industrial Lines. We are very, very happy with the development, which we've seen. We have seen a strong 95.7% combined ratio, and already have dealt with inflation on both sides on pricing as well as on reserving very well in this business segment. In a nutshell, with regard to the profitability targets, the segment is more or less 2 years ahead of the plan. Second, with regard to Retail International was EUR 214 million. They are the biggest net income contributor within the primary group. They also managed the inflation very, very well, in particular, with regard to the price increases which were needed in their markets. And finally, Retail Germany. In Retail Germany, we have to come back of Life, have a growing profit contribution from Life and which is -- which really matters also on group level. We are able to pay dividend out of the Life books again. It was prohibited for a certain period of time. Now it's allowed. And therefore, Retail Germany becomes a very strong dividend contributor to Talanx AG, which is quite helpful on group level. But let me now provide you with some more insights on the Industrial Lines first. In Industrial Lines, we have an increase in the gross written premium of 18%, an increase in the net income of 23%. The combined ratio, I already mentioned it, we are at very good 95.7%. And the return on equity at 9.5%, even close to the midterm target of above 10%. So this segment is really well on track. On the next page, we have a waterfall diagram to show you where is the increase in the net income coming from and what you can easily point out it's coming from the technical results plus EUR 145 million increase. And in the net investment income, we had a decrease, and this was due to the fact I just want to explain that, that in 2021, we had extraordinary effects from the private equity book, which were non-repeatable. And therefore, we have now a normalized net investment income here in the numbers. But all in all, the increase is derived from the positive development of the technical result. On the next page, you can see how the profits within Industrial Lines and the premiums are split between the specialty business and the commercial business. What you can see here is that specialty business now has achieved 35% of the gross written premium, so roughly 1/3. And the same is true with regard to the operating results, where they also were able to achieve 34% of the results very positively. Please note also that from January 1, specialties now owned 100% by Industrial Lines segment, which also explains the strong rise in the operating result contribution here, but this looks very healthy. With regard to the outlook, we expect the insurance -- Industrial Lines segment to grow with a high single-digit growth in 2023. So not so fast as compared in 2022, but still growing. We would like to have a combined ratio below 96%, and we are very confident that we can achieve this, given the resiliency, which is already embedded in this segment, and a return on equity above 9%. What makes us so confident? So Industrial Lines is currently operating in a hard market. Second, we have a cost leader position in the Industrial Lines business and in a hard market. And if you have a cost leader position, you can earn decent money. So we are very happy with the development of this segment. Let's go to Retail Germany. In Retail Germany, in 2022, we had a decrease in premiums, which was related to the Life business, whereas in P&C, we had a growing book. The net income is reduced, which is related to P&C mainly whereas in Life, we had an improvement of the result. Overall, the return on equity improved to 6.9% and there's clearly some way to go in order to achieve above 10%, but the segment is well underway to do so. On the next page, I would like to provide you with some insights on the development of the P&C book. So we could observe in 2022 an improved technical result by lower operating costs, which we'll also have during the course of 2023, but also to partly some positive runoff results, which will be in the light of inflation nonrepeatable. But the main driver for the reduction in the result of Retail P&C was a reduction in the net investment income. We have used the overall situation in the group to realize some losses in the bond portfolio in order to have higher coupons for the time for the future. And this results in EUR 55 million lower investment income during the course of the past year. All in all, we always have to keep in mind that Retail Germany can just reflect roughly 3% of the group gross written premium. So it's a very small segment. With regard to Retail Germany Life on the next page, there we have a fundamental swing due to the rising interest rates. So we didn't need to realize capital gains in order to fund ZZR. Instead, we are getting money back from the ZZR in 2022. And this resulted then in roughly EUR 1 billion lower realized capital gains and also in a much better technical result because we didn't had to payout policyholder participations in the investment income at such a size. And also, we benefited from lower expenses due to lower restructuring costs. So all in all, we had an increase of the EBIT contribution of the Life segment. So with regards to the outlook, we expect insurance revenue growth in this segment, but I want to draw your attention once again on the change in accounting. The overall number with regard to insurance revenues will be much lower than gross written premium as in Life in essence component is deducted from the gross written premiums and therefore, we have a lower number here. The combined rate should fluctuate around 97%. There's still some inflationary pressure here with regard to spare parts price development in the motor business for instance, and some other things. In the Life business, we expect some nice new business value to be achieved during the course of the year and the return on equity should be above 9% for 2023. Coming to the last primary insurance segment, Retail International, where we can report very good growth of 16%, which is currency adjusted even 22% and the gross written premiums are in particular up in the P&C book by 28% and currency adjusted even 36%, and it is mainly driven due to price increases whereas the Life business is down 13%. And this is according to our strategy that we wanted to reduce our Italian Life book, which is also reflected in the numbers and also is due to the fact that we sold the Russian entity at the beginning of last year and deconsolidated the entity then. So strong growth in Retail International. With regard to the net income, we see a nice increase of 13% to EUR 214 million, making Retail International to the strongest profit contributor in the primary segment. On the next page, we would like to explain a little bit more in detail where the profit increase is coming from. First of all, we have to report that the net technical result, which is also reflected in the increase in the combined ratio was a little bit lower than in the previous year. So that's despite the price increases, which we are able to achieve, we had to do more on the reserving side and it's a very resilient segment also, and we did so. So we are very happy with the development of the technical result in the light of the inflationary pressure, which we have seen in particular in some markets there. What has contributed most to the increase of the profit was the development of the investment income, which was related to the increase of interest rates in some of the market, which goes in parallel to the increase in inflation. And so this explains more or less the increase in the profit to EUR 214 million. With regard to the outlook, we have to report that we expect to grow this business even further, but the growth will be not as high as what we've seen in 2022. And it will be -- but it will be still a double-digit growth what we expect in the P&C book, whereas in Life, we are still continuing to decrease our exposure in Italian Life. The combined ratio should be again below 95% and the return on equity should be above or around 8.5% or slightly above it, which also reflects that, in particular, in this segment, also the accounting mismatch, the OCI mismatch in 2022 was pretty strong. So the bar in terms of which equity needs to be will be the denominator for this 8.5% increase, I think, by roughly 1/3 going forward. So a very strong and positive development here as well. With regard to Reinsurance, what you can see on the next page, you have already had your discussions with the colleagues of Hannover Re, so there's nothing much to add. We have seen growth and profitability here. And on the next page, you see we just repeat the outlook what the colleagues already have told you. They also expect some growth in a very hard reinsurance market, which is a positive. The net income, what you see here, this EUR 850 million is just our share of the net income, the total number of Hannover Re is EUR 1.7 billion, and the return on equity, it will be clearly double-digit again. Before I close my presentation, I would like to give you some insight also on our investment portfolio and on the capital situation. So first of all, what you can see on the next page, I know there are a lot of numbers here, but the ordinary investment income increased by 16% and we benefited a lot in our ordinary investment income from the inflation linkers and also from some real estate investments and also from increase in interest rates in some countries. With regard to the realized gains, losses, I already mentioned it's significantly down due to the lower needs to fund the ZZR in German Life, and therefore, we didn't need to realize bonds in order to achieve the required local statutory yields. We had a somewhat higher impairment on our equities, but all in all, I will show you that on another page. Talanx is continuing to fulfill the low better approach in our investment philosophy. On the next page, I will provide you with some insights on the quality of our investment portfolio. There's nothing much has changed here. So we still are predominantly a better bond investor. What you can see here and 95% of our bonds have an investment grade, so very conservative positioning. And we feel very well positioned, therefore, in the highly volatile capital markets as of today. On the next page, we have the development of the equity. And this again, is I have to explain to you the accounting mismatch of IFRS 4, where we have discounting effects on the asset side, but we do not have those discounting effects on the liability side. The good news is, under the new accounting standard, the development of equity will be much more an indicator of the economic development compared to the past. So here, the change is really driven by the increase in the interest rates. And if -- and I already highlighted that we expect equity under the new accounting standards to be above EUR 9 billion -- clearly above EUR 9 billion at the year-end 2022 and around EUR 10 billion for the end of 2023. So on the next page, we have the solvency ratio. So in the third quarter, we had 211%. What do we expect for the year-end figure, around 200% also. So it will be at the upper end or slightly above the target range of 150% to 200%. So and with regard to the ratings, we had a stable A+ rating of S&P and we have improved our rating at AM Best to A+ during the course of the year. So I hope this has provided you with some overview and has shown also the resiliency of which Talanx is able to show in this very volatile times. We are very happy with our results of 2022, and we are confident that we can achieve very good results also in the year 2023. We are operating in hard markets. We have low-cost business models and therefore, there is the opportunity to earn decent money. Thank you. And over to Bernd for the Q&A.

Yes. Okay. As usually, now is the opportunity to ask questions, and I ask our operator to handle those. I guess the first 1 in line we have is Michael Huttner from Berenberg.

[Operator Instructions] And the first question comes from Michael Huttner from Berenberg.

Lovely presentation. And yes, given the difficult times, lovely results. And I think I'm confidence on Retail International, a 95% combined ratio. Inflation and any buffers and what you can say about that. As much as you can say, would really be appreciated. I know I'd say, complicated. And you talked about the dividend from Life and Retail Germany, maybe you can give more of a feel for how much that was and how it's going to develop?

So I will probably start with the first one, and Jan will take the second one. Well, in the International, with inflation buffering is the biggest advantage basically is that the markets are rating very fast, and we are a bit over the cycle in inflation because we have a short-tail business, mainly casco business area. So you should see really the curve of inflation, they would say, at the end of the curve, and a lot of the pricing is already given in. And there are still some markets like basically Brazil, Turkey, where inflation was huge, but the price increases as well have been huge. So we're talking in Turkey about 240% price increases. So as it's a short-tail market, I would say they're a bit over the peak. And therefore, we are confident with the combined ratio, which was set up.

With regard to the dividend payment of Life, the biggest Life entity in Retail Germany alone, the [ HINexT ] contributed EUR 60 million of dividend capital upstream. As a smaller one, they will have contributed another double-digit million figure, but I don't know in detail or just 1 second, should be roughly -- so in total, we expect from Retail Germany, EUR 140 million and just the biggest Life entity, EUR 60 million, and the others will contribute another double-digit million figure to it. Does that help you, Michael?

Yes. And on the inflation buffers -- thank you so much for the Retail International comment, but could you given more general feel of how you see it? It's just that Slide 16, you kind of see the dip and you saying, whoo. But then you think, well, maybe part of the dip is because you anticipate that it's not -- it's in the inflation buffer anyway, I don't know.

We will report that Torsten -- what's in view mid of May. What I can say already as of today, that given that the resiliency level in Retail International was exceeding what the accounts and perceived as best estimate, so too conservative. We had to release some resiliency there, but we have still a level which is very, very comfortable in Retail International. Does that help you, Michael?

Maybe to add on this, what Jan said, it's basically on the higher end, you will see it probably when it comes to our internal compared to the reserve figure.

Yes. So yes, I think Torsten's comment was very helpful just to remind all of you, what do we have, we have set out internally a lower and upper limits for the resiliency embedded in the best estimate. So if an entity is above the upper limit, which was the case at Retail International, then we asked them during the planning cycle to release some of those reserves because this is not capital efficient. So we really try to balance this. And so therefore, we also -- the external view on our reserves is also very helpful for steering the group there.

And the next question comes from Roland Pfänder from ODDO BHF. Sorry, question now comes from Darius from KBW.

Apologies in advance. I have four. So the first question. Brazil has been a problem area for some time now. What is management doing to address this? And when would you expect Brazil to no longer be a headwind to the International segment? That's the first question. Second question. What combined ratio would you say you are currently writing business in Germany Retail P&C right now? That's the second question. Third question. I'm slightly confused about your sort of 96% guidance for Industrial Lines for full year 2023. And the reason being is because if you normalize the full year 2022 combined ratio, you are at 94.5%. You also make a comment that you are 2 years ahead of the plan, and the plan is to be at 95% in 2025. So that would mean 95% in 2023. So why 96% and not 95% today basically? That's the third question. And the fourth question is slightly philosophical in a sense. So your equity goes up 33% under IFRS 17, and you're guiding to 10% to 14% ROE. I just did the math based on your net income guidance. Now, what would you say is it sort of sustainable through the cycle return on equity going forward? Because in my mind, it feels that maybe 2023 ROE profile is slightly better than usual because obviously, a 10% ROE business doesn't suddenly become a 14% ROE business through the cycle. So is the 10% sustainable on a new basis do you think through the cycle? Or is it slightly better than usual given positive dynamics next year?

Okay. I will start, and then Jan will continue. So with Brazil, we see already that the fourth quarter, and you see this is a very short tail basically casco market that's monthly. Basically, we see that on daily basis. Even there in Brazil, we are really already on the profitable side. So I would say the market reacted very well since our hard cycle, and we feel really that we will have nice profit this year in Brazil already as we have seen the last quarter. Regarding the Germany P&C now, maybe, Jan, you could comment here?

Yes. Well, there is still some inflationary pressure on the claims side in Retail Germany. So the combined ratio of 97%, which we have set out is an ambitious target for the current year, but we are still confident that we can achieve it. We will have a look at it at the year-end with regard to the combined ratio, managing resiliency embedded in the best estimate and so on, what's needed from a group level. So maybe it will be somewhat higher -- can result somewhat higher, but also lower depending on the overall situation. That will be seen at the end of the year.

On the Industrial Lines, where we not go to 95%, I would say -- we say it's clearly below 96%, and I would say we take it here on the conservative side as the outlook here because in the past, Industrial sometimes had some surprises, and we would have only surprises but positive surprises to you in that segment. And regarding the equity, I think as well, Hannover Re, in the last 10 years that always -- not 10 years, but last year, so above 10% return on equity. And maybe we say strongly above 10% could be over the cycle, a good message, I would say.

We are currently in a hard cycle, but over the cycle, clearly above 10% is the message.

And why we're so confident about this is because the main part of our business is not just with 83% coming outside of Germany, so a very diversified portfolio, but as well the main part comes from B2B business, it's been Industrial and Reinsurance. And this next years to come is, in our opinion, a harder market cycle than in the past. So therefore, we are very confident to be clearly above 10% return on equity.

But I suppose -- as a bit of a follow-up on the last one. But I suppose your equity goes up, so on a like-for-like basis, it implies that your return is actually higher. I'm just curious about that. I mean should we not expect it to be lower, given that you're sort of denominator goes up?

No. Well, what we see is, together with the growth, operational efficiency has increased even further and in those segments where we are already cost leader, this is also -- the growth was also helpful, and we expect to earn decent money there going forward.

Last question was okay with you? So really, if we say clearly above 10% and even 14% in your calculation is clearly above 10% within the target we promise.

And the next question comes from Roland Pfänder from ODDO BHF.

Some questions on Industrial Lines, please. Could you speak about the runoff results in '22? Also, what was the impact on -- from inflation on the segment? What would you expect would be the burden on the combined ratio from rebuilding your redundancies in that segment? Maybe some words on the M&A environment for specialty insurance. Do you see opportunities there currently? Or will it take longer time to get active? Maybe a short question on Retail International. Could you please mention reinvestment yield and the running yield?

Okay.

Industrial -- let me start with Industrial Lines. So it's always hard, Roland, to measure exactly the inflationary impact. We did some math as we did a lot of in-depth study on inflation. And it's really complicated because you have to look at it line by line and what was already priced in, what is the additional inflation. So out of that, the additional inflation impact, which is already reflected in the numbers and was roughly somewhat below EUR 300 million in the Industrial Lines segment, so around EUR 280 million. This is what we calculated. But this is a rough estimate. You should take it also as a rough estimate. The runoff results in Retail International, in total, is up to EUR 211 million during the course of 2022. And they are -- and that compares to previous year of EUR 180 million, so slightly higher. And also to be honest, also unavoidable because we were very conservative in this segment last year in order to cope with the expected future inflation, which will be future inflation, which were reflected in the long tail business, where we did some extra reserving also for the long-tail part. And it's also already reflected in the numbers of 2022. So in a nutshell, the numbers of Industrial Lines are very small.

Maybe just to add on this, we say how much will it cost to build up additional redundancies in the future for the combined ratio. We have not defined the results of those, what we could see here and probably expect that there will be none to rebuild it.

In Industrial Lines, but in other parts.

Industrial Lines. So here, we really see that -- you can see how the quality Industrial Lines, however, strong the results have been last year on 2022 that this inflation is basically compensated that is more roughly the message we have here. And then there was a question on specialty lines. The markets continue to be hard, but not as hard as we've seen in the past, but still hard. So the growth initiatives will continue. And you have seen the targets we have given to you in the Capital Market, and we're still confident to be on track with what we have promised at the midterm targets in the specialty lines.

And you asked for the reinvestment yield in the group, it was roughly 2.8% in the course of 2022. And in Industrial Lines, 3.1%. Industrial Lines, they have a little bit more exposure to the dollar. And therefore, this explains the difference, whereas on the group figures, we have this large Life portfolios included.

That is one message, but you asked I think about HINT, right? It was understood reinvestment yield. That I get it right, Roland?

No. Actually, on Retail International?

HINT Beteiligungen, division is HINT -- sorry. So internally...

At HINT, we were able to achieve close to 5% reinvestment yield during the course of 2022.

It's breathing very fast as again, the full portfolio is mainly short-tail business. So the reinvestment yields very fast kick in. Actually, you can see there was something, I remember, EUR 88 million inflation linkers, we had as well positive effect because they could -- over the last year already they use this portfolio or we shift the portfolio to inflation linkers. So very fast movement. And actually, already this year, the investment income is higher percentage-wise than the last year. So it's very fast kicking and high interest rates, so close to 5%.

And the next question comes from Vikram Gandhi from Societe Generale.

Just really 1 from my side. I'm a little bottled by your comment that there is still some inflationary pressure in Retail Germany because most of your German peers do not seem to suggest that. And if anything, the messaging has been that the pricing has been pretty strong to cover the inflationary impact. So I just wanted to understand this in a bit more detail as to where Talanx's portfolio could be different versus the rest of the market where you still see inflationary impact? And if I can link this back to some of the comments made during previous conference calls where you alluded to, I guess, the architects and self-employed professionals and those business segments where potentially you might be seeing inflationary impacts, and I wonder why that should be the case. But that's really the question.

Okay, Vikram. So first of all, I think in the market as a whole with regard to the motor portfolio, it's not only us to see some more inflationary pressure. So if I reflect the discussions I had with some peers, they see the similar. But second, yes, with regard to the portfolio construction of Retail Germany, we have some exposure into those lines who are more affected by inflation than the average portfolio of our peers like architects and so on, what you've just mentioned. This is also true. So first of all, I think with regard to motor, it's an overall market development, it's not only us. And with regard to the portfolio construction, slightly more exposed compared to the peers.

We have a follow-up question from Michael Huttner from Berenberg.

On Retail Germany, I just wondered if you could say what the price increases have been or are you expecting? And also, the targets you've given in terms of combined ratio, are they IFRS 4 or IFRS 17 or how do we kind of compute them? That's it.

With regard to this portfolio with 3% of the gross written premiums of the group or the Retail Germany portfolio, which is pretty small on a group level, the combined ratio are set out under the new standard IFRS 17.

And is it -- and is that true for the other targets as well?

Yes. Everything is on IFRS 17, and the price increases in motor Germany have been around 8%.

Well. Okay. And do you expect any more this year?

Well, the inflation, unfortunately, at least in our view, is more sticky than the central banks try to make us believe.

And actually, this would be -- maybe a comment on that if I will not comment on competitors what message this year. But if it's really happened, then if competitor would have said so that there's no inflation to be expected to see, then we will be very happy because we expect that and we have a much higher reserving in our books and which we can have as a runoff later on. So hopefully, the competitors are right. If it was a message then, then we have better results even in Germany due to more conservative resilience to build up again.

And the next question comes from Bhavin Rathod from HSBC.

I have very quick 2 questions. The first one would be on Turkey. If you could provide any early indication on your loss exposure coming from Turkish earthquake, that would be really helpful. And the second one would be on stand-alone combined ratio for Industrial Line in the fourth quarter, was again very strong. Could you just help us break out what was the driver of the strong improvement? Was it driven by strong reserve releases? Or was it more to an underlying improvement in that business? So any colors would be really helpful.

Okay. Jan, can we start with Turkey?

One second, I'll tell. So with regard to Turkey and the earthquake, we -- in the first quarter, we currently expect a net loss on group level of EUR 250 million -- sorry, net reserve to be built of EUR 250 million, not a net loss, I'm sorry, EUR 250 million, and it's covered by the large loss budget. EUR 200 million out of that is related to reinsurance and EUR 50 million related to primary insurance.

So basically, this is an event, which is mainly a reinsurance event and the primary insurance is not significantly. And again, this is very covered by the budget in the first quarter. So it's no headaches for us at the moment. Also, the event is very dramatic, but this is within the budget. And just saying Hannover Re, we have not part of the Turkish earthquake pool, unfortunately. So therefore, it's very limited number we comparable to the market, which could have been there. When it comes to that Industrial Lines first quarter, Jan?

Give me a second so to double check.

So we'll double check now.

Sorry.

What else coming now.

93.1%.

Which fits to my message that at the end, we said, okay, the 96% below, this is still within the message we're giving 96% below.

And we have one more follow-up question from Michael Huttner from Berenberg.

I'm really sorry. It was just on the combined ratio. So the new -- the outlook you've given, which has really helped is IFRS 17. The numbers we have today are IFRS 4, is that -- is there a significant difference? I know you kind of touched on this at the Investor Day.

Yes, we did so, Michael. And yes, there is a difference. In the future, we have the discounting of the current year claims. And therefore, the combined ratio going forward is very much also related to the development of interest rates. And therefore, we were also a little bit reluctant how much we should provide with combined ratio figures. And therefore, in order to provide you with the overall guidance, this is the reason why we focus too much on the net income contribution in our communication. So yes, and it's really much -- so in a nutshell, combined ratios will be much more volatile if the interest rate environment is volatile like it is as of today.

There are currently no more questions on the phone, and I hand over to Bernd Sablowsky for questions from the webcast.

Yes. We have 3 questions raised by Hadley Cohen from Deutsche Bank, which I will read out as follows. The first one is relating to Slide 16 of our presentation where we give an illustration as to the development of our resiliency reserves. And the question is, Slide 6 indicates there is a quite big drop in primary resiliency reserves given that you are suggesting no real change through resiliency in Industrial Lines, it would imply that it is coming through in Retail. If that is the case, it feels quite large, a large number in the context of the size Retail business. Can you talk a bit more about what is going on here? And what you are now building in with regards to inflation assumptions going forward to get more comfort that no more adjustments are required? So that is the first question related to the resiliency reserves. The second one is dealing with lapse rate. I am assuming this is probably not a major issue for Talanx, but can you talk about the extent to which you have seen any uptick in lapse rates in Q4 or Q1 '23? Can you give sensitivities maybe in relation to a percentage of eligible own funds. Third question is related our M&A pipeline. Hadley wants to know as whether we can provide an update with our M&A plan currently and how we are thinking about this in the context of the current inflationary macro backdrop and as well as this provides a particular opportunity. So those are the 3 questions from Hadley.

I will start then. The first question was regarding the resiliency. Basically, Jan, if you can tell something?

Yes. Okay, I'll do. So while we can do the math -- so this Chart #16 is just a conceptual chart, yes. It's not indicating the numbers as we haven't seen them from Towers Watson so far. It's just indicating the development. So -- and what you can see here is that due to the inflationary pressure, we will have to expect that the external actuary will require higher reserves and their best estimate use compared to the past. And this is reflected here in this chart because this will then reduce what we can -- what we call resiliency embedded in our best estimate. In order, if you were to do the math, we have, on average, EUR 50 billion net reserves during the course of 2022. And if you were to assume 1 percentage point higher inflation with the duration of 5 years, that will result in a pretty significant reduction in the resiliency. But what we want to bring across clearly is that you shouldn't expect such a strong reduction in the resiliency because we already worked against it and which is also reflected in the combined ratio development. So there will be a very comfortable resiliency reserves, and I'm pretty sure with that reported on mid of May.

And to add on this, as you said, it comes mainly only from Retail. No, I think the building up and Hannover Re as well as their call said as well something to their expectation how they will build up the resiliency. As you can see and you will see that in the last years, which we have shown in the Capital Markets as well, the primary insurance significantly built up resiliency. It was about EUR 1 billion in the last cycle, add on that. And the reinsurance basically now has to mainly build up again what they have in the last years consumed. And therefore, if you see where it will come from this rebuild up until 2025 has mainly come from the reinsurance side which they have to increase the buffers. If you see it absolute as well proportionately. So there it will come from. But in any case, we are always talking about the level of above best estimate. So there's -- it's only the volatility measure. And if you ask, do we can expect volatility, we believe with the resiliency we have, we are quite comfortable at least compared to the market and the peers with that kind of thing. And as mainly comes a bit from the reinsurance side and the market is very hard now, we are confident as well that we can rebuild it to the past levels again up in the reinsurance side. So there, that discussion you mainly have to focus on the reinsurance side. For the second question, when it comes to the lapse ratio, there's actually no significantly increase of lapse ratio, and therefore, you can afford -- over sensitivities, we observe nothing for the time being. And regarding the last one, the M&A pipeline. Well, as you know, we always stay with our message, we want to be very conservative or let's say, very consequent with our M&A on discipline. But we as well want to therefore, staying within the focus. So what we do see is, yes, there will be opportunities coming up, I believe, which is good for us because we are rather on the buyer side than on the seller side. And we will stay focused in the main areas, which is Retail International, where we have to focus regions, which we have shown to you and as well in the specialty line. So this would be the best field to make M&A business.

And we have 1 final question on the phone, which comes from Vikram Gandhi from Societe Generale.

Just 1 quick 1 in light of what is happening with some of the smaller regional banks in the U.S. Is there any comment that you can make around the U.S. D&O exposure that the group might have either via Industrial Lines or via reinsurance in light of what's happening?

Yes, we can. Obviously, we have observed it, and it's a nonevent on the direct exposure side.

There are no further questions at this time, and I hand back to Bernd Sablowsky for closing comments.

All right. So thanks for joining in this morning to listen to all the details we have given to you. The next events we would make you aware of is our Annual Shareholders Meeting that is on May 1, and we come out with our Q1 numbers a week later. So to see/speak to you there, and thanks again for spending time with us this morning.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day.