Talanx AG (TLX) Earnings Call Transcript & Summary

Good morning from Hannover. This is the Talanx results call for the first 6 months of 2024. And I'm here together with Jan Wicke, our CFO, who will take you through the results and answer all the questions you may have in relation to those. For the first time, we are doing this in a video format, as we saw it would be nicer if we could see each other while talking [ through numbers ]. Obviously, the choice to display your image or not is entirely up to you for the Q&A session. [Operator Instructions] After this experiment, [ this ] virtual session, we will collect feedback and see as to whether we continue or how to adapt as to whether we switch back to the traditional phone call format that we will see. Should we encounter technical issues during the session, we'll somehow manage. I'm pretty confident as we are used to go via virtual format these days. As usual, all the documents, including, but not limited to, our financial data supplement; are displayed on our website in the IR section of the home page. And [ with a short ] delay, you will also find a replay of this video. And with this, I hand over to you, Jan. The floor is yours.

Thank you, Bernd. And good morning, everybody, and thank you for joining us here in our half year numbers call. And I'm very pleased that I can present you those numbers. And to start with, at Talanx, we are really pleased to see our growth momentum continuing. Our revenues are up 13%. And most importantly, the bottom line is growing even stronger than the top line that is 32%. And all this crystallized in a return on equity of around 20%, which demonstrates the strength and profitability of our diversified business model. Let's go into more detail. We have reached EUR 23.6 billion revenue after 6 months. The growth rate has picked up in the second quarter, but it was heavily influenced by M&A. The first-time consolidation of the Liberty business in LatAm is enhancing our growth in both the top and the bottom line. The organic growth without M&A for the group would have stand at 8%, which is still a very good number if you compare that to our peers. Looking at the bottom line, and this is where the CFO looks to, achieving EUR 1 billion group net income already after 6 months is quite an achievement, and it's a milestone for our group. The main driver of this is the insurance service results, so the technical performance. The combined ratio is down by 2.5 percentage points and -- after 6 months, which is a real good number. The return on equity, as I already mentioned, is up to 20.3% and was also influenced by slightly higher investment income. Our group consists of two parts. One is Reinsurance, and the other part is the Primary. If you look at those parts of the group, we first have to acknowledge those parts are growing. In Reinsurance, growth has picked up. It's 5% for Reinsurance as a whole, with much more growth in the P&C reinsurance, whereas Life & Health was stable. And in Primary Insurance, the growth was even stronger with 24% during the course of the year. If we were to exclude the M&A in Latin America, it would be would have been 11% for the Primary group, the growth rate. So all in all, for the group, 13% growth. If you look at the bottom line, the development is even more pronounced. Hannover Re just published fantastic half year results with the net income up 21%, very strong numbers. And Primary did even better. We have an increase of the net income of 39% during the course of the first 6 months, and this [ dose ] adds up to us in the group, and we are lucky shareholders of those of Primary and Reinsurance with a 32% increase of the net income. And this strong development of Primary during the course of the last years, you can see it here on the chart from 2018 to 2024, where we have increased the share of the group profit of Primary Insurance to 48%; brings us closer to the 50-50 split, which we have set as an informal target for Primary versus Reinsurance. However, please keep in mind this is [ not a dot mark ]. We would not hold back Hannover Re from growing strongly just to achieve this. Or in other words, we like anything in between 40% and 60% as a share for the Primary Insurance, and this is due to the fact that this is a sweet spot of diversification, which is good for capital efficiency within the group. Looking at the first half of 2024, we have to have a look at a large loss development, given that we are ensuring bigger risks compared to many of our peers. And what you can see here is that we have booked, as usual, our budget, given that the reported large losses have been below the budget. The biggest large losses, which we've seen in the second quarter, in particular, were flood events, like the floods in Southern part of Germany with more than EUR 170 million; like the flood in Brazil, which is another core market for Talanx, with more than EUR 100 million; or like man-made issues, the riots in New Caledonia with EUR 82 million; and also the floods in Dubai would add another EUR 80 million, which is not here marked on the chart. So we have seen in the second quarter an increase with regard to large losses, which is worth to be mentioned. In the Primary Insurance, we will have a buffer for the quarters to come of EUR 84 million. Whereas in Reinsurance, we have to mention that within the large-loss budget, which was booked, there is also something in for the Baltimore Bridge, which was not -- there are a lot of questions still not clear, so we cannot give you a concrete number of Baltimore, but we are very confident that the large-loss budget will cover Baltimore as well and that there will be even in addition, a small buffer for the quarters to come. With regard to the quarters to come, we have already seen 2 hurricanes in the third quarter, Beryl and Debby. And the hurricane season is predicted to be quite severe. And we should keep that into -- in our minds,when we come to the guidance of the group because we have decided, like all other insurance groups, to not to adjust our guidance for the full year. But I want to bring across that at Talanx, we are very, very confident that we can deliver net income clearly above EUR 1.7 billion for the year as a whole, that we will deliver a return on equity of above 15%. And given the favorable growth which we have seen in the first half year, which will come down a little bit as this M&A effect is phasing out slightly during the course of the year; we will be very strong for the full year. So we will reassess our guidance after the third quarter when we have some more knowledge and then discuss that with you with the Q3 numbers. If we go a little bit more into detail into the segments, I would like to start with Industrial Lines. Industrial Lines is able to present a fantastic result for the first half of the year. The net income is up by 48%, and this is driven by the further improvement of the technical performance. Combined ratio is down to 91.1%, which is a strong number, keeping in mind that they continue to do their books very conservatively. Insurance revenue are up 14%, and this also drives my optimism for the future of Industrial Lines. In our HDI Global business, we have, by far, the best cost ratio of the industry. This gives us the opportunity to grow faster than our peers in a hard market. And this is good for the bottom line. And here, you can see the first signs of it, and this translates into a return on equity of slightly below 16%, 15.7% for the first half year. If you go then to Retail International, Retail International remains the growth engine of Primary Insurance. Even without the acquisition, it is growing at a solid double-digit growth rate of 19% currency adjusted. And if we include M&A, it's 49%, yes. And it's not only the growth. Please look also for the technical performance, which we can deliver here. So we have a 92% combined ratio here, which helps us to increase the profit by 59% to EUR 224 million net income contribution to the group for the first half of 2024. And this adds up also to return on equity to 14.7% for the first half year. And there, we have decided to adjust the segment forecast a little bit. We have been too conservative here, stating initially return on equity only slightly above 8.5%. We will increase that to more than 10% for the full year, and we are very confident that we can deliver on that one. And let me add something more what drives my confidence with regard to this segment. We are here in the right markets. Being so strong in Latin America, where the demography is significantly different than from other parts of the world, this will provide us with very good growth opportunities, not only for the current year, but also for the years to come. Let's go to Retail Germany. In Retail Germany, return on equity is above 10%. The return on equity of 12%, what you see here in this graph, includes also the asset management contribution earned from the assets sitting in this division. But even without this contribution, the return on equity is above 10%. Yes, we are facing some headwinds in Retail Germany. The combined ratio is up to 99.7%, and the main drivers are the floods in Southern Germany and the [ motor ] business. But our management is taking action to improve the performance. And what makes me confident, the mindset is clearly on profitability that might go at cost of growth. But if you look at the growth potential in other parts of the group, I'm not concerned at all. Talanx will remain strongly growing company also for the future. And with regard to Reinsurance, I do not have to say so many words, just look at the return on equity, 22.8% return on equity for Hannover Re, a very strong number, and we are happy shareholders of Hannover Re. So then I have a few insights from you from the CFO desk. As usual, I start with the capital position. So the overall Solvency II ratio after the second quarter stands at 218%, which is 1 percentage point up compared to the previous quarter. And this is despite the fact that we paid dividend, so a very strong number, which also shows that the capital generation, which is shown on the next chart, is pretty strong. What you can see here on the left side of this chart is the net asset value. We have increased our equity from EUR 10.5 billion to EUR 11 billion, and this despite the effect of paying EUR 600 million dividend, and this adds an up to a value equation of close to EUR 1.2 billion from a shareholders' point of view. If we enhance the shareholders' point of view, not only looking at what is already reflected in the equity development, what is to be expected in the future, we can add the CSM after minorities and taxes, and we can also add the risk adjustment after minority and taxes. And if we do so, we end up at EUR 19 billion shareholders total value, which then translates into EUR 73.6 per share if you divide it through the number of shares. What does that number mean? It's not a growing concern value. It's an assumption that we would stop business next day and just would be winding up the profits which we have acquired so far. And just be assured, we do not want to stop doing business. We want to grow our franchise and add additional future value to the numbers here. So this really drives my confidence, and this is my favorite chart. As I'm here together with Bernd, I also have to show you [ Bernd's ] favorite slide, which is this one, where you can see the development of the market cap of Talanx divided into the 2 parts of Hannover Re and Primary Insurance. You see that starting from 2022, we have seen a nice increase, a slight dip in the last weeks. Maybe this might change. But if we go to the valuation a little bit deeper, then we will easily find out, if you look at the P/Es of Talanx, it's well within the range of the peers. But it is -- you can add up P/E of Hannover Re and Primary Insurance. And if you see the very good Hannover Re P/E, which is due to the fact that Hannover Re is able to constantly deliver a return on equity better than its peers and more stable results and better growth and -- then you see the valuation of Primary group, which is below 4 P/E. This is something where we look at and ask ourselves also some questions about [ devaluation ]. On the next page, you see our second source of income, which is next to our technical performance, the investment income. And sorry, we are pretty boring here, so we stick to our conservative asset allocation. As you can see, what is here worth mentioning two things. First of all, we have a shrinking proportion of euro investments in our portfolio. This doesn't come as a surprise as we are growing internationally. Second, we have reduced our already-small equity share in the first half of the year further by 26%, but -- which is a normal portfolio management action. So if we look then at the reinvestment yields, there we see a nice development that we are able to achieve 4.7% reinvestment really, which has also driven that -- the [ current ] that we include a lot of dollars and so on into our reinvestment. And in the dollar area, there are higher interest rates than it's in Eurozone. And you can also see that the spread on the left side of the chart, it's a spread which we earn on our investment portfolio, which is reflected in the net insurance finance and investment result. We were able to increase that by 50 basis points during the course of the year. Finally, I want to draw your attention to one chart, where my team very often recommended not to put it in, but I insist on doing this. That is the fair value on P&L assets, which can provide quite some volatility to the bottom line. And we haven't seen so much volatility during the course of 6 months. We have seen some [ depreciation ], not surprisingly in the area of real estate, EUR 48 million, but the rest was more than -- so with the rest, we were more than able to compensate for it. So all in all, we had a very positive development here -- or a slightly positive development here. I do not want to overestimate that. But I want to draw your attention also to the right side of the chart that there is, in case of a capital markets meltdown, quite some potential that the bottom line could be affected, which you can see on the right side. But we haven't seen anything so far. So having said that, coming to the group outlook. So to summarize a little bit before taking your questions, we are very happy about the strong growth in the first quarter. Primary group is doing exceptionally well. This is why we are very confident that we can deliver a return on equity of above 15% for the full year. So it's good. Net income will be clearly above EUR 1.7 billion for the full year and that we -- [ which ] we will also pay the dividends, which we have announced. Second, I would like to see most of you in-person on the Capital Markets Day on December 11, which will take place in Munich. We will provide you with our new financial midterm targets or to be more precise, what we expect as return on equity, what our net income ambitions are and how we want to continue with our dividend policy. We hope to welcome you. Having said that, I'm now ready to take your questions.

[Operator Instructions] And I start with Ismael Dabo from Morgan Stanley.

Congrats on a good set of results. I have two really quick questions. One is the Industrial Line's performance keeps coming in exceptionally well, even with large losses in 2Q. I'm just wondering if you could sum a little bit more about the trends in the line rate versus trend that maybe in line of business? And also, if there was any resiliency build in the reserves for the quarter or for the first half in general? And the second question is maybe not related to, but maybe related to you. S&P gave Hannover a positive credit rating and removed some of the strengths on the capital ratings, which I think some people are expecting high set of dividends that come from Hannover Re. I'm just wondering, what does that mean for Talanx and any potential future capital return for you guys?

So let's start with the first question with regard to Industrial Lines and the market trends to give you some color here. So we are growing both the rates and we are acquiring new business. And the increase in the rates is still covering -- inflation increases completely. So we are very happy with the development of the profitability. And we can grow our business compared to our peers so good, given that we have, by far, the lowest cost ratio. And this makes us pretty competitive in the market. With regard to the resiliency, we have an already-high resiliency level, and we added to the resiliency during the course of the first half year, in order to compensate also that the buffer in relative terms remains stable, even though the business is growing by 14%, yes? And we did -- maybe we do not have an exact assessment after the first half year, we maybe could have done -- have done, not could have done, slightly more than that. So you can assume that we have displayed rather conservative numbers here for Industrial Lines. So this is first question. With regard to the second, I think with regard to what the rating agencies are doing, always reviews in progress. And with regard to the dividend policy, which might be affected by rating requirements, we will come out with our dividend policies on December 11 on our Capital Markets Day. Does that answer your question? Ismael?

Yes. I think at least [ for the interim ]. It is probably something to have to wait for till the end of the year, which I completely understand. That's perfect.

Okay. So then we continue with Michael. Michael Huttner from Berenberg.

Yes, a good set of results but -- I'm not saying I was disappointed. I was hoping you'd raise your net income guidance. And I know you put [ excellent ] signs or whatever, but it's not the same as actually raising it. I just wondered, what held you back? Because it's clearly not an absence of buffers. It's clearly not an absence of strong trends. There must be something in your mind as CFO, where you thought this is not -- so I just wondered, what that might that little kind of difficult -- that little gray cloud is in your mind on the -- which started raising? And then the other two questions [ are much more ] mechanical. You mentioned the net income has been expense ratio advantage in Industrial Lines. I just wondering if you can give us the figures as you see them relative to peers. You also mentioned that you were clearly not favoring margin rather than volume in Retail Germany. And I just wondered if you can actually give us some numbers and some precise indications. I think you cancelled some brokers, you raised pricing. And you left your guidance, 98% combined ratio, for the year unchanged.

Okay. First, to the overall question with regard to the guidance. Together with my team, I looked at the volatility of Q3 results and second half results. And if you look -- just takes the years 2017, '18 and so on, then we have even seen losses in the third quarter due to a very strong hurricane season. You may recall the HIM hurricane season. And it's always the case, and it's not only us who are reluctant to reassess the guidance in the midst or after the hurricane season has started. And next to that, there are some predictions that we will see -- the predictions of the authorities in the U.S. is with 85% probability, they see a more severe hurricane season this year. And this makes me a little bit reluctant to adjust too early. But nevertheless, all the rest, what you said, Michael, is pretty true. We are a very resilient group. And so we will reassess our guidance after the third quarter. So this is the first one. Second was German Retail. To be very concrete here, so what we are doing is we have to adapt prices to a heavy [ claims ] inflation, which we see, in particular, in the motor business. And we are not alone. The whole market does it. And we are bringing more or less a message to the customer, which is derived from the behavior of the garages of the automobile industry because we have seen increases in the hourly wages for mechanics in the body shops for cars to EUR 300 to EUR 400 an hour. And this has to be translated into higher insurance costs or higher premiums for insurance. And this is what needs to be done in the German market. So -- and -- going forward, what makes me confident that our segment will deliver more return on equity above 10% for the full year, is pretty simple -- we put profit first towards growth. So -- and this is what the CFO normally likes, first to have a profitable business before you grow it. Does that answer your question, Michael?

And I think you mentioned you -- maybe you could be a bit more specific on the price increases and also the cancellation of some contracts with some brokers.

Yes. We have cancellation with some brokers where the overall broker relationship proved not to be profitable and together attempts to make it profitable, not successful. So we are still talking to the people. But if we cannot achieve prices which are adequate, then we have to cancel it. And so it was with broker pools who get a nice margin, also on a pool level next to the margin on the broker level, yes. So you have a double charge with regard to commissions here. And second, we have a very differentiated price increases in the market. So it really depends on the risk. It really does not -- it's very difficult to give you an overall number here. What I've seen is, but it's not reflecting HDI, it's reflecting the market as a whole; is that there was inflation index, where motor insurance was part, and they reported an increase of 29% on a whole market level.

Next, we go with Philip Ross from BNP.

I just have one question. It's a broader one on NatCat [ exposed ] across the group. I guess it follows on a little bit about Michael's guidance question. But it seems to me that the market sort of understands the Hannover Reinsurance footprint as opposed to -- in terms of NatCat exposure. But just thinking about the Primary business, particularly Industrial, you've done some work over the years to correct the footprint, maybe 7 or 8 years ago, you over exposed, et cetera. So if you could just talk about how you see the footprint in Industrial Lines in sort of Q3 NatCat. And maybe I guess also in international, you'll have some exposure maybe in Mexico, Latin America. I appreciate it's a lot smaller, but just to give us a bit more of a flavor of what you might be exposed to in 3Q in the wind season.

So with regard to the wind season in Q3, I'm not talking about the earthquake risks, then yes, we are surely exposed to Mexico. Last year, we had a hurricane in December in Mexico, which was in our large-loss list. But next to them, being affected by tropical cyclones, we have also seen this in Brazil, in the northern part of Brazil during the course of the last 2 years. So these are the 2 areas where we've seen so far NatCat exposure to topical cyclones at Retail International. The most exposure within the Primary group is in Industrial Lines, and we are [ insuring ] industrial plants in the United States, in Florida and Texas and so on and also in Puerto Rico, where there's a lot of pharmaceutical industry. And so we are a little bit more exposed in Industrial Lines. But as you said correctly, we have adjusted our NatCat exposure. And we did two things. First, we included that in the pricing, and we took smaller tickets. And second, and this is in particular true for the specialty business, we have a little bit downsized NatCat exposure in the course of 2022 and the beginning of 2023 already in the portfolios as we were not satisfied with the price increases, which we wanted to see there. So if you compare that to 2017, we are, on a relative base, less exposed, given our growth, which we have seen. If you look at the growth of Industrial Lines, in absolute terms, we are more exposed. I hope this gives you some color. So -- but we are confident. And given the resiliency of Industrial Lines, which is extremely strong, we are very confident.

So then we go to Bhavin Kumar from HSBC.

I have two on my side. The first one would be on Retail International. And if you could remind us what is the resiliency situation of the Retail International line, particularly following the integration of Liberty [indiscernible]. So have the [ regulatory ] situation being taken into consideration in the sense that it's already been under review? Or should we expect some more review to be done maybe at a later half of this year? Any color on that would be really helpful. And the second one would be on the ROE guidance for Retail International, obviously, increased from 8.5% to over 10%, but it's obviously very strong already at the first half of 2024, should we expect some more equity top-up for the segment, which would probably dilute the ROE for the second half for this segment? And the third and final one would be on your fair value, fair value through profit and loss statement. So obviously, we have seen a positive impact in the first half of 2024. Can you remind us what is the inherent assumption that you have baked in your guidance for full year 2024 to net income?

So let's start with Latin America to be very -- yes. First of all, I want to state, on December 11, Wilm Langenbach, who is responsible within the Board for Retail International, will give a deep dive on the integration work which is done, and everything there is currently on track. But we have to knock on [ woods ] because it's a difficult task and the people are really working in Latin America to achieve this already very good results. Second, with regard to resiliency and the overall impression, we have bought some very good entities in Latin America. We are very pleased with the technical performance of the entity. We are pleased with the quality of the management, which we could add to our group. So we are very happy with the overall development. Third, with regard to integration costs. So it's normal when you start integrating companies at the beginning, you have slightly higher costs before you then benefit from the synergies to take place. We already have seen within our numbers quite a significant part of integration costs already during the course of the first half year, which is another positive. So all in all, we are really up so far, everything is on track. The development by far exceeds our initial expectation, but it's also driven by a very cyclical market. And I just want you to keep that in mind that in Latin America, used to have shorter cycles, and we have currently a very hard cycle in South America. And maybe we are a little bit conservative with increasing it to above 10%. Yes, I have to admit that. But on the other side, the volatility of the cycles is there. Then you asked something about the fair value through P&L. What we have mentioned, what we have included in our guidance. So we have included in our guidance further depreciation on the real estate. Roughly, it's the same amount which was displayed on the chart. So keep that also in mind. But we expect this to happen, that we will have further depreciation on the real estate. And we haven't added anything else to the guidance on top of this. So -- but this is already included.

Okay. Then there's a follow-up question from Michael, Michael Huttner.

So two questions. One is the -- well, actually, only one, it was the cost advantage in Industrial Lines. And I know you said you'll do a deep dive on the Retail International on the 11th of December. But is there any figure you can give us, any at all, on the acquisitions? And any kind of feel for where the profit lies or the ROE or combined ratio? Anything would be hugely appreciated.

So with regard to Retail International, first of all, within the growth numbers you've seen, on a group level, without the LatAm acquisition, the growth would have been just 8%, not 13%. On a segment level, it's 19% instead of 49%, currency adjusted. And with regard to the bottom line, it's roughly EUR 40 million, what we've seen in the [ fourth ] quarter. And it's already including a significant part of integration costs, yes, but not all of the integration costs. This is also clear. The colleagues who are working on it in Latin America, in particular, in Chile, Colombia and Ecuador, they've just started their work after the approval of the regulator end of the first quarter. So there's more to come. And therefore, it really makes sense to make a reassessment in December where do we stand, to see the full picture here.

On the Industrial Lines?

On Industrial. Could you repeat it once again? Sorry, Michael, I wasn't...

It's okay. The cost advantage. You mentioned many times you have the cost advantage versus peers. And I just wondered if you can remind us sort of figures.

So the cost ratio in Industrial Lines is still below, its 17%, and most of the peers stand more around 24%. So it's quite huge. So more than 5 percentage points difference here. And this is in the DNA of the group. We really try to avoid [ matrix ] structures. We have tried to avoid that we have too much stuff in the headquarters. We want to have the people more in underwriting and sales.

Then final question comes from Nick Johnson from Deutsche Bank.

Just coming back to Latin America and a follow-up question really on reserves there. Just wondering if you can say how confident you are that the reserve prudence in LatAm is as strong as the German business. Could you possibly just talk a bit about the reserve process for LatAm and the rest of international, particularly around inflation assumptions?

That's a good one. So given that we put the integration of -- first of all, I should explain a little bit the resiliency concept and then I will explain what we do in specifics for the LatAm region. So first of all, the resiliency process is as follows. Once in a year, we have an additional assessment of our reserves of -- 95% of the reserves is grouped by Towers Watson. And we compare the numbers Towers Watson tells us for best estimate with what we have booked. And as you could see, we published it in May, we have EUR 3.7 billion additional reserves booked if we compare this to Towers Watson. So our best estimate view is much more conservative than what Towers Watson told us. With regard to Latin America, the CFO of Retail International and I, we have decided to include the Retail International Liberty business in the next review of Towers Watson. So we haven't done this external review of Towers Watson with the newly acquired Liberty entities. But what we have done so far is that our own actuaries have had a closer look to it. And we are very comfortable with the level of reserving we've seen, but we haven't had a final assessment of Towers Watson. So in next May, when we publish our resiliency review once again, we will have some more insights. My overall expectation is that we won't see a bigger difference to what we have in our own entities in Latin America. Finally, what is the difference between Latin America and the business which we have in Europe, for instance? In Latin America, we have more short-tail business, yes. Given that there is more short-tail business, the overall level of resiliency is slightly smaller as this business is winding up pretty fast. Does this answer your question?

Yes, that's very helpful. Any comments around inflation assumptions? Or is that just baked into the comments you made about being comfortable?

Yes, good question. So what we do in our own actuaries, so we have, first of all, in the loss triangles, we have implicit inflation, which is derived from the past year. And on top of that, we have an extra assessment in the group, whether we need to add with regard to the projected inflation, additional inflation buffers. And this is also done in the newly acquired companies, and this also is reflected here in the numbers. But this is a normal procedure because inflation really matters to us. And if I look at the group as a whole, I've just seen the report of the actuarial function, we have more than 430 different inflation indices for valuation purposes and pricing purposes, which came as a surprise by the number for me as well. So it's really very differentiated for line-by-line and country-by-country, currency-by-currency.

That's very helpful. And well done on a very good Q2.

Okay. Thanks, Nick. And that was the final question, final call. Is there anything, anyone? Okay. So then this was our first virtual results call. We liked it that we could see you. Hopefully, you liked it, too. We will get in touch with you to collect some feedback in order to improve for the future. Thanks for spending time with us. Thanks for listening. And with that, concluding remarks to Jan.

Yes. Thank you, Bernd. Thank you for joining us here. You've seen our half year numbers. We are very pleased about the numbers we could present to you. We are very confident with regard to the future of Talanx, given that we are growing pretty fast in very profitable markets. And we are really looking forward to our future. Thank you for joining here.