Talanx AG (TLX) Earnings Call Transcript & Summary

Good morning. Good morning, and welcome from Hannover. We are here at our little studio at HDI Platz in Hannover. And thank you for the time you're spending with us this morning to go through our numbers for the second quarter of the financial year 2026 and the first 6 months of the financial year. I'm next to my CFO, Jan Wicke, who will, as always, take you through our numbers in more detail. And after his presentation, we are happy to answer all the questions you have in relation to our numbers. We are on MS Teams today. So if you want to pose a question to us after Jan's presentation, all the supplementary information material to our presentation is published on our website, including, but not limited to, our comprehensive financial data supplement. And with that, I hand over to you, Jan.

Thank you, Bernd, and good morning, everybody, and thank you for attending our earnings call. I'm glad to provide you with some insights how Talanx has performed during the course of the first 6 months. And to start with, we were able to achieve a net income of roughly EUR 1.5 billion after 6 months, which is the highest result in Talanx history. And even better than that, we have record results in each and every segment in all the four of them. 52% of our profits were derived from primary insurance, 48% from reinsurance. So this is a well-balanced mix. And this has driven our confidence to increase the guidance already after the second quarter. We now expect to deliver a net income significantly above EUR 2.7 billion for the full year. As usual, let me start to provide you with an overview about top line and bottom line. Top line, we were -- insurance revenues are stable in euro terms and currency adjusted, we are growing by 3%. The net income is up 9% to EUR 1.5 billion. And the high profitability of our business is displayed in a return on equity of 21.5% and the slight decrease in the return on equity on this outstanding level is driven by a higher equity, which I will explain later a little bit more. Looking at the top line, where is the growth derived from? Primary insurance is growing currency adjusted by 4%, reinsurance by 1% and this combined then to a currency-adjusted growth of the group of 3%. And the bottom line, with regard to the bottom line, primary insurance was able to increase their contribution to the group net income by 12% to EUR 780 million. Reinsurance is up 7% to slightly above EUR 700 million. And for the group, this adds then up to EUR 1.499 million to be precise in the numbers for the half year. Looking at the diversification in the group, there has not very much changed. So we are very well diversified with regard to both top line and bottom line. On the left side of the chart, you see the split of insurance revenue, which is very well diversified throughout the world. And on the right side, you see the earnings contribution by segments where we also have a nice diversification. Looking at one source of our results is the development of large losses. And there, we want to draw your attention to the fact that we have had a very benign first half year with regard to large losses. So far, we have just reported losses of EUR 942 million. We have booked, as usual, the higher of large loss budget or reported losses. So we have booked EUR 1.4 billion in our account. This means there is a difference of EUR 474 million and which would translate into a net income effect of EUR 265 million. So a very benign large loss development during the course, but not yet reflected in the bottom line numbers. And obviously, this drives also our confidence to increase our guidance to significantly more than EUR 2.7 billion for the full year. This would translate into a return on equity of slightly above 19%. Let's dig a little bit into the segments. And as usual, we start with Corporate & Specialty, HDI Global. With regard to the top line in euro terms, we have a decrease of 2%, currency adjusted, we are nearly flat, above EUR 5 billion. The group net income despite a super prudent accounting is up 7%. We have very strong technical results, which is reflected in the combined ratio of 90.7%. And we have a growing investment income, which is driven by that we have sold in the past some fixed income with lower coupons and bought some with higher ordinary income. And so we see a growing investment income here as a second driver of the earnings increase. Return on equity stands at 16.5%, and we are very, very confident that this segment who is really performing very well, will deliver a return on equity in this area also for the full year. Coming to Retail International, which had an outstanding first half year of 2026. Here, we see in euro terms, a growth of 9%, currency adjusted even above 10%. For the first time, they have already achieved more than EUR 5 billion insurance revenue after the first half of the year, and we now expect them to hit the EUR 10 billion mark by the end of the year in this regard to insurance revenues. Even a higher growth rate is seen in the bottom line. The net income is up 16% to EUR 387 million. And the drivers of this with the really outstanding development is a very strong technical result with a combined ratio of 91.2% and also rising investment income, which supports the profitability of the segment. The return on equity stands at 20.8%. And even if we adjusted for the buyout of the Polish minorities at the beginning of this year, then it's 19.9%. This is a really very good number for retail business. And Wilm Langenbach and his team, they are really proud on what they have delivered so far. Coming to our smallest segment, Retail Germany, which accounts for slightly below 7% of the overall net income. With regard to the insurance revenue, we would have expected a stronger decrease of the numbers. But given that they are quite successful in the distribution in non-life and also in the other life areas, it's just a decrease by 1% despite the fact that we had compensate for the end of the Targobank agreement. The group net income is up 19% to roughly EUR 100 million, and this is despite the fact that they had EUR 15 million large loss budget overshoot. And in this segment, then we have booked the reported large losses. And this translates also in a combined ratio of a very good 93%. Return on equity stands at very good 13%. Coming to our biggest, by far, biggest segment, Hannover Re, the reinsurance. Here, we have a decrease in insurance revenue of 3%. Currency adjusted, we are growing close to 1%. The group net income contribution to the Talanx Group result has been increased by 7% to more than EUR 700 million. And this is driven by an outstanding low combined ratio of 83% here. Our return on equity stands at 21.9% as most of you might have listened to the call of Clemens and their colleagues, I do not have to comment further, but it's -- Hannover Re is constantly delivering good results. Coming to capital management. With regard to the solvency ratio, we are standing at 2.46%. So we have a very good solvency situation. The net income development, as I already told, was very pleasing. We have an increase of the net -- sorry, the net income development. The equity development is very pleasing. We have an increase of the equity despite paying a dividend of EUR 930 million by roughly a little bit less than EUR 1 billion. So overall, from a shareholder perspective, we were able to create roughly EUR 1.9 billion value through the first half of 2026. This translates into more than EUR 7 per share. Also, we see a very good development in the other shareholders' capital components. So overall, if we add to the equity, the CSM and the risk adjustment after minorities, after taxes, then this adds up to roughly EUR 23 billion for Talanx as a whole. So this is not too bad. Coming to the investment portfolio, we can report that we haven't changed a lot. So we are still predominantly investing into fixed income. More than 80% of our assets are in fixed income and out of that, more than 90% in investment grade. So it's a low better investment portfolio approach, and we added some other asset classes, which are on the pie chart on the right side of the chart in order to achieve a little bit yield pickup here overall. Nevertheless, looking in the accounts, you will see that we have increased our investment income quite substantially. The investment income for owners is up 15%, return on investment, 40 basis points. and the finance and investment result, which also takes into account the unwind of the claims reserves is even up 21%. And what is reflected in this development is, and you are all aware of it, in the last year, we have sold fixed income with low coupons out of the low interest rate phase and bought some new fixed income for it with higher coupons. And therefore, we have now a higher ordinary investment income, which we can report and which flows here through the results of the Talanx balance sheet. Coming to our outlook. Overall, we are pretty, pretty confident with regard to the Talanx business model. And looking at the businesses model in more detail with regard to diversification at the beginning of the presentation, you have seen our split of revenues and earnings. So we are very well diversified. We have a P&C focus, more than 80% of our business is in P&C. And looking at the quality of the portfolio, I just want to draw your attention that we are always booking the higher of large losses incurred and reported and the large loss budget, and we have booked the budget. And despite the fact that we have booked the budget, the combined ratio is below 90%. So we have a very high quality in our P&C book. Thirdly, we are a cost leader. And I may draw your attention to the appendix of this presentation. On Page 31, we have updated our cost advantage towards the peer with the year-end figures by 2025. And there, you can easily find out that we have a significant cost leadership compared to our peers, and this gives us a competitive edge in an increasingly competitive market. And last but not least, we are all living in a world of uncertainty. And therefore, it's really useful to have a lot of resiliency to cope with this uncertainty. And as you are also well aware of, we have a super strong balance sheet, and this drives also our confidence with regard to our outlook. We now expect to deliver for 2026 significantly more than EUR 2.7 billion net income, and this translates into a return on equity from slightly above 19% for the full year 2026. And with that, Bernd, I hand over for you for the Q&A.

A The first question comes from Kamran Hossain from JPMorgan.

Congrats on a record first half. The first question is probably something lots of people going to ask about, but the guidance outlook is very good. Can I just ask -- this time last year, you increased the guidance -- so that went from EUR 2.1 billion to EUR 2.3 billion. So you were confident enough to put a number on it this time last year and then it increased again in Q3 last year. What's driving your -- not reluctance, but what's driving the rationale to not give another number at this stage in the year? Is there anything behind that? Do you think the upside is probably even more than we might have seen last year? So just interested in kind of what does significant mean and why didn't you put a number on it this time around? The second question is, when I look at the earnings, clearly, investment income was a benefit and you've highlighted that in the slides. How much of the beat versus being significantly above EUR 2.7 billion is sustainable into 2027? I think quite a bit of it will be, but just interested in your take on that.

Okay. First, with regard to the outlook. First, I have to admit, it is very unusual that we already reassess our guidance after the second quarter. As you are all aware, the third quarter is a hurricane quarter with the largest consumption with regards to large losses. And so we have a lot of confidence that we have already increased above EUR 2.7 billion or significantly above EUR 2.7 billion at this stage in the year. We will reassess our guidance after the third quarter when we have more knowledge about the usage of the large -- what has happened with regard to large losses in the third quarter. And then we can put that into comparison to our large loss budget. In the current outlook, obviously, it's included a full consumption of the large loss budget for the full year despite the fact that we have a huge buffer if you look at the numbers after the second quarter. And I just want to highlight also, we haven't said above EUR 2.8 billion. At the current stage, we feel comfortable to say clearly or significantly above EUR 2.7 billion. And we will reassess this after the third quarter, and then we will also deliver an outlook for 2027. Second question with regard to the investment income, how much is sustainable in this investment income? I believe the higher coupon, which we see in the ordinary investment income is sustainable. And let's assume the following. We have not a very high large loss consumption in the third quarter. Let's just assume it for a while. Then it could be also used to realize a little bit more hidden losses on the bond portfolio in order to ensure that we can show earnings growth also in the years to come. So this is also in our mindset on how to steer year-end results. And this comes down to our priorities. The first priority for Talanx is dividends always up, and we will deliver on that one. The second priority is we want to provide our investors with earnings growth with lower volatility. And this is what we always keep in mind when we are steering our results.

So next in line is Hadley Cohen from Morgan Stanley.

I think Kamran has asked the key question already. But if I could just ask on the C&S combined ratio, I mean, you're still building buffers there, I think, but at a slower pace than you were, which means more is flowing through to the combined ratio and the bottom line. How should we think about the outlook from here? Are we basically -- are you basically saying that because you're building buffers at a slower pace, incrementally the combined ratio should continue to get better from here? Or should we assume that the slower pace of buffer build is effectively offsetting pricing pressure that you're seeing in those lines, so the combined ratio remains broadly stable. So that's my first question. Second question is on Retail International, please. So very strong around 10% top line growth there. Can you give us a sense of the mix of volume versus price in that respect, please? And just to get a sense of the sustainability of the growth trajectory there? And Jan, you've been very useful in the past with respect to giving us some guidance around full year earnings for this division and what have you now the restructuring costs are largely behind us from the integration of the acquisition. Is the first half print, for example, a good proxy for something that we should extrapolate into the second half? And is the sort of volume growth a good indication for the earnings trajectory from here?

Yes. Thanks, Hadley. The first question was with regard to the resiliency development and combined ratio development at Corporate Specialty. Obviously, we try to deliver a stable combined ratio through the cycles. And in this area to have a combined ratio below 92% is already a good number. We shouldn't forget about that. We are currently in a very benign environment, but this is also already a very good number. With regard to the resiliency building, I come back up something with what Christian and [indiscernible] said. There are 3 phases of resiliency building, strong resiliency building, what you have seen in the last year. Then there is mid-building -- a little bit building of resiliency. This is what you should expect for the current year. And then there is a phase where there's no resiliency building. But I want to ensure you we are still building some resiliency, not at the level of 2025. So it's not too bad. So second question was with regard to Retail International, which had really an outstanding development in the first half of the year. And you asked for mix and volume and should provide you a little bit, I guess, some more color on where the growth was coming from. Looking at the first half of the year, the growth was derived from Poland, from Brazil, from Mexico, from Turkey. That are the main growth drivers in the [ HI ] portfolio. The markets there are also -- there's a little bit balance in the markets in terms of softening and hardening from the markets. My view on retail business is if you deliver a combined ratio around 93%, you're already very good in the retail business. So -- and they are now currently outstanding very, very good. Should we -- what is the earnings trajectory for Retail International? So if we look at the current run rates, that looks really very pleasing. Obviously, we will try also to manage the earnings volatility in the segment. So I'm a little bit reluctant to multiply it with 2. As usual, also if you look at the Talanx history in the last year, the second half year was always a little bit weaker than the first half year. Keep that in mind. We are a little bit trying to steer the results here. But the underlying trend of what Wilm Langenbach and his team is doing is very good. And you are absolutely right, we are behind the curve with regard to the cost for migration. They are achieving and working on cost advantages here. And the cost advantages, they will provide us with a competitive edge, which will be also useful for the years to come. But we will provide you with some more insights on the outlook for 2027 in the next quarterly call as usual, when we provide you with the full year outlook on 2027.

Next question from Michael Huttner from Berenberg.

Congratulations, like seriously congratulations. You must be very happy. Just on Germany, so top line beat in a funny way. I just wondered if you can talk a little bit more about that. And then the EUR 15 million kind of excess large losses, when I spoke to a wonderful IR team, they said it was mostly SME claims. So I'm just wondering, is it like what I would call recession claims when you have an insurance policy, you can virtually -- you can transform it into cash by having a claim. And then the -- I may have a third one. So top line currency adjusted 3% in H1, you're saying you're still maintaining the 5%, I mean, kind of 5% for the full year. And just doing the math, it would imply 7% in the second half. Where would that growth come from?

So to start with Germany, top line development. So it's -- we had to compensate in the first half year roughly for EUR 80 million insurance revenue of TARGO. And if you see this minus -- minus 1%, and then you really can see that we have growth in the other areas of Retail Germany, and it was above our own expectations. With regard to the large losses, well, there have been higher claims. So I should follow your idea whether there's anything that it doesn't seem to be fraudulent. So it's normal delivery in the property lines, and we have had these losses and we are delivering to our customers. This is key to us. And the third question was on -- pardon me, the third question, Mike, could you repeat it please?

Top line. Good top line. If you maintain the 5% for the year, it means you're expecting more in the second half.

When we are talking about mid-single digits, then we have a range in between 3% and 7%, and this might be below the average, 3% to 7% despite the fact that we see some nice developments in both reinsurance and also in Corporate and Specialty and particularly in Retail International.

Chris Hartwell from Autonomous with more questions. Chris, what's on your mind regarding our numbers?

I mean, first of all, can I come back to, I guess, really Kam's question just on the net income target. I mean it's interesting that you've changed the phrasing around the net income target for 2026, but the return on equity target is unchanged. And so if I do the sort of the math around that, I mean, 19% ROE is just above EUR 2.7 billion if I assume that sort of the June 30 shareholders' equity is a good proxy for average across the year. And 20% would be, I guess, close to EUR 2.9 billion. So I'm sort of wondering if you can sort of help me, I guess, with the phrasing of around 19%. So I guess the around bit on the ROE guidance. And secondly, just coming back to the cost leadership point you were making. I guess how defendable do you think that is, particularly with the industry trying to embed AI and various other sort of efficiency mechanisms across the industry? Do you think that's sustainable? And just related to that as well, Retail Germany, I guess, is the missing piece on that sort of clean sweep of cost leadership across the group. So I'm intrigued to know why you don't have a cost advantage there. And if I can sort of sneak just a little third one in as well. There hasn't been a great deal of talk on dividend. I appreciate the message you gave in Q1. But again, if we could have a little bit of thought around sort of dividend sort of outlook. And particularly, I guess, how you sort of think about dividends as cycles get more challenging sort of obviously, solvency isn't related entirely to top line growth, sort of more exposure. But presumably, the ability to deploy capital is going to become more challenging both in C&S and in reinsurance. So can we expect further acceleration of dividend over the next few years?