Talanx AG

XETRA:TLX

Earnings Call Transcript 2021-Q1

[Carsten Werle, Head of Investor Relations]

Yes. Good morning from Hannover. This is the Talanx First Quarter 2021 Results Call. I'm here together with our CFO, Jan Wicke, who will take you as usual through the quarterly numbers. After his presentation, Jan will be happy to take your questions. And as usual, you can also raise questions via the webcast.Please note, as a hint, that we today have published also, for the first time, a new financial data supplement in PDF and in Excel format. And this will from now on be published each quarter. You find all the documents on the IR section of our homepage as well as for a short delay -- a replay of this webcast.And with these remarks, Jan, over to you.

[Jan Martin Wicke, CFO & Member of the Management Board]

Well, thank you, Carsten, and good morning, everyone, and thanks for dialing in. We hope that you're all in good health and full of good energy. And I'm personally happy to present my strong results on -- not my, our strong results for the first quarter.Let me start with -- on Page 2, Carsten. Let me start with a summary on how our group performed in the first quarter of this year. And first of all, why do I believe that we have a strong result? Well, Looking at the growth, you can see that our growth exceeds 9%. And currency adjusted, it's even above 13%. So we are growing faster and better than our peers.Second, if you look for the results, it's EUR 277 million for the first quarter net income, all lines contributed to these results. And it's worth noting that the primary insurance group exceeded 50% of this result. The quality of the result is seen in the combined ratio, 96.1%, which is pretty good. And all of this, this resulted in a return of equity above 10%, which is well above our 8% target. And this is done on a very robust solvency coverage ratio, so where we have 206% and where we are slightly above the target range.Well, in a nutshell, we now expect that our net income for the full year will come out at the upper end of the EUR 800 million to EUR 900 million range, which we previously communicated to you.But let me dig into the results a little bit further. First, on a group level, if we can turn to Page #4, please. First of all, with regard to the growth, this above 9% growth is derived from our reinsurance operation in both lines and P&C reinsurance as well as in Life/Health Reinsurance. We are growing the business nicely. We have the trust of our customers here, and we are very happy with the development. The same is true in Industrial Lines, where are also price increases helped the growth, but in particular, the specialty business is growing.I would now like to draw your attention to the bottom line of this chart, the return on investment. There you see that we have increased return on investment in the first quarter, if you compare to the quarter previous year, to 3.5%. And I just want to highlight that this is a one-off effect and a periodical effect due to German Life, where we've realized a lot of book reserves in order to fund the set AR. This number will normalize during the course of the year.So obviously, the combined ratio has not affected this improvement by 3.7%. It's a result also that we see a different corona impact in the first quarter of this year if we compare that to the previous year.Let me now try to do on Page #5, to give you an overview with regard what was the underlying performance in the first quarter. What we tried to do in this waterfall chart is to exclude extraordinary effects, both positive ones and negative ones. One, the obvious one is obviously corona, which accounted for a negative burden of EUR 128 million in the EBIT, if we sum up positive and negative effects. I will dig into that one a little bit later. So let me focus now on the other ones.Second, if you go now on the right side of the waterfall chart, there you see a one-off effect of EUR 129 million. The colleagues from Hannover Re yesterday have explained this in more detail. It's related to a restructuring of life portfolio, which has caused a onetime gain of EUR 129 million. It was a huge portfolio. And what else, one-off part, there was the need to restructure the collateral structure. There was a need to realize gains, which on normal circumstances would have been released over a longer period of time. And this has led to this EUR 129 million one-off effect.In corporate operations, we had a negative hit due to a loss portfolio transfer with a subsidiary related to a claim some years ago, which we had -- which had impacted the result. The EBIT was EUR 30 million, and the net income was EUR 24 million.And finally, we have here classified as an extraordinary effect that we have a significantly lower tax rate for Industrial Lines and reinsurance, and this is particularly related to an unusual high number of returns out of the private equity investment portfolio. As you know, we are quite heavily invested in private equity and with very low tax rates and here also, we expect that this will normalize during the course of the year.What is the result out of this calculation? So we have shown in the first quarter a profit of EUR 277 million. If we normalize for all those effects and also for corona, which I will explain a little bit later in more detail, then we would end up in EUR 268 million. But you shouldn't just simply multiply EUR 268 million by 4 in order to get a good estimate of the annual result. We have done the maths and calculated what was the average impact on the annual result of the first quarter since we went public. And for all years, it was 30%. So -- and this is really true because in many lines we try to realize a little bit more in the first quarter so that we have then a positive momentum for the quarters to come. So 30% was the average since going public.So let me now go into more details with regard to corona. I would like -- just like to draw your attention to a few numbers here on this chart and will not explain all of them. First, the obvious one, if you go into the column of Life/Health Reinsurance, there are EUR 151 million losses due to excess mortality. This is the major corona impact in the first quarter, more than -- or roughly 2/3 of it is related to the United States. The other parts are derived from South Africa and Latin America. The positive news here is Joe Biden's vaccination campaign in the United States is successful. We already have seen a positive development in March and even also in April with regard to the United States. Unfortunately, I also have to add that in South Africa and Latin America the vaccination campaigns are lagging, so there are still some effects to come. But over the year, we would expect that to be much lower than what we've seen in the first quarter.Second, I would like to draw your attention to the column primary insurance. Total EBIT impact there you see EUR 35 million positive. So in the primary insurance, corona as a whole had a positive impact on the results, which is related to Retail Germany and Retail International, both benefit from the lockdown, which resulted in lower mobility and therefore lower claims frequency. And if we were to normalize the claims frequencies to normal times, then we would have had in Retail Germany EUR 21 million more claims and in Retail International EUR 25 million. So -- and this adds up in -- if we look at the primary insurance group, including Industrial Lines as a whole, to EUR 35 million positive impact related to corona.How does it sum up in total reinsurance and primary insurance? In total, the negative impact in the bottom line is EUR 34 million and in the EBIT EUR 128 million.So let's explain now a little bit the large losses during the first quarter. You're familiar with this page. In total, you will find that the large losses were accounted -- were summed up, up to EUR 287 million. We have booked the higher of budget of large losses is EUR 317 million already in the first quarter. So we had a budget usage of 90%. So large losses are in budget, but they are pretty high. If you go to the various lines of business, there it's worth mentioning, but I will do it later also again, that Industrial Lines was the only segment where the large losses exceeded the budget, whereas in the rest, we were well within the budget. Please note also that these large losses are just P&C. It's without the Life/Health Reinsurance, where we had this excess mortality during the first quarter.On Page 9, we have the traditional overview about the combined ratio and highlighted 2 figures. First, for the group as a whole, including corona, the combined ratio is 96.1%, which is very pleasing and demonstrates that, from a technical point of view, the business is good. And the outlier, the positive outlier is my former area of responsibility, even if you were to exclude the positive effect of corona, the combined ratio would have reached 89.7%, so below 90%.So I'll put it in other words, since I handed over to my successor, Christopher Lohmann, the profits are coming. Yes, no, but it's very good what he is doing with his team. And it's a very pleasing development driven by both low claims frequency and better cost situation due to the KuRS program. But I will dig into that one a little bit later.So let's go now to the segments. Let's start with Industrial Lines on Page 10. So I will just highlight a few numbers on those charts and not run you through all of it. But I'm happy to answer your questions later.So first, a few numbers to be highlighted are first of all the growth. So we are growing 5% here in Industrial Lines. Specialty business is a key contributor to this growth, and we are very happy about it. As this business currently operating around 90% combined ratio, so it's -- so we are happy with it. The overall combined ratio, obviously, was affected by the large losses, which account -- where we had EUR 92.5 million. And it was, in particular, due to the Texas freeze, where we had some clients. And if we now see that the combined ratio is 98.7% and also has absorbed these large losses, then it's a clear signal that the underlying frequency claims were developing in the right directions. Or in other words, that the restructuring program, which Edgar Puls and his team have set up, is successful. So all in all, we are quite happy with the development there.With regard to the return on equity, we have achieved 7.5%. Obviously, that's not where we want to end. So midterm, it's clear that we want to be above that. But for this -- for the course of this year, it's really worth mentioning that the net income is also positively affected by this one-off -- with one-off income from private equity, which has a double impact. First, the investment income is higher, then you should annualize it in your Excel models. And second, the tax rate is lower, then you should annualize it because this is a one-off for the first quarter. I do not expect that to be repeated in the next quarters.If we now go from Industrial Lines to Retail Germany, then all in all, you see an increase in the EBIT margin by 300% and the net income by 300%. So a significant improvement in the results. A few comments with regard to that one here. Again, you cannot multiply this result by 4, but it should give you the confidence that the EUR 240 million KuRS EBIT target for 2021 will be achieved during the course of this year. We are very, very confident that we can achieve that.And -- but you should not multiply it by 4 for 2 reasons. First reason, with regard to the technical results in the first quarter, they benefited from the lockdown measures in Germany significantly, given that the vaccination campaign in Germany is accelerating, and we have a positive mood that mobility will normalize during the course of the year and this will lead to higher claims during the next quarters. And to be honest, if you ask me whether I'm happy or not, yes, from a financial point of view, obviously, a lockdown is a positive one, but I'm a human being, too, and I think we are all happy if the lockdown ends and the mobility turns back to normal. And we will have to pay for higher claims here.Second, I want to highlight that in the life results, which contributed to the strong Retail Germany results, we have realized more than EUR 200 million extra in the first quarter in order to fund -- to set that up for the whole year. So -- and this is given that our funding is seen over the course of the years, but capital gains are already realized in the first quarter, this gives an aperiodical effect in the first quarter. So you cannot multiply the life results by 4 as well.But all in all, Christopher Lohmann and the team has -- they are working on the new agenda GO25 for Retail Germany. Christopher will present this agenda, which he is to set out on the Capital Markets Day in more detail. And I will leave it to him to explain you then a little bit more in detail what he is going to change in order to make the results stronger.If we just then go to a few remarks to the quarters in Retail Germany to Page 12. With regard to growth in P&C, it's just a little growth, 1%. There are 2 effects in it. One, a very nice one. The gross written premium are increasing significantly with small and medium-priced enterprises and to say they have employed professionals. We are benefiting from the positive media reflection on our claims policy with regard to business shutdowns, where we paid the claims. This has resulted in a gain in trust, and this then has resulted in more new business. We are growing here more than twice the market in a difficult economic environment. I think that's pretty good what the colleagues are doing there. On the other hand, we have a decline in our motor business by 10%. This is on the negative side. So all in all, slight growth. With regard to net income and combined ratio, I think I already have mentioned the most important effects.If we then go to life. And there, I would just like to mention the reduction in premiums by 2%, this is related to the fact that in Retail Germany more than half of the new business in life is written by the bancassurance and many of our bank partners have closed their bank branches in lockdown period. This has resulted in lower new business. And so this reduction reflects a reduction in sales capacity during the first quarter due to the lockdown.Net investment income, I already mentioned that, and the operating result is by then reflected by that -- boosted. And with regard to one question, which very often emerge with regard to our German Life entities versus Solvency II ratio, on average, for the 4 German Life entities it's 169% at the end of 2020. So it's solid, and the derisking measures are well on track and will be continued. But Christopher will tell you more on the Capital Markets Day with regard to that one.So let's go to Retail International. In Retail International, we have very solid first quarter results, strong technical performance here. But let's first have a closer view on the growth. It's nearly flat, little growth there. But if you look for currency adjusted, we are growing 8.1%, which is quite strong. If we differentiate between Europe and Latin America, then we see 6.3% growth in Europe. Whereas in LatAm, the business is growing 16% in euro and 1.5% currency adjusted. And the reason behind that is rather simple. In those countries, they do not have the financial strength to pay out subsidies to each and everyone in order to avoid frictional costs in the economy. In those countries, corona has caused frictional costs. If you look at the new car sales, we are -- the majority of our business is motor business in those countries. And you simply see that the new car sales are significantly down compared to previous year. And this leads on to the situation where motor insurance is sold much less. So this is what we have to mention with regard to those countries.As we go then to the operating result, I already mentioned that Retail International is benefiting from the lower claims frequency related to corona. But even if you were excluding for that effect, we would see a combined ratio below 97%, 96.6% -- what is it? Sorry, below 96%. And so the overall impact the -- overall technical performance of Retail International is very pleasing.Net income has grown by 24% compared to previous year to EUR 54 million. Net income and the return on equity achieved is 9.3%, very good level.If you then turn to reinsurance, you have listened -- most of you, I assume, have listened yesterday to the presentation of the colleagues. So in a nutshell, reinsurance is growing 12%. It's really outstanding and reflects the trust which Hannover Re has earned in the insurance community.The net income, it's 3% up. Our share of the net income, which excludes for the minority, so you've heard yesterday, the figures are twice as big. But given that we have slightly above 50%, it's, for us, EUR 153 million. If we then go more into the details, the combined ratio achieved, very good, 96.2%. So the technical performance of Hannover Re is very pleasing. And just we expect this trend also to continue.If we then turn to investment income, capital situation and our efforts with regard to sustainability, let's start with investments. So all in all, the assets under management book value and if you compare to the previous year are growing 7%. So this is where you can also see the growth of the group, which is above the peers. The ordinary investment income is growing just by 5%. This is a result of the lower interest rates. What has grown in the first quarter, if you compare that to the first quarter in 2020, is the extraordinary investment income components. And this, again, is due to the funding of the tests in German Life is not to be annualized for the full year. I ought to leave that with that.Let's then go to the book value per share. The shareholders' equity development is reflected on Page 18. You see a small increase in the shareholders' equity. There are some good news going forward. If we are to come to IFRS 17, I think this page will be much more meaningful given that the accounting mismatch is then minimized. This IFRS 17, the book value per share, what you see here on the IFRS 4 has grown. If you are to include the goodwill, it's above EUR 41 per share. If you are to exclude the goodwill, it's about EUR 37.If we then go to the solvency situation, our overall solvency situation is very pleasing. So the current ratio is -- year-end ratio is 206%, which is slightly above our target range from 150% to 200%. We feel very comfortable to be positioned at the upper end of the target range currently, given the overall economic situation. And so this positive solvency picture, it's partly driven also by some model changes. It's 5 points roughly. We have newly modeled corporate bonds. In the past, they have been modeled like corporate bonds, covered bonds modeled like corporate bonds. Now they have an own model, which takes into account the collateral structure and the higher credit quality. And this is, in particular, positive for the German Life entities. And I think it's very, very adequate to do so.And this result also is the following, if we go to the next page, if you have a closer look at our credit spread sensitivity, this has been reduced by this change in the model as well. But I think it's much more adequate. And from a lot of you who have some questions in the past, given your portfolio, your conservatism with regard to credit exposure, why is the sensitivity so high? And I think given this is new, more adequate modeling, we are now on the right track.So let's then go -- switch to -- move to the next page. And the sustainability report for 2020, what are the highlights? First of all, we've set out a tough target for the carbon intensity of our bond investment portfolio, we want to reduce it by 30% to 2025. And compared to 2020, I know some of our peers compare their sustainability targets compared to 2015, 2018 I've seen. It's much tougher to compare to 2020 because we have already done some things there. So it's a tough target, but we will achieve that. This is our part of the contribution.Next to that, we are continuing to invest also in infrastructure projects. We have close to EUR 2 billion already in renewable energies. When I discussed this page with the Head of Public Relations here, I wanted to add also that we are not only investing in the E -- in the environmental, sustainability and things -- and also in governance as we are financing prisons in some countries, but we didn't want to mention this on the chart. So this just mentioned that we have invested EUR 2 billion in renewable energies. With that, you could supply more than 800,000 households, which here stated is roughly equivalent to a city like Munich, I would say, to the inner city of Munich, if you include also the suburbs, obviously, Munich has more than 810,000 households.So with having said that, the sustainability target is really something what we take serious. But where we have a stepwise approach, we assess what we can do in order to contribute here and then define our next steps.Let me now come to the outlook. First of all, with regards to the -- I can continue -- move to 23, please? Yes. Thanks.First of all, with regards to the dividend policy, everything remains unchanged. So the payout ratio should stick in between 35% and 45%. And the dividend per share should be at least stable year-on-year or they should grow. The return on equity, there we have the target slightly to above 8%, compared to the initial guidance. With regard to the group net income, I already mentioned, given the strong start in the first quarter, we would now expect to end up at the upper end of the range. With regard to the net return on investment, where we have seen 3.5% during the first quarter for the full year, we just expect 2.5%. And with regard to the currency adjusted growth, it should be around 5%. Okay, I have to admit, this might be a little bit conservative given the first quarter results. But there should be some room left to exceed expectations.With regard to our midterm targets on the next page, everything remains unchanged. We stick to our target that we want -- I just want to draw your attention on the EPS growth. We stick to the target that we want to grow the EPS year-on-year on average by 5%. Given the starting point in 2018, you will easily point out that for 2022 we then would expect the net income of the group to exceed the EUR 1 billion.So having said that, I hope I could give you a good overview about the results and why I have this impression that we had a very strong start in the year, given our growth and the good bottom line, but I'm now happy to answer your questions.

[Operator]

[Operator Instructions] First telephone question today is from the line of Paris Hadjiantonis from Exane BNP Paribas.

[Paris Hadjiantonis, Research Analyst]

Yes. Good job on a nice set of numbers today. A few questions from my side. Firstly, when I look at the Industrial Lines, the combined ratio looks good, but there are a number of different things going on there, so higher losses than budget. There's also some negative effects coming from the reserves, prior year reserves. And when I start to normalize for these things, the combined ratio is actually looking even stronger than the headline number. So I arrive at something which is slightly below 95%. I wonder whether there's anything else underlying or is it just lower frequency and good luck and you expect that to normalize upwards as the year progresses. So that's question #1.Question #2 will be on the solvency ratio. I mean, especially when I look at sensitivities for interest rates, I'm wondering why there's so much asymmetry between the upwards and the downwards move on interest rates, if you can explain that. And then more broadly on the solvency ratio, you are now above 200% as of full year. Obviously, the interest rates should give you another small benefit for Q1. So solvency ratio, which is meaningfully above 200%, is that just a nice thing to have? Or are you thinking of actually deploying some of that excess capital somehow, I don't know, organic or inorganic growth, for example?

[Jan Martin Wicke, CFO & Member of the Management Board]

Well, thank you, Paris, for your question. First question was with regard to Industrial Lines. So the restructuring and the efficiency program in Industrial Lines is well on track. And what we are doing there is, yes, we had in the first quarter some bad luck with regard to the large claims that exceeded the budget. So the underlying frequency losses are even better. They could compensate for that, but we can show this 98.7% combined ratio.But with regard to the full year and when you're modeling that, I just want you to keep in mind that we wanted to build up some volatility buffer during the course of the year. We will continue that given that we have made tremendous progress with the volatility buffer already last year. It could be the case that, with the end of this year, that then should be finished, that we would have a adequate volatility buffers in the reserves as well. So I would expect the combined ratio to remain on that level, maybe a little bit better for the year-end, included a certain growth of the volatility buffer.But I also want to mention that Industrial Lines business, and this is the reason for the volatility buffer is volatile, yes, if you're insuring industrials and obviously, large claims are part of the program. And this is also the reason for it why we are doing that.I also understood that, not only you, but also some of your colleagues would like to have some more comfort on the reserve levels. And we will explain on the Capital Markets Day in November the level of reserves, the comfort we have, the policy. And not only that, but also how we will deal with it under IFRS 17 so -- going forward. So that you have full transparency that and that you can share our own confidence which we have in our reserve situation and can reflect on that one. So this is with regard to the first question.Second question was with regard to the interest rate sensitivity, which you see on Page...

[Carsten Werle, Head of Investor Relations]

20.

[Jan Martin Wicke, CFO & Member of the Management Board]

Yes, on 20. And you asked for the asymmetry in between an interest rate increase, which is only slightly positive, and an increase rate decrease, which is negative -- the effect is rather simple. It's German Life where we have this asymmetry. If you have gains there, you have to share it with the policyholder. If you get below the threshold of the guarantee, the shareholder has to bear the burden. And this asymmetry is reflected here in the interest rate sensitivity.And third,question from you was with regards to the above 200% solvency ratio. Maybe this is a good -- it's a very good question. And obviously, we've asked ourselves also where do we want to be positioned within our target range of solvency. And therefore, a little bit more lengthy explanation to that one.What is happening in a low interest rate environment, with a solvency capital adequacy ratio which is derived from a market value balance sheet, if you have very low discount rates on both sides, on the asset side as well on the liability side.With regard to the SCR, the solvency capital requirement, where we have included like the whole industry moving averages into the calculations. Over the years, this effect will phase in and will lead to higher SCR requirements over time, simply by adding lower interest rates in the models year-on-year in this average. This development will be rather slow and constant over the period of -- to the own funds, there will be more volatility. And the more volatility is simply given by the small changes in the discount rate on the market values. And therefore, the volatility of the owned funds will increase. And therefore, we, and I have the feeling also the industry as a whole, feels more comfortable currently to be positioned at the upper end of normalized solvency targets.I have to admit that was a lengthy explanation, but I hope it helps a little bit that you understand why we feel comfortable also with this 206% and see no urgency to change it and to deploy excess capital at this point in time.

[Operator]

Next question is from the line of Michael Haid from Commerzbank.

[Michael Hermann Haid, Team Head of Financials]

Two questions. One on the decline in German motor business, minus 10%. Can you break that down into price and volume? And what were the drivers here of this decline? And also, what would be very helpful, as you performed quite strongly in the SME business, can you provide a breakdown of premiums you will see from the SME business and from the motor business? That's my first complex of questions, actually.And the second question is, I noticed that the net realized gains in German Life was EUR 277 million. Our contribution was only EUR 105 million. So why were the realized gains so much higher? And what is the target for the -- for the full year? And does this sets -- has a positive impact on IFRS profitability? These are my questions.

[Jan Martin Wicke, CFO & Member of the Management Board]

Thank you, Michael. Very good questions. First, with regard to the motor development. Is the price volume-related? It's volume-related. We haven't reduced prices in motor. We have avoided to do -- well, a price adjustment on the other side to increase the prices year-on-year, but we haven't done a price reduction. So it's a volume effect.With regard to German Life, that -- well, we are currently checking the current level of debt there, I think, EUR 4.6 billion. Isn't it? Could you please -- I have some colleagues here, they should check on that number. It's EUR 4.6 billion. So it's right?

[Carsten Werle, Head of Investor Relations]

Page 13.

[Jan Martin Wicke, CFO & Member of the Management Board]

Yes, Page 13, it's EUR 4.6 billion. And you asked also whether this would have a positive impact on the IFRS results. It will have a positive impact on IFRS results if it comes to a situation where interest rates are growing again, then you will have a release of that. If interest rates are moving down, then there won't be any positive impact because then it's a little bit money set aside in order to fund the guarantees in later periods. So there will be less guarantee burden in later periods due to the funding of the [ SCR ]. Does that help, Michael?

[Michael Hermann Haid, Team Head of Financials]

Yes. Can you provide a breakdown between SME business and motor?

[Torsten Leue, Chairman of the Management Board & CEO]

Yes. One second. So in 2020, we had in total EUR 435 million premium in SME and self-employed. This is expected to grow to, I would say, it's now more than EUR 460 million -- more than EUR 470 million during the course of the year.And with regard to the motor business, well -- well, Carsten will provide you later on with the figure there. I do not have it here now on my sheet. I'm sorry. But we have this figure, obviously. But yes, we will deliver this figure later. Sorry.

[Michael Hermann Haid, Team Head of Financials]

Okay.

[Carsten Werle, Head of Investor Relations]

Okay. Can we talk later on, Michael? And thanks for your question.

[Michael Hermann Haid, Team Head of Financials]

Yes.

[Operator]

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

[Thomas Fossard, Co]

Yes. First question would be related to your COVID-19 losses guidance. I think that, initially, you had EUR 150 million guidance for 2021 on the primary side. Given the relatively positive evolution in Q1, I was wondering if this was time for you to change this guidance for primary and Industrial Lines.The second question will be related to your Retail Germany EBIT target, which, as you say, is staying unchanged at EUR 240 million. But it -- which looks super, super conservative. And given that on the -- if we are looking at the adjusted combined ratio, 95%, you're already running below. So I was wondering why you're staying so cautious on the primary side of things.

[Jan Martin Wicke, CFO & Member of the Management Board]

Thank you, Thomas. Two very good questions. First of all, with regard to COVID, please keep in mind the EUR 150 million were the bottom line effect for the Talanx Group as a whole and it includes both reinsurance and primary insurance. So EUR 150 million for the group as a whole. It might seem that a little bit conservative, given the first quarter development, but if you look in particular at the excess mortality in Life, which is not only driven by the mortality losses in the United States, it accounts for more than 2/3 of it. But it's also driven by South Africa, Latin America, fortunately, to a lesser extent. So we have no exposure to India, which is the area of major concern currently. But -- so it includes all. So it's a bottom line estimate, which we have set out end of last year, for the group as a whole.Second, with regard to Retail Germany, the EUR 240 million seems to be very conservative, what you mentioned, and we have said they will exceed EUR 240 million during the course of this year. And the combined ratio should be below 95% if you are to exclude for the positive one-offs from lockdown. So I would expect the combined ratio to be below 95% at the end, minus the effect -- the positive corona effect on the lockdown. So at the end of the year, this is what I would expect to happen in Retail Germany.So all in all, the development is very pleasing and gives -- and Christopher and the team are doing very well, but they will obviously try to achieve a better return on equity going forward. And maybe we'll have to set out additional measures in order to achieve that. Christopher will present his GO25 program at the Capital Markets Day in November in more detail. He and his team, they are working intensively to specify the set of measures. Is that okay, Thomas? I couldn't...

[Thomas Fossard, Co]

Yes.

[Carsten Werle, Head of Investor Relations]

Okay. So do we have further questions?

[Operator]

Yes. We have a follow-up question from the line of Michael Haid from Commerzbank.

[Michael Hermann Haid, Team Head of Financials]

One question on Industrial Lines. I understand that you want to talk more -- that you want to provide more information at the next Capital Markets Day on reserving. You mentioned that it may be possible that you -- if I understood correctly, it may be possible that you will increase the buffer to the desired level already in this year. Can you say how much this desired level of buffer would be just around -- just the figure would be very helpful.

[Jan Martin Wicke, CFO & Member of the Management Board]

I understand your question very well, Michael, and it's a very good one. This is what we want to release at the Capital Markets Day and for 2 reasons. We do not want to present you the figures what we have achieved already, and you will see the positive trend. We will give you some comfort on that one that we really have delivered on that one. We want also to give you guiding information for IFRS 17 and how the transition is done with regards to the reserving. We will do that on a group level as a whole and provide you with the adequate information there, yes. And this is what I want to present today. But I really believe it makes sense to see it in the context of the changes in the accounting standards, which are to come, and also to present to you what we will undertake in order to provide you with comfort, not only for this year, but also for the years to come going forward. So we will present the whole concept on reserving on the Capital Markets Day. And it will reflect that Talanx will continue to be a conservative player in this area.

[Carsten Werle, Head of Investor Relations]

So it sounds like you should have the 17th of November in your calendar.

[Jan Martin Wicke, CFO & Member of the Management Board]

Please.

[Operator]

There are no more telephone questions, and I would like to hand you over to Carsten to read out the questions from the web.

[Carsten Werle, Head of Investor Relations]

Actually, we have quite a couple of questions. Ashik Musaddi from JPMorgan has 2. I think the first one perhaps is already answered. The question is, if we use your guidance of at least 5% growth in net income from 2018 base of EUR 850 million, I get to EUR 1.03 billion of earnings in 2022. Does that make sense? Or am I missing anything?

[Jan Martin Wicke, CFO & Member of the Management Board]

No. That makes sense.

[Carsten Werle, Head of Investor Relations]

Exactly. Second question, Industrial Lines premiums grew by 8% constant currency. Is that something we should be expecting going forward? And what are risk-related claims inflation for this book, given growth is mainly coming from specialty items?

[Jan Martin Wicke, CFO & Member of the Management Board]

There are 2 questions in that one. First of all, the premium growth going forward, well, we will have a disciplined underwriting approach and really depends on the market. We are not trying going out in order to do -- the first target is profitability and not volume. So currently, we are quite happy with this growth rate. It was 5% during the course of the first quarter. And we -- also, if I look currently at the figures, that should be something for the whole year, the trend is positive.Second question with regard to claims inflation. This has to be taken into account in the pricing decisions and the claims inflation, in particular, also social inflation, in particular in the United States, has to be reflected. And there is a certain growth part in the business. It's simply related to price increases, which are necessary to compensate for claims information. And this is executed in a disciplined way.

[Carsten Werle, Head of Investor Relations]

Okay. Then we have a couple of questions from Michael Huttner of Berenberg. Perhaps we do them one by one, so I don't miss anyone on the system. On Retail Germany, the improvement is stunning. Yet, in Industrial Lines, still relatively modest. Is there a way of thinking about this? Where are all these man-made claims coming from? Is it the factories restarting after no maintenance?

[Jan Martin Wicke, CFO & Member of the Management Board]

Very good question, Michael. And -- so all in all, if you look at the large losses in the first quarter, the majority is really stemmed from Texas freeze, yes, which was an extraordinary situation and which was more than EUR 50 million of this EUR 92 million. So it's not from the other factories restarting after no maintenance. But obviously, we are very cautious now. And we are waiting for what will happen when the lockdown ends. And -- but we are prepared and we give out some recommendations to our clients as well. So up so far, we haven't seen that. In the first quarter claims is also this big, big fire claim in Berlin included, which you might have seen in the figures of some of our peers, too.

[Carsten Werle, Head of Investor Relations]

So next question is a bit related. Can you explain a little more the Industrial Lines large losses? What is the common theme? Is it Europe and factory owners making claims for whatever reason? And how much are rates rising now in Industrial Lines?

[Jan Martin Wicke, CFO & Member of the Management Board]

The rates -- well, we answered the rate question at the annual press conference for the rate increases. During the course of the year, it's really difficult to assess because it differs line by line. It differs region by region. So that's a tough one because it's a heterogeneous picture. All in all, prices are still growing, but it really differs. Long-tail business is growing faster than short-tail business. That -- I know this is really on a more generic level that question. But I think it makes sense to have this year-on-year with the annual press conference and because then we have a full year, which we can compare to the previous year. If we do it during the course of the year, the overall trend is still slight price increases in both Industrial Lines as well as in reinsurance.

[Carsten Werle, Head of Investor Relations]

Okay. Then next question also Michael Huttner. Can you say a little more about the optimism of growth? Where is it likely to be?

[Jan Martin Wicke, CFO & Member of the Management Board]

So the growth will be derived from both reinsurance and Industrial Lines. Whereas in the retail part, we expect a rather flat development.

[Carsten Werle, Head of Investor Relations]

Can you say where solvency would be now? Would it be around 210% given interest rates? So I suppose the kind of expectation for the Q1 numbers.

[Jan Martin Wicke, CFO & Member of the Management Board]

We expect it to be in the same range as we have been at the end of the year.

[Carsten Werle, Head of Investor Relations]

So there are even more. I just heard you are building volatility buffers in Industrial Lines. Are you doing the same in Retail Germany? The combined ratio underlying even better than 89.7%?

[Jan Martin Wicke, CFO & Member of the Management Board]

How shall I answer that one? In Retail Germany, the overall reserve situation which I was able to hand over to my successor, Christopher Lohmann, is already very, very good. And as we are also always reflecting accounting principles, so I think it's a positive one. The very good combined ratio in the first quarter was also related that Retail Germany had really no large loss during the first quarter, which was unusual, yes. Normally, they have 2, 3 large losses also in the Retail Germany segment. And so it's a little bit also some part of luck that the figure is so low in the first quarter.

[Carsten Werle, Head of Investor Relations]

Perhaps in connection with this, are the buffers in reserving already included in Solvency II own funds?

[Jan Martin Wicke, CFO & Member of the Management Board]

It depends on how the procedures of Solvency II bookings are reflected. We have here quite some -- not a homogeneous picture in the group as a whole. In reinsurance, there are some deviations in between the Solvency II bookings and the IFRS bookings, which leads to higher own funds in Solvency II. In Retail International, Retail Germany, it's booked in parallel. So the figures you see in Solvency II are the same what you see in IFRS.

[Carsten Werle, Head of Investor Relations]

Okay. Why did German Motor volumes dropped so much? All due to digital competition from [indiscernible]

[Jan Martin Wicke, CFO & Member of the Management Board]

Two effects on my point of view. One effect is competition. So you're pretty right with what you wrote. Second is that we have a very old portfolio if you look at the average age of our customer in the motor portfolio.

[Carsten Werle, Head of Investor Relations]

And the last question from Michael. I suppose that's one which triggers a full seminar. Can you say if IFRS 17 will lead to higher reported profits?

[Jan Martin Wicke, CFO & Member of the Management Board]

In the end, over all periods of time, the profits will be the same. So no change with regard to that one. What I can say with regard to IFRS 17, so there are a few things. First of all, the volatility with regard to the equity development will be lower due to the fact that the accounting mismatch due to more consistent discounting on both sides of the balance sheet will be minimized. So this is a good news with regard to IFRS 17.Second, with regard to P&L volatility, we would expect to have a slightly increased P&L volatility, which is not driven by the technical results. So there, we'll see the same like as of today, but will be more driven by the investment results, yes. And so this is what we were to expect. So -- and all in all, over all periods, the profit should be the same. But our management performance will hopefully lead to higher profits going forward.

[Carsten Werle, Head of Investor Relations]

So with this, we'd end the questions from the web. Stuart?

[Operator]

Okay. There are no further questions on the phone lines at this time, and I would like to hand back to Jan Wicke for closing comments.

[Jan Martin Wicke, CFO & Member of the Management Board]

Well, first of all, thank you for the questions. Very good questions from your side. Thank you for the discussion. And I always hope that all of you will stay healthy. I hope that the lockdown will end. And I hope that maybe the Capital Markets Day in November you will see us physically as well and that we have interesting discussions there. That's what I hope. So all the best for you, and thank you for attending this call.