Talanx AG

XETRA:TLX

Earnings Call Transcript 2023-Q1

[Bernd Sablowsky, executive]

Good morning to everyone from Hannover. This is Talanx results for the first quarter '23. I'm together here with Jan Wicke, our CFO, who will guide you through the numbers and take your questions. As you are all aware, this is the first time we are reporting under the new accounting standard IFRS 17. So quite a lot to learn and get used to for all of us, but we assure we manage it together. After this presentation, as usual, we will have the Q&A session. And if you are also aware, everything will be posted on our website after the call. So having said that, I hand over to Jan. Jan, the floor is yours.

[Jan Wicke, executive]

Thank you, Bernd, and thank you to all of you for having me and listening to the Q1 results of Talanx. First of all, I have to say we like the performance of our business in the first quarter very much. We had some tailwinds, which you can see on Page #2. So first of all, we have all segments were able to deliver a return on equity above 10%. In primary insurance, we were able to grow the insurance revenue by more than 10% and it's 14% in the same number, currency adjusted.

The capital base is very strong with 212% Solvency II ratio. So we are maintaining our strong resilience and therefore, to start with the most important message right straight away. We are confirming our outlook that we deliver EUR 1.4 billion as net income for the full year 2023.

To dig into the figures a little bit deeper to the group financials, I would like to turn to Page 4. Thank you, Bernd. So we were able to grow the insurance revenue in total to EUR 1.7 billion. So it's a growth rate of 6% for the group as a whole.

As you -- or most of you might have listened to the call of Hannover Re, the development at Hannover Re was flat, but very favorable with regard to the structure of the business with the nonproportional contracts. In primary insurance, we were able to grow the business significantly. The group net income grew by 31% to EUR 423 million. So this is by far more than a quarter of EUR 1.4 billion and the return on equity grew by 4.2% to 18.8%. But I have to admit that those net income and the return on equity was driven by the effect that we were benefiting from the lower large losses and in addition, we had some discounting effects, which will level out a little bit throughout the year.

So therefore, this 18.8% return on equity, it's not the figure which we expect at the year-end to be there. On the next page, I would like to draw your attention how the numbers in the first quarter compared to the outlook. So what you can see with EUR 10.7 billion insurance revenue, we are well on track to deliver EUR 42 billion for the full year. It will depend to a certain amount also on the development of the currency rate, in particular, the dollars whether we are to outperform this target or not.

Second, with regard to the group net income, I already mentioned that given the higher underwriting profitability, which we see, we are quite -- we hope we will deliver EUR 1.4 billion net income for the full year. And with regard to the return on equity, the figure, we expect it to be lower than 18.8%, but clearly above 10% for the full year.

We just want to highlight already at the beginning of this presentation that with regard to the volatility of the results derived from the fair value through P&L assets, we haven't seen nearly anything in the first quarter, but we do not expect that to be in all the quarters. So within our guidance, we have factored in that we expect that due to higher interest rates, there will be some valuation impact on both private equity investment as well as on real estate funds, which might result in a drag in the group net income by the year-end.

And therefore, we stick to our guidance of EUR 1.4 billion for the full year. So on the next page, we wanted to provide you with the usual overview about our large losses. I think it's no surprise that the earthquake caused the burden, which was on a net basis and the undiscounted view you're familiar with from the previous year. It's EUR 250 million net burden, and in addition, we had 2 events in New Zealand, which together amounted to EUR 100 million.

The overall budget for the first quarter was EUR 466 million, so with EUR 419 million we are booking in our accounts of EUR 466 million, you're familiar with that one. So we have some buffer for the quarters to come with regard to the large losses.

If you then go to the next page, that we would like to give you an overview on the revenue, the insurance revenue composition. So we have 40% of the revenues derived from the primary segment and 60% from Hannover Re. Within this 40%, you might wonder if you see the amount of Retail Germany, which is just 7% of the group as a whole.

This is due to the high proportion of life insurance at Retail Germany and as you are familiar with the earned premiums. We have to deduct in addition, the investment component in order to figure out insurance revenue. And given that we have this high proportion of life insurance and therefore, higher investment component, this reduces the number and the relative proportion of Retail Germany in the overall revenue mix of the group.

If we then go to the next slide, where we can see the bottom line how the earnings mix is within Talanx. And there you can see that not 40%, but 43% of the bottom line is derived from the primary insurance. And there, you can also see how much the different business segments contributed to the overall profit in the group.

So in total, we have a very nice picture here with regard to the diversification of the earnings streams. Let me now dig into a little bit more into the segments. And to start with, like usual, I would like to start with Industrial Lines. With regard to Industrial Lines, we can report a strong revenue growth, 13%. Currency adjusted is the same number. If we go into deeper details there, then commercial lines, so the traditional Industrial Lines business grew by 15%, whereas the specialty business grew only by 11%.

And -- so it's still growing, but we have a more risk-adjusted approach at specialty lines, in particular, did some derisking in some NatCat exposed lines and also had an effect on the transaction-related business like M&A insurance and so on, which was somewhat lower than compared to previous year.

With regard to the technical performance, we are very pleased with the performance in the first quarter combined ratio stands at 93.2%. And if we were to apply for a net-net combined ratio, it would be even lower than this month. So we have to -- at this time, we have to announce also that there are some discounting effects in both in the combined ratio and the return on equity. So -- and you have always to keep in mind that there are 2 effects. One is the discounting of the current year claims. And the other one is the unwind effect.

So the interest accretion of the reserves, which we have on the balance sheet as a whole. And those 2 effects are not perfectly matched. So the discounting effect on the current year claims was higher than the unwind effect which we see. But over the year, the unwind will grow. And therefore, this will lead to the situation that the overall effect will shrink during the course of the year to a certain amount.

So all in all, we are very confident that we can deliver a combined ratio clearly below 95[ -- 96%, excuse me, 96% for the full year 2023. The return on equity, which currently stands in this segment at 12.2%, should be above 9% and I think it's fair to say that we even expect it to be above 10% for the full year given that Industrial Lines is really very well on track to deliver.

We then go to Retail Germany. With regard to the insurance revenue, we have a split picture. In the P&C business, insurance revenues are up by 8% and in particular, driven by a favorable development in the small and medium enterprise business where we are up even a little bit higher than 8% and where we are also well on track to achieve all our growth targets.

In life, like the whole German market, we have decreased insurance revenue by 8%, which is also related to a certain extent to the fact that our distribution is highly dependent on bancassurance and within the bancainsurance. There is a certain shift in the banking towards more attractive banking products currently going on. And therefore, we have less insurance revenues there.

So all in all, it doesn't come as a surprise that in the current environment, it's slightly lower. With regard to the combined ratio in P&C, we will work hard to achieve the full year target around 97%. The return on equity currently stands at 10%, and we will also work to keep it there. So that also for the full year, this business segment can achieve that one if were to include the asset management results as a part of the asset management results, which is related to the business segment, it would already stand at 11.8%, but we want to achieve this 10% even without that for the full year.

With regard to the capital ratios of the German Life entities, they remain very robust. So it's without transitional end of March, it's 277%. Let's now go to Retail International. The next page, please. So first of all, we have a growth machine. So we are growing in both P&C and life insurance here. With regard to P&C, the growth is coming maybe from all countries, but in particular, from those where inflation affects the business. And we have seen some favorable price increases, for instance, both in Latin America but also in Turkey or Poland. For the full year, we expect this very positive growth figures to come down a little bit, so they will not stick at this very elevated level for the full year.

With regard to the growth in Life of 33%, there is 1 special effect included in that one, and this is a new cooperation agreement with the Aviva Bank in Turkey. If we were to adjust the growth figures for this new bancassurance agreement that it would be just plus 7%, which is also a good number.

So with regard to the technical performance, we already achieved a very favorable 93.4%. And so we are well on track to achieve a combined ratio for the full year of below 95%. Return on equity stands at 13.3%, given that, in particular, in this segment, we expect the unwind effect over the year also to increase. Therefore, we will have to work to have it above the outlook of 8.5%. Currently, return on equity is very much supported also by a strong return on investment because in those countries where the inflation is high, also the investment returns have increased significantly.

Finally, a few words on reinsurance, but given that you heard already the presentation from Jan Wicke and Clemens, I will leave it to a few words with regard to the insurance revenue development. The development is nearly flat and might -- but they're still stick to the outlook to achieve a 5% growth.

The very positive news in this insurance revenue development is the structure of the new business where they were able to execute a shift from proportional to nonproportional business where we have higher profit expectation, which is clearly affected -- reflected in the very, very positive development of the contractual service margin.

Net income stands at EUR 247 million, so they are well on track to deliver on their target. This is just 50% of the figure you are familiar with when you hear the Hannover Re reporting and the return on equity stands at outstanding 21%. For the full year, we expect it to be slightly lower, but nevertheless, an outstanding number is to be expected.

So let me now switch to investment capital and sustainability to start this with the capital situation. So the overall solvency ratio stands at 212% end of March. So they're slightly above our target range of 150% to 200% rating is stable, and it's a good rating. So -- and on the next page, you see the sensitivities with regards to our Solvency II ratio. And overall, it shows that we are very well balanced and that we don't take too much capital market risks on our balance sheet.

On the next page, we have what we call resiliency embedded in our best estimate reserves. You are familiar with this concept, given that Hannover Re has published its figures for a year. But you can regard this resiliency on top of the Solvency II resiliency and so -- and we are quite happy to report that there is still a resiliency embedded in our best estimate of EUR 2.65 billion despite all the effects of inflation on our balance sheet, which provides us not only a buffer with regard to volatility, but puts us also in a very strong position from a capital point of view.

With regard to reinsurance, there was a drop, but I think JJ and Clemens have already mentioned that they will rebuild the resiliency level to their comfort level during the course of the year and have already done so in the first quarter. On the next page, you can see what the new accounting standard offers as an additional insight, and I think, which is quite helpful. So first, to start with is the shareholders' equity development. And as you can see, we have an increase by EUR 600 million -- more than EUR 600 million shareholders' equity during the course of the first quarter, which splits up between a change of EUR 423 million, which was the net income and the OCI development of EUR 200 million.

But on top of that, we have a development of the shareholders' contractual service margin and the risk adjustment where we will see these figures we released over -- with the release of risk over time. And what we are providing here you with a figure which is adjusted figure, this is adjusted for tax effect and for minority. So the CSM or Hannover Re, it's just accounted for 50% of what you know from their figures. And also, the tax effects are taken care of here.

And if you add that and we have EUR 29 per share, contractual service margin and risk adjustment which you can see out of our balance sheet as of 31st of March. On the next page, there is the usual breakdown of our investment portfolio and a little bit boring because there's not much change. We are still heavily invested in bonds and we are still very conservative, but we are continuing our low-better strategy. Nevertheless, there are something I would like to draw your attention to, and this is on the next page, the other for assets which are accounted for fair value through P&L.

And what we try to do here and maybe we will change the way how we report on that one over the time. We tried to provide you with a fair value through P&L equivalent figure. So it's not the real value to P&L assets, what you see. We have in the appendix on on Page #33. We have all of our fair value through P&L assets reported, which you find in the balance sheet. What you here see is the effect of value through P&L assets, which have a material relevance for the Talanx P&L. So it's the figure after minority, after taxes and taking into account that the various asset classes within those for value and P&L as that are taxed differently.

And it's also without primary life where we have values through P&L assets in the variable fee approach of course. So in total, if you look at the numbers here, we have more than EUR 4 billion, which are exposed to the P&L and a 10% change. And those EUR 4 billion would result in EUR 400 million change in the net income. So it's a quite material impact. We haven't seen any material impact during the first quarter because it was below EUR 10 million, but that does not mean that this effect will be always so low. And this is why we wanted to draw your attention to that one. This is given that we are a little bit -- we do not want to rule out that the higher interest rate level, if you take economic textbooks should lead to some valuation impact in both private equity and also in the real estate funds, which we haven't seen so far, but it could happen.

And therefore, we are a little bit more conservative with the full year. And that is why I wanted to draw your attention to that. So on the next page, I want to give you some highlights with regard to our sustainability reporting. Just to mention the 2 on the top of the chart, we were able to reduce our carbon emissions in operations by 37% compared to 2019 and by 20% with regards to our investment portfolio, so which is pretty good.

And with regard to the sustainable investment target of EUR 8 billion, we have prepared another page for you on the next page, please. We are already close to fulfill this target. Maybe we will achieve that already during the course of 2023. And there you see also a split of our sustainable investments.

So with regard to the outlook, we stick -- on next page. We stick to our guidance with regard to the insurance revenue, EUR 42 billion as a full year target. With regard to the group net income, EUR 1.4 billion is the full year target. The return on equity should be clearly above 10%. And if you just do the math, EUR 1.4 billion and an average equity of say, EUR 9.4 billion for the full year. You can figure out the number, which is reasonable from today's point of view.

And the dividend per share, where we just have delivered the EUR 2 for the year 2022 will -- we increased also for 2023. We don't know yet by which amount, but we will increase it going forward. So having that, I just wanted to give you a brief overview. I'm happy now to take your questions.

[Operator]

[Operator Instructions] The first question is from Roland Pfänder of ODDO BHF.

[Roland Pfänder, analyst]

Two questions from my side. Touching on the resiliency reserve of the primary insurance business. Could you split this a little bit into the different parts where the movements were in the last year, that would be interesting. Then second question on the advantage or positive impact you had from the discounting. I guess that's linked to the interest rate environment we are in. Let's assume just for a moment that interest rates would remain there. How long would you have this positive impact fading out by time? Would that be there for 3 or 4 years? Or how would we need to see it? And maybe you could give us an indication for the first quarter, how much is actually in numbers?

[Jan Wicke, executive]

Okay. Well, thank you, Roland, for your questions. First of all, to give you some insights with regards to the resiliency movement in the primary. First of all, I have to admit that we have decided just to release resiliency figure for the primary group as always. But nevertheless, I would like to give you some insights.

We feel very comfortable with the resiliency level in Industrial Lines, which even has increased during the first quarter. We feel comfortable with the resiliency level at Retail International, where in the last year, we had to reduce it because the resiliency level was so high that the auditor didn't accept this level of resiliency at least it would be too much.

And therefore, in 2022, there was a must have release, which was that included also in the IFRS 4 figures in the results. And finally, with regard to Retail Germany, where we have seen some impact of inflation and the resiliency embedded in the debt estimate. So we are still comfortable, but not as comfortable as we were at the beginning of 2022.

And there to give you some more insight, it has to do with some reserves in long-tail business liability business, which are affected due to the long duration by the new inflation assumption, which we have factored in. So this is that with regard to the resilient effect. So -- so then the second question was on discounting. When will the discounting of current year effect and the unwind the so-called unwind interest accretion for the reserves on stock will level out? I would -- as a rough number, I would expect it after roughly 5 years, yes, to level out to a big -- to more than, let's say, 60%, 70% of and that's what we currently estimate. But I have to admit -- let me just check. We have calculated that not on current forward rates, not on stable. You asked for stable interest rates. So we will double check with that one. And you can ask the colleagues of Investor Relations on that 1 afterwards. Okay?

[Roland Pfänder, analyst]

Maybe just 1 follow-on. And the current effect in the first quarter, was it around 1.5 combined ratio points or do you have a precise number?

[Jan Wicke, executive]

To be honest, this is very difficult to prepare this precise number due to the fact that we have applied different accounting standards from GMM to PAA in different currency environments. So I do not have a concrete number, but I think 2% on average is a good number here.

[Operator]

The next question is from Michael Huttner of Berenberg.

[Michael Huttner, analyst]

Excellent results. And I had 3 questions: one, the leverage ratio, if you could have a figure. The second on the German Life solvency, I can't remember the figure before the 277, maybe remind us. And -- and maybe tell us what you're going to do with this money. I always wonder when money is kind of not use that people starts kind of think, I could third party or something. In other words, the capital discipline becomes less.

On the international, I just wondered if you could give us a little bit more feeling for the very strong results, which -- is it because Turkey is less negative or and I'm saying these things, I don't know. And then I did have 1 extra one, and I'm really sorry, the share price has been really, really strong since you had your AGM. It would be nice to think it was a need because of the AGM, but maybe there are other things that work and maybe you have some insights.

[Jan Wicke, executive]

Okay. Let me start with the Solvency II numbers for the German Life entities at the year-end without transitionals. It stands at 290%, and now it stands at 277%. And this is also due to the fact that we are distributing dividends from the term life entities up to the holding and to provide our shareholders with increased dividends. .

So also we are very -- and we feel very comfortable with this 27%. Third question of your was international results. To give some more color on that one, we had a very pleasant development at VARTA on the one hand side. Italy was also very strong and well on track to fulfill all post-merger targets there. So very good results in both Varta and Italy, whereas in Turkey, had to bear some burdens due to the earthquake. I think this doesn't come as a surprise.

And with regard to the LatAm region, we've had a very favorable development in particular, in Brazil, where our turnaround was managed and we were able to account for adequate crisis and had a positive result. So -- and -- the share price development is also related to the fact we were included in the MSCI Germany index. As of 31st of May, and I think some index funds already have started to build up the position here, but we don't know whether they have already finished. So -- and then finally, I need some support from my colleagues with regard to the leverage ratio. So we will ask Torsten for the leverage ratio. Could you -- they will provide me that in a minute. So maybe we'll take some other questions first. And then we will give you an inflow on the leverage ratio.

[Michael Huttner, analyst]

Just 1 maybe yes, maybe how much cash from Germany -- from German Life?

[Jan Wicke, executive]

In total, we have -- and on the second, we need to check on that one. We will check that and we deliver that in a minute. .

[Operator]

There are no further questions on the phone at this time. So I hand back to Mr. Bernd Sablowsky.

[Bernd Sablowsky, executive]

Yes. Thank you. We have a couple of questions that have been raised over the webcast. They are coming from Hadley gone from Deutsche Bank. Thanks for your questions, Hadley. I read them out and then Jan will have them. So Hadley saying, optically, reported combined ratios also below guidance above reported levels. We are seeing also in the sector under IFRS 17. Could please provide some of the components with the combined ratio disclosure specifically, what are the discounting effects? And how much are you allocating for reserve buffer buildup? So that was the first question. discounting effect and how much we allocate the reserve buffers? Second question.

[Jan Wicke, executive]

Let's do a question by question. So with regard to the overall discounting effect, there are 2 discount effects. First, discounting of the current year, secondly unwind and the silo the sum of those

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