Talanx AG

XETRA:TLX

Earnings Call Transcript 2022-Q2

[Bernd Sablowsky, executive]

Good morning from Hannover. Bernd Sablowsky speaking at the occasion of the Talanx results call for the first 6 months and the second quarter of '22. I'm together here with Jan, my CFO. Jan will give you a rundown through our numbers and the results. As usual and already announced by Stuart, after the presentation, we will have a Q&A session. As usual, you will find all the information material and documents on our website, where we will also have a replay of this call.

Having said this, I hand over to Jan.

[Jan Wicke, executive]

Thank you, Bernd, and good morning, everybody, and thanks for joining our call. If we would have to assess the first half year, I just can say that we at Talanx, we are very pleased with the results of the first 6 months. The bottom line is up to EUR 560 million, which is, by the way, record result. And this is despite a very challenging environment, if we look at the NatCat losses which we had in the first half year as well as Ukraine. The profitability is up to 11.8%, and we are very proud that we can show a growth above 17%. This growth clearly outperforms our peers and it's also a signal from our customers that they trust in the resiliency of Talanx, which is very good.

So if we go to Page #3, there you see what I've just said a little bit in written. So you can see that the growth rate is 17.7% and currency adjusted 14%, so pretty strong. We are to increase our outlook for the growth to a high single-digit gross written premium increase for the full year. Currency adjusted, if we were to have the same currency exchange rates as we have them as of today, it would be a 10% plus. But we don't know where the currency is going, and this is why we have adjusted this for currency effects.

With regard to the bottom line, we keep our guidance stable. We confirm the range given the resiliency we have for the full year. So we expect the profit to be in between EUR 1.05 billion and EUR 1.15 billion. And this should also help to deliver return on equity from 10% or more. This will partly also depend on the development of the interest rates as the interest rates heavily impacts the equity, also the denominator in the calculation.

If you go to Page 4, there you can see that we are a very well-diversified group. Here on the chart, the blue colors represent the Primary Insurance, the gray color Reinsurance. And you can see the earnings mix as well as the premium mix. If we go to the first half of the year -- next page, please -- there you can see that we had 40% of our premiums related to the primary insurance and 43% of the profits in the first half year, also to the primary insurance. So it's a very well-balanced picture, which gives us the confidence that we can deliver as we are very resilient also in terms of the earnings mix, which we have.

We then go to the next page, there you can see the technical performance due to -- during the course of the first 6 months. And there, we had a significant impact of the large losses. First of all, Ukraine. In total for the group, we reserved EUR 346 million. I will dig into that one a little bit later. If you were to exclude this Ukraine -- the war of the Russians in the Ukraine with the effect from our numbers, the combined ratio would have been at 96%. Without that, it's 98.4%. And we do not only see in these figures the Ukraine, but also the NatCat burden and also inflation. We have a very conservative reserving. You are already familiar with it. And therefore, for the new claims to happen, we obviously have included more conservative inflation assumptions in that one.

If we go to the next page, there you can see the large loss development. In total, we had a large loss burden of EUR 1.083 billion during the course of the 2 quarters, which exceeds our budget by EUR 267 million. What does that mean for the full year, we have increased the expected last large loss budget. We have increased it. As you're all familiar with this, we are always booking in our accounts higher of the 2 numbers of budget or experienced large losses. So this EUR 1.083 billion is already included in our EUR 560 million net income, which we show after 2 quarters.

What is also worth mentioning here, I just want to point out that NatCat development was very heavy during the first quarter. There were floods in Australia with EUR 259 million. The storms in Europe is approximately EUR 180 million. And there are other floods in South Africa with EUR 84 million, Hail in France, and you could add also more than EUR 50 million in floods in Malaysia to the large loss event list here. And what does that show? It does show that the climate change is there, that we have a higher frequency and higher severity of the clients related to it.

As an insurance group, we can deal with this challenge. We have to adjust our prices to it, and we are doing so. As a society, I think all of us -- we should notice that we have to do something against climate change here. So the NatCat development was clearly above our expectation. Much better than our expectation was the development of man-made large losses, just EUR 65 million. It's very low compared to previous year. And -- but this may change. But it's also a little bit a result of the very well-executed restructuring in Industrial Lines business that we were able to reduce it, but it's some statistical effect and it also is quite low.

So in a nutshell, we succeeded our loss large budget during the course of the first half year, mainly due to Ukraine, but also due to NatCat, we had some support from the very low number of man-made losses.

If we then go to the next page, we just want to mention again that Talanx has started the year with quite some resiliency reserves in place, which -- the total amount is above EUR 3 billion for the group as a whole, and this will help to manage inflation. How are we doing that? First of all, in our normal business, we have to adapt prices to the new inflation assumptions. We have to put in our pricing. Second, with regard to the reserving for all new claims, also this new inflation assumptions are included. This is obviously also a burden in the loss ratios as of the current year. But I think all of you, you're very much used to the very conservative approach where Talanx is a little bit traditionally different to some of the peers and this gives us also the confidence where we stand that we can meet our outlook despite all the effects we have to deal with.

If we then go to the segments, I would like to start with Industrial Lines. We are very, very pleased with the development in Industrial Lines. It's not only profitable again, but it's also growing. If you see here the growth, it's our growth champion in the second quarter. The operating result is slightly up. It's a very conservative reserving. The combined ratio for half year is 96.5%. We have set out the outlook on 97-point-something for the full year. And in the second quarter, we even had a 95.9%, and it's -- again, I would just mention it -- they were able to strengthen resiliency, but it's also a little bit lucky result in the second quarter given the low man-made losses which we had. We know that in Industrial Lines, it's a volatile business. You may have some wonderful quarters. You may also have some quarters with a combined above 100%. So for the full year, the expectation is 97-point-something around that, and they will meet their targets. We are very confident there.

If we then go to Retail Germany. There, in total, we have a shrinking net income, which is driven by P&C. I will explain on that one later on a little bit, and we have a positive development of the premiums. We are growing, in particular, in P&C. And in those areas where we want to grow, which is in particular the SME business, and we are also growing as we look at the new business in Life. We don't see that in the premium development so much in the figures given that we have a lot of policies were terminated, but on normal course. They were not terminated by the customers, so they're just expiring, which is a specific effect due to the history of the portfolio.

If we dig into a little bit more on the next page on P&C, I think it's worth to go a little bit more into detail because we have here a worsening of the combined ratio. I just want to mention a few effects to set it into context. So first of all, we had a NatCat burden due to the storms in Germany. And this NatCat burden is reflected in the figure, a little bit more as we bought less reinsurance protection compared to previous years. So the sales retention for that one is higher. And this is also then reflected in the combined ratio.

Second, we have a normalization of the claims frequency close to the pre-corona level. And third, we have claims inflation impact, in particular in the Motor business. So yes, there is a challenge and the challenge going forward, in particular, is to adapt the prices to what is needed under new inflation assumption. But the business unit is already working on that one. In addition, they will restructure some of the portfolios which are more exposed to inflation, that are property lines. And so that we are confident that we will see some improvement there.

Second, what is very positive in Germany is the development of Germany Life. I already mentioned that we were able to increase the new business and annual premium equivalents, we increased it by 12% and 30% of which in biometric products. Second, we were able to significantly increase the result despite the fact that the net investment income is significantly low. And I think I should explain that a little bit more in detail, given to the increase in the interest rate, there was no need for additional funding, et cetera. And therefore, we have reduced the realized gains significantly here in the portfolio. Overall, the situation in Life really has turned to be much, much better. If you look at the Solvency 2 capital adequacy ratios, on average for the German Life entities, it's now 349%, which is a very strong number and which should enable us to some capital upstream actions going forward. So it's a very positive development here.

We then go to Retail International. There, first of all, we see a very good growth of 13%. And if you are adjusting that for currency effect, it's 16.9%. And it's also aligned with the strategy, so we are growing much faster in the P&C business. There, we are up 25.5%. Currency adjusted even above 30%. And whereas the Life business is going down as we have already set out the expectations to it.

The net income is impacted at Retail International by special effects due to the deconsolidation of our Russian entity. There was a deconsolidation loss of EUR 23 million, which was compensated by one off of EUR 15.9 million in Poland. But in total, it's a negative thing. If you were excluding those 2 effects, the results would be slightly positive, slightly above previous year.

So all in all, we are pleased with the results of Retail International, keeping in mind that the inflation pressure in some of the countries where Retail International is operating in is pretty high, and the management has a lot of action underway to cope with the challenges of inflation there. So all in all, good results.

With regard to the Reinsurance, you are already able to listen to the call of Hannover Re. We are very happy with the results which they were showing. And so -- and we also are very happy with the profitable growth at Hannover Re.

Let me now dig into the investment income and some other aspects of our results. First of all, the overall investment income is down, but the main factor here, you can see it under the #2 here on Page 17 is that we have reduced realized net gains due to the fact that there was no need for additional sets at our funding. So it's driven by German Life. And next to that, we had very rather, compared to the peers rather little write-offs to account for in the first 2 quarters.

The ordinary investment income is up, yes. And we are able to achieve higher yields. If we reinvest our bonds currently, the assets under own management at period end are down. But what you see here is the increase of interest rates and its effect on the market value. The market values are down due to higher interest rates. On the ceteris paribus level, we would have had an increase in assets of more than EUR 6 billion, given that the group is growing. So all in all, a very stable result on the net investment income.

And in order to underline what I just said, on the next page, we have again shown you the structure of our investment portfolio, which is very conservative. We followed our new better approach, and we are going to continue with that. So also for the future, we expect to be a little bit less volatile. Under the current accounting standards, maybe there will be some change under the IFRS 17/9 accounting starting from next year due to the SPPI sale assets.

Going to Page 19. There is the development of the equity. You've seen the numbers of our peers here in Germany. So if you compare our equity development there, we are slightly better off than the peers who just recently announced their figures with regard to the equity development. But I just want to mention it again and again, this is really an accounting mismatch issue what you see here. The good news is, under IFRS 17, the development will be different, given that then on the IFRS 17 and 9, you will have the same discounting factors on the asset side as well on the liability side of the balance sheet. There will be much, much less movement of the equity due to the interest rate changes would be -- it will be much, much more stable.

And where you can see already this kind of accounting in practices on the next page, which is our solvency position. The solvency position stands after 2 quarters at 211%, which is slightly above our target range of 150% to 200%, is slightly down compared to the previous quarter, but this is just due to the effect that we have reduced our subordinated capital by EUR 500 million by paying back the outstanding Tier 2 bond of EUR 500 million.

So let's go to the outlook. So first of all, we confirm our group net income. It should be in between EUR 1.05 billion and EUR 1.15 billion for the full year. Given the resiliency of the group shouldn't be a problem to deliver on that one. We expect a high single-digit growth. It's a currency adjusted number here. If I already mentioned that at current exchange rate will translate into more than 10%. But we don't know where the exchange rates will be at the year-end. So high single-digit growth number. All the rest and the return on equity in total should be around 10%. If the interest rates remain high, it will be above -- even above this 10%.

So all in all, after 6 months, we at Talanx, we are very pleased with the results so far that we were able to achieve despite the NatCat burden, which we've seen in our figures. And despite the Ukraine, where we have been also in comparison to our peers quite conservative in reserving.

I would like to dig into kind of once again with regard to the accounting, please keep in mind that 80% of the reserves which we have set out are IBNR reserves, so incurred. We believe that they are incurred, but they were not reported yet by our customers or seen. So it's a quite conservative number, which we have included in our numbers here.

Having said that, I'm happy to answer your questions.

[Operator]

[Operator Instructions] The first telephone question is from the line of Darius Satkauskas from KBW.

[Darius Satkauskas, analyst]

So my first question is, you increased combined ratio guidance, Retail Germany and Retail International for full year 2022. It seems that part of the reason is large losses and the other inflation. You flagged in the past growing primary reserve redundancy as something to sort of to be a defense for inflation. And you mentioned that in your introductory remarks, so why not release some of that prudency to offset some of the pressure in the quarter? That's my first question.

And the second question is Retail International has been printing around 95% combined ratio for quite a while, even though inflation in countries such as Turkey has been high for a long time. So what has changed? And are you still comfortable with roughly 95% combined ratio run rate in the medium term?

[Jan Wicke, executive]

So first of all, to answer the first part of your question, Darius, we believe that EUR 560 million net income is a very good number, and there was no need for further release of reserves. It's rather an environment with a lot of uncertainty where we are a little bit traditionally different in terms of conservatism where we believe that building and retaining resiliency is very important. So that's the first question.

Second, the overall long-term target for Retail International is 96%, crystal clear. It should be around 96% there. And yes, we will make use of some resiliency reserves during the course of this year in Retail International. It's also needed to be crystal clear here due to the change in the accounting because we had such a conservative reserving in this business unit that from an accounting perspective, it was slightly too conservative. And therefore, we will make use of some resiliency reserve during the course of the year in Retail International. Does that answer your question?

[Darius Satkauskas, analyst]

Yes, that's great.

[Operator]

The next question is from the line of Michael Huttner from Berenberg.

[Michael Huttner, analyst]

Lovely results despite the increased resiliency. So my first question, can you give a figure for the increased resiliency because you mentioned it several times, so maybe you have something.

The second is on the Motor combined ratio in Germany, if you could give us a figure -- feel for where it is now? And how do you see it developing in terms of pricing come November or January?

And then 2 more, if I may. One, you mentioned several times that you'd increased the resiliency, including new inflation assumptions. So I just wondered if you could give us a feel for where we are now on that. And then the last one, and I know you didn't mention it, but it's a hopeful question. What's the cash outlook? I remember you have this target of 1.5x the dividend kind of cash or capital at holding. So I just wondered where you see this coming up.

[Jan Wicke, executive]

I heard 4 questions. If I missed something, just ask again, please. First of all, increased resiliency, we have increased resiliency in the Industrial Lines. This is where we have increased resiliency. And please keep in mind 2 effects which were in parallel. One effect is for new claims, our reserving will continue to be conservative. And we have put in inflation assumptions. That was your third question. And our inflation scenario is 7-point-something, 3%, 3% and then above 2.5%. So we -- for the Eurozone, we have different assumptions. I cannot recall it from my head for the dollar. So we have increased our inflation assumptions quite significantly. And this is inserted also in the way how the people do the claims reserving. So you see that in current year claims.

So -- but then second to that, you will have an impact on the claims which are currently in the process of winding up because when they were made, they were not reserved with those higher inflation assumptions I just mentioned. I just mentioned, there were also reserved with rather conservative inflation assumptions. So clearly above the ECB outlook numbers, but we have to -- we'll have to increase that. So for the total picture of resiliency.

What I would expect if inflation is to stay, and I think that's the overall assumption which we should have, this will, to a certain part, bite into the overall resiliency. But we are much, much better off than most of our peers with our resiliency reserves. I just want to mention that again because we do have them. And we are not in a position where you have to account for or start to account for inflation in the stock of your claims which you already have on your book. So 2 effects here. So I hope that has brought some color into that one.

Second, you asked for the combined ratio in Motor, and I just have to double-check. It should be, I think, during the course of the first half year was something 101 or something like that. But we will double check on that. I'll come back to that one.

Fourth question was with regard to the cash outlook. The number is 102% was a combined ratio in the Motor business in Germany for 6 months. But it was heavily impacted by the storms. Please keep that in mind in a higher sales retention as we bought less reinsurance for that one.

So the fourth question you had, Michael, was with regard to the cash outlook. That's a very good one. We are growing clearly above our own expectations and it's profitable growth. So we expect future profits coming out of that. We see overall that we were able to achieve the premiums, which compensate us already for the inflation effects. So this is a positive. But obviously, this growth will also drive some capitalization needs. And therefore, I would like to -- just to mention, we will come with a new dividend policy by the 6th of December at our Capital Markets Day. We have learned from all of you that you would expect something more. I want to set out the expectation that the dividend outlook should be stable or upwards, and I will continue to underline upwards. But you should keep into your thoughts also that if we are growing so on such a wonderful way like it is currently, we love this growth, and we will finance this growth also.

I hope that's brought some color into all the 4 questions.

[Operator]

[Operator Instructions] We have one more telephone question from the line of Thomas Fossard from HSBC.

[Thomas Fossard, analyst]

2 or 3 questions on my side. Maybe you could comment a bit more on the specific situation you are facing in Germany. It seems to be that we are hearing a lot of pretty downbeat comment on Germany at the present time regarding inflationary pressure. And maybe for us to put the -- everything into perspective, it would be interesting to better understand what you're facing really in terms of loss cost inflation in your German book, and how you have reacted to this through prices year-to-date, and how much you think you would have to do more in the coming quarter?

The second question would be on the Industrial Lines combined ratio in Q2, which were pretty strong. Can you put additional comments regarding resiliency buffer buildup or reserve release, the COVID-19 reserve releases? And how should we look at the combined ratio on a normalized basis for the coming quarter?

[Jan Wicke, executive]

Yes. I'll start with Retail Germany. So first of all, we have continued our conservative reserving approach also in Retail Germany. And that does mean that we have a normalization of the claims frequency in Retail Germany, so to pre-corona level. We have an increase in the average claims due to inflation. And this has been accounted for in the first 2 quarters already. So this is -- and this has led to various actions by the management team of Retail Germany. They have increased the prices in Motor already 2x and maybe a third time will be needed. They are assessing that currently. They are restructuring those parts of the portfolios, in particular, in property, which are more exposed to inflation. That they are a little bit more selective here working on that one. They're continuing their path on cost reductions, which was already set out before that.

So there are quite some actions underway. For the result of Retail Germany as a whole, they are able to compensate the lower results partly by higher results in the Life business. And if you look at the proportions of Life and non-Life in Germany, and this is a little bit of strange animal within the group because the only business where we have more Life business than non-Life business, this should, yes, balance a little bit the picture of Retail Germany.

Second, with regards to Industrial Lines business, we are very, very pleased with the combined ratio which we have seen, and it's a very conservative reserving. We have built up resiliency buffers despite the inflationary environment in Industrial Lines. But given that we know our business and we know how volatile Industrial Lines business is, I do not want to raise the expectation that -- 95.9% is something for the year-end. Obviously, I can't rule that out also. But it's a volatile business, and we have set out the expectations the 97% for the full year, and it will be reduced by 1 percentage point till 95% is reached. I can't rule out that Industrial Lines maybe even a little bit faster in the past, but I do not want to -- well, we want to wait a little bit for that one because it's also a little bit the case of the hurricane season is coming and so on. It's difficult after 2 quarters already to give an outlook here. And with regard to hurricanes, 2 lines of business are exposed, most to it is Reinsurance and Industrial Lines.

[Thomas Fossard, analyst]

Excellent. Maybe one additional comment regarding the low level of the water on the Rhine River. I know it has been the case a couple of years ago. And at that time, I remember that it had triggered a lot of concerns regarding potential business interruption claims. Maybe in between times, this line of business has even more developed or the pickup in terms of buying this type of coverage has further increased among your German industrial clients. So could you shed some light on how Talanx could be exposed and if this is potentially a material thing to have in mind?

[Jan Wicke, executive]

That's a very good question, Thomas. And you're absolutely right with regard to business interruption claims. There, we have quite some increases in the claims. And this low water on the Rhine, we had an extensive discussion yesterday on that one. That will cause 2 effects, the harbor of Rotterdam, which is quite important. They have a lot of shipping the small ships over the Rhine from Rotterdam. And in addition, you have more or less the traffic jam on the sea for before Hamburg and Rotterdam. So the supply chain problems. They are currently increasing for the industry in Germany as a whole due to what you've just mentioned.

So with regard to our exposure, I just want to give a green line. We haven't increased our exposure here. And with regard to price adjustments in what we need to get in Industrial Lines business interruption we already reflect the specific exposures in the prices we asked for in Industrial Lines. Does that answer your question?

[Thomas Fossard, analyst]

Yes.

[Operator]

Currently, there are no more telephone questions. I would like to turn you over to Bernd for the written and webcast questions.

[Bernd Sablowsky, executive]

Yes. We have 3 webcast questions from Hadley Cohen from Deutsche. I'll start with the last one because it's picking up on the Rhine water level we just touched upon. Hadley wanted to know what that means.

As Jan said just a minute ago, we do not see us affected strongly by the low water levels at the Rhine.

The other 2 questions Hadley raised, I read them out. "How much of conservatism the German P&C combined ratio is related to inflation that we are currently seeing? And how much is conservatism related to the outlook for inflation expectations going forward? In other words, how do we get comfort that the combined ratio in German P&C is not going to deteriorate further?

And the question number two, Hadley has in mind is, can you please provide an update on your current reinvestment rates and how this compares with the underlying running years? Those are the 2 questions. Maybe we start.

[Jan Wicke, executive]

Yes. Okay. With regard to Retail Germany, obviously, there is some work to do also going forward, but we are confident that maybe not in this year, but maybe most likely in the next years, we will have the combined ratio again down to -- just down below 100%. That is what we expect.

Second, with regard to the reinvestment yields. So the reinvestment yields are close to 2.3% for the first half of the year, which is clearly above the previous years where it was 90 basis points lower. So I hope this will answer both questions.

[Bernd Sablowsky, executive]

And I think Michael Huttner again in the line with questions?

[Operator]

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

[Michael Huttner, analyst]

Fantastic. I had 3 questions. One is the specialty business and I'm a bit puzzled, it's now about 1/3, as I understand it, of your Industrial Lines business in terms of premiums. But if the combined ratio, I'm assuming there you're still just putting the money aside is 100%. That would imply that the rest of the Industrial Lines business is well below the 96% or 95.9% that you reported. So I'm just wondering if you could give us a bit of color from this. And also, when will you release profits from specialty? What's the right time?

The second is on the solvencies. I think this is the first time you've reported solvency at the same time as you report results. And I just wondered how come? What made the change possible? Or is there something new?

And then the third question is maybe can you give us a little bit of a feel for how you see IFRS 17. The comments from, I think, it was Munich RE is that shareholders' equity will -- plus CSM is roughly equal to solvency owned funds. Of course, you've got to adjust for that, but any indication would be very helpful.

[Jan Wicke, executive]

Yes. Okay. So first of all, the ratio of HGS [ HDI ], you're pretty right. At HGS, given the speed of the growth, we are quite conservative also in reserving there. And the rest of the business, we call it HDI business, HDI Global business is very profitable and currently showing already better combined ratios than the ones which are reported on business unit level as a whole. This is very pleasing.

Second, the release of profits with HGS, when will it start and what do we expect? So we will increase the profit from HGS during the course of the next year. So it will be step-wise. And obviously, in the end, it should be according to their premiums. So that's in the long-term, but it won't happen too fast as we are growing the business here, and as they need to have some buffers also in the HGS business. So it's -- it will take some time.

Third, the solvency ratio, we were able to publish them. We have speeded up some models and that we are able to also calculate an expectation of the solvency ratio, which is pretty stable, and that's what we have published. We wanted to publish the solvency development in line also with this IFRS 4 equity development. Given that this IFRS 4 equity development is showing just an accounting mismatch and does not reflect adequately like Munich RE has told you also the development of the equity base of the company.

Fourth, the IFRS 17/4 for development, like my colleague at Munich RE has said, we are very positive with regard to the future development because IFRS 17 will provide us or will reduce the accounting mismatch to a minimum. There will be still some minor accounting mismatch things, but overall, it reduces significantly. And for you, as an analyst, it will be much easier to reconciliate from IFRS 17 to Solvency 2, yes. This should provide with additional comfort with regard to the capital we are running with -- which we need for the business, if you want to reassess that. So I'm very positive here on that one.

[Michael Huttner, analyst]

And any feel -- I suppose what I'm really asking your ROE, so you have figure under IFRS 4 of around 10%, maybe more if the current interest rates stay where they are. Is that the figure we might see under IFRS 17?

[Jan Wicke, executive]

I wouldn't rule it out, but it's -- I think it's more information to come on our Capital Markets Day on December 6. All of us in the industry, we are currently learning something about IFRS 17. I have to admit that. So -- and we will provide you with additional information on the Capital Markets Day with regard to that one. That should help you to build your guidance going forward. But I cannot rule out what you've just mentioned.

[Michael Huttner, analyst]

And then last question, if I may. I'm really, really sorry. But we hear all this stuff about gas prices. And here in the U.K., I think we're going to pay GBP 4,000 a year or something like that to heat houses. Can you give a feel for how this affects A, your business? And would it reduce frequency in Motor or would Industrial Lines be -- do you have some issues there? And B, is -- would the government, because everybody will suffer from this, then say to all the corporates, please don't pay as much because it doesn't look good?

[Jan Wicke, executive]

Let's start with the first. How does it impact our business? Well, I think we will have a traditional recession impact. If the people have less money in their pockets, then it will be more difficult to ask for adequate prices, in particular, in the retail businesses. In the wholesale businesses, there, I would expect to see 2 effects in parallel. One is the recessionary effect, yes. The second one is we have a lot of indexation in our insurance contracts in the wholesale business. So you have an insured sum, which is adapted to inflation year-by-year. So we expect some growth to happen due to inflation simply because we have to adapt the indexation in the contract, which is done on a regular basis. So we have some inflation protect built in, in the way how we drive business. And in particular, Industrial Lines, as you ask for it, will benefit from that one. Yes. So 2 effects. The recessionary is obviously negative. This inflation indexation, which we have in many, many contracts is a positive.

[Michael Huttner, analyst]

And is there -- would the dividend policy or the capital management be influenced by thoughts that if everybody is suffering, corporates seem to be generous?

[Jan Wicke, executive]

Well, we will communicate our dividend policy on December 6. But in terms of thought, obviously, we have to look at the picture as a whole, but up so far, I haven't received any calls from politicians, do not show too much dividend or so. So yes, that's what I can tell from at this point of time.

[Operator]

We have another follow-up question from the line of Thomas Fossard from HSBC.

[Thomas Fossard, analyst]

Yes. One additional question, Jan, is, given you raised your combined ratio guidance for Retail Germany and International, but kept the 2022 net income guidance unchanged. Can you comment where we should expect the offset coming from given Hannover Re has also kept its guidance unchanged. So I'm not sure where is it missing or what is the missing part?

[Jan Wicke, executive]

Yes, Thomas. 2 things are worth to be mentioned. First of all, we will have a higher investment income also in Retail International, as we are also there invested in inflationary cuts quite significantly. This will increase investment income. Second, we have some -- we have in Retail International, even huge resiliency reserves, and they are so huge that from an accounting perspective, they are not really viable, they are also not really capital efficient. So there will be some release of resiliency reserves during the course of the year in Retail International.

[Operator]

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

[Bernd Sablowsky, executive]

All right. So thanks, everybody, for joining and asking all these questions, which we happily answer. If there's anything else you need in the course of the day or in the days to come, please do not hesitate to reach out to Bernd's cadre or myself. And other than that, we talk to each other again at the occasion of Q3 numbers. Thanks for listening and talk to you soon.