Talanx AG

XETRA:TLX

Earnings Call Analysis

Talanx Projects Strong 2023 and 2024 Finances

Talanx radiates optimism with a solid 9-month performance driving their 2023 net income projection to above EUR 1.5 billion—an uptick enhanced by remarkable Primary Insurance revenues growing by 13%, or 16% currency-adjusted, and net income surging over 50%. This momentum paves the way for an ambitious 2024 net income target of more than EUR 1.7 billion, anticipating to outdo the initial 2025 target a year early. Group revenues are up by 8%, with net income rocketing 38%. Return on equity climbs by 4.6%, promising to maintain well over 10%, indicative of enduring financial health.

Talanx Business Performance: Robust Growth and Increased Outlook

Talanx is experiencing strong performance with revenues in Primary Insurance growing by 13%, and even 16% on a currency-adjusted basis. There has been a notable increase of more than 50% in the bottom line for Primary Insurance. This significant growth has given Talanx confidence to raise the group net income expectation for 2023 to clearly above EUR 1.5 billion and set an ambitious 2024 target of more than EUR 1.7 billion, surpassing the initial 2025 target by over EUR 100 million a year early.

Healthy Profitability and Revenue Growth

The company's return on equity (RoE) remains impressive, predicted to stay above 10% and potentially near 15%, indicating efficient use of equity towards generating profits. Total revenue for Talanx Group increased by 8% for the first nine months, bolstered by strong contributions from the Primary division. Group net income has seen an uplift by 38%, while RoE has improved by 4.6%. Talanx anticipates achieving over EUR 42 billion in insurance revenue by year-end, with a reassuring growth forecast despite global economic challenges.

Industrial Lines Drive Earnings

Within the Primary Insurance segment, Industrial Lines have seen a revenue growth of 10%, or 12% adjusted for currency, with commercial lines being the main driver. Despite a conservative approach in specialty lines, the combined ratio stands at a solid 92.7%. Talanx has made strategic decisions to take over EUR 80 million losses on the bond portfolio, intending to secure higher ordinary income in the future. Consequently, Industrial Lines is still expected to achieve an RoE clearly above 10% for the full year.

Strong Growth in Retail International, Despite Inflation Challenges

The Retail International division has recorded exceptional growth, with Property & Casualty (P&C) insurance growing by over 33% and Life insurance by 41%, although these numbers are somewhat inflated by unique factors such as inflation accounting in Turkey. Excluding these effects, growth remains robust with 16% in P&C and 9% in Life. The combined ratio remained below 95%, showcasing strong technical performance, particularly in South America. An equity injection related to the Liberty transaction is expected to temporarily dip RoE, but Talanx reaffirms investors that the RoE will improve in the long run.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Moritz, your Chorus Call operator. Welcome, and thank you for joining the Talanx analyst call 9 months 2023 results. [Operator Instructions]

I would now like to turn the conference over to Bernd Sablowsky.

[Bernd Sablowsky, executive]

Thanks very much. Good morning, everyone, from Hannover. This is Talanx results call for the first 9 months and the third quarter of 2023. I'm here together with my CFO, Jan Wicke, who will present the details of our current year's results to you. As usual, after his presentation, we are available for questions. And I wish to remind you that, as usual, all our material including, but not limited to, the financial data supplement, is posted on our webcast.

So now, Jan, over to you for the details of the results.

[Jan Wicke, executive]

Thank you, Bernd, and good morning, everybody. At Talanx, we are very satisfied with the current performance of our business. And before we dive into the details, let us take a quick glance at some key figures which support the confidence in our business model and also are the basis for our guidance for both 2023 and 2024. I will focus a little bit more on Primary Insurance business, given that our colleagues from Hannover Re already explained the reinsurance numbers to most of you last Thursday.

And in Primary Insurance, the revenues continue to grow above 10% or, to be precise, it was 13% after 9 months. And if you were to adjust these numbers for currency, it's even 16%. The bottom line rose even much, much stronger with more than 50% in the Primary Insurance. And both the rising premiums and our ability to monetize growth have led to our increase in the outlook, that we are now expecting for 2023 group net income clearly above EUR 1.5 billion for 2023.

And based on the excellent 9-month figures, we are now introducing also the profit target for 2024. We believe we can do more than EUR 1.7 billion net income next year. This means that we strive to exceed our initial 2025 profit target of EUR 1.6 billion by more than EUR 100 million, 1 year ahead of plan. And this obviously raises a question whether we will update our 2025 target. We will do so, but we will do so in March '24 when we publish our full year 2023 results.

With respect to the 2024 outlook of above EUR 1.7 billion, I wish to highlight that this includes already a small profit contribution from the Liberty acquisition but not the expected full potential out of this transaction. The return on equity will remain clearly above 10% and in a very, very healthy level like in the current year.

Let me now move to the group financials and provide you with an overview of the consolidated group numbers. In total, the group was able to increase its revenue base by 8% in the first 9 months. And this is based, as I already mentioned, on the double-digit revenue growth in Primary Insurance and a single-digit growth at Hannover Re.

We have a strong net income increase of 38% in a group as a whole, again, with a very robust contribution from the Primary division. The return on equity is up almost 5% or, to be precise, 4.6%, and despite the fact that we have done something in order to increase the resiliency embedded in our best estimates.

With regard to give you an overall view on the results of 2023 so far. Obviously, we had some tailwinds here both from discounting, on the one hand side. But on the other hand, we were able to increase our resiliency embedded in the best estimate reserve, but we also had some tailwinds on the large loss development which is, if we move to the next page which is shown on Page 6. Compared to the previous year, we had EUR 277 million net large losses. But please remind that last year was significantly affected by the Russian war in the Ukraine.

Nevertheless, we did not book this EUR 1.589 billion. We booked a number close to EUR 1.7 billion as large losses as we usually take the higher number of those budget or incurred losses so that we will have a buffer for the fourth quarter for more than EUR 100 million, which is good to have the buffer given that, at least for the hurricane in Mexico, we expect this to be a large loss above EUR 100 million. So -- and that will be then still well within the budget.

With regard to the large loss development so far in the first 9 months, there have been 2 earthquakes. The most expensive one was in Turkey and Syria with EUR 330 million. The other one was in Morocco with EUR 70 million. And the Italian storm is worth mentioning with EUR 132 million net burn in our numbers.

On the next page, we dig a little bit more into the bottom line and where the results are coming from. Primary Insurance is contributing 47% of the net income in the first 9 months to almost half of the group earnings. And within Primary Insurance, all 3 divisions contribute nicely, with the largest contribution in absolute numbers coming from Industrial Lines, closely followed by Retail International. And the relative earnings contribution in between Primary and Reinsurance may level out a little bit towards the end of the year, but we are getting closer and closer to our long-term goal of an even split between Primary and Reinsurance.

Based on our very good first 9 months, we have raised the outlook with regard to the insurance revenue. We stick to that we want to achieve above EUR 42 billion insurance revenue by the end of the year. It would slightly depend on the dollar, but we will -- we are very confident with that one. With regard to the group net income, it should be clearly above EUR 1.5 billion, and return on equity, clearly above 10%. And if you later do the math, it should be around 15% at least, which is a very, very healthy level of profitability.

Let me now go a little bit more into detail with regard to the segments. If we move to Page 10, where we see the Primary Insurance as a whole. 13% increase in the top line, 51% bottom line and very strong contribution in terms of return on equity.

On the next page, there is Industrial Lines. Industrial Lines, we were able to see revenue growth of 10%, and if we are adjusting it for currency, 12%, which is shown on the chart here. And if we dig a little bit deeper into the 12%, then it's predominantly driven by commercial lines, whereas specialty lines, we were below this 12% due to a more selective underwriting approach. The combined ratio stands at 92.7%, which is a very strong number, and we were able to increase the resiliency embedded in those numbers.

And given that the technical result was so strong in Industrial Lines, we even decided to switch a little bit in the bond portfolio. So we realized more than EUR 80 million -- in adjusted Industrial Lines, more than EUR 80 million losses on the bond portfolio in order to achieve higher ordinary income in the future. And altogether, this adds up still to a return on equity of 13.4% in the first 9 months. And so we do not only expect to have return on equity by the end of the year above 9%, it should be clearly above 10% for the full year despite the fact that we are still, in terms of steering results, 'to do a little bit more in the bond portfolio going forward.

Retail International, on the next page, is our growth machine. In P&C, we have more than 33% growth; in Life, even 41%. Those growth figures are a little bit affected by some extraordinary effects. With regard to P&C, it's Turkey and the inflation accounting. If we were to exclude Turkey from the growth number, then the growth rate would be still 16%, which is a very strong organic number. With regard to the Life business, we have a positive impact on the newly set up bancassurance agreement in Turkey, which contributed EUR 65 million insurance revenue premium. And without this newly founded bancassurance agreement, the growth rate would have been just 9% compared to the previous year.

The combined ratio stands at slightly below 95%, and this is despite the fact that we face in Turkey still some challenges due to hyperinflation. But we also see in Turkey a very strong rebound in terms of pricing of the business and also with regard to the development of the combined ratio, but which is still above 100%. And this below 95% was heavily driven by excellent technical performance in South America, in particular, in Brazil and Chile. So we are very happy with the development in these countries.

The return on equity stands at 11.9% after 9 months, but I would like to draw your attention to the fact that in order to do the closing of the Liberty transaction, we will provide the subsidiaries in Latin America with equity, which will then reduce the return on equity for the full year because the equity component is higher. So no worries about it. In the long run, the return on equity will rise. Now, there will be a dip due to the equity injection. No worries about it.

With regards to the transactions in Latin America on the next page, we want to provide you with an overview. So with regard to Sompo, we have closed this transaction 24th of August. With regard to Liberty Brazil, which accounts for roughly 80% of the whole Liberty deal, we have already the approval of the Antitrust Commission, but we are still in final -- answering the final question of the financial supervisor in those countries. But there are no obstacles to be seen so that we expect to do the closing within the fourth quarter here.

With regard to the closing in the Andes countries which is Chile, Colombia and Ecuador, we have already received the approval from all antitrust bodies in those countries. But same like in Brazil, we still have to answer some questions of the financial supervisors here. But again, there are no critical question, at least from my point of view, so that we expect closing in the first half of 2024, maybe even in the first quarter, to happen.

With regard to -- if you move on to Retail Germany. Retail Germany provided for the highest return on equity within the Primary Insurance with 14.2%. If we look at the growth picture there, we have a split picture. We have growth in the P&C business with 7% driven by the SME business which continues to grow, its revenues are up 11% even in the first 9 months; and also growing bancassurance contribution in non-life is very pleasing.

Whereas in Life business, we have a decrease in the insurance revenue of 7%. And if we look at the APEs, then we have even a decrease by 10%, which is driven by significantly lower single premium business, like in the whole German market. So there's nothing special here. Anyway, it's our smallest segment.

Combined ratio stands slightly below 96%, so it's within the target range, positively influenced by the bancassurance profitability. The new business value in Life is up in the first 9 months, which might be a little bit surprising. But the reason behind it, that we have a higher proportion of bancassurance business within our revenue mix. And this, in the end, causes also this very favorable return on equity of 14.2%. And if we were to include the partly asset management contribution of Retail Germany with its large Life books, then we would even see a 15.8% return on equity in the first 9 months.

So let me then move on to the Reinsurance. In Reinsurance, you have already heard what our colleagues have told you last Thursday. Just to repeat, it's a 4% growth. The 4% growth is particularly impacted by a shift in the new business from proportional to nonproportional on reinsurance contracts, which are normally much more profitable. So it's a shift towards profitability. The net income stands at EUR 704 million, which is positive. And the return on equity has reached outstanding 20.5 percentage level. And if you then include also that our colleagues at Hannover Re were able to build resiliency embedded in the best estimate, then you will well understand why we are so satisfied with the development of our Hannover Re.

On the next pages, I would like to provide you some color with regard to our capital situation and also with regard on how we are invested.

With regard to the Solvency II capitalization, we can show you very strong numbers here. We have Solvency II ratio without transitionals of 222%. It's an increase by 5 percentage points compared to the last quarter. There are 2 reasons for the increase: first of all, the favorable earnings development; and second, the capital increase. We have increased the capital by EUR 300 million. If we were to exclude this number, it would be just 219%, which is still a very strong number.

And you may ask the question, why is it so strong? Yes, we have bolstered a little bit the solvency ratio because we are preparing ourselves for the consolidation of the Liberty entities. And after the consolidation of the Liberty entities, we still expect the solvency ratio to be above 200%, where we want to have it.

On the next page, you can see -- and as you already know, I'm a fan of the new IFRS 17 and 9 accounting. You can see the development of the shareholders' equity, which is a good yardstick for the economic development of the company. We have an increase of the equity by more than EUR 1.2 billion. And if you then focus a little bit on the value creation, which is derived from the sum of net income and other comprehensive income, then the value creation was even above EUR 1.4 billion during the course of the first 9 months which are, on my point of view, quite strong numbers.

Next page, 19, is my favorite slide in the presentation. And this is why I want to dig into that one a little bit more. On the left side, you see the shareholders' equity, and then we've added to the shareholders' equity as the contractual service margin and the shareholders' view of it. What does it mean? We have taken the net contractual service margin, deducted the tax effect and deducted from that one also the minorities, which are quite huge due to the Hannover Re minority shareholding.

So that you have a net perspective from a Talanx shareholders view if you look at the CSM as an indicator of future profitability, which is already in the book. And the same is true for the risk adjustment, where we also deducted minorities and standard tax rate. So in total, if you then add up everything from a shareholders' perspective, the equity, the CSM and risk adjustment, you will end up at EUR 17.4 billion for the Talanx shareholders. And this translates into a value per share of EUR 67.4, which is a strong number.

And I just want to highlight and, in particular, Clemens in his presentation last Thursday has speaked to that we were able to grow our CSM strongly also due to the course of the first 9 months. So we are very happy not only with the overall number but also with the development of this number.

On the next page, you can see that the reason for this nice earnings and CSM development is not that we have an aggressive investment strategy in place. We continue to have a little better approach in our investment portfolio and with the majority of our investments held in bonds. We have an increased assets under management are rising due to the growth of our business by EUR 3 billion.

And there's only one thing I want to draw your attention to. If you compare the rating split which we have currently in place with the previous one, there is a big shift in between AAA to AA bonds. And this is just due to the downgrade of the U.S. There's no -- as we are a huge investor in U.S. Treasury. So no active portfolio management hedged.

On the next page, you get another insight into our investment strategy but from an IFRS 17/9 perspective. On the left side of the slide, you will see bars which are reflecting the net insurance finance and investment results. What does that mean? It's the investment results minus the insurance finance result, which is needed to unwind the liabilities in the book. And given that we had an increase in the unwind due to higher interest rates. Therefore, this insurance finance results have become more negative.

And this causes then that the sum of those, so net insurance finance and investment result, drops from EUR 1.2 billion to EUR 1 billion from year-on-year despite the fact that the return on investment has been increased. So the unwind was pretty strong. But it's not only that. You can -- the interpretation of this number, net insurance finance and investment result, is -- at least what you can see here is the spread which we earn by investing above risk-free rate our investment portfolio. But on top of that, you see in those numbers the movements in the bond portfolio.

And during the course of the first 9 months, we have realized in the bond portfolio roughly EUR 180 million profits in order to buy bonds with higher performance for the future, which will provide for higher ordinary income in the years to come. So -- and if you were to add this EUR 180 million on top of the EUR 1 billion, which is shown here on the left side on the page, then again you would be at the same level than previous year.

The average reinvestment yield is growing from 2.6% in September 2022 to 4.4% in September 2023, so 180 basis points more. And this provides for the expectation that we will see more ordinary income in the years to come.

On the next slide, shows something which I've shown you already in the last quarterly call, which is our sensitivity in the P&L towards the fair value through P&L assets. And I have to admit, first of all, that I've been much too pessimistic so far. What you can see on the one hand side, there's still a huge sensitivity but it hasn't played out in the course of the first 9 months.

So in total, this is not on the slide here, we have seen -- with regard to private equity, not a negative impact in the first 9 months but a positive of EUR 2 million. So private equity remains positive, slightly positive, but it's far below the positive numbers which we have seen in the past years, but it's still positive with EUR 2 million.

With regard to real estate, we have seen devaluations, so a negative impact of EUR 34 million already. And we expect some more to come in both in private equity and in the real estate funds, and we have included that already in our outlook. So I really like to draw your attention on this slide given that changes in the fair values through P&L assets may affect always results. And the fact that we haven't seen anything is more by surprise than a good indicator for all of the -- of our future.

So if we just now go to the outlook 2023 and 2024. Let's start with 2023. We expect to achieve insurance revenues above EUR 42 billion. This will slightly depend on the development in particular of the dollar, so the foreign currencies matter here. With regard to the group net income, we will be clearly above EUR 1.5 billion. So the return on equity should stand clearly above 10%. If you do the math, then you will see it should be even above 15% for the current year.

And the dividend per share will be above EUR 2. Just to remind you, we have promised to increase the dividend to EUR 2.50 until 2025. And given that we have a huge profitability or a very good result -- or expecting very good results for the current year, obviously this gives room to maneuver within the range on our path to EUR 2.50 by 2025.

On the next page, you see the outlook for 2024. The outlook here is above EUR 1.7 billion, and this above EUR 1.7 billion already includes a small contribution from the newly acquired Liberty subsidiaries in Latin America but not the full potential. The return on equity should stand, also again, clearly above 10%, in the area of 15%. This is where we would expect it in the current market.

So I hope I could provide you with a good overview about our first 9 months. And now I'm happy to take your questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Michael Huttner from Berenberg.

[Michael Huttner, analyst]

Lovely results. It's -- and lovely new guidance. Three questions initially, though: tax, the conservatism on the bond kind of write-downs or realized losses just in Q3 stand-alone but for the group and also Industrial Lines, and then on the deals, maybe you can -- since they're imminent and you've already done Sompo.

Can you give maybe a clear feel for when we might see more meaningful earnings contributions? And the taxes, just to ask, the very low tax rate, is it something we should start to bake in? Or how should we think about it?

[Jan Wicke, executive]

Thank you, Michael. First of all, the bond realizations of EUR 180 million net so far were during the course of the second and third quarter and mainly related to Industrial Lines, some in retail -- a few in Retail International and some in corporate operations. And it's, by rule of thumb, slightly above 50% in the third quarter. With regard to the contribution of the Liberty transaction, we expect to see a positive contribution above EUR 80 million in the course of 2025. And during the course of 2024, it will be just a partial contribution of that one due to restructuring efforts, which are normal if you combine entities. So the contribution will be significantly lower in 2024.

With regard to the tax rate, we've seen some shift in business. And to give you a little bit a hint, let's assume there is a global minimum tax coming up. And you have a very conservative bookkeeping throughout your entities, also in those who will be affected in global minimum tax regions, then obviously you try to shift your resiliency a little bit from those regions to other regions where you have higher tax rate. And this will, in the course of doing that, will cause some positive tax effect. But those tax effects will not last forever. So starting from the next year and also included in our outlook, they are normalized tax rate. I hope this hint answers your question.

[Operator]

And the next question comes from the line of Phil Ross from BNB Paribas.

[Philip Ross, analyst]

Just one question for me, please, on the dividend path. You said you'll have room to maneuver within the range between EUR 2 and EUR 2.50 in the coming years. But thinking about 2025, is there a chance you'll do more than the EUR 2.50? Or are you particularly stuck to this number? I'm just thinking in the context of having increased net income guidance for FY '23 as well as FY '24. So if that keeps happening, can you do more than EUR 2.50?

[Jan Wicke, executive]

Yes. Well, Phil, this is a very good question. First, I understand very well your question, and it's a normal course of business. If the results are better, obviously there's more room to maneuver with regard to the dividend. The formal procedure with proposals to the dividend is that both Supervisory Board and Board of Management will agree on a proposal always after the year-end closing. So given that there is no agreement currently, I'm limited give you further answer than the one I've given. So until 2025, we will for sure achieve EUR 2.50 by 2025. But if there is some discussion, and I assume there will be a discussion, then there might be some more room to maneuver.

[Operator]

And the next question comes from the line of Bhavin Rathod from HSBC.

[Bhavin Rathod, analyst]

I have 3 questions on my side. So the first one would be on your higher guidance for 2023. Obviously, it's been revised up quite significantly. How are you looking at the slides and the segmental combined ratio target? We can see the combined ratio target is still the same as it were presented in the previous quarterly results. So just trying to better understand, where should we see the incremental contribution coming from within your primary line segment in terms of the better underwriting performance? So that would be my first question.

The second one would be on reserve resiliency situation. Jan, it would be helpful if you could provide some color on how should we think about the pace of reserve resiliency buffer buildup going forward given the fact that you have built a significant amount of buffer in the recent period. So how should we think about that pace going into 2024?

And the third one would be on the Retail Germany combined ratio, which has again come down quite a bit in the third quarter. So can you provide any indication how are we seeing the claim inflation situation in Germany? And how this has been offset by the strong performance of the bancassurance segment. So any indication of what's driving the strong combined ratio in the third quarter would be really helpful.

[Jan Wicke, executive]

Thank you, Bhavin. So first, with regard to the higher guidance. This higher guidance is clearly driven by a strong technical performance, which we've seen. And this technical performance already includes, and this brings me to your second question, resiliency contribution. And just in order to state, Hannover Re have stated for the full year they expect to build additional roughly EUR 300 million resiliency embedded in their best estimate, and there will be also a significant contribution also in the triple-digit million area of the Primary Insurance during the course of this year.

And I hope this gives you enough color for the resiliency building. Please keep always in mind that we are publishing the resiliency embedded, our best estimate together with an assessment of independent actuarial company, which is Towers Watson, with the Annual General Meeting or with the first quarter of 2024. So -- and in between, it's quite difficult to give you exact numbers on that one because that are all estimates, both from the external actuary and upon our actuaries. But I would really bet on that you will see a significant increase and the difference in between what we've booked and what the external actuary believes, which was what would be enough for reserving against the claims we had.

So third, with regards to Retail Germany P&C business, so first of all, it's the smallest segment within the group. It contributes to slightly below 3% of the insurance revenues of the group. And for the next year, it will be even slower when we are to consolidate the Liberty P&C revenues in our books. We have seen a rather stable combined ratio, which is outstanding in the German market, this is [ right ], and it's driven by bancassurance.

We also faced some profitability challenges in the motor business. But the motor business, if I'm not mistaken, accounts for roughly just EUR 600 million or something like that, EUR 600 million insurance -- or it's even EUR 550 million insurance revenues, where the whole market in Germany currently stands at a combined ratio of 110% to 116%. And so we'll have to improve our pricing and we are prepared to do so in order to achieve positive technical results. But again, I'm talking about EUR 550 million revenues out of -- it's a full year number, out of EUR 42 billion. So please keep in mind the magnitude of the fact. So I hope this had answered all 3 of your questions. Has it?

[Bhavin Rathod, analyst]

Yes, it is. Can I just quickly follow up? I mean, would you be able to say what would be your combined ratio in German motor? I remember the last time you mentioned 110% kind of a figure. Would you say the third quarter was broadly at similar levels? Or have you seen any movement?

[Jan Wicke, executive]

No. It was even at 111%.

[Operator]

And the next question comes from the line of Roland Pfänder from ODDO BHF.

[Roland Pfänder, analyst]

Two questions from my side. First of all, on Industrial Lines, could you maybe provide for the third quarter the moving parts, what you see in terms of, for example, pricing in commercial? Did you book any run-offs? Did you increase your resiliency again? And what did you do with the benefit from discounting in the quarter? So that's the first one.

Second one, on Life Germany. You had a very strong new business value in the quarter. Could you explain which product you are selling, which drove this figure? Because I think the classic life products are still a little bit under pressure in the high-yield environment out there.

[Jan Wicke, executive]

Thank you, Roland. First of all, with regard to Industrial Lines, how is the pricing cycle here, we are still able to increase the prices by -- and compensate for the claims inflation which we also see at the same time. So it's still a positive trend where we can still protect the margins we have in the business. And therefore, the technical performance of Industrial Lines, let me -- I'm normally quite humble, but here, I can say it was very, very good in the third quarter. And this is why we were not only able to set aside something towards resiliency.

But as you know, and out of our discussions, we have -- with regard to resiliency both we have a lower limit where we are the segments as we have -- with regard to resiliency both, we have a lower limit where we ask the segments to increase their resiliency and we also have upper limits, where the resiliency achieved levels where they are not good from a capital efficiency levels. And Industrial Lines is more to the upper end already, and this is why we've asked them to realize losses in their bond portfolio in order to provide for higher ordinary income in the years to come. So very strong result here.

So with regard to Life Germany, you asked for the strong new business value contribution, which was in particular, you're absolutely right, very strong. It was in particular also related to credit life products and unemployment insurances, which contributed very strongly given that we have a very low unemployment rate in Germany, which contributed very strongly to that number. Maybe if there's a recession, these numbers will come down a little bit, but currently they are very, very strong. So I hope that answered both your questions.

[Operator]

And the next question comes from Ismael Dabo from Morgan Stanley.

[Ismael Dabo, analyst]

I think most of my questions have been asked already. But just wondering if you could give just a little bit more color. So obviously, just looking at your Industrial Lines, like the bond ratio target, and obviously you guys have performed very well in that business. I know you just highlighted some of the moving pieces, but just curious exactly why that's so strong. And if there's anything I may be missing there beyond just rate versus trend, any one-offs or anything like that? From what I understand, you guys booked the full cat loss ratio.

And then additionally, I think you briefly mentioned in your Industrial Lines that commercial was growing faster than the specialty lines. Just curious, as of right now with specialty lines that you guys are a little bit limited on their risk appetite on, and in particular, what lines of commercial are you more favorable on?

[Jan Wicke, executive]

Good. So first of all, with regard to Industrial Lines combined ratio target, yes, we will lower the target in terms of having more ambitious targets there going forward. It's for sure. So it should improve. What is the main driver for the very nice combined ratio? First of all, I think we have improved significantly the underwriting skills in this area of the business, so during the past years, it's a multiyear process. And second, never forget, we are the clear cost leader in Industrial Lines business, providing for a difference of close to 5% in the cost ratios compared to our peers. So it's about cost efficiency in this business, where we are much better than our peers, and this provides us with a certain competitive advantage also for the future.

With regard to the underwriting in the specialty lines business, I just want to split the specialty line business between 2 parts: one is a special lines business and the other is the delegated authority business, which is also included in our numbers here. And within the delegated authority business, we have discussions with some MGAs on rate increases, in particular in relation to their NatCat exposure, where they weren't able to increase it in the sum we wanted them to have. And this has reduced then our appetite for signing or underwriting that business. So we have a certain NatCat derisking in it.

And second, there are some lines like D&O insurance in certain areas of the world where the prices have come down more than we perceived with what would be justified. And this, again, then has led to underwriting discipline. We have in our underwriting manual, we have this fantastic sentence that's really written in there, I love that. "Volume is vanity, profit is sanity." And this is the mindset of the underwriting, which is pursued in Industrial Lines.

[Operator]

And we have a follow-up question from Phil Ross from BNB Paribas.

[Philip Ross, analyst]

Just one more for me, please. It's a question on the earnings split, Primary and Reinsurance. You commented, Jan, that you're moving closer to the 50-50 split. But it does seem that Hannover in FY '23 is reporting somewhat subdued earnings as they increase resiliency. So do you think it will be a bit harder to reach, I guess, the 47% Primary share in FY '24 if Hannover net income rebounds more strongly? Or are you more confident that the Primary segments can improve accordingly to keep that split and push on towards the 50-50?

[Jan Wicke, executive]

Well, Phil, this is a very good question. And obviously, the case is Hannover Re is doing better than expected. We are happy about it, yes, instead of then being sorry for missing the 50-50. And we are very proud on the development of Hannover Re here. And if they can do better, we just tick the box and are happy shareholders.

[Operator]

And another follow-up question from Michael Huttner from Berenberg.

[Michael Huttner, analyst]

Three. Are you going to raise the budget or guidance for large losses in 2024? Is that in your over EUR 1.7 billion guidance already assumed?

The second, you spoke about Turkey combined ratio and the trend of improvement. I wonder if you can give a little bit more color when we might expect a level of profitability. Profitability doesn't have to be 100%. It's a high investment income country, but just to get a feel.

And then finally, I wonder if you can give us the numbers for the IFRS 17 impacts, the discounting and the unwinding of the discount. I think we have -- yes, if you could give them for the Primary, that would be of most interest.

[Jan Wicke, executive]

Okay. Let me start with the development of the large loss budget. And obviously, we have increased, I guess, by 11% for the next year. Second, with regard to Turkey, the colleagues of Retail International are currently doing a so-called push for profit project there. And we expect them to be positive, including the higher investment income by 2024. So there should be a huge swing in results in between 2023 and 2024 in Turkey.

And finally, with regard to the discount, for the group as a whole, I recall the number that compared to the previous year, we had a positive discount effect translated to combined ratio of 1.7%, so compared to the previous year. And the unwind was also up. However, I don't see -- I cannot tell you that in percentage point, but was quite significantly up. Maybe, Michael, we will provide you with this number later on. I'm sorry, I don't have that one here. But please keep also in mind that compared to the previous year, we have an increase in the resiliency. The unwind is -- you can figure it out from the net investment in insurance results in the FDS.

[Michael Huttner, analyst]

Brilliant. And just also on when you raised guidance both this year and next year, what was the main driver? Was it the fact that private equity is less negative than you may have anticipated? Or is it really just Industrial Lines doing amazing? Yes, just to get a feel for what's the driver here.

[Jan Wicke, executive]

The first driver of all of it is that we are monetizing the growth not only of the current year but also of the past years. And we are able to monetize the growth due to a very strong technical performance in our figures, and this was the main driver. We have remained conservative with regard to the investment assumptions given that we expect some write-downs in both real estate and private equity now to happen in 2024. We have also included some in the year-end 2023. So we still believe that the higher financing costs will impact those asset classes, and this is included in both outlooks.

[Operator]

So we have no more questions on the phone so I hand back for the written questions.

[Bernd Sablowsky, executive]

Yes. Thanks, Moritz. Hadley has raised questions, 2 questions by webcast. The first one is, given the ongoing risk transfer from reinsurers to primaries and the level of loss volatility year-to-date, we are hearing from some primary insurers that there could be a need to lift cat loads within combined ratios going into '24. How do you think about this for your primary operations? That was the first question, NatCat load and the combined going forward.

The second one is related to our M&A activities and M&A pipeline in particular. The question is, you've clearly built up scale in your LatAm operations post recent transactions. To what extent do you feel you have appropriate scale in Europe ex Germany operations? Is there a risk to your competitive position in its subscale? How healthy is the M&A pipeline there?

[Jan Wicke, executive]

Let's start with the NatCat loadings. In primary insurance I think, Hadley, you are absolutely right. There is a need for further price increases for the NatCat loads in the premiums, and this is simply driven by the climate change. You need that year-on-year given that both the frequency and severity of those claims will increase over time. So it's not just a 1-year thing, and it's also true for our primary operations.

Second, with regard to the M&A pipeline. So within Europe, in both in Poland and in Turkey, we have achieved a very strong market position. So there's no need to worry here. With regard to Italy, it's a very profitable niche we're in. And -- but in case of something comes in and we can do a deal to our conditions where the hurdle rates of profitability are met, we would be open for it. So all in all, is okay.

With regard to Retail Germany, yes, we have to admit that the scale in Retail Germany P&C is pretty low. That that's true. But therefore, we have a little bit to adapt to the profitability, you have to take what we can expect for this entity given the fact that, unfortunately, nothing is available on the German market which we could buy.

Any further questions, Bernd?

[Bernd Sablowsky, executive]

I don't see any further questions, neither on the web nor on the phone. So maybe it's time for you with the concluding remarks.

[Jan Wicke, executive]

Yes. Well, first of all, thank you for attending our earnings call. You've seen that we were able to present you very satisfying results. We would like to remain humble at Talanx going forward. We try to continuously improve our technical performance and monetizing our growth also in the future. This has led to the increase in the outlook for both 2023 and 2024. And so we try to do our best to make our shareholders happy. Thank you so much.

[Operator]

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.