Talanx AG

XETRA:TLX

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I am Haley, your chorus call operator. Welcome, and thank you for joining the Talanx analyst conference call on the full year 2019 results. [Operator Instructions]And I would now like to turn the conference over to Carsten Werle, Head of IR. Please go ahead.

[Carsten Werle, Head of Investor Relations]

Yes. Good morning from Hanover. Thank you, Haley. I'm here together with Torsten Leue and Immo Querner, who will lead you through our full year results presentation. And after the presentation, there will, of course, be ample opportunity to ask your question. As you've already seen and heard, for the first time, you can also raise your questions via the webcast, but we will start with the questions from the telephone call.You'll find all our documents, the release, the report and the presentation documents on the IR section of our homepage, and we will keep a replay of the webcast on our web page.And with these remarks, I'd like to hand over to Torsten.

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

Hello, everybody, from Hanover. I guess everybody's busy in these times of Corona, and I will say something in my outlook in 2020, what does it mean for us. So before doing that, I would run you through the 2019 figures. I'm starting already with Page 2.So last year, we had a record result in our history, in the 115 years, with EUR 923 million. It was really the biggest result we had in our 115 years history. Then we had a growth of 13%, so 1-3, was the growth on the top line. And the other way around 3-1, so 31% on the bottom line, more than double increase than the top line. The good thing for us is that all the divisions really contributed to that one. And especially industrial lines, with the 20/20/20 program, which was, as you remember, special on the Fire gen portfolio to clean it up. We outperformed that with 34.9% price increase and which brought the combined ratio in industry of 8% down. I think we could really see that we started very early the cleanup. And as we don't have such a huge exposure or not significant at all exposure in the U.S., a long-tail business, I think it's very pleased result to come to normal areas in the future.The group return on equity is close to 10%, with 9.8%, we are close there. Please remember, this 9.8% always is -- basically we include as well as the OCI effect, which many times it's not done in the market. So that's really -- it's clean, in our opinion, group return on equity, 9.8%. And this is clearly above these 2018 figures, where we had 8% and well above of our minimum target, which is the 800 basis points above risk-free.Dividends, EUR 1.50 that we will propose to general meeting, and this trend is our friend, as we always said as well on the Capital Market is we increased 7 times in a row our dividends since the IPO.For 2020, we confirm our net income outlook, and this is totally on track than what we have said in our Capital Market Day last year that we had, on the basis of EUR 850 million, where we started the journey on our strategic plan, a 5% EPS, at least, increase in CAGR.And I will jump on Page 4. On Page 4, you see that we have -- from the bottom, you see that the currency-adjusted growth was 11.9%, so double digits, much higher than we thought. It's -- the net return on investment is with 3.5% as well. We have some special effects, which is above what we have forecasted. The group net income was EUR 923 million as well is far above what we have said. And all the other parameters, you see as well, are nicely really above what we have said, return on equity and as well dividend payout. And please remember here, not only that we paid the seventh time in a row of increased dividends and this average dividend yield last year would mean for you 4%. And as well, we have increased, you will see later, our cash reserve or buffer, let's say, from 0.3 to 0.85 in the last year, which gives us safety for the future to have a dividend continuously coming from now.On the Page 5, you see more details. You see again here, the top line is 13% and the bottom line is 31%, increase in percent. And maybe some remarks on that, and Immo will really tell you much more details later. It's 11.9% growth, currency-adjusted. You see some special effect on the net investment income, where we have Viridium as a one-off and effects from Hannover Re, as was mentioned several times during the last year.And I said that, our is -- as we had to build, especially in the fourth quarter, is a compensating effect always on net underwriting results. So nothing here more to comment, I guess. And for this good in the 31% and why is increasing 31% much faster than the EBIT? Basically 2 effects. We had some tax effects. Basically, it's a question where you get -- which country the profit out and where we have better tax yields percentage that is better for us at the end. And minority and this is really a point to mention. We -- the primary insurance contributed much more 10 percentage points up to 33% to the overall group result. So basically, primary performed relatively better than the reinsurance side. And therefore, we have a share and we want to have a diversification effect. Always, we mentioned the 50-50 reinsurance, prime insurance, and we are on the way with the 33% on the right way. And therefore, we have less minorities which have deduct and therefore, 31 percentage up.On the next slide, on Page 6, you see this is a Q4 stand-alone. And as always, we said, this is really very difficult sometimes in our industry to compare. But what we can see is a indication is that the growth -- the top line with 18%. This momentum is still there. On the bottom line, you see a reduction of 16%, but this -- basically, the last quarter, there were some tax effects in reinsurance in 2018. There were some special effects in 2019 stand-alone. You remember Chile, what we had there some violent demonstrations. We had Ergo Turkey as a first consolidation. So there are onetime effects. There were onetime effects in the reinsurance last year in 2018. And we are, for sure, at the end of the year, whatever we can feel, we can keep what we promise. We are much more conservative now when it comes to volatility buffers and that we need in the fourth quarter to steer.I will come then to the next page, on Page 7. This is a page of large losses. And you see that, basically, if you're on the right bottom under the column, is a EUR 1.3 billion figure, and you see it's higher than last year, with EUR 1.2 billion last year. So it means we had really a year of large losses, both man-made and the NatCat. And everybody is above last year, except the industrial lines. You see on the left side, where you have the circle, you see it was EUR 312 million industrials down. And this is one inflection of the good successful program 20/20/20. We really get here a bit volatility out of the portfolio with many measures, not just price increases, different reinsurance and different net exposure.All the others are a bit up compared to last year, so special effects, for example, in retail international where we had Chile in the fourth quarter, as mentioned. So there's a large claim. Normally, they don't have large claims much, so that's the EUR 18 million, EUR 13 million out of this is only Chile.And the reinsurance side, really, you see here, that was significantly increased compared to last year. So it was a year with quite significant large losses. And therefore, as well, not just because of this, but as well because of our growth, we decided to increase in our outlook for 2020, our budget for large losses to EUR 1.335 billion. That's an increase of 12%, which is in our guidance.So on Page 8, maybe some combined ratio and overlooks here. You'll see that was 98.3% for the group overall. In spite of those large losses, we are on the level of last year. Coming to the segments, and Immo will tell you much more about it later. Industrial Lines, as I said, significant drop. What we forecast is a 1.14 -- so only 1.14 was came in. So this was really basically the cleanup project we started very early. And if you see now what is in the market, this is a quite good ratio, I guess.Retail Germany. I think here we have to look to the ex KuRS. So the 96.9% is a bit lower than last year. And please remember, we want to open in 2021 the EUR 240 million KuRS target. We announced this year already EUR 230 million, with a combined ratio of 96.9%, so quite close to our target, which we have forecast for next year.And whenever you see there, for example, as well in the last quarters, we took some effects of costs already a bit earlier this year. So overall, Germany, very much on track in the current -- when it comes to the KuRS comparison.Retail International. Well, you see here an increased combined ratio, but this is mainly driven only that we have aligned the cost allocation system, basically, meaning things from the other goes to the technical now, and this is only effect of 1 percentage points, which were in retail international just to align with the group standards. So just reallocation effect, no material effect. Although you see in the companies, maybe 2 I would mention here, 1 is the negative in Chile, you see that 104.2%, and this is mainly driven by those violent demonstration we had in Chile. We changed here again as a reflection of that. Now our net exposure totally to that thing whether it will happen in the future, we will much less be exposed to this surprisingly, especially in Chile violent demonstrations.And Poland, on maybe the second I would mention here is very surprisingly, with 90%, really, it's another record year in Poland, rather excellent results and really very well done. So these are basically the main effects you can see in Retail International.Reinsurance. I guess you have with 98.2%, everything was said in the call, where it come from.On Page 9, you see that all -- as I said before, all divisions really -- and this is, I think, important in the group, especially industrial lines contribute to our 31% increase to our net income. As you see here, industrial, really the shift of EUR 118 million was its biggest one contributor. And again, as I said before, 33% is coming from the total net income from the primary insurance now and therefore, EUR 154 million or 2/3 for that was really contributed by the decrease this year by the primary insurance.Coming to the next Page 10. Here you see that our dividend proposal is EUR 1.50. And as I said before, this is, since the IPO, always increased. Last year, it would give you a yield of the average price of the year of 4%. Our dividend yield and our cash buffer has now increased by 0.85%. As we said, 1.5% to 2% is our target to change our policy. But so far, I always said, and we will say, trend is your friend.So that means on next page, on Page 11, that our strategy somehow works. We have the 3 main blocks in our strategy. One is the enhanced capital management. Here, we set our clear financial targets with 800 basis points above risk-free for the return equity and the 5% average EPS growth until 2022. This, I think, is very well on track. We have done, second point, more focused in the divisions. You see it in the blue box. And if you run it through, you see that the program 20/20/20 with an increase of 34% and not 20%, and I said 34.9% is on track and working.Specialty, we had quite a good timing because we grew more than 30% in these -- in the specialty lines business, so very strong growth, very profitable. We had international retail still double-digit growth, so the growth and it's running as normal, I would say.Retail Germany. We see really here with EUR 230 million without the KuRS program already last year and our always forecasted target KuRS for only 2021 to EUR 240 million. It's running. It's a small/medium enterprise. Really, we are doubling in the market. It's a growth of around 7%, so really nice growth initiative, which is working. And reinsurance, with 13.3% return equity, I think clearly, very nice compared to the peers whereas 10% with the return on equity. So at the end, it means, our cleanup programs are working and as well the growth initiatives, I guess, delivered results we wanted.On next Page 12, you see as well as part of the strategy is the ESG, how we position ourselves, and we have basically here the 3 main or 4 blocks. Starting right on the top, we are CO2-neutral last year in Germany. And step-by-step in long term, we will roll out it worldwide. On the right bottom, you see that we -- as we mentioned already last year, we are completely withdrawal from coal until 2038, and we want to be really one of the leading insurer in renewable energy.On the asset side, on the left side, you see that our ESG, we are compliant totally. We have signed the PRI, and we want to double our investment in infrastructure to 5% or roughly EUR 5 billion, a bit more. And we are here with EUR 2.8 billion already, more than halfway through. But again, since the last Capital Market, we have done, we are -- we phase out as well in the asset side in the coal in 2038, plus we exclude our oil sands. So this was -- came on top of what we have said in the Capital Market Day. Well, on the left bottom side here is nothing new, where we focus our engagement when it comes to ESG.So with that, I will hand over to Immo, and he will tell you much more details about the segments.

[Immo Querner, CFO & Member of the Management Board]

Good morning from my side. As always, I'm going to start with the Industrial Lines business, which is probably at the center of the interest anyway. As you can see, we've grown the business by 33% top line. So the main driver behind this is, of course, the first time consolidation of the specialty business that used to trade on the Hannover until the end of last year.If you would net out the effect of the first time consolidation of the newly added specialty business, the organic underlying growth would be like 12.5%, and this is what you see both in the kind of pro forma top line as well as on the net premium development. Where have we grown the business? It's been the, you could call it, legacy part of the specialty business that we had contributed out of HDI Global into HDI Specialty and the Americans and that's true both for North America as well as Latin America.I think the second column is probably more significant as we've seen a major turnaround in the figures. We are profitable again. We've dramatically reduced the loss ratio which is down. The combined ratio is down from 109% to 101.4%, well in line was what we had communicated in our Q3 call. Although the large loss development has been more than difficult year than an easy year because we've slightly overshot the large loss budget. Still, we have managed to keep what we have communicated to you in terms of the overall combined ratio. We've seen positive run of results. Although we thought that we should play safely by being more conservative where we could be or mostly be -- or should be on single cases after having secured our guidance of around 101%. I think this is -- the reason for that is to build up volatility buffers to times that may be more difficult in the future.Bottom line-wise, we see 4.4% return on equity sort of the nice thing. It is positive, again. Of course, we know that this is still not in line with our self-set profit ambition that would be in the region of 8% to 10%. We're confident to get there over the coming years. 2019 has ceased to have been the other -- in the other income some changes because we did not benefit from disposal of some unused real estate that we did in 2018. On the other hand, the underlying financial income out of the financial portfolio was slightly more positive than that we had envisaged this to be. So bottom line, we are very satisfied to see the turnaround in the Industrial Lines business.It all started with the 20/20/20 program. I think we've been consistently communicating the key figures and key performance indicators of this program since we got it started some 1.5 years ago. We thought that we could make 20% price to risk improvement. In the end, we have delivered 34.9%, and we are proud of that. This has been the major driver for our dramatic reduction in the combined ratio of the Fire line from 141% in 2018, down to roughly 106%.We still don't see any adverse selection. And I think what's probably particularly important for you is, we are not going to stop. We are going to continue the program because we know that even 106%, although it's much better than it used to be in 2018, is still not good enough to support a combined ratio that would be in line with our return on equity ambitions. So this is part of the next couple of years, that should take us into combined ratio areas that are well below 100% in the coming years. The next year, it should be back, i.e., below 100%.Next slide tells you something else that, in my eyes, is quite interesting. If you look on the right-hand side, the 4 boxes, the proven contribution that we've seen in 2019 amounted to 18%, which is the combination of price increases and premium equivalents, such as high deductibles, for instance. But we've not stopped the Fire business, we've also looked at other lines and have been able to improve the underlying economics also as far as transfer is concerned with double-digit figures, but also engineering and casualty has seen significant price improvements.The attritional losses, and I'll -- let me come to the left-hand side of the chart, is down from 57% to 45%. I think this is pretty significant because we always get it wrong with large losses. Anyone -- everyone gets it always wrong with large losses. But the underlying attrition losses is something that there's probably a true reflection of your pricing power and your underwriting discipline, and this is much improved from 57% to 45%.If you look at the composition of our portfolio, we've withdrawn our capacity from high exposures and -- particularly the very high exposures and have redeployed it into areas which are not as exposed to the last line on the left-hand side. So I think that should give you an impression that we really mean it and that the profit improvement trajectory of the Industrial Lines business goes much beyond the 2020 program and the Fire business.Retail Germany, this is Page 17, has seen slight growth. It's a growth that we've seen both in the Life and the non-Life business, which is nice. The operating result is up by 28%. It now amounts EUR 230 million. And for the ones who still remember the first days, of course, what we said that we should be good enough for EUR 240 million EBIT by year 2021. We've always made it this year, 2019. I think it would be not telling a secret that we could have shown even EUR 240 million, but we really try to play it safely and to -- as in the Industrial Lines business, to a certain extent, build the buffers in the fourth quarter for times that are not as easy as the ones that we've seen in 2019.We've even been able to accelerate the cost program in order to get this organization ready for the challenges of the more digital world, and that has worked well, although it has come at a cost. The ROE has seen a nice improvement of 5.5%. Yes, we know that although this is a very nice development, it -- we're still not where we want to be, that should at least be in the region of 7% to 8%.If you look into the subsegment of our domestic Retail POC business, we've seen growth. And the growth has come exactly from 2 sources. It's our SME business that is very much at the center of our sales initiatives. That has worked well. And it is the Life assurance non-Life business that has also picked up very nicely. Where we've been a bit more conservative is the motor business. And as well, for the ones who can remember Mr. Zeller, volume is vanity, profit is sanity. And we've played it pretty much according to this principle.The combined ratio has developed into the right direction, allowing for the cost effect. On pro forma basis, it would be 96.9%. Again, we've committed to showing a 95% in 2021. And we are very optimistic that we will be in the position to do so. Equally here, we've tried to play it safely when it comes to playing volatility buffers in the fourth quarter. And I think the non-Life business has developed exactly the way we wanted it to develop.Slide 19. The Life business. It has also grown, although it has not grown as much as some of our peers in Germany have grown the Life business and the reason is very simple. We were very adamant in concentrating on biometric or capital lighter business. We've got a very limited appetite for single premium business, and that is reflected in a rather moderate growth, but we grow the business. I'll come back to the composition of our portfolio on the next slide.Well, the investment income has gone up. The reason is very simple. While we all in German market do benefit from the new corridor method when it comes to the determination of the ZZR amounts, the interest rate developments in 2019 have not been as we had hoped them to develop, i.e., interest rates have not picked up, and that necessitated a larger contribution to the ZZR. By year-end, we are now talking about, in terms of stock of our ZZR, of a rather frightfully high figure that amounts to EUR 3.8 billion.Likewise, we have benefited from a positive one-off. This is fair. I think the -- this is a significant driver behind the favorable development of our operating result. And yes. So this is -- here, we've been lucky to be fair.Let me continue with a deep dive into the portfolio structure of our Life business. They can see that we've seen a welcome change from the new business structure. It is now only less than 35% of the business that is associated with so-called conventional business. So-called conventional businesses are the business that we still like because, believe it or not, there are still some pockets in the commercial business that are very profitable. Then there is business where policyholders have reserved the right to top-up their premiums. This is something we will, of course, honor. And then there are certain parts of the [ whole ] business and the employment benefit schemes. But the share of the business that is conventional is down. It's down to 24% when it comes to new business, and it is almost just 40% when it comes to the stock of our business, which is good.On the contrary, the capital-efficient product -- the share of the capital-efficient products and the biometric business has gone up. We are -- so we're proud when it comes to the story behind the right-hand side of this -- of the chart. While, of course, we do not like the interest rate environment that we've seen in 2019, we still managed to improve the spread, i.e., the difference between the interest that we owe to our public holders from a balance sheet point of view, including the ZZR that we've built up in the past. And the running yield in our portfolios, this spread has gone up and also supported by favorable rounding from 0.6% to 0.8%. And if you look at HDI Leben, which is the largest of our carriers and has been very much at the center of the interest of many. They -- I think they are part of the story and their spread is now at 0.7%. Retail International. In a way, the figures exactly reflect what we had flagged to you on the occasion of our Q3 call. Q4 was not a brilliant quarter from a share figures point of view. Why is that? Yes, we suffered from the violent demonstrations in Chile. That is something that you already heard from Torsten, and I told you so in November. And we had to digest EUR 56 million of integration charges that are associated with the acquisition of Ergo Sigorta in Turkey. On top of that, we also played it safely because I think we were fine when delivering our interim guidance. Premiums are up by 10%. The operating result is up by 6%. Going forward, I think this is -- this is also probably of some interest to you. The return on equity has advanced to 8.2%. It is not yet there where it should be. Here, the reason is not that we do suffer from any operational underperformance. The pure reason is that when we calculate the return on equity, we also allow for the goodwill that we've paid in the past as part of the equity. And now this is equivalent now. We paid for eternity, so to speak, and the more we grow the business, the relatively less important the go-to component becomes. And so we'll naturally grow into our double-digit ROE ambition and here, we are well on track. Slide 22. I think things are fine in Brazil. I think Poland, we currently see the peak. You've heard the story about Chile. But this one was Turkey, apart from the one-off that I've just mentioned, the interest rate environment in Turkey is still much different from what we see in Western Europe. And this is the reason why you could still make a living on back of combined ratio of 112%. That is additionally inflated by reallocation of the cost, and you've already heard that. Reinsurance. I think I'm going to make it very brief. The company has grown its business by 18%. The net income is up by 14%, and they've been able to digest it above expectation large loss burden. Life insurance business has developed extremely positively. I would like to keep it there, and we've already heard the somewhat above average expert in Q4. Now sort of an exhibit that is somewhere between looking back and looking into the future. Our currency -- our current solvency ratio is 196%. This is the Q3 figure. We're going to communicate the year-end update probably in May. We've always said that the market risk should not dominate our risk profile. It is exactly 44%. 95% of our investment bonds -- of our bonds are investment-grade and the allocation of listed equity is below 1%. That should translate and has translated into betas that are lower than the market average. And it should have translated and it has translated into somewhat higher resilience when it comes to market shocks and drawdowns. And this is what you see on the right-hand -- on the bottom part of the right-hand side that Talanx is, in a way, a more resilient stock than what you would normally see in the market. Net investment income, Page 26. We have grown the ordinary investment income. How come, could you ask? The question is simple. The assets under management have grown. And while interest rates, with the notable exception of [ Mexico, ] I must admit, have moved into the wrong direction. The realized gains are mainly driven by 2 effects: the 1 is the ZZR induced realization of hidden gains, and I've already mentioned this. Plus lucky punch when it came to the disposal or the Viridium effect that we have explained to you in Q2 and Q3. Shareholder equity is up, and it is up actually quite significantly. The other comprehensive income is, of course, driven by the lower interest rates. That's part of our return on equity calculation. Torsten already mentioned that. That is part of the equity upon which we would apply to return calculus. If you would exclude the goodwill, the book value per share would drop from EUR 40.15 to EUR 35.78 that if you add back and you see this on the next chart, the hidden results of our asset side as much they are attributable to the shareholder, you would have to add up -- add back another EUR 2.36. And it's probably no surprise that also this part, i.e., the truly hidden reserves on the asset side, picked up. Solvency II, I already mentioned that we're going to communicate the year-end figures around the 7th of May. Latest available figure is the 196%. This is a figure that refers to Q3. Between Q3 and Q4, we've seen a mild uptick of the interest rates. So actually I'm quite optimistic that what we see year-end should at least be in the ballpark range of what we've seen in Q3. And just to remind you, let's put the EUR 923 million in context, i.e., the profits that we've made in 2019. As 90% of these profits stay within the Solvency family, either because they're retained or as much as their dividend end up. 79% of the dividend would end up enhanced of HDI Mutual. We work on a figure that means that roughly 90% of the profits are Solvency II relevant and that means that the underlying Solvency formation, on a ceteris paribus basis, is like roughly 9% of our SCR, which is, I think, a nice figure because it's a structural drift that supports the business also and when the going gets rough. Well, that's it from my side.

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

So thank you, Immo. Let's come to the outlook of 2020. I've said before, already that we confirm our outlook. And maybe give you some words on Corona. So I think for our industry in general, you have to see the direct/indirect effects. The direct effects, I guess, in our industry, we can say that's manageable, and I'll tell you why. So first, our business model, from a liquidity point of view, is that we get the cash first, let's say, and then we pay out the claims. So it's a reverse, let's say, cash flow, as you have, so the liquidity issues in our industry is quite tough to imagine. Second point, if you look to the insurance side, on the product side, let's say, this is a great limited horizon we have insured here. You have the figure from Hannover Re already, which was a 3-digit -- lower 3-digit figure. And only from that figure, we have only half of that, which is the exposure they mentioned. Then we have primary insurance as well. We believe we have, in the worst case, something like middle double-digit million negative effect because why is it like this? There is a big area of business interruption as the cause of material damages, and that is not the case. And that thing and pandemic risk are not mainly not insured. So therefore, this business interruption is not an issue event. Cancellations, yes, there's an issue. And therefore, I mentioned the figure I said to you before. So from that side, from the insurance side, we don't see really some huge material effects. On the asset side, though, you see that there's a huge decreases in many asset classes now. We have always strategically driven a lot better approach, which means we have less than 1% in shares in our portfolio, so this really has benefits for us now. And as well from on the bond side, 95%, as Immo said before, are really investment grades, Re as well. The last year, especially last 2, 3 years, we drove the flight for quality when it came to the bond sides. From there, this is as well relatively a picture, for sure, a bit less than the market. The last thing is for sure, probably the most important for us, our clients and employees, sort of the first step to see the health of our people. And we have to make sure that our business continuation plan is well prepared. And here, I think worldwide, we are really a functional working with the group and each location does different things. But basically, what you can do in such things, I think we have done and are well prepared on that. So these are all the direct effects to our company. Indirect effects. Well, I think your guess is as my guess. How long is this recession or will there be a recession and how long will it take? What happens now? This is really very hard to forecast. And therefore, we have the CCC disclaimer as always, and for sure, let's say, the consequence of those corona crisis is part of the CCC disclaimer. Nevertheless, today, we confirm our outlook into 2020, end of the year. And starting on Page 31 from the bottom, we have GWP growth of 4% on the forecast. And as you have seen, Hannover Re, only the renewal has a 14% increase with average price increase of 2.3%. So you can see that the 4% being Hannover Re one of the major part in the group. This is not something unachievable, we believe. Net return on investment is 2.7% because we cannot expect every year Viridium effect. So therefore, it's basically a normalized return equity investment, but it's going down. That's clear. Because of interest yields are going down. As you remember, we have a key figure, 20 basis points down means 25% net income effect for us. On the group net income, you can see we confirm on -- between more than EUR 900 million and EUR 950 million. In spite, as I said, the decreased interest yields of the effects I mentioned. We have now foreseen a special effect like Viridium, and we have increased our loss budget by 12% to EUR 1.335 billion, which is included in those outlook 2020. That would mean that our equity is -- return equity is between more than 9% and 9.5%. Again, the OCI has increased significantly. That's not a question of the return, but it's more about increased equity due to OCI, why this is 9% to 9.5%. Dividend payout, again, we said 35% to 45%. Nothing has changed here. And I think having the safety bar and our 0.85, we always say that trend is your friend, nothing more. But basically, the guarantee of the kind of at least stable dividend from last year, we keep ongoing. With that words, I will hand over to Carsten and I think we have a nice Q&A now.

[Carsten Werle, Head of Investor Relations]

Thank you very much, Torsten. Haley, I think I just passed further to you to start the Q&A.

[Operator]

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

[Michael Igor Huttner, Analyst]

I had 3 questions, if I may. All, unfortunately, a little bit related to the crisis. But just to get a feel because you sound confident. Maybe there's some additional data points you can share. So one on the cash buffer, the EUR 0.85 billion, what could it progress to at this end of the year? And if you could remind us of, sorry, of the targets or the comfort level for this? Then on Solvency, I know you said yearend would be higher than EUR 196 million. I guess people are more interested in Solvency today. But if I can ask it a different way, are you close to the level where you think you would need to include your transitionals to still be able to be in your target Solvency range which, if I remember, is EUR 150 million to EUR 200 million? And then the third point, you mentioned several times, you've built up your reserve buffers and gave a clear indication on the industrial line side. I just wondered if you can give the picture for the other bits of the group as well.

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

So thank you, Michael. I will start maybe the first question and Immo will elevate on the second or the third one. Well, this is -- what we said is EUR 1.5 to EUR 2 should be our cash pool unless we change them not our dividend policy. This is something, at least 3 years, we believe we need for that still. So that is basic the direction you can head on. I mean we have been faster than about 0.3 the year before, now 0.85. So let's see if it's pretty faster, but indication for the time being is at least 3 years. Immo, maybe the next question is on the position of reserve/buffer?

[Immo Querner, CFO & Member of the Management Board]

Yes. So it totals to 196%. What I said is, well, I think should be in the same range. And I think I'm optimistic because we -- when it comes to year-end because of the interest rate development. Going forward, I think we currently do not foresee the necessity to resort to transitional measures in order to keep within the 150% to 200% range. This is what I can say as of today. When it comes to the buffering that we've seen in the retail divisions in 2019, I think it would be better to think of a significant double-digit amount.

[Operator]

The next question comes from the line of Edward Morris of JPMorgan.

[Edward Morris, Equity Analyst]

First one, just coming back to this reserving prudence that you've done in industrial lines in Germany. Can you just talk a little bit more about what you're sort of hoping to get to or at least what the target is there? So really, I'd like to understand is there a level of reserve margin that you'd like to move towards if you -- assuming that you continue to deliver good results there? Or can you just give us a feel for the longer-term ambition? Second question is on realized gains. Just wondering what you think the outlook is there now, given where interest rates are for 2020. And how much, in terms of realized gains, is assumed in the EUR 2.7 billion ROI guidance? Can you just give us a feel for what the outlook is likely to be here this year?

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

Well, maybe I just start it and then Immo will continue with the reserve and realized gains. But generally speaking, we are at least, for sure, resulting on the best estimate level. And we said as well, the capital market is a clear indication where industrial business, where basically this discussion starting from. For example, just to give you how we feel here, we are extremely patient about the combined ratio, and we said as well that what we promised in the midterm. And whenever we feel comfortable to get volatility out of this and part of volatility is to get the next exposure down from the reinsurance side, but as well to have some reserve above this estimate. And whenever we feel we do -- we can do, we do it. It's just a general mark. So we want to make -- clearly show to the market, these are our targets, our 5% EPS growth, et cetera, at least. And then get volatility as much as possible out of our business model, if possible. And Immo maybe has more details.

[Immo Querner, CFO & Member of the Management Board]

Perhaps sort of making this 100% resize, should we see a brilliant year in the industrial line business? I still would not speculate on a combined ratio that would be dramatically below 100% because whatever you see where we set aside to support the long-term volatility. So I think this is our current thinking. When it comes to the extraordinary capital, the extraordinary -- there were gains that these realized capital gains that we see. In our plan, we've seen a significant drop in disposition. As of today, I would say, it probably not dropped as much. And why is that? Because looking on the screens, I think we should be prepared for lower rates that will translate into higher ZZR needs, but again, will translate into higher realized gains without having a bottom line impact. I think this is the full story. Extraordinary result would be higher. But essentially, there would be 0 effect of this making it into the bottom line.

[Carsten Werle, Head of Investor Relations]

Questions answered, Ed?

[Edward Morris, Equity Analyst]

Yes. Perfect.

[Operator]

The next question comes from the line of Paris Hadjiantonis of Exane BNP Paribas.

[Paris Hadjiantonis, Research Analyst]

Yes. Even though there's quite a lot of volatility in the market, I was wondering if you can actually share with us, any sensitivity with regards to a potential one-off downgrade or credit downgrade across your book. You have said your fixed income is quite high-quality, but if you can give us an idea of how we should be thinking about this kind of scenario? Then the second question is, I guess on the operational side, on Retail Germany, your EBIT for the year was at EUR 230 million. You have said that you have accelerated your KuRS program for the challenges in the ZZR world. I mean if you can give us an idea of what kind of investments you've made on that front would also be interesting. But the question, I guess, is EUR 240 million in 2 years' time, just lowballing what you can truly achieve there?

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

So maybe I'll start with the second one, and Immo will tell you on the [ vola ] regarding sensitivity. I mean, I think it should be fair that when we promise something that we should deliver at the first point. And let's see where we will end, the year is still starting. And we will see in the second half year where we stand. We have still a Capital Market in November, and we see what were coming out at that point of time. For the time being, it looks good. And please leave in that room to say it looks good. When you're close to a target which you promise a year later, and you will see in the second half year were coming up, let's see, it is still too early to say something. And so that's regarding Retail Germany. And maybe Immo, something regarding [ vola ] ?

[Immo Querner, CFO & Member of the Management Board]

Yes, I think this is really too early. As of now, we're not in a position to give you a precise answer here. I think what I would like to do first is to get at least the first drop of the year-end '22 figures and then develop the sort of the stress testing on these figures. Sorry for that.

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

Is that okay, Paris? Because...

[Paris Hadjiantonis, Research Analyst]

Yes, that's fine. Back on the Retail Germany and the investments in KuRS, can you give us an idea of what additional went into KuRS with regards to the acceleration of digital?

[Immo Querner, CFO & Member of the Management Board]

Yes, I think that was like a lower double-digit million euro amount. And part of that related into the sort of the accelerated integration of our 2 Life platforms. And the other one was things like claims system -- claims management system, system environment and making the company fit to the digital environment. So that was behind it. It would have come anyway but now we saw a range of opportunity to digest the figures in 2019, given that we are apparently lowballing. And we just seized the opportunity.

[Operator]

The next question comes from the line of Vikram Gandhi of Societe Generale.

[Vikram Gandhi, Equity Analyst]

It's Vik from SocGen. Just a couple from my side. Can we have a word around where you are with the centralized internal reinsurance that was highlighted at one of the Investors Day? And secondly, can you talk about the large and mid-loss over the fourth quarter of last year. Have I seen a significant bump up there? And whether there are any specific actions that you've taken to reduce the volatility coming from man-made losses, of course, apart from improved pricing? Yes, that's all from my side.

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

Good question, and this is [indiscernible] as well, and the second one for Immo.

[Immo Querner, CFO & Member of the Management Board]

Thank you. I'll start with the second one. Our reinsurance initiative at Talanx, at least from the 10,000 meters point of view, it's worked like Swiss clockworks. We've now rolled the new model out throughout the organization. So a significant part of the business is so ceded to the Talanx AG and they will be on unceded to the other reinsurers. We've set up the operations when it comes to the risk appetite that we had defined earlier on and that we shared with you in the occasion of the Capital Markets Day in Frankfurt. We stayed within these limits, and it's going. Sort of it is -- we are still not at the long-term equilibrium business model nor have we achieved the financial equilibrium because we first have to invest into redundancies before we benefit from runoff gains. We first have to collect the money before we invested, which is difficult anyway these days. And we're still have to cover like 20% of the cedents and move them to the new setup. But whatever we wanted to achieve by year-end has been achieved. We were satisfied.

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

And maybe on the fourth quarter, large losses, maybe some comments. The first comment again our expectation due to our growth, we will increase, as I said, 2x the large loss project for 2020. First quarter, nothing significant. If you just deduct the 2 main claims with Hagibis, this typhoon in Japan with -- was 100 -- with close to EUR 200 million effect on our group and as well as Thomas Cook as well on special effect. I would say that you could if you take out only these 2 ones, then you would have the expectation for the fourth quarter stand-alone.

[Vikram Gandhi, Equity Analyst]

Okay. Well, on Hagibis, I would have thought that the large manmade losses on the fire and property and then on the casualty, these may not be linked to the Typhoon Hagibis is what I was just thinking. So I was just kind of focused more on the manmade losses on industrial lines than the NatCat.

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

There's no pattern. We can see that there's something wrong in the portfolio somehow. So from my side, man-made still went down compared to last quarter 2018, as they were EUR 218 million to EUR 238 million compared to quarter-to-quarter. And there's nothing significant. I recall now. Immo, do you recall something?

[Immo Querner, CFO & Member of the Management Board]

No.

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

No, nothing significant there, as long as large, Vik, but take the Thomas Cook as I said, this was one. Additionally on top, it was not expected.

[Operator]

And there are currently no questions from the webcast so far. [Operator Instructions] The next question comes from the line of Andreas Schäfer of Bankhaus Lampe.

[Andreas Schäfer, Analyst]

So this -- I've just one detailed question regarding your German retail business. I mean you mentioned that you had a strong focus on regular premium new business and that was the reason why you lost some market share. But as far as I understand from the annual report, only your single premium business has grown by, I don't know, 12% or 13%. Could you elaborate a bit how you see your market position? And especially where the growth was coming from? Was it more the broker business or the own distribution channels?

[Immo Querner, CFO & Member of the Management Board]

Yes. I want to refer to a somewhat conservative stance. I thought of the development of the single premium business in the German market that was -- is, I think it was like 93% of the market, something like that. I think compared to our peers, we were much more moderate in that case. I think the business that we see is probably more broker-related. We've also seen nice developments in the bancassurance channel.

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

And assuming, especially the single premium business, maybe to add on that one is, if you see what the development in the markets are now having done last year a lot of single premium, I'm really happy that we are very moderate in that kind of business when it comes to single premium.

[Immo Querner, CFO & Member of the Management Board]

So the market, sort of the development of single premium business, the market has been making 38%. So that's more than above 30%, but 38%. And maybe a good business, maybe not a good business, we thought we should take uncertainty.

[Operator]

And there are no more questions at this time. I hand back to Carsten Werle for closing comments.

[Carsten Werle, Head of Investor Relations]

Yes, thank you very much, Haley. To be fair, I would like to pass over to Torsten for a closing comment.

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

So just 3 comments. We had a record year. We are on track for the targets and our outlook in spite what happens around us. For the time being with the CCC disclaimer, we are on track. And really for you, all the best and take care, all of you. Thank you very much for joining us.

[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.