Ladies and gentlemen, thank you for standing by. I'm Moritz, your call's call operator. Welcome, and thank you for joining the Talanx Analyst Call Full Year 2022 results. Throughout the recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you have dialed in by telephone, you can press star followed by one on your telephone to register for a question. Questions can also be raised by using the chat box on the webcast page at any point during the session. Kindly add your name, function, and email to be identified. The Q&A session will begin the question asked by telephone. I would now like to turn the conference over to Bernd Sablowsky. Please go ahead.
Thank you. Good morning from Hanover. This is the Talanx results Call for the full year and the fourth quarter of the financial year 2022. I'm here together with our Group CEO, Torsten Leue, and our CFO, Jan Wicke, who will together take you through the results and where we currently stand. You are aware that we published our preliminary key results in early February already. Today, you will get a clearer picture and the full set of numbers explained by Torsten and Jan, and the annual report is already also published on our website today with lots of numbers and more details. All documents, including the financial data supplement on our webpage. What we do now is Torsten Leue and Jan will take you through a short presentation summarizing the financial year results.
Thereafter, as usual, you will have the opportunity to ask questions. Over to you.
Yes. Welcome as well from my side. Let's don't lose time. Jump to page two. What is the summary? I can see here we have, as we published the record results of net income growth of 16%, and I think this was really remarkable, with a 12.9% in equity in a market where you have seen that we have strong headwinds. The volatility was high, with not just NAV cuts, Ukraine war, but as well inflation. We will go more details in the lines of business then. Therefore, we could basically, because of our results, increase our dividends. You know that the last years we have promised the moment we have a cash flow increase to 1.5 to 2, we will increase our dividends.
This kind of increase of 25% to EUR 2 is basically fulfilling the promise we have given. On page four, this is saying that GWP is increasing by 17%. I know that our insurance market will be never a growth stock market, but as you could imagine, this is really a, I would guess, a growth here of significant 17%. I cannot see many other peers in the market growing with 17%. The good thing is that the net income is growing basically on the same level as the top line. That brings us to an increase up to 12.9% return on equity, far above what we have promised with a 10% return on equity.
On the next page, you can see that, as I said before, this was a year really with strong headwinds, and we have had a lot of large losses. Actually, the highest level ever since the IPO was EUR 2.18 billion. A good message, though, is here that the large loss budget we have given ourselves is exactly in line what we have basically calculated. We could say the steering and the risk management is working. Only the Ukraine war we have not on our radar screen. The 0.37, basically given as well. There's a lot of IBNR still, and we have to see what will come in the future. We wanna here as well be on the conservative side.
The next page, you can see that the nice increase of the results is driven as well and mainly by the prime insurance, where we can see that we grow a little bit faster than the reinsurance sector. The core idea at the end of the 43% share now we have in the prime insurance is basically to continue a little bit the path Hannover Re has already done in the last years. That year by year, we can have a reliable increase of earnings. On next page, you see where the earnings in the prime insurance are coming from.
Well, what we can see is that we are highly diversified in the, in the group, not just with reinsurance and prime insurance, as you see before, nearly 50/50, but as well when it comes to the lines of business in the primary. Here we don't talk just about lines of business, but as well regions and business models. As it's reflected as well now into the model, diversification is a big plus in our business model. Therefore, you know, it's always good, I think, in these times, which are volatile, that you are highly diversified, even comparable to the market.
The second message here is Industrial Lines was some concern in the past when there was some discussions and it was the main story in the IPO as well, the Industrial Lines. We clearly can say with the numbers that we are not just two years ahead what we have planned, but that the cleanup was working and we are growing really nice in the profitable growth path, including the nice growth initiative of specialty lines. On the next page, at the result, what comes out. We are considered, as we know, as a dividend stock. You can see that we increased up with 25% to EUR 2 now and we promised to general meeting. As you can see, that EUR 0.40 increase is basically an increase which we have done in the last seven years together.
It was really a significantly step up, and I think we are with that kind of number, we are really on a nice comparable basis. Now in this path was possible basically because last years we promised in the strategic cycle, 2018-2022, an increase of earnings per share of 5%. Actually, and this is mainly driven by the primary insurance, is for 13.6% earnings per share. These nice earnings brought us to the conclusion that we can increase dividends even higher than we have promised in the past. That is the finish of the year 2022 of the strategic cycle and the capital market. We've given you the new cycle until, on the next page, you see until 2025.
Basically here, you can see that we want to accelerate or even more ambitious targets in all, the segments you can see here, as well as the capital management and people management. This is basically inside, we see it was working, the results were okay. Now it's more focused and more, let's say, ambitious targets. What you can see is, we have the key parameters, return equity, net income growth, and dividends.
This is on next page for the strategic cycle, as we have already told you in the capital market. It shows you again that these targets are really significantly and ambitious, and we believe, especially as well because of primary insurance improving nicely now into hard cycle in the reinsurance market going forward, and as well Industrial Lines, which is considered to be hard market in the cycle, gives us very confident that we will as well fulfill and promise these kind of targets. For this year, we have given you, or the outlook is return equity above 10%. The group net income of EUR 1.4 billion, it would be on the basis, if you just see the year.
This year, it would be 12%, a double-digit growth. We have as well told you that due to IFRS 17, there's a slight adjustment we have to do, but still on the base of 1 to 50, which we said the base would be a nice growth in this year, still these volatile times. As well, you know that, we have the EUR 2 now as a promise, and as well the 25% increase of dividends again until 2025. This path is meaning we always say in 2025, it will be the EUR 2.50. The paths will be defined on this way. Good. With that kind of my opinion, very ambitious targets, I will hand over to Jan.
Thank you, Torsten. Let me provide you with my highlights with regard to 2022. First, to look back to the previous year. On the next page, please. What we can see that we had both a record in gross written premium and a record in net income. What are we doing here? We are monetizing our growth, which we have, what we could show in the past years. We are very happy with that. Was everything wonderful in 2022? To be, no, we have to admit that we had an increased combined ratio by 1.2%, mainly driven by inflationary pressure and large losses. I will come back to that two points a little bit later.
All in all, we could show a return on equity of 12.9%, which is pretty good, even though it includes an effect of roughly 2.6% relative related to the OCI development, which is related to the increase in the interest rates. On the next page, I would like to provide you with some color on our large losses, where are they derived from. Torsten already mentioned this EUR 2.2 billion in large losses, which we've seen in 2022, where of EUR 367 million are related to the war. Another 13% to man-made losses, and 70% are related to NatCat events. Out of that 70%, 98% are related to extreme weather events.
Out of that, 58+ 27, so more than 85%, are related to storms and flood events, which have become increasingly expensive. This is where we've seen the inflationary pressure first. This is clear evidence that the climate change is happening, if 85% of the NatCat losses are related to that one. We wanted to give you here some color on that one. Second page. Next page, please. There you can see the large loss development relatively to the net premiums earned over the past years since going public in 2012. What you can see here on average has been below 7%. The last year development fits well into the figures here.
The increase of the large losses, which we had to report for 2022, is heavily related to our fantastic growth, which we were able to show. So, and one comment also with regard to the large losses, as there were some questions related to that one. In our large loss budget, there's no discretionary buffer built in. So it's an expectation value, what we are calculating out of our NatCat models. The key question is always about the unexpected. Unexpected like COVID, like the Ukraine war, whether we should put a buffer in for that or not. We haven't done so far, and therefore, the probability of exceeding the budget is roughly 40%. All in all, what you can see here, it's well calculated.
If you look at the numbers in the past, it really makes sense the way it's done so far. I would like to provide you on the next page with some insight with regards to the inflationary pressure, which will be reflected in our report on the resiliency, which is embedded in our best estimates, which we have booked in our accounts. Just to remind you once again, the resiliency embedded, how do we calculate it? We have our IFRS reserves, and then we ask an external actuary to provide us with a second view on our reserving. If the second view of reserving shows lower numbers, then the difference in between what we've booked and the lower numbers is what we call resiliency embedded in our best estimate.
We already guided you on the Capital Markets Day that due to the inflationary pressure, we will show lower resilience reserves as the external actuaries is expected to show higher number for the liabilities we already have on our books. I would like to provide you also with the guidance that we already worked against the inflationary pressure also in our liabilities, which is also reflected in the development of our combined ratios. During the next two years, I think we will have, again, a very strong comfort level in our resilience reserves.
There will be a dip in the resiliency, but we are already in a way of rebuilding it, and we are very confident with the current reserving level, and we will show significant resiliency also in May when we publish those numbers. Coming to the outlook for the next year on a group level. We have a change in the accounting, and this is reflected in some new numbers. First of all, with regard to the top line, we won't have gross written premiums in the reporting any longer, but the insurance revenue. The insurance revenue, this are the gross written premiums minus the investment component in those premiums, which are, for instance, ceding commissions in reinsurance or the investment component in the life insurance. Therefore, we expect to have EUR 42 billion insurance revenues in 2023.
You may ask the question, is this still growth? Yes, it is growth. It's the mission of Talanx to grow its business. Despite the fact, as Torsten said, we are not regarded as a growth stock, we are growing, and we are growing simply faster than those of our peers. EUR 42 billion is the figure which also includes this growth ambition. With regard to the net income, we have set out the guidance for EUR 1.4 billion for the next year.
What you can see here on the chart, we'll be fluctuating around this number a little bit more due to the volatility, which we will have in the numbers as some of our assets are now book fair values through P&L, and which provides a higher volatility compared to the accounting standard which we had to fulfill in 2022. With regard to the equity, we expect, we are showing currently an equity of EUR 7.5 billion, and we already guided you at the capital markets day that under IFRS 17 / IFRS 9 , the number will be higher. For year-end 2023, we expect the number to fluctuate around EUR 10 billion, which will obviously raise the bar for the return on equity target because this is a divider for denominator for the return on equity.
On the next page, you see it summarized once again. It's in total, EUR 42 billion insurance revenues, EUR 1.4 billion group net income, return on equity above 10%. If you keep in mind the EUR 10 billion equity, it will be clearly above 10%, what we expect to happen during the course of this year, and the dividend will grow. We will pay for 2022, EUR 2, and we will pay more for 2023. Let me now dig into the segments a little bit in order to provide you some color where the results in 2022 are coming from. First of all, we have one chart.
It's a little bit introductorial introduction to this chapter, which shows you the diversification in both premiums as well as in net income. What you can see here is that the primary group contributes EUR 22 billion to the overall premiums of EUR 53 billion and EUR 540 million net income to the overall net income of EUR 1.172 billion, what we were achieved. We are very well diversified in between primary and reinsurance. On the next page, we dig into a little bit into the technical results of those primary insurance and reinsurance in the P&C book.
What you can see here that reinsurance was growing in 2022 a little bit faster than primary insurance with 30%, whereas primary insurance was just growing by 24%, which is, by the way, still a very strong number. On the technical profitability, we have seen exactly the opposite development. Primary insurance was able to achieve a stable or even improved combined ratio, where we have this quite an increase of 2.2% in the combined ratio of the reinsurance. The overall increase of the combined ratio on the group level by 1.1% is derived from the reinsurance book. On the next page, we would like to dig a little bit more into what we've seen in our three business segments in the primary insurance. First of all, Industrial Lines.
We are very, very happy with the development which we've seen. We have seen a strong 95.7% combined ratio and already have dealt with inflation on both sides, on pricing as well as on reserving very well in this business. segment. In a nutshell, with regard to the profitability targets, the segment is more or less two years ahead of the plan. Second, with regard to Retail International, with EUR 214 million, they are the biggest net income contributor within the primary group. They also manage the inflation very, very well, in particular with regard to the price increases which were needed in their market. Finally, Retail Germany. In Retail Germany, we have the comeback of life.
Have a growing profit contribution from life which really matters also on group level. We are able to pay dividends out of the life books again. It was prohibited for a certain period of time, now it's allowed. Therefore, Retail Germany becomes a very strong dividend contributor to TARGOBANK AG which is quite helpful on a group level. Let me now provide you with some more insight on Industrial Lines first. In Industrial Lines, we have increase in the gross written premium of 18% and an increase in the net income of 23%. The combined ratio, I already mentioned it, were at very good 95.7%, and the return on equity at 9.5%, even close to the midterm target of above 10%.
This segment is really well on track. On the next page, we have a waterfall diagram to show you where the increase in the net income coming from, and what you can easily find out, it's coming from the technical results, + EUR 145 million increase. In the net investment income, we had a decrease, and this was due to the fact, I just want to explain that in 2021, we had extraordinary effects from the private equity book, which were non-repeatable. Therefore, we have now a normalized net investment income here in the numbers. All in all, the increase is derived from the positive development of the technical result.
On the next page, you can see how the profits within Industrial Lines and the premiums are split between the specialty business and the commercial business. What you can see here that Specialty Business now has achieved 35% of the gross written premiums, so roughly one-third. The same is true with regard to the operating results, where they also were able to achieve 34% of the results very positively. Please note also that from January first, Specialty is now owned 100% by Industrial Lines segment, which also explains the strong rise in the operating results contribution here. This looks very healthy. With regard to the outlook, we expect the insurance Industrial Lines segment to grow with a high single digit growth in 2023.
Not so fast as compared to 2022, but still growing. We would like to have a combined ratio be below 96%, we are very confident that we can achieve this given the resiliency which is already embedded in this segment, and a return on equity above 9%. What makes us so confident? Industrial Lines is currently operating in a hard market. Second, we have a cost leader position in the Industrial Lines business and in a hard market. If you have a cost leader position, you can earn decent money. We are very happy with the development of this segment. Let's go to Retail Germany. In Retail Germany in 2022, we had a decrease in premiums, which was related to the life business. Whereas in P&C, we had a growing book.
The net income is reduced, which is related to P&C mainly, whereas in Life, we had an improvement of the result. Overall, the return on equity improved to 6.9%. It's clearly some way to go in order to achieve above 10%, but the segment is well on the way to do so. On the next page, I would like to provide you with some insights on the development at the P&C book. So we could observe in 2022, an improved technical result by lower operating costs, which we'll also have during the course of 2023. Also to partly some positive run-off results, which will be in the light of inflation non-repeatable.
The main driver for the reduction in the result of Retail P&C was a reduction in the net investment income. We have used the overall situation in the group to realize some losses in the bond portfolio in order to have higher coupons for the time for the future. This results in a EUR 55 million lower investment income during the course of the past year. All in all, we always have to keep in mind that Retail Germany just reflects roughly 3% of the group gross written premium. It's a very small segment. With regard to Retail Germany Life, on the next page, there we have a fundamental swing due to the rising interest rates. We didn't need to realize capital gains in order to fund the ZZR.
Instead, we are getting money back from the ZZR in 2022. This resulted then in roughly EUR 1 billion lower realized capital gains, and also in a much better technical result because we didn't have to pay out policyholder participations in the investment income at such a size. Also we benefited from lower expenses due to lower restructuring costs. All in all, we had an increase of the EBIT contribution of the life segment. With regards to the outlook, we expect insurance revenue growth in this segment. I want to draw your attention once again on the change in accounting.
The overall number with regard to insurance revenues will be much lower than gross written premium, as in Life and Essen component is deducted from the gross written premiums, therefore we have a lower number here. The combined ratio should fluctuate around 97%. There's still some inflationary pressure here with regard to spare part price development in the motor business, for instance, and some other things. In the life business, we expect some nice new business value to be achieved during the course of the year, the return on equity should be above 9% for 2023. Coming to the last primary insurance segment, Retail International, where we can report a very good growth of 16%, which is currency adjusted even 22%.
The gross written premiums are, in particularly, up in the P&C book by 28% and currency adjusted even 36%. It's mainly driven due to price increases, whereas the life business is down 13%, and this is according to our strategy that we wanted to reduce our Italian life book, which is also reflected in the numbers. Also is due to the fact that we sold the Russian entity at the beginning of last year and deconsolidated the entity then. Strong growth in Retail International. With regard to the net income, we see a nice increase of 13% to EUR 214 million, making Retail International to the strongest profit contributor in the primary segment.
On the next page, we would like to explain a little bit more in detail where the profit increase is coming from. First of all, we have to report that the net technical result, which is also reflected in the increase in the combined ratio, was a little bit lower than in the previous year. Despite the price increases which we are able to achieve, we had to do more on the reserving side, and this is a very resilient segment also, and we did so. We are very happy with the development of the technical result in the light of the inflationary pressure which we have seen, in particular in some markets there.
What has contributed most to the increase of the profit was the development of the investment income, which was related to the increase of interest rate in some of the market, which goes in parallel to the increase in inflation. This explains more or less the increase in the profit to EUR 214 million. With regard to the outlook, we have to report that we expect to grow this business even further, but the growth will be not as high as what we've seen in 2022. It will be, but it will be still a double-digit growth, what we expect in the P&C book, whereas in Life, we are still continuing to decrease our exposure in Italian Life.
The combined ratio should be again below 95%. The return on equity should be above, or around 8.5% or slightly above it. Which also reflects that in particular in this segment also, the accounting mismatch, the OCI mismatch in 2022 was pretty strong. The bar in terms of which equity needs to be, will be the denominator for this 8.5% will increase, I think, by roughly one-third, going forward. A very strong and positive development here as well. With regard to reinsurance, what you can see on the next page, you have already had your discussions with the colleagues of Hannover Re. There's nothing much to add. We have seen growth and profitability here.
On the next page, you see, we just repeat the outlook, what the colleagues already have told you. They also expect some growth in a very hard reinsurance market, which is a positive. As a net income, what you see here, this EUR 850 million, is just our share of the net income. The total number of Hannover Re is EUR 1.7 billion. The return on equity, it will be clearly double-digit again. Before I close my presentation, I would like to give you some insight also on our investment portfolio and on the capital situation. First of all, what you can see on the next page, I know there are a lot of numbers here.
The ordinary investment income increased by 16% and we benefited a lot in our ordinary investment income from the inflation linkers. Also from some real estate investments and also from increase in interest rates in some countries. With regard to the realized gains, losses, I already mentioned it, they were significantly down due to the lower needs to fund the assets that are in German Life, and therefore, we didn't need to realize bonds in order to achieve the required local statutory yields. We had a somewhat higher impairment on our equities, but all in all, I will show you that on another page. Talanx is continuing to fulfill the low beta approach in our investment philosophy.
On the next page, I will provide you with some insight on the quality of our investment portfolio. There's nothing much has changed here. We still are predominantly a bond investor. What you can see here, 95% of our bonds have an investment grade, so very conservative positioning, and we feel very well positioned, therefore, in the highly volatile capital markets as of today. On the next page, we have the development of the equity. This again is, I have to explain to you the accounting mismatch of IFRS 4, where we have discounting effects on the asset side, but we do not have those discounting effects on the liability side.
The good news is, under the new accounting standards, the development of equity will be much more an indicator of the economic development compared to the past. Here, the change is really driven by the increase in the interest rates. I already highlighted that we expect the equity under the new accounting standards to be above EUR 9 billion, clearly above EUR 9 billion, at the year end, 2022, and around EUR 10 billion for the end of 2023. On the next page, we have the solvency ratio. In the third quarter, we had 211%. What do we expect for the year end? A figure around 200% also.
It will be at the upper end or slightly above the target range of 150%-200%. With regard to the ratings, we had a stable A+ rating of S&P, and we have improved our rating at AM Best to A+ during the course of the year. I hope this has provided you with some overview and has shown also the resiliency, which Talanx is able to show in this very volatile times. We are very happy with our results of 2022, we are confident that we can achieve very good results also in the year 2023. We are operating in hard markets. We have low-cost business models, therefore, there is the opportunity to earn decent money. Thank you. Over to Bernd for the Q&A.
Yes. Okay. As usual, you have now the opportunity to ask questions, and I ask our operator to handle those. I guess the first one in line we have is Michael Huttner from Berenberg.
Yes. Ladies and gentlemen, we will now begin the question and answer session. If you have dialed in by telephone, please press star followed by one on your telephone to register for a question. If you wish to remove yourself from the question queue, please press star followed by two. Questions can also be raised by using the chat box on the webcast page at any point during the session. Kindly add your name and function and email to be identified. The Q&A session will begin with the questions asked by telephone. If you're using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star followed by one on the telephone or type a question using the chat box. The first question comes from Michael Huttner from Berenberg. Please go ahead.
Thank you so much. Thanks for the lovely presentation. Yeah, given the, given the difficult times, lovely results. I had three. Confidence on Retail International and 95% combined ratio, inflation and any buffers and what you can say about that, you know, as much as you can say, we'd really, really appreciate. I know it's very complicated. Then you talked about the dividend from Life in Retail Germany. Maybe maybe you can give more of a feel for how much that was and how this could develop. Thank you.
I would probably start with the first one, and Jan Wicke will take the second one. Well, in the international, with inflation buffer, you know, the biggest advantage basically is that the markets are reacting very fast, and we are a bit over the cycle inflation because we have a short-tail business, mainly Casco business areas. If you see really the curve of inflation, they would say at the end of the curve. A lot of the pricing is already given in, and there are still some markets, like basically Brazil, Turkey, where inflation was huge, but price increases as well have been huge. We're talking in Turkey about 240% price increases.
As it's a short-term market, I would say they're a bit over the peak and, therefore, we are confident with the combined ratio which was set up.
With regard to the dividend payment of Life, the biggest Life entity in Retail Germany alone, the HLV, contributed EUR 60 million of dividend, capital upstream. As a smaller one, they will have contributed another double-digit million figure, but I don't know in detail. However, just one second should be.
Roughly, in total, we expect from Retail Germany EUR 140 million, and just the biggest live entity is EUR 60 million, and the others will contribute another double-digit million figure to it. Does that help you, Michael?
Yeah. No, that's brilliant. On the inflation buffer, thank you so much for the Retail International comment, could you give a more general feel for how you see it? It's just at slide 16, you know, you kinda see the dip and you think, "Ooh," you think, "Well, maybe part of the dip is because you.
Yeah.
You know, you anticipate that.
Well, we
It's in the inflation buffer. Anyway, I don't know.
We will report the Willis Towers Watson view mid of May. What I can say already as of today, that given that the resiliency level in Retail International was exceeding, yeah, what the accountants perceived as best estimate, so too conservative. We had to release some resiliency there. We have still a level which is very, very comfortable in Retail International. Does that help you, Michael?
That really does. Thank you so much.
Yeah. Maybe to add on, this is what Jan said, it's basically on the higher end. You will see it probably, when it comes to our internal.
Yeah
...compared to the reserve figure.
Yeah. And then I think Tom, Torsten's comment was very helpful. Just to remind all of you, what we do, we have, we have set out internally also lower and upper limits for the resiliency embedded in the best estimate. If an entity is above the upper limit, which was the case at Retail International, then we ask them during the planning cycle to release some of those reserves because this is not capital efficient. Yeah? We really try to balance this. Therefore, we also, this external view on our reserves is also very helpful for steering the group sale.
That's really helpful. Thank you.
The next question comes from Roland Pfänder from ODDO BHF. Please go ahead. I'm sorry. The question now comes from Darius, from KBW. Please go ahead.
Morning, everyone. Thank you for taking my questions. Apologies in advance. I have four. The first question. Brazil has been a problem area for some time now. What is management doing to address this? When would you expect Brazil to no longer be a headwind to the international segment? That's the first question. The second question. What combined ratio would you say you are currently writing business in Retail Germany P&C right now? That's the second question. Third question. I'm slightly confused about your sort of 96% guidance for Industrial Lines for full year 2023. The reason being is because if you normalize the full year 2022 combined ratio, you are at 94.5.
You also make a comment that you are two years ahead of the plan, and the plan is to be at 95 in 2025, so that would mean 95 in 2023. Why 96 and not 95 today, basically? That's the third question. The fourth question is slightly philosophical in a sense. Your equity goes up 33% under IFRS 17, and you're guiding to 10%-14% ROE. I just did the math based on your net income guidance. Now what would you say is a sort of sustainable through the cycle return on equity going forward?
You know, in my mind, it feels that maybe 2023 ROE profile is slightly better than usual because obviously, you know, a 10% ROE business doesn't suddenly become a 14% ROE business through the cycle. Is the 10% sustainable on a new basis, do you think, through the cycle, or is it slightly better than usual given positive dynamics next year? Thank you.
Okay. I will start, and then Jan will continue. With Brazil, we see already that the fourth quarter, and you see there's a very short tail, basically Casco market, that the monthly, which we basically we see that on a daily basis, even there in Brazil, we are really already on the profitable side. I would say the market reacted very well in sense of hard cycle, and we feel really that we will have nice profits this year in Brazil already, as we have seen the last quarter. Regarding the Germany P&C now, maybe Jan, you give a comment here.
Yeah. Well, there is still some inflationary pressure on the claim side in Retail Germany, the combined ratio of 97%, which we have set out as an ambitious target for the current year. We are still confident that we can achieve it. We will have a look at it at the year-end with regard to the combined ratio, managing resiliency embedded in the best estimate and so on, what's needed from a group level. Maybe it will be somewhat higher, can result somewhat higher, but also lower, depending on the overall situation, that will be seen at the end of the year.
On the industrial line, why we not go to 95%, I would say, we say it's clearly below this 96%, and I would say we take it here on the conservative side.
Yeah
Outlook here, because in the past, Industrial sometimes had some surprises, and we would have only surprises, but positive surprises to you in that segment. Regarding the equity, I think, as well, I know in the last 10 years that always, or not 10 years, but last year, so above 10% return equity, and maybe we say strongly above 10%, this could be over the cycle, a good message, I would say.
We are currently in a hard cycle, but over the cycle, clearly above 10% is the message.
Why we are so confident about this is because main part of our business is not just with 83% coming outside of Germany, it's a very diversified portfolio, but as well, main part comes from B2B business, be it industrial and re-reinsurance. This next years to come, is, in our opinion, a harder market cycle than the past. Therefore, we are very confident to be clearly above 10% return equity.
Thank you. I suppose, as a bit of a follow-up on the last one, but I suppose, you know, your equity goes up. On a like-for-like basis, it implies that your return is actually higher. I'm just curious about that. I mean, should we now expect it to be lower given that your sort of denominator goes up?
Well, what we see is together with the growth, the operational efficiency has increased even further. In those segments where we are already cost leader, the growth was also helpful, and we expect to earn decent money there going forward.
All right. Thank you.
Last question was okay with you?
Yeah, yeah.
Okay.
Perfect. Thank you.
Really, if you say clearly above 10% and even 14% in your calculation, is clearly above 10% within the target we promised.
Right.
The next question comes from Roland Pfänder from ODDO BHF. Please go ahead.
Yes, good morning. Some questions on Industrial Lines, please. Could you speak about the run-off results in 2022? Also, what was the impact from inflation on the segment? What would you expect would be the burden on the combined ratio from rebuilding your redundancies in the segment? Maybe some words on the M&A environment for specialty insurance. Do you see opportunities there currently, or will it take longer time to get active? Mega short question on Retail International. Could you please mention reinvestment yield and the running yield? Thank you.
Okay.
Industrial. Let me start with Industrial Lines. It's always hard, Roland, to measure exactly the inflationary impact. We did some math, as we did a lot of in-depth study on inflation, and it's really complicated because you have to look at it line by line and what was already priced in, what is the additional inflation. Out of that, the additional inflation impact, which is already reflected in the numbers and was roughly somewhat below EUR 300 million in the Industrial Lines segment, around EUR 280. This is what we calculated. This is a rough estimate. You should take it also as a rough estimate. The run-off results in Retail International in total add up to EUR 211 million during the course of 2022.
They are, and that compares to a previous year of EUR 180 million, so slightly higher. Also, to be honest, also unavoidable because we were very conservative in this segment last year in order to cope with the expected future inflation, which will be future inflation, which will be reflected in the long tail business, where we did some extra reserving also for the long tail part. It's also already reflected in the numbers of 2022 too. In a nutshell, the numbers of Industrial Lines are very small.
Maybe just to add on this, you say how much will it cost to build up additional redundancies in the future for the combined ratio? We have not the final results of Towers Watson. What we could see here and probably expect is that there will be none to rebuild it.
In Industrial Lines, but in other parts of the business.
Industrial Lines. Here we really see that, you can see how the quality Industrial Lines, how strong the results have been last year on 2022. That this inflation is basically compensated. That is more roughly the message we have here. There was a question ago about specialty lines. The markets continue to be hard, but not as hard as we've seen in the past, still hard. The growth initiatives will continue. You have seen the targets we have given to you in the capital market, and we are still confident to be on track with what we have promised the midterm targets in the specialty lines.
You asked for the reinvestment yield. In the group, it was roughly 2.8% in the course of 2022, and Industrial Lines, 3.1%. Industrial Lines, they have a little bit more exposure to the dollar. Therefore, this explains the difference, whereas on the group figures, we have these large life portfolios included.
That is the one message. Did you ask, I think, about Hint, right? That was understood. About Hint, reinvestment yield.
Oh.
Did I get it right, Roland?
No, actually, on Retail International.
Yes.
Okay.
Hint. Oh, yeah. International is Hint. Yeah. Sorry.
No, at hint, we were able to achieve close to 5% reinvestment yields during the course of 2022.
It's breathing very fast as again, the full portfolio is mainly short-tail business, so the reinvestment yields very fast kick in. Actually, you can see there was something I remember EUR 88 million inflation-linked bonds we had as well, positive effect.
Yeah. I do remember.
Because they could over last year already, use this portfolio or reshift the portfolio to inflation linker even. Very fast movement. Actually already this year, the investment income is higher, percentage-wise than the last year. It's very fast kicking in higher interest rates, so close to 5%.
Okay, thank you.
The next question comes from Vikram Gandhi from Société Générale. Please go ahead.
Hello, good morning. Just really one from my side. I'm a little puzzled by your comment that there is still some inflationary pressure in Retail Germany because most of your German peers do not seem to suggest that. If anything, the messaging has been that the pricing has been pretty strong to cover the inflationary impact. I just wanted to understand this in a bit more detail as to where Talanx's portfolio could be different versus the rest of the market where you still see inflationary impact.
If I can link this back to some of the comments made during previous conference calls where you alluded to, I guess, the architects and self-employed professionals, and those business segments where potentially you might be seeing, inflationary impacts, and I wonder why that should be the case. That's really the question. Thank you.
Okay, Vikram. First of all, I think in the market as a whole, with regard to the motor portfolio, it's not only us to see some more inflationary pressure. If I reflect the discussions I had with some peers, they see that similarly. Second, yes, with regard to the portfolio construction of Retail Germany, we have some exposure into those lines who are more affected by inflation than the average portfolio of our peers, like architects and so on, what you've just mentioned. This is also true. First of all, I think with regard to motor, it's an overall market development. It's not only us. With regards to the portfolio construction, slightly more exposed compared to the peers.
Okay. Thank you.
We have a follow-up question from Michael Huttner from Berenberg. Please go ahead.
Fantastic. Thank you. On Retail Germany, I just wondered if you could say what the price increases have been or you're expecting. Also, the targets you've given in terms of combined ratio, are they IFRS 4 or IFRS 17 or how do we kind of compute them? That's it.
With regard to this portfolio, with 3% of the gross written premiums of the group or the Retail Germany portfolio, which is pretty small on a group level. They, the combined ratio is set out under the new standard IFRS 17.
Is that true for the other targets as well?
Yep.
Oh, okay.
Everything is on IFRS 17.
Yeah.
The price increases in motor Germany have been around 8%.
Oh, wow. Okay. Do you expect any more this year?
Well, the inflation, unfortunately, at least in our view, is more sticky than the central banks try to make us believe.
Actually this would be maybe a comment on that if I will not comment on competitors what message is here. If it's really happened, then if competitor would have said so that there's no inflation to be expected this year, then we would be very happy because we expect that. We would then have a much higher reserving in our books than which we can have the run of later on. Hopefully the competitors are right. If it was a message then we have better results even in Germany due to more conservative resiliency building up again.
Thank you. That's very helpful. Thank you.
The next question comes from Bhavin Rathod from HSBC. Please go ahead.
Hello, good morning. Thank you for taking my questions. I have very quick two questions. The first one would be on Turkey. If you could provide any early indication on your loss exposure coming from Turkish earthquake, that would be really helpful. The second one would be on the stand-alone combined ratio for Industrial Lines in the fourth quarter was again, very strong. Could you just help us break out what was the driver of the strong improvement? Was it driven by strong reserve releases, or was it more driven by underlying improvement in the business? Any colors would be really helpful. Thank you.
Okay. Jan can maybe start with Turkey.
One second. Okay. In with regard to Turkey and the earthquake, we in the first quarter, we currently expect a net loss on group level of EUR 250 million. No, sorry, a net reserve to be built of EUR 250 million, not a net loss, I'm sorry. EUR 250 million. It's covered by the large loss budget. EUR 200 million out of that is related to reinsurance and EUR 50 million related to primary insurance.
Basically, this is an event which is mainly a reinsurance event, and the primary insurance is not significantly. Again, this is very covered by the budget in the first quarter, so it's no headaches for us at the moment. The event is very dramatic, but this is within the budget. Just saying as well, Henry, we have been not part of the Turkish earthquake pool, fortunately, so therefore it's very limited number comparable to the market which could have been there. When it comes to just line fourth quarter, Jan.
Give me a second. I have to double-check.
Double-check now.
Sorry.
Answer is coming now.
93.1%.
Which fits to my message that at the end we said, okay, the 96% below this is still within the message we're giving, 96 below.
Perfect. Thank you so much.
We have one more follow-up question from Michael Huttner from Berenberg.
I'm really sorry, and thank you. It was just on the combined ratios to the outlook you've given, which is really helpful, is IFRS 17. The numbers we have today are IFRS 4. Is there a significant difference? I know you kind of touched on this at the investor day, but I forgot.
Yeah. We did so, Michael. Yes, there is a difference. In the future, we have the discounting of the current year claims, yeah. Therefore, the combined ratio going forward, is very much also related to the development of interest rates. Therefore, we were also a little bit reluctant how much we should provide with combined ratio figures. Therefore, in order to provide you with the overall guidance, this is the reason why we focus so much on the net income contribution in our communication. Yes. In a nutshell, combined ratios will be much more volatile if the interest rate environment is volatile like it is as of today.
It makes sense. Thank you so much.
There are currently no more questions on the phone, and I hand over to Bernd Sablowsky for questions from the webcast.
Yeah, we have three questions raised by Hadley Cohen from Deutsche Bank, which I will read out as follows. The first one is relating to slide 16 of our presentation, where we give an illustration as to the development of our resilience reserves. The question is, slide 6 indicates there is a quite big drop in primary resilience reserves. Given that you are suggesting no real change to resiliency in Industrial Lines, it would imply that it is all coming through in Retail. If that is the case, it seems quite large, a large number in the context of the size of Retail business. Can you talk a bit more about what is going on here and what you are now building in with regards to inflation assumptions going forward to get more comfort that no more adjustments are required?
That is the first question related to the resilience reserves. The second one is dealing with lapse rates. I am assuming this is probably not a major issue for Talanx, but can you talk about the extent to which you have seen any uptick in lapse rates either in Q4 or Q1 2023? Can you give sensitivities maybe in relation to a percentage of eligible owned funds? Third question is related to our M&A pipeline. Hadley wants to know as to whether we can provide an update with our M&A pipeline currently and how we are thinking about this in the context of the current inflationary macro backdrop, as well this provides particular opportunities. Those are the three questions from Hadley.
I will start then. First question was regarding the resiliency. Basically, Jan, you can tell something.
Yeah. Okay. I will. While we can do the chart number 16 is just a conceptual chart. It's not indicating the numbers as we haven't seen them from Willis Towers Watson so far. It's just indicating the development. What you can see here is that due to the inflationary pressure, we will have to expect that the external actuary will require higher reserves than their best estimate use compared to the past. This is reflected here in this chart because this will then reduce what we can what we call resiliency embedded in our best estimate. In order, if you were to do the maths, we have on average EUR 50 billion net reserves during the course of 2022.
If you were to assume one percentage point higher inflation with a duration of five years, that will result in a pretty, significant reduction in the resiliency. What we want to bring across clearly is that you shouldn't expect such a strong reduction in the resiliency because we already worked against it, and which is also reflected in the combined ratio development. There will be a very comfortable resiliency reserve. I'm pretty sure that that, reported.
Mid of May.
To add on this, as you said, it comes mainly only from retail. Now, I think the building up and Hannover Re as well, in their call, said as well something to their expectation, how they will build up the resiliency. You can see, and you will see, that in the last years, which we have shown in capital market as well, the prime insurance significantly build up resiliency. It was about EUR 1 billion the last cycle, add on that. The reinsurance basically has to mainly build up again what they have in the last years consumed. Therefore, if you see where it will come from, this rebuild up until 2025, has mainly come from the reinsurance side, which they have to increase the buffers.
If you see it absolute as well proportionally, there it will come from. In any case, we are always talking about the level of above best estimate. There's only the volatility metric. If you ask can expect volatility, we believe with the resiliency we have, we are quite comfortable, at least compared to the markets and peers with that kind of thing. As a, as a scan, it mainly comes to build up from the reinsurance side, and the market is very hard now. We are confident as well that we can rebuild it to the past levels again up in the reinsurance side. There, that discussion, we mainly have to focus on the reinsurance side.
For the second question, when it comes to the LEPS ratio, there's actually no significantly increase of LEPS ratio. Therefore, you can have whatever sensitivities, we observe nothing for the time being. Regarding this last one, the M&A pipeline, well, as you know, we always stay with our message. We wanna be very conservative, or let's say very consequent with our M&A and discipline, we as well want, therefore, staying within the focus. What we do see is, yes, there will be opportunities coming up, I believe, which is good for us because we are rather on the buyer side than on the seller side.
We will stay focused in the main areas, which is Retail and national, where we have the focus regions, which we have shown to you, and as well in the specialty lines. This would be the best field to make M&A business.
We have one final question on the phone, which comes from Vikram Gandhi from Société Générale. Please go ahead.
Hello. Thank you for the opportunity again. Just one quick one. In light of what is happening with some of the smaller regional banks in the U.S., is there any comment that you can make around the U.S. D&O exposure that the group might have, either via Industrial Lines or via reinsurance, in light of what's happening?
Yes, we can. Obviously, we have observed it, and, it's a non-event on the direct exposure side.
Okay, fantastic. Thank you.
There are no further questions at this time, and I hand back to Bernd Sablowsky for closing comments.
All right. Thanks for joining in this morning to listen to all the details we have given to you. The next events we would make you aware of is our annual shareholders meeting. That is on May 1st, and we come out with our Q1 numbers a week later. To speak to you there, and thanks again for spending time with us this morning.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day.