Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome and thank you for joining the Talynx Analyst Call 6 Month 2021 Results Conference call. I would now like to turn the conference over to Carsten Werle, Head of IR. Please go ahead.
Yes. Thank you, Stuart, good morning from Hannover. This is the Talanx results call for the first half of the year. And I'm here together with Jan Wicker, our CFO, who will take you, as you know it, Through the results. After the presentation, Jan will be happy to answer your questions.
And as usual, you can also raise questions via the webcast. I would also like to hint you to all the documents that you find, of course, on our web page, including the financial data supplement that we published for the 2nd time this quarter. And with these introductory remarks, I'd like to hand over to Jan. The floor
is yours. Well, thank you, Carsten, and good morning, everyone, and thanks for dialing in. We hope you are all in good health and beginning to get used to being halfway Out of the pandemic and how way back into a normal life for all of us. Let me start with a summary on how our group performed in the 1st 6 months, if we could turn to Page 2, please. And first of all, I really have to state, I'm really happy to present you such good results in terms of both top line and bottom line.
Top line, We were able to grow our business measured in gross written premiums by more than 9% in the first half of the year. And that is and that's growth in all segments. And if we would adjust it for currency changes, We could even report a 13% growth rate. 2nd, the technical performance of our business is Strong. The combined ratio is below 96% in the 1st 6 months, whereas previous year was heavily affected by Corona claims.
If we adjust for Corona also, we see an improvement in the combined ratio reflecting that Strong technical performance in the group. This then translates to a group net income of EUR 546,000,000 Euro for the first half year, 44% out of the primary insurance group. And in terms of our key performance indicator, the return on equity is above 10% 10.5% as you can see on the page and thereby clearly above our threshold of 8%. The solvency ratio is very robust, 2 10%. And so the question is There is a question about the outlook going forward.
And with regard to the outlook, we have to take into account that we had a large lots Event flooding event in Germany called Bernd, which will impact our net income by roughly EUR 150,000,000 And we have to take that into account. But even taking that into account and taking some other large claims also into account, we expect the Group net income now to be in between €900,000,000 €950,000,000 So that's a good news. Let me now run you a little bit through the highlights of our 6 months figures. If we go to Page 4, And first of all, the top line growth, where does it come from? The top line growth is derived from P and C Reinsurance with more than €1,000,000,000 and Industrial Lines and Retail International, but also Retail Germany It's growing.
What you can see here on the page is that the operating result is highly affected by the swing in The technical results, P and C, you see we have €481,000,000 positive result, whereas Last year was minus $160,000,000 and this is more than $500,000,000 Even more than €600,000,000 swing in the technical result, what you can see here, which has Yes, resulted in such a good overall bottom line result going forward. So, let's now go a little bit And on Page 6 to Page 6, where we have tried to give you something like a normalized result for the first half year In by the way of excluding extraordinary items. 1 is still corona. So Corona has affected negatively the first half year by EUR 72,000,000 in the bottom line, 222 in the EBIT. And this was due to Corona claims of 278 And offsetting effects that where we account for the lower Claims frequencies and lines like motor insurance and so on, which are related to corona.
And all in all, this result then in EUR 222,000,000 negative EBIT contribution due to corona. Then our colleagues from Hannover, we have already reported that due to a restructuring of reinsurance contract In North America, there was a one off of $129,000,000 positive in the EBIT, which has to be excluded when accounting for so What do you have to keep in mind when seeing now EUR 566,000,000 as a normalized result for the 1st half year. Please keep in mind that, in particular, in Retail Germany, we have decided to realize extraordinary gains already during the First half of the year, in order to get the contributions that are done. 2nd, please keep in mind that the ordinary investment income is a little bit overstated in the first half of the year as we had Unusual high returns from our private equity book, which unfortunately will not repeat every quarter, but which has helped us to show a little bit higher figure during the first half of the year. So, if we now would go into more detail with regards to the Corona claims, I would like to draw your attention to Three figures on this page.
First of all, where are the claims coming from? The claims are coming from excess mortality in life and health reinsurance, which accounted for $263,000,000 during the first half of the year. In the Q1, these claims were coming from the United States, and it was more or less a result from or the death of Donald Trump's corona policy, which had to be paid. In the second quarter, there's less mortality in the United States. So the vaccination campaign of Joe Biden was successful, but there are new claims which are related to South Africa and Latin America, which we see here in the right.
Also worth noting is that the $12,000,000 negative in Retail International, as Corona plans that $11,000,000 out of this $12,000,000 are related also to excess mortality in Poland and in Latin America. And so all in all, corona is now seen in excess mortality. And if we ask our researchers on pandemic and We're doing research on pandemic situations, then we can see a clear correlation between vaccination campaigns And vaccination success in the countries and vaccination quotas and deaths. So everybody who's Now promoting more vaccinations in the population is pretty right. You would find We can see that in our figures too.
On the positive side of Corona, we have also offsetting effects. Lower claims frequency, which are in particular beneficial for Retail Germany and Retail International, as you can see Here and what we calculate here is that we take normal claims frequency And in just our figures for that one and then the positive effect overall would be €88,000,000 during the first half of the year. So, if we now add up those figures and the overall negative impact in The EBIT is $222,000,000 and in the net income, dollars 72,000,000 If we now go To Page number 10. There you have an overview on the combined ratios of the group. So overall, The combined ratio of the group is 95.9%, which is clearly below last year's Figures which were heavily impacted by corona claims business interruption, credit protection and event protection insurance, which were the majority of the Corona claims.
If we were to Exclude Corona, then there is an improvement from 97.4% to 96.5% during the first half of the year, Which clearly shows that the improvement of the technical performance is on track and that we see here positive contribution from rate increases, which we had, in particular, in Industrial Lines and in Reinsurance during the course of the year. What's well, with regard to reinsurance and this very good combined ratio of 96%, I think the colleagues of Hannoverie have I've explained that already in detail. I do not have to explain that further. With regard to Retail International, there we can see that Best pro form a in South America is Chile currently with 94.5%. In Europe, this was a little bit difficult Given that we had some extraordinary effects in Italy, so I would say Vata was 92.7% as Performing best within our European countries.
So let's now go to a little bit to the segment and I'll explain there in more detail what was going on. So first, with regard to Industrial Lines, we see strong growth. And this Strong growth is derived from our growth initiative, HGS, RDE Global Specialty, With a really very strong growth, but also from growth in liability and property lines. So second, the technical performance is there's a further improvement. In the medium term, We have adjusted our target that we want to achieve a 95% combined ratio, medium term, So year on year an improvement by 1% going forward.
So 98% should be achieved this year and should be better than next year and so on. But this is just a rule of thumb. Please keep in mind, Industrial Alliance business by nature has a certain kind of volatility. And so therefore, by rule of thumb, 1 percentage point per year. The investment income is also worth noting because here we have this impact from the private equity book.
So, For the whole year, we expect slightly lower investment return also in this segment. We then go to Retail Germany. Maybe we can go already to the next page and start with the P and C in Retail Germany. What we can see in P and C is the growth again and this growth is derived from the SME growth initiative where we see an 11% increase in gross written premium in the small and medium sized enterprises and self employed and professionals. And we are very proud of that because this growth shows that we have earned the trust of the customers And the brokers, in particular, due to our claims handling during the corona crisis, this is business closure insurances where we paid and now we were rewarded with additional contracts.
And so, we are very positive and happy about this development. With regards to the overall very, very good results, we have decided for a balance sheet Strengthening in the segment Retail Germany and both in P&C and in Life. And if we turn to the next page on Live, there you can see that this balance sheet strengthening is also reflected an increased Solvency 2 ratio for the German Life entity, which now stands without transitional measures at 2 24%, Which is a very good result and which underlines one of the targets of the course program, which was To derisk German Life and to bring that into good shape. And the other targets with regard to the Koos program achieving an EBITDA above EUR 240,000,000 and delivering on a combined ratio below 95 And we really want to confirm those targets or the division is also Convinced that they will outperform on both targets. So very positive overall development here.
If you then go to Retail International, there we see a strong growth and very healthy technical results. We have 11% growth. I have to admit, if it comes to growth in Life, there's just a rebound From previous year during corona, due to the lockdowns, the Life gross written premium was heavily affected. This is just a rebound effect. But in Non Life, We are growing and it's worth mentioning the fantastic development at Varta, but also that we have some positive effect by Amissima As integration, which was accounted for since April, also in the figure, but overall, strong growth in both segments.
The technical result is also very good. The combined ratio stands at 90 92.8%, which is obviously also a little bit supported by corona effect. But I think Retail International has a strong track record with regard to technical results, And this is also reflected. But it is worth mentioning that we observe already some effects Going forward in claims inflation at Retail International and in normalizing in The claims frequency, so you should not have in your spreadsheets 92.8 forever in the combined ratio given that there is claims frequency increasing and claims inflation taking part. Let's now turn to the reinsurance business.
In Reinsurance, I think the colleagues of Hannoverie already have explained that in all details. But just Mentioning 2 things. 1 is the gross figure 10% and second, if you see the development of the operating result, which is really, really strong. And we are happy to see such a strong profitable growth and So let's now come to the investment income, which is on Page 19. The ordinary investment income is up 10%, and this is partly driven by Significant private equity gains, but also driven by an increased asset under management.
2nd, We have a strong increase in the extraordinary investment income. And this, as I really want to draw your attention to that one, We already did that in the Q1. It's driven that we have EUR 400,000,000 extra extraordinary gains In German, live in order to build up the annual ZZR. So, this is It's done now, so for the whole year. So there won't be so much extraordinary gains going forward in that segment.
And therefore, please adjust that in your earnings spreadsheets going forward in order to avoid wrong expectations. So, the net return on investment, which you see here in the first half year is 3.3% for the whole year, we expect it to be around 2.7%. So yes, If you now go now to the next page on the shareholders' equity, we have paid our dividend in the first half year. So The growth is rather small with regard to the shareholders' equity. If you then go on the next page The solvency ratios current solvency ratio stands at 210%.
How can I describe the development from March to now? We have an increase in both in basic owned funds, but also in the SCR, given that we are growing pretty fast. And this leads to the small reduction, but on a very, very satisfying level so that I don't have any concerns with Regarding solvency, let's now come to the outlook. The outlook is obviously heavily impacted by the flooding event in Germany. The German Insurance Association GDV estimates in between EUR 4,500,000,000 EUR 5,500,000,000 in short loss.
Our group will have to cover a gross claims volume of clearly above 600,000,000 Which will then translate due to our own reinsurance to net claims slightly above 300,000,000 And even if the gross claims will amount to €1,000,000,000 or €900,000,000 net Claims will remain at that level as we have a very well thought through reinsurance coverage for the group, for both Farno, V, as well as for the Talents primary group. And this 300,000,000 Net clients then translates into a net income effect of €150,000,000 approximately €150,000,000 and this is due to the fact that, €1,000,000 And this is due to the fact that in between €200,000,000 to €250,000,000 of the net claims, Hannover B has reported 200,000,000 to 250,000,000 net plans, which translates then here in this Chart into €100,000,000 to €125,000,000 net claims accounted for minorities. So what you see here with this Net claims, dollars 300,000,000 is also net of minorities. And then We have some tax effects also to be taken into account. So, that is then to be translated in a net income effect of Roughly €150,000,000 what we expect currently.
Next to that, we had some large losses. Also, I would just want to highlight the Riot in South Africa, which are also taking into account when we have adjusted our outlook. Where did we adjust our outlook? Due to the very strong first half year, we have adjusted the group net income to 900,000,000 Up to €950,000,000 We expect therefore the return on equity in between 8.5% 9%. Obviously, like always, there is this caveat that this takes into account that large loss So, we'll be within our budget and that we won't don't have turmoils at the capital markets or currency markets going forward.
So let me summarize. We've had a very strong first half year. We are improving in terms of growth with a growth rate above 9%. I think we are also clearly outperforming our peers, And we are proud on that one, and we are proud that we have improved our technical performance also to a mine ratio below 96 So all in all, the management is very confident that we can achieve group net income in between €900,000,000 €950,000,000
Ladies and gentlemen, we will now begin the question and answer session. Questions can also be raised using the chat box on the webcast page at any point during the session. Kindly add your name, function and e mail to be identified. The Q and A session will begin with the question asked by telephone and continue with the webcast questions. Making your selections.
The first telephone question today is from the line of Thomas Fossard from HSBC. Please go ahead.
Yes. Good morning,
everyone. Hope you're doing well. A couple of questions for me. The first one would be on the Competitive landscape for motor in Germany.
Could you update
us on the trends, keeping in mind that actually you all the market benefited from Significant claims frequency. And I was interested to better understand if this was starting to be Recycled into marketing and commercial campaigns from some of your competitors The second question will be related to the various balance sheet Strengthening measures that you have taken in Q2. We know that actually you're willing to increase The volatility buffers in the industrial lines and maybe also in other lines, Maybe you could update us on where you stand currently on your journey. And actually, if you You'll be close to being over by the end of the year, given it sounds like you are in a kind of acceleration mode on a quarterly basis. And maybe the third and last question would be relating to your reinsurance protection, Probably more on the primary side.
Can you shed some light or remind us how you covered for How are you protected for such type of event in Europe and what is your Retention? Thank you.
Yes. So Let's start with the competitive landscape in Motor Insurance Germany. Obviously, competition is increasing due to very benign The claims frequency due to the lockdown measures here in Germany, some competitors have given premium refunds, Yes. In order to well, which has increased, obviously, the level of competition. So but overall, I have the feeling up so far, and it's very early to judge on that, Right.
Because the renewal will start in October, yes? So far that the market is Rather disciplined, but this may change till October. I think now everybody is making Aker's Plans how to position the company in the renewal. And maybe your question is a little So up so far, yes, there is more competition. But overall, from my point of view, it's still disciplined.
2nd, The various balance sheet strengthening measures, the update. We will give with regard to the volatility buffers, We will give an update on our reserving policy at the Capital Markets Day. And this will not only contain what we've Done so far, but we also will show what will be the reserving policy going forward. And I'm very confident that we can give you A very good comfort level on where we are standing and what's going on. And you wanted to know I'm very how satisfied I am so far with the progress which has been made.
I'm very with the progress which has been made, and we will show you on that one. And maybe Yes. But let's wait until the Capital Markets Day. We will release then some more information during the quarter. With regard to balance sheet strengthening at the Capital Markets Day, obviously, The main focus is on P and C reserves.
What we've done also during the course of this quarter, we have During the course of this quarter, we have also strengthened the Life balance sheet in Retail Germany in order to Get the course program with regard to the risk reduction profile a step further. Yes, and so we show now very Strong balance sheet also in our Life entities there. The third question was with regards to the reinsurance, which we have in And what are the net and what you can see in the Presentation where the overall net claims they already have there the reinsurance protection is embedded because it's after reinsurance. And so what is on our own result in Industrial Lines, it will be in between €60,000,000 €80,000,000 In Retail Germany, in between €20,000,000 €30,000,000 and it's across more Many lines which are affected by the floods. And yes, what is else?
Well, what we due in the group in terms of processes we have within the Talang's AG Reinsurance company, and there we have short tail cover for the group as a whole. And this leads to this overall very good net claims situation Given that the gross claims are so much higher. I hope this answers your question. Thomas?
Okay. Thomas, we can't hear you anymore. We hope your questions are answered. Thank you very much for taking questions. Thank you.
If you're collecting questions, Stuart, we have some questions via the web, so I would continue. We have questions from Michael Huttner of Berenberg. Michael asked for the Retail Germany result in Q2, 2, which look a bit weaker, dollars 20,000,000 EBIT versus $137,000,000 in Q1. How much should we adjust for additions To reserves and prepayment of the ZZR in these figures. Second question, also the 224% Solvency 2 ratio for the German Life units is very strong, up from 169% at full year 2020.
What does this mean for potential cash dividends from Retail Germany Life? 3rd question, The one risk is that the Texas REIT saw a late reserving of $58,000,000 in Q2. Could you say if this could be a risk for large losses going forward, would you look to adjust your large loss budget to reflect this extra risk? I want to add even more. HDI Global, a 4th one.
HDI Global is growing very strongly top line. When will we see the benefit in terms of EBIT, please? And first question, how much could inflation reduce your excess reserves
First of all, very good question. So let me start, while we have it here on the screen, This is the first one. Well, I would like to circle around your question here. So the overall EBIT target For Retail Germany is expected for the whole year to be above $240,000,000 overall and this is Where we expect this to clearly above $240,000,000 for the full year. So if we adjust if we now do Quarter by quarter reporting than we have in the Q1 this large extra investment income was already in the Q1.
And in the Q2, some balance sheet strengthening. To be honest, I haven't calculated that in detail. So the overall EBIT target for Retail Germany will be above €240,000,000 And also the 95, there will be lower than 95 as a combined ratio as a net combined ratio. 2nd, a question with regard to the dividend payments, potential cash dividends from Retail Germany. Overall, so Weka Germany is already as of today after Hanoverie, the 2nd biggest Cash provider for the holding company and it will remain.
So there will be a strong cash contribution from the segment for the holding. And there's just one thing worth noting, Michael, which is That there are some restrictions for dividend payments out of Life Companies, and they are related to the HGB relationship between market price liabilities and assets, whether you are allowed to pay dividend. And this level is not reached, I think, Within the next 2 years, 1, 2 years, this level is not reached. So, the main dividend stream from Retail Germany will We derive from the P and C entity if we were not to adjust for company values in the statements which we could do, but we do not intend to do that at this stage. So the first The tax freeze was the next question.
First of all, you're pretty right. There was a latest Reserving, so it's now €185,000,000 the Texas REITs and the large loss list. And just to give you the gross figures, it's about €400,000,000 So the net figure is just €185,000,000 In particular, in Reinsurance, we have seen some late incoming claims messages from the primary insurers. This is as there were business interruption claims related to it, yes, Which then have added up to this event. Do we look to adjust our large loss budget to reflect this ex So I think it's just a late reporting risk, which came in here.
The large loss budget already was increased during course of from 2020 to 2021 by 13%, I guess, for that. So we already have increased the large loss budget for but this was adjusted for both the increase in premiums and the higher burden of large losses. So then next question is HDI Global is growing strongly in the top line, but we will see the benefit terms in EBIT, please. We expect in the next 2 years better EBIT figures from HDI Global, overall, as a rule of thumb, if you normalize for in your spreadsheet, normalize for the investment income and Please take into account the lower interest rate environment. And second, if you then make the Rule of some one percentage point in the combined ratio year on year, Then you will be pretty close to what we expect from this division.
Then next question, How much could inflation reduce your excess reserves, please? This is a topic which is under strong investigation Here at Talanx in both Hanoverie and in the primary group, we did some extensive studies on that one. So first of all, please Note that inflation is included in our pricing models already. Part of the rate increases, which we asked for our customers were related 2 changed inflation assumptions, which we have to account for. 2nd, with regard to the reserving profile, there is implicit inflation already calculated in our claims reserves.
And maybe it's a good idea I can tell something I think in the Capital Markets Day on the implicit inflation assumption, which are already embedded in our reserving. But, obviously, we did some stress tests. And all in all, I just want to bring a cost that we feel very confident That we can deal with transition Transitorious, transitory inflation, which is the main scenario at the Capital Markets Day. It's also clear, if the inflation trend is going up and we would see, let's say, in the U. S, Continuously, 3% and in Europe, above 2%.
Then further price increases in the business Would be necessary, in particular, in the long tail lines of business. So I'm going a little bit more because I really like that question. If you go even further into detail with regard to inflation, Then you should not draw your attention to the overall market inflation. So we observe Inflation line by line. So, just as an example, if you go to Doctors' mail practice, although met mail, there you have a much higher inflation than in the normal market.
So therefore, the different Okay. This was a lengthy answer, sorry, but you see I liked your question. It's really a topic where close attention is needed.
There is one more web question, Carson, if you'd like to read that out.
Okay. Thanks for the hint. So we have a question of Paris Satyrthonis of Exane BNP. Normalizing or actually, it looks like it's a couple of questions. The first one, normalizing the Industrial Lines Combined ratio for Q2 reserve releases results to a combined ratio of around 100 and 2%.
Any losses worth flagging during Q2 or is this just volatility? 2nd, given reserve releases of $44,000,000 in Industrial Lines in Q2, can we assume that you are rather comfortable with the level of reserve buffers? Or will you continue to add to Industrial Lines reserves going forward? 3rd one, can you discuss Retail Germany SME profitability? And if possible, explain where the midsized large losses in Retail Germany are coming from?
And 4th question, can you quantify the economic benefits Of the recently announced 3rd party asset management agreement with Frankfurt and Liebmann.
Yes. Okay. A Series of questions. First of all, profits from winding up outstanding claims at Retail International. So what we do there and This is really the reason why I want to we want to disclose a little bit on our comfort on reserving.
This is really A normal volatility quarter over quarter, so you don't have to worry that this is a sign of worsening business and so on. So I would like to give you comfort on that one. That are the first two questions. We are Are we already comfortable with the level of reserve buffers or volatility buffers in Industrialize? Not yet, but we are improving quarter to quarter.
So I'm positive on Development must be or not yet there with regards to Industrial Lines. C, can you discuss Retail Germany profitability SME profitability, the overall target is a 95 combined ratio. Obviously, also with small and medium enterprises, there is some volatility. And if you are growing fast, Then at the beginning, it's quite normal that the combined ratios are slightly higher, but they are well below 100%. So in terms of we are ready to invest a little bit into growth.
If you take the last year, obviously, Due to the business closure claims, the combined ratio was last year due to corona above 100%. But this year, it should be well below 100%. Not yet at 95%, but in the long run we expect it to be there. So the 3rd and then Dee, can you quantify the economic benefit of the recently announced 3rd party asset management? Yes.
We are very proud that we could close the deal with Frankfurt and Leben and that we are now administering, not managing More than $10,000,000,000 assets from them. And this will help us to scale our infrastructure in Asset Management. And I think as you're all working in that area, you know with sustainability reporting what's going on. So the costs on reporting on assets will increase substantially here. And what we and We are now teaming up here with Frankfurt Allem.
And this will really help us also Not only we will have just a small profit going forward out of this business, but I think going forward, the Strategic benefit is that we can that we will have Synergies in investing, in extending the infrastructure to all the sustainability reporting, which is required going forward. So, it's a very positive deal and we are really happy about Trust what we perceive in the relationship with Banco DO LEAP.
Thank you very much, Paris, and all the best for your new professional endeavor.
There are no further questions at this time, and I would like to hand back to Doctor. Jan Wieker for closing comments. Please go ahead.
Yes, let me just summarize once again what we have discussed today. We had a very Strong first half year with strong growth figures and a strong bottom line. And this is why we have increased our outlook despite the flood events which have taken part in Germany. And what I also want to mention is that we will have Some changes here in our Investor Relations department. During the course of this earnings presentation, you heard Quite often the word Bernd in the context of large loss event.
And yes, but it's not the only context because Bernd will be the Successor from Carsten Wehrle as Head of Investor Relations. And to confuse you even more, we have more than 1 band In our Investment Investor Relations department, we also have Bernd Gade, who will continue to work with us here. So first, let's go to so I really want to mention that you should not keep in mind Bernd in the context of a large loss Yes. He will be he will work for value contribution on behalf of you. And we will try to Continue the very good work provided by Carsten and his team in the Investor Relations during the course of the last 10 years.
And I wish really you very good luck, Bernd, with doing this Additional responsibility, which you will take care in addition to the responsibility of M and A within the group. Now let's come to Carsten. Carsten has been the face to the capital market for now or close to a decade here. So already supported and the going public of Talanx. And I'm sure you have perceived him as a trustworthy person to discuss this when it comes to the figures of Talang's.
But Karsten has been more than that. He has also been played an important role within our In order to force this company to take a capital market view on the development in the various business segments. And Carsten has really contributed a much I can just can say that out of the view of a business division responsible person, which I was when I was heading Retail Germany always discussing with me on what is needed for capital markets in term improving returns and Using risk and it was really a great contribution with Carsten F. Maest. Carsten is leading us because he used to set up his own business And I wish him really all the best.
We will stay in close contact with him and we will have a party as of today. And so, this is what I want to say to close this call. And once again, thank you, Carsten, and welcome to Bernd.
Thank you very much.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.