Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Talanx Analyst Call Six Month 2021 Results Conference Call. I would now like to turn the conference over to Carsten Werle, Head of IR. Please go ahead.
Yeah, thank you, Stuart. Good morning from Hannover. This is the Talanx Results Call for the H1 of the year. I'm here together with Dr. Jan Wicke, 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 webpage, including the financial data supplement that we published for the second time this quarter. With these introductory remarks, I'd like to hand over to Jan. The floor is yours.
Well, thank you, Carsten, good morning, everyone, 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 halfway back into a normal life for all of us. Let me start with a summary on how our group performed in the first six months. If we could turn to page two, please. First of all, I really have to state, I'm really happy to present you such good results, 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 H1 of the year. That's growth in all segments. If we would adjust it for currency changes, we could even report a 13% growth rate.
The technical performance of our business is strong. The combined ratio is below 96% in the first six months, whereas the previous year was heavily affected by COVID claims. If we adjust for COVID, also we see an improvement in the combined ratio reflecting the strong technical performance in the group. This translates to a group net income of EUR 546 million for the H1 year, 44% out of the primary insurance group. In terms of our key performance indicator, the return on equity is above 10.5%, as you can see on the page, and thereby clearly above our threshold of 8%. The solvency ratio is very robust, 210%. There is a question about the outlook going forward.
With regard to the outlook, we have to take into account that we had a large loss event, a flooding event in Germany called Bernd, which will impact our net income by roughly EUR 150 million. 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 EUR 900 million-EUR 950 million. That is good news. Let me now run you a little bit through the highlights of our six months figures. If we go to page four. First of all, the top line growth, where does it come from? The top line growth is derived from P&C reinsurance with more than EUR 1 billion and industrial lines and Retail International, but also Retail Germany is growing.
What you can see here on the page is that the operating result is highly affected by the swing in the technical result, P&C. You see we have EUR 481 million positive result, whereas the last year was -EUR 160. This is more than EUR 500 million, or even more than EUR 600 million swing in the technical result, what you can see here, which has resulted in such a good overall bottom line result going forward. Let's now go a little bit to page six, where we have tried to give you something like a normalized result for the H1 year by the way of excluding extraordinary items. One is still COVID. COVID has affected negatively the H1 year by EUR 72 million in the bottom line, EUR 222 in the EBIT.
This was due to COVID claims of EUR 278 and offsetting effects where we account for the lower claims frequencies in lines like motor insurance and so on, which are related to COVID. All in all, this results then in EUR 222 million negative EBIT contribution due to COVID. Our colleagues from Hannover Re have already reported that due to a restructuring of a reinsurance contract in North America, there was a one-off of EUR 129 million positive in the EBIT, which has to be excluded when accounting for so-called normalized results. What do you have to keep in mind when seeing now EUR 566 million as a normalized result for the H1 year? Please keep in mind that in particular in Retail Germany, we have decided to realize extraordinary gains already during the H1 of the year in order to get the contributions to the ZZR that are done.
Please keep in mind that the ordinary investment income is a little bit overstated in the H1 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 H1 of the year. If we now would go into more detail with regards to the COVID 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 EUR 263 million during the H1 of the year.
In the Q1, these claims were coming from the U.S., it was more or less a result from the death toll of Donald Trump's COVID policy, which had to be paid. In the Q2, there's less mortality in the U.S., the vaccination campaign of Joe Biden was successful. There are new claims which are related to South Africa and Latin America, which we see here in the result. Also worth noting is that the EUR 12 million negative in Retail International as COVID claims, that EUR 11 million out of this EUR 12 million are related also to excess mortality in Poland and in Latin America. All in all, COVID is now seen in excess mortality.
If we ask our researchers who are doing research on pandemic situations, we can see a clear correlation between vaccination campaigns and vaccination success in the countries, and vaccination quotas and deaths. Everybody who's now promoting more vaccinations in the population is pretty right. We can see that in our figures, too. On the positive side of COVID, we have also offsetting effects. Lower claims frequency, which are in particular beneficial for Retail Germany and Retail International, as you can see here. What we calculate here is that we take normal claims frequency and adjust our figures for that one, the positive effect overall would be EUR 88 million during the H1 of the year. If we now add up those figures, the overall negative impact, not in the EBITDA, is EUR 222 million, and in the net income, EUR 72 million.
If we now go to page number 10. There you have an overview on the combined ratios of the group. Overall, the combined ratio of the group is 95.9%, which is clearly below last year's figures, which were heavily impacted by COVID claims, business interruption, credit protection, and event protection insurance, which were the majority of the COVID claims. If we were to exclude COVID, then there is an improvement from 97.4%- 96.5% during the H1 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. With regard to reinsurance and this very good combined ratio of 96%, I think the colleagues of Hannover Re have explained that already in detail.
I do not have to explain that further. With regard to Retail International, there we can see that best performer in South America is Chile currently, with 94.5%. In Europe, it was a little bit difficult, given that we had some extraordinary effects in Italy. I would say WARTA with 92.7% is performing best within our European countries. Let's now go a little bit to the segment and explain there in more detail what was going on. First, with regard to Industrial Lines, we see strong growth. This strong growth is derived from our growth initiative, HGS, HDI Global Specialty, with a really very strong growth, but also from growth in liability and property lines. Second, the technical performance is there is a further improvement. In the medium term, we have adjusted our target that we want to achieve a 95% combined ratio.
Medium term, year-over-year, an improvement by 1% going forward. 98% should be achieved this year and should be better than next year and so on. This is just a rule of thumb. Please keep in mind, industrial lines business by nature has a certain kind of volatility. 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. For the whole year, we expect slightly lower investment return also in this segment. We go to Retail Germany. Maybe we can go already to the next page and start with the P&C in Retail Germany.
What we can see in P&C is the growth again, and this growth is derived from the SME growth initiatives, where we see an 11% increase in gross written premium in the small and medium-sized enterprises and self-employed and professionals. 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 COVID crisis with these business closure insurances where we paid, and now we were rewarded with additional contracts. We are very positive and happy about this development. With regards to the overall very good results, we have decided for a balance sheet strengthening in the segment Retail Germany in both in P&C and in life.
If we turn to the next page on life, there you can see that this balance sheet strengthening is also reflected in an increased Solvency II ratio for the German Life entity, which now stands without transitional measures at 224%, which is a very good result, and which underlines one of the targets of the Kurs programme, which was to de-risk German Life and to bring that into good shape. The other targets with regard to the Kurs programme, achieving an EBITDA above EUR 240 million and delivering on a combined ratio below 95%. We really want to confirm those targets, or the division is also convinced that they will outperform on those targets. A very positive overall development here. If we 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 is just a rebound from previous year during COVID, due to the lockdowns, the life gross written premium was heavily affected. This is just a rebound effect. In non-life, we are growing and it's worth mentioning the fantastic development at WARTA, also that we have some positive effect by Amissima as integration, which was accounted for since April, also in the figures. Overall, strong growth in both segments. The technical result is also very good. The combined ratio stands at 92.8%, which is obviously also a little bit supported by COVID effect. I think Retail International has a strong track record with regard to technical results, and this is also reflected.
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. 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 Hannover Re already have explained that in all details, but just mentioning two things. One is the gross figure, 10%. Second, if you see the development of the operating result, which is really strong, and we are happy to see such a strong profitable growth in Hannover Re. Let's now come to the investment income, which is on page 19.
The ordinary investment income is up 10%. This is partly driven by significant private equity gains, but also driven by an increased asset under management. Second, we have a strong increase in the extraordinary investment income. This, I really want to draw your attention to that one. We already did that in the Q1, is driven that we have EUR 400 million extra extraordinary gains in German Life in order to build up the annual ZZR. This is done now for the whole year, there won't be so much extraordinary gains going forward in that segment. Therefore, please adjust that in your earnings spreadsheets going forward in order to avoid wrong expectations. The net return on investment, which you see here in the H1 year, is 3.3%. For the whole year, we expect it to be around 2.7%.
If you now go now to the next page on the shareholders' equity. We have paid our dividend in the H1 year, the growth is rather small with regard to the shareholders' equity. If you then go on the next page to 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 own funds, but also in the SCR, given that we are growing pretty fast. This leads to the small reduction, but on a very satisfying level, so that I don't have any concerns with regard to 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 4.5 billion and EUR 5.5 billion in insured loss.
Our group will have to cover a gross claims volume of clearly above EUR 600 million, which will then translate, due to our own reinsurance, to a net claims slightly above EUR 300 million. Even if the gross claims will amount to EUR 1 billion or EUR 900 million, the net claims will remain at that level as we have a very well-thought-through reinsurance coverage for the group for both Hannover Re as well as for the Talanx Primary group. This EUR 300 million net claims then translates into a net income effect of EUR 150 million, approximately EUR 150 million. This is due to the fact that in between EUR 200 million-250 million of the net claims, or Hannover Re has reported EUR 200 million-250 million net claims, which translates then here in this chart into EUR 100 million-125 million net claims accounted for minorities.
What you see here with this net claims EUR 300 million is also net of minorities. We have some tax effects also to be taken into account. That is then to be translated in a net income effect of roughly EUR 150 million, what we expect currently. Next to that, we had some large losses also. I just want to highlight there's a riot in South Africa, which are also taken into account when we have adjusted our outlook. Where did we adjust our outlook? Due to the very strong H1-year, we have adjusted the group net income to EUR 900 million-EUR 950 million. We expect, therefore, the return on equity in between 8.5% and 9%.
Obviously, like always, there is this caveat that this takes into account that large losses will be within our budget and that we don't have turmoil at the capital markets or currency markets, going forward. Let me summarize. We've had a very strong H1 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 combined ratio below 96%. All in all, the management is very confident that we can achieve group net income in between EUR 900 million-EUR 950 million to the end year and show some nice growth figures also. Well, now I'm open to take your question.
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 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 with the question asked by telephone and continue with the webcast questions. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one on the telephone or type a question using the chat box. The first telephone question today is from the line of Thomas Fossard from HSBC. Please go ahead.
Oh, yes. Good morning, everyone. Hope you're doing well. 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 all the market benefited from a 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 on the ground. The second question would be related to the various balance sheet strengthening measures that you have taken in Q2. We know that actually you're willing to increase your 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.
Actually, if you'd 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. 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 protected for such a type of event in Europe, and what is your retention? Thank you.
Yeah. Let's start with the competitive landscape in motor insurance, Germany. Obviously, competition is increasing due to very benign claims frequency due to the lockdown measures here in Germany. Some competitors have given premium refunds. Yeah. Which has increased, obviously, the level of competition. Overall, I have the feeling up so far, and it's very early to judge on that, but because the renewal will start in October, yeah. So far that the market is rather disciplined. This may change till October. I think now everybody is making up his plans how to position the company in the renewal, and maybe your question is a little bit early. Up so far, yes, there is more competition, but overall, from my point of view, it's still disciplined. Second, the various balance sheet strengthening measures, the update.
With regard to the volatility buffers, we will give an update on our reserving policy at the Capital Markets Day. This will not only contain what we have done so far, but we also will show what will be the reserving policy going forward. I'm very confident that we can give you a very good comfort level on where we are standing and what's going on. You wanted to know how satisfied I am so far with the progress which has been made. I'm very satisfied with the progress which has been made, and we will show you on that one. Let's wait till 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&C reserves.
What we've done also during the course of this quarter, we have also strengthened the life balance sheet in Retail Germany. It is in order to get the Kurs programme with regard to the risk reduction profile a step further. We show now very strong balance sheet also in our life entities there. The third question was with regard to the reinsurance, which we have in place for our primary insurance. What you can see in the presentation were the overall net claims. There, the reinsurance protection is embedded because it is after reinsurance. What is on our own result in industrial lines, it will be in between EUR 60 million-EUR 80 million in Retail Germany, in between EUR 20 million-EUR 30 million, and it is across many lines, which are affected by the floods. What else?
Well, what we do in the group in terms of processes, we have within the Talanx AG, reinsurance company. There we have shorter cover for the group as a whole. 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, it's okay?
Thomas, we can't hear you anymore. We hope your questions are answered. Thank you very much for your questions.
Yeah. Thank you.
As a reminder, if you'd like to ask a telephone question, please press star followed by one on your touch tone telephone. You may also write your web questions in the chat box located on the webcast page.
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 asks for the Retail Germany result in Q2, which look a bit weaker at EUR 20 million EBIT versus EUR 137 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 II ratio for the German Life unit is very strong, up from 169% at full year 2020. What does this mean for potential cash dividends from Retail Germany Life? Third question. The one risk is that the Texas freeze saw latest reserving of EUR 58 million 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? Even more.
A fourth one, HDI Global is growing very strongly top line. When will we see the benefit in terms of EBIT, please? Fifth question, how much could inflation reduce your excess reserves going forward?
First of all, very good questions. Let me start, while we have it here on the screen, with the first one. Well, I would like to circle around your question here. The overall EBIT target for Retail Germany is expected for the whole year to be above EUR 240 million. Overall, this is where we expect this to end. Clearly above EUR 240 million for the full year. If we now do quarter-by-quarter reporting, we have in the Q1, this large extra investment income was already in the Q1. In the Q2, some balance sheet strengthening. To be honest, I haven't calculated that in detail. The overall EBIT target for Retail Germany, it will be above EUR 240 million, and also there will be lower than 95% as a net combined ratio.
A question with regard to the dividend payment, potential cash dividend from Retail Germany. Retail Germany is already, as of today after Hannover Re, the second-biggest cash provider for the holding company. It will remain, there will be a strong cash contribution from the segment for the holding. 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 dividends. This level is not reached I think within the next one, two years. This level is not reached. The main dividend stream from Retail Germany will be derived from the P&C entity.
If we were not to adjust for company values in the HGB statements, which we could do, but we do not intend to do that at this stage. The Texas Freeze was the next question. First of all, you're pretty right. There was a latest reserving, it's now at EUR 185 million, the Texas Freeze in the large loss list. Just to give you the gross figures, it's above EUR 400 million. The net figure is just this EUR 185. 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, which then have added up to this event. Do we look to adjust our large loss budget to reflect this extra risk? I think it's just a late reporting risk, which came in here.
The large loss budget already was increased during the course from 2020- 2021 by 13%, I guess, for that. We already have increased the large loss budget. This was adjusted for both the increase in premiums and the higher burden of large losses. Next question is HDI Global is growing strongly in the top line. When we will see the benefit terms in EBIT, please? We expect in the next two years better EBIT figures from HDI Global. Overall, as a rule of thumb, if you in your spreadsheet normalize for the investment income and please take into account the lower interest rate environment. Second, if you then make this rule of thumb one percentage point in the combined ratio year-on-year, then you will be pretty close to what we expect from this division.
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 Hannover Re and in the primary group. We did some extensive studies on that one. 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 to changed inflation assumptions, which we have to account for. Second, with regard to the reserving profile, there is an implicit inflation already calculated in our claims reserves. 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. Obviously we did some stress tests.
All in all, I just want to bring across that we feel very confident that we can deal with 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. 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. We observe inflation line by line. Just as an example, if you go to med mal, there you have a much higher inflation than in the normal market.
Therefore, the different lines there have already included different inflation assumptions. This was a lengthy answer. Sorry. You see, I liked your question. It is really a topic where close attention is needed.
Got it.
There is one more web question. Carsten, if you'd like to read that out.
Okay. Thanks for the hint.
Sure.
Yeah. We have a question of Paris Hadjiantonis of Exane BNP Paribas. Actually, it looks like it's a couple of questions. First one, normalizing the industrial lines combined ratio for Q2 reserve releases results to a combined ratio of around 102%. Any losses worth flagging during Q2, or is this just volatility? Second, given reserve releases of $44 million 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? Third one, can you discuss Retail Germany SME profitability and, if possible, explain where the midsize large losses in Retail Germany are coming from? Fourth question, can you quantify the economic benefits of the recent deal on third-party asset management agreement with Frankfurter Leben?
Yeah. Okay. A series of questions. First of all, profits from winding up outstanding claims at Retail International. What we do there, and this is really the reason why we want to disclose a little bit on our comfort on reserving. This is really a normal volatility quarter of quarter. You don't have to worry that this is a sign of worsening business and so on. I would like to give you comfort on that one. That are the first two questions. Are we already comfortable with the level of reserve buffers or volatility buffers in industrial lines? Not yet. We are improving quarter to quarter. I'm positive on the development, but we are 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 is quite normal that the combined ratios are slightly higher, but they are well below 100%. 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 COVID above 100%. This year, it should be well below 100%. Not yet at 95%, but in the long run, we expect it to be there. The third, and then D, can you quantify the economic benefits of the recently announced third-party asset management? Yeah, we are very proud that we could close the deal with Frankfurter Leben and that we are now administering, not managing, more than EUR 10 billion assets from them.
This will help us to scale our infrastructure in asset management. I think as you're all working in that area, you know with the sustainability reporting what's going on. The costs on reporting on assets will increase substantially here. We are now teaming up here with Frankfurter Leben, 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 will have synergies in investing, in extending the infrastructure to all the sustainability reporting which is required going forward. It's a very positive deal and we are really happy about the trust, what we perceive in the relationship with Frankfurter Leben.
Thank you very much, Paris, and all the best for your new professional endeavor. Stuart?
There are no further questions at this time. I would like to hand back to Dr. Jan Wicke for closing comments. Please go ahead.
Yeah. Let me just summarize once again what we have discussed today. We had a very strong H1 year with strong growth figures and a strong bottom line. This is why we have increased our outlook despite the flood events which have taken part in Germany. 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. Yes, but it is not the only context because Bernd will be the successor from Carsten Werle as Head of Investor Relations. To confuse you even more, we have more than one Bernd in our Investor Relations department. We also have Bernt Gade, who will continue to work with us here.
First, I really want to mention that you should not keep in mind Bernd in the context of a large loss event. Yeah. He will work for value contribution on behalf of you. 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. 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&A within the group. Now, let's come to Carsten. Carsten has been the face to the capital market for now close to a decade. He has already supported 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 Talanx.
Carsten has been more than that. He has also played an important role within our company in order to force this company to take a capital markets view on the development in the various business segments. Carsten has really contributed much. I 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 terms improving returns and reducing risk, and it was really a great contribution which Carsten has made. Carsten is leaving us because he is 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. This is what I want to say to close this call.
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.