Investor Relations Reporting Key figures Alternative performance measures (APM)

Alternative performance measures (APM)

The Talanx Group uses various financial performance measures as part of its financial reporting. Some of these measures are so-called alternative performance measures (APMs), which means that they are not defined or explicitly included in the accounting framework that we report under.

This document defines these APMs used by Talanx and ensures that the requirements of the “Guidelines on Alternative Performance Measurements”, published by the European Securities and Markets Authority (ESMA), are implemented in an appropriate way.

The guidelines intend to promote the usefulness and transparency of APMs included in prospectuses or regulated information. Adherence to the guidelines will improve the comparability, reliability and/or comprehensibility of APMs. The APMs used by the Talanx Group supplement those measures that are documented and published in accordance with International Financial Reporting Standards (IFRS). An APM is defined as a financial measure of historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework, or can be calculated from it directly without adjustments.

The explanation and definition of APMs below also includes some measures that are defined or specified in the financial reporting framework (and are therefore not APMs) to help readers understand and derive the APMs.

The most comprehensive presentation of key performance indicators, both those defined by the accounting framework and the APMs, can be found in the Financial Data Supplement, which we publish quarterly, together with the annual and interim reports and the quarterly statements.

The Talanx Group uses the following APMs:

Definitions and use

Currency-adjusted insurance revenue growth

This metric looks at how much revenues would have increased (or decreased) had exchange rates remained unchanged between the two periods that are being compared; for this purpose the revenues of the current period are (re)calculated at the exchange rates of the previous period
Talanx Group uses this measure to assess how the local business has developed on its own merits, regardless of currency developments
We apply this measure in those of our businesses where a significant part of revenues are generated outside of Germany; these are Industrial Lines, Retail International, and Reinsurance

Combined ratio (property/casualty business)

The combined ratio has been a very common measure among insurance and reinsurance companies to measure the so-called technical profitability of the underwriting business in the non-life business (P/C: property and casualty), ie the profitability of that business excluding
- the investment return generated by investing the cash received from policyholders in financial or other instruments, to the extent that they are above the risk-free interest rate plus an illiquidity premium (this "risk-free" portion of the investment income is included in the combined ratio) and
- costs and income which cannot be directly allocated to the insurance contracts or group of contracts
The combined ratio is the sum of all costs directly related to an insurance contract (ie insurance losses, acquisition cost, administrative expenses and net income / net expenses from reinsurance contracts held) as a percentage of insurance revenue (gross, ie before reinsurance)
In other words, the combined ratio is the sum of the loss ratio and the expense ratio (see below)
The combined ratio can be calculated in two ways, by calculating the claims (after reinsurance) and the costs (before reinsurance) either on the insurance revenue before reinsurance costs ("net / gross") or on the insurance revenue after reinsurance costs ("net / net"). By default, we calculate the ratio in the primary insurance of the Talanx Group on the insurance revenue before reinsurance (net / gross)
The reinsurance costs include the premiums ceded to reinsurance as well as a margin for the insurance cover provided by reinsurance for the insurance risk associated with these premiums
A ratio of below 100% indicates a positive underwriting result, as allocated costs are lower than insurance revenue
As a consequence of the accounting transition to IFRS 17, it is our experience and our expectation that the discounting of technical liabilities, in particular, has a clearly positive effect on the combined ratio (ie lowering it relative to the ratios shown before the accounting change). This positive effect is, however, comes with the expense of unwinding the discounts in the insurance finance result, which over the years offsets the positive impact of the discounting. The specific implications depend on the corresponding movements in interest rates

Loss ratio

The loss ratio is the sum of
(1) claims incurred,
(2) other technical expenses,
(3) loss component (expected losses on the contracts) and
(4) the balance of income and expenses from reinsurance contracts held (net reinsurance result),
as a percentage of insurance revenue
Net expenses from reinsurance contracts held, in other words the net reinsurance result, includes
(1) premiums ceded to the reinsurer,
(2) the margin payable to the reinsurer for the protection
(3) payments received from the reinsurance company to cover loss expenses and
(4) a reimbursement by the reinsurer for the costs related to the contracts
The loss ratio provides an indication of how successfully technical risks are being underwritten
The loss ratio is typically the most material component of the combined ratio

Expense ratio

The expense ratio, or cost ratio, is the sum of
(1) administrative expenses
(2) distribution cost (“amortisation of insurance acquisition cash flows”) and
(3) commissions other than insurance acquisition cash flows,
in each case where attributable to insurance contracts,
as a percentage of insurance revenue (gross)
The cost ratio provides an indication of the efficiency of the services provided in the property/casualty areas

Adjusted Combined ratio based on insurance revenue after reinsurance expense (“net / net”)

In this version of the combined ratio, the denominator (insurance revenues) is net of reinsurance expenses, ie excludes the revenues ceded to the reinsurance company in return for the insurance coverage provided by the reinsurer
This version of the combined ratio is closer to the combined ratio used before the introduction of IFRS 17 per 1 January 2023, where the denominator of the ratio had been net earned premiums, ie premiums excluding premiums ceded to the reinsurer; net earned premiums, however, are not part of the disclosure in the income statement under IFRS 17 any more

Net return on investments for own risk

The net return on investments for own risk is the net investment income for own risk as a percentage of average investments for own risk
The ratio is used to evaluate the return on the company’s investments. Together with the underwriting result (net insurance service result) and the net insurance finance result, the result of investment determines the operating profit of an insurance company
The average for the investments for own risk is calculated by adding the value of the first and last day of the reporting period and dividing that total by two
The numerator of the ratio, where it does not refer to a 12-month period, is annualised, by making the assumption that the net investment income was earned in a 12-month period, ie by multiplying three months by four, six months by two etc.

Ordinary investment result

The ordinary investment result comprises those components of the investment result for own risk which are viewed as regular income (for instance, payments of interest income, dividends, rent), and related costs
The ordinary investment result also includes, as an expense, the regular depreciation of investments, in particular of real estate and infrastructure investments

Extraordinary investment result

The extraordinary investment result comprises those components of the investment result for own risk which do not occur regularly (for instance, gains and losses which occur upon selling a financial instrument, impairments of investments or reversals of such impairments), and related costs
The extraordinary investment result also includes investment gains and losses from fair value changes, so changes which result from market movements

Current return on investment

The current return on investment is the net investment income for own risk minus the extraordinary investment result, as a percentage of average investments for own risk
The ratio is used to evaluate the regular return on the company’s investments; the calculation therefore also includes those investment expenses which occur regularly but have not been included in the ordinary and the extraordinary investment result as defined above. These are the general administrative expenses to run our investment management operations (“other investment expenses”)
The average for the investments for own risk is calculated by adding the value of the first and last day of the reporting period and dividing that total by two
The numerator of the ratio, where it does not refer to a 12-month period, is annualised, by making the assumption that the net investment income was earned in a 12-month period, ie by multiplying three months by four, six months by two etc.

Group net income

Group net income is the consolidated net income for the year/reporting period (after financing cost on subordinated liabilities and taxes), which is attributable to shareholders of Talanx AG, ie which excludes net income attributable to non-controlling interests
Group net income is the Group’s main operational metric when it comes to providing an outlook for the bottom line result, typically of the current year and, at a late stage in the year, of the following year. It determines the ability to pay out dividends to Talanx shareholders (to the extent they are remitted or upstreamed to the dividend-paying entity) or to increase equity through retained earnings

Return on equity

The return on equity is the Group net income, as defined above, as a percentage of average equity excluding non-controlling interests
The numerator of the ratio, where it does not refer to a 12-month period, is annualised, by making the assumption that the Group net income was earned in a 12-month period, ie by multiplying three months by four, six months by two etc.
The return on equity ratio, or RoE, is a profitability ratio that measures the ability of a firm to generate profits from its shareholders’ investments
It is the Group’s most important operational management metric, and it is currently also the metric with the most significant impact on management’s variable compensation. The Group publishes return on equity targets for both Talanx Group and for its current four main operational divisions

Return on equity adjusted for net income impact from fair value through p&l (FVPL) assets:

Talanx Group is introducing this metric together with the introduction of the new accounting standard IFRS 9, which has become effective from 1 January 2023
The metric adjusts Group net income, as defined above, by changes in the market value of its investments where these changes affect the income statement (there are other market value changes that do not affect the income statement but are reflected directly in equity)
The purpose of the adjustment is to reduce the volatility of the return on equity as markets go up and down. The denominator of the ratio, ie shareholders’ equity, is not adjusted. We believe that to adjust the RoE for market value changes in the income statement gives investors a more predictable reflection of how the core business of Talanx, insurance and reinsurance, is developing over time
To reduce complexity and make the adjustment more transparent, we apply flat tax rates to the FVPL amount for each segment (25% for Industrial Lines, 32% for Retail Germany, 25% for Retail International and 23% for Reinsurance) and flat minority percentages for the two divisions with material minority shareholdings (50% for Reinsurance, 10% for Retail International)

New business value (life business)

The new business value is the contractual service margin recorded from new business in the life (&health) business, minus the loss component from new business, before reinsurance
The contractual service margin, CSM, is a key reporting requirement under the new accounting standard IFRS 17, where the so-called General Measurement Method (GMM) or the Variable Fee Approach (VFA, typically in the Life businesses) are applied; it reflects the expected future profits from the business written. These expected future profits are accounted for in the balance sheet and get released through the income statement over the lifetime of the insurance contracts
The loss component reflects the so-called onerous contracts, which means that at the point of underwriting they are expected to generate losses during their life time
As an operational management metric, it is used in Retail Germany Life and in the Life/Health Reinsurance segment to record the success of the new business policy appropriately

Some of the APMs listed here are also explained in the Talanx Group annual report (Annual Report 2023, page 49) and online glossary, which can be consulted as additional sources of information when classifying specific items. The APMs are predominantly Group operational management metrics and undergo regular performance reviews in both internal and external reporting. The resulting findings are taken into account as part of a strategy review process. We would like to point out that the comparability of APMs within the industry can be limited due to different calculation methods.