Talanx continues on track with 9M results

“Business performance was in line with our expectations despite significant large losses in the Industrial Lines Division and the absence of the one-off effects seen in the previous year. We are confident of reaching our earnings forecast of at least EUR 700 million in 2014”, said Herbert K. Haas, Chief Executive Officer of Talanx AG. “In 2015, we expect to generate Group net income of at least EUR 700 million despite a further significant increase in our large loss budget in the primary insurance business and the fact that interest rates are expected to remain at their historically low levels.”

While large losses in the Reinsurance Division almost halved year-on-year to EUR 242 (447) million, they rose in the Primary Insurance business to EUR 259 (221) million, largely due to another unusual accumulation of mid-sized and major cases of property damage. However, at Group level, the net burden of large losses declined to EUR 501 (668) million after above-average large losses from natural disasters in 2013.

The underwriting result was again impacted by the participation of policyholders in the increased net investment income recorded by German life insurers. As a result, it declined by 10.2 percent to –EUR 1.4 (–1.2) billion. By contrast, the combined ratio in composite insurance was virtually unchanged, at 97.7 (97.6) percent. At EUR 3.0 (2.8) billion, net investment income was up year-on-year despite the further decline in interest rates. The 6.5 percent increase was primarily attributable to gains realised in the primary life insurance business.

The increase in net investment income offset the decline in the underwriting result, so that operating profit (EBIT) remained stable at EUR 1.4 (1.4) billion. Like Group net income, last year’s EBIT also included the one-off effect of approximately EUR 100 million from the sale of Swiss Life shares. Adjusted for this effect, operating profit rose by around 13 percent in the first nine months of 2014. Earnings per share amounted to EUR 2.10 (2.09) as at 30 September 2014. The Talanx Group’s solvency ratio was 240.5 percent (31 December 2013: 210.2 percent).

The Group’s gross written premium rose by 5.4 percent to EUR 6.8 (6.4) billion in the third quarter of 2014, due in particular to growth in the Retail International and Reinsurance Divisions. The underwriting result decreased to –EUR 578 (–512) million as a result of the participation of life insurance customers in the higher investment income. Net investment income improved to EUR 1.0 (0.9) million on the back of higher disposal gains realised in the German life insurance business in particular. As a result, operating profit was up 27.6 percent on the prior-year period, at 439 (344) million. Group net income rose by 26.3 percent in a quarterly comparison to EUR 149 (118) million.

In July, the Group took advantage of the favourable interest rate and capital market environment and placed a senior benchmark bond with a volume of EUR 500 million. The cash inflow will be used principally for the reduction of credit lines and it allows a possible early redemption of existing bonds. In addition, Talanx subsidiary Hannover Re placed a subordinated bond with a volume of EUR 500 million in September. This was aimed at optimising the maturity structure of its outstanding hybrid capital.

Business development of the divisions
Premium growth in the Industrial Lines division amounted to 2.7 percent at the end of the first nine months of 2014. Gross written premium rose to EUR 3.2 (3.1) billion, largely driven by growth at foreign branches and subsidiaries. Adjusted for exchange rate effects, growth amounted to 3.8 percent.

The underwriting result amounted to –EUR 66 (–93) million due to the significantly improved run-off result. As a consequence, the combined ratio declined by 2.2 percentage points to 104.7 (106.9) percent. Net investment income increased by 25.1 percent to EUR 209 (167) million due to extraordinary income from the disposal of investments. As a result, EBIT rose to EUR 125 (50) million. The segment’s contribution to Group net income increased to EUR 85 (28) million.

The Industrial Lines Division recorded virtually unchanged premium income of EUR 716 (729) million in the third quarter of 2014. At –EUR 72 (–74) million, the underwriting result was almost the same as in the prior-year period; the combined ratio declined slightly to 115.0 (116.5) percent. Net investment income was likewise almost unchanged, at EUR 58 (59) million. The operating loss (EBIT) narrowed to –EUR 16 (–20) million and the contribution to Group net income improved to –EUR 4 (–13) million thanks to a decreased tax rate.

In the Retail Germany Division, premium income declined slightly to EUR 5.1 (5.2) billion. This decrease reflects muted customer demand in the life business and profitability-enhancing measures in car insurance. Gross written premium in life insurance declined by 2.2 percent to EUR 3.8 (3.9) billion. The Annual Premium Equivalent (APE) was down 2.8 percent year-on-year, at EUR 313 (322) million. Property/casualty lines almost matched the prior-year level, at EUR 1.3 (1.3) billion.

The underwriting result recorded in this division is dominated by the life insurers and declined by 11.9 percent to –EUR 1.3 (–1.1) million due to the participation of life insurance customers in net investment income. The combined ratio was virtually unchanged at 101.7 (101.6) percent despite the lower run-off result for property insurance. The segment’s net investment income improved by 8.4 percent to EUR 1.4 (1.3) billion, mainly due to the realisation of exchange rate gains on fixed-interest securities to finance the additional interest reserve. Operating profit was up slightly year-on-year, at EUR 119 (111) million. The division contributed EUR 72 (63) million to Group net income.

As for the first nine months, gross written premium for the third quarter decreased on the back of slight declines in the life and property lines, and amounted to EUR 1.5 (1.6) billion. Higher disposal gains lifted net investment income by 10.3 percent to EUR 493 (447) million. The underwriting result for the quarter was also impacted by the improvement in net investment income and decreased to –EUR 456 (–398) million. Due to the absence of significant losses from storm damage compared with the previous year, the combined ratio in composite insurance declined by 2.2 percentage points to 102.7 (104.9) percent. Operating profit rose by 4.8 percent to EUR 22 (21) million and the contribution to Group net income amounted to EUR 15 (11) million.

Gross written premium in the Retail International Division rose by a clear 5.5 percent, amounting to EUR 3.3 (3.1) billion after the first nine months. At constant exchange rates, premium growth would have amounted to 10.0 percent, which corresponds to EUR 128 million in premium income.

In Brazil, premiums increased by 13.1 percent excluding currency translation effects. By contrast, growth in euros was only 1.7 percent, at EUR 640 (629) million. The Mexican unit lifted its income in the local currency by 6.6 percent. After adjustment for exchange rate effects, it grew by 1.4 percent to EUR 133 (131) million. In Turkey, premium growth in local currency amounted to 21.7 percent. In euros, it rose by 2.9 percent to EUR 142 (138) million. Slower single-premium business in life insurance saw gross premiums in Poland decline by 10.4 percent after adjustment for exchange rate effects. Translated into euros, premium income declined by 9.8 percent to EUR 1.1 (1.3) billion. In contrast, the Italian company benefited from higher single premiums in the life insurance business, which lifted income to EUR 759 (490) million.

The underwriting result declined to –EUR 6 (23) million. This was due in part to policyholders’ participation in the higher net investment income recorded by the life insurance business and a slightly higher combined ratio for property insurance of 96.5 (95.8) percent. The positive cash flow from the healthy business performance led to higher investment portfolios, and hence to a 12.3 percent improvement in net investment income to EUR 241 (214) million. As a result, operating profit rose by 4.5 percent to EUR 164 (157) million. The contribution made by the division to Group net income was EUR 96 (93) million.

The segment recorded premium income of EUR 1.1 (1.0) billion in the third quarter. The underwriting result amounted to –EUR 20 (6) million. The combined ratio rose to 98.6 (97.6) percent. Net investment income grew by 25.0 percent to EUR 85 (68) million. Operating profit was down year-on-year, at EUR 40 (44) million. Accordingly, the contribution made by the division to Group net income declined slightly to EUR 22 (27) million.

The Non-Life Reinsurance segment recorded slight premium growth in the first nine months of 2014 amid ongoing strong competition and despite its selective underwriting policy. Gross written premium was up slightly (1.7 percent) on the prior-year figure, at EUR 6.1 (6.0) billion. Growth in local currency amounted to 3.2 percent. At 95.3 (95.0) percent, the combined ratio remained well within the target of below 96 percent. The underwriting result declined to EUR 224 (245) million, while net investment income improved to EUR 666 (600) million. The segment generated an operating profit of EUR 868 (833) million. Its contribution to Group net income rose to EUR 271 (247) million.

Premium income increased by 6.6 percent to EUR 2.0 (1.9) billion in the third quarter. Operating profit grew by 25.9 percent to EUR 335 (266) million. The segment contributed EUR 106 (81) million to Group net income.

Gross written premium in the Life/Health Reinsurance segment remained almost unchanged in the first three quarters, rising by 1.4 percent to EUR 4.6 (4.6) billion; after adjustment for exchange rate effects, income rose by 2.6 percent. The underwriting result amounted to –EUR 242 (–273) million on the back of profitability-enhancing measures, while net investment income was on a level with the previous year at EUR 461 (460) million. Operating profit improved by 44.5 percent to EUR 237 (164) million and the segment’s contribution to Group net income increased to EUR 86 (74) million.

Considerable premium growth of 14.1 percent in the third quarter offset the decline in income in the months before. Gross written premium for the quarter amounted to EUR 1.7 (1.5) billion. This also had a significant impact on operating profit, which rose to EUR 85 (34) million. The Life/Health Reinsurance segment contributed EUR 29 (27) million to Group net income.

Outlook 2014
Based on constant exchange rates, Talanx expects to generate year-on-year gross premium growth of 2 to 3 percent in financial year 2014, the bulk of which will come from the international markets. Based on the disposal gains realised in the first half of the year, the return on investment should be at least 3.4 percent in 2014, with by far the largest contribution coming from ordinary investment income. Talanx continues to aim for Group net income of at least EUR 700 million. The Group anticipates a return on equity of 9 to 10 percent for 2014. Achieving these targets is subject to the proviso that large losses remain within the bounds of our expectations, that there will be no disruptions to currency or capital markets, and that uncertainties relating to the continuing low interest rates and the German Life Insurance Reform Act (LVRG) do not materialise in a lasting negative manner. The goal of again distributing around 35 to 45 percent of Group net income as a dividend payment for the 2014 financial year also remains unchanged.

Targets 2015
The Group is aiming for net income of at least EUR 700 million for the 2015 financial year. Talanx is therefore expecting the underlying business performance to improve significantly despite a larger major loss budget – over EUR 100 million more than in 2014 – in the Primary Insurance business, a challenging capital market environment and the negative consequences of the German Life Insurance Reform Act (LVRG), the precise impact of which cannot be established at present. This target assumes that exchange rates remain constant, that there are no negative developments on the capital markets and that catastrophe losses are within the major loss budget, which Talanx has again adjusted upwards. The new figure is EUR 290 (185) million for Primary Insurance in 2015.

Key figures from the Talanx Group income statement, 9M 2014, consolidated (IFRS)

Key figures from the Talanx Group income statement, Q3 2014, consolidated (IFRS)