Talanx grows its premium in the first nine months – robust Group net income despite heavy burden of large losses

The losses from hailstorm “Andreas” totalling EUR 119 million affected the Industrial Lines, Retail Germany and Reinsurance divisions. Primary insurance business was impacted to the tune of EUR 55 million, while the loss on the reinsurance side amounted to EUR 64 million. It should also be noted that the first nine months of 2012 were influenced by a positive special tax effect that no longer applies in 2013 and is reflected in Group net income in the third quarter.

In the third quarter, gross written premium grew by 2 percent to reach EUR 6.4 (6.3) billion. The underwriting result deteriorated by 13 percent to –EUR 512 (–452) million. Investment income fell by 12 percent to EUR 937 (1,068) million. The operating profit (EBIT) contracted to EUR 344 (461) million. The combined ratio deteriorated to 100.6 (95.4) percent. Group net income declined by 39 percent to EUR 121 (197) million.

Shareholders' equity (excluding non-controlling interests) as at 30 September 2013 was EUR 168 million lower relative to the position as at 31 December 2012 due to valuation effects in the investments. The Talanx Group is nevertheless very robustly capitalised. The Solvency I ratio stood at 212 percent at the end of September.

The sale of 8,200,000 shares of Talanx AG by Haftpflichtverband der Deutschen Industrie Versicherungsverein auf Gegenseitigkeit (HDI V.a.G.) increased Talanx’s free float by around EUR 200 million at the beginning of July, or by 3.2 percentage points to 14.4 percent. In doing this, HDI V.a.G. strengthened Talanx AG’s position on Germany’s MDAX stock index.

Business development of the divisions
Gross written premium in the Industrial Lines division grew by 10 percent in the first nine months to EUR 3.1 (2.8) billion. Adjusted for currency translation effects, growth stood at 11 percent. The premium increases derived primarily from growth in foreign markets and premium adjustments in Germany. The underwriting result amounted to –EUR 83 (69) million. The decline was due to the heavy burden of natural catastrophe losses incurred again in the third quarter as well as an unusual accumulation of mid-sized claims just under the large loss threshold. From a nine-month perspective, there was a strain associated with the additional reserves constituted in the first quarter at HDI-Gerling in the Netherlands. Altogether, this pushed the combined ratio higher to 106.2 (94.3) percent. Investment income fell by 8 percent in the low interest-rate environment to EUR 167 (181) million. The operating profit (EBIT) in Industrial Lines consequently came in at EUR 60 (212) million. The contribution to Group net income contracted to EUR 34 (134) million.

In the third quarter of 2013 gross written premium improved on the comparable quarter of the previous year by 21 percent to reach EUR 729 (602) million. The underwriting result stood at –EUR 72 (10) million. Investment income amounted to EUR 59 (68) million, while the operating profit (EBIT) declined to –EUR 18 (55) million. The contribution to Group net income decreased to –EUR 12 (35) million.

In the Retail Germany division gross written premium climbed 3 percent to EUR 5.2 (5.1) billion. Growth was driven by a moderate increase in life insurance written by the bancassurance companies and a stable development in the property/casualty lines despite the implemented premium adjustments and portfolio rehabilitation measures.

The underwriting result was on a par with the previous year at –EUR 1.1 (–1.1) billion. Investment income rose by 7 percent to EUR 1.3 (1.2) billion, particularly due to the realisation of hidden reserves to finance the additional reserve for policies with guarantees (Zinszusatzreserve) that life insurers are required to constitute under German commercial law. The combined ratio improved slightly to 101.6 (102.3) percent despite the large loss expenditure. The operating profit (EBIT) increased to EUR 111 (64) million, while the contribution to Group net income fell to EUR 63 (106) million owing to deferred tax income included in the result for the previous year.

In the third quarter of 2013 gross written premium grew by 2 percent relative to the corresponding quarter of the previous year, rising to EUR 1.6 billion. The underwriting result improved to –EUR 397 (–411) million. Investment income increased to EUR 447 (423) million. The operating profit (EBIT) amounted to EUR 21 (–9) million. The contribution to Group net income stood at EUR 12 (56) million.

The Retail International division generated very substantial growth in the first nine months, particularly due to the acquisitions in Poland. The two companies Warta and TU Europa are included in full in the financial statement for the first nine months. In the comparable period of 2012 TU Europa was consolidated for four months and Warta for three months. Against this backdrop gross written premium surged 40 percent to EUR 3.1 (2.2) billion. The gains derived from an increase of 31 percent in property/casualty business to EUR 2.1 billion, with the Polish companies the main contributors here. Life insurance grew by 65 percent to EUR 1.0 billion. The majority of the growth comes from the strategic target markets.

The underwriting result improved to EUR 22 (–25) million. This was assisted by the relatively low combined ratio in Poland, although the reduced burden of large losses compared to the same period of 2012 as well as steps taken to boost the profitability of motor business in Turkey and Brazil were also factors here.

Investment income climbed 7 percent to EUR 214 (201) million. The operating profit rose to EUR 157 (75) million, while the combined ratio decreased to 95.8 (97.8) percent. The contribution to Group net income amounted to EUR 93 (39) million – an increase of 139 percent relative to the previous year's period.

In the third quarter of 2013 gross written premium grew by 9 percent relative to the corresponding period of the previous year to reach EUR 982 (897) million. The underwriting result stood at EUR 5 (-4) million. The operating profit (EBIT) totalled EUR 44 (23) million, while the combined ratio stood at 97.6 (96.1) percent. The contribution to Group net income amounted to EUR 27 (8) million.

Gross written premium in Non-Life Reinsurance climbed by a modest 1 percent to EUR 6.0 billion – or 3 percent adjusted for currency translation effects. The improvement of 44 percent in the underwriting result to EUR 245 (170) million more than offset the decline in investment income, which fell to EUR 600 (730) million owing to the elimination of special effects in unrealised gains. The operating profit (EBIT) rose by 4 percent to EUR 833 (797) million. The contribution to Group net income was stable at EUR 247 (249) million.

In the third quarter of 2013 gross written premium increased by a modest 2 percent to EUR 1.9 (1.8) billion. The operating profit (EBIT) totalled EUR 266 (349) million. The contribution to Group net income contracted to EUR 80 (107) million.

Life/Health Reinsurance boosted its gross written premium to EUR 4.6 (4.4) billion in the first nine months, an increase of 4 percent relative to the corresponding period of the previous year. Adjusted for currency translation effects, growth stood at 7 percent. The underwriting result decreased to –EUR 297 (–238) million. The operating profit (EBIT) fell to EUR 140 (227) million and Group net income retreated to EUR 66 (89) million. The negative effect reflected in the underwriting result and hence in the operating profit (EBIT) and Group net income was due to losses incurred in Australian disability business. The previous year's result had also been disproportionately high owing to special effects.

In the third quarter of 2013 gross written premium contracted by 9 percent to EUR 1.5 (1.6) billion. The operating profit (EBIT) came in at EUR 32 (75) million. The contribution to Group net income amounted to EUR 26 (28) million.

Outlook 2013
Talanx remains cautiously optimistic that it will be able to achieve Group net income after taxes of around EUR 700 million for 2013. Despite a market environment that remains challenging, Talanx expects gross premium growth of at least 4 percent at constant exchange rates. Net return on investment is expected to be above 3.5 percent in 2013. The Group anticipates a return on equity in 2013 of around 10 percent, despite the inflow of equity from the IPO and ongoing low interest rates. This outlook assumes that any further major losses will be within the expected range and that there will be no turbulences to the currency and capital markets. The target of paying out 35 percent to 45 percent of IFRS Group net income as dividends has remained unchanged.

Targets 2014
From today’s perspective, Talanx is looking to generate Group net income of at least EUR 700 million for the 2014 financial year. Taking into account the gain on disposal from the reduction of its stake in Swiss Life in 2013, the company therefore expects a significant improvement in its operating performance in the coming year. This target is conditional upon constant exchange rates and the absence of adverse developments on capital markets and also assumes that expenditure on large claims remains within the large loss budget, which has been revised upwards appreciably. Talanx is raising the budgeted amounts for 2014 to EUR 185 (80) million in primary insurance and EUR 670 (625) million on the reinsurance side.

Key figures from the Talanx Group income statement, 9M 2013, consolidated (IFRS)

Key figures from the Talanx Group income statement, Q3 2013, consolidated (IFRS)