Talanx posts significant growth and a solid result in the first quarter

In the first quarter Talanx applied a number of amended and new IFRS standards. They provide inter alia for an adjustment (due to IAS 8) of previous year’s figures as well as of significant changes with respect to the recognition and measurement of the expense for pension plans with defined benefits (IAS 19). Group shareholders' equity took a charge of EUR 334 million as a consequence of initial application. Nevertheless, the Group's solvency ratio as at the end of the quarter remained virtually unchanged at 222 (31 December 2012: 225) percent, a level comfortably above statutory requirements.

Additionally, in mid-February Talanx issued a senior unsecured bond. The instrument with a volume of EUR 750 million was placed primarily with institutional investors in Germany and abroad and was several times oversubscribed. The proceeds were used principally to replace existing financing arrangements.

Business development of the Group
All four divisions boosted their business volume in the first three months of 2013. Gross written premium climbed by 11 percent (12 percent adjusted for currency translation effects) to EUR 8.5 (7.6) billion. Along with organic growth in all segments, this was driven by the consolidation of the TU Europa Group and the Warta companies in Poland, which were not included in the figures for the comparable quarter of 2012. The strongest growth was consequently delivered by the Retail International Division, with a gain of 63 percent. After adjusting for acquisitions, premium growth Group-wide in the first quarter came in around 7 percent. Net premium earned increased by 15 percent on the back of a higher retention – which climbed from 85.2 to 85.8 percent – to reach EUR 5.7 billion.

Talanx benefited from a sharply lower burden of major losses in the first three months. The associated expenditure decreased by EUR 75 million to EUR 13 million. As a result, the loss ratio (property/casualty) for the Group improved to 68.8 (70.3) percent. In conjunction with a stable expense ratio, the combined ratio consequently retreated to 95.0 (96.4) percent.

Investment income contracted by 9 percent to EUR 875 (961) million. Particularly crucial factors here were the elimination of positive special effects connected with the measurement of inflation swaps and ModCo derivatives in non-life and life/health reinsurance as well as the low interest-rate environment. The disposal gain of EUR 22 million booked in the first quarter from the sale of the Swiss Life shares, of which EUR 16 million accrued to investment income, failed to offset these effects.

Despite the improved underwriting result, the operating profit (EBIT) for the first quarter stood at EUR 516 (538) million owing to the reduction in investment income. Group net income after tax came in at EUR 203 (206) million, and hence remained stable on the very good level of the previous year's corresponding quarter.

Business development of the divisions
Gross written premium in Industrial Lines was boosted by 8 percent in the initial quarter to EUR 1.7 (1.6) billion. This development was driven both by growth at the subsidiaries abroad and by market hardening and portfolio rehabilitation successes in Germany. The loss experience recorded by the division was not, however, typical: whereas in the comparable quarter of the previous year major losses were incurred above all in lines where a large proportion of the business is reinsured, in the first three months of 2013 significant losses were concentrated on the marine and liability lines, in which industrial business runs a higher retention. Additional reserves set aside at HDI-Gerling in the Netherlands imposed a further strain on the result.

Against this backdrop the underwriting profit in Industrial Lines fell sharply to EUR 2 (65) million. On the back of a slightly elevated expense ratio the combined ratio climbed to 99.4 (82.7) percent. The previous year's figure had, however, been unusually low. Investment income fell slightly short of the previous year at EUR 55 (58) million. The operating profit (EBIT) retreated to EUR 33 (97) million.

Retail Germany boosted its gross written premium in the period from January to March by 4 percent to EUR 2.1 (2.0) billion. The premium income booked by the property/casualty insurers was on a par with the previous year. In the motor line the greater focus on profitable business led to a modest premium decline, which was, however, offset by stronger premium income associated with gains in market share in casualty business. The life insurers profited from higher single premiums.

New business in Germany – measured by the Annual Premium Equivalent (APE) – contracted in the initial quarter to EUR 164 (181) million. This was a reflection in particular of the systematic emphasis placed by HDI Versicherung AG on profitable business. This effect was not entirely offset by the rise in new business with life insurance products, which saw growth of 10 percent to reach EUR 107 (97) million.

The underwriting result for the division improved by 12 percent to minus EUR 0.3 billion. This reflects in part the sustained efforts being made to boost profitability in property insurance business at HDI Versicherung AG. In addition, the division benefited from an exceptional run-off profit. The combined ratio consequently improved considerably to 95.0 (105.3) percent. Investment income, which is shaped in large measure by the life insurers operating in the division, remained virtually unchanged at EUR 0.4 (0.4) billion.

Driven by the improved profitability, EBIT moved sharply higher to EUR 66 (38) million. Given that the process of realignment within the segment is still ongoing, it is not anticipated that the appreciable improvements will carry over on this scale to subsequent quarters.

The Retail International Division continued its thoroughly dynamic growth in the first quarter of 2013, boosting the gross written premium by almost
two-thirds to EUR 1.1 (0.6) billion. A pivotal role in this increase was played by the Polish insurers TU Europa and TUiR Warta, which were not yet included in the consolidated group in the corresponding period of the previous year.

The underwriting result improved substantially to EUR 17 (-16) million, while the combined ratio for the segment retreated to 94.1 (100.3) percent. This can be attributed in part to the newly acquired companies with their lower combined ratios. As a further factor, the segment profited from premium increases in the motor sector as well as a reduced number of vehicle thefts, especially in Brazil. Investment income fell marginally short of the previous year's quarter at EUR 74 (76) million, although the latter had been heavily supported by realised gains. Thanks to the vigorous growth and significantly improved combined ratio, the operating profit (EBIT) surged to EUR 66 (35) million.

Talanx continues to move forward entirely as planned with the integration of the companies acquired in 2012. Effective 1 January 2013 the Mexican insurer Metropolitana Compañía de Seguros S.A. de CV was merged into HDI Seguros, S.A. de C.V.

Gross written premium in non-life reinsurance grew by 4 percent (also 4 percent after adjustment for currency translation effects) to EUR 2.2 (2.1) billion. The segment benefited from modest major loss expenditure in the first quarter and improved the combined ratio to 94.0 (96.8) percent.

The underwriting profit in non-life reinsurance was consequently more than doubled from EUR 47 million to EUR 98 million. Investment income, however, fell significantly short of the level recorded in the previous year's corresponding quarter – principally due to the elimination of special effects in unrealised gains – and came in at EUR 195 (267). The operating profit (EBIT) for the segment totalled EUR 266 (276) million.

Gross written premium in the life/health reinsurance segment was boosted by 12 percent (13 percent adjusted for currency translation effects) to EUR 1.6 (1.4) billion. Positive factors here included the assumption of three portfolios of longevity risks in the United Kingdom.

The underwriting result decreased to -EUR 82 (-50) million. Despite the protracted low level of interest rates, investment income fell just slightly short of the corresponding quarter of the previous year at EUR 162 (177) million. The operating profit (EBIT) after the first three months stood at EUR 87 (117) million.

Outlook
Talanx reaffirms its guidance for the full 2013 financial year, which is now even more robust in view of the favourable development of the first quarter. Although the market environment remains challenging, Talanx expects to grow its gross premium by at least 4 percent on the basis of constant exchange rates. The return on investment for 2013 should be around 3.5 percent in structural terms. For the current financial year the Group continues to target Group net income after tax in excess of EUR 650 million. Consequently, the Group anticipates a return on equity of more than 9 percent for 2013, despite the inflow of equity from the initial public offering and the protracted low interest-rate environment. This guidance is conditional upon major losses not exceeding budget and assumes that there are no turbulences on currency or capital markets. The goal of paying out a share of 35 to 45 percent of IFRS Group net income as a dividend remains unchanged.

Key figures from the Talanx Group income statement for Q1 2013, consolidated (IFRS) (Q1 2012 adjusted due to IAS 8)