Torsten Leue: "It would be too early to change the forecast now"

Mr Leue, Russia has launched an offensive war against Ukraine. Your comments?
The Board of Management and the employees of the Talanx Group are deeply affected by the war in Ukraine in the middle of Europe. The war will impact on our shared values. This geopolitical crisis demonstrates to us in a dramatic way that peace in Europe and throughout the world cannot be taken for granted. We are committed to organising targeted humanitarian assistance. The Talanx Group will give aid to refugees and also provide help directly in Ukraine. We stand in solidarity with the people in Ukraine and our thoughts are with those who are grieving for relatives and friends in this terrible situation and are currently in fear of their lives.

What is your view on your commitment in Russia and in Ukraine? Does the Talanx Group have employees in the region?
We are only represented in Russia with a small industrial branch office.

How do you assess the consequences for the economy and for the stock markets?
The current situation in Ukraine presents the biggest geopolitical crisis of recent decades and will naturally lead to uncertainties and significant volatilities. There will be negative consequences for the economy and this has already been reflected in the financial markets during recent days.

What effects do you expect this to have on the insurance business as a consequence of the war – most particularly in relation to war coverage?
Unfortunately, developments are extremely dynamic. At this point, we are unable to offer any comment. Generally speaking, risks resulting from acts of war are excluded in the vast majority of policies.

What do you expect for individual sectors, for example in cyber risks, in goods transport insurance or marine insurance?
Over the medium term, the risk situation will deteriorate, particularly in the case of cyber risk, so that taking on insurance risks in these areas is likely to be significantly more challenging.

The central banks are presented with a dilemma by the war in Ukraine given the fact that inflation rates are already high: Are geopolitical austerity plans obsolete or even more necessary than ever?
You are pointing towards the central banks having to deal with a potential collapse of the economy in light of rising inflation as a consequence of the geopolitical crisis. The ECB has already signalled that it is analysing the geopolitical situation and doing everything in order to guarantee price and financial stability. Generally speaking, it is important that the ECB engages in good strategic communication so as to work towards a potential normalisation of monetary policy in this extremely challenging and unpredictable environment.

How will you respond to an environment with rising interest rates?
Rising interest rates are currently only one scenario. We are rather well positioned to ride out turbulence in the capital market with our low-beta strategy and the approach of entering into fewer risks with our investments. Furthermore, we have adjusted to greater volatility in the capital market by focusing on quality within our low-risk portfolio for some time now. Rising interest rates are the result of inflationary developments. That’s why it’s important for us to accelerate active cycle management in underwriting alongside a conservative investment policy so that we are able to cushion potential claims inflation and pressure on costs. Particularly in our New Normal, a hybrid world of work, we are confronted with the challenge of further enhancing efficiency and effectiveness, while at the same time maintaining the social glue that binds our employees together.

Group net income in 2021 was 50% stronger than forecast. Talanx has achieved a profit of one billion euros one year earlier than was projected in 2018. What are the reasons for this?
The strategy we adopted in 2018 is paying off. Since 2018, gross premium income has increased by 30% or around 10 billion euros to more than 45 billion euros. It’s even better that our Group net income has increased by 44%. All the divisions have made a positive contribution to this result. In particular, we have made better progress than planned in primary insurance with our operational improvements. Our primary insurance activities now make up 45% of the Group net income – in 2018 this was still 31%. This good result is only possible because we foster a decentralised culture based on trust which is committed to an entrepreneurial approach. This culture and our Purpose “together we take care of the unexpected and foster entrepreneurship” have consequently brought us through the pandemic very successfully.

In autumn 2018, as the new Chairman of the Board of Management of Talanx, you announced medium-term financial targets up to 2022 – this envisaged an average annual increase of 5% in earnings per share based on the original earnings target of around 850 million euros for 2018. The return on equity was supposed to be at least 800 rather than 750 basis points above the risk-free interest rate. What is your conclusion?
I am very satisfied. So far, we have achieved the profit target per share with an average increase of 5.6% each year, our return on equity is approaching 10% and is well over 800 basis points above the risk-free rate. Another aspect is also important to me. Firstly, the fact that all the divisions have contributed to the gratifying figures and results. Secondly, seeing just how much energy there is in our Group in spite of the coronavirus pandemic and how well our cultural transformation is moving forward.

During recent years, the reinsurance business has been a strong pillar of support. What is your assessment of the quality of growth in the segments?
All business segments have developed well. In particular, primary insurance has made a contribution to improving the operating result more quickly than we originally planned. A higher proportion of primary insurance is more strongly diversified and is therefore strategically relevant for us in order to release risk-based capital for additional profitable growth. Another reason for the positive development is that we as a company created our “Purpose” with around 4500 employees before the start of the coronavirus pandemic. This purpose drives us forward. It is not simply some slogan but a lived reality day in and day out.

What role do one-off effects playing for the first billion-euro profit, for example the impacts of the Covid-19 pandemic compared with the first year of the coronavirus in 2020?
The operational development of Hannover Re, but above all in primary insurance, was better than expected. Notable positive one-off effects are not included in the billion-euro profit. Quite the contrary: We experienced significant headwind. Firstly, our net major loss budget of 1.5 billion euros was exceeded by around 200 million euros last year. Natural catastrophes like the low-pressure weather system “Bernd” leaving in its wake the huge flooding damage in western Germany made a substantial contribution to this. Secondly, the coronavirus pandemic also exerted a negative impact on us in 2021, particularly in the area of life/health reinsurance with a big effect on our Group net income measured in high double-digit millions of euros after just the first nine months. This demonstrates just how resilient we are, and our Group net income highlights our high quality.

How should the result for 2021 be classified against the background of the burden of high major claims?
In 2021, the major claims resulting from the natural catastrophes doubled by comparison with the previous year. The biggest single claim was in relation to the low-pressure weather system “Bernd”. After the first nine months of 2021, the net claims burden amounted to around 320 million euros. Overall, the major claims burden without the coronavirus was higher last year than over the past ten years. Once again: Achieving a billion-euro profit in this environment highlights the quality of our result for the year.

How much did investment help?
In 2021, we achieved a return on investment of more than 3%. We had projected around 2.7%. The fact that overall, we actually did better than expected, is not simply due to the diversified alignment of our investment policy and the use of interest premiums. In 2021, the volatility of the markets was also not as pronounced as might have been expected. We are pursuing a low-beta approach in our strategic investment policy, which significantly limits our affinity for risk in investment. We continue to regard the risk-return profile as more attractive in highly diversified underwriting, and this is why we allocate a disproportionately high amount of the available risk-based capital to this area.

The profit generated by Hannover Re, in which Talanx holds a 50.2% stake, increased in 2021 by 39% to 1.23 billion euros. What is the position for primary insurance? How big is the primary insurer’s share in exceeding the forecast and in achieving the billion-euro profit?
In line with expectations, reinsurance returned a very good result. However, exceeding our forecast in spite of the breached major claims budget essentially results from primary insurance. The share of primary insurance in the Group net income has steadily increased over recent years.

The Talanx share price increased by around one third in 2021 and this amounted to a rather bigger increase compared with Hannover Re. To what extent are the restructuring measures in primary insurance now reflected in the share price development?
We have moved forward faster than originally expected with optimisation of primary insurance. The advances in relation to sustainability of the increases in earnings and the quality of the results are being increasingly acknowledged by players in the market. Our mission is to deliver what we have promised.

How have the segments Industrial Lines, Retail Germany and Retail International performed in 2021?
After restructuring of the fire business in Industrial Lines, we embarked on a course of profitable growth. This was rewarded in the first nine months of the past business year with a double-digit growth rate, above all in business with special risks. Indeed, this is one of our key growth initiatives. The combined ratio in Industrial Lines fell significantly below 100% on 30 September 2021 and this will be reflected in the total net income. This means we are on the right path to obtaining a combined ratio of 95% over the medium term. In 2015, we decided to increase the operating result in business with industrial clients and retail customers in Germany from 3 million euros at that time to at least 240 million in the year 2021. We have exceeded this target. The aim now is to build on this platform and continue to grow profitably. Particularly in the area of commercial customers, we have grown by almost 10%. Our customer-centric settlement in business closure insurance during the pandemic continues to pay off. And the engine of growth is continuing to run in business with retail customers and industrial clients outside Germany. In the first nine months of 2021, our gross premium income underwent double-digit growth with a combined ratio of 94.3% in spite of exchange-rate issues.

Since autumn, benchmark values have applied to the three primary insurance segments for the year 2025, which are intended to bring them close to Hannover Re in terms of return on equity each with more than 10%. Where do you perceive the biggest risks on the way?
We are very optimistic that we can achieve our new, ambitious targets for returns. This confidence is based on the developments of the segments over recent years. The promised results were delivered. This creates trust that the new targets will also be achieved. The outcome will depend on remaining disciplined and focused, as well as consistently implementing the strategy – also the cultural and digital transformation. We are the cost leader in the relevant markets in three out of four segments. The task now is also to achieve a competitive cost position by 2025 in the fourth segment in Germany. The biggest risks are currently in the geopolitical situation, the measures taken by the central banks and in the political and regulatory environment.

While we’re talking about costs: How are you getting on with modernisation and consolidation of IT structures?
A digital transformation relies on the household being in order. We have now switched off 600 applications – this corresponds to 35% of the overall systems in Germany. Two years ago, we stood at 20%. This has given us more scope to invest in modernisation.

Where is your sector in the cycle?
I believe it’s likely that in most regions, we won’t be talking any time soon about markets becoming softer in our sector.

You are projecting an increase in Group net income to 1.05 up to 1.15 billion for 2022. Against the background that a billion-euro profit was achieved last year, this seems rather conservative.
We now in February and looking at the general environment, there are a number of uncertainties. We have already discussed the geopolitical crisis in Ukraine. It would be too early to change the forecast now. The current environment is an indication that 2022 is not going to be an easy year.

You are targeting a global and cross-segment diversification of income streams primarily in the non-life division of the primary insurer. In 2022, two thirds of the business are projected to be generated abroad. Where are you on this issue at the moment?
After a share of 53% in 2018, we are now at 61% in line with the plan, essentially on the back of organic growth. Our global and cross-segment diversification especially in non-life has exerted positive impacts on our risk-based capital requirements and therefore permits further profitable growth.

In primary insurance abroad, Talanx is mainly concentrating on Poland and Turkey, and on countries in Central and Latin America such as Brazil, Chile and Mexico. An announcement has been made that investigations are being made this year into whether an entry into South-east Asia would make sense. What is the plan here?
We continue to remain focused on the existing core markets in Latin America and Eastern Europe. In these five markets, we want to rank among the five leading providers in non-life and we can see further potential for growth here. We are currently examining whether to get involved in South-east Asia. We will be able to provide an answer to this question over the course of the year. The outcome is open.

What would be the relevance of a commitment in Asia?
From today’s perspective, this would be along the lines of a realignment in our portfolio. We are not adopting a transformational approach. Incidentally, we have already had a significant presence in Vietnam with primary insurance for a number of years.

How likely are further acquisitions generally? In which areas or regions are they most likely to be expected?
In 2021, the Group underwent organic growth with a double-digit increase in gross premiums. There is no pressure to take action and accelerate growth through acquisitions. However, if suitable opportunities occur, we are on the buyer side. There are specific criteria for any acquisitions such as return on equity that needs to be increased as a consequence of a potential takeover. Furthermore, potential acquisitions must be a good cultural fit. The focus for inorganic growth is on non-life in our core regions and in business with special risks.

What funds are available for acquisitions?
A mid-single-digit billion amount would be available. However, we wouldn’t stake everything on one card. Rather, our strategy would be to consider several realignment transactions each with a volume in the mid-three-digit million euro range.

What role do portfolio adjustments play – for example through discontinuation or sale of certain activities?
We have already done our homework. After around ten divestments over recent years, there is currently no need for additional significant portfolio adjustments.

Talanx is proposing an increase in dividend by 10 euro cents to 1.60 euros per share in 2021. Hannover Re adjusted its dividend policy last autumn. Is an adjustment due at Talanx and what might this look like?
As an industry, we are a “Value Stock”. To this extent, a dividend is naturally an important factor for investors. Talanx and Hannover Re are pursuing the dividend strategy of paying out a dividend at least at the year-earlier level. Since we have extended the cash pool available for dividends in recent years to the extent that we can pay out a dividend at least equal to the year-earlier dividend even in a weaker year, we will turn our attention to our dividend policy at the end of the current strategy cycle in 2022. If there is an adjustment for Capital Markets Day on 6 December, this will undoubtedly not be to the disadvantage of shareholders.

Will you directly pass on special dividends from Hannover Re in future?
That is one of several possibilities.

Since targets for the primary insurance companies were already defined up to 2025 in the autumn, what are the medium-term goals for Talanx? What do the future financial targets of the Group look like?
We will communicate that on Capital Markets Day. This will revolve around continuing our development over past years with ambitious goals. One thing is certain: return on equity of at least 10% at Group level must be available in the medium term.

The interview was conducted by Carsten Steevens.