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Edited Transcript of TLX.DE earnings conference call or presentation 12-Aug-19 7:00am GMT

Q2 2019 Talanx AG Earnings Call

Hannover Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Talanx AG earnings conference call or presentation Monday, August 12, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carsten Werle

Talanx AG - Head of IR

* Immo Querner

Talanx AG - CFO & Member of Management Board

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Conference Call Participants

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* Andreas Schäfer

Bankhaus Lampe KG, Research Division - Analyst

* Frank Kopfinger

Deutsche Bank AG, Research Division - Research Analyst

* Michael Hermann Haid

Commerzbank AG, Research Division - Team Head of Financials

* Rahul A. Parekh

JP Morgan Chase & Co, Research Division - Analyst

* Roland Pfänder

ODDO BHF Corporate & Markets, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the analyst call on Talanx' 6 months 2019 results. For your information, today's conference will be recorded.

At this time, I would like to turn the conference over to Mr. Carsten Werle. Please go ahead.

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Carsten Werle, Talanx AG - Head of IR [2]

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Yes. Thank you, Marie, and good morning from Hannover. This is Talanx' 6-month 2019 results call. I'm here together with our CFO, Dr. Immo Querner, who will lead you through our results. And there will, as you know it, at the end of the call, be ample opportunity to raise your questions. You'll find our quarterly documents, the release, the report and the presentation on the IR section of our web page, and you may follow this call via phone and also via webcast, and there are replay options for both channels.

And with these remarks, I'd like to hand over to Immo.

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Immo Querner, Talanx AG - CFO & Member of Management Board [3]

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Well, good morning, everyone. Thank you for attending the call. First 6 months, the bottom line [being part] good. And I think in terms of growth, we've seen growth across the board, it's not just reinsurance. All segments have contributed.

In terms of EBIT, yes, we have benefited from the one-off Life/Health Reinsurance, but particularly the 2 retail divisions, Retail Germany and International, largely contributed to the bottom line profit.

20/20/20, the project, the program as such, it is ahead of target. While first half year is not quite at roughly 100%, we're confident to make it for the full year, and I'll share with you the reasons why we are this confident.

The group net income is up by more than 9%, and we're talking about an annualized return on equity of 10.4%, which is well ahead of what we had last year and is equally well ahead of our minimum return standards.

Against the backdrop of nice development, particularly the tailwind that we get from the special one-off out of Hannover Re or our share of that, we have raised the outlook from around EUR 900 million to more than EUR 900 million.

These are the highlights. Let me dive into the key figures, and it's on Exhibit 4. The highlights for the first 6 months. The top line is up by 11%. If you would allow for currency movements and neutralize them, we're talking 10%. So currencies at least on a net-net basis have not really distorted the top line growth.

Net investment income is a slight decrease. Now this may come as a surprise because, yes, we do benefit from the Viridium [extraordinary] . On the other hand, we had [realized less] to fund the ZZR. Why is that? You may recall that in autumn last year, we've seen a revision of the ZZR mechanics. So the ZZR buildup is smoothened and not as sharp as it would've been under the old regime, and that has translated in the first half year into lower need to realize hidden reserves to fund ZZR from a loaded cap perspective.

The operating results are up, I think for reasons that I've already mentioned.

The net income after [minorities] is up even a bit more in relative terms. And what are the reasons? The reasons are a lower tax burden. First, the Viridium disposal has been more or less tax-free. Second, we've left the BaFin and the reinsurance segment behind [this]. And the composition of our taxable base has probably been somewhat friendly between higher and lower tax regime.

On Page 5, you see a deep dive into the second quarter on a stand-alone basis. I wouldn't want to go into too many details at this point, I'll do this on the segment discussion. But what you see at the top line is that the growth dynamics are actually intact because the Q2 stand-alone growth was actually even somewhat higher -- slightly higher than what we've seen on a half year-to-half year basis. And [Q2 stand alone growth] have benefited from the Viridium transaction.

Slide 6, looking at the large loss budget and the growth of some of these budgets. Group-wide, we have seen the first half year 2019 that is well below the pro-rate share of the large loss budget. This is true for the reinsurance business. We were sitting on EUR 230 million of underutilized large losses in the first half year, which have been in effect to [come set aside] for -- to support the large loss buffer for the second half year.

In the primary divisions, we have more or less been on par to slightly even above [up] budget, one of the main reasons being Jörn. This is the hailstorm that hit the southern part of Germany, around Munich, benefited both Industrial Lines and Retail Germany, and this is the reason why in both segments, among other large losses of our industrial -- the Industrial Lines are concerned, we are slightly above the pro-rata budget as far as large losses are concerned.

Let me move on to exhibit 7, on the [aggregate] combined ratio of 6-month and Q2 stand-alone for the 5 -- for the 4 divisions and the group. I think on the aggregate, we're kind of fine with minus 97.5% combined ratio for the 6 months.

Retail -- sorry, Industrial Lines with 102.3% for the full half year and 101.9% for the second quarter on a stand-alone basis. We are not quite yet there. I'll discuss these figures when I move on to the Industrial segment in a second.

Retail Germany, doing fine. And if you would net out the cost expenses, we'd be talking about 96.3% combined ratio, which is not that far away from 95% target that is the endgame for our cost program. Retail International, 95.2% for the first 6 months and 95.6% for the second quarter on a stand-alone basis is very healthy combined ratio. And reinsurance is known to you.

Look, just one word in passing on the lower right-hand side of the chart, you see Turkey with 108.5% for the first 6 months and 107.7%. It appears to be a high combined ratio, and in a way it is a [height] combined ratio. But in a high interest rate environment, Turkey is a country where we still earn in excess of 20% on the asset side, short-term money, which has helped to significantly improve the EBIT of this unit. You are still talking about interest rates. This is an [expression] we probably need to forget as far as we talk about the Eurozone, but I'll come back to this in a second.

Slide 8. If you compare the EBIT for the first 6 months 2018 to the first 6 months in 2019, you see that the Retail Germany, Retail International, Reinsurance have all contributed to the EBIT growth. The Industrial Lines kind of stagnated. And we've seen a slight negative contribution on a period-to-period comparison out of the Corporate Operations including consolidation. What are the reasons for that? A, we have used the good figures to set aside some very cautious extra reserving buffers at the Corporate segment against backdrop of our Talanx AG inventory insurance book, which is still very small, but this has been a time to play extra conservatively.

And then we're talking about a nonrecurrent event that has emanated out of the consolidation, mainly a one-off that has helped in a way a year ago that has now gone away. Just some intragroup consolidation that is driven by the IFRS inconsistencies. Even IFRS 4, they don't have to wait for IFRS 17 to look at -- to wait for an inconsistency in intragroup basis, even IFRS 4 has got some inconsistency when it comes to Life -- group internal life reinsurance, and that has also contributed to a certain extent to the negative one-off of EUR 30 million.

Now let me move on to the Industrial Lines, which is probably very much at the center of today's discussion. To preempt the kind of [questionable] questions, yes, we are still confident to make it as far as roughly 100% combined ratio is concerned for the full year 2019. But I'll come back to why we believe that and how we fared in our 20/20/20 program.

Let me start with the top line. We've grown by slightly more than 20%. Now the 20% falls into 2 sources. The one is just the internal -- the group internal transfer Specialty business from Hannover Re's into Hannover to the Industrial Lines business. If you deduct this effect, you're still talking about top line growth of 4.4%, which is completely unrelated to the sale of the Inter Hannover to the Industrial Lines. It's organic growth outside the property business. And property, the [pruning] program has resulted in a loss of roughly EUR 220 million premiums, which has been partly offset by EUR 110 million premiums that has been a result of higher premiums that were the result of these negotiations to a net effect of roughly EUR 110 million minus out [of] 20/20/20 as the difference between gross losses EUR 220 million and higher premiums -- premium rates amounting to EUR 110 million. But the rest is organic business from a wide variety of jurisdictions and sources.

The net premium earnings increased smaller, this is a direct corollary of the Inter Hannover specialty business transaction because this is a highly reinsured business, and thus the highest top line does not equally translate into a higher net premium earned figure.

Let me talk about the middle column. Large losses, I've already mentioned this in the introduction, it have been slightly ahead of our budget as far as the Industrial Lines business is concerned. It's roughly 0.8% of Q2 combined ratio that is attributable to the excess utilization of the nat cat budget.

The runoff result has stabilized at around EUR 32 million. It's slightly less than the half year's figure for 2018, which should not come as a surprise because I think we've already indicated in one of our previous calls that the structural runoff result will probably be somewhat softer than what we've seen in the past.

The combined ratio for the Fire business alone was 109%, which is materially down from the structural 120% and from full 140% that we've seen in full year 2018. They're really making progress also from the bottom line point of view.

On the right-hand side, net income. Yes. There's still some residual via charges that are associated with our fronting and capital business that we do out of United States. And again, we are confident to make it as far as our combined ratio target for the full year of roughly 100% is concerned.

Slide 11 is a slide that's probably known to you by now. In Q2, we've continued to renegotiate the terms of our property book. If you look into the result that is bottom line-relevant and P&L-relevant by the 1st of January, we've already contracted now or negotiated now the improvement that is the starting point of 20.7% improvement. This is more than the 20% of the old target. So we are well ahead of the plan.

Second, in Q2, we've also managed to improve the profitability of the book of 17% -- [in growing] 17% achievement by the end of Q1 to 18.9% that will already be P&L-relevant in the third and fourth quarter. That, again, underlines the momentum that is in our current [winning] process. Perhaps some of you have taken the opportunity to also look at the recent publications of Aeon and Marsh about the hardening of the industrial pricing cycle. I think one of the 2 publications, you'll find some red boxes indicating the areas where we would see the most dramatic price increases or condition improvements for that matter.

One of these boxes is German property market. And I can tell you that we are certainly not behind the curve. So we are well ahead of the original final target. There is the ambition to make more. We believe that it is necessary and feasible. We would not shy away from [surrendering] business if it would not meet our profitability standards. From that, we have lost EUR 110 million, which is a balance of EUR 220 million minus EUR 110 million price increases. And we've continued even with -- we've continued further initiatives that would even be P&L-relevant in the second half year.

Retail Germany, Slide 12. We have grown by 2%, which is nice. We've grown the business both in Life and non-Life. And as far as Life is concerned, it has been biometric business and our Bancassurance channel and capital life products. The EBIT improvement is like 43%, which is really good and remarkable. Net income increased even higher by 46%.

We're not talking about return on equity and annualized return on equity, which amounts to 5.8%, which is not yet where we want to be, but it is certainly very much in the right direction. Normally, the fellows would use the expression one-off probably only if there is something that is negative and needs special explanations. I think I will take the liberty towards a highlight, one that has helped us in the first 6 months in a -- we have benefited from a net positive of some accounting-driven one-off that has contributed EUR 9 million in the Life EBIT. So the first 6 months in that regard are perhaps a bit flattering. But even if we deduct the EUR 9 million, it will still be a very nice quarter and a very nice half year.

Slide 13. Retail Germany P/C is up by 2%. If we look at the Q2-to-Q2 figure, even up by 8%, and there's a story behind that. The story is that we've been -- repriced this plan as far as big renewal season on the German motor business is concerned.

On the other hand, we've -- by now, we've got a higher share of the business that were not renewed by the end of the year, but has good renewal date that is somewhere in between. And this has allowed us to compensate some of the top line losses, the motor business, that we've seen in the large renewal [round] in the inter-year business, so to speak. And that is one of the reasons why the Q2-to-Q2 figure looks nicer than the 6 months to 6 months because in any case, we are growing the business and we're talking about a combined ratio net of KuRS expenses now amounting to 96.3%. And if you bear in mind that we have suffered (inaudible) commerce from above-average large losses because of Jörn, the Hailstorm, around Munich that has been digested in the combined ratio. I think it really tells you that the program [cost] is working there. We've managed to improve the figure although we have suffered from the above-average nat cat burn in the first 6 months in Retail Germany.

As far as Life is concerned, we're also growing. Main growth driver is -- the main risk driver is the biometric risk protection business in our Bancassurance operations. As I've said, our build-up is still a build-up, but the build-up is not as dramatic as it would've been under the old regime where we mentioned this in passing.

Today, we're talking about ZZR balance of EUR 3.6 billion, and it's still going to grow. Probably it's even growing a bit more than we first would've expected it to grow at the beginning of the year based on the new mechanism, and the reason is not another change of the mechanism, the reason is that interest rates have now developed as favorable -- as we had hoped for. Last week, we're talking about 10 years bond minus 60 basis points and the full curve of German bonds being in negative territory, something that, I think, has never ever happened before. And you may recall that 89% of the assets that we hold on the primary business and even more on the Life Insurance business have euros, and that means that this is certainly a major headwind through the structural asset income that we're going to make in the future.

I already mentioned the EUR 9 million positive net effect of some one-offs. Still, even if you deduct the 70 -- the EUR 9 million from the EUR 71 million EBIT, we're still talking about EUR 62 million in EBIT. So even Life in Germany has contributed to the profitability of the group, and this contribution has significantly grown.

Retail International was growing 9.2% currency adjusted. If I would have to single out a few countries, certainly Italy for that matter, but also back in America with Mexico being really strong markets, we are now looking forward to the initiation of our joint venture with Santander in Brazil. Brazil, as you know, is one of our most important markets. And whether we see the opportunity to support growth, I -- in agreement with -- as the one with Santander, we, of course, would be happy to seize the opportunities.

Bottom line-wise, I think WARTA is still one of the main profit drivers that -- most of the case, if you talk about the OpEx earnings, and the reason is that our corporate tax rate is as low as 19%. So whenever we make more profit on a relative basis in Poland, that means that the average tax rate would go down because this is relative terms in low tax country.

As far as the situation in Turkey is concerned, we're quite optimistic to see the closing of the transaction with -- related to ERGO's Turkish business in a not-so-distant future. I think that -- apart from that, I think everything is according to plan as far as Retail International is concerned.

Reinsurance, I think, is probably well covered by you anyway. I think the most important fact is that the return on equity is as high as 14.7%, which is nice. Growth is there, and that's particularly driven by advance solutions. Yes. I think the Viridium effect is widely recognized, but I would like to mention again that this company is sitting on EUR 230 million underutilized large loss budget out of the first 6 months.

Slide 18, net investment income. I would like to mention one line, and that is the second, the current interest income or current income, which is up by 5% on a 6 months-to-6 months basis and 8% on a Q2-to-Q2 basis, which is remarkable against the backdrop of the low interest rate environment. The reason is that we're sitting on more assets, [business] that we now invest in bonds. And the reason is that, of course, in other parts of the other government retail business, we find ways to invest our assets outside the Eurozone, which is probably not that bad an idea. Extraordinary income is the net effect of the positive one-off driven by Viridium, and the [absent] [of that are related realization needs and is the net figure here.

Talking about interest rates, that automatically takes me to Slide 19 because the other comprehensive income increase of EUR 793 million is a reflection of maybe low interest rates that have translated into a higher OCI of the -- for the part of the assets that are accounted for on a mark-to-market basis that would not run through the P&L. But shareholder part, net of the fees, net of minorities and net of policyholders have increased by almost EUR 800 million, which is the result of the interest rate development. We're now talking about the book value per share of EUR 83.04 (sic) [EUR 38.04]

And if you then look into Slide 20, you would still have had -- would have to add a part of the hidden reserves that is not even reflected in the mark-to-market valuation of an IFRS 4 balance sheet because loans and receivables, for instance, are accounted for in amortized cost.

And if you would add the per share of the shareholder, net of the fees and minorities and the policyholders and the German Life business, then we would benefit from the hidden reserves. And if an IFRS balance sheet, we would have to add another EUR 2.04, taking us to a net asset value per share of more than EUR 40 per share.

Slide 21, solvency figures. It is more than just a guesstimation. We are talking about preliminary figures, and the fully loaded solvency ratio is 200 -- or has been 203% at the end of Q2.

Yes, the developments, capital markets, namely the interest rate development, has not been helpful, and we've seen this in our German Life carriers. To give you an example, the flagship carrier at least in terms of size, (inaudible) has now a fully loaded solvency ratio of 227%, which is down from 240% at the end of Q1. And the main driver has been the development of the interest rate curve in Europe. But we're benefiting from a very diversified book of business across all jurisdictions, the types of businesses and thus, the aggregate fully loaded solvency ratio is only down by 1 percentage point from 204% to 203%.

That takes me to Slide 23, it's the outlook on the back of the good half year. Certainly, also benefiting from the premium one-off. We have modified our guidance from roughly EUR 900 million to more than EUR 900 million, and those are equally translated into some of the language for our return on equity guidance.

That's it from my side. I'm here to answer your questions that you may have, and yes, looking forward to these.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question. Michael Haid, Commerzbank.

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Michael Hermann Haid, Commerzbank AG, Research Division - Team Head of Financials [2]

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Two questions. First, on Poland. One of your competitors in Poland has said that he sees first signs of a slowdown in Poland. Can you tell us your observations for Poland, and your expectations?

And the second is the Industrial Lines, of course. You mentioned that the 20/20/20 program is clearly ahead of the plan. 19.x percent of the price increase is done. Other players in the market have followed you, improving their profit portfolios. And you probably get some tailwind now, which you probably did not expect when you initiated the 20/20/20 program. So is the 20% the end of the story here? Or what should we expect going forward from your Industrial Lines portfolio?

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Immo Querner, Talanx AG - CFO & Member of Management Board [3]

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Okay. Let me start with the first question. I think [upswing cycle] it has been [reached and] I think they are right. Yes. I think we've seen the highlight of the Polish party being behind us. The pricing cycle is no longer improving. So in a way, we see the turning point, and I confirm that. Would this automatically translate into bad -- into worse figure out of Poland? As far as we are concerned, I would not really anticipate that because we've used the upswing cycle we've seen in Polish market to prepare ourselves accounting-wise, I think, appropriately putting it that way.

As far as the Industrial Lines business is concerned, I think you should [focus] your attention to the subtleties of Slide 11. We've currently achieved 20.7%, which is more than the original 20%. Does it mean that we'll stop pruning the business and stop improving the business? The clear answer is no. I think we want to make full use of the fact that we have been very much front-running -- at the forefront of the price improvement initiatives. We've seen certain market commentators such as AON and Marsh that think we would -- we see a greater market improvement, particularly in areas that we're active in. There is clearly the ambition to go beyond the 20%.

Now this could prompt the question why would you see a certain target figure in this chart. I think that what is -- that is a very legitimate question. We've decided not to publish any official target figure, other than it would be more than 20%. And the reason is that in this phase of the pruning cycle, I think things get a bit more tricky. You've got to juggle between price increases and condition improvements. And there's also an element that I think we've got no inclination to be too transparent to our competitors. But I can clearly alleviate any concern. I hope I can dispel any concern that we will sit idle and would stop with the initiatives now that we've achieved more than the 20%. Right, the contrary is true, and this is why we've made this little arrow kind of somewhat dynamic. [now]

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Operator [4]

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Our next question comes from Frank Kopfinger, Deutsche Bank.

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Frank Kopfinger, Deutsche Bank AG, Research Division - Research Analyst [5]

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Yes, also 2 questions. Two on Industrial Lines. My first question is, if you suggest that you're still on track for this around about 100% combined ratio for the full year, is it safe to assume that 98% is the number we should look at for the second half? And if this is -- is this also the starting point for [2019] then?

And then secondly, on the runoff level of EUR 32 million for H1. Yes, in the past you indicated that the level is going down, but is this now -- the EUR 32 million, is this -- should we think about this as being a normal run rate level?

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Immo Querner, Talanx AG - CFO & Member of Management Board [6]

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Thanks for the questions. I think yes, your calculation and math is right that if first half year 102.3%, and year-end, it should be around 100%. That means that the second half year should come in at around 98%. First question is, is this realistic? And/or why do we believe that this is realistic?

A, we have suffered somewhat from above-average large losses in the first half year. By nature of these calculations, we do not anticipate an overshoot of these budgets for any future period of time.

Second, you may recall that in Q1, we suffered from 2 extraordinary one-offs, negative. One of these [dates], the one-off, is the restated premium and the other one was a late verification out of December, the [December's] claim. This is something we -- this is burdened -- this has weighed on the half year's result, and we do not expect this to recur.

Third, we know traditionally that the Specialty business -- the newly acquired Specialty business, newly acquired as far as [RfB] is concerned, is historically more stronger second half year than the first half year.

Then, and this I -- something I mentioned in passing that, that the price of the condition improvement project has also runoff results that there will be P&L positive as per Q3 and Q4. This is the difference between a 17.0% and the 18.9%.

And last but not least, and this takes me to the second question, we know from history that the runoff result in the second half year is traditionally more strong than in the first half year. If you look back at the past couple of years, it's probably fair to say that we see anything between 25% and 35% of an annual -- of the annual runoff result in the first half year, and we see the balance in the second half year. If you add up these 4 or 5 factors, you could probably get a feeling for why we believe that roughly 100% is not out of reach. Of course, there should be no major excess catastrophes or nat or large loss event. That is fair. But this is part of our general [triple C] reminder. Apart from that, I think we are optimistic.

As far as the guidance for 2020 is concerned, this is one of the highlights that we should come back on the occasion of a Capital Markets Day. This is probably not the time to look too much into the future as of today.

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Operator [7]

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Our next question comes from Andreas Schäfer, Bankhaus Lampe.

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Andreas Schäfer, Bankhaus Lampe KG, Research Division - Analyst [8]

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I have two questions on the investment side. First of all, you mentioned that you have invested more money out of the eurozone that has helped the investment income. Is that hedged? Or do you have, let's say, an open currency position in your -- on your investment side?

And the second question, could you give us some sort of rough guidance about the potential reinvestment rate in Q3 if rates stay where they are now?

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Immo Querner, Talanx AG - CFO & Member of Management Board [9]

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Okay. Let me first answer the first question. It's neither hedged nor is it an open position. And what we generally do is we look at the exposure that we hold on the liability side. And if we are exposed to U.S. dollars or British pounds, Australian dollars, liabilities then we would invest the corresponding funds in these currencies unhedged because that is a natural hedge because of our insurance business. This is one of the reasons why we are so keen to develop the non-euro business. It's not just good for the diversification in terms of insurance diversification. It's equally good because it means that we will be in a position to invest outside the eurozone without running any currency risk.

Should we invest in non-euro-related assets for one of our euro balance sheet, which is Life Insurance, I think there are 2 alternatives. One is, in very few exceptions, we take the ForEx exposure, if you're talking about asset classes that we cannot [fund] . If we want to participate in the private equity investment that we do, then it is sometimes very difficult to get all of that in euros. But this is really a kind of mega exception.

In other cases, if we're talking about a stable profit stream in another currency to be held by an entity that has no -- that has only euro-denominated liabilities, then we'd also look into hedging. We try to avoid currency mismatches as much as we can.

As far as the [few] investment is concerned, the first 6 months on average, we've seen an, I think, a few investment rate in our Life Insurance business amounting to 1.8%. I think it's got weak at the end of Q2 just a little because of the interest rate development. I'm just trying to find the figure that you invested at the end of Q2. Just a second. It may get a bit noisy because I will turn the previous figures -- pages. At the end of the German life business, more like EUR 140 million or something for the retail business, which is good, not as high as it should be. But we'll continue our low, better strategy. I think there should be no concern that Mr. Draghi or his successor will drive us into unreasonable yield hunting even though some of the protagonists might want us to do so. Okay?

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Andreas Schäfer, Bankhaus Lampe KG, Research Division - Analyst [10]

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Okay.

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Operator [11]

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We will now take our next question from Frank Kopfinger, Deutsche Bank.

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Frank Kopfinger, Deutsche Bank AG, Research Division - Research Analyst [12]

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I have 2 follow-ups. One is just on other subject, one is German retail. Again and still, you run ahead of your targets, and this was already the case last year. And one of the key reasons for doing this was that 2019 was the year obviously where you switch off your old systems and you transfer the books to your new systems. My understanding is that this has been partially completed, so maybe you can give an update where you stand and whether there are still some potential headwinds in front of you. So this will be German retail.

And the other thing is on your Slide 8, you point to your conservative reserve for building up the Talanx AG's capital free insurance activities. Could you break down this number on what was driven by this reserving approach?

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Immo Querner, Talanx AG - CFO & Member of Management Board [13]

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I think we'll start with the second question. We've roughly set aside I think like EUR 10 million in the first half year to put ourselves in a position that a company would be in if it had been in the market for quite some time. The reason why I'm saying that is, normally, it takes time to put up reserve buffers. As a new entrant in the insurance/reinsurance markets, you wouldn't be sitting on reserves as per day 1. And then I think it's the ambition to use good days to arrive at a very decent, conservative reserve level that would be consistent with what you would find elsewhere. Yes, and I think first half year has provided us the opportunity to do so without really biting into the profitability of the business.

As far as Retail Germany is concerned, I think you're alluding to [BS 2000], one of the probably best known legacy issuers of our IT environment. Yes. We have advanced not only according to plan, we moved slightly ahead of plan. And we are really confident to completely shelve it within the second half of the year and really put this to rest or the [German Museum] for that matter. This is a good news. From a cost side, the bad news is that, of course, the necessity to digitize our business has increased. The world is not waiting for us, and thus, we are perfectly happy to step up our investment into better digital offering, and then thereby, 2 initiatives underway. It, of course, will be costly, and -- but we would not shy away to improve the efficiency and the quality of our profit service offering and, how to put this, happily accept these charges. This is also one of the reasons next to the favorable one-off of roughly EUR 10 million that we benefited from it in the first half year. They're just multiplying the Retail Germany EBIT of EUR 125 million by 2, and signaling that we've jumped 2 years and 2021 is behind us would probably be not the right mathematics. So we are sticking to our commitment that by 2021, we will see at least EUR 240 million EBIT. But we are very, very confident that we're going to make it.

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Operator [14]

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Ladies and gentlemen, our next question comes from Roland Pfänder, ODDO BHF.

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Roland Pfänder, ODDO BHF Corporate & Markets, Research Division - Equity Analyst [15]

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Yes. Could you speak about the underlying technical profitability in the Industrial Lines business outside fire insurance? Are you satisfied with this? And are there also programs running to improve profitability in this field?

Second question, Retail International. In your presentation, you mentioned that you buffered up the reserve redundancies. Will we see this in the next quarters to come? And why was this necessary? Or why did you do so? And also I would be interested to learn about the different cost allocation you put forward in the segment.

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Immo Querner, Talanx AG - CFO & Member of Management Board [16]

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Okay. Three questions. Let me start with the third one, which is the easy one. At the beginning of Q -- I think at the end of last year actually, we looked again at our accounting [manual lists] after a series of acquisitions around the globe and identified it as smaller adjustment needs to call cost, what cost is [and to call charges] , what other charges are that would not have to be reflected in the technical income. But this is just P&L and bottom line-neutral. That is just housekeeping of our accounting manual that in some [carries] , particularly in Retail International, led to a slightly higher cost ratios but to lower burdens on the nontechnical cost. The reason is very simple, IFRS should be the same for everyone. But as you know from Animal Farm, not [all] animals are equal. Sometimes people have different understanding about what IFRS really has told us, and therefore, we've got our accounting manual and there's just housekeeping. I think it's going to be done once every 5 years and this is the result.

Why have we set aside extra buffers in Retail International? I think we -- yes, we know what best estimate is, but I think we would normally have a preference for a somewhat conservative best estimate understanding. And whenever we see the opportunity to support a conservative reserving, then we would not shy away from implementing that.

I think one of the questions in the beginning related to Poland, I think one of the reasons why we are relatively relaxed as far as future profit stream out of Poland is concerned is that, yes, we do benefit from the conservative balance sheet policy, and I think there's nothing wrong with that.

I think the other Industrial Lines, I mean it's -- if you look at the fire combined ratio of 109% in the first half year, you could -- it's quite straightforward to figure out the rough combined ratio for the 80% of the business that are not property is roughly 100 -- it's roughly around 100%. I think there is no need to really come up with programs that are as [properly] managed as the 20/20/20 program. But I think this is now completely clear under the new management team running the operation that there should be a [330] degrees vigilance as far as pricing and tradition discipline is concerned. And whenever there is any hint that things should be improved, also in smaller lines, then we would not hesitate to take corrective action. I think that would probably be the right view.

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Operator [17]

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(Operator Instructions) Our next question comes from Rahul Parekh from JPMorgan.

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Rahul A. Parekh, JP Morgan Chase & Co, Research Division - Analyst [18]

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I joined the call a bit late, so I don't know if these questions were asked before, so I'm just going to go ahead. My first question is on your investment income. So I just wanted to understand that given the lower interest rates, et cetera, and the [thought for your learning], as you rightly called it, are you looking -- how much are you planning to change your investment split towards alternatives or some other asset class as of such? And is there any specific allocation target that you have in mind there?

And my second question is just a continuation of that question at German retail. You mentioned that you [were in] kind of investing more in digital there and that you would not shy away from doing that. So I just wanted to understand how big is that number there.

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Immo Querner, Talanx AG - CFO & Member of Management Board [19]

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Let me start with your second question, and I can't give you a precise figure, but it certainly would not be anything that would endanger our EUR 240 million objective -- minimum EUR 240 million objective for 2021. And our continuous path was this. You may recall that I think on the occasion of the discussion of the full year figures, we arrived at a very simple piece of mathematics. I think the old EBIT for the full year 2018 was EUR 180 million. The difference between EUR 180 million and a target of EUR 240 million makes EUR 60 million. EUR 60 million divided by 3 years makes roughly EUR 20 million. If you apply kind of straight-line method it would roughly take us to EUR 20 million EBIT improvement per year. I think if you look at this trajectory, I think the -- it is not really very likely that this trajectory would be endangered by these initiatives.

As far as the investment start is concerned, yes, we started to invest into alternatives infrastructure I think many years ago. The first interim target was like EUR 2 billion of investments in infrastructure -- with the kind of next logical step being around EUR 5 billion. The reason -- why EUR 5 billion? We know from the analysis [that] our solvency data that any asset allocation beyond 4% to 5% of the asset under management would greatly benefit from the marginal diversification that would -- that could become questionable after 4% to 5% asset allocation. So until then, it's probably a relatively safe bet if you find assets that would be adequately priced. And even in the field of infrastructure, there are good investments and not so good investments. Some underpriced, others are overleveraged and others would suffer from very difficult to assess political risks. And there, we try to be picky. But we're continuing our sort of our initiatives into this direction. We build up a technical staff and a team that can [continue] to invest in these assets but on a disciplined basis. And as a result of Q1, I think there has not been any inclination to deviate from our [low] , better strategy. I think this is time when it really pays off that I think we have implemented, by and large, a very disciplined duration match investment style that we could afford to continue a [low,] better kind of strategy, which is not to say that there is no risk in the portfolio, but that I think we really don't want to overdo it. And we would not want to yield to the pressure to drive us into yield hunting. And sometimes, I've got the impression that this is exactly what people in Frankfurt want us to do.

Question answered, Rahul?

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Rahul A. Parekh, JP Morgan Chase & Co, Research Division - Analyst [20]

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Yes. Yes. Perfect.

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Immo Querner, Talanx AG - CFO & Member of Management Board [21]

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Thank you very much. Any more questions, Marie?

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Operator [22]

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We have no questions at this time. (Operator Instructions) We have no further questions.

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Carsten Werle, Talanx AG - Head of IR [23]

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Sure. Well, thank you for this -- being our guest this morning. I hope you got what you wanted and looking forward to talking to you again on the occasion of our Q3 results. Bye.

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Operator [24]

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Thank you. Ladies and gentlemen, this will conclude today's call. Thank you for your participation. You may now disconnect.