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Edited Transcript of TLX.DE earnings conference call or presentation 11-Nov-19 8:00am GMT

Q3 2019 Talanx AG Earnings Call

Hannover Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Talanx AG earnings conference call or presentation Monday, November 11, 2019 at 8:00:00am 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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* Michael Hermann Haid

Commerzbank AG, Research Division - Team Head of Financials

* Paris Hadjiantonis

Exane BNP Paribas, Research Division - Research Analyst

* Roland Pfänder

ODDO BHF Corporate & Markets, Research Division - Equity Analyst

* Thomas Fossard

HSBC, Research Division - Co-Head of European Insurance and Analyst

* Vikram Gandhi

Societe Generale Cross Asset Research - 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' 9-Month 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, sir.

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

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Yes. Thank you, Elaine. Good morning from Hannover. This is the Talanx' 9-Month 2019 Results Call. I'm here together with Immo Querner, our CFO, who will lead you through our results. And then, of course, there will be ample opportunity to raise your question.

You'll find our quarterly documents, the release, the report and the presentation on the IR section of our homepage. And you may follow this call via phone and via webcast, and there are replay options for both channels.

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

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

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Thank you, Carsten. Good morning to everyone. Let me start right with Exhibit #2, that's a kind of elevator pitch. So the first 9 months have been rather pleasing, I would say. We're very satisfied with what we see. Top line is up, and even with an accelerating momentum. The EBIT has increased by more than 26%.

As far as the development of one of our most important initiatives, then this is the profitablization of the Industrial Lines segment in general and Fire in particular. And you'll recall the program name 20/20/20. We are ahead of schedule. We have already contracted 24 -- more than 24% condition increase -- combined ratio points condition increase, be it via price increases or the increase of deductibles or other means, while the original plan was only in "20%" by year-end. So we're well ahead of our plan.

The 9-month net income is up by 52%, and that has translated into group return on equity of an annualized figure of 10.4%. All this is very supportive to reconfirm our guidance for 2019, there should be above EUR 900 million. And as far as 2020 is concerned, the current guidance would now be -- it should be at least above EUR 900 million, could go up, up to EUR 950 million.

I could rephrase the whole story in slightly different terms. You may recall that our current historic all-time high in terms of profitability was 2016 with profit amounting to EUR 903 million. So as of today, we are set or not too far away from coming up with a fiscal year 2019 that could be an all-time high. And looking into 20/20/20 -- or looking into 2020, sorry, we're set for another record in next year to come.

Putting this into our long-term perspective, a view that we shared with you on the occasion of our last Capital Markets Day, we said that there should be an underlying growth dynamic of our EPS per share of 5% PA compound, starting on a base of 800 -- pro forma base of EUR 850 million back in 2018. If you arrive at a precise calculation, that would take us into a result that should be around EUR 937 million, and that is more or less right in the middle of the guidance that we've just released for 2020. Thus, we believe we're very consistent and -- with what we've said. We are very much in a delivery mode. Although, and this should be mentioned at least in passing, we are faced with significant headwind in the financial income due to the protective and worsening low interest rate environment that roughly translates into a headwind of EUR 25 million after taxes minorities in 2020. So this is, I think, the broad picture.

Let me now dive into the 9 months, as you see them on Slide 4. Gross written premiums are up by 12%. Currency adjusted is a little bit less, and that basically tells us that forex has been our friend, at least on average, and that is mainly driven by the U.S. dollar.

Net investment income is up. Why is it up although we're suffering from a low interest environment? The answer is relatively straightforward. Yes, we've benefited from the roughly EUR 100 million Viridium effect. Yes, we've benefited from some extraordinary gains of having disposed of some real estate investments, particularly in Eastern Europe. And there was the need to fund to ZZR a slightly higher amount than originally planned because the low interest rate environment requires a higher buildup of the ZZR.

I think all the other figures I've already mentioned. 52% increase of the net income, and 10.4% annualized return on equity. Q4 -- sorry, Q3 on a stand-alone business is probably at least as impressive. We're talking about a top line growth of 14%, i.e., the growth momentum is intact. Net investment income is up. And here again, it is ZZR-driven realizations, plus some extraordinary gains when disposing real estate. And net income after minorities is up by 412%, which is quite a remarkable comeback after a somewhat disappointing Q3 2018.

As far as our large loss budget is concerned, we are well on track. We're talking about an underutilized pro rata large loss budget in our Reinsurance Division. And it is good news because we know that (inaudible) will be costly, that will be digested accounting wise in Q4.

As far as the Industrial Lines business is concerned, I'd like to mention 2 things. A, we are, and this is I think now kind of normal to a certain extent, below our pro rata large loss budget. And this is really new for a very long period of time, plus the relative share of our man-made losses is significantly down, which is good. And this is another indicator for the success of our project 20/20/20, which I'll come back to in a second.

Slide 7 gives you an overview of our combined ratios. Talanx, as a group, we're talking 98.5%. Certainly also driven, and you may recall the explanations given by Roland Vogel when discussing Hannover Re's results last week, driven by conservative accounting as far as Hannover Re is concerned.

Industrial Lines, I think, is interesting. For the first time 9 months, we are talking 101.4%. Q3, on a stand-alone basis, yes, this is the black 0 that we've been waiting for. And the Industrial Line has delivered that. Will that be good enough to support 100% for the full year? Probably not quite. Our current expectation is around 101% for the full year 2019 combined ratio in the Industrial lines, but pretty close to what we have originally expected, and Q3 certainly provided some good tailwind.

Retail Germany is doing fine, on a normalized basis i.e., after deducting the investitive costs that are associated with our KuRS program. And I think within 2019, we will sort of -- we'll have the best behind us. We're talking 96.1%. And putting things into perspective, you may recall that by 2021, we wanted to talk about or we want to achieve a combined ratio at around 95%, and very -- we are very confident that we are going to accomplish that.

Retail International is doing extremely well, 95%. I think a very strong figure. A brief comment in Turkey. The 108% is driven by 2 things -- or sort of 2 things should be borne in mind. One is that, of course, we benefit from a very supportive interest rate environment, i.e., you can make a living at the back of combined ratios will well below -- above 100%, plus a single-digit percentage figure is attributable to change of accounting policy that has led to higher technical costs and lower nontechnical costs that are EBIT neutral.

Slide 8, I think, is interesting. And we are very pleased by this chart because it shows that all lines have contributed to the 27% increase of our EBIT in the aggregate, all dividends -- including all our primary dividends.

Slide 10. As usual, I'd like to start with a deep dive into our Industrial Lines segment. So the gross top line is up by 30%, and that is, of course, inflated by the consolidation of our specialty business that we bought from Hannover Re. At least we bought 50.2% of what used to be called Hannover, now HDI Global Specialty. A significant part of this top line is reinsured by Hannover Re, and this translates into a net premium growth that is not quite as strong as the gross line development. Here, we're talking 12.5%, and that gives you a feeling for the underlying natural growth of this line. I mentioned this not because we are in a kind of growth fever, I mentioned it because you see that -- again, you'll see this in a second that there is no need to be concerned about our willingness and ability to be adamant and -- when it comes to implementing our 20/20/20 project. As we grow the business in a wide variety of activities beyond the Fire business, there is no need to be hesitant when it comes to enforcing our minimum underwriting standard when it comes to pricing or other conditions.

Yes, large loss business -- large loss budget utilization has been below 100%, which is good. As of the 1st of October 2020, we have already implemented price addition increases that translate into combined ratio improvement of 24% in 20% of our business, i.e. the Fire business, and thus, we are ahead of plan. You'll get an update about the dynamics of this figure on the occasion of the upcoming Capital Markets Day.

We have benefited a bit from some lucky punches on the asset side, i.e., by selling mature portfolio of private equity investments at very favorable terms. All that have not translated into a significantly improved return on equity figure. That's a good income stub. Everyone knows that this is not the end, but it is a very, very, very good start.

As we talk about the project 2020, you will see a chart that you should know by now that is the usual graphical representation of where we should be, and this is the gray area and where we actually are. And these are the blue bars. And when looking into the 1st of January 2020, with all the things we've already done by the 1st of October 2019, we have already contracted a conditioning improvement worth 24.2% combined ratio point. And we are very proud and pleased about this figure.

Retail Germany. I think it's good to see that both segments of this division have contributed to the growth. And this is life and nonlife. And the momentum is kind of stable. The operating result is up. We talk about EUR 185 million EBIT for the first 9 month. Again, putting things into perspective, the result of the straight-line method that I introduced, I think, some 9 month ago, would be an expectation of around EUR 200 million by year-end. I think it's fair to say that 9 months EBITDA of EUR 185 million is very supportive. Yes. On the other hand, I think it's also fair to say that on the back of this strong development that we've seen in Retail Germany, we can now afford to be even accelerate some of the projects that we want to implement in order to improve a wide variety of digital initiatives and growth initiatives, particularly in the SME sector. So that could cost a handful of euros in Q4.

Return on equity, 5.8%. Again, it's not where we want to be medium to long term, but again, I think all -- sort of the -- all indicators point into a very good direction and suggest that we are well on track.

Retail Germany P&C. We've grown the business by 2%. That is true both for the first 2 months as it is true for the Q3-to-Q3 comparison. The main growth driver would be SMEs and self-employed professionals right in line with our strategy, while we are extremely disciplined when it comes to dealing with a softer market in the motor business. Either the motor business is or lives up to our underwriting standards, the pricing standards than we like the business. If this is not the case, we would not write it. While the SME focus or self-employed focus is probably good for the bottom line, it is fair to say that the -- both the acquisition costs and the administrative costs are slightly higher. Still, we believe that this is the right business for HDI Germany to be in, and we're very much encouraged this division to pursue this course of action.

Retail in -- retail life. Again, the top line is up. And the main growth drivers would be biometric business, both conventional biometric business and the biometric business you'd find in a bancassurance business and would be capitalized savings business. So far, so good. The operating result that is to the right-hand side of the chart is up by 18%. To be fair, we have benefited from 2 or 3 lucky one-offs in the second and third quarter. That would probably not reoccur in the fourth quarter. Yes, that is a kind of right basis for a very confident view on what is going to happen in the full year 2019.

Retail International, growth is up by 3%. If you look at a figure that is of high interest to us, and this is the currency-adjusted premium top line development in our core P&C business, we're talking 9.9%. So this is almost double digit. So this is very much in line with what we want to see. The operating result has advanced even by great growth rates. We're up by 13%.

Looking ahead, I think it's fair to say that Q4 would probably would have to digest 2 or 3 things that should -- that would normally not occur in every quarter. A, you may remember that we acquired ERGO Sigorta in Turkey. And in running up for the merger of the 2 companies, we have initiated a post-merger management program that is associated with some transitional costs that we will account for in the fourth quarter. Here, we're talking about a double -- single-digit -- a higher single-digit million euro figure. You also may recall that we have teamed up in Brazil with a partner to develop a joint venture that, again, is now going live and where we're associated with some initial costs. And we will probably -- will be hit, to a certain extent, by the violent demonstrations that we've seen in Chile that occurred in October. So it's good to have a very strong first 9 month, and that would help us to also deal -- from an accounting perspective, it's probably somewhat weak in Q4 as far as Retail International is concerned.

Reinsurance. I think you've already heard the story from Roland Vogel on the back of a very strong development of the Life Insurance business, on the back of a very strong investment result, on the back of disposal of the deal and the group internal transaction that you would not find in our figures because they will be deconsolidated as it is an intergroup's transaction, but that is something that you'd see in the kind of re stand-alone figures. And on the back of an underutilized large loss budget, they have decided to be somewhat more conservative as far as the reservation for the ordinary P&C business is concerned. But I think you all remember that.

Net investment income, Slide 18. I think what's interesting to see that the current interest income on a 9-months-to-9-months comparison is up by 1%. So we're talking about a very robust or resilient set of figures. How come? Well, A, we benefit from the maturity of our investments, i.e., just because interest rates are down today. That not automatically translates into bigger figure. The bad -- flip side of this line is, however, that when it hits a kind of persistence headwind that we have to digest over time. And for the year 2020, that translates into a structural headwind of EUR 25 million after taxes and minorities in comparison to a world in which we would not have suffered from the most recent deterioration of the interest rates. The other reason why the interest -- the current income is fairly stable is, of course, the going inflow of assets that we see on our balance sheet.

Let me turn to Slide 19. The low interest rate environment that we currently are exposed to, of course, also translates into a growing equity base. And this is accounted for under the item other comprehensive income. And this is up. And that now translates into a book value per share that is almost EUR 40.50 per share. And even if you want to exclude goodwill, that has been up by almost EUR 6 per share. This is the one part, i.e., the hidden reserves that are not hidden at the balance sheet but hidden in the P&L. There is another set of hidden reserves in IFRS for balance sheet, and this is the hidden part, i.e., a part of the fair values that are not translated -- that are not reflected in the balance sheet as such. If you look at this figure, you're talking about another almost EUR 2 per share that is attributable to the shareholders after taxes, minorities and policyholders that would have to be added to the figures that we've just discussed.

Solvency II. After 9 months, our fully loaded Solvency II figures, a figure, i.e., without using transitionals, is down to 196% from 203%. Now probably, we would assume that this is -- that is driven by the interest rate development. This is only partially true. The interest rate effect that translates into weaker Solvency II figures for the life carriers would only expect -- would only explain less than 4 percentage points. By just looking at the life effect or the interest rate effect, that would have taken the figure from 203% to anything between 199% and 200%. The rest is the net effect of weaker Solvency II figures at hand as we've -- as they've reflected there are business opportunities that I see for 2020 that translate into higher premium-risk charge, the premium risk that would have to be digested by the calculus, and some positive maldevelopment in regards the operational risk. Anyway, the 196% is well in line with our -- at the upper range of our target range. And then the fact that the interest rate decline only translated into a 3% to 4% deterioration of the figures is probably more demonstration of the resilience of our business model.

Otherwise, I think the first 9 months give us every reason to be very confident when it comes to reconfirming our guidance for 2019. It should be more than EUR 900 million. Now please do bear in mind that, historically, our record result in 2016 was, I think, at EUR 903 million, something like that. So if there is no CCC event, no catastrophe, no turmoil on the capital markets or no catastrophe, I think it is rather likely that we're going to see a record result in 2019. And on the basis of this, I think there is no (inaudible) as to why there should be a downward pressure in our dividend policy.

As far as 2024 -- 2020, sorry. Slide 24, 2000 -- outlook for 2020 is concerned, I think the group net guidance would be -- it should be at least EUR 900 million. So it should be at least as good as we see 2019. And it could be more. It could be EUR 950 million or anything in between. And that means that although we have to digest a EUR 25 million headwind from the financial income and although there are no reasons why Viridium should happen again in 2020 because it has happened already in 2019. So although we're talking about a EUR 35 million "burden" to what we've seen in 2019, we believe it's going to improve. And it is going to be -- so at least it is not completely unreasonable that from today's point of view, not only 2019 would be a record result, but 2020, another record result would also be on the cards.

Now putting this into the long-term perspective. You may recall our Capital Markets Day last year in Frankfurt that we said that based on a normalized-income basis of EUR 850 million in 2018, it should be a 5% compound increase per year. If you work out a figure, that would take you exactly to EUR 937 million. And yes, I think there is more that's right in the middle of what we currently guide for 2020, despite the headwind that we -- that I've just mentioned.

So that's it from my side. Of course, I would not be surprised if there are some questions.

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Carsten Werle, Talanx AG - Head of IR [4]

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Elaine, I think we could start the Q&A then.

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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 from Vikram Gandhi from Societe Generale.

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Vikram Gandhi, Societe Generale Cross Asset Research - Equity Analyst [2]

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I've got three questions. Firstly, can you update us on your thinking about the German Life Insurance back book from a long-term perspective and how that might have an impact on your dividend upstreaming and ROE ambitions going forward?

Secondly, how would you characterize the underwriting performance for Industrial Lines for the third quarter? Would you say there was an element of luck that held? Or would you be very confident that this is the result of the actions taken that did -- actions taken over some time now? And lastly, it would be great if you can share your thoughts on the reserves development for Industrial Lines as well as Retail International, particularly Poland.

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

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Thank you. Well, as far as the Life book is concerned, structurally, I think, although we're talking about a very difficult interest rate environment, I think the spread, i.e., the difference between what we earn and what we owe to policyholder customers, is very robust. And this is -- the reason for that is that we've prudently invested in sufficiently long-term investments. And this is particularly true for HDI Leben. That is one -- that is probably one of the companies that has been very much in the -- right in the middle of public interest.

ROE wise, I think it will take a while before we fully earn the cost of capital in the German Life business. That will take some time, and the more successful we are, we -- in terms of reducing the cost base, i.e., by implementing our IT project, Voyager, making 1 factory out of at least 2 factories, the more disciplined we are in terms of selling biometric and capital-light policies and the more successful we are in terms of managing the back book, the faster we get there. Is this something we're going to see in 2020? Probably not. But I'm very confident that at least in the business mix that we see, the -- at least the division, the Retail Germany as a division is not too far away from maintaining the cost of capital.

Underwriting, I think there is always an element of luck and bad luck. But if you look at the -- and this is why I mentioned this when I discussed the large loss budget utilization, historically, we have suffered from man-made losses as opposed to natural catastrophes. Now the fact that in Q3, the first 9 months, it's been more natural catastrophes and not so much man-made, it tells you that something has changed. Something has changed to the better, i.e., I think we are much better in control of -- or sort of the structural exposure to man-made risk that can be very idiosyncratic has improved. We see -- we also see this when we look at the frequency loss ratio on attrition losses that have come down to the Fire business, have come dramatically down in the Fire business. This is another indicator of a structural shift of the underwriting profile. Therefore, we are really optimistic that this is not just luck, this is perhaps the absence of bad luck in combination with rigorous underwriting. And we are really committed to taking this well into 2020, institutionalize this rigorous underwriting to export all the things that we've now learned to other lines of business to support what you could dub a more capitalistic general underwriting attitude. So here, we are very pleased, and I think will -- there will be ample of opportunity to discuss some of the insights and details of this development when we meet in Frankfurt.

Reserve development wise, I think it's fair to say that in Q3, we have taken the opportunity, particularly in the Retail segment, to support the redundancy levels in our books, and that is both true for Retail Germany as it is true for Retail International. I think you mentioned Poland. Poland has probably seen the climax of the good underwriting years, but as of today, we're still benefiting from very healthy figures. And yes -- and also, this has helped us to be very prudent.

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Carsten Werle, Talanx AG - Head of IR [4]

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Questions answered, Vikram?

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Vikram Gandhi, Societe Generale Cross Asset Research - Equity Analyst [5]

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Yes. If I can just very quickly come back on the third point. So am I right to understand that the redundancy levels for the Retail segment has gone up slightly, basically? That's what you're trying to say, right?

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

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Yes. This is the feeling. You know that the annual reserve review is only once a year. But when you talk to -- sort of to the actuaries, to the accountants and look at some of the indicators that will be available to us, you would also arrive at the conclusion that at these segments, the redundancy levels should have gone up.

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Vikram Gandhi, Societe Generale Cross Asset Research - Equity Analyst [7]

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Okay. And any comment on the reserves for Industrial Lines? That was the bottom part of the question.

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Immo Querner, Talanx AG - CFO & Member of Management Board [8]

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Okay. Sorry. Yes, I think we've seen a kind of moderate runoff result. We've seen a positive runoff in the results, but it's not been skyrocketing. There is perhaps a kind of implicit reserve buffering because you'll recall that whenever the actual utilization of the large loss -- a large loss budget is below what we would have expected for a certain period of time, we account for the difference as if it had happened, sort of like Hannover Re. Now the fact that in Q3, the large loss burden has been not as high as originally budgeted has translated into setting aside some buffers for Q4. Here, we're talking about moderate figures, but I think it's the right side of the street.

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Operator [9]

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We will take our next question from Paris Hadjiantonis from Exane BNP.

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Paris Hadjiantonis, Exane BNP Paribas, Research Division - Research Analyst [10]

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Basically, I have two questions, both, I think, to an extent related to Industrial Lines. Firstly, your 20/20/20 initiative, that obviously relates to just 20% of the overall portfolio. So I'm wondering what kind of pricing environment you're seeing for the rest of the portfolio. Even the -- generally, the comments are for better prices in commercial lines not only in Germany and North America but a wider effect on the -- in terms of globally.

And then, on the change of guidance for the combined ratio for this year, you were previously guiding for around 100%, now you're guiding for around 101%. I just want to check that there's not anything visible bad news coming into Q4 and this is more kind of conservatism into your numbers and into what you will be putting into reserves.

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Immo Querner, Talanx AG - CFO & Member of Management Board [11]

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Okay. As far as the rest of the portfolio is concerned, I think it's fair to say that looking back into the past years, higher has been the main problem. It is not to say that the rest of the business that we're enrolling and sort of the rest of the business, so -- and what does it mean? Yes, we've concentrated and we've launched an initiative through 20/20/20, but I think all the discipline and all the tools that we've now seen at work in the Fire business, of course, automatically trigger the question, is there anything in there that we can use for other lines? And yes, there is -- or there are many things that we will roll out in terms of lessons learned. The Steering models focusing on the bottom line, a very consistent implementation of a maximum tolerable combined ratio concept, all these are things that should also help us to improve figures in the other lines.

As of today, 90% of the premiums that we earned -- that we earn, we do earn in markets with hardening markets. So I think that kind of should answer the question whether -- the underlying improvement, whether this is limited to Fire or whether it goes beyond that? It does go beyond that. And that, of course, is good, but it is also necessary.

A change of the guidance. I mean if we look at the figure, we talk about net premium incomes of roughly EUR 3 billion in the segment. The 1 percentage point is roughly EUR 30 million. This is a lot of money for you and me, but it is sort of -- in a context, this is not, I think -- I wouldn't call it a big change, but it tells you something. It tells you something that we are really committed to delivering on the long-term profit improvement part of Industrial Lines. Next year, we want to see a black 0 or a figure that is below 100%, and this is not the end. This is -- this would then be a good start because we all know that in today's interest rate environment, the -- you cannot earn the cost of capital just with the combined ratio of around 100% or even below 100%. We need to improve this figure. It certainly needs to go into the regions that are more in line with what we want to achieve in the Retail segments.

And let me put it this way, if you were to draw a straight line, again, and I would use this straight line as a the kind of expected combined ratio trajectory, it would probably be fair enough to assume that whenever we benefit from luck -- coming back to the first question that has been raised, so whenever they would be underwriting luck, we'll probably invest this luck into higher redundancy levels to support any further guidance and the reliability and resilience of this trajectory going forward. I think this would be our kind of philosophy. We do want to deliver. And if there is really luck, we'll probably set it aside for some bad times. So this is the kind of logic behind the guidance. But again, in 2020, we should -- in the absence of kind of CCC type of events, we should be talking about a technical underwriting profit in the Industrial Lines division.

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Carsten Werle, Talanx AG - Head of IR [12]

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Questions answered, Paris?

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Paris Hadjiantonis, Exane BNP Paribas, Research Division - Research Analyst [13]

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Indeed.

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Operator [14]

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(Operator Instructions) We will take our next question from Thomas Fossard from HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [15]

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Yes. I've got a couple of questions. The first one will be related to your sort of Solvency II ratio sensitivity to interest rates. The last time you updated the sensitivities was at the end of last year. I was wondering if because of the low interest rate and maybe complexity coming into your books, the sensitivity is higher currently than the one you presented at the end of last year.

The second question would be related to your full year '19 net income guidance, which looks pretty conservative, especially since Hannover Re revised its own 2019 net income guidance upward. So I was wondering if you could elaborate a bit more on maybe things that we should have in mind and why this apparent cautiousness, I would say, on the '19 guidance.

And maybe the last one would be related to your target to -- in terms of dividend cover to 1.5x to 2x. Any update on what is the current situation at the present time?

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

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Okay. Let me start sort of -- let me take them those as you've put them. For the first figure, I think the interest rate sensitivity if I draw -- sort of draw any conclusion out of the Q3 figures, I would say that the sensitivity to low interest rates has been probably remarkably low because the interest rate decline has only cost us less than 4 percentage points, subject to pretty low -- subject to ratio. I think we've -- that would now be premature to update our complexity analysis. But I think that was -- if we really looked into the details of the figures, that was something that we actually kind of liked. I think many people would have expected a much more pronounced development.

As far as the guidance question is concerned, now sort of -- I hate to be extremely technical. Hannover Re's guidance has been EUR 1.1 billion, plus EUR 100 million from Viridium. This is a very complicated calculation because it translates into EUR 1.2 billion. This guidance had not included the extraordinary effect out of the disposal of Svedea. This is a management -- MGA Company in Sweden that has contributed another EUR 50 million, essentially, a tax-free income to Hannover Re. And that has now been recognized in the guidance, and this has led to an increase of the guidance to EUR 1.5 billion -- to EUR 1.25 billion. And fortunately, and this is something that I think should be in the public domain, the EUR 50 million extraordinary profit that you would see in the account of Hanover Re would not be seen in the accounts of the Talanx Group. The reason is very simple. Svedea has been sold to HDI Global Specialty, so there is no extraordinary profit. If you deduct the EUR 50 million of this calculus, you would still stand at EUR 1.2 billion. And this is more or less the figure that we've seen at the end of Q2. And together with Hanover Re, we increased our guidance at the end of Q2 to more than EUR 900 million. Unfortunately, accounting would prevent us and me from showing the EUR 50 million profit of an intragroup transaction, and thus, there was no reason to change the guidance again. I think this is a very tactical but still important detail that should not be forgotten.

I think the third question was...

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Carsten Werle, Talanx AG - Head of IR [17]

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Dividend cover.

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Immo Querner, Talanx AG - CFO & Member of Management Board [18]

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Dividend. Sorry, dividend cover, yes. I think we'll give the details in -- or not. We'll give the details of things as we see them probably by year-end 2019 when we meet in Frankfurt. But I think it's fair to say that we anticipate a major leap forward into the dividend coverage, i.e., the ratio between the standard dividend and the retained earnings that we would expect for year-end 2020. We will not be there already, so the 1.5x coverage ratio will not be achieved by year 2019. But we anticipate major improvement that I will share with you in Frankfurt.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [19]

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If I may just may come back on the interest rate sensitivity. So maybe the other way to raise the question is, why have you been yourself surprised by the absence of obviously a more significant drop in Q3 alone?

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Immo Querner, Talanx AG - CFO & Member of Management Board [20]

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I think the reason is -- I think this is kind of enshrined genetics by now. If you had asked me 6 years ago that German Life Insurance company can survive interest rates that are as low as they were at the end of September, my answer would have been, no way, impossible, at least not without using traditionals. But this kind of (foreign language) has been proven wrong. I think the reason is that the mechanism of how we've managed the asset liability calibration, the way how we've turned the new business structure and the way how we've managed the back book, it's paying off even more than originally thought. I think this is my takeaway.

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Operator [21]

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(Operator Instructions) We will take our next question from Roland Pfänder from ODDO BHF.

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Roland Pfänder, ODDO BHF Corporate & Markets, Research Division - Equity Analyst [22]

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Turning to the International business. If you look at the combined ratios in Mexico and Chile, they are trending up in the third quarter. So is this the random fluctuation here? Or maybe even could you comment on the political unrest we currently have in Chile and the impact you might see on the business?

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Immo Querner, Talanx AG - CFO & Member of Management Board [23]

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Thank you. The current political unrest that we see in Chile is not reflected in the figures that we see as per the end of September. So whatever it is, it's not on the figures.

Reasons for development in Chile. There are some -- a minor legacy book that had to be dealt with. There are some integration efforts. There was, I think, a NatCat event in the first quarter. I think this is kind of not one single -- big single reason why Chile is what it is. It's kind of going through a transformation with the new management that will probably take some quarters to fully play out.

The development in Mexico is completely different. We've got to decide how much growth we would want to see and what "price" we want to pay for that growth. So this is a more controllable managerial issue when managing the combined ratio in a growth to bottom line prioritization exercise. We all know that Chile -- that Mexico is one of our target markets. It's not that difficult -- it's not -- sorry, it's not that easy to find attractive M&A targets. We would be very unwilling and hesitant to overpay should there be at one point an M&A target. That means that the organic growth is something that is our main priority. And here, the policy is that as long as the bottom line figures are okay, we are more than happy to invest into growth, but this is something that can always be fine-tuned and managed. So this is something that I wouldn't consider to be an issue.

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Roland Pfänder, ODDO BHF Corporate & Markets, Research Division - Equity Analyst [24]

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Maybe coming back to Chile. Could you give us a flavor for fourth quarter impact? Is it significant? And do you have already any insight there?

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Immo Querner, Talanx AG - CFO & Member of Management Board [25]

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Not really. I think it would probably make it on the large loss list, that is true. But anything else would really be premature. But yes, as you will see this in the figures, we thought it was worth mentioning it, and it's also part of our outlook statement in our quarterly release. But it would really be premature to attach a precise figure to that, yes.

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Operator [26]

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We will take our next question from Michael Haid from Commerzbank.

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Michael Hermann Haid, Commerzbank AG, Research Division - Team Head of Financials [27]

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Two questions. One, on German Life Insurance, of course. The slide said, our EUR 185 million capital gains to finance the ZZR for 2019. With the new corridor method, what are you expectations for the ZZR requirement for the full year 2019? And can you remind me of the figure for 2018 again?

Second question, Motor Germany, you mentioned the softer market in Motor Germany. Is this your expectation? Or is it already experience, knowing that the renewal season has just started yet? And what are your expectations here?

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Immo Querner, Talanx AG - CFO & Member of Management Board [28]

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Let me start with the ZZR question. I think what we see or what we expect for the full year 2019 is a figure around EUR 430 million for the full year, and that compares to roughly EUR 301 million that we had account for in 2018. The reason is not the corridor method as such because the corridor method has really helped the industry and has helped the industry both in 2018 as with 2019. But regardless of the support or the benefit of this new -- the new calculus, the fact that the interest rates have gone down has necessitated a higher buildup in comparison to what we've seen in 2018. So that is it. By year-end, we would be expecting stock of ZZR local GAAP that is a little bit shy of EUR 3.9 billion by year-end.

Now Motor. I think the -- getting a bit rougher. I think there is risk of an easing price discipline in the market. This is something we, of course, cannot control, but what we can do is decide whether we want to support or participate in a deterioration -- in a deteriorating price spiral or not. And here, the clear answer and message is that we don't want to support that and want to stick and cling to profit-oriented underwriting policy, even if this would be detrimental to the top line.

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Carsten Werle, Talanx AG - Head of IR [29]

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Any more questions, Elaine?

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Operator [30]

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(Operator Instructions) We will take a follow-up question from Vikram Gandhi from Societe Generale.

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Vikram Gandhi, Societe Generale Cross Asset Research - Equity Analyst [31]

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Sorry. This is the last one from my side. Can you shed some more light on the combined ratio development for Retail Germany? I mean if I back out the KuRS impact, what I get to is a 2 percentage points deterioration year-on-year for Retail Germany combined. And you've already mentioned some of the redundancy buildup, so I just wondered if there's anything more to it, and that's all.

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Immo Querner, Talanx AG - CFO & Member of Management Board [32]

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Yes. I like these questions because these questions already contain the answer. Yes, it is true. What you see is that the combined ratio looks weaker as it is because of extra conservatism that we could afford. Sorry for this answer without any news.

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Carsten Werle, Talanx AG - Head of IR [33]

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Any more, Elaine?

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Operator [34]

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(Operator Instructions)

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Carsten Werle, Talanx AG - Head of IR [35]

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I think if there are no more questions, Elaine, then we don't have to make it longer than it should be.

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Immo Querner, Talanx AG - CFO & Member of Management Board [36]

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Well, then I think we're looking forward to meeting all of you in Frankfurt next week. Some of the questions that you may have and didn't want to ask today, you can ask then and you'll certainly get many more answers. And we look forward to this event.

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Operator [37]

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This concludes today's call. Thank you for your participation. You may now disconnect.