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Germany's Talanx happy to lose business in battle to restore profit to fire book

German insurance group Talanx AG would be willing to shed some business as it fights to restore underwriting profitability to its industrial fire insurance business, CFO Immo Querner told analysts Aug. 13.

He also said the fall in the value of the Turkish lira could give Talanx some opportunities to bolster its existing presence in the country via acquisitions.

Fighting fire

The group, which includes reinsurer Hannover Re and industrial mutual insurer Haftpflichtverband der Deutschen Industrie V.a.G, reported a first-half combined ratio of 119% for its fire business, which dragged its overall industrial lines combined ratio to 102.3%. Across the German market, the fire combined ratio was 115%. The combined ratio measures underwriting profitability, with figures above 100% representing an underwriting loss.

Fire business comprises 20% of Talanx's industrial business, and it has vowed to cut the business's combined ratio to "well below 100%" by 2020, in what it has called its 20/20/20 goal. Its mid-term goal of a 96% combined ratio for the whole industrial division remains unchanged.

The company has already achieved a 7% improvement in the quality of the business, through a combination of price increases and narrowing terms and conditions, such as higher deductibles. Querner told analysts on a conference call for Talanx's second-quarter earnings: "If we lose some business because the market would not accept what we would require to be a minimum profitability standard, so be it."

But he said he was confident that the company could achieve the improvements in pricing and in terms and conditions because other insurers had also recognized the need for changes, given the 115% industrywide combined ratio.

"Therefore we are confident that we would get some tailwind from not just what we do but the market sentiment," he said, adding: "But even if this is not true, this would not stop us."

Turkish opportunities

Analysts also quizzed Talanx's senior management about the effects of the drop in value of the Turkish lira. Talanx's Turkish business produced a combined ratio of 103.2% in the first half, although the unit contributed €3.3 million to group profits when investment returns are factored in.

Querner said underwriting conditions in Turkey are "going to get tougher," as the devaluation of the lira would make car parts relatively more expensive when paid for in that currency. Even so, he said the lira's fall in value would not be a "major issue" for Talanx.

He added that it could even give Talanx some acquisition opportunities in Turkey, although any targets "would have to be looked at very carefully" to ensure the quality of the reserves, nor is the company keen on adding more Turkish third-party motor liability business to its books. He also said any deal "would certainly not translate into higher profits in the second half of 2018."

Deals in the pipeline

Asked about Talanx's acquisition plans more broadly, in light of a €750 million hybrid bond it issued in 2017 to help it pursue growth opportunities, Querner said the company was looking for purchases that sat between large, transformational deals and small, bolt-on purchases, and that there were deals in the pipeline. He said the company had walked away from some deals over price but that "we are still confident that something in one or the other segment is going to materialize within the next six to nine months or so."

Shares in Talanx were up just over 1% as of about 3 p.m. Frankfurt time Aug. 13, ahead of both the German benchmark Dax 30, which was down 0.4%, and the STOXX Europe 600 Insurance index, which had added 0.35%.