Letter from the Chairman of the Board of Management

Photo: Herbert K. Haas

Dear Shareholders,
Ladies and Gentlemen,

2012 was a historic year for the Talanx Group. We listed the Talanx share on the Frankfurt Stock Exchange on 2 October despite a difficult market environment, thereby achieving a strategic goal that we had been pursuing for some time. With a volume of EUR 817 million, the IPO was at the time the largest since March 2010. The placement price was EUR 18.30 per share and the first traded price was around 4% higher, at EUR 19.05. The share price had risen around 17% above the allocation price by the end of 2012, and this pleasing development continued in the new year.

The IPO was an important and carefully considered step in the planned development of the Talanx Group for us and our main shareholder, mutual insurance company HDI V. a. G., which still holds a significant stake of 82.3% in the company. We now have the financial flexibility to maintain a successful long-term position on the global insurance market in future.

We are satisfied overall with our business development in 2012. Like the entire sector, Talanx was largely spared major losses from natural disasters. One exception was hurricane “Sandy”, which ravaged the east coast of the USA at the end of October, causing substantial damage. As losses incurred up to that point were moderate, the Group as a whole was able to absorb the burden from “Sandy” within the planned major loss budget.

2012 was influenced to a much greater extent by developments on the capital markets. The sovereign debt crisis kept us all in suspense during the first half of the year and was only banished from the headlines, at least for the time being, by ECB President Mario Draghi’s unambiguous commitment to the stability of the euro. However, investors are continuing to focus on the stability of the banking system, which is of immense importance to a major asset manager such as Talanx. Low interest rates, fostered by the support measures provided by central banks and governments, mean that it is still difficult to generate an adequate return on investment. Although the decline in interest rates enabled us to achieve some gains on government bonds with a good rating, the outlook remains extremely challenging with ongoing low interest rates on the capital market. Realistically, therefore, we must expect net returns on investment to decrease further. We will need to compensate for a decline in investment income with an improvement in the underwriting result. Our divisions have taken this into account in their plans for 2013.

In economic terms, we improved main key figures at Group level in the 2012 financial year. Operating profit (EBIT) grew by 42% year-on-year to EUR 1.8 billion, while Group net income was up 22% at EUR 630 million. The accumulation of major and very severe losses in 2011, however, must be taken into account. At 9.8%, the return on equity for 2012 almost reached our target return of 10.0%, although shareholders’ equity rose by EUR 2.1 billion, mainly due to net proceeds from the IPO and volatile valuation reserves in investments.

The pleasing Group net income is mainly attributable to our two reinsurance segments, both of which significantly increased their operating results. Industrial Lines increased its gross premium by 14% and achieved a positive combined ratio of 95.1%. Retail Germany made good progress with ongoing measures to increase profitability, which was reflected in an improved combined ratio of 100.6%. Finally, Retail International benefited from the first-time consolidation of the two newly acquired Polish companies TU Europa and WARTA, which made a substantial contribution to the 31% increase in gross premium and the striking improvement of 96% in the operating result.

We consistently pressed ahead with our international growth strategy in 2012. Industrial Lines opened new branches in Canada, Singapore and Bahrain. A joint venture with a local partner began operating in India. Retail International concluded its acquisitions in Mexico and Poland after obtaining approval from all the regulators concerned, and immediately began to integrate these entities into the Group. As you can see, Talanx systematically strengthened its presence in its strategic target regions, remaining true to its strategy of focused expansion in 2012.

However, there is one entirely new aspect to the last financial year – for the first time, our shareholders will receive their share in Group earnings. The Board of Management and the Supervisory Board are to propose a dividend of EUR 1.05 per share to the Annual General Meeting. All shares will be entitled to dividends for the full 2012 financial year, irrespective of the fact that the IPO did not take place until October. This represents a dividend yield of 4.9% based on the year-end price and of 5.7% for our initial subscribers, based on the issue price. We will continue to strive in the coming years to pay you an attractive dividend based on the performance of your company.

I would like to extend heartfelt thanks to you, our new shareholders, for the confidence you have shown in Talanx with your investment. We – my colleagues on the Board of Management and I as well as all employees of the Talanx Group – will do our utmost to justify your confidence placed in Talanx. We look forward to meeting many of you in Hannover at our first Annual General Meeting since the IPO on 6 May 2013. We also hope you will continue to remain favourably disposed to us in our first full year as a listed company.

Yours sincerely

Photo: Signature Herbert K. Haas

Herbert K. Haas