Good morning, ladies and gentlemen. I'd like to welcome you to our conference call, presenting our results for the Q1 of 2020. First of all, I need to apologize for the specific timing of this call and the overlap with AXA's Q1 call. Today is our AGM, and there was, unfortunately, no flexibility for rescheduling. We will also have to end our call by 10:30 A.M. this morning, as we need to go to the AGM thereafter. As usual, I'll start with an overview before our CFO, Roland Vogel, will go over the financials in more detail. I'll then comment on the outlook for the year. For the Q&A, as usual, I'm additionally joined by my board colleagues, Klaus Miller and Sven Althoff.
In the Q1 of 2020, Hannover Re was able to grow both its top and bottom line, with a net income of EUR 301 million, fully in line with our initial profit guidance for the year of EUR 1.2 billion. However, you all know that we withdrew our full-year guidance just two weeks ago due to the prevailing uncertainty surrounding both the claims development and the capital market environment. Therefore, the results for the Q1 cannot be used to draw conclusions about the full year, but purely looking at the underlying business development, I'd still say that we had a good start to the year. This is also confirmed by the return on equity of 11.5%, which is well above our minimum target. In P&C reinsurance, we saw double-digit premium growth due to increased demand for reinsurance.
The combined ratio of 99.8% was above our target of 97%, and this can entirely be explained by the decision to reserve for unanticipated coronavirus-related losses, mainly in the area of business interruption, event cancellation, as well as credit and surety. In total, we reserved EUR 220 million, implying that our large-loss budget was exceeded by around EUR 100 million. The result of our life and health reinsurance business group was not impacted by the coronavirus pandemic to date. The EBIT of EUR 124 million is quite favorable. The U.S., mortality experience was in line with expectations, and also, in general, the good result did not include any material extraordinary effects. At 3.2%, the return on investment is similarly pleasing.
Finally, based on preliminary calculations, the solvency ratio should be within the range of 220%-230% at the end of the Q! , well above our threshold of 200%, despite the considerable volatility in interest rates and credit spreads. The operating cash flow in the Q1 was particularly strong, driven by attractive reinsurance growth, as well as very solid results on the investment side. However, total assets under own management only increased very slightly to EUR 47.9 billion due to mitigating effects from decreasing valuation reserves and currency translation. Looking at our capital position, shareholders' equity was almost stable. Market movements had a strong impact in the Q1 , and the negative change in unrealized gains due to significantly increased credit spreads was stronger than the positive impact from the decrease in interest rates.
Therefore, on balance, the unrealized gains within the OCI decreased by EUR 379 million, more than offsetting the positive net income for the Q1 . The composition of the total capital on the left side of the slide is unchanged, with a high degree of flexibility around the hybrid bucket. On that note, I'd like to hand over to Roland, our CFO, who will explain the figures in more detail.
Good morning, and thank you, Jean-Jacques. Moving directly on to the segmental reporting, I will start with the development of our P&C business group. Gross written premium grew by 12%, adjusted for currency effects. This growth came in well diversified by region and line of business, and more pronounced in property than in casualty. The Americas and the APAC region contributed particularly to this growth, while structured reinsurance remained on the high level of the previous year. The large-loss situation in the Q1 was twofold. On the one hand, I would call it normal. Large-loss experience was rather benign. On the other hand, we had to deal with a high degree of uncertainty around the impact from the coronavirus pandemic, with almost no claims notifications received from our clients.
However, based on our own assessment of potential impacts from the coronavirus pandemic, we set aside around EUR 220 million in IBNR reserves for expected losses from the pandemic. These reserves are really across our book, mainly for expected losses from business interruption, event cancellation cases, as well as credit and surety reinsurance. As a result of this reserving for corona-related claims expectations, the large-loss budget for the Q1 was exceeded by EUR 96 million, which accounts for roughly three combined ratio points. Adjusting the 99.8 reported combined ratio for this budget overrun, the figure would have been in line with our 97% combined ratio target. Based on the development of a variety of single cases, the runoff of reserves was slightly negative in the Q1 .
Overall, we have to assume that the balance of our reserve developments, including conservative initial underwriting year combined ratios, led to a confidence level rather in line with the year-end 2019, but we also did not have the chance to increase it after the year-end reduction. The net investment income increased strongly, driven by higher realized gains. We will come to that, in addition to the favorable ordinary investment income. Other income expenses were positive by EUR 11 million, mainly driven by positive currency effects. Altogether, the EBIT margin is slightly below our 10% target, due to the decreased underwriting result. Finally, the tax ratio is slightly above the normal level, but this is within the normal quarterly volatility. Total net large losses, including corona-related claims, accounted for EUR 284 million in the Q1 , exceeding the budget by the already mentioned EUR 96 million.
The EUR 220 million provisions for the coronavirus complex are included in both the gross and the net numbers, as we have treated our estimates gross for net. Our large-loss list includes four events in the area of natural catastrophes, namely three weather-related events in Australia and Storm Sabina, also known as Ciara, in Europe. We did not actually record any large manmade losses exceeding our EUR 10 million threshold in the Q1 . The net Cat losses added up to EUR 63.6 million, which would have been very benign in comparison to our Q1 budget of EUR 188 million. However, in the end, the budget was exceeded by approximately EUR 100 million mentioned various times already. The next slide shows the profitability of our P&C portfolio by line of business, according to our new reporting lines.
Here, the regional split is a little bit more condensed, including the natural catastrophe components, of such reasons to no longer artificially take that out. The various lines of business are shown on a worldwide basis a little bit more consequently. Looking at the numbers for the Q1 , the impact from the large losses and the additional reserving for the coronavirus led to an increase in the combined ratios in all regional markets. Not surprisingly, the most visible effect is on our credit and surety business, where we expect to see increased loss activity due to the impact of the economic downturn. The agricultural business was affected by the bushfires in Australia. Overall, as already mentioned, the combined ratio stands at a rather high 99.8%. Let's move on to life and health.
Growth was mainly driven by a large financing fee in Australia, which we wrote in the Q4 of 2019. However, this was mitigated by the expected reduction in premium volume due to the effect from recaptures in our U.S. mortality portfolio as a result of our management action in the previous year. Altogether, gross written premium increased by 0.5%, adjusted for currency effects. In contrast to our P&C business group, the life and health result for the Q1 does not include any impact from the coronavirus pandemic. On the other hand, our U.S. mortality portfolio performed in line with expectations, compared to a very favorable experience in the Q1 of the previous year. On the other hand, the technical result is not impacted by negative effects from Australian disability business in the way it was in the previous year's Q1 .
Therefore, the underwriting result, including funds withheld, is on a comparable level to last year. Ordinary investment income was favorable. And also, in life and health, the contribution from realized gains has contributed. The credit spread widening impacted the value of our ModCo derivative. The effect was around minus EUR 27 million. However, other derivatives contributed very positively to the change in fair values for P&L, thereby compensating for the ModCo impact. Other income and expenses are mainly driven by a further increase in the contribution from financial solutions business, for which a large portion is recognized according to the deposit accounting method. Currency effects in this quarter are slightly negative. Although, altogether, the EBIT of EUR 124 million does not include any material extraordinary effects and demonstrates a good underlying profitability of the life and health business group.
At 10.5%, the tax ratio is below the normal level, mainly due to very good results from subsidiaries and jurisdictions with a low tax rate. On the next slide, the development of our investments in the Q1 of 2020 was very satisfactory. I'm particularly pleased with the strong ordinary investment income, which was rather stable despite the somewhat lower contribution from private equity. Realized gains of around €100 million are coming mainly from our fixed income portfolio. Apart from the normal portfolio turnover, we sold around EUR 500 million in lower quality credits before the crisis actually started. At the time, almost all sales within our fixed income portfolio were associated with realized gains. Impairments and depreciations were above last year, but still on a very low level.
As I already explained, the main effect within the change in fair value of financial instruments here, the negative effect from ModCo , was more than offset by other derivatives. Altogether, the ROI was very strong at 3.2%. Unrealized gains decreased significantly to EUR 1.8 billion, mainly driven by higher corporate spreads. On the next slide, you can see that, on the one hand, we have slightly reduced our corporate bond exposure, in particular within our US SME portfolio. On the other hand, the share of governments, as well as short-term investments in cash, was slightly increased, reflecting our passive de-risking approach, with new money currently being invested in risk-free assets. Finally, the price corrections on the stock markets in March were a trigger event for our investment committee to look at whether we should re-enter listed equities.
Owing to the current uncertainty, we decided to start with a buy of around EUR 250 million, a careful and moderate step that portfolio has developed positively after we bought it. The contribution to ordinary investment income is diversified, as usual, this time with a lower share from private equity. This should not be surprising in the current market environment and is expected to remain the case in the currently distressed markets. The next slide here, we have included this one because the coronavirus and the economic downturn have put the asset risk, and in particular, corporate portfolios, in the spotlight. As you can see, our corporate portfolio is highly diversified by sector, within source sectors, additionally by issuer, as we have rather strict limit control by issuer implemented. The exposure to the energy sector, which may be impacted by the low oil price, is around EUR 700 million.
The exposure to other sectors, such as retail, travel, leisure, hotel and airlines, which may be directly impacted by the current crisis, is around EUR 500 million in total, again, on a very well-diversified basis. Having said that, on the asset side, it's still too early to make any reliable estimates as regards where and to what extent we might see defaults or impairments. We certainly expect some, but the amount is highly dependent on the severity and the duration of the economic downturn and the effectiveness of potentially mitigating government measures. I think this concludes my remarks, and I would like to hand back to you, Jean-Jacques.
Thank you, Roland. As you know, we withdrew our profit guidance on the April 21st due to the uncertain impact of the coronavirus pandemic.
However, we're still showing you our target matrix with the initial targets for 2020 to allow for an assessment of the results for the Q1 . On the positive side, the return on investments is very strong at 3.5%, adjusted for the impact from our ModCo derivative. The return on equity and also our capitalization, according to Solvency II, are both comfortably above our minimum target. In P&C, the first impact from the reserving for coronavirus-related losses is visible. And in life and health, the overall result and also the earnings growth were favorable in the Q1 The treaty renewals as of 1st of April 2020 were successful for Hannover Re, confirming that the coronavirus crisis is not materially affecting us from an operational perspective.
On this date, we traditionally renegotiate our business in Japan, as well as on a lesser scale in Australia, New Zealand, some Asian markets, and North America. In the US, we mainly expanded our property business based on increasing primary rates and improved pricing in non-proportional business. Additionally, the renewals in the Caribbean and South America were successful. In Japan, we saw rate increases for loss-affected Cat business that were significant, with improvements of +40% to +60%. However, after the heavy loss burden in the last two years, we still feel that terms and conditions need to further improve. Hence, we decided to simply maintain our market share in that segment. Positive trends could also be observed in our aviation and marine portfolio. Overall, our premium in the April renewal increased by 25%. The risk-adjusted price change was +4.4%.
Looking only at the non-proportional business, the price increase was 8.3%. On the next slide, we have put together our current assumptions for the impact of the coronavirus pandemic. Overall, the high degree of uncertainty around the claims development and the capital market impact do not allow us to quantify the impact on our financials. Therefore, we can only focus on qualitative comments at this point in time. In P&C, we expect a direct impact on coverage of event cancellations and business interruption, while second-order effects are possible in casualty lines. Also, we're expecting that the economic downturn will result in insolvencies, Roland mentioned it already, which would lead to losses in our credit and surety business as well. In life and health, we believe the impact on mortality and morbidity will not be significant, an assumption that is also supported by our scenario analysis and stress testing.
The main impact on our investments is the risk of impairments, as already mentioned, and reduction in ordinary investment income. Otherwise, we feel that we have a high-quality investment portfolio. To complete the picture, the market movements, and in particular, the spread widenings, are expected to negatively impact our capitalization, but not to an extent that would bring our solvency ratio below our 200% threshold in the year 2020. Therefore, we also intend to maintain our general dividend policy. Based on the favorable renewals at 1.1 and 1.4, we see further growth opportunities in 2020 in most areas of our diversified P&C reinsurance portfolio, even though the coronavirus crisis is expected to moderately impact our growth rate later in the year. On the positive side, we would expect that the crisis will support further improvements in reinsurance market conditions.
Additionally, we would expect to see some opportunities for our structured reinsurance business. In general, highly rated reinsurers with a strong balance sheet, like Hannover Re, may see higher demand than the average market players these days. Usually, we also show the indication for the profitability versus cost of capital on this slide. However, one reason for withdrawing the profit guidance was the uncertainty regarding the claims development from the coronavirus pandemic. Hence, we're currently not yet in a position to provide an update on the profitability data. The same is true for our life and health outlook. We did not see any material impact from the coronavirus pandemic in the Q1 result. However, we also cannot rule out moderate negative effects on our mortality and morbidity business, depending on the further development of the pandemic.
In longevity, some positive effects might be possible, but this is still uncertain. We also expect continued strong profitability in financial solutions because the business is risk remote. In financial solutions, we might also see additional demand to support clients in mitigating the impact of the crisis. Apart from this, we see particularly promising growth potential in the Asian markets beyond the crisis. Overall, I see the Hannover Re Group well positioned to manage and absorb the impact of the coronavirus crisis. We're constantly updating our scenario calculations, and we will provide profit guidance again as soon as the underlying probabilities are sufficiently reliable. This concludes my remarks on the outlook, and we would be happy to answer your questions.
Ladies and gentlemen, we will now begin our question and answer session.
If you have a question for our speakers, please dial 0 and 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 0 and 2 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. And the first question is from Andrew Ritchie, Autonomous Research. Your line is now open. Please go ahead.
Hello. Hi, there. Good morning. I hope all are keeping well. I guess my main question was just to get a sense of your view on market conditions and how market conditions may change, both from an opportunity to write more business and broad pricing.
We've already seen quite a few primary companies go into the market to buy more reinsurance already. So maybe just your perspective on would you expect to see, for example, already some change in market conditions relative to what you were expecting before as early as the mid-year renewals? And the second question, just remind us how you would treat any revaluation of private equity. When would you do that? Is that at your discretion? Just some sensitivities around the private equity portfolio would be useful. Thank you.
Well, thank you, Andrew. I'll take a stab at the first question, and Sven might complement if needed. And Roland will talk about private equity. Generally, we didn't really identify coronavirus-specific changes during the 1.4 renewal, although it's very difficult to assess. But my sense is that based on client feedback, broker feedback, there is a flight to quality.
There is increased scrutiny from the buyers on capitalization level. I can see some opportunities for changes in the sense of increased shares on programs for a company like ours, and possibly also less capacity, desirable capacity, if you want, for the 1/7 renewals already and beyond. Probably more marked in the 1st of January 2021 renewals. I believe that the hardening of market conditions, which is already fueled by NatCat events in the past few years, will be strengthened, and there'll be momentum in the reinsurance market. In terms of opportunities for me, I mentioned it briefly in the introduction. I feel that structured reinsurance is the one area where we might have a good upside. We don't have specific demand right now, but a lot of questions asked by our customers on options, on structure.
And you can feel very much that all clients are looking at the wide range of options to de-risk. And reinsurance comes among the prime options for our cedants. So I also see there opportunities for growth. So both pricing and flight to quality and structured reinsurance will create momentum, in my view, in reinsurance.
On private equity,
I'm happy to take that, Andrew. I think we've mentioned before that, of course, the valuation of the private equities is a little bit less procyclical than that of the listed equities because you have these market values immediately. We are talking to managers and fund managers to get new values. We should not forget that the private equity portfolio has also, value-wise, performed very well. It does contribute significantly to the nearly EUR 1.8 billion of reserves and variation reserves we have today. We will update, of course, valuations.
Some will go down. This will have an impact on the OCI. I do not foresee really write-offs to a material extent this year. Of course, it depends on scenarios, but I don't see that. We have seen already, and this is why we mentioned it, and that is also what we would expect for the running year, that distributions from these funds and from the managers will decrease. So the usual outperformance of the contribution of private equity to the ordinary, this is something we do not expect for the year. But from a valuation perspective, this should have an impact on our OCI to a digestible extent.
Okay. Thanks very much.
And the next question is from Vinit Malhotra. Maybe your line is now open. Please go ahead.
Good morning. Just thanks. And just two questions for me, please.
One is the Slide 20, the coronavirus, the IPNR staking of EUR 220 million for these three lines. Could you just help us understand the risks on the corona a little bit? I mean, we've heard of the enhanced scope in US workers' compensation. And I know that you've reduced your premiums there, but there's also non-proportional. And then just how much of a risk or uncertainty do you see relative to this EUR 220 million from the corona effects? That's really the question. And the second thing is just on the growth in April is quite a bit far ahead of some of the renewals seen in the peer group, which are mid-single digits, really, in terms of growth.
Is it mostly your difference is coming from more the US side or more the specialty like aviation, marine, or could you just help us quantify a little bit where you might be different from the peers in this renewals? Thank you.
Well, thank you. I'll pass on these two questions to Sven.
Thank you. And very good morning also from my side. When it comes to the knock-on effects, this has played a limited part in us setting the EUR 220 million of our corona reserves. On the other hand, of course, we have to be conscious that when it comes to lines of business like D&O, E&O, where we have systemic risk out of insolvencies, in the end, certain insolvency situations may be related to corona impact.
Therefore, this is one of the aspects where the uncertainty is particularly high and where we will have better answers towards the end of the year. But we are watching this very carefully, like we are watching the credit and insurance space very carefully. It's not always easy to decide whether an insolvency is corona-related or corona was only one of the contributors in what would have happened otherwise. I would not have a specific number for you, which part of the EUR 220 million is taken care of for the knock-on effects. But as Roland has mentioned, this was very much a top-down view of how we see corona in general right now. We have spent less time given the uncertainty on how we are contributing those numbers across our business.
When it comes to the growth at the 1st of April renewal, quite a bit is driven by Japan. Jean-Jacques already mentioned the very meaningful rate increases we have achieved on both a cash and on a risk-adjusted basis. But our approach with the Japanese clients in general has been a little different compared to a number of our peers. The focus from the peer group was very much on the wind towers. But we said from the word go to our Japanese clients that, yes, we need to readjust the pricing on the wind towers. But at the same time, we also understand that giving payback will be difficult for the clients on the wind towers only. So we had a much broader conversation with our Japanese clients, and that was very successful. We received a lot of compliments after the renewal from our clients.
In terms of payback, we have not only achieved those cash increases, which are very much in line with the market, but we have also achieved additional non-cash business from our Japanese clients. We have also received very well-priced earthquake-exposed business from our Japanese clients. So that was one of the main contributors for the very significant growth at 1.4. The other main contributor was the agricultural business, where we have very successfully negotiated one contract in the United States on the MPCI business on a quota share basis. This is coming from a client that used to buy from us, then the client stopped to buy from us, and now that client is buying again. That was a main contributor compared to 1.1 as well.
Okay. Thank you.
The next question is from Andreas Schäfer, Bankhaus Lampe. Your line is now open. Please go ahead.
Thank you. So there's just one question from my side left on the asset side. I mean, I was surprised to see that your unrealized capital gains for non-fixed income assets have risen quite strongly in Q1. So could you give us, especially on real estate, some sort of overview about your exposure, especially to retail investments, shopping centers, and so on? And what do you expect here for the development of the value of your investments in real estate?
Yeah. I'm happy to do that. Overall, if we talk about real estate and the prices, the portfolio as such has not changed dramatically. We sold one piece of real estate in the Q1 with good realized gains. So in that regard, the variation reserves should have gone down by that gain. Other than that, the portfolio has not changed a lot.
These are kind of revaluations. The real estate portfolio as such comprises EUR 2.6 billion, including funds. Retail is really one of the smaller components in our direct holdings. This is all commercial. Within that, most of it is a focus on office buildings, and we have increased logistics. Retail is really a minor component of that. Still, also, we have seen that some of our clients here have stopped the payments of their rents, and we have been flexible in this regard. The impact, especially in the Q1 , of course, was limited. We expect a little bit more. Also, again, the real estate portfolio is not driven by retail.
Thank you.
The next question is from Vikram Gandhi, Société Générale. Your line is now open. Please go ahead.
Hello. Good morning. This is Vick from SOCGen. Just one question.
How should we think about the EUR 220 million charge on the COVID-related claims with respect to credit and insurance business? Have you already penciled in the most significant part of the claims that are likely to emerge? And likewise, even on the event cancellation claims, or is there more to come? And how should we think of this EUR 220 million with regard to the initial EUR 200 million potential exposure that you had provided to the market? Thank you.
Thank you, Andy. Sven, I'll let you address this one as well.
Yeah. Thank you. I mean, as you will appreciate, there is a very high amount of uncertainty right now in coming up with a robust corona reserve. For starters, the uncertainty, of course, comes from the fact that the event is still ongoing, and we do not have a final view on what will happen in the upcoming weeks.
So therefore, we have tried to take a balanced top-side best estimate view. On the credit insurance side, which was one of the specific parts of your questions, we have, of course, 2008 as a reference case where roughly we had 15-20 loss ratio points, more frequency coming during the financial crisis years out of our credit insurance book of business. At the same time, we have very strong mitigating programs from government in place or in negotiations right now, which did not happen in 2008. I mean, to take Germany as a specific example, the German government has decided to take a very, very significant quota share of the in-force German and export credit business written by German companies for a less than proportional part of the premium. And we are aware that we have various European countries thinking about at least similar concepts.
At the same time, credit insurers, given the uncertainty, are doing what they are doing in these circumstances as long as the programs from governance are not finally in place. They are severely de-risking their portfolios. Therefore, we still feel, even though the dynamics of the recession will be very different compared to only a financial crisis recession in 2008 compared to a recession which is hitting the non-financial part of the economy much more severely now in the corona crisis, it's giving us comfort that our initial loss ratio and Roland mentioned that when he commented on the slide where we showed the loss ratios by line of business, that our initial view on the credit insurance side is conservative by adding roughly 25-30 loss ratio points in the Q1 based on this line of business as well.
Could you repeat just the second part of your question, please?
Sure. The one of the questions was pretty much similar to credit insurance. Should we think that you have also resolved a large part of the event cancellation claims that you anticipate?
Yes. Even though, again, it was a top-down number we have established, this is taking care of very significant parts of our event cancellation portfolio. As you know, we are one of the three participants on the program for the 2020 or now 2021 Olympics. Our line on the program is relatively small with only $50 million. So this number, even though we only expect a partial loss on the Olympic program, is, yeah, fitting comfortably into our overall reserve. Outside of the Olympics, we have a contingency and event cancellation portfolio.
But that is in itself only a double-digit number we are currently associating with corona-specific cancellations. So I would say that we have been able in the Q1 to reserve for most of that particular exposure.
Okay. That's very clear. Thank you.
There are currently no further questions. So I hand back to the speakers for closing remarks.
Well, thank you very much for your question and interest. I think we covered the ground pretty well. We wanted to convey the message that we have a decent Q1 with material reserving for these corona-related losses. At the same time, it's still early in the year, and we will follow development very carefully, and we'll be able to quantify more specifically how the impact evolves. But generally, we feel confident, we feel well-positioned, very well-capitalized to master this challenge, but also beyond that to capture new opportunities.
We mentioned that earlier during the question session. So good steady performance with challenges ahead, but these are nevertheless, in our view, manageable. So we'll have our AGM, as you know, later today to present the results of 2019 and to comment on Q1 as well for today. Thanks again for your interest, and see you next time.