Good morning from Hannover. This is Talanx first quarter 2020 results call. I'm here together with Dr. Immo Querner, our CFO, who will lead you through the results of our first quarter. After the presentation, as you know it, there will be ample opportunity to raise your questions. On our webpage, you'll find all documents, the release, the quarterly statement, the presentation. Also today, the 2019 group SFCR report, and we will keep a replay of this webcast on our webpage after the call. With these remarks, I'd like to hand over to Immo Querner.
Good morning to all our investors, analysts, who have dialed in. Thank you very much. Today, we'll run through the Q1 figures. The main headline figure, EUR 233 million net income after tax and minority, has been communicated earlier. This is no news, but I think the details, particularly in this quarter, are quite interesting and important. I think in a nutshell, I would say that the business momentum evidenced by our top line is intact, and that at least on a net basis, currencies have not played a major role, at least at a group level. That is different at segmental level. I think what is, of course, interesting is the effect of corona that we see in the Q1 results. We've digested EUR 330 million of non-life claims across all our divisions. Part of that has been set by an otherwise unused part of our large loss budget.
As you may remember, on a quarterly basis, we would normally account for the higher of the incurred large losses or the pro rata expectation in Q1. Because of corona, we have, of course, exceeded the expectation. The net effect that has exceeded the pro rata expectation is EUR 163 million that has made it into the combined ratio, so to speak. We have set aside EUR 330 million. On top of that, we had to digest an earnings hit related to our assets under management, the EUR 60 million losses in investments that are somehow corona related, plus a minor item, EUR 7 million, relating to impairment of a certain part of our PVFP in our German Life business that is related to an equity underlying of unit-linked policies.
The total net impact in terms of loss after, or lower profit after minorities, taxes, and policyholders is EUR 133 million. We still translate, after all that, into a quarterly ROE, an annualized ROE that is 9%, size at 9%. This would be above our minimum target of 800 basis points + risk-free. I think also important to realize that we're very confident to see solvency figure as per the end of Q1 that is within the upper half of our target range. The target range is between 150% and 200%. Let me go into the detail, and I'd like to draw your attention to exhibit four. Top line-wise, yes, we've seen a growth of roughly 6%. The technical result is, of course, not as good as it could have been without corona.
Still, we're talking about a combined ratio despite of corona that is below 100%, which is good. The Q1 had to digest a write-down of equities and some unrealized losses in hedging instruments. On the other hand, but I'll come back to this in greater detail at the end of our presentation, we've seen some positive one-offs, particularly in our reinsurance operations, so that this loss was partially offset by higher realized gains in bonds in P&C Re. The tax ratio has gone down. Why is that? This is because on a net net basis, we've seen a higher share of our profits coming from jurisdictions with lower tax regimes. Page five. I think this is an interesting one. Tells you something about the, or puts the corona effect or the corona impact into perspective. What would have been the quarter without corona?
Are there any other special effects that one should be aware of? On the right-hand side, let me start on the very far right. You see the reported group net income of EUR 223 million at the very bottom right. That corresponds to reported EBIT of EUR 559 million. In a quarter as this one, everyone would ask probably the same question, what would have been without corona? To be fair, one should rephrase the question, what would it be without corona and other special effects? The adjusted operated earnings without special effect, including corona, would be, and this is now the beginning of the slide, EUR 656 million or Group net income of EUR 280 million. EUR 280 million would certainly very much support our original guidance for the year 2020 and would be well above our Q1 2019. Corona consists of several factors.
Yes, we've got a EUR 330 million non-life loss hit. A part of that, from a P&L perspective, was offset by using the part of the quarterly large loss budget that has not been absorbed by other large losses. The impact on the bottom line EBIT is just EUR 313 million - EUR 150 million. This is the [EUR 163 million] that I mentioned in the very beginning of the presentation. We see the hit on the asset side, EUR 60 million, the EUR 7 million. After corona, just taking into account the corona effect, the EBIT would have been [EUR 436 million]. On the other hand, we benefited from positive one-offs on the asset side. Part of that, and this is P&L relevant, is the effect at Hannover Re that I think was discussed yesterday at greater length during the presentation of the Q1 results of Hannover Re.
The P&L non-event is, of course, the part that we needed to realize to fund the debt that I will come back to in a second. In P&L terms, that translated into positive realized gains, one-off of EUR 54 million, and other non-asset or corona effects that are somehow special and where we had lucky punches for a variety of reasons, amounted to EUR 22 million. This is then the bridge, the waterfall, answering the question, what would have been the Q1 like without these special items? I think you'd agree that this would have been a rather strong quarter, and that put us into the position to digest Q1 in a way that at the end, after all effects, we see a quarter that is almost as high as Q1 2019.
If you deep dive into the segments, you can disaggregate the group-wide perspective into a segmental view. This is done on page six. Here, you see that the industry lines have suffered both on the loss side as well as on the asset side. Retail P&C has mainly suffered corona-wise because of the losses that we had to reserve for because of business closure losses. Retail Germany life is just a EUR 7 million PVFP effect bottom line. Retail International, EUR 20 million. This is the tactical corona effect. This is a very precautionary topping up of IBNR-like reserves. Reinsurance, as you know from yesterday, EUR 230 million corona-related hit. As you may recall, Talanx now also operates as group captive company, that should not be a surprise that we've also set aside some EUR 8 million for corona-related losses in Q1 in corporate operations.
This all translates into EUR 313 million that was discussed earlier. Just to put this into perspective, only a tiny fraction of that, if 10% at all, would reflect claims that have been completely reported, at least in the primary division. The rest is something like claims that we expect with a sufficient degree of certainty, and have an IBNR character as per the end of Q1. Is this the end? Probably not. One thing is sure, at year-end 2020, the EUR 330 million would be different. Could be higher, could be lower. The reason why we are uncertain is also the reason behind our withdrawal of the guidance. This is as far as the losses are concerned. The same was true for the asset-related effects. Slide seven. With large loss overview as you know it.
I think you would agree that corona is also a large loss. What do I mean by that? It is a large loss that should at least partially fall into our large loss budget. As you know, whenever we have within a quarter, we account for the higher of the pro rata expected share or the incurred share. This year, the incurred is higher than the pro rata expectation. That translates into the effect that the EUR 330 million losses that we have accounted for, are partially picked up by an otherwise unutilized large loss budget and only EUR 163 million, or 3.1% combined ratio points, make it into the bottom line, EBIT, or combined ratio of the EBIT figure. That automatically tells you that otherwise, it has been a quarter that has been very light in terms of large losses.
That is good, also particularly as far as our fire business is concerned. Now, exhibit eight. Here you see that all lines or all divisions have somewhat suffered from corona. Without corona, with a fully utilized large loss budget, the combined ratio would have been 96.7%. In Industrial Lines, it would have been 100.5% while supporting our ambition to see a black zero in 2020 without corona, of course. Retail Germany would have seen a 94.9%, which is ahead of our cost target. You may recall that we wanted to see a 95% by year-end 2021. We're ahead of that. Net of corona, admittedly. Retail International would have seen a 94.3%, which would have been even below the very strong figure that we've seen in Q1 2019, and Reinsurance would have seen a 96.9%.
Before I deep dive into industrial business, the usual waterfall depicting the quarterly changes by division. All divisions, with the notable exception of Retail International, have seen a slight decrease of the EBIT because of corona. This should not come as a surprise. We are talking about EUR 559 million, and on an after-tax, after-minorities equivalent, EUR 233 million, very much at the same level as we've seen back a year ago. Here's a deep dive, and as usual, I'd like to start with the industrial lines business. Premiums are up, mainly driven by the specialty business. This should not come as a surprise. This is what we've seen in the prior quarters. Corona-related claims amounting to EUR 34 million, including event cancellations. Combined ratio net of corona, around 100%. I already mentioned that. That is a result of our 20/20/20 program, which is proving to be effective.
Let me add, in passing, that 20/20/20 is not the end. We're still pursuing our division by profitisation initiative across all lines. To support our medium and long-term combined ratio objectives, that certainly would not stop at the black zero that we have penciled in for 2020 net of corona. The run of result is normal for the core business. In specialty, there are a few accounting specialties. This is not the reason why the business is called specialty, but there are also some special accounting features like dealing with delayed pipeline premium and IBNR that is charged for the delayed pipeline premiums. This, and some noise, and high losses from fires that have also hit the net retention of the specialty business, have contributed to a run of loss in this part of the segment.
The core has seen a positive run of similar, in terms of magnitude, to the figure that we've seen in Q1 2019, which I think is good. Retail Germany. This is now page 12. We see a smaller top line. I'll come back to the reasons why this is when we look at the sub-segmental levels in the next pages. The operating result is also down, and that is mainly driven by the non-life losses out of the business closure losses that we had to digest in this line. That translates into a lower net income. When you look into the segments themselves, and this is now page 13 for the non-life retail business in Germany. There we see the decline of premiums in Q1 versus Q1 2019. This is the net effect of two different stories.
The one is that in the interest of profitability, we've lost some business in German motor business. On the other hand, we've grown the business with SMEs and self-employed professionals and residential property policies. Net effect is a slight decline. The net investment income is down. This is also driven by corona, although the absolute amount of this effect is not as high. The combined ratio, the reported one is 103.8%. Normally, I would've just added one other figure, and this is the combined ratio. Net of course expenses, this figure is 103.4%. This would be the set of figures that we've always reported, because we have always reported them, I will report them here and now. The difference is very small. This should not come as a surprise because course is drawing to an end.
That means that the gap or the wedge between these two figures should taper off. We had to digest 8.9% of corona-related losses. This is, of course, part of the story, because 103.4%, as such, is disappointingly high. The 8.9%, mainly because of the business closure risks, representing EUR 29 million out of EUR 31 million in Q1, of course, at 8.9%. Without that, we would've been well below the 95%. Retail Germany life, and this is page 14, has also seen a decline in the top line, down by 3%. Here the reason is completely different. This is a result of the fact that the new lending volume out of our bancassurance business has been down. One reason is that bank branches were closed during part of Q1.
A closed branch cannot sell loans, and therefore cannot cross-sell life insurance policies, or non-life insurance policies that are sold together with the loans. This is the story behind the decline of the top line. Net investment income is slightly down. ZZR, on the other hand, is up. This is no criticism of the corridor method. Without the corridor method that was introduced some years ago, the figures would've been much worse. It is a reflection of the lower risk-free interest rate environment that has been south in Q1. We had to set aside EUR 139 million of ZZR in Q1 alone. We're now talking about total stock as per the end of the quarter. That is roughly EUR 4 billion, which is quite a figure. Operating EBIT, there are two effects that almost offset each other. One is the EUR 7 million impairment on the PVFP.
Why is that? That is a block of business that has been acquired as a part of the Gerling transaction, represents unit-linked policies. As you know, the life insurance company benefits from fees that are charged on the basis of the assets under management that are wrapped in these unit-linked policies. If equity indices go down, and here we're talking about equity-linked, unit-linked policies, the prospect of earning fees on a lower asset under management volume is not as high as it used to be before that. That is translated into a partial write-off of the PVFP that is still sitting on the business. On the other hand, there was special deconsolidation of one of insignificant investment vehicle that for accounting reasons translated into a lucky punch, that in a way offset the PVFP impairment. Retail International. I think it's also an interesting one.
Interesting in the sense that, I think for the first time in lifetime memory, so to speak, we see a downward trend in the top line. Why is that? There are mainly two stories driving this. One is that, here we're talking about Euros, the currencies in Latin America have not performed as well as they should have, putting it mildly. That translates into a top line in Euro terms that is not as high as a year ago. Second, the life insurance business, particularly in Italy and Hungary, where we do life insurance, has also suffered from the corona issue. This is the other main story behind that.
On a currency neutral basis, just looking at the non-life core business, we're talking currency adjusted 5.2%, which is not as high as it was before. That is certainly sort of the background corona effect that we see in all our markets. It's still growing. We also set aside EUR 20 million worth of corona-related topside adjustments in our IBNRs. We don't know whether it's going to be hit or not. We adjusted for precautionary reasons, EUR 20 million of this segment. Your investment resulted down also part of some impairments in equities that again, are corona-related. Bottom line though, that is, I think, quite interesting. We still see a slight increase of the net income contribution of the segment. With a return on equity of 8.8%, we are converging towards our internal target rate of 10%, even in a difficult quarter, Q1 2020.
Reinsurance, I'm going to keep it short because I think that was discussed at great length yesterday. The colleagues from Hannover Re have grown their business. Both currency adjusted and unadjusted. They've been supported by currency tailwind. That is certainly true. They've adjusted EUR 230 million worth of claims that are corona related. Part of that was picked up by an otherwise unutilized large loss budget. Same story as in the rest of the group. All reinvestments increased slightly. Extraordinary investments, there was a lucky punch in preparation of a slight reallocation of their assets. They sold some of the bonds at a profit. The RE after minorities, is still double-digit with 11.8%, I think. That was probably also discussed yesterday, that particularly life reinsurance business has come in quite strongly. Page 18. Net investment income. The ordinary investment income is remarkably stable.
The extraordinary investment sees two opposing effects. We've got the corona related impairments that are already mentioned. We see, on the other hand, the extraordinary gains at Hannover Re and some of the realized gains that were needed to support the increased ZZR. Although this is P&L irrelevant. Assets under management have still slightly grown 5%. Let me now turn to page 19, which is an interesting chart. It is complicated, it's probably worth 45 seconds of discussion. Here you see a diagram with an X-axis and a Y-axis. On the X-axis, you see the share of the BBB or worse rated fixed income instruments of our assets under management. On the Y-axis, you see the asset allocation in percentage terms of our equity investments. Now we're talking at Talanx about an exposure to listed equities of roughly 1% as per year end 2019.
The share of our BBB or below investment in fixed income would be like 23%. You see the relative position to our exposure structure in comparison to the one of our peers. We are in the southwestern corner. Now you can argue, well, what would be the relative exchange rate, so to speak, between an increased or decreased share of BBBs versus equities? Now, this of course, depends on the duration of BBBs, sort of the riskiness. We try to come up with three iso-risk lines. The iso-risk lines will tell you for different maturities, what the relative riskiness of BBB bonds versus equities would be. i.e., how much equities could you buy more if you dispose of a certain percentage in terms of asset under management allocation of BBB bonds?
This is interesting because it gives you a feeling for whether or not our position is really robust in a sense that we live to our low beta commitment. I think this chart will tell you that, yes, we do. Even if you allow for the relative iso-risk exchange rates between BBB bonds and equities. This is certainly one of the reasons why we have fared somewhat more robustly through the financial turmoils that we've seen in Q1, than others. That we are relatively defensively or low beta positioned on our asset side. Page 20, just looking into the development of our equities now including the OCI. The OCI has been negative. The reason is the widening spreads that we've seen at the end of the quarter.
What you do not see yet in Q1 is, of course, the dividends that we're going to pay, hopefully, after today's shareholder meeting. That you may want to participate in via the internet, because it's going to be a virtual general shareholder meeting. We see the decline of the other comprehensive income, but we are still talking about a stock of off-balance sheet reserves that we see in our books that is quite high. This is something you see in to page 21, is the usual chart. Here, we're talking about the truly hidden reserves on the asset side of EUR 6.2 billion or EUR 6.3 billion. If you allow for the pro rata share, or if you take away the pro rata share of our life insurance policyholders, the fisc and minorities, you're still talking about EUR 667 million of hidden reserves that will accrue to the shareholder.
If you divide this by the number of shares, you would be talking about EUR 2.64, which is even much higher than an annual dividend, by the way. Page 22. The most recent officially communicated Solvency 2 ratio, net of transitionals, i.e., fully loaded, is the year-end figure of 211%, which has been remarkably stable if you compare to the figures we have seen in prior years. As per the end of Q1, we would expect a figure that is in the upper half of our target range. We'll communicate the precise figure in due course here on the internet. Talking about Solvency 2, I think next page is quite interesting, at least for the specialists among you who try to translate whatever they see in development of conventional market indicators into an outside-in guesstimate of our Solvency 2 ratios. Therefore, they need sensitivities.
We've updated our sensitivities as part of the calculations of our year-end figures. If you would compare the figures that you see here on page 23, to the ones that you would have seen a year ago, they are smaller, basically as far as the credit spreads are concerned. How come? There are three drivers behind that. There's a high-quality investment portfolio. We've tried to improve the diversification. Plus, we've rolled out also the dynamic volatility adjuster. Something we, until then, had only used on the life side. We now use that also for the non-life part of our business. Which is, in a way, just anticipating the existence of the volatility adjuster in all states of the world that we model when we calculate the Monte Carlo results for 10,000 states, 100,000 states of the world, that would then constitute the SCR. That has helped a bit.
Coming back to the outlook. Yeah. The outlook has been communicated by us, in a somewhat nihilistic way. We don't know. We've withdrawn our guidance. This is not because we've shipwrecked Q1. This is neither because the underlying business is off track. Quite the contrary, because it is because we see a wall of fog in front of us, and it is impossible for us to really assess what's going to happen corona-wise with the assets, with the top line, with the losses during the rest of the year. This is just fair and, in a way, a humble statement because this is something we haven't seen before. On the other hand, I think it's also fair to say that we have been quite conservative in preparing ourselves for the damages that will emanate in Q1. Q1 hasn't been that bad. That's it from my side.
Are there any questions?
Heidi, we could then start the Q&A.
Ladies and gentlemen, we will now begin the question and answer session. If you have dialed in via telephone, please press star followed by one on your telephone to register a question. If you wish to remove yourself from the question queue, please press star followed by two. Questions can also be raised by using the chat function on the webcast page at any point during the session. Kindly add your name, function, and email to be identified. The Q&A session will begin with the questions asked via telephone. If you are using speaker equipment today, please lift the handset before making your selections. As a reminder, anyone who has a question may press star followed by one on your telephone or type a question using the chat box.
Who wants to start?
The first question comes from the line of Paris Hadjantonis of Exane BNP Paribas. Please go ahead.
Yes, hi. Good morning from my side. I hope you're both doing well. The first question will be on the retail combined ratios. Obviously, excluding the corona impacts, they look quite solid and they have improved year-over-year. I'm just wondering whether there's also a positive effect essentially coming from lower frequency there, mainly on the motor business. If you can basically give us an idea or if you can quantify, I don't know, what kind of frequency development you've seen in motor over the first quarter and whether those are going to continue in the second quarter. Staying with motor. Immo, you've made some comments around German motor and that you have actually paired back a bit. Why is that? Is there more competition? Do you think that it's not as profitable as it has been before?
Then on Retail International, in some of the countries where you operate, I would guess that for the time being, I'm mainly looking at Brazil and Turkey. There is quite a lot of FX volatility. I'm just thinking about how that could impact your business going forward, maybe in terms of top line or whether we should be thinking about potentially higher claims inflation or any impact on the investment side as well. Thank you.
Well, thank you. These are all very legitimate questions. Let me start with the retail combined ratio. Yeah, it has been quite strong. Have we benefited from lower frequency because of corona, and that translate into lower loss ratios in the motor business? Probably, yes, to a certain extent. A, we have seen a trend of lower frequency throughout past quarters anyway. Therefore, it's very difficult to say whether this is now just a continuing trend or more cycles. If you look at the lockdown in Germany, this is just one out of three months. There is no lockdown effect in January and February. This is for sure. Third, if you compare the rigor of the lockdown that we've seen in Germany to the rigor of the lockdown that we've seen in other parts of Europe, it's probably fair to say that Germany hasn't been particularly rigorous.
I think it is somewhere between what you see in the rest of Europe and Sweden. If you look at the driving data that are put together by Google, for instance. Yes, there has been certainly a small positive. I think it's really not the main driver behind a favorable underlying Q1 combined ratio effect net of corona, although it has certainly played some kind of role. What is the future going to be? I wish I knew. Just from my personal experience, I could tell you that when driving into our offices, we see more traffic. I see more traffic again. It's not as bad as in February, but it has picked up. This anecdotal evidence is supported by the macro statistics that are put together by Google and the likes. It's also supported by the toll data of the lorry toll collectors in Germany.
The things are picking up again. I don't know whether we'll see a major effect. Probably yes, that would be very helpful. Insurance is about pooling risks and living on the back of diversification. The fact that we lose on business closure risks, it is good if at a very same point of time, we benefit because of a lighter loss ratio in other parts of the business. German motor, in the end, it is price competition has picked up. You may have observed the battle of the two giants in Bavaria. In the end, I can only use the famous saying that was used by Mr. Zeller from Hannover. Volume is vanity. Profit is sanity. Retail International. Yes, FX. There is going to be the multitude of FX effects.
We've seen these effects already in Q1 because, a significant part of the decline of our top line is driven by disadvantageous development of the FX rates in Latin America. This should translate into a lower top line. That should also translate into higher imported inflation, at least in the countries where the local basis to manufacture spare parts is not as developed. That takes me into the very complicated question of how much inflation are we going to see in the aggregate because of corona. I think short term, people are somewhat relaxed. Medium term, certainly the prospect is less clear.
What you normally see is then when the currency goes down, that at some point, central bank intervenes and interest rates go up, which is good again for us because we invest in short-term monies, and that would help us to offset some of the additional pain that we see on the claims side. Is this going to be the same this time? I don't know, because many jurisdictions, corona-wise, national banks pursue an ultra-accommodative central bank policy. Yes, there is some noise ahead. If you look for another reason why there is no guidance as of today, this would probably be a good element of the answer.
That's very helpful, [Immo]. Thank you.
Thank you very much, [Paris]. Next question, please.
The next question comes from Vikram Gandhi at Societe Generale. Please go ahead.
Hello. Hi, good morning, everybody. It's Vik from Soc Gen. Hope all of you are doing well. I've got three questions, and apologies if you've addressed any of these in your opening remarks. Firstly, on the industrial lines, how should we think about the potential headwinds, including moral hazard in the recessionary environment, particularly from the SME book? Second is on the retail business in Germany. What are your thoughts on potential refunds or rebates of premiums to customers? Lastly, on the infrastructure investments, where Talanx has been deploying more capital of late. These infrastructure investments where there are no readily available market prices, how should we think about the potential risk of write-downs or impairments going forward? Thank you.
The headwind moral hazard. I think there are two types of moral hazards that I'm personally concerned about. The one is, of course, the ubiquitous moral hazard that policyholders stretch the wording of their policies and think that they should submit claims that they should not have been entitled to see compensation. This is our normal business, and while we've made it clear that we are going to honor all the business closure risks that we've underwritten within seconds, so to speak. I think we've also made clear that we will try to protect ourselves against fraudulent claims or free rider type of submissions. This is something that we owe not only to our shareholders, I think we owe it to the principle of insurance. I think here we will be adamant.
The other moral hazard, which I think is probably more difficult to assess, is the moral hazard that you see among lawmakers and regulators in certain parts of the world. They try to talk us into ex gratia payments that are not supported by the wordings of the policies. I think here we've got to be extremely careful. Yielding to this pressure would undermine the very fundamentals of the industry. It's not to say that we live in an ivory tower. It's not to say that we should not be passionate. I think there we must be very vigilant that being flexible is not overstretched. As far as rebates, I think our position is that many of our tariffs that we sold include automatic rebates anyway, sort of whether it is a claims-free bonus next year. If this is a result of driving less, it doesn't matter.
It translates into a bonus that would be allocated next year. Other tariffs would receive automatic mileage adjustments. We don't see any reason for a special rebate action. Infrastructure. Yes, you're right. There are no mark-to-market prices in a narrow sense. That helps, at least from an accounting point of view. I think we've always, if you look at our portfolio, you would agree, we've tried to concentrate our investments to infrastructure elements that are particularly robust, also when it comes to the demand of these services. This is something that I think has played out nicely. So far, we've seen no indication that we should prepare for major hits. This is not a guarantee. In two quarters, things may look differently. As of today, I'm relatively relaxed. Thank you.
Thank you, Vikram.
Thanks. Thank you.
The next question comes from [Fossard] of HSBC. Please go ahead.
Yes. Good morning, [Immo]. Good morning, Kerstin. Three question on my side. The first one would be related to the industrial lines. Could you tell us what about the trend in pricing so far into the year, what you've been able to achieve? Also, in terms of dynamic for the upcoming quarters. Do you see any resistance or, I would say, more constraints to pass additional price increases. Bearing in mind the financial conditions of your clients. Maybe I'm not talking of the big ones, but maybe the smaller ones. Year-to-date pricing plans and what you're expecting for the subsequent quarters. The second question will be related to your COVID-19 impact for the primary lines. You said, talking to Germany specifically, that EUR 29 million of, among the EUR 31, was related to business closure.
In total, what is really event cancellation or contingency and what is, I would say, BI, and have you seen already claims coming in, or is that largely IBNR? I'm just talking on the primary, not on the reinsurance part. The third question would be related to the discussions you may have at the industry level in Germany, for some form of socialisation of the losses. We've seen some action already in Bavaria. I'm not sure that you're part of this, but what can you tell us about maybe discussions which are currently ongoing in other German Länder for making insurance pay, also they are not liable to pay, but as a part of helping some businesses or some professions to recover more quickly. Thank you.
Well, thank you, [Mr. Fossard]. With the pricing trend, I think there's not too much news now because we've seen the major renewal round that has recurred in Q4 2019, as far as industrial lines business is concerned, because this is mainly a European thing for us. Here, you know the figures that we report, like 35% conditioning fee since we launched the 20/20/20 program. There's not really much news as of Q1 2020. Going forward, you're right. I think it's going to be more difficult because of the financial constraints of some of our policyholders. I think it's going to be particularly difficult for the ones who started late in the profit optimization initiatives, because they've come too late.
If you look into the cost structure of industrial insurance, in a very simplistic way, you're talking 70%, 75%, 80% loss ratio, which is variable cost. You're talking perhaps 10% commissions, which is variable cost. You're talking, there's literally a cost block of 10%-15%, 20%, roughly this order of magnitude. It's sort of, here we are pretty low as far as industrial line Germany is concerned. Part of which is also variable because you don't have to pay for loss adjusters if there are policies that would translate into losses. Why do I say that? The difference between marginal cost and an average cost are actually relatively low in our industry, particularly in the industrial lines business.
If there is someone who is not prepared to pay anything between the marginal and the variable cost, it's still a good decision to simply say no. This is the logic behind the service pricing initiative that we've now launched throughout the division. We define walkaway prices that would be not good enough to meet our minimum profitability considerations, and then it is a better idea to say no. It's more the question, how much top line would we lose? Here we are going to be adamant. COVID in retail Germany, it's not business closure. It's business interruption. It's been business closure. There is a subtle difference. Business interruption would protect people against the business being closed because something else has happened, and they cannot produce.
Business closure is different in the sense that it protects people against the fact that the regulator, some authority tells the company, "You must close your shop." We have covered this in certain cases. Therefore, it didn't need us to wait for the Bavarian initiative to convince us that we should pick up at least part of the claim. We stand by our word and honor the policies. If you look into the incentive mechanism around the Bavarian initiative, I think there are three perspectives. The ones who've got a particularly strong wording would hate the idea, because it means that the moral hazard that I mentioned earlier, when answering previous questions, materializes. People want you to pay for something that is not covered. There is the ones who know that they've got to pay anyway.
Therefore, the 15% solution Bavarian is no solution because they would lose any court case. Our business closure risks would be completely irrational to say we just want to pay 15% because we know that the wording is the wording, and we honor the wording. Therefore, there's nothing in for us. Then there is the gray area in between where people say, "Well, I don't know." I think, yes, we probably also have got some gray wordings. While we support the Bavarian initiative in a way, it was not something we had waited for the reasons that I've just explained. There was a third question.
Your third question, Thomas, was on recovery.
No. Well, I think that was it. Actually, just to catch up on the Bavarian initiative. Actually, what you're telling us today, that there are no other discussions in other lenders at the present time to come to a kind of insurance marketplace solution, I would say.
Well, there are many discussions. In many other Länder, people have particularly disliked the compromise, in inverted commas, that has been established in Bavaria. As you may know, Bavaria is a special part of our country. Sometimes it is too special for the rest of the country.
Okay. That was our. Thank you very much, Thomas.
The next question is from Michael Haid of Commerzbank. Please go ahead.
Good morning to everyone. Two questions. First question on corona-related claims. I want to get an idea or a feeling about how conservative is your reserving for these corona-related losses. Obviously, most of the claims you reserve for at the moment are not notified yet, but of course, are foreseeable. We are in the midst of the second quarter. The crisis has been ongoing. I guess my simple question is, what should we expect in terms of more to come? Have you foreseen the current quarterly developments already with your Q1 results, so not much to come in the second quarter? How should we look at this? Second question on new business generation in Life Germany. I see the IFRS gross premiums written down 3%. Presumably, that is driven by single premium business.
Can you give us an idea about how new business in terms of new business premiums developed for recurring and single premium business in the first quarter, and obviously, what you have seen already in the second quarter?
Well, let me start with the second question. I think the decline of the top line in Life is very much driven by the low activity in our bancassurance distribution channels, because the branches of the banks could not be accessed, and therefore the cross-selling business, together with loans, has suffered. By product line, now in terms of annual premium equivalents, the recurrent premium is actually up by 3%. Single premium business is down by 3%. The TARGO Leben, which is one of our most profitable bancassurance channels, on aggregate, is down APE-wise by 2%, this is a reflection of the specific challenges of the bancassurance channel in the times of shutdown bank branches. Going forward, the savings business is skewed in very many part of the business towards the fourth quarter.
I think here, but it is just a personal guesstimation, that really depends on how long the lockdown is going to be and how much this is going to weigh on the willingness of people to set aside funds to save for their retirement phase. Here, probably your guess is as good as mine. I think I would be surprised if this is a great year in life insurance, but this is my personal guess. How conservative are our figures on the corona non-life side? What have we done? We have done whatever we have done. We’ve drawn up our balance sheet and P&L. I think it was at the end of last week. Whatever we saw in terms of sufficiently concrete claims, either reported, notified, settled, or just occurred, but not reported, we set aside. This is an aggregate amount of EUR 313 million.
One of the reasons or the top reason, chief reason why we have withdrawn our guidance is that we do not know what is going to happen. If I could give you the answer to your question, there would have been no reason to withdraw the guidance in the first place if I discard the investment income uncertainty. There are two data that To help you to assess the level of conservatism, A, would be sort of the proportion of notified reported claims is, if at all, a low single-digit figure. Second, if you would compare the corona-related losses in terms of combined ratio impact that we've seen in our company. The EUR 313 million translate into 5.9% corona-related losses. If you would compare this figure to the figure of our peers. Corona is certainly the mega event that will hit each and everyone.
I think that is a measuring rod that could tell you something about the relative level of conservatism. Unfortunately, I really cannot give you any more help. Sorry for that, Dr. Haid.
No, that's perfect. Thank you.
Thank you very much, Michael. Next one, please.
We will now take a question from the internet.
It's me. We have a question from William Hawkins of KBW. First question, you said that the EUR 330 million could be higher or lower by the end of the year. Was this just a figure of speech, or was your intention that the Q1 IBNR reserving fully captures expected losses for the rest of the year? Goes a bit into Michael's question. Second one, how material do you expect the positive tailwind of lower motor frequency, fewer cars on the road, to be for your claims experience? Have you taken account of any of this as a positive within your EUR 330 million total? Thank you.
Well, I think both questions, in a way, I think I've answered. The first question is the accounting question that is exactly the rephrased question that has been put forward by Dr. Haid. This is what we have seen.
We also see a lot of fog ahead of us. Therefore, this is the same answer. As far as the windfall profit is concerned, we probably have seen some windfall profits in Q1 because of lower motor frequencies. I think that was one of the first questions where I said, well, first, it is just a natural trend. Second, it's just been one out of three months. Third, I think in comparison to other countries, the decline of mileage and physical activity is not as significant in Germany as another part of the world.
Positive within the EUR 330 million. This is not the case, no?
We certainly benefited the fact that we've seen a better claims development in the motor business is reflected in the general figure, but not in the EUR 330 million. Sorry. Yeah, sorry. There is no explicit netting. Sorry. I got the question right now.
I hope your questions are answered, William. We move on, please.
The next telephone question is from Andreas Schäfer of Bankhaus Lampe. Please go ahead.
Thank you. From my side, there's just one question left. On retail, on life insurance in Germany, I understand that the EBIT of EUR 36 million is relatively clean given the fact that the PVFP impairment was offset by the deconsolidation gain. It looks relatively high, especially given the fact that your investment income dropped and your ZZR allocation more than doubled compared to last year's first quarter. Could you elaborate a bit more where the, let's say, EBIT is coming from? I think it can't be the investment margin. Is it more technical profits, or?
Yeah. I could give you the reasons why it hasn't changed. One is the ZZR buildup is a non-event as far as the bottom line is concerned, because it would all be additional gains that we see because of reloading gains. There would be no ZZR, but it would be shadow RfB that would be set against the additional ZZR buildup. I think the only special effects are really the set off of the PVFP impairment against the one-off lucky punch because of the deconsolidation. Otherwise, it is relatively stable and no big changes.
Would it be fair, let's say, to assume that the EBIT at the year-end would be four times EUR 36 million in German Life? It looks like it would be even higher than last year, which benefited from some positive one-offs.
Yeah. Last year, you're right. We benefited from some lucky one-offs. I think I'm really not in a position to give segmental guidances for the year-end. I think one observation is right. Life, contrary to what many believe, at least in IFRS accounting terms, is relatively stable. The picture in Solvency 2 is completely different. IFRS wise, what I can say, well, that is steady as she goes, yeah?
Okay, thank you.
Thank you very much, Andreas. The next question.
The next question is from [Darius Satkauskas] of KBW. Please go ahead.
Good morning. In the past, you discussed the industrial lines exposure to corona is mostly coming from specialty lines. I'm just wondering, outside of these lines, can you talk about what are you seeing in industrial lines in terms of COVID-19 related notifications? Are you still confident that exposure to business interruption is limited because contracts require physical damage triggers, or are you seeing some exclusions in some contracts? My second question is, do you expect any positive benefits to premium rates in primary lines in 2021, given the corona impact in the industry this year? That's it. Thank you.
Well, in industrial lines, it is business interruption and event related. We've put this together and a bit of re-innovation. These two represent the overall claims burden that is corona related in Q1. It's roughly five out of six is business interruption and event, and one out of six is re-innovation. As reporting and notification has been pretty light, this is somewhat speculative allocation across lines, I would say. I think next quarter, we will know more. Sorry for this, but it's probably not very satisfying answer. Could you repeat your second question? Because I simply missed it.
Yeah. I'm just wondering if you expect any kind of positive benefit to premium rates next year in your primary lines, given what's happening this year in terms of COVID-19.
Positive. Well, to be honest, not really. Why? I think the general level of activity, in 2020, will certainly see a decline in GDP. Whenever you see a decline in GDP, I think I didn't need a crystal ball to predict that this should translate into the top line that is somewhat stretched. That was one of the questions that has been put forward earlier. Discussions and negotiations to increase the profitability and reduce the priced in combined ratio as part of our profit realization initiative, particularly in the industrial lines business, all this is probably getting more difficult. Therefore, I think from an insurance point of view, this is probably not sort of the fantastic second leg of the V that is just ahead of us. Here, I'm somewhat more conservative in my assessment.
That's great. Thank you.
Thank you. Darius. Next one, please.
The next question is from Michael Huttner of Berenberg. Please go ahead.
Fantastic. Sorry for the noise. They're taking the roof off. Sorry. Thank you very much. I had just one question to understand maybe the range of uncertainty. Just to understand. On slide five, you have in terms of net income, you have these three numbers I focus on. EUR 280 million adjusted operating EBIT with no corona. EUR 147 after corona, just the bad stuff. I mean, sorry, just the claims and nothing much else. EUR 223 reported with the realized gains, some which were a little bit exceptional in character. If I try and annualize these things, not multiply this thing by four, I multiply this thing by three plus the actual of Q1, I get a range of figures. At the lowest I get EUR 843 .
At the highest, I get EUR 1,022 and the lowest EUR 664, highest EUR 1,022, and the just four times your actual result, EUR 890. If I put the range at basically EUR 600 and a bit and EUR 1 billion and a bit, I get to about. Is that the range of uncertainty that you're seeing, or am I underestimating the uncertainty because you've kind of taken the corona claims inside your large loss budget?
I think you underestimate the uncertainty range. Let me start with the investment income. The financial income or the investment income is driven by two separate layers of uncertainty. One, what is going to happen to the financial markets in the first place in a reflection of the duration of the lockdown, the decline of the GDP, soaring credit risk spreads, for instance? We don't know. Second, it very much depends on the instrument, whether this is something that's going to be recoverable or non-recoverable. Whenever we see a write-down on equities, we've got the once impaired, always impaired principle. This is probably going to be very difficult to see a reversal. When it comes to unrealized gains or on financial instruments that are carried through P&L on a spot market basis, this could be recovered if markets come back in the fourth quarter.
That was one of the questions that in my eyes at least pointed into the right direction that additionally increases the uncertainty. What is going to be the P&L impact on the non-listed assets? I think infrastructure is probably the area of least concern. What happens to CLOs? What happens to private equity? We all know that there's a time that's got to elapse before you see the hints that you see in the listed equity markets feeding it through the reportings of the fund managers that then translate into our P&L. This very much now depends on what is going to happen to the economy and to the credit markets. Here we see a wide range of things that could happen and that under no circumstances could have been accounted for in Q1 2020.
As far as the technical side is concerned, although I hate the idea, we don't know what the public model hazard is going to be like. Would there be more Bavarian or French models? I don't know. Talking about other lines that are probably not as important for us, but we also have this, is credit bonds. For a multitude of reasons things are very foggy here. There is really too much uncertainty to just pick a range and multiply it by four. We did not withdraw our guidance lightheartedly because, of course, ask ourselves the question, is Q1 a reasonably solid basis to come up with something that would be a better guidance for the rest of the year? We found this challenge to be insurmountable, at least for us. Sorry for that.
No, it's really helpful. Thank you so much. Thank you. Yeah, good luck. Thank you.
Thank you very much, Michael.
There are no more questions at this time. I hand back to the presenters for closing comments.
Yeah. Thank you very much for your participation. We know it's a busy day for many of you, and so we appreciate it a lot, and we wish you all the best. Stay safe, stay healthy, and all the best for your business.