Good morning from Hennepfer. This is Talang's first quarter twenty twenty results call, and I'm here together with Doctor. Mukherjana, 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 SFR report, and we will keep a replay of this webcast on our webpage after the call.
And with these remarks, I'd like to
hand over to Immok Werner.
Good morning to all our investors and analysts who have dialed in. Thank you very much. Today, we'll run through the Q1 figures. I mean, main headline figure EUR $233,000,000 net income after tax on minority has been communicated earlier. So this is no news, but I think the details, particularly in this quarter, are quite interesting and important.
I think in a nutshell, 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 not 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 €313,000,000 of non life claims across all our divisions. Part of that has been set by an otherwise unused part of our large loss budget. And 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. And the net effect that has exceeded, the pro rata expectation is EUR 163,000,000 that has made it into the combined ratio, so to speak. But we have set aside EUR 13,000,000. On top of that, we had to adjust an earnings hit related to our assets under management, 60,000,000 losses and investments that are somehow corona related plus a minor item EUR 7,000,000 relating to impairment of a certain part of our PBFP in our German Life business that is related to an equity underlying of uniting policies. The total net impact in terms of loss after lower profit after minorities taxes policyholders is €133,000,000 We still translate after all that into a quarterly ROE and annualized ROE that is 9% as a size of 9%, so that and this would be above our minimum target of 800 basis points plus risk free.
And I think also important to realize that we're very confident to see a solvency figure as per the end of Q1 that is within the upper half of our target range. And the target range is between 150200%. Now let me go into the details, and I'd like to draw your attention to Exhibit four. Top line wise, yes, we've seen a growth of roughly 6%. The tactical result is of course not as good as it could have been without corona.
And 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 and 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 and bonds in P and C Re. The tax ratio has gone down.
And 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?
And 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 €222,000,000 at the very bottom right. And that corresponds to reported EBIT of EUR $559,000,000. Now, 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? Now the adjusted operated earnings without special effect including corona would be, and this is now the beginning of the slide, euros $656,000,000 or group net income of €280,000,000 €280,000,000 would certainly will would very much support our original guidance for the year 2020 and would be well above our Q1 twenty nineteen. Now corona consists of a multi sort of several factors. Yes, we've got a €330,000,000 non life loss hit. A part of that from a P and L perspective was offset by using the part of the quarterly large loss budget that has not been absorbed by other large losses.
So the impact on the bottom line EBIT is just 13,000,000 minus EUR 150,000,000. This is the 160,000,000 that I mentioned in the very beginning of the presentation. Then we see the hit on the asset side EUR 60,000,000 to 7,000,000. So without sort of after corona, just taking into account the corona effect, the EBIT would have been $436,000,000 Then on the other hand, we benefited from positive one offs on the other side. Part of that, and this is P and L relevant, is the effect that Hannover Re that I think was discussed yesterday at greater length during the presentation of the Q1 results of Hannover Re.
And P and L non event is, of course, the part that needed to be that we needed to realize to fund the ZZR. We'll come back to this in a second. Now P and L terms that translated into positive realized gains, one off of €54,000,000 and other non and other non asset or corona effects that are somewhat special and very lucky punches for a variety of reasons, amounted to EUR 22,000,000. So this is then, the bridge, the waterfall, answering the question, what would have been the Q1 like without these special items? And 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 twenty nineteen.
Now if you deep dive into the segments, you can disaggregate the group wide perspective into segmental view. This is done on Page six. You'll see that the investment lines have suffered both on the cost on the loss side as well as on the asset side. Retail P and 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 7,000,000,000 PVP effect bottom line.
Retail International, 20,000,000,000. This is the tactical corona effect. This is a very precautionary topping up of high Vina like reserves and reinsurance, as you know from yesterday, $230,000,000 corona related hit. As you may recall, Thailand now also operates as a group captive company, so that should not be a surprise that we've also set aside some €8,000,000 for corona related losses in Q1 in corporate operations. Now this all translates in a EUR $313,000,000 that I 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. And the rest is something like claims that we expect, with a sufficient degree of certainty, and have kind of an IBNR character as per the end of Q1. Is this the end? Probably not. And one thing is sure, at year end 2020, the EUR $330,000,000 would be different.
It could be higher, could be lower. And the reason why we are uncertain is that we are uncertain is also the reason behind our withdrawal of the guidance. So this is as far as the losses are concerned, and the same was true for the asset related effects. Slide seven, now with large loss overview as you know it. I think you would agree that corona is also a large loss.
So what do I mean by that? It is a large loss that should be at least partially fall into our large loss budget. And as you know, whenever we have within a quarter, we account for the higher of the pro rata expected share or the incurred share. So this year, the incurred is higher than the pro rata expectation. And that translates into the effect that the €330,000,000 losses that we have accounted for are partially picked up by an otherwise unutilized large loss budget and only €163,000,000 or 3.1% combined ratio points make it into the bottom line EBIT combined ratio or the EBIT figure.
And that automatically tells you that otherwise, it has been a quarter that has been very light in terms of large losses. And that is good, particularly also particularly as far as our fire business is concerned. Now, Exhibit eight, you see that all lines or all divisions have somewhat suffered from corona. Without corona, with a normalized 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. So we're ahead of that net of Kona 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 twenty nineteen, and Reinsurance would have seen a 96.9%. Now let me deep dive before I deep dive into the Asset Light business, the usual waterfall depicting the quarterly changes by division.
All the visions with the notable exception of Retail and National have seen a slight decrease of the EBIT because of corona. This should not come as a surprise. Still we are talking about EUR559 million and on an after tax after minorities equivalent EUR233 million, pretty much at the same level that we've seen back a year ago. Now 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 is this should not come as a surprise. This is what we've seen in prior quarters. Corona related claims amounting to EUR 34,000,000, including event cancellations. Combined ratio net of corona around 100%, I already mentioned that.
That is a result of our twenty twentytwenty program, which is proving to be effective. But let me add in passing that 2020 is not the end. We're still pursuing our division wide profitization initiative across all lines and to support our medium and long term combined ratio objectives that certainly would not stop at the black zero that we've canceled into 2020, so net of corona. The run off result is kind of 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 is and some noise and higher loss of liquefiers that have also hit the net retention of the specialty business have contributed to run off loss in this part of the segment. But the core has seen a positive run off similar in terms of magnitude to the figure that we've seen in Q1 twenty nineteen, 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 subsequent 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. And that translates into a lower net income. When you look into the segment 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 twenty nineteen. This is the net effect of two different stories.
The one is that in the interest of profitability, we've lost some business in the German motor business. On the other hand, we've grown the business with SMEs and self employed, professionals residential property policies. So 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.
Now the combined ratio, the reported one is 103.8%. Normally, I would have just added one of the 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. And because we've always reported them, I will report them here and now.
Now the difference is very small. This should not come as a surprise because cost is drawing to an end. So that means that the gap or the wedge between these two figures should taper off. But 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.
Now the 8.9% because of corona because of the mainly because of the business closure risks representing 29,000,000 out of €31,000,000 in Q1, of course, at 8.9%. Without that,
we would have
been well below the 95%. Retail Germany Life has also seen and this is Page 14, has also seen a decline in the top line, down by 3%. Now here the reason is completely different. This is the result of the fact that the new lending volume out of our bank insurance business has been down. One reason is that banks bank branches, were closed during part of Q1.
And 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. ZFR 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 have been much worse. But it is a reflection of the lower risk free interest rate environment that has been south in Q1. Now we had to set aside 01/1937 and January of the ZZR in Q1 alone. We're now talking about total stock as per the end of the quarter that is roughly EUR4 billion, which is quite a figure. Operating EBIT has there are two effects that almost offset each other.
The one is EUR7 million impairment on the PBFP. Why is that? That is a block of business that has been acquired as a part of the Goring transaction represents uniting policies. Now 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 uniting policies. Now 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 and the management volume is not as high as it used to be before that, and that is then 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 roughly that in a way offset the previous year. Retail international, 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. The one is that here we're talking about euros and the currencies in Latin America have not performed as well as they should have, putting it mildly, and that translates into a top line in euro terms is not as high as a year ago.
Second, life insurance business, particularly in Italy and Hungary where we do life insurance, has also suffered, also from the corona issue. And 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 kind of background corona effect that we see in all our markets, but it's still growing. Now we also set aside EUR20 million worth of corona related topside adjustments in our IBNR.
We don't know whether it's going to be hit or not, we digest it for precautionary reasons, euros 30,000,000 in this segment. Your investment investment resulted down also part of some impairments in equities that again are corona related. Bottom line though, and that is, I think, quite interesting, we still see a slight increase of the net income contribution of the segment and with a return on equity of 8.8%. We are converting towards our internal hurdle rate of 10% even in a difficult quarter of Q1 twenty twenty. 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. So that is certainly true. They digest the EUR $230,000,000 worth of claims and a corona related part of that was picked up by an otherwise unutilized large loss budget, same story as in the rest of the group. Ordinary investments increased slightly and extraordinary investments, there was Lucky Punch in preparation of a slight reallocation of their assets.
They sold some of the bonds at a profit. The ROE after minorities is still double digit with 11.8%, I think. And that was probably also discussed yesterday that particularly Life Re has been the 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 posing effects. We've got the correlated impairments that I already mentioned, plus we see on the other hand the extraordinary gains at Hannoveri and some of the realized gains that we needed to support the increased ZZR, although this is P and L irrelevant. Assets under management have still slightly grown by five percent.
Let me now turn to Page 19, which is an interesting chart. It is complicated, but it's probably worth forty five seconds of discussion. You see a diagram and with an x axis and a y axis. On the x axis, you see the share of BBB or worse rated fixed income instruments of our assets under management. And on the y axis, you see the asset allocation in percentage terms of our equity investments.
Now we're talking at Tarlang's about an exposure to listed equities roughly 1% as per year end 2019 and a share of our BBB or below investment in fixed income would be like 23%. And you see the relative position to our exposure structure in comparison to the one of our peers. And we are in the Southwestern corner. Now, I can argue, well, what would be the relative exchange rate, so to speak, between an increased or decreased share of Now this of course depends on the duration of triple Bs, sort of the riskiness.
And we try to come up with three iso risk lines. And 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. But this is interesting because it gives you a feeling for the whether or not our position is really robust in a sense that we live to our low, better commitment.
And I think this chart would tell you that, yes, we do. Even if you allow for relative ISO risk exchange rates between BBB bonds and equities, this is certainly one of the reasons why we have said somewhat more robustly through the financial turmoils that we've seen in Q1 than others, that we are relatively defensively or low better 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. Now 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. And this is something you see in Page 21, it's the usual chart. Here we're talking about the truly hidden reserves on the asset side of EUR 6,200,000,000.0 or EUR 6,300,000,000.0. If you allow for the pro rata share or the takeaway, the pro rata share of our life insurance policyholders, the FISC and minorities, you're still talking about EUR $667,000,000 of hidden reserves that were accrued to the shareholder.
And if you divide this by the number of shares, you would be talking about 2 point euros 6 which is even much higher than an annual dividend, by the way. Now Page 22, the most recent officially communicated Solvency II ratio net of transitionals, I. E. Fully loaded is year end figure of 211%, which has been remarkably stable if you compare to the figures we've 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 this, the precise figure due course here on the Internet. Talking about Solvency II, I think next page is quite interesting, at least for the specialists among you who try to translate whatever you see in development of conventional market indicators into an outside in guesstimate of our Solvency II ratios. Therefore, they need sensitivities. We've updated our sensitivities 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, particularly as far as the Careers Spares 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, 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 adjusted in all states of the world that we model when we calculate the Monte Carlo results for 10,000 or 100,000 states of the world and that would then drive the that would then constitute the FCR. So that has helped a bit. Coming back to the outlook. Yes, 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, right, the contrary with the false. It is because we see a water 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.
So 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, obviously, quite conservative in setting us and preparing ourselves for the damages that will laminate in Q1. And Q1 hasn't been that bad. That's it from my side. Are there any questions?
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If you are using speaker equipment today, please leave a handset before making your selection. And the first question comes from the line of Paris Hagiantonis 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, they have improved year on year. But I'm just wondering whether the short show a positive effect essentially coming from lower frequency there mainly on the motor business. So 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 when those are going to continue in the second quarter. Staying with Motor, Imo, 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? And then on retail international, in some of the countries where you operate, I would guess that for the time being, I'm I'm mainly looking at Brazil and Turkey, there is quite a lot of FX volatility. So I'm just I'm just, you know, thinking about how how that could impact your business going forwards 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 ratios combined ratio. Yet it has been quite strong. Have you benefited from lower frequency because of corona that translate into lower loss ratios the motor business?
Probably yes to a certain extent, but A, we have seen lower trend of lower frequency throughout sort of past quarters anyway. And therefore, it's very difficult to say whether there's now just a continuing trend or more seconds. If you look at the lockdown in Germany, this is just one out of three months. With sort So of 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. So yes, there has been certainly a small positive. But I think it's really not the main driver behind sort of a favorable underlying Q1 combined ratio effect of corona, although it has certainly played some kind of role. Is it going what is the future going to be?
I wish I knew. Just from a 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 analytes. It's also supported by the tall data of sort of the Loritol collectors in Germany, the things are picking up again.
So I don't know whether we'll see a major effect. Probably yes, and that would be very helpful, because insurance is about pooling risks and living on the back of diversification. And the fact that we lose on business clauder risks, then it is good if at a very same point of time we benefit because of 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 sort of the battle of the two giants in Bavaria.
And in the end, I can only use famous saying that was used by Mr. Zeller from Hannoveri, volume is vanity, profit is sanity. And Retail International, yes, FX and we sort of there is going to be the multitude of FX effects. And 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 rate in Latin America. This should translate into a lower top line that should also translate into higher imported inflation, at least in countries where the local basis to manufacture spare parts is not as developed.
Now 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 is less sort of the prospect is less clear. And 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're investing short term monies and that would help us to set some of the additional pain that we see on the claim 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. So yes, there is some noise ahead. But 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, Guillaume. Thank you.
Thank you very much, Paris. And next question, please.
Next question comes from Vikram Ganhai of Societe Generale. Please go ahead.
Hello. Hi. Good morning, everybody. It's Rick from SocGen. 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, 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? And lastly, on the infrastructure investments where, you know, 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. Well,
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 that they should not be entitled to 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 that 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. And 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, that they try to talk us into payments excretions that are not supported by the wordings of the policies. And 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 that that that we live in an ivory tower. It's not to say that that we should not be passionate. It's but I think that we must be very vigilant that 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 this is a no claims free bonus next year. If this is the result of driving less, it doesn't matter.
It translates into a bonus that would be allocated next year. And other tariffs would see automatic mileage adjustments. We don't see any reason for special rebate action. Infrastructure, yes, you're right. Sort of there are no mark to market prices in a narrow sense.
That helps at least from an accounting point of view, but 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. And this is something that I think has played out nicely. And 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, but as of today, I'm relatively relaxed.
Thank you.
Thank you, Vikram. Thank you.
Next question comes from Fossard of HSBC. Please go ahead.
Yes. Good morning, Imo. Good morning, Carsten. 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? And 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. So, year to date pricing trends and what you're expecting for the subsequent quarters? Second question would be related to your COVID-nineteen impact for the primary lines.
You said talking to Germany specifically that €29,000,000 of more than 31,000,000 was related to a business closure. But in total, I mean, what is really even consolidation or contingency? And what is, I would say, BI? And have you seen already, I would say, claims coming in? Or is that largely IBNR?
I'm just talking on the primary, not on reinsurance part. And the third question would be related to the discussions you may have at the industry level in Germany for some form of socialization of the doses. We've seen some action already in Bavaria. I'm not sure that you you you you're part of this, but what can you tell us about maybe discussions which are currently ongoing in all the German vendors for I mean, making insurance pay. Also, they are not liable to pay, but as a part of, you know, helping some businesses or some professions to recover more quickly?
Thank you.
Well, you, Mr. Fauston. Well, the pricing trend, I think there is not too much news now because we've seen the major renewal round that has occurred in Q4 twenty nineteen as far as Industry Lines business is concerned because this is mainly European thing for us. And here we you know the figures that we report like 35% conditioning fees since launched the 2020 program. So there's no not really much news as of Q1 twenty twenty.
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 be particularly difficult for the ones who started late in the profit organization initiatives, because it's become too late. On the other hand, 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.
And you're talking, it's literally cost block of 10 to 15, 20%, roughly in this disorder of magnitude. It's like it's it's it's it's sort of, here we are pretty low as as far as industrial line of Germany is concerned, part of which is also variable because, you don't have to pay for loss adjusters if if if there are policies that that would translate into losses. Why do I say that? The difference between marginal cost and average cost are actually relatively low in our industry, particularly in the industrial lines business. So 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.
And this is logic behind the sort of pricing initiative that we've now launched throughout the division. We define walk away prices that would be not good enough to meet our minimum profitability considerations. And then it is a better idea to say no. So it's more the question how much top line would we lose? And here we are going to be adamant.
COVID in retail Germany, it's not business closure, business interruption, it's been business closure. So 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 or some authority tells the company, you must close your shop. And we have covered this in certain cases.
And therefore, it didn't need us to wait for a Bavarian initiative to convince us that we should pick up at least part of the claim. We stand by our words 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 materialize because people want you to pay for something that is not covered. Then there is the ones who know that they've got to pay anyway.
And therefore, the 15% solution, but there is solution because they would lose any court case. So 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. So therefore, there's nothing in for us. And then there is the gray area in between where people say, well, I don't know. And so for us, I think, yes, we've probably also have got some gray wordings, while we support the Bavarian initiative in a way, it was not something we had waited for, for the reasons that I've just explained.
With the third question?
Your third question, Thomas, was on recovery?
No. What I think that is that was it. But I actually just to catch up on the Bavaria initiative, actually there are 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, are many discussions and many other lenders people have particularly disliked the compromise in inverted commerce 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. So that was our introvert. 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 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 and but of course are foreseeable.
So we are in the midst of the second quarter. The crisis has been ongoing. So 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 second quarter? Or how should we look at this?
And 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, 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 very much driven by the lower activity in our bank bank assurance 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 and now in terms of annual premium equivalents, the recurrent premiums actually up by 3%. Single premium business is down by 3%. The target was even, which is one of our sort of most profitable bank insurance channels on aggregate is down APE wise by 2%.
And this is a reflection of the specific challenges of the the bank assurance 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. And I think here, but it isn't just a personal guesstimation that really depends on how long the lockdown is going to be and and how much this is gonna weigh on the willingness of people to to set aside funds to to save for for their retirement phase. Here, probably, your guess is as good as mine. But I think I would be surprised if this is a great year in life insurance, but this is my personal guess.
Now the how conservative are our figures on the corona non Life side? Well, what have we done? We have done whatever we have done. We've drawn up our balance sheet and P and L. I think it was in the at the end of last week.
And whatever we saw in terms of sufficiently concrete claims either reported, notified, settled, or just occurred but not reported, we set aside. And this is an aggregate amount of $313,000,000. One of the reasons or the top reason, the 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 probably be would have been no reason to withdraw the guidance in the first place if I discard the investment income uncertainty. I think there are two data that I think could help in terms to help you to assess the level of conservatism.
A would be, yeah, sort of the proportion of notified and reported claims is, if it 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, and the €313,000,000 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 every one. And 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, doctor Heide.
No. That that works. Perfect. Thank you.
Thank you very much, Michel. Next one, please.
And we will now take a question from the Internet.
Okay. Then it's it's me. We have a question from William Hawkins of KBW. First question, you said that the three thirty million euros 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? Because it's 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 330,000,000 total? Thank you.
Well, I think both questions in a way I think I've answered. So the first question is the accounting question that is exactly sort of the rephrase question that has been put forward by Doctor. Height. This is what we have seen. But we also see a lot of fog ahead of us.
Therefore, this is the same answer. As far as the sort of the windfall profit is concerned, we probably have seen some windfall profits in Q1 because of lower motor frequencies, but I think that was one of the first question where I said, this is the first it is just a natural trend. Second, it's just been one out of three months. And third, I think in comparison to other countries, the decline of mileage and physical activity is not as significant in Germany as in other parts of the world.
And yes. Positive within the €330,000,000 this is not the case, no?
We certainly benefited from fact that we've seen a better claims development in the Motor business is reflected in the general figure, but not in the $313,000,000 sorry. Yes, sorry, there is no explicit netting. Sorry, then I got a question right now.
So I hope your questions are answered, William. Can we move on, please?
The next telephone question is from Andreas Schafer of Bankheads Lampe. So
from my side, there's just one question left. On retail on life insurance in Germany, I understand that the EBIT of DKK 36,000,000 is relatively clean given the fact that the PVFP impairment was offset by the deconsolidation gain. I mean 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. So could you elaborate a bit more where the, let's say, EBIT is coming from? I think it can't be the investment margin.
Margin. Is Is it it more more technical profit or?
Yes. Sort of I could give you the reasons why it hasn't changed. One is the ZZR buildup a non event as far as the bottom line is concerned because it would all be sort of additional gains that we see because of realizing gains. There would be no ZZR, but it would be shadow RFP that would be set against the additional that are build up. And I think the only special effects are really sort of the set off of the PBFP impairment against the one off Lucky Punch because of the deconsolidation.
Otherwise, it is relatively stable, and no big changes.
So would it be fair, let's say, to assume that the EBIT at the year end would be four times DKK 36,000,000 in German Life? I mean it looks like it would be even higher than last year, which benefited from some positive one offs.
Yes. Last year, you're right. We benefited from some lucky run offs from some run offs.
I
think I'm really not in a position to give segmental guidances for the year end. But 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 II is completely different. But IFRS wise, well, you could say, well, that's steady as she goes, yes.
Okay. Thank you.
Thank you very much, Andrea. The next question?
The next question is from Darius Zekauska 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-nineteen related notifications? And are you still confident that exposure to business interruption is limited because contracts require physical damage triggers, or are you seeing some exclusions in 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, industry lines, the it is business interruption and event related. We've put together this together and a bit of renaviation, these two represent overall claims burden that is corona related to Q1 is roughly what sort of one five out of six is business interruption and event and one out of six is reinnovation. As reporting and notification has been pretty light, it's 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 worrying wondering if you expect any kind of positive benefits to premium rates next year in your primary lines given what's happening this year in terms of COVID-nineteen.
Positives? Well, to be honest, next, not really. Why? I think the general level of activity in 2020 we'll certainly see a decline in GDP. And and whenever you see a decline in GDP, I think it would would not be I think it I didn't need the crystal ball to to to predict that this would translate into into a top line that is somewhat stretched.
And I think and that was one of the questions that that that that we put forward earlier. Discussions and negotiations to increase the profitability and reduce the price in combined ratio as part of our profitability initiative, particularly in retail particularly in in in the industrial lines business. All this is probably getting more difficult. And and therefore, I think from a from from from from from an insurance point of view, this is probably not sort of the the fantastic second leg of the b that is just ahead of us. Here, I'm somewhat more conservative in my assessment.
That's great. Thank you.
Thank you, Darius. Next up, please.
The next question is from Michael Hurtner of Berenberg. Please go ahead.
Fantastic. Sorry for the noise. I they're taking the roof off. Sorry. And thank you very much.
And I I had just one question to understand maybe the range of uncertainty, but you you just to understand. So on slide five, you have in terms of net income, you have these three numbers I focus on. So $280,000,000 adjusted operating EBIT with no corona. $1.47 after corona, just the bad stuff. I mean, sorry, just the claims and and nothing much else.
And then two two three reported with the realized gains, some which were a little bit exceptional in character. If I try and annualize these things, so not multiply this thing by four, but multiply this thing by three plus the axle of q one, then I get a a range of figures. So at the lowest, I get eight forty three. At the highest, I get one zero two two, and the mid and and sorry. Lower is six six four.
Highest one zero two two, and the just four times your actual results, $8.90. So if I put the range, it's basically 600 and a billion and a bit. I get to about an is that the is that the range of uncertainty that you're seeing, Or is there am I underestimating the uncertainty because you you've kind of taken, the corona claims inside your large loss projects?
I think you underestimate the the inset the range. Let me start with the investment income. The the the financial income or investment income is driven by two separate layers of uncertainty. One, what is going to happen to to the financial markets in the first place in the reflection of the duration of the lockdown, the decline of the GDP, sovereign credit risk express, for instance. We don't know.
Second, it very much depends on on the instrument whether this is something that's gonna be recoverable or nonrecoverable. Whenever we see a write down on equities, we've got the once impaired, always impaired principle. So this is probably gonna be very difficult to see a reversal when it comes to unrealized gains or or on on financial instruments that are carried through p and l on a on a spot market basis. This could This could be recovered if markets come back in the fourth quarter. Then and 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 and L impact on the non listed assets? I think infrastructure is probably sort of the area of least concern. But what happens to CLOs? What happens to private equity? We all know that there is a kind of 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 and L.
And 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 that under no circumstances could have been accounted for in Q1 twenty twenty. As far as the technical side is concerned, although I hate the idea, we don't know what the moral hazard, the public model hazard, how moral hazard is gonna to be like, sort of would there be more Bavarian of French models? I don't know. Talking about other lines are probably probably not as important for us, but but we also have this is credit bonds for a multitude of reasons.
Things are very foggy here. So there is really too much uncertainty to to just pick a range and multiply it by four. We we we did not 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. That's really helpful. Thank you so much. Thank you, and and, yeah, good luck. Thank you.
And there are no more questions at this time. I hand back to the presenters for closing comments.
Yes. 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.