Yeah, thank you, Roma, and good morning from Hannover. This is Talang's Q1 twenty nineteen results call. I'm here together with our CFO, Doctor. Emu Kurner, who will lead you through our quarterly results today. You'll find our documents, the release, the report, and the presentation on the IR section of our homepage.
This morning, we've also published the SFCR report for 2018. You may follow this call via phone and via webcast, and there are replay options for both channels. With these introductory remarks, I'd like to hand over to Mohdana.
Well, thank you. Good morning all from my side. Sorry for running a little bit late. Yeah. Let me start with slide two.
I think bottom line, it's been a really good start into the year. The top line is not both currently adjusted and unadjusted. I think what is particularly pleasing that not only the reinsurance progressed in terms of EBIT contribution, the same was true for both retail divisions. I'll come back to the second in greater detail. While sort of the first glance through industrial lines income as well as the other two primary segments, I think we feel, I'll come back to this in greater detail, that we are really on track to deliver what we've communicated that we should see a technical breakeven at year end 2019, but us spend some time during the course of this telephone call.
Group net income is up by almost 8%. The group ROE now runs on an annualized basis at 10.3%, which I think is really good. We are confident to make to deliver the €900,000,000 by year end. For the full year, we know we've got this general CCC caveat currencies, capital markets, catastrophes. This is still true, but I dare say that I think our confidence has increased.
In terms of Solvency II, the fully loaded Solvency II ratio, I. E. Without any traditionals, is up. It's up from year end 2017, and it's also up from Q3 to 2018 at two zero nine percent. Again, perhaps we find some time at the end of the presentation to also discuss some of the drivers behind this favorable development.
Let me turn to Exhibit four. Gross written premiums, as I've already indicated, up at 11%. If you would neutralize currency developments, it would wholly inverted commas be up by 10%, and that means that the currencies net net has helped, and that's particularly true to these strong currencies in the developed world. I think countries to for currencies in developing countries and our retail markets overseas. But you can see this later.
Net net, currencies have provided some tailwind. Net investment income is down. How come? I think there is one very, very simple explanation because of the new ZNR legislation or regulation that has come in force in Germany last year, we had realized less than we did in the first quarter twenty eighteen, and this is the main driver behind the change of realized gains. Operating result is up 4%, and I'll come back to the segmental contribution on the next slide.
Net income after minority is up by 8%. It's grown even stronger. One reason for this is the favorable development of the tax ratio. And I think this is then is driven by two things. The BEAT burden is fading away.
That is it is quite a lot in first quarter twenty eighteen. Plus there has been a positive net balance of favorable and unfavorable single tax items that behaved nicely in the first quarter twenty nineteen. The return on equity, the analyzed return on equity was 10.3% calculated in a very conservative manner. You know our calculus is well above our minimum target. The minimum target formula is 800 basis points plus risk free.
Now risk free, according to our definition, is currently 0.2%. That would then add up to a minimum target of 8.210.2% is much higher. Let me turn to large losses. Just three observations in the industry lines, and this is the main consumer of large loss budgets in our primary business. It's been
a little
bit below our pro rata budget. Of course, we've booked the full budget in our first quarter. In reinsurance, the underutilization is much more pronounced against the pro rata loss budget of €175,000,000 We've only used roughly €60,000,000 The rest of course has been put aside, as you know. So we've got some extra buffer for the rest of the year. What is quite interesting as far as industrial lines are concerned is that contrary to what we have recently experienced over the past quarters, it's not the large man made losses that have used the budget, it's Nat Cat, including things such as the Flotenheim and and and the storm Eberhard hitting us on the continent.
Combined ratios, page six. Talan's is down, the combined ratio, that is nice. Retail Germany is down, and if you exclude the cost, the transitional or transitory cost expenses, it's now the adjusted pro form ratio is now down to 96.1%. You may recall that we are shooting for 95% combined ratio by 2021. So I think we are well on course to deliver on this one.
Retail international is down. Reinsurance is down. I'll come back to the asset lines business. There probably takes a little bit more time to analyze the set of figures. Just one word because against the background of our acquisition of Argos, a Turkish business, the combined ratio is 109.4%.
Putting things into proportion, the maximum tolerable combined ratio in Turkey is in the vicinity of this 109.4%. Why is this? This is very simple because the yields that you can make in the Turkish market are so high that 109% combined ratio is good enough to render profits that would be commensurate with the profit needs, including the capital that you could hold against these activities. And so we have achieved a positive EBIT in the first quarter in Turkey. I'll come back to Turkey in a second anyway.
Page seven, the EBIT contribution, it's up from $5.92 to $6.60, which is nice. I think all the segments have contributed with the exception of the industrial lines. If I should single out one segment, it's certainly retail Germany with a staggering 58% EBIT growth on a quarter to quarter basis. But again, that would be pretty much at the center of my discussion around this segmental performance that I'll come back to in a couple of slides. Let me start as usual with the industrial lines when it comes to a segmental deep dive.
Gross, the top line and the net premium development is kind of interesting this quarter. The gross premium income is up by 12% and here we've of course benefited from the consolidation of the newly held RDE Global Specialty, formerly known Inter Hannover. That is now the combined entity writing the former Inter Hannover business and the specialty business we had with before in our Industrial Alliance segment. But it's 12.1% up. This company in itself only holds a self attention of 10%.
And I think we discussed this during the course of our Capital Markets Day in Frankfurt, initially would see the best part of this business, the other sort of the business that they not keep to Hannover Re, and that explains why the growth rate of the net premium income in the segment Industrial Alliance is not as high as the gross premium development. And this then, of course, translates into a lower self retention because quite a lot of business is passed on to Hanoveri. Plus some reinstatement premiums are the drivers behind the decline of our self retention ratio from 60.3% to 56%. As the business grows in Inter Hanover, or what used to be called Inter Hanover, I mean, Hagi Specialty, and as the session ratios move toward the long term equilibrium of 45% to Hanoveri and 45% to Hage, this self retention ratio should move up, structurally should move up again. Operating income EBIT is down by 31%, and that is driven on the one hand side by 102.9 combined ratio.
Obviously 102.9% is not around 100%. So are we disappointed with this result? Not really, because I think there's just one single factor. There was a very, very, very late fire claim that was reported in the last days of December. Here we got it wrong in terms of the initial reserve setting.
So that has contributed roughly €20,000,000 If you would net out this aperiodic effect, we're talking about 100% combined ratio for the entire segment, which is bang on line with our target for 2019. And although we had to digest this true up in the first quarter, the runoff result is back to normal. You may recall the last quarter that the first quarter twenty eighteen reported a run off loss of €30,000,000 This is now back up to 6,000,000. And the 6,000,000 that you see in the first quarter twenty nineteen is roughly as high as the long term average of what we see in any first quarter. Q1 run off results are very volatile, but long term average is about, I think, 10,000,000,000 or €11,000,000,000 So this is very close to what we historically would have expected.
The other result is somewhat burdened by currency loss, which is sort of although we try to get it perfectly right with the currency mismatch, you'll never get it right according to IFRS, and there is some kind of non systematic noise, and some first time other result burdening as part of the integration of HID Global Specialty IV format in the Hannover. But this is the reason, sort of looking into the figures behind sort of the first glance of the figures why we are very confident that we're to make it with the technical breakeven. Net income is also down because the EBIT is down. It's not as down as in relative terms as the EBIT, and this is driven by tax fee investment income from subsidiaries reduced the tax ratio, and this is the reason why net income is only down by 26%. Me move on very quickly, move on to the next slide.
This is 10. You know this chart, almost nothing has changed in this chart. Nothing has changed in this chart not because we are complacent, because we've abandoned any of our objectives, or we are less vigilant or the only reason is that in Q1, there is very little business that we can renew. Thus, there is very little room to improve the book. Currently, we are sort of making all preparations for the renewal season, And we're confident that we will at least achieve the 2020 target by year end, and should underline at least.
I think we're shooting for a little bit more. In Q1, I can only reconfirm that with full preparations of the next renewal round, but unfortunately, are new figures that I can report in Q1. Let me move on to the Retail Division on Slide 11. Gross profit and premiums are up by 1%, which is not a lot. But if you recall, the past quarters was always sort of the same structure.
Life was down and P and C was up. Now, and this is now the second quarter, we see growth in both segments, life and non life. Both segments have contributed to the growth. The operating result is up by a staggering 58%, which I think is a major achievement. Combined ratio is 99.3%.
It's been burdened by kind of accelerated scrapping of legacy IT that has cost us some money in Q1. This is part of our cost exercise. It's part of sort of the traditional cost that will fade away now. If you apply the same calculus that we've applied now for the past, I think, three or four years when calculating our pro form a ex course combined ratio, we're talking 96.1%, which I think is good. Net income is up by 64%.
We're talking €36,000,000 Now I can say, well, Thailand is rolling again in retail business. We should dramatically adjust our sort of our estimation for the full year bottom line results of Talanz Deutschland. Yes, we are satisfied with I think what should not get carried away and just multiplying this €36,000,000 by four may be a little bit on the optimistic side. Retail Germany P and C, yes, we see a slight premium increase. This is the net effect of a lower top line the motor business, which is the result of the softening market and more price pressure that we are not prepared to yield to, and which has been more than offset in other lines that are particularly true for our business with self employed and SMEs in Germany.
The official combined ratio is slightly up, and that's particularly due to a higher single digit figure that we had to account for as part of our accelerated IT legacy scrapping initiatives. There has also been a positive one off in Q1. I should also mention this in passing at least, that we benefit from a €3,000,000 release of an IPT reserve that we had set aside against our discussion with the fiscal authorities. In the end, we got our way and or more or less got our way and could release €50,000,000 The operating result in this segment is up by 67%. Think I cannot recall any quarter has seen an increase in retail Germany P and C that has been as high as this one.
Retail Germany Life, premiums are up. The drivers behind this positive premium to our top line development are twofold. The one is wanted single premium business. I think we should carefully distinguish between wanted and unwanted single premium business and the biometric business, particularly in our bank insurance business has picked up again, which is good. Investment income is down 80% and this is the ZZR effect that has only been topped up by EUR61 million.
It had been topped up in Q1 last year by €238,000,000 And this is quite a difference. And this difference has then translated into a lower need to realize hidden reserves on the asset side. Operating results up by 50%. And the main driver is behind the continuous kind of natural volatility of IFRS accounting in German life insurance, the thing that will not go away with SELT 17 if I may add this. But the drivers behind this is sort of the nice pickup in our biometric top line and better cost management.
Just in parting, spreading more sort of good news as far as retail Germany Life is concerned. So obviously two figures are up. I think one of you has always asked what is the fully loaded sum to ratio of the kind of indicator carrier of retail Germany, and this is Hardie Lehmann. Hardie Lehmann's fully loaded solvency ratio stood at year end 2018 at 254% without any additional, I mean, and this is really the market improvement. Let me move on to retail Germany.
Premiums are up by 8%. If you would look at the currency adjusted premium development, you'd be talking almost 12%. Now here the currency trend has not been our friend, and this is now sort of the other side. We have sort of strong developed market currencies have advanced, and that's not true for the emerging currencies, and you see this here. What we're really satisfied with is development in our core business in P and C.
Currency and just has again grown by more than 2%, I. E. Double digit, which is good. The growth has come along with better technical conditions as evidenced by a lower combined ratio, which is now down. If I would have to single out two countries that have particularly contributed to this favorable technical performance, it's VARTA and Brazil, probably the two most important carriers of ours in our international retail operations, both cases.
And we're talking about 91% combined ratio in Poland and 97% combined ratio in Brazil. Both are down from Q1 twenty eighteen levels. And I think it's fair to say that if anything, Q1 reserving in this segment, as far as the reserves are considered more on the conservative side. Net income is also up, return on equity now up to 8.7, which is good, and as you know from our Capital Markets Day that we are shooting for 10% at one point in the not so distant future. So we're getting there step by step.
Let me spend one or two sentences on Turkey against the background of our acquisition of Argo's retail operations in this country. Well, you all know that Turkey is still a challenging macroeconomy. I think that this is no secret. Interest rates are high, which is, of course, a reflection of also the inflation and the macro environment. This is not just bad, it's also good because it means that sitting on money that can be invested at around 20%, 21%, of course, helps you arrive at positive bottom line, even if the combined ratios are well above 100%.
So this is no different from what we see in developed markets. And I alluded to this when I discussed the maximum tolerable combined ratio, which is around 109% or so today. As far as the MTPL market is concerned, you may recall that there are two very important instruments that have been used by the government to intervene. The one is price cap. Price cap is kind of fading away because the government increased allowance by 1.5% on a monthly basis, and there was a five percent one off increase in January 2018.
So we're actually quite optimistic that by year end 2019, the price cap as a profit constraint should perhaps not fully diminish, but should no longer really weigh in our bottom line results by the end of this year from today's vantage point. And the other instrument is the bad customer pool. This is still there, it's probably stayed there for a while. But I mentioned this because if you merge two companies, and this will be then the end game of our acquisition, not only of Liberty's Turkish operation that we digested this year, that will have more as far as Agro's business is concerned. That helps to prove the economics of the burden sharing in this risky customer pool.
The 109% plus combined ratio that I've just reported also influenced by an accounting one off. We always look at whether all the accounting instructions are applied in a consistent way, and as part of this annual review process, kind of unified or harmonized the way we would account for other technical expenses and technical expenses and non technical expenses. And as a result of this, I think this is the only country where it really mattered was Turkey that the combined ratio was somewhat burdened by roughly 3% because of new accounting conventions in an EBIT neutral way because whatever is now looking not as nice in the combined ratio is looking brighter in the nontechnical results. So this is EBIT neutral. And the rest of the combined ratio development is explained by inflation translating into high ultimates, that's particularly true for bodily injury, high cost of spare parts.
And there was one prior claim, one no further prior claim, bottom line, I think we are very satisfied with our development in Turkey. Because we are satisfied with our development in Turkey and still consider this to be one of our strategic key reasons, we are very happy that we have now almost made it to develop this market into a market where we hold a top five position. We are just sort of whisk away from this objective. We know that this is probably an anti cyclical investment, but when we discussed the acquisition of Liberty Mutual, I think roughly one and a half years ago, we already signaled at this point that the acquisition of Liberty Mutual would not necessarily be the end, then we will be further eyeing this market for potential opportunities. I think we are confident that we will see significant synergy potential after of with an earnings accretion from year two on.
We hope that the official closing will be done in half a year's time in Q3 twenty nineteen, and the full merger of the two entities we currently expect for 2020. Medium term, I think Turkey should be good enough for an EBIT margin of roughly 4%. And just in passing, the integration of Liberty, the quarter is very well on track. Reinsurance on this is on Page 16, think nothing new. Top line is up.
Combined ratio is down. Net income is up, ROE is up. The ROE is down because the equity has improved in further, but still 13.1% isn't that better figure. We are fully utilized in that large loss budget and US mortality business. I think we see the end of the day slide at the end of the tunnel and the things have really improved.
But I think you've all discussed this in greater detail with Mr. Frode. Let me move on to page 18, a brief overview of our investment income. Ordinary investment income is up by 2%. How come?
Yes, we still suffer from a low interest environment, particularly in the Eurozone, which is not as bad which is worse than in The United States or the dollar round, although the US dollar interest rates have come down in the first quarter. So how come? It's a wide blend of things, some high one offs, dividends, But the main drivers have been higher stock of assets in the management, which has gone up by roughly 6%. And if the interest in the order income goes up by 2% and the asset base goes up by 6%, you see that we still continue to suffer from the low rate environment. The other main point, think, is realized net gains and losses, down by €180,000,000 Now the €180,000,000 minus is almost exactly the figure that is that our build up went down, that was $177,000,000 So this is the kind of wash in the P and L.
Changes in equity, Page 19. It's up. It's up because we've made profit after taxes, but it's also up because the other comprehensive income, I. E, the change of the asset and liability values that did not go through the P and L according to IFRS accounting. The net balance is up by almost €600,000,000 and this is mainly a reflection of lower yields and lower spreads.
And that also, of course, translates now into a book value per share for Tarlangs of almost €38 Unrealized gains, I think you know this chart. There are two types of hidden reserves. The one is what you see in the OCI, and then there is the hidden reserves that you don't even see in the OCI. So the off balance sheet reserves have also gone up, but mainly in the life insurance business. And of course, this has to be shared with the FISC and the policy holders.
Page 21, solvency ratio up 209%. Here you also see the historic trajectory of what the figures were in the past quarters. I think there is lots of detail back in the appendix pages 33 to 40. Just sort of a big bird's eye view. The market particularly in Q4 has been against us.
Rates went down, which is not helpful. And in Q4, spreads went up, which is equally not very helpful. But these adverse developments, market developments were more than offset by using now Shakespeare's Macbeth, which is that helped us this time, was yes, German regulator, was a new ZZR legislation that has boosted both own funds as has helped to reduce the SVR, which is certainly something that you will not find outside Germany. Then there has been a change of some aspects of our internal model, and the most prominent one is the introduction of the static EA in some of our non life carriers. And then a variety of operational improvements, ranging from cost cutting to even more refined ALM management translating into smarter reinvestment guidelines.
All this has contributed to the NICE development, now taking us to the two zero nine percent fully loaded. The outlook hasn't changed, still 900, roughly 9.5%. We know that the first quarter has been slightly above the pro rata that would be needed to support this. And because this is true and because there's still some of underutilized large loss budget and twenty twentytwenty is running well, I think there is no reason why we should be less confident than at the beginning of the year. I think the contrary would be true.
Yeah, that's it. Q1 from my side. Of course, I'm available for any question.
Roman, I would propose we start the Q and A.
Yes, thank you. If you find your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question, and we'll pause for just a moment to allow everyone to signal. We now take our first question. This comes from Michael Huttner from JPMorgan.
Just
two questions. Because the results, they look so clean in your explanation, so detailed. Thank you. On the industrial lines, you said you were hoping to do better than the 20% rate rise in the industrial in fire. And I just wondered if you can kind of give a little bit better feel for what your ambition could be and or what the tailwinds are or something.
Then in retail Germany, you said do not multiply that lovely figure of €60,000,000 by four for the EBIT. I noted that you had written off quite a lot of IT in a part of your cost program, which sounds a little bit one off, a little bit biased to having closed costing a little bit more than normal in Q1. So I wonder, given that it feels like the Q1 was burdened with negative one offs, why not multiply it by four? These are the only two questions I had. Thank you.
Okay. Let me take a stab at the second question. I think, yes, you're right. There was a positive one off in the sense that the writers continue forever. But the truth is that I think during the course of 2019, there will still be some writers that are in the pipeline.
I think discussed the state of our IT affair in great length and honesty with last met, I think, in Frankfurt. Q1, yes, perhaps a bit more than the average, but and this is why I mentioned, for instance, the IPT effect. We've also seen positive one offs in Q1 that has helped us, and we should not expect them to reoccur. This is the reason why we are not saying that 2019 should be a particularly bad year. The contrary is true, but just multiplying it by four, I think, maybe bitterly because on the optimistic side.
Perhaps I think when last year's EBIT was 180 and that we told I think all investors that we want to make the 140 and we want to make the $2.40 and if you divide it by three and just arrive at a kind of average pro rata improvement process in the essence of any better insight that should be 20,000,000 plus PA that would take us to 200. Yeah, it's been a good quarter, do not get carried away. I think this is the only message that I wanted to put across. In terms of industrial lines, yes, I think I'd like to back perhaps to the one chart that has not changed, which is the status report of our 2020 project, which is on page 10. At the end of last year, we always arrived 90% of what we wanted to arrive by year end 2019.
The old plan was that we wanted to derive the 17% out of 20, the 13.3% out of '20 I. Twothree, and now we're about 17% out of 20. So the difference between the 13.3 and the 17 is kind of overachievement of what we did in 2018. Now if you say, well, is there any reason why we should be less successful in implementing our measures in 2019 in 2019 than we thought in 2018? Then probably it should be a bit more than 20%, kind of parallel shift, this kind of logic.
And I think this kind of parallel shift logic, that at least we should not lose what we've gained in 2018 would be the right starting point to develop a kind of feeling of what we actually now do want to achieve. Fantastic.
Thank you
very much.
Questions, Michael?
Yes. That's lovely. Thank you.
Thank you, Michael. Next one, please.
It's not lovely. It's a lot of hard work.
Yes. On tailwinds, any tailwinds?
I think if there is one tailwind, but this is very difficult to assess, that I think now everyone in the market realized that the state of affairs in industrialized and commercialized business has got to improve. And when looking at the figures that have been released over the past ten days or so, I think our view of the world probably gained more support now.
Makes sense. Okay, so that's Thank you.
Okay, next one, please.
Thank you. We now move on to our next question. This comes from Frank Kopfinger from Deutsche Bank. Please go ahead.
Thanks. Good morning, everybody. I have also two questions. My first question will be on the industrial lines on the top line development. You pointed on for this 12% growth, you pointed to HDI Global.
However, could you break this down a little bit further into what has been really come from Inter Hanover, what is coming from the repricing actions and what is business loss? And then secondly, on your disclosure on the solvency, I noticed that your credit spread sensitivities came down a little bit. Can you comment on where this come from, whether this is from your rebalancing actions which you did at the end of twenty eighteen? And also whether you could provide a breakdown of your credit spread sensitivity sensitivity and what a move in corporate spreads and covenant spreads would be?
Okay. I'll start with the second question. I think the reason why water the sensitivity has gone down, there is no single answer. Let's move to the appendix on page 41. One reason is very, very simple.
Last year, we reported credit spreads of plus 100 basis points. Now I think everyone in the industry, and this is the kind of template that has been just suggested by the CFO forum, recommends that it should be 50 basis points kind of stress. This is a very simple explanation. But I should mention this. It's just true.
Second, yes, I think our reinvestment methodology that has translated into our modeling has helped. And the idea is very simple but convincing, I would say. If you're sitting on a book with guaranteed interest rates, then everyone knows that according to how the German system works is that benefit profits in excess of the minimum guarantee perhaps with a 10%. But if something goes wrong, you could have picked up 100% downside. Now, we have refined the reinvestment policies in a way that we would only move into higher risky credit exposure if this would be really needed to support the guarantees.
And if the need would go away, we would in a way reallocate our asset allocation to more conservative allocations. That means that, yes, of course, the average yield probably will go down, but the optionality working against this in German life insurance is dramatically improved, and that then translates into more favorable FCR calculations because the likelihood that the shareholder has to inject funds to make difference goes down. So I think this is an important factor. The other point, think the other question I asked is can we break down the commercial and profits we can. I haven't got the figure because the way we model is, is that credit and government yields or spreads would move in lockstep.
I think we've explained this on the occasion of one of our Capital Markets Day is that for us, sovereigns with a rating worse than AA-, are just as good as any corporate. So for instance, Italy is Italy SPR for that matter, and is modeled accordingly. And for the better rate of sovereigns, would apply factors, but still would move in lockstep. So even a AAA spread on The Netherlands or Germany would then move with spread that we'd see on AAA corporates. This probably is somewhat conservative modeling because we know that particularly the better rate of sovereigns would benefit from some flight of quality if there is noise in the market.
It is the way how we modeled it because we've really got to manage the complexity of the model. But I'll see whether we can come up with figures. I haven't got them here now. Sorry for that. As far as the previous development the industrial lines business, because I think roughly two seventy would be the net effect from Hage Specialty.
And the pruning process has cost us roughly 20, which is down the balance of business that we've lost, and the business that we've sold at higher prices, and some other new business. So this is the kind of net effect. Questions to answer?
Just for clarification, so you're suggesting that there is a $20,000,000 net effect coming from business loss versus repricing?
The balance of business that we've lost, this is offset by higher prices and some other businesses, and the net effect is roughly, I think, 20,000,000 in the order of magnitude.
Okay. Okay, perfect. Thank you.
But I think this is in line with what we communicated, I think, on the occasion of our yearly call that is, say, well, bottom line, it's been more or less flat. Now €20,000,000 is a lot of money for you and me, but putting in of relation to the stock of the premiums, I think, is still a single digit percentage figure.
Okay, perfect. Thank you. Thank you, Frank. Next one, please.
Thank you. We move on to our next question. This comes from Vikram Gandhi from Societe Generale. Please go ahead.
Hi. Good morning, everyone. It's Vikram from SocGen. Just two questions from my side, both on industrial lines, I'm afraid. Firstly, just curious on the tax rate for industrial lines, 28.8% for first quarter twenty nineteen versus 36.6 last year.
And you mentioned the positive one off effect helping the tax at this time. I'm a bit surprised with this high tax rate since I would have thought the international expansion should have significantly lowered the oral tax rate for industrial lines. So that's question number one. And the second is, should we expect some more costs relating to the onboarding of the HDI Global Specialty on industrial lines? That's all from my side.
Okay. I think as far as the tax rate development is concerned, a significant part of our business is still accounted for in Germany. A, the amount of business that we provide in non German subsidiaries is relatively small. And when it comes to the branches, we are not just operating in low tax branches. If you do business in France, it is certainly fun working there, but not necessarily a low tax environment.
And France is one of the markets where we gain footprint. True for places such as Italy. I think this is probably different from others. What we're trying to do in the long run, of course, is to shift some of the self attention to our Irish reinsurance captive that is going to be held by the reinsurance segment. That will help structurally.
At the same time, there is still some residual burden from the BEAT tax because it is not as easy for the industrial lines business running international programs with a lot of natural intercompany sessions that are now penalized by the beat setup to overcome this not as easy as for Hannover Reed. I think this is the reason why the tax rate I think you shouldn't expect wonders. In terms of cost, there is probably still some integration costs. If there was something like cost in RDE specialty, there probably would still be some cost related expenses if this would be the case. But I think in the big picture, this is negligible.
We've got to invest into all kinds of accounting backup systems so and there were still some expenses. Bottom line, the combined ratio impact is positive, though. And the reason is very simple. The underlying combined ratio of this entity is very favorable because, A, they benefit from nice commissions from the reinsurance partners. This is today still mainly Hannoveri and long term, it would be fifty-fifty Hannoveri and Hage Specialty.
Some of the expenses that are covered by these commissions that make it into the net cost line in the P and L, however, relate to expenses that are part of the net, not technical expenses. So in a way that looks brighter perhaps than it is first class. So structurally, that the business will benefit costincome ratio wise, but I think we'll still see some integration work that this should not be marginal. This should be marginal, sorry, should not be material.
All right. Thank you. Okay. Thank you, Vikram. Next one, please.
Thank you. We now move on to our next question. This comes from Andreas Schafer from Bankhaus Lampe. Please go ahead.
Thank you. I have just two questions. One on Poland. I mean, you mentioned last year that the combined ratio of of Vaxter in Poland was affected by some additional reserves increases. It's the roughly ninety, ninety one percent we've seen in q one now a clean number without any changes in the reserving quality.
And the second quarter is in German retail P and C. I mean, there was just a pretty weak growth from of open 2% in terms of premium. Mentioned that the competition has picked up. As far as I understand, after a couple of very good years, competition, especially in motor insurance, has just started to pick up this year. So does it mean that if competition will be stronger in the next couple of years, we're not going to see any sort of premium growth?
Louis Thomas, Poland, I think, by and large, your observation is right. It's a more normalized combined ratio. Still, I would say if there would be kind of super clean best estimate reserve setting, then we'd still probably also on Q1 on the conservative side of Poland. But the extraordinary effect that we kind of really invested in redundancy that we reported in Q1 twenty eighteen has not been as pronounced this quarter. That's probably right.
Retail Germany. Yeah, I think the again, structurally, you've got a point that as competition grows and price development is not as helpful as it used to be, the top line trajectory should be flatter. And this is true. We don't see any reason why we should let ourselves into the game of writing business that would not meet our profitability standards. And this is very simple.
We are prepared to sacrifice top line when it is needed to defend the quality of our book.
Okay, thank you.
Thank you, Andrea. Next one, please.
Thank you. We'll move on to our next question now, which comes from Thomas Fossard from HSBC. Please go ahead.
Yes, good morning. I've got two questions. The first one would be, again, on the industrial lines, but more on the Clems development. And could you update us on year to date how claims environment have been trending? You mentioned nat cat claims, but was interesting to better understand what you were currently seeing on the man made and industrial claims as 2018 has been a very burdened by concentration of this type of losses.
So any change or any improvements, structural improvement you're starting to see in your books? Second question will be on the investment income. So 2,700,000,000 is the guidance for the current year, but you highlighted that clearly the lower for longer environment is still kicking in Europe. So could you remind us the dynamic of potential dilution of your running yield going forward if we were to stay a bit longer again in this type of environment, especially in Europe? Thank you.
Think the kind of long term trend is probably in the region of 10 to 20 basis points. This is then that will be kind of lose. Of course, is a big overlay, and this is the level of realizations of FIG reserves that will structurally go down as a result of the ZSR
regulation.
Offsetting the structural decline that I've just mentioned is, of course, the growing part of our non euro business. That is equally true for Annoveries as it is true for our retail operations and industrial operations. And that is actually one of the reasons why we like the non euro business, that we'll be doing more business in economic environments that are not as burdened by questionable central bank policy. I think that answers the second question. The claim structure, I think I alluded to one aspect in my introductory remarks that we've seen a kind of shift in the profile from man made losses to to Snapchat.
And you can see this on page five that that that if you look at large losses, q one twenty eighteen was dominated by man made large losses, whereas it is now the other way around, that it's more natural losses. When it comes to man made losses, I think it's more interesting to look into things that we do not see anymore. And this is, of course, something we try to monitor. Have we abandoned the right business as part of our pruning exercises? And there's now growing kind of anecdotal evidence if you look at what happens in the market claims are there in the market that we would have been exposed to had we not pruned our portfolio.
And that is particularly true for man made exposure. And that is one of the reasons why we're really confident that we are going to make it. Thomas,
If there are no follow-up, then
No. That's perfect. Thank you. Thank you.
We will now move on to our next question, and this comes from William Hawkins from KBW. Go ahead.
Hey, Imo. First of all, on Slide 21, when you refer to the further increase in the Solvency II ratio in the first quarter, could you briefly summarize the key drivers of that? I'm assuming markets have been positive and maybe there's been positive capital generation and possibly other stuff as well. Could just give us a bit
more information about that? Yes. You're perfectly right. I think the market has been positive in the sense that at least spreads have come down, and the yields have more or less stayed where they were at the end of the year. So that's not too much decline.
Plus, of course, the profit that we've made. So this is kind of organic growth. But while I'm sort of kind of optimistic or mildly optimistic, and this is the reason why you've seen this comment on the slide, Solvency II calculations are very difficult to project. But currently, I would say that should be perhaps a tad stronger. This is our current feeling.
Can we be wrong? Yes, it can be wrong, but the past couple of quarters, I think our projections have been more or less accurate. Yeah. But these are the two reasons.
Thank you. And then secondly, on slide 15, when you're giving information about the Turkey deal, is there any goodwill associated with this transaction that we need to be taking account of at close?
I mean, of course, a camouflage fashion, what's the purchase price? And we agreed with the seller that we would disclose this, but putting it that way, of all the concerns that one could have with this transaction, the goodwill concern would probably be the least important concern.
Brilliant. Thank you.
Thank you, William.
Thank you. We move on to our next question, and this comes from Michael Haidt from Commerzbank. Please go ahead.
Good morning. Thank you very much for taking my question. Only one question, a technical question on Solvency II, actually. You mentioned that the relaxation of the ZZR requirements has a positive effect on your Solvency II ratios at the solo life entities. I didn't have yet the time to look at this in more detail, but in theory, in an ideal world, and I know that Solvency II is not perfect, in an ideal world, this relaxation of the ZZR should have actually a negative impact and not a positive because the ZZR is designed as a helping tool, if you use that less, then it is actually rather negative.
Can you say also how much this impact is the positive impact is on your solo entities or on Talendx as a group?
Yes. First, I've got to do now something that I hate to do. I've got to disagree strongly with one of our investors or analysts. The ZZR relaxation is helpful, And the reason in my eyes is very straightforward. The ZZR is going to be set aside regardless of what the current spot rate of the interest rate is.
It's a long term moving average. Now in scenarios in which there is sort of under the old regime, still the necessity to drastically build up the ZRR without sitting on hidden reserves because the spot market interest rates have gone up, have put all life insurance companies into a very difficult position, because they would have been forced to fund it at the expense of the shareholder in the absence of any hidden reserves that they could realize. Now whatever money you would inject into a life insurance company as a shareholder currently must be modeled with kind of only 10% participation in the yields that are associated with these funds. Now this, of course, is a very bad deal for the shareholder that in certain scenarios he would have to inject funds in which he would only benefit with 10%. This likelihood has gone away because the magnitude of any ZZR buildup under the new regime is much lower than it would have been under the old regime.
It's just the optionality and the interplay of the optionality that is embedded into our German life insurance system with the need to strengthen local GAAP reserves that really helps. What has been the impact? The ZZR impact alone for retail Germany life insurance has been in the region for the aggregate of our German life insurance of €200,000,000 ZZR. And because kind of mark to market view of the risk neutral probability is also reflected in the the own funds. The financial options and guarantees biting into the own funds of our German life insurance companies been have approved or have benefited with a little bit of more, €100,000,000.
So this is the ZRR effect. It's really been helpful. In my eyes, it's been the right thing from a policy point of view, but it's also been helpful.
Okay, fantastic. Yes, thank you.
Are there any more questions, Roman?
As there are no further questions, I'd now like to hand the call back to you for any additional or closing remarks.
Well, thank you for your patience, and looking forward to your comments in your write ups.