Thank you, Roman. Good morning from Hannover. This is Talanx Q1 2019 results call. I am here together with our CFO, Dr. Immo Querner, who will lead you through our quarterly results today. You can find our documents, the release, the report, and the presentation on the IR section of our homepage. This morning, we have 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. For the introductory remarks, I would like to hand over to Immo Querner.
Thank you. Good morning also from my side. Sorry for running a little bit late. Let me start with slide two. I think bottom line, it has been a really good, a decent 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, and I will come back to this in a second in greater detail. While at first glance, the Industrial Lines did not come as well as the other two primary segments. I think we feel, and I will come back to this in greater detail, that we are really on track to deliver what we have communicated, that we should see a technical breakeven at year-end 2019, but I will spend some time with this 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 deliver EUR 900 million by year-end. The full year, we know we have got this general triple C 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 conditionals, is up. It is up from year-end 2017, and it is also up from Q3 2018. It is 209%. Again, perhaps we find some time at the end of the presentation call to discuss some of the drivers behind this favorable development. Let me turn to exhibit four. Gross written premiums, as I have already indicated, is 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 have helped. That is particularly true to the strong currencies in the developed world. I think the contrary is true for currencies in developing countries and in our retail market overseas. But you will see this later. Net-net, currencies have provided some tailwind. Net investment income is down. How come? I think there is one very simple explanation. Because of the new 188 legislation or regulation that has come in force in Germany last year, we had to realize less than we did in the first quarter 2018, and this is the main driver behind the change of realized gains. Operating result is up 4%, and I will come back to the segmented 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. I think this then is driven by two things. The BEAT burden is fading away. That has hit us quite a lot in the first quarter of 2018. Plus, there has been a positive net balance of favorable and unfavorable single tax items that behaved nicely in the first quarter 2019. 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. Risk-free, according to our definition, is currently 0.3%. That would then add up to a minimum target of 8.3%, and 10.2% is much higher. Let me turn to large losses. Just three observations.
In the industrial 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 EUR 175 million, we've only used roughly EUR 60 million. The rest, of course, has been put aside, as you know. We've got some extra buffer for the rest of the year. What is quite interesting as far as industrial line is 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 flood in Queensland, and the storm Eberhard hitting us on the continent. Combined ratios, page six. Talanx is down, the combined ratio, that is nice.
Retail Germany is down, and if you exclude the transitional or transitory cost expenses, the adjusted performer ratio is now down to 96.1%. You may recall that we are shooting for a 95% combined ratio by 2021. I think we are well on course to deliver this one. Retail International is down. Reinsurance is down. I 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 AGUS 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 good enough to render profits that were to commensurate with the profit needs, including the capital that you could hold against these activities. 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 EUR 592 to EUR 616, which is nice. I think all the segments have contributed, with the exception of the industrial lines. If I should single out one segment, is certainly Retail Germany, with a staggering 58% EBIT growth on a quarter-to-quarter basis. Again, that would be very much at the center of my discussion around the segment 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%. Here we've, of course, benefited from the consolidation of the newly held HDI Global Specialty, formerly known as Inter Hannover. That is now the combined entity writing the former Inter Hannover business and the specialty business that we had read before in our industrial lines segment. It's 12.1% up. This company in itself only holds a self-retention of 10%, and I think we discussed this during the course of our capital markets day in Frankfurt. Initially, you would see the best part of this business, the other side of the business that they now keep, to Hannover Re.
That explains why the growth rate of the net premium income in this segment, industrial lines, is not as high as the gross premium development. This then, of course, translates into a lower self-retention because relative to quite a lot of business is passed on to Hannover Re. 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 Hannover, or what used to be called Inter Hannover, I mean, HDI Global Specialty. As the cession ratios move toward the long-term equilibrium of 45% to Hannover Re and 45% to HDI Global SE, this self-retention ratio should move up, structurally should move up again. Operating income, EBIT is down by 31%. That is driven on the one hand side by 102.9% combined ratio. Obviously, 102.9% is not around 100%. Are we disappointed with this result?
Not really, because I think there's just one single factor. There was a 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. That has contributed roughly EUR 20 million. If you would net out this a priori effect, we're talking about 100% combined ratio for the entire segment, which is bang on line with our target for 2019. Although, we have to digest this true-up in the first quarter, the run-off result is back to normal. You may recall in the first quarter of 2018, we reported a run-off loss of EUR 30 million. This is now back up to EUR 6 million. The EUR 6 million that you see in the first quarter 2019 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 the long-term average is about, I think, EUR 10 billion or EUR 11 billion. This is very close to what we historically would have expected. The other result is somewhat burdened by currency loss. Although we try to get it perfectly right with the currency mismatch, you'll never get it right according to IFRS. There is some kind of non-systematic noise. Some first-time other result burdening as part of the integration of HDI Global Specialty, i.e., former Inter Hannover. This is the reason, looking into the figures behind the first glance at the figures, why we are very confident that we're going to make it with the tax break even. Net income is also down because the EBIT is down.
It's not as down in relative terms as the EBIT, this is driven by some tax-free investment income from subsidiaries that reduced the tax ratio. This is the reason why net income is only down by 36%. Let me move on very quickly 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. 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 making all preparations for the renewal season, and we are confident that we will at least achieve the 20/20/20 target by year-end, and I should underline at least.
I think we're shooting for a little bit more. Getting to Q1, I can only reconfirm that we have full preparations of the next renewal round, but unfortunately, there are new figures that I can report in Q1. Let me move on to the retail division on slide 11. Gross premiums are up by 1%, which is not a lot, but if you recall, the past quarters was always the same structure. Life was down and P&C was up. Now, 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 accelerated scrapping of legacy IT. That has cost us some money in Q1. This is part of our cost exercise.
It's part of the transitional 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 forma ex cost combined ratio, we're talking 96.1%, which I think is good. Net income is up by 64%. We're talking EUR 36 million. Now, I can say while Talanx is loading again in retail business, we should dramatically adjust our estimations for the full year bottom line results of Talanx Deutschland. Yes, we are satisfied, but I think one should not get carried away and just multiplying this EUR 36 million by four may be a little bit on the optimistic side. Retail Germany, P&C. We see a slight premium increase.
This is the net effect of a lower top line in 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 initiative. There has also been a positive one-off in Q1. I should also mention this in passing at least. That would benefit from a EUR 3 million increase, a release of an IPT reserve that we had set aside against our discussions with the fiscal authorities.
In the end, we got our way, or more or less got our way, and could release the EUR 3 million. The operating result in this segment is up by 67%. I think I cannot recall any quarter that has seen an increase in Retail Germany P&C that has been as high as this one. Retail Germany Life. Premiums are up. The drivers behind this positive premium growth, top-line development, are twofold. One is wanted single premium business, I think we should carefully distinguish between wanted and unwanted single premium business. 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 EUR 61 million. It had been topped up in Q1 last year by EUR 238 million.
This is quite a difference, this difference has then translated into a lower need to realize hidden reserves on the asset side. Operating results up by 50%, the main drivers behind the continuous kind of natural volatility of IFRS accounting in German life insurance, a thing that will not go away with Solvency II, if I may add this. The drivers behind this is sort of the nice pickup in our biometric top line and better cost management. Just in passing, spreading more sort of good news, as far as Retail Germany Life is concerned. Solvency II figures are up. I think one of you have always asked what is the fully loaded Solvency II ratio of the kind of indicator carrier of Retail Germany, and this is HDI Leben.
hallileon's fully loaded solvency ratio stood at year-end 2018 at 254% without any additional. I mean, 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. This is now sort of the other side, with sort of strong developed market currencies have advanced, that's not true for the emerging currencies. You see this here. What we're very satisfied with is development in our core business in P&C. Currency and just this again grown by more than 2%, i.e. double digits, 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 Malta and Brazil, probably the two most important carriers of ours in our international retail operations. For both cases, we're talking about 91% combined ratio in Poland and 97% combined ratio in Brazil. Both are down from Q1 2018 levels. I think it's fair to say that if anything, Q1 reserving in this segment as far as the reserves are concerned, are more at the conservative side. Net income is also up. Return on equity now up to 8.7%, which is good. As you know from our capital markets day that we are shooting for 10% at one point in the not-so-distant future. We're getting there step by step.
Let me spend one or two sentences on Turkey against the background of our acquisition of ERGO's Turkey retail operations in this country. Well, you all know that Turkey is still a challenging macro economy. 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 they're sitting on money that can be invested at around 20%, 21%, it of course helps you to arrive at a positive bottom line, even if the combined ratios are well above 100%. This is no different from what we see in developed markets. 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 there are two very important instruments that have been used by the government to intervene. One is the price cap. A price cap is kind of fading away because the government increased allowance by 1.5% on a monthly basis, and there was a 5% one-off increase in January 2018. 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 on our bottom line results by the end of this year from today's vantage point. The other instrument is the bad customer pool. This is still there, and it'll probably stay there for a while.
I mention 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 will be digested this year. That will happen also as far as ERGO's business is concerned. That helps to improve 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 structures are applied in a consistent way. As part of this annual review process, we kind of unified or harmonized the way we would account for other technical expenses and non-technical expenses.
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 2% because of new accounting conventions in a neutral way. Whatever is now looking not as nice in a combined ratio, is looking brighter in the non-technical terms. This is even neutral. The rest of the combined ratio development is explained by inflation translating into high estimates. That's particularly true for bodily injury, high cost of spare parts. There was one fire claim, but no major fire 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 a whisker away from this objective. We know that this is probably an anti-cyclical investment, that 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, and we will be further eyeing this market for potential opportunities. I think we are confident that we will see significant synergy potential after we will have a dynamic accretion from year two on.
We hope that the official closing will be done in half a year's time, in Q3 2019. A 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%. Just passing the integration of Liberty Sigorta is very well on track. Reinsurance on this is on page 816. I 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 even further, but still, 13.1% isn't that bad a figure. We are fully utilized in that, the large loss budget and U.S. mortality business. I think we see the end, or there is light at the end of the tunnel and the things have really improved.
I think you've all discussed this in greater detail with Mr. Furrer. Let me move on to page 18. Brief overview of our investment income. On reinvestment income is up by 2%. How come? Yes, we still suffer from a low interest environment, particularly in the Eurozone, which is worse than in the United States or the dollar realm, although, the U.S. dollar interest rates have come down in the first quarter. How come? It's a wide blend of things. Some high one-offs, dividends. The main driver has certainly been a higher stock of assets in the management, which has gone up by roughly 6%. If 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, I think, is realized net gains and losses.
It's down by EUR 180 million. The EUR 180 million minus is almost exactly the figure that the ZZR buildup went down. That was EUR 177 billion. This is the kind of wash in the P&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 do not go through the P&L and according to IFRS accounting. The net balance is up by almost EUR 600 million, and this is mainly a reflection of lower yields and lower spreads. That also, of course, translates now into a book value per share for Talanx of almost EUR 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. The off-balance sheet reserves have also gone up, but mainly in the life insurance business. 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 a sort of big bird's-eye view. The market, particularly in Q4, has been against us. Rates went down, which is not helpful. In Q4, spreads went up, which is equally not very helpful.
These adverse developments, market developments, were more than offset by sort of using now Shakespeare's Macbeth, the three witches that helped us this time was, yes, German regulator with the new ZZR legislation that has boosted both the owned funds as has helped to reduce the SCR, which is certainly something that you'll not find outside Germany. There has been a change of some aspects of our internal model, and most prominent one is the introduction of the static VA in some of our non-life carriers. 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 209% 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. Because this is true and because there is still some underutilized large loss budget and 2020 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. That's it. Q1 from my side. Of course, I'm available for any question.
Roman, I would propose we start the Q&A.
Yes. Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit 1 on your telephone. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We pause for just a moment to allow everyone to signal. We now take our first question. This comes from Michael Huttner from JP Morgan. Please go ahead.
Fantastic. Thank you very much. Just 2 questions. The results, they look so clean and 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 NFIr. I just wondered if you can kind of give a little bit better feel for what your ambition could be or what the tailwinds are or something. In retail Germany, you said do not multiply that lovely figure of EUR 60 million by 4 for the EBIT. I noted that you had written off quite a lot of IT as part of your cost program, which sounds a little bit one-off, a little bit biased to having cost-cutting a little bit more than normal in Q1.
I wonder, given that it feels like the Q1 was burdened with negative one-offs, why not multiply it by 4? These are the only 2 questions I had. Thank you.
Okay. Let me take the start with the 2nd question. I think, yes, you're right. There was a positive one-off in the sense that the writers shouldn't continue forever. The truth is that, I think during the course of 2019, there will still be some writers that are in the pipeline. I think we discussed the state of our IT affair at great length and honesty with last meeting in Frankfurt. Q1, yes, perhaps a bit more than the average, but, this is why I mentioned, for instance, the IPT effect. We've also seen positive one-offs in Q1 that has helped us. We should not expect them to reoccur. This is the reason why we are not saying that 2019 should be a particularly bad year. Quite the contrary is true, just multiplying it by 4, I think maybe a bit on the optimistic side.
Last year's EBIT was EUR 180. We told all investors that we want to make EUR 240. If you divide it by three and just arrive at a kind of average pro rata improvement process, in the absence of any better insights, that should be EUR 20 billion-plus PA. That would take us to EUR 200. It's been a good quarter. Do not get carried away. This is the only message that I wanted to put across. In terms of Industrial Lines, if I come back perhaps to the one chart that has not changed, which is the status report of our 20/20/20 project, which is on page 10. At the end of last year, we almost arrived 90% of what we wanted to arrive by year-end 2019.
The old plan was that we wanted to arrive the 13.3% out of 20, i.e. two-thirds. We're about 17% out of 20. The difference between the 13.3 and the 17 is kind of overachievement of what we did in 2018. If you say, "Well, is there any reason why we should be less successful in implementing our measures in 2019 than we thought in 2018?" Probably it should be a bit more than 20%, if it parallel shifts, this kind of logic. 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.
Are there any more 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, is that I think now everyone in the market realized that the state of affairs in the Industrial Lines, the commercial lines business has got to improve. When looking at the figures that have been released over the past 10 days or so, I think our view of the world probably gained more support now.
Makes sense. Lovely. Super. Thank you.
Okay. Next one, please.
Thank you. We now move on to our next question. This comes from Frank Kopfinger of Deutsche Bank. Please go ahead.
Yes. Good morning, everybody. I have also two questions. My first question will be on the industrial lines on the top-line development. For this 1% growth, you pointed to HDI Global.
Yeah.
Could you break this down a little bit further into what has been really come from Inter Hannover, what is coming from the repricing actions, and what is business lost? 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 2018? Also whether you could provide a breakdown of your credit spread sensitivity and what a move in corporate spreads and covenant spreads would be.
Okay. We'll start with the second question. I think the reason why the credit sensitivity has gone down, there is no single answer. Let's move to Figure B, the appendix on page 41. One reason is 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 suggested by the CFO Forum, recommends there should be 50 basis points kind of spread. This is a very simple explanation. I should mention this. It's just true. Second, I think our reinvestment methodology that has translated into our modeling has helped. The idea is very simple, but convincing, I would say.
If you're sitting on a book with guaranteed interest rates, everyone knows that according to how the German system works, is that you benefit from profits in excess of the minimum guarantee, perhaps with a 10%, but if something goes wrong, you could pick 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. 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, the optionality working against this in German life insurance is dramatically improved, that then translates into more favorable SCR calculations because the likelihood that shareholder has to inject funds to make a difference goes down.
I think this is an important factor. The other point I think, the other question I'll ask is, can we
Price down
credit commercial, probably we can. I haven't got the figure because the way we model this is that the credit and government yields or spreads would move in lockstep. I think we've explained this on the occasion of one of our capital market days, that for us, sovereigns with a rating worse than AA- are just as good as any corporate. For instance, Italy is Italy spread for that matter, and is modeled accordingly. For the better rated sovereigns, we would apply factors, but still would move in lockstep. Even a AAA spread on the Netherlands or Germany would then move with the spread that we'd see on AAA corporates. This probably is somewhat conservative modeling because we know that particularly the better rated sovereigns would benefit from some flight of quality if there is noise in the market.
This is the way how we modeled it, because we've really got to manage the complexity of a model. I'll see whether we can come up with figures. I haven't got them here now. Sorry for that. As far as the premium development in the Industrial Lines business is concerned, I think roughly EUR 270 would be as a net effect from HDI Global Specialty. The pooling process has cost us roughly EUR 20, which is then the balance of business that we've lost and the business that we've sold at higher prices, and some other new business. This is the kind of net effect. Questions are answered?
Yeah. Just for clarification. You're suggesting that there is a EUR 20 million net effect coming from business lost where the 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% of magnitude.
Okay. Perfect. Thank you.
Yeah. I think this is in line with what we communicated, I think, on the occasion of our yearly call, that is to say, well, bottom line, it's been more or less flat. Now, EUR 20 million is a lot of money for you and me, but in relation to the stock of the premiums, I think there's still a single-digit percentage figure.
Yeah. 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. Morning, everyone. It's Vik from Soc Gen. 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 2019 versus 36.6% last year. You mentioned the positive one-off effect helping the tax at this time. I'm a touch surprised with this high tax rate, since I would have thought the international expansion should have significantly lowered the overall tax rate for Industrial Lines. That's question number one. 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. As far as the tax rate development is concerned, a significant part of our business is still accounted for in Germany. The amount of business that we provide in non-German subsidiaries is relatively small. 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. France is one of the markets where we'veThe gain footprint same was 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-retention 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 cessions that are now penalized by the BEAT set up to overcome. It's not as easy as for Hannover Re. I think this is the reason why the tax rate is. I think you shouldn't expect wonders. In terms of cost, there is probably still some integration costs and/or if there was something like cost in HDI Global Specialty, there probably would still be some cost-related expenses if this would be the case. I think in the big picture, it is negligible. We've got to invest into all kinds of accounting backup systems. There were still some expenses. Bottom line, the combined ratio impact is positive, though. The reason is very simple.
The underlying combined ratio of this entity is very favorable, because they benefit from nice commissions from their reinsurance partners. This is today, still mainly Hannover Re, and long term, it will be 50/50, Hannover Re and HDI Global Specialty. Some of the expenses that are covered by these commissions that make it into the net cost line in the P&L, however, relate to expenses that are part of the net, not technical expenses. In a way that looks brighter perhaps than it is at first glance. Structurally that the business will benefit cost income ratio wise, but I think we'll still see some integration work, but this should not be marginal. This should be marginal, sorry, should not be material.
Okay. All right. Thank you.
Okay. Thank you, Vikram. Next one, please.
Thank you. We now move on to the next question. This comes from Andreas Schaefer from Bankhaus Lampe. Please go ahead.
Thank you. I have just two questions. One on Poland. You mentioned last year that the combined ratio of Warta in Poland was affected by some additional reserve increases. Is the roughly 90%-91% we've seen in Q1 now a clean number without any changes in the reserve and quality? The second quarter is on German retail P&C. There was just a pretty weak growth of 0.2% in terms of premiums. You 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. Does it mean that if competition will be stronger the next couple of years, we're not going to see any sort of premium growth?
As far as 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 super clean, best estimate reserve setting, then we're still probably also on Q1 on the conservative side of Poland. The extraordinary fact that we really invested in redundancy that we report in Q1 2018 has not been as pronounced this quarter as probably right. Retail Germany. Yeah, I think, 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. 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. This is pretty simple.
We are prepared to sacrifice top line, when it is needed to defend the quality of our book.
Okay, thank you.
Thank you, Andreas. Next one, please.
Thank you. We 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 claims development. 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 heavily burdened by the concentration of this type of losses. Any change or any structural improvement you're starting to see in your books? Second question will be on the investment income. 2.7 is a guidance for the current year, but you highlighted that clearly the lower for longer environment is still kicking in Europe.
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.
I think the kind of long-term trend is probably in the region of 10 to 20 basis points. That will be kind of loose. Of course, there is a big overlay, and this is the level of realizations of big reserves that will structurally go down as a result of the SCR regulation. Offsetting the structural decline that I've just mentioned is, of course, the growing part of our non-EUR business that is equally true for Hannover Re as it is true for our retail operations and industrial operations. That is actually one of the reasons why we like the non-EUR 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 nat cat. You can see this on page five, that if you look at large losses, Q1 2018 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 that we try to monitor. Have we abandoned the right business as part of our pruning exercises? There's now growing anecdotal evidence, if you look at what happens in the market, that there are claims out there in the market that we would have been exposed to had we not pruned our portfolio.
That is particularly true for manmade exposure. That is one of the reasons why we're confident that we are going to make it. That's from us. If there are no follow-up.
That's perfect. Thank you.
Thank you. Again, ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one at this time. We will now move on to our next question, and this comes from William Hawkins from KBW. Please go ahead.
Hey, Immo. 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 you 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. The yields have more or less stayed where they were at the end of the year. There's not too much decline. Plus, of course, the profit that we've made. This is kind of organic growth. 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 predict. Currently, I would say there should be, perhaps a tad stronger. This is our current feeling. Can we be wrong? Yes, we can be wrong. The past couple of quarters, I think our projections have been more or less accurate. Yeah. These are the two reasons.
Thank you. 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, this is, of course, a camouflage fashion. What's the purchase price? 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.
Great. Thank you.
Thank you, William.
Thank you. We move on to our next question. This one's from Michael Heider 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, 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 or the positive impact is on your solo entities or on Talanx 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. 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. In scenarios in which there is sort of under the old regime, still the necessity to drastically build up the ZZR without sitting on hidden reserves because the spot market interest rates have gone up, would have put all life insurance companies into a very difficult position because they would have been forced to fund the ZZR at the expense of the shareholder in the absence of any hidden reserves that they could realize.
Whatever money you would inject into a life insurance company as a shareholder currently must be modeled with only 10% participation in the yields that are associated with these funds. This, of course, is a very bad deal for the shareholder that in certain scenarios you would have to inject funds in which you 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 gap reserves that really helps. What has been the impact?
The ZZR impact allowance for retail Germany life insurance has been in the region for the aggregate of our German life insurance of EUR 200 million ZZR. Because mark-to-market view or the risk neutral probability is also reflected in the own funds, the financial options and guarantees biting into the own funds of our German life insurance companies have approved or have benefited with a little bit more of EUR 100 million. This is a ZZR 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.
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 closing remarks.
Well, thank you for your patience and looking forward to your comments in your write-ups.