Talanx AG

XETRA:TLX

Earnings Call Transcript 2018-Q1

[Carsten Werle, Head of Investor Relations]

Yes, good morning from Hannover. And welcome to Talanx First Quarter 2018 Results Call. I'm here together with our new CEO, Torsten Leue. As you know, Torsten has taken over from Herbert Haas with our AGM on Tuesday this week. And we are here together with our CFO, Dr. Immo Querner. The two will guide you through the presentation and will then take your questions.Before we start, a hint towards forward-looking statements. You're aware that these statements may be subject to certain known and unknown risks or uncertainties, and you'd find this in more detail in the disclaimer on the last page of this document. This presentation, the interim statement as well as the earnings release are in the IR section of our web page. There you also have access to this webcast, and you may dial in via phone, and there are replay options for both channels. And with these remarks, I pass over to our new CEO, Torsten Leue.

[Torsten Leue, Chairman of Management Board & CEO]

Yes, thank you, Carsten. Hello from my side as well, and I'm happy to have you on the line here my first week even of my new job here. And I would like to start the job to make it, let's say, in a highlight way.In this sense, I think you have seen already the results coming out 1.5 hours ago. So maybe just on Page 2, giving you the highlights. We believe after the first quarter results that we have that we're well on track to achieve around EUR 850 million outlook end of the year. You see some plus and minus. We believe the first plus that Retail International and Reinsurance side had a very strong start in this year, top and bottom line, even in spite of very strong headwinds from the currency. We think that Retail Germany is fully on track to deliver the so-called KuRS targets, which we have communicated to you. Just to give you indication. Even we had Friederike, which was really negatively impacted the results in Germany, in spite of this, if you would take out the KuRS costs, we have 97.4% combined ratio in the first quarter. So it seems to be a quite good quarter. Even we see that Talanx in Germany is growing 6 times in row, quarterly row top line. So they're growing, and they're delivering the communicated combined ratios, again 97.4% without the KuRS cost. Industrial, you see a minus. Here we have 2 main effects. First is a very volatile quarter 1. Quarter 1 especially is very volatile as we see in the past. This year it was negatively -- negatively affected the first quarter, and we will tell you some more details about it. And the second point is that the German Fire business, so one line of business in this segment is not satisfying. You know the Balanced Book, and we know that we need 15% increase until next year in that line of business. And I asked my colleagues really to accelerate that kind of activities in that lines of business. You see the next plus is the Solvency II ratio, the 206%, means 20 percentage points higher than what we had last year, 2016 end of year, and as well in the upper-end range or our targets. 150 to 200 is now our target range and especially it was interesting probably that all life carriers without the traditionals are above, say, 100%. And the last point is really a strategic point for us. As I told you, we will come back later on the Capital Market Day in October with you on our strategic view results, which we have. But this is one thing we took out of it already now. Because it's a strategic move, we have to prepare now to be ready 1st of January 2019. Basically what it is, we will form a joint venture between HDI Global and Hannover Re as a separate entity in our company and really want to grow in that nice specialty market in a focused, global way and see nice growth chance in that area come later to that.I will then turn on Page 4 and see on the quarter 1 results the main facts. You see the box 8% growth, which actually was. When you see the strong headwinds which we had from the currency, it's 14.1%. So it's a nice growth. Not everything is earned, so the earned is only 4% at the moment. But you see then, the operating -- the EBIT result 3% up, so not 4% but 3%. So basically, this comes to the Industrial area mainly impact as the combined set not as we wanted. So on the bottom line, you see then even a minus 8%. So the 218% (sic) [ EUR 218 million ] that is mainly impacted to the one-time effect we faced through the U.S. tax reform bill, which costed us EUR 25 million, without that it would be actually from the EBIT side increase of 2 percentage points on our bottom line. The second effect was that we earned a bit more in the minority stake Hannover Re and the WARTA group, so that impacted basically our net income after minorities. But in spite of that, you could say the EUR 218 million more than one quarter of the year, despite of the tax reform of EUR 25 million is coming this quarter. So therefore, we are confident that we're on track to achieve EUR 850 million around end of the year.Let's come on next page. On Page 5, you see that all segments contributed to this increase, in spite Industrial Lines, the 2 reasons I mentioned already and we will tell you more details about. And having that picture in mind, even strong currency events against us, despite of that segments could increase their EBIT.On the next page is the large losses. You see basically the main figure is for us, on the right bottom, the EUR 137.6 million, which is below last year of EUR 152 million. So basically the first quarter was not heavily impacted by big claims. We had one though that was the storm in Germany, Friederike, which was nearly EUR 60 million impact we had. But overall, you could say this was not a very eventful year in the large losses. But key for us on the next page is, as you know, we always book the best estimates here in the budgeted values into our profit/loss. So on the right beside the pie chart, you see how much buffer basically we have in the first year. And the buffer is, as you see, the EUR 137 million which really occurred. Our budget is EUR 242 million. So you could say that more than EUR 100 million our buffer for the next quarters to come. Or in different words is we budget always 5.8%. On the right bottom, you see that is our budget; we budget it in. And we only have, let's say, prevented 3.3 percentage points. So EUR 100 million -- more than EUR 100 million actually and more than last year at the same is the kind of buffer we have rolling forward for this year.On the next page, you see the combined ratios. The group is a little bit above last year. And you see all, let's say, segments are good in spite of Industrial Lines. And you see the 102%, which is not what we think that should be. So I think this -- and again, Immo will tell you more about the details. There's volatile results of this one of the first quarter plus this German Fire business. These are the main 2 reasons. And we asked our colleagues to accelerate that kind of cleanup of this -- the Balanced Book. They are still confident that they will achieve the 99% combined end of the year, which basically means that the next quarters to come have to be all below 100%. In the Retail Germany, you see the 99%. That is an excellent result. As you can see that we have without the KuRS cost 97.4 percentage points. So they're really well on track as their program already on this level, 97.4%, in spite of Friederike, which basically there was a budget of EUR 6 million in the quarter. The impact in this German segment was EUR 12 million, so actually there's EUR 6 million in buffer budgets. In spite of this Friederike, they could manage that kind of combined ratio. International area, you see the 94.9%. And if you draw your attention on Poland and Brazil, they're all running very nice and especially Poland. This 94.8% combined ratio is a very conservative one. I think the confidence level of the results is increasing. This would be my guess at least from this point of time. And Brazil, last year was always above 100%. There is some cleanups in [indiscernible] we need, especially in the area of [indiscernible]. Now you see that worked, and they are far below 100% in the market, which still has high interest yields to earn. So this was basically Retail International, so everything looks fine. 94.9% is, I think, fit to the combined ratio. And Reinsurance, I think you've heard it already. And I think I will not comment on that more.On the next page comes our strategic move, which we believe gives a lot of growth aspiration for us because HDI Global specialty as of first of 2019. What basically it is, is that we believe this market of specialties is a fast growing market. In the last year, it has been growing by 6 percentage points at least. It's a market of EUR 115 billion. It's 4x smaller than this really, let's say, commodity commercial business, but it's a fast growing market. But you need special know-how for that, except for, of course, probably specialty because you talk about special [ safe ] channels, the MGA, or you talk about special products. So we have those know-how in the group at several points in the group. So we believe -- we don't want to do [ that ]way. We really want to do it in a focused way to join the forces here in this kind of joint venture. And we believe already this would be profit contribution-wise because it's a really classical, simple case of growth synergies within the group, if you do it right. And these growth synergies will contribute to both carriers and to our shareholders of the joint venture, HDI Global and Hannover Re, as of the first year. We planned it in the first of January 2019 to start. And this market is growing, as I said, 6%. We could be -- or we believe -- we have not finalized the business plan, and more details will come on the Capital Market Day for sure. But as this is a market which is growing already at 6%, [ first that ] we believe as we have really moved up this kind of more focused way where we will show double-digit growth to come. And the combines in that market, as you know -- as you can see it now for market figures, it's in the low 90s to mid-90s combined ratios. So again, some attractive growth initiatives in our group.On the next page, you see how it works. This is a joint venture, HDI Global specialty in the middle. The basic idea is HDI Global buys 50.2% from Hannover Re into [ Hannover ], which is a daughter company of the Hannover Re. This brings to the joint venture EUR 900 million premium; plus into the joint venture comes all this renewal rights which HDI Global has in their books over the year as of 1st of January 2019 starting. So you could say this is an entity which has EUR 1.2 billion premium from the start, basically, let's say, [ when you see ] 2019 ongoing. So quite significantly entity. And just to give you a flavor. In HDI Global, we have -- in the whole portfolio of HDI Global 10% is specialty. It's EUR 300 million roughly. If you see the market figures, those companies who do it as well in several lines of business, they have 20% to 30% specialty in their books. So we -- really, we can catch up with that market. And I think we will catch up even more if we focus, as this nice, growing profitable market is.On the next page, [ logic ], let's say it is on the paper, but you really feel in the culture here there's a lot of energy in the project here. That 1 plus 1 makes 3 at the end. That we have HDI Global who can use the underwriting know-how in the -- into Hannover who does this business many years successfully with a very special know-how. And that one on the larger scale, a plus [ or ] scale as well we have in the -- in HDI Global, so really we could say this adds on very nicely. Plus, into Hannover as nucleus of the joint venture, can use this large international network now and claim service of the HDI Global. So this is really a win-win situation. Plus in HDI Global, we were fully concentrated in the HDI Global, Hannover Re equity book, means really a higher diversification into the international book of the book of HDI Global. So this is for us, and again, more details when we finalize the business plans will come on Capital Market Day to you. But this is really a nice win-win case, and we like it very much.And with that word, I would then hand over to the details to Immo.

[Immo Querner, CFO & Member of Management Board]

Well, thank you. Good morning also from my side. And as you know, I'd like to start with the Industrial Line segment, which may be one of the top areas of today's discussion, and I'll also spend some time on these sums and figures.Industrial Lines. Bottom line, it has been a disappointment. I think that is clear. Let me start with the budget side of this quarter. The top line is up. It's up by 2%. And the -- I don't see adjusted top line movement is even higher than 5.4%. And it tells you that we've grown particularly outside Germany in the non-euro area because otherwise there would be no currency effect, which is consistent with our [indiscernible]. But even within the European Union, we -- the best part of the growth has come from other areas such as the Netherlands. The premium development has also been supported by some price improvements, but I'll come back to this in a second. Because whenever it has been, if you wanted it, it has been insufficient. The surface tension level is up. Again, this is very much in line with our strategy. It's up for a variety of reasons that you've [ find them ] by [ 13 ]. Well, the operating result EBIT is down by 36%, which is bad. The combined ratio is above 100%, and it is 102.3%. Why is that? Reason number one, this is a purely tactical reason, although it's costly, so to speak, is that they -- that while we know that the first quarter runoff results has always been very volatile. It has been sort of on the not so pleasant side this quarter. In general, I think very robust and stable pattern within our series of quarterly runoff results in the industrial segments. The first quarter is traditionally the most volatile and the smallest one. And over the quarters, the volatility pave the way, and the average runoff results goes up. This has got a variety of reasons. One is that traditionally Q1 has got a higher risk of late reportings because brokers, policyholders and lead co-insurers may have an incentive to break not so pleasant news after the renewal season has ended. This is a structural reason. Another structural reason is that the Fire reviews upon which we ultimately sample the claims better be concentrated on the second half of the year because this is then -- the runoff to the balance sheet is handled in a tactical effect, and this is half-closed, particularly year-end. There are some fast close with teams in place that can -- I've got offsetting consequences in Q1. Just putting things into perspective, in the last years we've seen Q1 runoff result of plus 15, minus 15 in this segment.And as far as the Fire business is concerned, I think it's all -- the Fire business is generous, particularly the Fire business in Germany, particularly with the large accounts. As we've already shared with you when we discussed the year-end results, we're fully aware of the situation. I think we've put in place plans that would increase the premium ratio for a constant level of risk and -- within the book that needs to be approved by roughly 15%. We know that we cannot -- probably cannot do this in one year. It's at least a 2-years program, and it's at least 15%. I should underline this. And I think we'll see the full impact in the -- especially in the year 2020 after the renewal round 2019. We have already communicated to you that the March weather-related losses in the Caribbean had in a way came too late for this year's renewal round. This was a pity in hindsight. There -- this is a pity because the bulk of the renewal occurs in Q3, Q4. We've seen some renewals in Q1. And the price-to-risk ratios has gone up by 8%, which is nice. I believe the 8% would not suffice to satisfy our minimum probability [ of loss ]. Coming back to the runoff results. I think there is one obvious question that may be in the minds of many -- on the minds of many. What is our full year expectation for the runoff results? And I see it -- want to bring this message across. We anticipate about a normal aggregate runoff result for the full year 2018. And as far as the reserve quality is concerned, while we're awaiting the full report of Towers Watson that we have commissioned as every year, and as every year we'll get a full report in summer. The preliminary indications suggest that the absolute level of the result we can see in Industrial Line segment is positive and unchanged for the prior years. Plus, I think I should, again, draw your attention to the fact that there was no need to compromise on a rather conservative accounting routine that when the realized large losses are smaller than the budgeted ones we would account for -- the quantity base would account for the budgeted ones. And here again, we've set aside a buffer of roughly EUR 20 million. And that's in the Q1 figures for the Industrial segment. Plus, this is now sort of in closing, as far as this segment is concerned. There's also a negative runoff related to the tax in the United States. As you know, there's quite a bit of intergroup cross-border business because of our fronting arrangements with our U.S. subsidiary. We then come to the Retail business in Germany. I think we've already shared with you the best part of the portfolio. What we can tell you, I think, apart from that -- and let me [ right ] jump into the segment of figures on Page 15. The combined ratio has developed in a very favorable way. Here -- and I think I would be somewhat cautious to extrapolate the improvement for the full year, and this -- and I make this comment for 2 reasons; a, while the segment has suffered from an above average and above budgeted Friederike net cap loss, we've, of course, not reserved the budget here but the actual losses because this should be a concerned with the company standard. We've also benefited from above average runoff results. And this runoff result is related to the settlement of the rather large liability case. If you compare the runoff gain in Q1 that -- in Q1 2018 to the one of the previous year, you'd find out that the runoff gain in Q1 in this segment is significantly above average. And the above average part of it a little bit higher than the extra -- Friederike-related extra budgeted that we had that we had to sustain. But what -- it is what it is. But that means that the combined ratio of the cost-related expenses should not be taken as a good proxy for the full year. Plus, I think I should mention as far as cost is concerned, while we had in mind a figure that we thought, it is now roughly 60% of what we wanted to achieve in terms of [ cost has changed ] so on. And we already made a plan implemented. We want to keep up the pressure, and there is need for speed, so to speak. That means that we're prepared to spend an extra EUR 20 million in cost-related expenses to accelerate the process and to adjust -- to adapt to new realities that we see in the German market.Life. I think I'm going to make it very quick because you see all the data. And very much in line with our strategies, premium have come -- has comes down. This again, however, is a blend of things that have developed nicely in terms of top line, such as the biometric business in our whole carrier and in -- [indiscernible], I mean. The investment income is up. The reason is that we have realized our provider share of the anticipated debt that they are recording to the old theme. As you may know, there is lots of discussion and much of lobbying to change the system. We pretty much support this, but we don't know whether or not it's going to happen. We want to play it safely and thus have realized the quarter we anticipated that are should it not happen with a Plan B, and we can very adequately live with any [ innovation ] that may evolve as far as this is concerned. The EBIT, otherwise, is more of less in line with what we've returned in the large segment, what we've returned last year. And there's been no extraordinary tax effect this year. The sort of brief -- some comments on Retail International. I think you've heard sort of all of the key messages from Carsten. Top line up by 1% on a euro basis. Again, very strong currency headwinds. Operating results plus 11%. Group net income, again, despite significant currency headwinds, up by 3%. Q4 we heard about the nice development in Brazil and Poland that we had one sort of -- had a lot of a [ stories ], as you may have read in our investor communication. We've now closed the deal with Liberty in Turkey, which is not a big contract but is relatively big as far as our portfolio is concerned because it means that we would add another 20% roughly in terms of top line to our business, which is relatively speaking quite a lot. It means that we would be adding quite a lot of non-third-party liability business, which is good. But it means that once we have merged Liberty upon -- on our carrier, we would get rid of the kind of license share of the bad risk pull in Poland because, essentially, we would make 2 -- that we would make 2 licenses into 1, which is good because it means that relatively speaking the underlying profitably is partly regulated and would improve.Reinsurance, I think, you've heard it all from Mr. [ Poole ] and Mr. [ Valein ]. Just putting things into context. As you've heard in the beginning, the EBITDA is up, and the net profit after taxes is down. The single most important reason for this wedge between the 2 line items is the EUR 22 million runoff of BF-related restructuring charges in the deferred taxes. And this is because we rearranged the portfolio structure in a way that will not be impacted by this group [ till] -- thanks to a charge in the life -- Reinsurance segment.Investment is relatively -- we're on Page 20, is relatively stable, in spite of the currency headwind that are also important in this P&L item. And again, [indiscernible], those very low interest rate in the segment. Extraordinary gain are driven by the [indiscernible]-related effect in Retail Germany and some above average realizations in the Reinsurance division.On Page 21, equity and capitalization. I think, it is very robust. And as anticipated, the off balance sheet reserves amount now to EUR 1.20 per share. If you follow me in Page 22, just see that the shareholders' equity is actually somewhat down. And the reason is you have the comprehensive income. And why is it down? It's driven by currency effects; by wage increases that, of course, have a negative effect on the amount of value on our asset side; realizing extraordinary profits that I mentioned already; and the very [indiscernible] effect. While this is not translated into weaker solvency ratio like the [indiscernible] discarding transitionals, we talked about 206%, or the fact that this is the second. Page 23 then is the development or the [indiscernible] diagram, breaking down our hidden P&L or balance sheet reserves. And what you see here again is in line with all the currency and interest rate effect that have [indiscernible] in the last page.And quick, Page 24. I'm going to make it very brief, but, of course, we're here to answer questions should there be any. The Solvency ratio was [indiscernible] up to 206%. As far as Life carriers are concerned, the same figure again without benefiting from transitional is up on average to 169% for German Life carriers. Now some of you may ask the question, is it also true for HDI Leben being the kind of indicator carrier? Yes, it is also true for HDI Leben. Actually, HDI Leben's solvency ratio without transitionals is exactly the average of all of German carriers. German Life carriers is exactly 169%, which is a dramatic upswing. I just want to recall that 90% of our -- of capital base is Tier 1, which is certainly very high level of quality about Tier 1 [indiscernible] Above [indiscernible] funds. And there are 2 other important things that I'd like to mention at least in parting. This is that the share of the market risk. And as you know that we want to keep it below 50%. It's now down again at 45%, which is good, and we very much welcome this development. And that has also translated into somewhat improved sensitivities, particularly business market risk. You'll find quite a lot of details in the appendix as far as the Solvency calculation is concerned. Just wanted to comment. Some of you have come up with estimations for year-end. In some cases, they were higher. I think there are 2 or 3 reasons that explains this difference. A, with this new policy of not accruing dividends that will be paid at year-end, simply because dividends are just decided at the end of the year, and this is quite a significant effect. And I think that was not part of some of the calculations that I've seen. Plus, the 2 model changes that finally were accepted by BaFin. That we had to make compromises with BaFin as far as the parameterization is concerned is particularly true for the pension-related model change. Precisely, we're now only allowed to take into consideration 50% of the model AA spread rather than 70% share that we suggested and as far as the [ op risk ] in the total model. The [ op risk ] model in Hannover Re is concerned we've -- [indiscernible] has been much more conservative than we thought. And the higher the [ operating ], then is -- the lower is the marginal [ diversification ] impacts that [ we've done ]. Some of the explanations that -- may be of the interest, but I think we've broken this down in the appendix. Well, that I think is it from my side. And let's now -- a good time to look into the future.

[Torsten Leue, Chairman of Management Board & CEO]

So thank you, Immo. For the outlook 2018, basically, we changed the gross written premium. We were at 2%. Now we are believing even in 5% growth due to the strong growth in the first quarter. The risk remains unchanged, and the main figure is a group net income of around EUR 850 million. We are -- we believe we're well on track after the first quarter results to achieve that figure by end of the year.And with that, I will then turn it over and be happy to take your questions.

[Operator]

[Operator Instructions] Now we'll take our first question from Michael Huttner from JPMorgan.

[Michael Igor Huttner, Senior Analyst]

I have lots of little questions. On the EUR 100 million value of the deal, can you explain or say how is this calculated? I mean, if I think of the size of Inter Hannover, it seems very small, though not a big value. But if I think of the share of the written premiums that you might keep, it might -- it seems the opposite. It seems very high value and -- I don't know. And then my second question would be on the [indiscernible] [ fees ] of 206%, which is above your target range from 150% to 200%. And I'm just wondering what -- how -- you set a target range. You're above it. What are you going to do with the excess? And you might say, "Well, it's not a big excess." That's true. But you are actually above the target range now. So -- and my guess is Q1 you'll be a little bit more above -- maybe not much, but maybe a couple of points, which is helpful. And then on the topic of one-off, so I noted and I mean -- I wasn't listening properly, so apologies. EUR 27 million of tax runoff related to U.S., EUR 22 million in Reinsurance and EUR 5 million in Industrial Lines and then my guess around EUR 40 million pretax, maybe EUR 30 million net of tax due to this volatility in the runoff in Industrial Lines. So somewhere around EUR 50 million or EUR 60 million of runoffs in the first quarter, which would mean the run rate is around EUR 270 million. And the EUR 850 million you're targeting is equivalent to a run rate more like what you actually published, which is EUR 218 million. So I'm just wondering if we should expect negatives to come in the next few quarters to explain this kind of caution. And then the last one is -- I missed it, and I'm really sorry, could you just say again what you're doing at Industrial Lines? I heard a figure of 15%, but I wasn't sure what it related to?

[Torsten Leue, Chairman of Management Board & CEO]

Good. I think, Immo, you are -- this is about -- lot of details to Immo.

[Immo Querner, CFO & Member of Management Board]

Important details there. I'll start with the last question. You've -- I think you've heard the correct figure. We know -- we want to increase the premium level of our [ fiber ] by 15% across the board, not within 1 year. Of course, we wanted to achieve that, but it's our ambition to have this P&L-wise working with the effect of the 1st of January 2020, i.e., in the renewal round 2019. It's not to say that will we see anything this year, like the contrary is true. But it's probably going to be a 2-years program. Yes, very simple. As far as the first question, EUR 100 million for Inter Hannover. As you may know, Inter Hannover currently only retains 10% of the business that it writes. 90% of the business is currently being ceded to Hannover Re. Then this kind -- in this perspective, it is a kind of front-end inverted commerce. Now the whole structure is designed in a way that, of course, also Hannover Re shouldn't suffer in terms of net premium family income that they get out of this operation. They'll be benefiting from more business that we -- that HDI will be bringing in once the renewal rights are put -- are transferred into the company. But that means that the self-retention of Inter Hannover or HDI Global specialty is going to be called in the future would remain relatively low [ was ] the best part of the business being either ceded to Hannover Re or to HDI Global. In the long run, we would anticipate roughly an [ even-stephen ] mix of the sessions going to Hannover Re and HDI Global. But this is the reason for the valuation.And it also reflects the fact that the renewal rights would be transferred into the company without any additional payments. So this is also part of -- that's all factored in into this calculation. Yes, you're right. The 206% are above our target zone, between 150% and 200%. Now the question is how to spend the money. A, as I'm also responsible for the risk management, I tend to be cautious. That means I have to remind you of the volatility of the figures and volatility of the markets. B, as you've heard, I think this company is growing. This company is growing in a variety of dimensions. And also, the primary segment is growing, not just because of TINT. All the P&C business in Retail Germany, also the new initiatives that we've just discussed in the Industrial Lines segment, mean there would be more growth, plus other thing is also in line with the communication that we shared with you when we explained the reasons behind our EUR 750 million hybrid issue in December last year. We've got a portfolio of smaller -- or semi-small ideas of inorganic growth. But at this -- when and if they would occur remains to be seen, but it's certainly a positive expected value in terms of solvency need as far as these initiatives are concerned. And as far as dividends are concerned, this is, of course, another way how to spend extra solvency. I think we're very happy to continue our policy of the 35% to 45% payout ratio with an upwards-only trend, so this is per share, I mean. What the business is, I think, is a discussion to know. As far as the -- one of the concern, I think text-wise you -- your calculation is nearly correct. The beat-related one-off charge in Q1 for the Reinsurance division was EUR 22 million. And so the balance of the EUR 25 million that were mentioned by Torsten are the -- roughly the charges that we've seen in the primary segment. Is our outlook cautious? Yes, I think in a way we are. Yes, we are optimistic. And if you know reason why we shouldn't be, is the EUR 850 million the limit to what we could achieve? I wouldn't set a limit here. On the other hand, we've seen that the quarters can be noisy at times. And we've seen last year that even after the brilliant first half year, Q3 can suddenly turn sour. And this is reason why we have decided to keep our outlook at EUR 850 million unchanged. And whether we'll have to change this remains to be seen. But I think one should take the message that there's no reason why we are particularly pessimistic about the future run rate. This is not the case. But it's certainly -- it would be the wrong timing to now change the outlook. The only area where we did this is the top line because we've seen so much growth in Q1. That's -- I think that's the only exception. I hope that I've at least addressed all your questions, if not answered them.

[Operator]

We'll now move on to our next question from Frank Kopfinger from Deutsche Bank.

[Frank Kopfinger, Research Analyst]

I have 2 questions. My first question is of the [indiscernible] on the Industrial Lines, especially on the German Fire book. Obviously, this was always part and core of your restructuring case within Industrial Lines, and you started the Balanced Book initiatives. So how should we look at this Balanced Book initiative? You said you want to accelerate it. You also said there might be -- you need to clean up. So are there some more costs involved? And how should we see the progress that you made so far? If you could shed more light on your view on this? And secondly, on Industrial Lines, could you also comment on whether you had some pricing effects after the 2017 events on your book and what you would expect going forward here? And then the other question would be on your new joint venture also coming back, whether you could quantify that the growth synergies and the cost synergies that you would expect from this.

[Torsten Leue, Chairman of Management Board & CEO]

So I would probably take the second question, and then hand over to Immo. So this new joint venture, as you see, this market is a market of EUR 115 billion growing at 6%. We believe, if we start in a focused way, we could achieve double-digit growth in the future. We don't see any cost synergies, as this is really bundling the forces where they are and just, basically, a case of growth synergies in the group.

[Immo Querner, CFO & Member of Management Board]

Industrial Lines. Yes, we've seen some price effects. That's something I would quantify with roughly 1.3%. If you compare the pricing level of the out -- of the portfolio that is in place at the beginning of 1st of January 2018 to the pricing level that was in place until 31st of January, this is the right direct, but is -- this is probably the only positive thing that I can say. And one reason is certainly the fact that [indiscernible] related large losses occurred relatively late in the renewal process. And I think I already mentioned that in the renewals that actually -- because subsequently in Q1, we increased the price to premium ratio on the Fire book by roughly 8%, which is, yes, again, the right direction. We know that there should at least be an increase of the price level of roughly 15%, at least 15%, to meet our own minimum profitability target. And in terms of cost, I think I would not anticipate any major restructuring cost in a classical conventional sense. But I would rather prepare for opportunity cost in a sense that would be willing to give a business if the -- if we cannot agree on appropriate terms. It's not the case that there would be 1/5 or 15% price increase for each and every policyholder in our portfolio. There will be a differentiated approach, looking at the capacity absorption level of engineering quality loss history and so on and so forth. And I think we're going to at least double the energy and the initiatives to implement this program, particularly in Germany. But cost-wise, I think we're not talking about anything that is something like cost as far as the Balanced Book initiative is concerned.

[Torsten Leue, Chairman of Management Board & CEO]

Maybe to bring it -- to add on this, to bring in a perspective. I mean, this whole industrial segment has a cost advantage in the market, which is very important in such a competitive market. And this is a market, Fire Germany, basically you know since many months or I would call even years it's soft markets. Therefore, they started the Balanced Book initiative. The good thing is it's really a focus topic. It's not a segment topic. It is a focus topic. But I really, and I said in the beginning, accelerating this kind of Balanced Book initiatives, I asked my colleagues we need to go back and to analyze it even further. It's always in the cleanup -- when you clean up a line of business, you always have to see the speed of because you always have top and bottom line in mind. Again, it's not a cost issue here and how you speed up in order not to lose everything at all and not to do it for everybody at the same price. So this is basically a tactical move you have to see always in the cleanup scenario over the years. So it's just a question how to speed it up and how to be tactical in that area, as we know the market soft is many months.

[Operator]

We now move on to our next question from William Hawkins from KBW.

[William Hawkins]

First of all, Immo, sorry, could you give us a bit more clarity on what you were saying about the negative reserve development in Industrial Lines? I note it on your prepared remarks, but I'm still not quite clear about line, country or year of origin? I mean is this U.S. cat losses from last year just coming in with some late reports? Or is there something else going on? If you could be a bit clearer. And then also on that point, did I correctly hear you say that it was negative 50 this quarter against positive 50 last quarter? And can you remind what the full year figure should be? That was the liability question. Secondly -- I'm sorry, this is almost repeating Frank's question, but I'm just interested kind of qualitatively. When you talk about the problems in German Fire in the first quarter in the context of Balanced Book initiative, I mean, from your point view is the disappointment this quarter just kind of quarterly noise, and you're just carrying on with the program, and hopefully things will be fine? Or are you strategically less confident and maybe thinking you may need to do more work than what, to me, seems to be very confident message from you guys just 6 or 7 weeks ago? And then lastly, hopefully housekeeping. It was a EUR 6 million impact, of course, on the German combined ratio in the first quarter. Can you just remind me exactly what that's going to be by the full year? I know you mentioned some acceleration in your prepared remarks. So just what's the full year figure expected to be?

[Immo Querner, CFO & Member of Management Board]

Okay, many questions. The -- I think you got it wrong as far as the EUR 50 million is concerned. The EUR 50 million was the runoff loss that we saw roughly in 2016 and 2015, with a runoff gain in Q1 of EUR 50 million plus. And it was just to illustrate the volatility of the runoff results, particularly in Q1. This year it's been around sort of below minus 30 or -- roughly minus 29. So it's not the kind of worst runoff result, one that is just negative. Where did it come from? I think there is not a single problem area as far as the runoff losses are concerned neither in terms of line of business, because we've seen negative effects in some lines, more in terms of the reason of losses. Sometimes some process delays, some co-insurancers gave us advice that relate sort of during the course of Q1 about losses that occurred last year. Then there are some [indiscernible]-related increases -- related to the [indiscernible] reviews in Q3, which is probably a development that is very much in line with the industry. We had some accidents in the accident line of business in one of our non-German European branches. So it's really a wildland of noise with no single problem area as far as this is concerned. And is it good? Or is it bad? It is what it is, yes. Sort of at least there's no reason why we believe that there should be any problem area in this sense. The cost -- as far as cost is concerned, I think it's the plan to spend another EUR 20 million on top of what we really thought we would spend in year '15 -- in year '18 for cost in order to, a, accelerate the program; and b, address to some new realities. And as far as -- I think one indicator parameter that I always look at and that I've always suggested you to look at is the combined ratio net of cost expenses. I think we've seen 97.4% in Q1. This is in a way benefited from some extraordinary one-off gains in Q1 in Retail Germany. I think one should not extrapolate the trend. And as far as the combined ratio, including cost expenses, the 99% that we've seen in Q1 is certainly a result of below-average expenses as far as cost is concerned and as well as the one-off effect. So I think I would qualify this as a very good quarter in 2018.

[William Hawkins]

I'm sorry. Just on German Fire. Are we just happy that this has just been a tough quarter? Or do you guys think that may need to be a bigger strategic reasoning?

[Immo Querner, CFO & Member of Management Board]

No, we are unhappy. I think there are 2 -- here, we're talking about 2 different cups of tea. The one is the noise that we've seen in the runoff results. This is noise, and it's probably some kind of nuisance and -- but it's a kind of nuisance that did not led us to paint anything about our reserving policy, and we've fully reserved the unused large loss budget in the Industrial Lines. Here, we're talking about roughly EUR 20 million extra buffer. The Fire -- sort of the Fire business is not noise because it's not quarterly erratics that kind of drive this figure. Here, we're talking about a structural need to improve our pricing, our price-to-risk relationship. And it means that we need to accelerate this adjustment process with full vigor and without looking at the top line. If it means that we lose significant part of the business in order to restore profitability, then it be so. But I think we could really distinguish 2 things.

[Operator]

We now move on to our next question from Paris Hadjiantonis from Crédit Suisse.

[Paris Hadjiantonis, Research Analyst]

The first question I have would be on German on Industrial Lines. In the past, you did provide a split between German business and international business in terms of combined ratios. I would -- if possible, you could that for this quarter given that we've seen the German Fire book not performing very well. I guess where I'm trying to get to is how bad that line of business was and whether or not the rest of the book, the international book, actually delivered an underwriting profit or because of any result movements that was an underwriting loss as well? And then moving on to the Retail International business. There are some very extreme foreign exchange movements for some of the countries that you're actually operating in. Some of them are positive. Some of them are negative. Maybe you could actually give us an idea of what we should be expecting in terms of headwinds or tailwinds. And also actually update us on what kind of hedging you do in these countries. I think you probably hedge capital. But can you please confirm that? And lastly, on the joint venture with Hannover. You're starting off a base of EUR 1.2 billion. You're guiding for double-digit growth. Historically, you have been saying that Retail International is where growth is coming from. Now you're probably going to start discussing about growth from specialty business as well. I guess do you rule out any bolt-on acquisitions in this line? Or do you only target organic growth? And what is basically your growth strategies? This is what I would like to ask.

[Torsten Leue, Chairman of Management Board & CEO]

Thank you very much, Paris. I will just answer the last question on joint venture. Double digits is a nice figure as for Retail International, and yes, we believe this will be and always not forget it should profitable growth. So we are not just make growth for growth reasons. But yes, absolutely, this is one growth initiatives we face or we will face. And we seem very positive we can achieve that, knowing what we have for resources in our group. So answer definitely, yes, double digit and growth initiatives. Do we [ allow ] inorganic growth? Generally, we always say no. But let's say especially the specialty thing here, I would not rule it out at all. And with that kind of really bullish message on the joint venture, I hand over to Immo regarding your 2 other questions.

[Immo Querner, CFO & Member of Management Board]

Yes. As far as the profitability gap between German property business or Fire business and the [ general ] property business, if I discard the noise that is imported by the run of losses that we've seen in Q1, I think the fact that we need to address the price rate -- the price level by 15%, at least by 15%, gives you good feeling for the profitability gap and between what we have in the German Fire market and what we see elsewhere. We have -- Q1 in the German Fire book has been above 100%. That obvious. And -- yes, 50% plus I think is a good starting point to develop an idea how much needs to be done. Foreign exchange-wise, the -- we normally do not hedge our operations. What we occasionally do is hedging expected dividends in order to proper manage the [indiscernible] gap in P&L and not see unpleasant surprises at a [indiscernible]. I think the ForEx development, particularly in Latin America, is a significant happen. And you get a feeling that if you compare the currently -- the currency-adjusted figures with the unadjusted figures. Just one second. Try to find the -- in Q1, the -- top line-wise, we've seen 1% growth, and currency neutral is roughly 5%. And in a way is the different of the medium single-digit amount carried through all the P&L items and right to the bottom line. And this is one of the reasons why we, of course, are cautious because we do not know what's going to happen in the quarters to come. The currency is certainly not a friend of TINT in this year, yes.

[Operator]

[Operator Instructions] And we now move on to our next question from Michael Haid from Commerzbank.

[Michael Hermann Haid, Analyst]

My questions on the Industrial Lines are all been -- have all been answered. So one question on Retail Germany. The new business generation in German Life in the first quarter fell. If I remember correctly, the APE fell from EUR 94 million to EUR 92 million. How satisfied are you with the sale of the new capital life product? Do you expect that this would improve going forward? And what -- since this capital-light product have usually a lower margin, what happens to your new business margin?

[Immo Querner, CFO & Member of Management Board]

Yes. I would expect it's me to answer the question. I think your observation is right that, that the new business is somewhat sort of -- the momentum is not as high as it used to be. I think in terms of modern classic, we still see growth area of 10% if you compare the number of modern classic policies sold in Q1 2017 to the ones sold in the Q1 2018, which is nice. We'll also see growth in of -- the nice development in some parts of the disability -- inability -- the [ earnings inability ] portfolio. Where we are a little bit more conservative is the distribution of biometric policies, of payment protection policies of bancassurance channel. And the reason is very simple. In order to prepare this business against potential noise out of the consumer protection area, we have initiated a program to even better align the distribution standards to what could reasonably be expect by consumer protectionists. Perhaps we've overshot this bid in Q1 and that we've got to fine-tune the process because there is a significant difference between doing the right thing from a consumer protections point of view and doing it in a right way that does not come along with overly cumbersome processes within the bank operations. And that has been an area that needs to fine-tuned in the quarters to come. I think -- I hope this answers the question, if not...

[Michael Hermann Haid, Analyst]

Do you have an indications with respect to new business margin, how much -- I mean, APE fell from EUR 94 million to EUR 92 million. I assume the new business margin somehow must have fallen more than that percentage point.

[Immo Querner, CFO & Member of Management Board]

The decline in APE is mainly driven by single premium business that has fallen by 12.5%. Recurrent premiums are about 3.9%. And normally, single premium business, even the saving business, has never been the most attractive part of the business. So I think this is probably not so much of a return. In terms of APE by product, the capital-efficient APE is not down, and the biometric part is somewhat down. This is because of this sort of the adjustments that we are tiptoeing into as far as the bancassurance distribution of policy of a -- in protection policies concerned. When it comes to carriers, we've seen particularly nice development at HDI Leben, believe it or not, whereas some of the bancassurance carriers have seen a somewhat most subdued development because of the PIP business developments that I alluded to. I think it's too early to really be precise about the margins that are associated with this, but 2 things are clear. We're going to step up our initiatives to streamline the processes, make them customer friendly but make them also sales friendly, as far as the bancassurance business is concerned. And we're not prepared to compromise on not selling capital [indiscernible] policies to brokers or to other sales channels. I think these things are clear.

[Operator]

Our next question comes from Michael Huttner from JPMorgan.

[Michael Igor Huttner, Senior Analyst]

And just 2 follow-up questions. On the Investor Day, you said you had a target cash level at the holding equivalent to tiers. A dividend of -- so I guess that's around EUR 700 million. Just wondered where you are now. And then the second question is you kind of alluded to a remarkable turnaround in the solvency of HDI Leben. And I just wondered if you can maybe explain how -- what happened there?

[Torsten Leue, Chairman of Management Board & CEO]

Immo, again.

[Immo Querner, CFO & Member of Management Board]

Yes. Well, as far as the cash [indiscernible], so to speak, we're not where we want to be. Pressured by analysts like you, we have maintained dividend continuity, and we've increased the dividend per share, and you know that we've pushed it beyond the 45% payout ratio in 2017. That is maybe somewhat taken -- somewhat used to buffer and -- which is now, I think, around at a level of 30%. Where we should be in the long run, to give you a feeling, 30% or 35%. So it's still nicely in the positive bit, but we've got a way to go in order to establish our target comfort zone. HDI Leben, how come? A multitude of development supporting down to 69%. One, yes, we've benefited from the [indiscernible] development both in terms of rates and spreads. Then we've seen a wide variety of portfolio management measures that have paid off. That includes being very disciplined as far as guaranteed rates on dynamic premiums is concerned, very [indiscernible] we [ trimmed ] them; fine-tuning the asset liability management, taking some slack out of the figures of our own-led or co-led group business. When we own-led or co-led business means there are large employee benefit schemes that are co-insured with other life insurers. Sometimes we lead the programs. Sometimes others lead the program. And there also needed to be quite a bit of fine-tuning. Another very important area is the fact that we could now be a bit more realistic and optimistic as far as the cost assumptions are -- the long-term cost assumptions are concerned, and the reason is very simple. As we've told you I think several times now, this project Voyager that puts the bancassurance back office onto the IT platform of HDI Leben, essentially, is a real strategic importance to us because it means that in the long run we're going to make one factory out of 2 factories, if not more than 2 factories. And that in terms means that the unit cost of producing life insurance protection could be much better controlled without selling policies that are questionable [ as to real ] quality. We don't have to do that. There's a -- this is also reflected in the figures. In terms of model changes, I think life insurance-wise, it's not been spectacular. There have been model change working in either direction. But this is -- this isn't not just one initiative that has led to the success. This is a multitude of things that have been done over the part 2 years. But if you hear some proud in my voice, and that's particularly being proud of our colleagues in Retail Germany, you would get it right. Because our first sort of -- last time, we had to communicate a 93% without transitionals. And this is now up to 169%, which is a very, very, very favorable development.

[Michael Igor Huttner, Senior Analyst]

Well done. That's amazing. And just to get back on the cash then and -- because I'm not quite sure what I do remember. And 35% of, say, 2x of dividend, which at moment...

[Immo Querner, CFO & Member of Management Board]

That was [indiscernible]. As a rule of thumb, the buffer we shoot at is roughly EUR 700 million, calling it [indiscernible].

[Michael Igor Huttner, Senior Analyst]

Roughly EUR 700 million, okay. That's good.

[Immo Querner, CFO & Member of Management Board]

1/3 of this -- it gives you a feeling where we are. So that means we can still afford our dividend policy, sort of kind of upwards only, with the 35% to 45% payout ratio. But I think it would be overoptimistic to [ address ] the upward revision of the payout ratio in the quarters to come.

[Operator]

There are no further questions. So at this time, I'd like to turn the conference back to you for any additional or closing remarks.

[Torsten Leue, Chairman of Management Board & CEO]

Good. So it's my role to close it. My first week of this new job. And just summarizing is we feel there was a good start, and we are confident to achieve our around EUR 850 million net income result end of the year. And hopefully the message was transferred as well that in areas which we have discussed intensively, our job is to accelerate our activities and to be faster, let's call it, agiler even than we have been in the past. So with that words, I will close the meeting. I would like to thank you very much for your listening over this nice Friday. Thank you very much.