Talanx AG

XETRA:TLX

Earnings Call Transcript 2019-Q1

[Carsten Werle, Head of Investor Relations]

Thank you, Roman. Good morning from all of us. This is Talanx Q1 2019 Results Call. I'm here together with our CFO, Dr. Immo Querner, who will lead you through our quarterly results today.To find our document, the release, the report and the presentation on the IR section of our Home page. This morning, we've also published the ZZR report for 2018. You may follow this call via phone and via webcast, and there are replay options for both channels.After these brief introductory remarks, I'd like to hand over to Immo Querner.

[Immo Querner, CFO & Member of Management Board]

Well, thank you. Good morning also from my side. I'm sorry if we're running a little bit late.Yes, let me start with Slide 2. I'd say bottom line, it's been a really good business start into the year. The top line is up, both currently adjusted and unadjusted. I think what is particularly pleasing that not only the Reinsurance progressed in terms of EBIT contribution, the same is true for both Retail divisions. I'll come back to the second in greater detail.While sort of the -- at first glance, Industrial Lines did come as well as the other 2 primary segments, I think we feel, and I'll come back to this in greater detail, that we're really on track to deliver what we have communicated that we should see a technical breakeven at year-end 2019. But I'll spend some time at 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 make -- to deliver the EUR 900 million by year-end. But full year, we know we've got this general triple C caveat: Currencies, capital markets, catastrophes. This is both true, but I dare say that I think our confidence has increased.And into Solvency II, the fully loaded Solvency II ratio, i.e. without any transitionals is up. It's up from year-end 2017 and it's also up from Q3 2018. It's 209%. Again, perhaps we'll find some time at the end of the presentation for us to discuss some of the drivers behind this favorable development.Let me turn to Exhibit 4. Our gross written premiums, as I've already indicated, up at 11%. If you would neutralize currency developments, it would totally and based on comments, be up by 10% and that means that the currencies that have helped, and that's particularly true to the strong currencies in the developed world. I think contrary is true for currencies in developing countries and in our retail markets overseas, but you can see this later. Net-net, we've -- currencies have provided some tailwind. Net investment income is down. How come? I think there is one very, very simple explanation because of the news that is our legislation or regulation that has come in force in June of last year. We have realized less than we had -- 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'll come back to the segmented contribution on the next slide.Net income after minorities is up by 8%. It's grown even stronger and one reason for this is the favorable development of the tax ratio. I think this is done -- this is driven by 2 things. The BEAT burden is fading away, but it is quite a lot in first quarter 2018. [indiscernible] has been positive net balance favorable and unfavorable single tax items that behaved nicely in the first quarter 2019.The return on equity, the annualized return on equity was 10% -- 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, which is risk-free -- now risk-free. And according to our definition, it's currently 0.2%. That would then add up to a minimum target of 8.2%, and 10.2% is much higher.Let me turn to large losses, just a few observations. In the Industrial Lines, and this is the main consumer of large loss budget in our primary business. It's been a little bit below our pro-rata budget because we've booked a full budget in the first quarter. In Reinsurance, the underutilization is much more pronounced. Against a 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. So we've got some extra buffer for the rest of the year.What is quite interesting as far as Industrial Lines 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 NatCat, including things such as the floods in Queensland and the storm ever hard hitting us on the continent.Combined ratios, Page 6. Talanx is down the combined ratio, Industrial Lines, Retail Germany is down. And if you exclude the cost, the transitional or transitory cost expenses, it's now the adjusted pro forma rate -- pro forma ratio is now down to 96.1%. You may recall that we are shooting for a 97 -- for 95% combined ratio by 2021. So I think we are well on course to deliver this one. Retail International is down. Reinsurance is down. And I'll come back to the Industrial Lines business. There -- it probably takes a little bit more time to analyze these set of figures.Just one word because -- against the background of our acquisition of ERGO's Turkish business. The combined ratio is 109.4%. Putting things into proportion, the maximum tolerant combined ratio in Turkey is in the vicinity of this 109.4%. Why is this? This is very simple. Because the yields that it can make in the Turkish market are so high, that 109% combined ratio is good enough to render profit that would come in a bit, but profit needs, including the capital that it holds against, these activities. And so we have achieved a positive EBIT in the first quarter in Turkey. I will come back to Turkey in a second anyway.Page 7. The EBIT contribution was -- it's up from EUR 592 million to EUR 616 million, which is nice. I think all the segments have contributed with the exception of the Industrial Lines. If I should single out one segment, it's certainly Retail Germany with a staggering 58% EBIT growth on a quarter-to-quarter basis, but again, that would pretty much at the center of my discussion around this -- the segmented 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 segmented deep dive. Gross -- the top line and the net premium development is kind of interesting this quarter. The gross premium income is up by 12%. And here we've, of course, benefited from the consolidation of the newly held HDI Global Specialty, formerly known as Hannover. That is now the combined entity of, I think, the former Hannover business and the Specialty business that we had written before in our Industrial Lines segment, but it's 12.1% up.This company in itself only holds about self-retention of 10%, and I think we discussed this during the course of our Capital Markets Day in Frankfurt. And initially, we'd see the best part of this business, the other sort of the business that they did not keep to Hannover Re and that explains why the growth rate of the net premium in term -- in this segment, Industrial Lines, is not as high as the gross group development. And this then, of course, translates into a lower self-retention because both have -- 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%. And as the business grows and into Hannover -- or what used to be called in Hannover, I mean, HDI Specialty -- and as the session ratio is moved towards the long-term equilibrium of 45% to Hannover Re and 45% to HDI, this self-retention ratio should move up -- structurally should move up again.Operating income EBIT is down by 31%. And that is driven, on the one end side, by a 102.9% combined ratio. Obviously, 102.9% is not around 100%. So are we disappointed with this result? Not really because I think there's just one single factor. There was a very, very, very late FI claim that was reported in last days of December. Here, we got it wrong in terms of the initial reserve setting, so that has contributed roughly EUR 20 million. If you would net out this after-order effect, we're talking about 100% combined ratio for the entire segment, which is bang on line with our target for 2019.And although we had to digest this true-up in the first quarter, the runoff result is back to normal. You may recall the last quarter -- that in the first quarter 2018, we reported a runoff loss of EUR 30 million. This is now back up to EUR 6 million. And 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 runoff results are very volatile, but long-term average is about, I think, EUR 10 million or EUR 11 million, so this is very close to what we historically would have expected.The other result is somewhat burdened by currency loss, which is sort of -- although we try to get it perfectly, but with the currency mismatch, you will never get it right according to IFRS, and then it's some kind of non-systematic noise and some first-time other results burdening in -- as is part of the integration of HDI Global Specialty, HDI formula, into Hannover. But this is the reason, sort of looking into the figures behind the sort of the first glance of the figures, why we are very confident that we're going to make it with the tax breakeven.Net income is also down because the EBIT is down. It's not as down as, in relative terms, as the EBIT. And this is driven by some tax-free investment income from subsidiaries that reduced the tax ratio, and this is the reason why net income is certainly down by 36%.Let me move on very quickly, move on to the next slide. This is 10. You know this chart. Almost nothing has changed in this chart. Nothing has changed in this chart not because we are complacent because we have bent any of our objectives or we are less vigilant or -- the only reason is that in Q1, there is very little business that we can renew. Thus, there is very little room to improve the book. Currently, we are sort of making all preparations for the renewal season and we are confident that we would 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. But in Q1, I can only reconfirm that we have full preparations of the next renewal round, but unfortunately, the new figures they tend to report in Q1.Let me move on to the retail divisions on Slide 11. Gross premium -- gross written premium is up by 1%, which is not a lot, but if you recall the past quarters, it was always sort of the same structure, Life is down and P&C was up. Now, and it's now the second quarter, we see growth in both segments, Life and nonlife. Both segments have contributed to the growth.The operating result is up by a staggering 58%, which I think is a major achievement. The combined ratio is 99.3%. It's been burdened by kind of accelerated scrapping of legacy IT that has cost us some money in Q1. This is part of our cost exercise. It's part of sort of the transitional costs that will fade away now. If you apply the same calculus that we've applied now for the past, I think, 3 or 4 years when calculating our pro forma ex-cost combined ratio, we are talking 96.1%, which I think is good.Net income is up by 64%. We're talking EUR 36 million. Now, you can say, well, Talanx is building again in Retail business. We should dramatically adjust our sort of estimation for the full year bottom line results of Talanx. Yes, we are satisfied, but I think what should not get carried away and just multiplying this EUR 36 million by 4 may be a little bit on the optimistic side.Retail Germany P&C. Yes, we've got a -- 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, and that's 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 accounted 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. And we'll benefit from a EUR 3 million increase -- release of an IPT reserve that we had set aside against our discussion with the fiscal authorities. In the end, we got our way and -- more or less got our way and that could release the EUR 3 million.The operating result in this segment is up by 67%. I think -- I cannot recall any quarter that have seen an increase in Retail Germany P&C that has been as high as this one.Retail Germany Life. Premiums are up. And the drivers behind this positive premium to our top line development are twofold. One is wanted single premium business. I think we should carefully distinguish between wanted and unwanted single premium business. And the biometric business, particularly in our Bancassurance business, has picked up again. It's good.Investment income is down 18% and this is -- these assets are effect that there are certainly been topped up by EUR 61 million and it has been topped in -- topped up in Q1 last year by EUR 238 million. And this is quite a difference and this difference has then translated into a lower need to realizing reserves on the asset side.Operating result is up by 50%. And the main drivers behind the continuous kind of natural volatility of IFRS accounting in Life Insurance -- in German Life Insurance, the thing that will not go away with [indiscernible] if I may add this, but the drivers behind this is sort of the nice pickup in our biometric top line and credit cost management.Just in passing, spreading more sort of good news as far as Retail Germany Life is concerned. Solvency II figures are up. And I think one of you have always asked what is the fully loaded Solvency II ratio of -- that kind of indicate the carrier of Retail Germany. And this HDI Leben. HDI Leben's fully loaded solvency ratio for the year-end 2018 at 254% without any interest. I mean, this is really a marked improvement.Let me move on to Retail Germany. Premiums up by 8%. If you would look at the currency-adjusted premium development, you'd be talking almost 12%. Now, if the currency trend has not been our friend, and this is now sort of the other side with some strong developed market currencies have advanced, and that's not true for the emerging currencies, and you see this here. What we're really satisfied with is development in our core business in P&C, currency-adjusted, again, growing by more than 2%, i.e. double-digit, which is good.The growth has come along with better tactical conditions as evidenced by the combined ratio, which is now down. If I would have to single out 2 countries that have particularly contributed to this favorable tactical performance, it's WARTA and Brazil, probably the 2 most important carriers of ours in our International Retail operations for both cases. And we are talking about 91% combined ratio in Poland and 97% combined ratio in Brazil. Both are down from Q1 2018 levels. And I think it's fair to say that, if anything, Q1 reserving this segment as far as the reserves are concerned are more on the conservative side.Net income is also up. Return on equity is now up to 8.7%, which is good. And as you know from our Capital Markets Day, that we are shooting for 10% or 1/4 in the not so distant future. So we're getting there step-by-step.Let me spend 1 or 2 sentences in Turkey against the background of our acquisition of ERGO's Turkish 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 went up 100%. So this is now different from what we see in developed markets. And I alluded to this when I discussed the maximum total combined ratio, which is around 109% or so today.As far as the MTPL market is concerned, you may recall there are 2 very important instruments that have been used by the government to intervene. The one is the price cap. That price cap is kind of fading away because the government increased allowance by 1% -- or 1.5% on a monthly basis and about a 5% one-off increase in January 2018. So we are actually quite optimistic and that by year-end 2019, the price cap, as a profit constraint, should perhaps not fully diminish, but should no longer really weigh in on our bottom line results by the end of this year from today's vantage point. And the other instrument is the bad customer pool. This is still there and it'll probably stay there for a while, but I mentioned this because the -- if you merge 2 companies and this will be then the endgame of our acquisition, not only of Liberty's structured operations that we digested this year, that will help also as far as ERGO's business is concerned, that helps to prove the economics of the burden sharing in this risky customer pool.The 109% plus combined ratio that I've just reported also influenced by an accounting one-off. We always look at whether all the accounting instructions are applied in consistent way. And as part of this annual review process, we kind of unified or harmonized the way we would account for other technical expenses and nontechnical expenses. And as a result of this, I think this is the only country where it really matters with Turkey that the combined ratio was somewhat burdened by roughly 2% because of new accounting conventions in a EBIT-neutral way because whatever is now looking not as nice in the combined ratio is looking brighter in the nontechnical part of this EBIT-neutral. And the rest of the combined ratio development is explained by inflation translating into higher ultimates, that's particularly true probably into the higher cost of spare parts, and there was one quite actually someone [indiscernible]. But bottom line, I think we are very satisfied with our development in Turkey.And 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 the top 5 position. We have just sort of whisked away from this objective. We know that this is probably an anti-cyclical investment, but we will discuss the acquisition of Liberty Mutual. I think roughly 1.5 years ago, we already signaled at this point that this -- 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 sort of -- with an earnings accretion from year 2 on. We hope that the official closing will be done in half a year's time in Q3 2019 and the full merger of the 2 entities we currently expect for 2020. Medium-term, I think Turkey should be good enough for an EBIT margin of roughly 4%. And just in passing, the integration of Liberty Sigorta is very on track.Reinsurance on this -- it's on Page 8 -- 16. I think nothing new. Top line is up. Combined ratio is down. Net income is up. RoE is up. The RoE sort of the -- because RoE is down because the equity is improving further, but still 13.1% isn't that better figure. We have fully utilized in that the large loss budget and the U.S. mortality business. I think you'll see the end -- or if it is light at the end of the tunnel and the things that we improved, but I think you've all discussed this in greater detail with Mr. [indiscernible]. Let me move on to Page 18, a brief overview of our investment income. Ordinary investment income is up by 2%. How come? Yes, we still suffer from a low interest environment, particularly in the eurozone, which is not as bad -- which is worse than in the United States or the dollar round, although the U.S. dollar interest rates went down in the first quarter. So how come? It's a wide blend of things. Just some higher one-offs, dividends, but the main driver has certainly been a higher stock of assets under management, which is still up by roughly 6%. And if interest income as it is ordinary income goes up by 2% and the asset base goes up by 6%, you see that we still continue to suffer from a low rate environment. The other the main point, I think, is realized net lane -- net gains and losses down by EUR 180 million. Now, the EUR 180 million minus is almost exactly the same. That is in our bill that went down, that was EUR 177 million. So this is kind of washed 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 and that did not go through the P&L according to IFRS accounting, and that is up by almost EUR 600 million and this is mainly a reflection of low yield and lower spreads. And that also, of course, translates now into book value per share for Talanx of almost EUR 38.Unrealized gains, I think you know this chart. There are 2 types of hidden reserves. The one is what you see in the OCI and then there is the hidden reserves that you don't even see in the OCI. So the off-balance sheet reserves have also gone up, but mainly in the Life Insurance business and, of course, this has to be shared with [indiscernible] holders. Page 21, solvency ratio up 209%. You also see the historic trajectory of the figures there in the past quarters. I think there is a lot of detail back in the appendix, Pages 33 to 40. Just sort of a big bird's eye view, the market, particularly in Q4, has been against us. Rates went down, which is not helpful. I think Q4 spreads went up, which equally is not very helpful, but these adverse developments, market developments were more than offset by sort of using now Shakespeare's Macbeth, a few witches that helped us this time was, yes, German regulator. It was in the news that said our legislation that has boosted both the owned funds as it helped to reduce the SCR, which is certainly something that you will not find outside Germany. Then there has been a change of some aspects of our internal model, and the most prominent one is the introduction of the static VA in some of our nonlife carriers and then a variety of operational improvements when you're cost cutting to even more refined ALM asset management translating into smarter reinvestment guidelines. And all this has contributed to the nice development now taking us to 209% fully loaded.The outlook hasn't changed. It's still EUR 900 million, roughly 9.5%. We know that the first quarter has been slightly above the pro rata that will be needed to support this. And because this is true and because there is still some sort of underutilized loss budget and 20/20/20 is running well, I think there is no reason why we should be less confident that at the beginning of the year, I think the contrary would be true. Yes, that's it, Q1 from my side. Of course, I would be available for any question.

[Carsten Werle, Head of Investor Relations]

Roman, I would propose we start the Q&A.

[Operator]

[Operator Instructions] We now take our first question. It comes from Michael Huttner from JP Morgan.

[Michael Igor Huttner, Senior Analyst]

Just 2 questions. Good results. They look so clear in your explanation, so detailed. On the Industrial Lines, you said you were hoping to do better than the 20% rate rise in the Industrial in Fire. And I just wondered if you can kind of give a little bit of better feel for what your ambition could be and -- or what the tailwinds or something? Then in Retail Germany, you said do not multiply that lovely figure of EUR 60 million by 4 for the EBIT, but I noted that you had written off quite a lot of IT as part of your costs program, which sounds a little bit one-off, a little bit bias to, I think, KuRS costing a little bit more than normal in Q1. So I wonder given that -- it feels like the Q1 was burdened with negative one-offs, why not multiply it by 4?

[Immo Querner, CFO & Member of Management Board]

Okay. Let me take, but I'll start with the second question. I think, yes, you're right. There was a positive one-off in the sense that the write-off shouldn't continue forever, but the truth is that I think you're in the course of 2019 there will still be some raises as they're in the pipeline. And I think we discussed the state of our IT at a great length and honestly, would loss that, I think, in Frankfurt.Q1, yes, perhaps a bit more than the average, but -- and this is why I mentioned, for instance, the IPT effect. We've also seen positive one-offs in Q1 that has helped us, and we would not expect them to reoccur. This is the reason why we're not saying that 2019 should be particularly bad year. On the contrary is true, but just multiplying it by 4, I think, maybe, a bit on the optimistic side.Perhaps I think when -- last year's EBIT was EUR 180 million, and then we told, I think, all investors that we want to make the EUR 140 million -- we want to make the EUR 240 million and if you divide it by 3 and justify at a kind of average pro rata, a proven process and yes into any better insight that, that should be 20 billion-plus PA that will take us to 200. Yes, it's been a good quarter, but do not get carried away. I think this is the end of message that I wanted to put across.In terms of Industrial Lines, yes, I think I'll come back perhaps to the one chart that has not changed is the status report of our 20/20/20 project, which is on Page 10. At the end of last year, we always arrived 90%, is what we wanted to arrive by year-end 2019. The old plan was that we wanted to arrive the 17% out of 20% -- the 13.3% out of 20%, i.e., 2/3 and now we were 17% out of 20%. So the difference between the 13% -- and the 13.3% and the 17% is kind of overachievement what we did in 2018.Now if you say, well, is there any reason why we should be less successful in implementing our measures in 2019 than we thought in 2018, then probably it should be a bit more than 20% kind of parallel shift this kind of logic. And I think this kind of parallel shift logic that at least we should not lose what we've gained in 2018 would be the right starting point to develop kind of feeling of what we actually now, do want to achieve.

[Michael Igor Huttner, Senior Analyst]

Yes, on tailwinds. Any tailwinds?

[Immo Querner, CFO & Member of Management Board]

I think if there is one tailwind, but this is very difficult to assess is that I think now everyone in the market have realized that the state of affairs in the Industrial Lines and commercial lines of business sort of improved and one 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.

[Operator]

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

[Frank Kopfinger, Research Analyst]

I have also 2 questions. My first question will be on the Industrial Lines on the top line development. You pointed on the -- for this 12% growth you pointed to HDI Global. However, could you break this down a little bit further into what has been really come from Inter Hannover? What is coming from the repricing actions? And what is business plus? And then secondly, on your disclosure on the solvency, I noticed that your credit spread sensitivities came down a little bit. Any comment on where this comes from? Whether this is from your rebalancing actions that you put at the end of 2018? And also whether you could provide a breakdown of your credit spread sensitivity and what a move in corporate spreads and covenant spreads would be?

[Immo Querner, CFO & Member of Management Board]

Okay. I'll start with the second question. I think the reason why the credit sensitivity has come down, there is no single answer. Let's move to figures on the appendix on Page 41. One reason is very, very simple. Last year, we reported credit spreads of plus 100 basis points. Now I think everyone in the industry has the kind of template that has been suggested by the CFO Forum recommends there should be 50 basis points kind of stress. This is a very simple explanation, but I should mention this. It's just true. Second, yes. I think the -- our reinvestment methodology that has translated into a modeling has helped, and the idea is very simple, but convincing, I would say. If you're sitting on a book with guaranteed interest rates, then everyone knows that according to how the German system works is that you profit -- that you benefit from profits in excess of the minimum guarantee price of the 10%. But if something goes wrong, you're going to 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. And if the need will go away, we would, in a way, reallocate our asset allocation to more conservative allocations. That means that, yes, of course, the average yield probably will go down, but the optionality working against this German Life Insurance is dramatically improved, and that then translates into more favorable SCR calculations because the likelihood that the shareholder has to inject funds to make up the difference goes down. So I think this is an important factor. The other point, I think -- the other question asked is can we invest in credits -- commercial -- problem is, I haven't got the figure because the way we model is that the credit in government yields or spreads would move in lockstep. I think we explained this on the occasion of one of our Capital Markets Days that for us, sovereigns was a rating worse than AA-, and just as good as any corporate. So for instance, Italy is Italy S.p.A for that matter and is modeled accordingly. And for the better rate of sovereigns, we would apply factors but still would move in lockstep that even if AAA spread on the Netherlands, Germany would then move with the spread that we'd see on AAA corporates. There is probably a somewhat conservative modeling because we know that, particularly, the better rate of sovereigns would benefit from some flight of quality if there is noise in the market. But this the way how we modeled it because we go to manage the complexity of the model. But I'll see whether we can cover both 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 million would be as a net effect from HDI Specialty and the prudent process has cost us roughly EUR 20 million, which is down the balance business that we've lost and the business that we've sold at higher prices and some other new business. So this is the kind of net effect.

[Frank Kopfinger, Research Analyst]

Just for clarification, so you're stating that there is a EUR 20 million net effect coming from business lost where there's repricing?

[Immo Querner, CFO & Member of Management Board]

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, EUR 20 million with the order of magnitude. I think this is in line with what we've communicated, I think, on the occasion of yearly call that is, say, for bottom line, it's been more or less flat. Now EUR 20 million is a lot of money for you in EBIT putting in -- sort of in relation to the stock of the premiums, I think, is still a single-digit percentage figure.

[Operator]

We move on to our next question, which comes from Vikram Gandhi from Société Générale.

[Vikram Gandhi, Equity Analyst]

It's Vik from Soc Gen. Just 2 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 '19 versus 36.6% last year. And you mentioned the positive one-off effect helping BEAT tax at this time. I'm a bit surprised with this high tax rates since I would have thought the international expansion should have significantly lowered the overall tax rate for Industrial Lines. So that's question number one. And the second is should we expect some more costs relating to the onboarding of the HDI Global Specialty Industrial Lines?

[Immo Querner, CFO & Member of Management Board]

Okay. I think as far as tax rate development is concerned, a significant part of our business is still accounted for in Germany. A, the amount of business that we bought in non-German subsidiaries is relatively smaller 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 the low tax environment. And France is one of the markets where we've gained footprint and multitudes of places such as Italy. I think this is probably different from others. What we're trying to do in a long run, of course, is to shift some of the [ self-insurance ] to our Irish Reinsurance captive that is going to be held by the insurance -- Reinsurance segment that will help structurally. At the same time, there is still some residual burden from the BEAT tax because it is not as easy for the Industrial Lines business running international programs with a lot of natural intercompany sessions that are now penalized by the BEAT setup to overcome this, not as easy as 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 if there was something like cost in HDI Specialty, there probably would still be some cost-related expenses, if this would be the case. But I think in the big picture, it is negligible. We've got to invest into all kinds of accounting package systems, and so that there were still some expenses. Bottom line, the combined ratio impact is positive though, and the reason is very simple. The underlying combined ratio of this set -- of this entity is very favorable because, a, they benefit from nice conditions from the Reinsurance partners. This is today still mainly Hannover Re and long-term 50-50 Hannover Re and HDI 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, so in a way that looks brighter for us than it is third plan. So structurally that business will benefit cost-to-income ratio-wise, but I think we'll still see some integration work, but this should not be marginal -- this will be marginal, sorry, should not be material.

[Operator]

We'll now move on to our next question. This comes from Andreas Schäfer from Bankhaus Lampe.

[Andreas Schäfer, Analyst]

I have just 2 questions. One on Poland, I mean, you mentioned last year that the combined ratio of WARTA in Poland was affected by some additional reserves increases on 50 -- roughly 90%, 91% we've seen in Q1, now a clean number without any changes in the reserve and quality? And second question is on German retail P&C. I mean there was just a pretty weak growth of 0.2% premium. So you mentioned that the competition has picked up. And as far as I understand, after a couple of very good years, competition especially in motor Insurance has just started to pick up from this year. Does it mean that if competition will be stronger the next couple of years we are not going to see any sort of premium growth?

[Immo Querner, CFO & Member of Management Board]

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 kind of super clean, best estimate reserve setting then we still probably would be also on Q1 on the conservative side of Poland, but the extraordinary effect that we really -- kind of really invested in redundancy that we reported in Q1 2018 has not been as pronounced this quarter. Yes, probably, you're right.Retail Germany, I think the -- again structurally, you've got a point that as competition grows and price development is not as helpful as used to be, the top line trajectory should be flatter and this is true. We don't see any reason why we should let ourselves in to the game of writing business that would not meet our profitability standards, and this is pretty simple. We are prepared to sacrifice top line when it is needed to defend the quality of our book.

[Operator]

We'll move on to our next question now, which comes from Thomas Fossard from HSBC.

[Thomas Fossard, Co]

I've got 2 questions. The first one would be, again, on the Industrial Lines, but more on the claims development and could you update us on year-to-date how claims environment has been trending? You mentioned NatCat claims, but was interesting to better understand what you were currently seeing on the man-made industrial claims as 2018 has been really built on by completion of these type of proceeds, so any change or any improvements -- which show improvement, you're starting to see in your books? Second question will be on the investment income. So 2.7% is a guidance for the current year, but you highlighted that, clearly, the lower-for-longer environment is still kicking in, in Europe. So could you remind us the dynamic of potential dilution of your running yield going forward, if we've to stay a bit longer, again, in this type of environment, especially in Europe?

[Immo Querner, CFO & Member of Management Board]

I think the kind of long-term trend is probably in the range of 10 to 20 basis points. This is then -- that will be kind of lose. It's -- of course, there is a big overlay, and this is the level of realization of hidden reserves that will structurally go down as a result of the ZZR regulation. Offsetting the structure decline that I've just mentioned is, of course, the growing part of our non-Euro business that is equally true for Hannover Re as it is true for our retail operations and industrial operations, and that is actually one of the reasons why we like the non-Euro business that we'll be doing more business in economic environment 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 the -- that we've seen a kind of shift in the profile from man-made losses to NatCat, and you can see this on Page 5 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 at the things that we do not see any more, and this is, of course, something that we try to monitor. Have we abandoned the right business as part of our pruning exercise and there is no growing kind of anecdotal evidence if you look at what happened 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. So that -- and that is particularly true for man-made exposure. And that is one of the reasons why we're very confident that we're going to make it.

[Operator]

[Operator Instructions] We will now move on to our next question and this comes from William Hawkins from KBW.

[William Hawkins]

Immo, first of all, on Slide 21, when you referred 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 has been positive capital generation possibly of itself as well. Could you just give us a bit more information about it?

[Immo Querner, CFO & Member of Management Board]

Yes. And you're perfectly right. I think the market is positive in the sense that at least spreads have come down, and the years have more or less stayed where they were at the end of the year. There is not too much decline. Plus, of course, the profit that was made, so there is kind of organic growth but while I'm sort of kind of optimistic or mildly optimistic and this is the reason why you're seeing this comment on the slide, Solvency II calculations are very difficult to predict and -- but currently, I would say they should be perhaps a tad stronger. This is our current feeling. Can we be wrong? Yes, we can be wrong, but for the past couple of quarters, I think our projections have been more or less accurate. Yes. But these are the 2 reasons.

[William Hawkins]

And then secondly on Slide 15 when you're giving information about the Turkey deal, is there any goodwill associated with this transaction that we need to be taking account of the close?

[Immo Querner, CFO & Member of Management Board]

[indiscernible] what's the purchase price? And we agree with the seller that we would disclose this but putting in that way all the concerns that what could have with this transaction, the goodwill concern would probably be least of them -- the least important concern.

[Operator]

We'll move on to our next question and this comes from Michael Haid from Commerzbank.

[Michael Hermann Haid, Team Head of Financials]

Only one question, a technical question on Solvency II, actually. You mentioned that the relaxation of the ZZR requirements has a positive effect on your Solvency II ratios at the solo life entities. I didn't have yet the time to look at this in more detail, but in theory, in an ideal world -- and I know that Solvency II is not perfect, in an ideal world, this relaxation of the ZZR should have actually negative impact and not a positive because the ZZR is designed as an helping tool and if you use that less, then it is actually rather negative. Can you say, also, how much this impact is -- the positive impact is on your solo entities or on Talanx as a group?

[Immo Querner, CFO & Member of Management Board]

Yes. First, I've got to do now something that I hate to do, I've got to disagree strongly with one of our investors or analysts. The ZZR relaxation is helpful, and the reason in my eyes is very straightforward. The ZZR could be set aside regardless of what the current spot rate of the interest rate is. It's a long-term moving average. Now, in scenarios in which there is sort of -- under the old regime, still the necessity to drastically build up 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. Now whatever money you would inject into the life insurance company as a shareholder currently must not -- must be modeled with kind of only 10% participations in the yields that are associated with these funds. Now this is, of course, is a very bad deal for the shareholder that in certain scenarios you would have to inject funds in which we'd 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've been under the old regime. It's just the optionality and the interplay of the optionality that is embedded into our German Life Insurance system with the need to strengthen local GAAP reserves that really helps.The -- what has been the impact? ZZR impact allowance for Retail Germany Life Insurance has been in the reason for the aggregate of our German Life Insurance of EUR 200 million ZZR. And because kind of mark-to-market, risk neutral probability is also reflected in the own funds. The financial option and guarantees biking into the own funds of our German Life Insurance companies have been -- have improved or have benefited with a little bit of EUR 100 million. So this is ZZR effect. It's really been helpful. It's, in my eye, has been the right thing from a policy point of view, but it's also been helpful.

[Operator]

As there are no further questions, I'd now like to hand the call back to you for any additional or closing remarks.

[Immo Querner, CFO & Member of Management Board]

Well thank you for your patience and looking forward to your comments in your write-ups.