Talanx AG

XETRA:TLX

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Haley, your Chorus Call operator. Welcome, and thank you for joining the Talanx Analyst Conference Call on the Q1 2020 Results. [Operator Instructions]And I would now like to turn the conference over to Carsten Werle, Head of IR. Please go ahead.

[Carsten Werle, Head of Investor Relations]

Yes. Good morning from Hannover. This is Talanx's First Quarter 2020 Results Call, and I'm here together with Dr. Immo Querner, our CFO, who will lead you through the results of our first quarter. After the presentation, as you know it, there will be ample opportunity to raise your questions. On our webpage, you'll find all documents, the release, the quarterly statement, the presentation, also today, the 2019 group SFCR report. And we will keep a replay of this webcast on our webpage after the call.And with these remarks, I'd like to hand over to Immo Querner.

[Immo Querner, CFO & Member of the Management Board]

Good morning to all our investors and analysts who have dialed in. Thank you very much. Today, we'll run through the Q1 figures. I mean the main headline figure, EUR 233 million net income after tax and minority, has been communicated earlier. So this is no news. But I think the details, particularly in this quarter, are quite interesting and important.I think in a nutshell, I would say that the business momentum, evidenced by our top line, is intact. And that, at least on a net basis, currencies have not played a major role, at least at a group level. That is different at a segmental level. I think what is, of course, interesting is the effect of corona that we see in the Q1 results. We've digested EUR 313 million of non-life claims across all our divisions. Part of that has been set by an otherwise unused part of our large loss budget. And as you may remember, on a quarterly basis, we would normally account for the higher of the incurred large losses or the pro rata expectation in Q1. Because of corona, we have, of course, exceeded the expectation, and the net effect that has exceeded the pro rata expectation is EUR 163 million that has made it into the combined ratio, so to speak. But we have set aside EUR 313 million.On top of that, we had to digest an earnings hit related to our assets under management, the EUR 60 million losses and investments that are somehow corona-related, plus a minor item, EUR 7 million, relating to an impairment of a certain part of our PVFP in our German Life business that is related to an equity underlying of unit-linked policies. The total net impact in terms of loss after or lower profit after minorities, taxes and policyholders is EUR 133 million, which still translate after all that into quarterly ROE -- an annualized ROE that is 9% -- as high as 9%. So that -- and this would be above our minimum target of 800 basis points plus risk-free. And I think also important to realize that we are very confident to see solvency figure as per the end of Q1 that is within the upper half of our target range. And the target range is between 150% and 200%.Now let me go into the details, and I'd like to draw your attention to Exhibit 4. Top line-wise, yes, we've seen a growth of roughly 6%. The tactical result is, of course, not as good as it could have been without corona. And still, we're talking about a combined ratio despite of corona that is below 100%, which is good. The Q1 had to digest a write-down of an equities and some unrealized losses and hedging instruments. On the other hand, but I'll come back to this in greater detail at the end of the presentation, we've seen some positive one-offs, particularly in our reinsurance operations. So that this loss was partially offset by higher realized gains on bonds in P&C Re. The tax ratio has gone down. And why is that? This is because on a net-net basis, we've seen a higher share of our profit coming from jurisdictions with lower tax regimes.Page 5. I think this is an interesting one. Tells you something about the -- or puts the corona effect or the corona impact into perspective. What would have been the quarter without corona? And are there any other special effects that one should be aware of? On the right-hand side, let me start on the very far right. You see the reported group net income of EUR 223 million at the very bottom right, and that corresponds to reported EBIT of EUR 559 million. Now in the quarter, as this one, everyone would ask probably the same question, what would it have been without corona? To be fair, one should rephrase the question. What would it be without corona and other special effects?Now the adjusted operated earnings without special effect, including corona, would be -- and this is now the beginning of the slide, EUR 656 million or a group net income of EUR 280 million. EUR 280 million would certainly -- well, would very much support our original guidance for the year 2020 and would be well above our Q1 2019. Now corona consists of a multitude of several factors. Yes, we've got a EUR 313 million non-life losses. A part of that, from a P&L perspective, was offset by using the part of the quarterly large loss budget that had not -- that has not been absorbed by other large losses. So the impact on the bottom line EBIT is just EUR 313 million minus EUR 150 million. This is the EUR 163 million that we mentioned in the very beginning of the presentation. Then we see the hit on the asset side, EUR 60 million and the EUR 7 million. So without -- sort of after corona, just taking into account the corona effect, the EBIT would have been EUR 426 million.Then on the other hand, we benefited from positive one-offs on the asset side. Part of that, and this is P&L relevant, is the effect that Hannover Re, that I think was discussed yesterday at greater length during the presentation of the Q1 results of Hannover Re. And the P&L non-event is, of course, the part that needed to be -- that we needed to realize to fund it that I will come back to this in a second. Now in P&L terms, that translated into positive realized gains, one-off of EUR 54 million and other nontax -- other non-asset or corona effect that are somewhat special and where we had lucky punches for a variety of reasons amounted to EUR 22 million. So this is then the bridge, the waterfall answering the question what would have been the Q1 like without these special items? And I think you'd agree that this would have been a rather strong quarter. And that put us into the position to digest Q1 in a way that at the end, after all effects, we see a quarter that is almost as high as Q1 of 2019.Now if you deep dive into the segments, you can disaggregate the group-wide perspective into segmental view. This is done on Page 6. You'll see that the Industrial Lines have suffered both on the cost -- on the loss side as well as on the asset side. Retail P&C has mainly suffered corona-wise because of the losses that we had to reserve for because of business closure losses. Retail Germany Life is just a EUR 7 million PVFP effect, bottom line. Retail International, yes, EUR 20 million. This is the tactical corona effect. This is a very precautionary topping up of IBNR-like reserves. And Reinsurance as you know from yesterday, EUR 220 million corona-related hit. As you may recall, Talanx now also operates as a group captive company, so that should not be surprised that we've also set aside some EUR 8 million for corona-related losses in Q1 in corporate operations.Now this all translates in a EUR 313 million that was discussed earlier. Just to put this into perspective, only a tiny fraction of that, if 10% at all, would reflect claims that have been completely reported at least in the primary division. And the rest is something like claims that we expect with a sufficient degree of certainty and have kind of an IBNR character as per the end of Q1. Is this the end? Probably not. And one thing is sure. At year-end 2020, the EUR 313 million would be different. It could be higher. It could be lower. And the reason why we are very -- why we are uncertain is that the uncertainty is also the reason behind our withdrawal of the guidance. So this is as far as the losses are concerned, and the same was true for the asset-related effect.Slide 7, now with large loss overview, as you know it, I think you would agree that corona is also a large loss. So what do I mean by that? It is a large loss that should be -- at least partially fall into our large loss budget. And as you know, whenever we have -- within a quarter, we account for the higher of the pro rata expected share or the incurred share. So this year, the incurred is higher than the pro rata expectation. And that translates into the effect that the EUR 313 million losses that we have accounted for are partially picked up by an otherwise unutilized large loss budget and only 136 -- EUR 163 million or 3.1% combined ratio points make it into the bottom line EBIT or combined ratio or the EBIT figure. And that automatically tells you that otherwise, it has been a quarter that has been very light in terms of large losses. And that is good, particularly -- also particularly as far as our Fire business is concerned. Now Exhibit 8. You see that all lines or all divisions have somewhat suffered from corona. Without corona, with a normalized -- with a fully utilized large loss budget, the combined ratio would have been 96.7%. In Industrial Lines, it would have been 100.5%, while supporting our ambition to see a black zero in 2020 without corona, of course. Retail Germany would have seen a 94-point -- 94.9%, which is ahead of our cost target. You may recall that we wanted to see a 95% by year-end 2021. So we're ahead of that, net of corona, admittedly. Retail International would have seen a 94.3%, which would have been even below the very strong figure that we've seen in Q1 2019. And Reinsurance would have seen a 96.9%. Now let me deep dive -- no, before I deep dive into the Industrial Lines business, the usual waterfall depicting the quarterly changes by division. All the divisions, with the notable exception of Retail International, have seen a slight decrease of the EBIT because of corona. This should not come as a surprise. Still, we are talking about EUR 559 million, and on an after-tax, after-minorities equivalent, EUR 223 million, pretty much at the same level that we've seen back a year ago. Now here, the deep dive, and as usual, I'd like to start with the Industrial Lines business. Premiums are up, mainly driven by the Specialty business. This is -- this should not come as a surprise. This is what we have seen in the prior quarters. Corona-related claims amounting to EUR 34 million, including event cancellations. Combined ratio net of corona around 100%. I already mentioned that. That is a result of our 20/20/20 program, which is proving to be effective. But let me add in passing that 20/20/20 is not the end. We're still pursuing our division by profitization initiative across all lines and to support our medium- and long-term combined ratio objectives. That said, we would not stop at the black zero that we've entered into 2020 net of corona.The run-off result is kind of normal for the core business. In Specialty, there are a few accounting specialties. This is not the reason why the business is called Specialty, but there are also some special accounting features like dealing with delayed pipeline premium and IBNR that is charged for the delayed pipeline premiums. This and some noise and higher losses for the bushfires that have also hit the net retention of the Specialty business have contributed to run-off loss in this part of the segment. But the core has seen a positive runoff, similar in terms of magnitude to the figure that we've seen in Q1 2019, which I think is good.Retail Germany. This is now Page 12. We see a smaller top line. I'll come back to the reasons why this is when we look at the subsegmental levels in the next pages. The operating result is also down, and that is mainly driven by the non-life losses out of the business closure losses that we had to digest in this line. And that translates into a lower net income. When you look into the segment themselves -- and this is now Page 13 for the non-life Retail business in Germany. There, you see the decline of premiums in Q1 versus Q1 2019. This is the net effect of 2 different stories. The one is that in the interests of profitability, we've lost some business in German motor business. On the other hand, we've grown the business with SMEs and self-employed professionals and residential property policies. So the net effect is a slight decline.The net investment income is down. This is also driven by corona, although the absolute amount of this effect is not as high. Now the combined ratio, the reported one is 103.8%. Normally, I would have just added one for the figure, and this is the combined ratio net, of course, expenses. This figure is 103.4%. This would be the set of figures that we've always reported. And because we have always reported them, I will report them here and now. Now the difference is very small. This should not come as a surprise because KuRS is drawing to an end. So that means that the gap or the wedge between these 2 figures should taper off. But we had to digest 8.9% of corona-related losses. This is, of course, part of the story because 103.4%, as such, is disappointingly high. Now the 8.9% because of corona because of the -- mainly because of the business closure risks representing EUR 29 million out of EUR 31 million in Q1 have costed 8.9%. Without that, we would have been well below the 95%. Retail Germany Life has also seen -- and this is Page 14, has also seen a decline in the top line, down by 3%. Now here, the reason is completely different. This is a result of the fact that the new lending volume out of our Bancassurance business has been down. One reason is that banks -- bank branches were closed during part of Q1. And a closed branch cannot sell loans, and therefore, cannot cross-sell life insurance policies or non-life insurance policies that are sold together with the loans. This is the story behind the decline of the top line.Net investment income is slightly down. ZZR on the other hand is up. This is no criticism of the corridor method. Without the corridor method that was introduced some years ago, the figures would have been much worse. But it is a reflection of the lower risk-free interest rate environment that has been south in Q1. Now we had set aside EUR 127 million and EUR 129 million of ZZR in Q1 alone. We're now talking about total stock as per the end of the quarter that is roughly EUR 4 billion, which is quite a figure.Operating EBIT has -- that there are 2 effects that almost offset each other. The one is the EUR 7 million impairment on the PVFP. Why is that? That is a block of business that has been acquired as a part of the going transaction represents unit-linked policies. Now as you know, the life insurance company benefits from fees that are charged on the basis of the assets under management that are wrapped in these unit-linked policies. Now if equity indices go down, and here we're talking about equity-linked, unit-linked policies, the prospect of any fees on a lower asset under management volume is not as high as it used to be before that. And that is then translated into a partial write-off of the PVFP that is still sitting on the business. On the other hand, there was special deconsolidation of one of insignificant investment vehicle for accounting reasons translated into lucky punch that roughly -- that in a way offset the PVFP impairment.Retail International. I think it's also an interesting one, interesting in the sense that I think for the first time in lifetime memory, so to speak, we see a downward trend in the top line. Why is that? There are mainly 2 stories driving this. The one is that here we're talking about euros, and the currencies in Latin America have not performed as well as they should have, putting it mildly. And that translates into the top line in euro terms that is not as high as a year ago. Second, life insurance business, particularly in Italy and Hungary, where we do life insurance, has also suffered also from the corona issue. And this is the other main story behind that.On a currency-neutral basis, just looking at the non-life core business, we're talking currency-adjusted 5.2%, which is not as high as it was before. And there’s a certainly sort of the kind of background corona effect that we see in all our markets, but it's still growing. Now we're also satisfied EUR 20 million worth of corona-related top side adjustments in our IBNRs. We don't know whether it's going to be hit or not, but we digested for precautionary reasons EUR 20 million in this segment. And investment result is down also part of some impairments in equities that again are corona-related. Bottom line, though, and that is, I think, quite interesting, we still see a slight increase of the net income contribution of the segment and with a return on equity of 8 point -- 8.8% we're converging towards our internal hurdle rate of 10%, even in a difficult quarter at Q1 2020.Reinsurance, I'm going to keep it short because I think that, that was discussed at great length yesterday. The colleagues from Hannover Re have grown their business. Both currency adjusted and unadjusted, they've been supported by currency tailwind. So that is certainly true. They digested EUR 220 million worth of claims, and the corona-related part of that was picked up by, in other words, unutilized large loss budget. Same story as in the rest of the group. Ordinary investments increased slightly, and extraordinary investments, that was a lucky punch in preparation of the slight reallocation of their assets. They sold some of the bonds at a profit. The RoE after minorities is still double digit, was 11.8%, I think. And that was probably also discussed yesterday that the Life Re has been -- Life Reinsurance business has come quite strongly.Page 18, net investment income. The ordinary investment income is remarkably stable. The extraordinary investment sees 2 opposing effects. We've got the corona-related impairments that I already mentioned. Plus, we see, on the other hand, the extraordinary gains at Hannover Re and some of the realized gains that were needed to support the increased ZZR, although this is P&L irrelevant. Assets under management have still slightly grown 5%.Let me now turn to Page 19, which is an interesting chart. It is complicated, but it's probably worth kind of 45 seconds of discussion. You'll see a diagram with an X-axis and a Y-axis. On the X-axis, you see the share of the BBB or worse rated fixed income instruments of our assets under management. And on the Y-axis, you see the asset allocation in percentage terms of our equity investments. Now we're talking at Talanx about an exposure to listed equities of roughly 1% as per year-end 2019 and a share of our BBB or below investment in fixed income would be like 23%. And you see the relative position to our exposure structure in comparison to the one of our peers. And we are in the southwestern corner. Now I could argue well, what would be the relative exchange rate, so to speak, between an increased or decreased share of BBBs versus equities. Now this, of course, depends on the duration of BBBs, sort of the riskiness. And we tried to come up with 3 Iso risk lines. And the Iso risk lines would tell you for different maturities what the relative riskiness of BBB bonds versus equities would be, i.e., how much equities could you buy more if you dispose of a certain percentage in terms of asset under management allocation of BBB bonds. This is interesting because it gives you a feeling for the -- whether or not our position is really robust in a sense that we live to our low-better commitment. And I think this chart will tell you that, yes, we do. Even if you allow for the relative Iso risk exchange rates between BBB bonds and equities, this is certainly one of the reasons why we have said somewhat more robustly through the financial turmoils that we've seen in Q1 than others that we're relatively, defensively or low-better positioned on our asset side. Page 20, just looking into the development of our equities, now including the OCI. The OCI has been negative. The reason is the widening spreads that we've seen at the end of the quarter. What you do not see yet in Q1 is, of course, the dividends that we're going to pay, hopefully after today's shareholder meeting that you may want to participate in via the Internet because it's going to be a virtual general shareholder meeting. Now we see the decline of the other comprehensive income, but we are still talking about a stock of off-balance sheet reserves that we see in our books that is quite high. And this is something you see in Page 21, is the euro chart. Here, we're talking about the truly hidden reserves on the asset side of 6.2 billion – of EUR 6.3 billion. If you allow for the pro rata share -- or if you take away the pro rata share of our life insurance policyholders, the fees and minorities, you're still talking about EUR 667 million of hidden reserves that would accrue to the shareholder. And if you divide this by the number of shares, you would be talking about EUR 2.64, which is even much higher than an annual dividend, by the way.Now Page 22. The most recent officially communicated Solvency II ratio net of transitionals, i.e., fully loaded, is year-end figure of 211%, which has been remarkably stable if you compare to the figures we have seen in prior years. As per the end of Q1, we would expect a figure that is in the upper half of our target range. We'll communicate this -- the precise figure in due course here on the Internet. Talking about Solvency II and I think next page is quite interesting, at least for the specialists among you who try to translate whatever they see in development of conventional market indicators into an outside-in guesstimate of our Solvency II ratios. Therefore, they need sensitivities. We've updated our sensitivities as part of our -- as part of the calculations of our year-end figures.If you would compare the figures that you see here on Page 23 to the ones that you would have seen a year ago, they are smaller, basically as far as the credit spreads are concerned. How come? There are 3 drivers behind that. As a high-quality investment portfolio, we have tried to improve the diversification. Plus we've rolled out also the dynamic volatility adjuster, something we until then had only used on the life side. We have now used that also for the non-life part of our business, which is, in a way, just anticipating the existence of the volatility adjuster in all states of the world that we modeled when we calculate the Monte Carlo results for 10,000 -- 100,000 states of the world. And that would then drive the – or that would then constitute the SCR. So that has helped a bit.Coming back to the outlook. Yes. The outlook has been communicated by us in a somewhat nihilistic way. We don't know. We've withdrawn our guidance. This is not because we have shipwrecked Q1. This is neither because the underlying business is off track, right, the country would recourse. It is because we see a lot of fog in front of us, and it is impossible for us to really assess what's going to happen, corona-wise, with the assets, with the top line, with the losses during the rest of the year. So this is just fair and in a way a humble statement because this is something we haven't seen before. On the other hand, I think it's also fair to say that we have been quite -- I would say, quite conservative in setting -- in preparing ourselves for the damages that will emanate in Q1. And Q1 hasn't been that bad. That's it from my side. Are there any questions?

[Carsten Werle, Head of Investor Relations]

Haley, we could then start the Q&A.

[Operator]

[Operator Instructions] And the first question comes from the line of Paris Hadjiantonis of Exane BNP Paribas.

[Paris Hadjiantonis, Research Analyst]

I hope you are both doing well. The first question will be on the retail combined ratios. Obviously, excluding the corona impact, they look quite solid and they have improved year-on-year. But I'm just wondering whether there's also a positive effect essentially coming from lower frequency there, mainly on the motor business. So if you can basically give us an idea or if you can quantify, I don't know, what kind of frequency development you've seen in motor over the first quarter and whether those are going to continue in the second quarter?Staying with motor, Immo, you've made some comments around German motor and that you have actually held back a bit. Why is that? Is there more competition? Do you think that it's not as profitable as it has been before? And then on Retail International, in some of the countries where you operate, I would guess that for the time being, I'm mainly looking at Brazil and Turkey, there is quite a lot of FX volatility. So I'm just thinking about how that could impact your business going forwards maybe in terms of top line or whether we should be thinking about potentially higher claims inflation or any impact on the investment side as well.

[Immo Querner, CFO & Member of the Management Board]

Well, thank you. These are all very legitimate questions. Let me start with the retail combined ratio. Yes, it has been quite strong. Have we benefited from lower frequency because of corona and that translate into lower loss ratios in the motor business? Probably yes to a certain extent. But, a, we have seen lower -- a trend of lower frequency throughout sort of past quarters anyway. And therefore, it's very difficult to say whether this is now just a continuing trend or more. Second, if you look at the lockdown in Germany, this is just 1 out of 3 months. So we've -- so there is no lockdown effect in January and February. This is for sure. Third, if you compare the rigor of the lockdown that we've seen in Germany, to the rigor of the lockdown that we've seen in other parts of Europe, it's probably fair to say that Germany hasn't been particularly rigorous. I think it is somewhere between what you see in the rest of Europe and Sweden. If you look at the driving data that are put together by Google, for instance. So yes, there has been certainly a small positive, but I think it's really not the main driver behind sort of a favorable underlying Q1 combined ratio effect net of corona, although it has certainly played some kind of role. Is it going -- what is the future going to be? I wish I knew. Just from a personal experience, I could tell you that when driving into our offices, we see more traffic -- I see more traffic again. It's not as bad as in February, but it has picked up. This anecdotal evidence is supported by the macro statistics that are put together by Google and the likes. It's also supported by the toll data or sort of the lorry toll collectors of Germany, that things are picking up again. So I don't know whether we will see a major effect. Probably yes, and that would be very helpful because insurance is about pooling risks and living on the back of diversification. And the fact that we lose on business closure risks, then that it is good if at the very same point of time, we benefit because of lighter loss ratio in other parts of the business. German motor, in the end, it is -- price competition has picked up. You may have observed sort of the battle of the 2 giants in Bavaria. And at the end, I can only use the famous saying that was used by Mr. Zeller from Hannover Re, "Volume is vanity, profit is sanity." And Retail International, yes, FX, and we see sort of -- there is going to be the multitude of FX effects. And we've seen these effects already in Q1 because a significant part of the decline of our top line is driven by a sort of disadvantageous development of the FX rate in Latin America. This should translate into a lower top line. That should also translate into higher imported inflation, at least in the countries where the local bases to manufacture spare parts is not as developed. Now that takes me into the very complicated question of how much inflation are we going to see in the aggregate because of corona? I think short term, people are somewhat relaxed. Medium term, certainly less instead of the -- the prospect is less clear. And what you normally see is then when the currency goes down, that at some point, the central bank intervenes and interest rates go up, which is good again for us because we're investing short-term monies. And that would help us to set some of the additional pain that we see on the claims side. Is this going to be the same this time? I don't know because in many jurisdictions, corona-wise, national banks pursue an ultra-accommodative central bank policy. So yes, there is some noise ahead. But if you look for another reason why there is no guidance as of today, this would probably be a good element of the answer.

[Operator]

Next question comes from Vikram Gandhi of Societe Generale.

[Vikram Gandhi, Equity Analyst]

It's Vik from SocGen. I hope all of you are doing well. I've got 3 questions, and apologies if you've addressed any of these in your opening remarks. Firstly, on the Industrial Lines, how should we think about the potential headwinds, including moral hazard in the recessionary environment, particularly from the SME book? Second is on the retail business in Germany. What are your thoughts on potential refunds or rebates of premiums to customers? And lastly, on the infrastructure investments, where Talanx has been deploying more capital of late. These infrastructure investments where there are no readily available market prices, how should we think about the potential risk of write-downs or impairments going forward?

[Immo Querner, CFO & Member of the Management Board]

Okay. Well, there have been moral hazards. I think there are 2 types of moral hazards that I'm personally concerned about. The one is, of course, the ubiquitous moral hazard that policyholders stretch the wording of their policies and think that they should submit claims that they should not have been entitled to see compensation. This is our normal business. And while we've made it clear that we are going to honor all the business closure risks that we've underwritten within seconds, so to speak, I think we've also made clear that we will try to protect ourselves against fraudulent claims or free-rider type of submissions. This is something that we owe not only to our shareholders. I think we owe it to the principle of insurance. And I think here, we will be adamant. The other moral hazard, which I think is probably more difficult to assess, is the moral hazard that you see among lawmakers and regulators in certain parts of the world. That they try to talk us into ex gratia payments that are not supported by the wordings of the policies. And I think here, we've got to be extremely careful. Yielding to this pressure would undermine the very fundamentals of the industry. It's not to say that we live in an ivory tower. It's not to say that we should not be passionate. It's -- but I think there, we must be very vigilant that, that being flexible is not overstretched. As far as rebates, I think our position is that many of our tariffs that we sold include automatic rebates anyway, sort of whether it is a claims-free bonus next year. If this is a result of driving less, it doesn't matter. It translates into a bonus that would be allocated next year. And other tariffs would see automatic mileage adjustments. We don't see any reason for a special rebate action. Infrastructure, yes, you're right. Sort of there no mark-to-market prices in a narrow sense. That helps at least from an accounting point of view. But I think we've always -- and if you look at our portfolio, you would agree, we've tried to concentrate our investments to infrastructure elements that are particularly robust also when it comes to the demand of these services. And this is something that, I think, has played out nicely. And so far, we've seen no indication that we should prepare for major hits. This is not a guarantee, and in 2 quarters, things may look differently. But as of today, I'm relatively relaxed.

[Operator]

The next question comes from Fossard of HSBC.

[Thomas Fossard, Co]

Three questions on my side. The first one would be related to the Industrial Lines. Could you tell us about the trend in pricing so far into the year, what you've been able to achieve? And also in terms of dynamic for the coming -- upcoming quarters, do you see any resistance, or I would say, more constraints to pass additional price increases, bearing in mind the financial conditions of your clients? Maybe I'm not talking of the big ones, but maybe the smaller ones. So yes, year-to-date pricing trends and what you're expecting for the subsequent quarters? Second question would be related to your COVID-19 impact for the primary lines. You said, talking to Germany specifically, that EUR 29 million of -- among the EUR 31 million was related to business closure. But in total, I mean, what is really even consolation or contingency? And what is, I would say, BI? And have you seen already, I will say, claims coming in? Or is that largely IBNR? I'm just talking on the -- primary, not on the insurance -- not on the reinsurance part. And the third question would be related to the discussions you may have at the industry level in Germany for some form of socialization of the losses. We've seen some action already in Bavaria. I'm not sure that you're part of this. But what can you tell us about maybe discussions, which are currently ongoing in other German vendors for, I mean, making insurance pay where they are not liable to pay, but as a part of helping some businesses or some professions to recover more quickly?

[Immo Querner, CFO & Member of the Management Board]

Well, thank you, Mr. Fossard. With the pricing trend, I think there is not too much news now because we've seen the major renewal brand that has recurred in Q4 2019. As far as Industrial Lines business is concerned because this is mainly European thing for us. And here, we know the figures that we reported like 35% conditioning fees since we launched the 20/20/20 program. So there's no -- not really much news as of Q1 2020. Going forward, you're right. I think it's going to be more difficult because of the financial constraints of some of our policyholders. I think it's going to be particularly difficult for the ones who started late in the profitalization initiatives because it's become too late. On the other hand, if you look into the cost structure of industrial insurance, in a very simplistic way, we're talking 70%, 75%, 80% loss ratio, which is variable cost. You're talking perhaps 10% commissions which is variable cost. And you're talking there’s literally a cost block of 10% to 15%, 20%, roughly this order of magnitude, and it's like -- it's sort of here we are pretty low as far as Industrial Lines of Germany is concerned, part of which is also variable because you didn't have to pay for loss adjusters if there are policies that would translate into losses. Why do I say that? The difference between marginal cost and average costs are actually relatively low in our industry, particularly in the Industrial Lines business. So if there is someone who is not prepared to pay anything between the marginal and the variable cost, it's still a good decision to simply say no. And this is logic behind the sort of pricing initiative that we've now launched throughout the division. We define walkaway prices that will be not good enough to meet our minimum profitability considerations. And then it is a better idea to say no. So it's more the question how much top line would we lose? And here, we are going to be adamant. COVID and Retail Germany, it's not business closure -- business interruption. It's been business closure. So there is a subtle difference. Business interruption would protect people against the business being closed because something else has happened and they cannot produce. Business closure is different in the sense that it protects people against the fact that the regulators, some authority tells the company, you must close your shop. And we have covered this in certain cases. And therefore, it didn't need us to wait for the Bavarian initiative to convince us that we should pick up at least part of the claim. We stand by our words and honor the policies. If you look into the incentive mechanism around the Bavarian initiative, I think the 2 -- there are 3 perspectives. The ones who've got a particularly strong wording would hate the idea because it means that the moral hazard that I mentioned earlier when answering previous questions materialize because people want you to pay for something that is not covered. Then there is the ones who know that they've got to pay anyway. And therefore, the 15% solution, Bavaria has no solution because they would lose any court case. So our business closure risks would be completely irrational to say we just sort to pay 15% because we know that the wording is the wording, and we honor the wording. So definitely there's nothing in for us. And then there is a gray area in between where people say, well, I don't know. And so -- and for us, I think yes, we probably also have got some gray wordings, but while we support the Bavarian initiative in a way, it was not something we had waited for, for the reasons that I've just explained. And what's the third question?

[Carsten Werle, Head of Investor Relations]

Your third question, Thomas, was on recovery?

[Thomas Fossard, Co]

No, well, I think that was it. But I actually -- just to catch up on the Bavarian initiative. So actually, there are -- what you're telling us today that there are no other discussions in other lenders at the present time to come to a kind of insurance marketplace solution, I would say?

[Immo Querner, CFO & Member of the Management Board]

Well, there are many discussions. In many other lenders, people have particularly disliked the “compromise” that has been established in Bavaria. As you may know, Bavaria is a special part of our country. Sometimes it is too special for the rest of the country.

[Operator]

The next question is from Michael Haid of Commerzbank.

[Michael Hermann Haid, Team Head of Financials]

Two questions. First question on broader-related claims. I want to get an idea or a feeling about how conservative is your reserving for these corona-related losses? Obviously, most of the claims you reserve for at the moment are not notified yet and -- but of course, are foreseeable. So we are in the midst of the second quarter. The crisis has been ongoing. So I guess my simple question is, what should we expect in terms of more to come? Have you foreseen the current quarterly developments already with your Q1 results? So not much to come in the second quarter? Or how should we look at this? And second question, on new business generation in Life Germany. I see the IFRS gross premiums written down 3%. Presumably, that is driven by single premium business. Can you give us an idea about how new business in terms of -- new business premiums developed for recurring and single premium business in the first quarter. And obviously, what you have seen already in the second quarter?

[Immo Querner, CFO & Member of the Management Board]

Well, let me start with the second question. I think the decline of the top line in Life is very much driven by the lower activity in our Bancassurance distribution channels because the branches of the banks could not be accessed. And therefore, the cross-selling business, together with loans, has suffered. By product line and now in terms of annual premium equivalents, the recurrent premiums are actually up by 3%; single premium business is down by 3%. The TARGO line, which is one of our sort of most profitable Bancassurance channels, on aggregate, is down APE-wise by 2%. And this is a reflection of the specific challenges of the Bancassurance channel in the times of shutdown of bank branches. And going forward, the savings business is skewed in very many part of the business towards the fourth quarter. And I think here -- but it is just a personal guesstimation that really depends on how long the lockdown is going to be and how much this is going to weigh on the willingness of people to set aside funds to save for their retirement phase. Here, probably your guess is as good as mine. But I think I would be surprised if this is a great year in life insurance. But this is my personal guess. Now the -- how conservative are our figures on the corona non-life side? Well, what have we done? We have done whatever we have done. We've drawn up our balance sheet and P&L. I think it was in the -- at the end of last week. And whatever we saw in terms of sufficiently concrete claims either reported, notified, settled or just incurred but not reported, we set aside. And this is an aggregate amount of EUR 313 million. One of the reasons or the top reason, the key reason, why we have withdrawn our guidance is that we do not know what is going to happen. If I could give you the answer to your question, there would probably be -- would have been no reason to withdraw the guidance in the first place if I discard the investment income uncertainty. I think there are 2 data that I think could help in terms -- to help you to assess the level of conservatism. A, would be, yes, sort of the proportion of notifying reported claims is, if at all, a low single-digit figure. Second, if you would compare the corona-related losses in terms of combined ratio impact that we've seen in our company, and the EUR 313 million translate into 5.9% corona-related losses. If you would compare this figure, to the figure of our PF. Corona is certainly the mega event that will hit each and every one. And I think that is a measuring rod that could tell you something about the relative level of conservatism. Unfortunately, I really cannot give you any more help. Sorry for that, Dr. Haid.

[Operator]

And we will now take a question from the Internet.

[Carsten Werle, Head of Investor Relations]

Okay. Then it's me. We have a question from William Hawkins of KBW. First question, you said that the EUR 313 million could be higher or lower by the end of the year. Was this just a figure of speech? Was your intention that the Q1 IBNR reserving fully captures expected losses for the rest of the year? It was a potential market question. Second one, how material do you expect the positive tailwind of lower motor frequency, newer cars on the road to be for your claims experience, if you take in account of any of this as a positive within your EUR 313 million total?

[Immo Querner, CFO & Member of the Management Board]

Well, I think both questions, in a way, I think I've answered. So the first question is an accounting question that is exactly sort of the rephrased question that has been put forward by Dr. Haid. This is what we have seen, but we also see a lot of fog ahead of us. Therefore, this is the same answer. As far as the sort of the windfall profit is concerned, we probably have seen some windfall profits in Q1 because of lower motor frequencies. But I think that was one of the first question where I said, well, this is -- first, it is just a natural trend. Second, has just been 1 out of 3 months. And third, I think in comparing to other countries, the decline of mileage and physical activity is not as significant in Germany as in other parts of the world, and yes.

[Carsten Werle, Head of Investor Relations]

A positive was in the EUR 313 million, this is not the case? No.

[Immo Querner, CFO & Member of the Management Board]

We've certainly benefited the fact that we've seen a better claims development in the motor business is reflected in the general figure, but not EUR 313 million, sorry. Yes, I'm sorry. There is no explicit netting. Sorry. And then I've got the question right now.

[Carsten Werle, Head of Investor Relations]

So I hope your questions are answered, William. Can we move on, please?

[Operator]

The next telephone question is from Andreas Schäfer of Bankhaus Lampe.

[Andreas Schäfer, Analyst]

So from my side, there’s just one question left. On Retail -- on Life Insurance in Germany, I understand that the EBIT of EUR 36 million is relatively clean given the fact that the PVFP impairment was offset by the deconsolidation gain. I mean it looks relatively high, especially given the fact that your investment income dropped and your ZZR allocation more than doubled compared to last year's first quarter. So could you elaborate a bit more where the, let's say, EBIT is coming from? I think it's currently the investment margin. Is it more technical profits? Or...

[Immo Querner, CFO & Member of the Management Board]

Yes. So I could give you reasons why it hasn't changed. One is the ZZR buildup is a nonevent as far as the bottom line is concerned because it would all be sort of additional gains that we see because of realizing gains. There would be no ZZR, but it would be shadow RfB that will be set against the additional that's in our buildout. And I think the only special effects are really sort of the set of the PVFP impairment against the one-off lucky punch because of the deconsolidation. Otherwise, it is relatively stable and no big changes.

[Andreas Schäfer, Analyst]

So would it be fair, let's say, to assume that the EBIT at the year-end would be 4x EUR 36 million in German Life? I mean it looks like it would be even higher than last year, which benefited from some positive one-offs.

[Immo Querner, CFO & Member of the Management Board]

Yes. Last year, you're right. We benefited from some lucky run-offs – sorry, from some not run-offs -- one-offs. I think I'm really not in a position to give segmental guidances for the year-end. But I think one observation is right. Life, contrary to what many believe, at least in IFRS accounting terms, is relatively stable. The picture in Solvency II is completely different. But IFRS-wise, well, I could say, well, that's steady as she goes, yes.

[Operator]

The next question is from Darius Satkauskas of KBW.

[Darius Satkauskas, Associate]

In the past, you discussed the Industrial Lines exposure to corona is mostly coming from specialty lines. I'm just wondering outside of these lines, can you talk about what are you seeing in Industrial Lines in terms of COVID-19-related notifications? And are you still confident that exposure to business interruption is limited because contracts require physical damage triggers? Or are you seeing some exclusions in some contracts? My second question is, do you expect any positive benefit to premium rates in primary lines in 2021 given the corona impact in the industry this year?

[Immo Querner, CFO & Member of the Management Board]

Well, the -- in Industrial Lines, the -- it is business disruption and event-related. We've put together -- this together and a bit of reinnovation. And these 2 represent the overall claims burden that is corona-related to Q1 is roughly 1 -- sort of 1 -- 5 out of 6 is business disruption and event, and 1 out of 6 is reinnovation. As reporting and notification has been pretty light, this is a somewhat speculative allocation across lines, I must say. I think next quarter, we will know more. Sorry for this, what is probably a not very satisfying answer. Could you repeat your second question because I simply missed it?

[Darius Satkauskas, Associate]

Yes. I'm just wondering if you expect any kind of positive benefits to premium rates next year in your primary lines, given what's happening this year in terms of COVID-19.

[Immo Querner, CFO & Member of the Management Board]

Positives? Well, to be honest, next, not really. Why? I think the general level of activity in 2020, we'll certainly see a decline in GDP. And whenever you see a decline in GDP, I think it would not be -- I think -- I didn't need the crystal balls to predict that this should translate into the top line that is somewhat stretched. And I think -- and that was one of the questions that was put forward earlier. Discussions and negotiations to increase the profitability and reduce the price in combined ratio as part of our profitalization initiative, particularly in the Retail -- particularly in the Industrial Lines business, all this is probably getting more difficult. And therefore, I think from an insurance point of view, this is probably not sort of the fantastic second lack of the beat that is just ahead of us. Here, I'm somewhat more conservative in my assessment.

[Operator]

The next question is from Michael Huttner of Berenberg.

[Michael Igor Huttner, Analyst]

Fantastic. Sorry for the noise. They're taking the roof off, sorry. I had just one question to understand maybe the range of uncertainty. But just to understand, so on Slide 5, you have -- in terms of net income, you have these 3 numbers I focused on, so EUR 280 million, adjusted operating EBIT with no corona; EUR 147 million after corona, just the bad stuff -- I mean, sorry, just the claims and nothing much else; and then EUR 223 million reported with the realized gains, some of which were a little bit exceptional in character. If I try and annualize these things and not multiply these things by 4, but multiply these things 3 plus the actual of Q1, then I get a range of figures. At the lowest, I get EUR 843 million; at the highest, I get EUR 1,022 billion; and the mid -- and sorry, lowest, EUR 664 million; highest, EUR 1,022 billion; and just 4x your actual result, EUR 890 million. So if I put the range at basically EUR 600 and a bit and EUR 1 billion and a bit, I get to about an -- is that the range of uncertainty that you're seeing? Or is there -- am I underestimating the uncertainty because you've kind of taken the corona claims inside your large loss budget?

[Immo Querner, CFO & Member of the Management Board]

I think you underestimate the uncertainty range. Let me start with the investment income. The financial income, the investment income is driven by 2 separate layers of uncertainty. One, what is going to happen to the financial markets in the first place, in the reflection of the duration of the lockdown, the decline of the GDP, solving credit risk expense, for instance, we don't know. Second, it very much depends on the instrument, whether this is something that's going to be recoverable or nonrecoverable. And whenever we see a write-down on equities, we've got the once impaired, always impaired principle. So this is probably going to be very difficult to see a reversal. When it comes to unrealized gains and financial instruments that are carried through P&L on a spot market basis, this could be recovered if markets come back in the fourth quarter. Then -- and that was one of the questions that, in my eyes, at least pointed into the right direction, that additionally increases the uncertainty. What is going to be the P&L impact on the nonlisted assets? I think infrastructure is probably sort of the area of least concern. But what happens to CLOs? What happens to private equity? We all know that there is a kind of -- that there's a time that's going to lapse before you see the hits that you see in the listed equity markets, feeding it through the reportings of the fund managers that then translate into the -- into our P&L. And this very much now depends on what is going to happen to the economy and to the credit markets. Here, we see a wide range of things that could happen, and that, under no circumstances, could have been accounted for in Q1 2020. As far as the technical side is concerned, we -- although I hate the idea, we don't know what the model has -- the public model has it, or how it is going to be like. Sort of would there be all Bavarian or French models? I don't know. Talking about other lines are probably not as important for us. But we also have this is in credit bonds. For a multitude of reasons, things are very foggy here. So there is really too much uncertainty to just pick a range and multiply it by 4. We did not withdraw our guidance lightheartedly because, of course, we ask ourselves a question, is Q1 a reasonably solid basis to come up with something that would be a better guidance for the rest of the year? We found this challenge to be insurmountable, at least for us. Sorry for that.

[Operator]

And there are no more questions at this time. I hand back to the presenters for closing comments.

[Carsten Werle, Head of Investor Relations]

Yes. Thank you very much for your participation. We know it's a busy day for many of you, and so we appreciate your interest a lot. And we wish you all the best. So stay safe, stay healthy and all the best for your business.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.