© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to today's Hannover Re International Conference Call on Q1 2018 Results. For your information, this conference is being recorded. At this time, I would like to hand the call over to your host today, Mr. Ulrich Wallin, Chief Executive Officer. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. I'd like to welcome you to our conference call presenting our results for the first quarter of 2018. As usual, I am joined by our CFO, Roland Vogel. Before we start, I'd like to extend my special thanks to all those participating from the U.K., because you have a bank holiday today. Unfortunately, we have bound this our Q1 conference call to the date of our AGM, which takes place today. Sorry for any inconvenience we may have caused. I'm pleased to be able to report to you that our results for the first quarter of the year fully support our guidance for 2018. We managed to substantially grow our business, and our gross written premium grew by 17.6%, which equates to 27.5% at constant exchange rate. This growth was mainly driven by a number of large transactions from our P&C business group. As most of this business was written annuity in the first quarter, it created a significant unearned premium reserve, and as a result, the net premium earned increased by only 7%. We're quite pleased that the EBIT grew by 8.5%, which is somewhat more pronounced than the growth of our net earned premium income, which we feel underlines the quality of the net premium growth. Group net income only grew by 3.3% to EUR 273 million. The lower growth of the group net income compared to the EBIT growth is a result of the one-off tax burden due to the reorganization of our U.S. Life & Health business following the U.S. tax reform, which was enacted at the end of last year. We are, however, not expecting any further negative effects from the U.S. tax reform so that the tax rate of our Life & Health business should normalize in the coming quarters.The 13% return on equity remains well above our minimum target of 900 basis points above the risk-free rate. Despite the fact that expressed in euros, the book value per share slightly reduced due to the further strengthening of the euro, in particular against the U.S. dollar, our solvency ratio remains comfortable at around 260%. Our property/casualty reinsurance business in the first quarter saw a very dynamic growth, both for the bottom as well as for the top line. Considering our continued conservative loss reserving policy, we are satisfied with the combined ratio of 95.9%, which meets our respective target.Also our Life & Health business had a very good first quarter, with an EBIT growth of 6.9% to EUR 96 million, driven in particular by our worldwide, excluding U.S. business, as well as by the U.S. Financial solutions business. Our legacy U.S. mortality business, whilst continued to be loss-making, developed better than we had expected following our complete remodeling of that business towards the end of last year. The premium growth amounted to 9.2% at constant exchange rate, which is well above our target. I already commented on the one-off tax burden as a result of the U.S. tax reform. Once again, our return on investments developed very favorable and came in at 3.3% on an annualized basis for the assets under own management. On this positive note, I would hand over to Roland, who will explain to you these figures in more detail.
Good morning. Thank you, Uli. I'll try to keep positive, and I should be able to keep my comments brief as the Q1 2018 results do not include too many material one-off effects. I would like to take this opportunity to point out that together with our Q1 results, we have also published our Solvency II SFCR reports for the full year 2017. These provide a lot of additional qualitative as well as quantitative information on top of the solvency ratios that we have already published with our year-end results. You will find them on our company website. The remarkable top line development of 27.5% adjusted for currency effects in the first quarter of 2018 is driven by most business units, but derives to a large extent from our P&C business, we will come to that. The difference in gross -- of gross and net premium is due to the change in unearned premiums, which will be earned throughout the year. So the differences will become smaller as the year goes on. The retention ratio even increased slightly as compared to the last year. For the income and expenses on a group level decreased mainly due to FX effects. The increase in group net income was a little bit less pronounced compared to the EBIT resulting from an unfavorable tax rate. The reason for that unfavorable tax rate is a one-time increase based on the restructuring of group internal retrocession before the background of the U.S. tax reform. We mentioned that already, late 2017 and during the first quarter of 2018, we were able to achieve or acquired approvals from the supervisory authorities as well as ratings to implement our new structure. Such business trends has caused one-off tax burden of around EUR 22 million. For the ongoing tax rate, we do not expect sustainable changes.On the next slide, you can see that the operating cash flow in the first quarter was particularly strong driven by strong reinsurance growth as well as pleasing results on the investment side. Such developments were partly mitigated by negative impact on the valuation from rising interest rates and hardening euro. On the other hand, as a proceedings there before we issued our first senior bond with a volume of EUR 750 million. Early Q2 2018, we had entered into a bank loan in the same amount, background here was the support of the transfer of capital between companies as a result of the U.S. tax reform-driven restructuring.Overall, assets under own management increased slightly to the mentioned EUR 40.5 billion. If we look at the capital side, you can see that the positive earnings this quarter did not entirely compensate for the negative currency effects and also the yield impacts, hence leading to a 2.1% decrease in shareholders' equity. The recently issued bonds, I mentioned already, was the senior note and will not change or affect the hybrid bucket, that means we still have enormous flexibility on our balance sheet. By the way, we issued the senior note to support the upcoming loss of financing and an aged business particularly in Asia and Australia.On the P&C, gross premium increased by a remarkable 38.8% to nearly 40% on an FX-adjusted basis. This is mainly driven by the successful new business written by our restructured reinsurance team and, overall, is in line with our reporting on this year's January renewals. This loss also includes some larger transactions of our traditional business lines, especially in Asia and Australia, the traditional lines thereby contributed approximately 12 percentage points to the nominal growth of around 28% in P&C. Net premium earned increased by 22.4% adjusted for currency exchange rates and that was based on the increase in the unearned part of the premium, as already mentioned. The 3.4% of net premium income, major losses were again below budget. For the first quarter, the underwriting result is on a good level as the combined ratio of 95.9%, comes in below the full year maximum target of 96%. As in previous years, we stuck to our reserving practice and kept a large loss expectation as part of our IBNR reserves. We've also not changed our reserving for the application of the Ogden rates. In the U.K. all case reserves here are still based on the negative 72 basis points discount rate. It is also important to bear in mind that the increase in structured reinsurance business generally leads to higher combined ratios as the lower risk transferred justifies also lower margins. It's more than 1/4 of our P&C premium coming from restructured reinsurance in Q1. The achievement of our 96% target is, therefore, actually pleasing.For early in the year any comments on the development of our confidence level in the reserves are actually uncertain. We have not changed our approach to setting up reserves and with large losses under budget, we do not expect any material changes to the year-end level.Ordinary investment income was stable and other income and expenses broadly unchanged. Altogether, net income for our P&C business stands at EUR 235 million, up by 9% compared to an already good first quarter of the previous year.Major losses were significantly lower than in the previous year, despite the fact that the net loss from catastrophes and man-made events in the first quarter 2017 had already been below the expected level. Therefore, the unused budget amounts to approximately EUR 94 million. As usual, the list of major losses in the first quarter is comparatively low. Next to Friederike, only 1 property and 1 credit claim made it onto the large loss list in Q1.On this -- on the next slide you can see that the picture is quite a mixed one. Overall, the combined ratio is below the maximum tolerable combined ratio. The main contributors to the good underwriting result in the first quarter were Continental Europe, Marine, credit and surety and, of course, the nearly loss-free cat XL business. North America here was impacted by a negative reserve development from the previous years, here, especially the California wildfire, which occurred late in the year developed slightly negatively. Aviation saw some general aviation claims and within the U.K. business, we increased our non-proportional motor business, which comes in with high initial loss ratio assumptions, remarkably above 100%. For our Life & Health segment, the reinsurance gross, written premium increased slightly by 2% or a little bit more by 9.2%, adjusted for currency exchange rate. New business production was particularly favorable in Asia and the U.K. The technical result has improved by quite a margin overall. This stems mainly from worldwide business excluding the U.S. and then particularly from the mobility business.After a number of quarters of underperformance, our U.S. mortality legacy portfolio did better and delivered a result above our current expectations given that the underwriting results on this slide here also includes the income from funds withheld. It is worth mentioning that income from funds withheld declined by EUR 17 million due to the discontinuation of 2 larger treaties.As explained earlier, the significant decrease in the other income and expenses can be explained by currency effects in the first quarter. Apart from this, the result from U.S. financial solution treaty is recognized according to the deposit accounting method contributed EUR 45 million, a figure largely unchanged from the previous year.Having set a new target of EBIT positive 5% per annum, we've had it quite well and achieved 6.9% increase compared to the previous years in Q1. I already explained the one-off effect of about EUR 22 million from the U.S. tax reform-driven changes, which percentage wise have an even higher impact for the business improved on its own. This effect will not go away over the course of the year, but as a one-off impact, it should be diluted or it should dilute down from quarter-to-quarter.Looking at the investments and developments in the first 3 months of 2018 is very satisfactory, with investment income above our return expectation for the full year, remarkably above that expectation. The ordinary investment income was on the previous year's high level and, therefore, favorable given that the decrease or the decrease of dividends from our listed equity portfolio, which result in Q3 last year. Realized gains were a little bit higher than in the previous years, but all in all, fully in line with full year's expectation. But here is to no longer continue with our barbell strategy and our intention to decrease our exposure to lower-quality credits as they have performed so well in the past. Before that, background of sale of some of these investments came with the realization of positive valuation reserves. The change in the fair value of financial instruments is predominantly driven by the change of the market derivative. But as you can see, this is only due to margin extent. Overall, the return on investment was 3.3%, making us very confident to achieve the full year's target of 2.7%. Given that interest rates, particularly the dollar and British sterling have increased, and spreads in European and U.S. corporates have widened a little bit in the first quarter, the valuation reserves decreased compared to year-end, which, on the other hand, is associated with higher reinvestment yield.The next slide shows the usually -- the usual view of how the different asset classes contributed to the ordinary investment income compared to where we are invested. On the right-hand side, you can see that we have some changes in our asset allocation with some minor changes in the first quarter. The left-hand side illustrates a very strong performance of our private equity portfolio and the continued positive contribution from real estate. As I have explained that the 13% from the private equity is expected to trend towards a more normal level over the course of the year, but the impact from our real estate portfolio should or even increase slightly over the course of the year.I think this should conclude my remarks about the financials. As usual, I leave the target matrix and the outlook to Uli.
Thank you, Roland. Yes, considering that we had a good result already during the first quarter of last year, it is quite pleasing that the result for the first quarter 2018 supports almost all of our strategic target. Well, I'm particularly happy that both of our business groups achieved results reporting all of their targets from the target matrix.Coming to the second quarter renewals, particularly the 1st of April renewals. The renewals were actually quite similar from a market environment point of view compared to the renewal at January 1. Loss-free business was mainly renewing flat of these only very slight increases. More meaningful rate increases were restricted to treaty, which suffered losses during the year or during the last year. The business remains very competitive. Discontinued imbalance between supply and demand, favoring the reinsurance buyers. Nevertheless, we were reasonably satisfied as a result of the renewal plan of the Re, as we were able to achieve double-digit growth again, which is not too dissimilar to the January 1 renewal for our traditional property cash treaty business.The main part of the renewal was, of course, Japan, almost all the business renews at 1st of January. On the property side, which is the most reinsurance business being bought, the rates were absolutely flat, some reported as flat as a pancake. As a result, we applied unchanged capacity from a catastrophe point of view, and overall, we saw a slight decrease of our premium income. This mainly comes from reduction of some of our proportional treaty, which were the result of some portfolio management actions.On cash equity side, there was further losses relating to pharmaceutical risks, which were reported in the first quarter. And of course, meant that P.S the rates were increasing again. However, we applied rather restrictive policy to the terms and conditions of those casualty treaties.On the other hand, we saw significant increases in the Caribbean, but in particular the loss laid in business from Puerto Rico was up for renewal. So there, of course, we saw significant increases and also increase in volume. Also we cautiously increased our involvement in the agricultural business from India, which resulted in a doubling of the premium income there, even though from a relatively small level. In North America, we were able to achieve some growth on the property business due to rate increases, but continued our cautious approach to the casualty business for our premiums developed rather flat.The renewals on the property catastrophe excess of losses very much resembles the experience from 1st of January, which meant that the rate increases, overall, were a little bit disappointing, and we kept our capacities and utilization unchanged. This resulted in a slight increase in the premium income due to some rate increases.Given the favorable development of the premiums in the first quarter and on the renewal at 1st of April, we were able to up our guidance for the development of the gross written premium to now more than 10%.Likewise, with the favorable investment result in the first quarter already explained by Roland, we slightly improved the return on equity -- on investment guidance from around 2.7% to at least 2.7%, only a very subtle change. Regarding the group net income and the dividend payout, the guidance is unchanged. As regard the dividend payout, considering the current development of our business and the very comfortable solvency ratio, we will consider again to pay special dividend also for 2018, which should result in an overall dividend payout at least to the level of last year. Naturally, this is an early indication and is of course subject to the development of the business during the remainder of the year. But the market development continues to be somewhat disappointing considering the large loss burden from last year. Nevertheless, we feel that we are in a good position to earn the cost of capital or even in excess of the cost of capital in most areas of our diversified property/casualty reinsurance portfolio. We are particularly pleased that the development of the volume as well as the profitability, Continental Europe, where our business already last year performed excellently. In addition, growth will be particularly pronounced in the structured reinsurance business as well as in the worldwide reinsurance business due to the large transactions which have already been mentioned.Regarding our Life & Health business, we expect continued excellent profitability in our financial solutions business, particularly stemming from the U.S. On the other hand, the U.S. mortality business will continue to be a burden to the bottom line, which also means that in this category, we are likely not able to achieve results supporting the cost of capital.On the other hand, our non-U.S. mortality business continues to develop very favorable. This EBIT margins close to double-digit numbers. Premium growth, we expect mainly to come from the mobility business where we also expect improved results, which meet our cost of capital requirement. On the longevity business, we see a rather stable development both on the bottom and on the top line, which, however, could change regarding the premium growth at this business, it's really quite barky and it depends if some of our quotations on the larger transactions come to fruition.Overall, we feel that we are well-positioned to continue to be successful in the reinsurance business in the short and in the longer-term future. As you know that our recent strategy revision creating value through reinsurance, we concentrate our efforts almost entirely to the reinsurance business that we feel that we have a favorable competitive position.On the property/casualty business, we are confident that we will continue to be able to reach our combined ratio target and increase the bottom and the top line of the business. Of course, the fact that an increased portion of this business stems from the structured reinsurance business, which have lower-risk transfer but also lower-risk margin, as Roland explained, the combined ratio target becomes a little bit more challenging.On our Life & Health reinsurance business, we expect that 2018 will continue to be negatively influenced by losses from our legacy U.S. business. And the extent of the negative influence would also depend on the recaptures, which may occur as a result of our more aggressive in-force management actions regarding rate increases. From 2019 onwards, however, we expect positive development of the profitability of this business. Continued stable returns on investment will definitely be aided by the increasing interest rate, in particular in respect of U.S. dollar investment. On that note, ladies and gentlemen, we come to the end of our presentation covering the good start we have made for 2018, and we will be delighted to answer your questions. Thank you very much.
[Operator Instructions] The first question is from Kamran Hossain, RBC.
2 questions for me. First of all, just on the outlook for midyear. I guess in your comments and from the call you've talked about plenty of excess capacity still existing, but at the same time you've kind of reported that you've seen very, very strong increases on loss effect business. So I's just intrigued about your views on how the midyear, I guess, June, July renewals will go? So that's question 1. Second question, also on pricing. You've talked about, I guess, the underlying casualty business stabilizing. Just interested on your thoughts on I guess with all of capacity from a large player in that market announced last week and how you think that might affect that market going forward?
Yes. Regarding the outlook for midyear pricing, thank you for your questions, Kamran. Well I would say, I mean, of course on 1/6, the Florida renewal season will be quite interesting even though a number of treaties are multiyear. So the effects will probably be not that large. I'm afraid that I'm not very optimistic on the Florida renewals, because that business is dominated by the ILS market. And for the ILS market, Florida is key for their portfolios. And I mean, the demand for reinsurance in Florida is not increasing this year, as far as I can see, but the supply definitely will. So I'm optimistic that we will see rate increases on Florida, particular there's a movement of the Irma loss recently. But I don't think or the hopes of the market will be fulfilled in that renewal. So remainder of the mid-3 year renewal, I think they'll follow the 1/1 and 1/4, seems that -- I mean loss-making treaties will see increases. I expect particularly on the U.S. property business outside Florida, I expect further increases like we have seen before. On the casualty business, it's really difficult one to read, because I mean there are definitely areas certainly in the U.S. where we've seen increases, like commercial motor and also, I mean, we have seen increased loss activity on the E&O, so their prices, which have been reduced for years seem to be [ catching ] up. I mean -- but I think in the short term, the business will continue to be competitive there despite the withdrawal you were talking about. I think it all depends on the development of the runoff results from previous years. It seems to be that the cushions of redundancies and the loss reserves on the casualty business are drying up and we may even see deficiency. And that development, coupled with the inflationary development depend what happens to the casualty business. For us, for the time being, the upside as I said rather cautious approach to casualty business.
The following question is from Vinit Malhotra of Mediobanca.
Two questions focusing on life Re, please. Just I'm a bit curious that the ongoing flu season, or just in the U.S. was quite bad, and the data suggests very high level, maybe a one-off, but a very high level of mortality. But your comments are completely sort of ambivalent to that. Could you just comment about the guidance and what you are expecting[indiscernible]
Vinit, I don't know whether you can hear us without any problem. The line doesn't work.
I'll give it [indiscernible]
[Technical Difficulty]
Yes, please go ahead.
So apology for the technology, I'm out of the office today. Sorry. The life Re. So 2 questions on life Re please. The first one is that we have seen the U.S. mortality affected by very high flu-related debts. Could you comment on whether your guidance incorporate that and what your experience was in 1Q? And second question is on the 5% EBIT growth target, how should we interpret that going forward? What should be the baseline? Is it implying that on a normal basis you want to grow 5% from 2019 onwards? Or how should we look at that?
Yes, Vinit, thank you for those questions. Around the flu season, we haven't seen it in the first quarter. That is, however, little bit the result of the reporting which is a little bit delayed on that business. And as the business is also underwritten by our subsidiary, it's also relatively close off of the quarter. So the flu season effect will be more pronounced in the second quarter. Early indications are not supporting that in the figures as yet. But of course, I mean, it has to be borne in mind that we have changed our expectations to higher mortality as well. But yes, so far so good, I would say from the experience we have seen, but we will certainly have the much better color on that for the second quarter. But as you know, I mean, even in the first quarter, on the U.S. mortality, we didn't make money. The only thing is we only lost half as much as we thought that we would lose. On the 5%, yes, that's on a normalized basis. I mean, you just want to increase on a normalized basis going forward the EBIT by 5% every year or say on average in a -- say in a 5-year period. But of course the basis for that should not be the low EBIT that we have experienced in 2017 and we're expecting for 2018, but more a normalized EBIT. We have done that, and we have done a very with the EBIT margins, because of the particularities of the business, we would have to take both -- I mean, margin requirements, on an EBIT margin on a much more granular basis in order to make sense. You obviously have seen that on the Financial solution business, which is deposit accounted, which of course we have not booking any premium but booking positive results, which of course skews that kind of metric. Therefore, we thought if we make a little bit simple and then go for an EBIT growth. Does that answer the questions?
Yes.
The next question is from Frank Kopfinger of Deutsche Bank.
I have 2 questions, my first one is also on life Re. How should we think now, after the strong start in Q1, about your EUR 200 million EBIT guidance for 2018? After this start I would just would like to have some of your thoughts by how much you think you run now ahead of your plans? And then secondly, you mentioned within the geographical split on the combined ratios that there was also a deterioration of your California wildfire loss. Could you quantify the impact there please?
Yes, Frank. On the life business, I mean, it's quite volatile on a quarterly basis. So I would not dare to say that we run ahead of our EBIT target. Of course, if you divide the EUR 200 million by 4, you might say well it's almost twice as what we were expecting. But I mean, we have actually started to be very -- a little bit more aggressive for managing the rates of the business at first. And of course we expect that we will see some recapture as a result. And therefore, I think that depending on the recapture of the EUR 200 million might either be challenging or comfortably reachable. So it's a little bit early to say. Over the year, we will get better clarity on that one. Then on the California wildfire, yes, we saw increased loss [ advices ] there, also on some treaties that we didn't expected, and therefore, we had an increase there of around EUR 21 million. The remainder of the cat losses remains on a net basis a little bit more stable, because in particular, Maria and Irma are sitting just in the lower end of our full account protections. And as a result of that, any further development of them will not have an effect on the net position. We think there that the combination of the key transaction recovery and the only account recoveries even taken into account reinstatement premiums, the losses are pretty much fixed there.
The following question is from Guilhem Horvath of Exane BNP Paribas.
My first question is on the investments. Can you elaborate a little bit on the decision you made to change your investment strategy and the barbell strategy and the reasons for that? And the second is coming back on this U.S. tax reform, can you elaborate a little bit on what you did exactly. I'm a bit surprised to see this one-off being quite small at the end compared to guidance some of your competitors gave. So can you elaborate a little bit on the complexity of the changes you made here to comply with the new U.S. tax reform?
Controller, that's for you.
That sounds so. Yes, the investment strategy, we have been pursuing our barbell strategy with increasing liquidity with more govs and taking a little bit more risk on the lower-quality side over the last, I think, 2 to 3 years, which we felt had worked out fine. We've achieved where we wanted to be. Still then we saw, especially in the U.S. dollar, that the lower-quality credits were performing extremely well. So that had worked out fine. Still it was quite clear that the potential upside going forward here without would be very limited. And on the other hand, we also saw that illiquidity premium, we were getting there, was really going down. This is why we stopped it. Then of course you have to decide where you put that money. We invested a little bit more across the board and leave the lower-credit side, especially in the U.S. dollar, but also in the euro. That means we are forgetting a little bit of extra premium there, but it is really -- we did a calculation over -- for the whole portfolio, the ROI is not, or the potential expected ROI is affected only to a really minor extent by that strategy that is the changes. And again, to come back to your question, it is really the minimum upside after the good performance, which we've seen and the achievement of our strategy beforehand. With regard to the tax reform, you could say that we were a little bit lucky. We had already established a few years ago a Bermudian company, which has opted to pay taxes in the U.S. And in that regard, that was the optimal point to transfer the business to. It is outside the U.S. So it can do the Triple-X financing business. And then on the other hand, it pays the taxes in the U.S. so it's not affected by the basic erosion and the abuse tax speed. So that company was already existing. We needed more capital. We needed some approvals from the supervisory authorities. We needed a rating that was achievable in the short time frame. It was a lot of work, but it was achievable. So we had to transfer capital and business between those companies to address the issues of the beat, which was achieved. Now we're proceeding business to a lower-tax environment beforehand but also to Germany with higher taxes. And overall, the run rate should again not be affected materially.
The following question is from Andrew Ritchie.
I just wondered if you could clarify on the structured solutions business. Is all of that now, and previously it's not earned premium, but in gross written, is that the expected volume pretty much booked for 2018 as we can see already? What would be the limit on writing -- continue to write loss for more of this business? What would be the reason not to keep writing if it is so exceedingly low-risk? The other question, just a clarification. U.S. life business that you were booking at 12% tax rate is now going to be booked at 21% moving from Ireland to Bermuda. Why does that not affect the ongoing tax rate? Is it just the assumption that you won't make money in U.S.?
Well, on the structured solution business, of course we are continuing to develop that business, and I think it's fair to say that throughout the year we will see additional writings of that business. Recently, we were successful on a number of transactions, which we could account as deposit accounting. So they will only show up on the bottom line and not on the top line. But it is continuing, attractive business. So we expect further growth from that and then throughout the year. Of course it has to be that this business has a few very large transactions, so if you look ahead in the coming year, it can be quite volatile, because, I mean, that business is only sold if it makes sense for the ceding company and their capital management. Things might change and so this business might go -- it goes out, but at this point in time, there's also a possibility that it might go bad, it go down at other times. As my colleague was responsible for choosing [indiscernible] or this asset. So it's a breathing volume, which at this point in time is breathing in quite a lot, I would say. And on the taxes, I would again hand over to Roland because it's such a complicated...
And Uli I think that calculation and the comparison of -- before restructuring and after restructuring is really based on multiplying an expected income with an existing tax rate. Those have changed but some of that business was taxed in Ireland with 12.5% and is now taxed with -- that was 21%. Some of the business beforehand taxed in Germany was 32% and is now taxed with 21%. What we lose on the Irish side, I suppose, a little bit also driven by the lower expected profits based on the fact that the legacy U.S. mortality business had its effect on the projected income for the future. And if we look at the transfer of the business, the expected profits and multiply that with the applicable tax rates, it's a little bit -- it's a wash and the expected overall tax rate is around where it had been before.
And if I may add of course, there's -- a fair amount of that business remains in our U.S. subsidiary. And that is actually quite profitable, so the results of our U.S. subsidiary have been quite profitable. And of course, there as the lowering of the tax rate, is actually helping us, because the profits from our U.S. company is actually taxed not -- no longer the 35% but only this 21%.
I guess the credible thing is presumably the financial solutions business in the U.S., which is the most profitable part not incurring a heavier tax load?
Partly, that's true. It's only true to the extent it's not kept in the U.S., but some of it is, but that's no good reason for ceding it. But then of course, in Ireland and now in the Bermuda, U.S. tax pay ups that business is bundled with the underperforming U.S. mortality business. So the short term, of course, the tax is even, should we begin to bring the U.S. mortality business to its full profitability. And of course, I mean, the tax rate presumably be a little bit higher. But that's a problem we would like to have.
The following question is from Thomas Fossard of HSBC.
Two questions on my side. First one would be related to the life and re business and the U.S. legacy book. So I guess that now we entered Q2, I guess that you've already started to approach clients in terms of higher rates to be shared and potentially starting to engage on the need to implement recapturing. Could you give us a feel of what you see, what has been the client's reaction so far to what you have proposed to them? I mean, is there any surprise? Or any granularity you could provide which will help us to bit understand what could be achieved in Q3 and Q4 on that front? And the second question would be related to the P&C Re business. Obviously, very strong growth on the structure solution side. Could you help us to understand what has been the drag on the combined ratio in Q1 from the 95.9%? And what is expected to be the drag on a full year basis? Of course you are keeping your guidance of below 96% unchanged, but with such a strong rate of course in business, if you could guide a bit on what we should expect on the traditional side and then the drag from the -- switch us to reserve?
Okay. On the reaction from the clients to rate increases, I mean, so far, we are engaged in that actually for a number of years now. All situations we found an agreement with the ceding companies, how to deal with it, so it has not been controversial. We have a little bit more pronounced action now in the second quarter, so -- but too early to say what the reaction is. I mean, so far, neutral, a little bit better than we were expecting actually. But that will be hammered out in the next 6 months. So I mean we will see where we go. That's for that. I mean, on the combined ratio, of course, I mean the large portion of the structured reinsurance business will cost us about 1 percentage point in the combined ratio this year, which means that the 96% would mean a 95% or even a little bit below 95%, maybe 94.5% on the traditional reinsurance business. I mean, if the large losses remain a bit in the budget we feel that the quality of the business would support such a combined ratio. It's Slightly better than it was -- the quality of the business is slightly better than it was last year from pricing point of view and on a fiscal-year basis. Immediately it's not from a fiscal-year basis, it's not quite as good as 2016. But we still feel that as our competitive advantage of our lower expense ratio that, that should be achievable even without increasing our writings of property catastrophe business and hoping that the losses won't happen. Does that answer the question?
Yes.
The next question is from Andreas Schäfer of Bankhaus Lampe.
So there's just one question left from my side. With respect to the unrealized capital gains, not only on the fixed income side but also on other assets and the unrealized capital gains, throughout quite strong year, something like more than EUR 70 million. Could you explain a bit what kind of asset classes are strongly impacted by this drop? And is it really related to the rise in interest rates?
That is quite clear, I think -- and obvious -- the increases in interest rates, especially in the U.S. dollar have caused the -- some decrease in our valuation reserves to that extent. The rest is really driven by the real estate portfolio, also the private equity portfolio. We haven't -- we really haven't lost anything material there. We might even also see some -- a few more realizations over the costs -- over the course of the year. So in that regard, the decrease in valuation reserves, which comes with a slight decrease in our capital position is really what we have been asking for over the last few years, complaining about the low-yield environment. Now the low yields are slightly increasing and that is associated with the decrease in the valuation reserves. It is, I would say -- I don't have the percentage here, but the vast majority is rate driven by the fixed income portfolio and the rising interest rates.
The next question is from Vikram Gandhi from Societe Generale.
Just a couple of questions. Firstly, can you comment on how should we think about the runoff result for this quarter? Would you say it is EUR 100 million the quarterly run rate less the negative EUR 20 million development that you mentioned on the California wildfires? And secondly, can you comment again on the rationale of the debt raising and its connection to the life Re business? I'm sorry my line was bad, I couldn't catch your opening remarks.
Ronald would you want?
Yes, I can take it. As we mentioned at various occasions before, not too easy to have the runoff result hammered out. I would say we have seen some positive runoff next to the negative development of the wildfires. We have also set up reserves according to the usual practice. So we might have build up. So overall, the number was a little bit higher than the one that you mentioned from a quantitative point of view. But with the remarkable initial conservative reserving, again, we feel that the confidence level should not be impacted materially. Again, it was a little bit higher from a quantitative standpoint than the number that you mentioned. So a little bit more than the 100, even including the negative development of the wildfires.
And the rationale for the debt.
Yes, and the rationale for the debt, sorry. So that was -- so we had really strong demand from our life colleagues to also do cash pre-financing business again. Various large transactions in the pipeline that together with capital requirements, plus also the increase in private equity and real estate, there was a little bit of strain on the liquidity of the SE, not the full group, but the SE as the financier of all these things, and also to be flexible, a little bit more flexible again in our investment strategy, we felt that it would help to have more cash available. We had prepared that for Q2, because that was the time when we had expected the materialization of the requirements from the life financing around the world. Then we had the U.S. tax reform with some capital movements within the group. So you can imagine that we no longer need that much money in Ireland and we need more money in Bermuda. It takes a little bit to convince the Irish authority to give that fees, so we needed which we then can take to send over to Bermuda. And on long-term basis, we felt it would be good to have the EUR 750 million a little bit earlier on to give us the flexibility to do the restructuring. And on that basis, we entered into that bank loan, and that was with the majority of the banks involved, continuing were then transferred into the senior loan in Q2.
The next question is from Roland Pfänder from ODDO BHF AG.
Two short questions from my side. First, regarding your interest income from funds withheld, you mentioned that you discontinued 2 treaties. So is it a new level we reached here? Or might that figure deteriorate further? Second question, I think, if I'm not mistaken, I saw that your aviation business volume, you're a little bit more positive here. Are there any reasons for this you could speak on this?
Yes. I mean, interest funds withheld, I mean this was really due to the fact that 2 cash financing treaties, which were on a funds-withheld basis recaptured because financing was being paid back plus the margin. That's quite normal. In fact, I mean, for the entire year, we are not expecting this to deteriorate further or to come down further because of the various financing opportunities we are currently working on. So I mean, on the forecast, this number is not coming down compared to last year. But it really depends on the individual transactions. Aviation, well the income is relatively flat there, not going down further, that is in line with the development of the premium. So I mean, airlines are slightly edging up and also on the aviation excessive loss, it's more stable situation than it was before. Therefore, the income is also stable. I mean a little bit of reshuffling in the portfolio. I mean, the 1 larger client that decided not to buy any proportionate aviation reinsurance any longer. At the Same time, there's another one, we have a very long-standing relationship, so we were able to increase our line in the aviation quota share and excessive losses slightly up. So that putting all together I think we have found the low-level point on the aviation, I would say. At least I hope that because there was a class I was underwriting myself for so long.
There are currently no further questions. [Operator Instructions] There are no further questions, I hand back to the speakers.
Yes. So thank you very much for calling in. And again for those of you in the U.K., have a very nice bank holiday. Sorry for interrupting it early in the morning. For everybody else, have a very nice and productive day. Thank you very much, again.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.