Hannover Rück SE (HNR1) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to our conference call presenting the results of Hannover Re for the first 9 months of this year. As usual, I'll start with an overview before our CFO, Clemens Jungsthofel, goes over the financials in more detail. And then I will comment on the outlook for this year and for 2022. For the Q&A, as always, I'm additionally joined by my Board colleagues, Klaus Miller and Sven Althoff. In the first 9 months of this year, Hannover Re has again proved its resilience in a challenging market environment. In life and health reinsurance, the results continue to be impacted by the COVID-19 pandemic. And in P&C reinsurance, we had to deal with elevated large losses from natural catastrophes, most prominently the European floods and Hurricane Ida in the third quarter. The fact that we still achieved a double-digit return on equity year-to-date highlights the strong underlying profitability of the group and our successful volatility management. Additionally, the group net income of EUR 856 million is in line with our full year target range of EUR 1.15 billion to EUR 1.25 billion and hence, we have kept our profit guidance unchanged. Gross premium increased by 14.4% adjusted for currency effects. This is mainly driven by our P&C business group, where we reported continued strong top line growth on the back of improving market conditions and increased demand from our clients, although growth in life and health reinsurance was also ahead of our expectations. In P&C reinsurance, the large loss impact of more than EUR 1 billion was clearly above our budget for the first 9 months. Adjusted for this quarterly budget overrun, the technical profitability was, however, in line with our expectations. Furthermore, this is supported by our unchanged net estimate of COVID-19-related losses, which has now been stable since the end of 2020 at EUR 950 million. As mentioned, the ongoing global pandemic continues to have a significant impact in life and health reinsurance. Within our portfolio, the main markets affected by COVID-related excess mortality are the U.S., but also South Africa, where Hannover Re has a very strong market position. All in all, losses connected to COVID-19 amounted to EUR 404 million. Most notably, the third quarter losses of around EUR 140 million came ahead of our initial expectation. As already disclosed in Q1, the restructuring within our U.S. mortality portfolio led to a positive one-off effect of EUR 129 million. Additionally, we recorded a positive effect of EUR 99 million from reserve releases in longevity in Q3, partly mitigating the COVID-19 impact. At 2.9%, the return on investment is significantly ahead of our expectations, mainly driven by favorable ordinary income. Our capitalization according to Solvency II continued to be excellent, confirmed by our strong solvency ratio of 239% at the end of the third quarter, well above our 200% threshold. The main reason for the decrease in the third quarter is the increase in required capital due to the attractive business growth, including the growth we expect to see in 2022. This leads to an increase in SCR, whereas the positive impact on own funds is less immediate due to our conservative assumptions for new business. Furthermore, large losses in P&C and COVID losses in life and health had a negative impact on the solvency ratio year-to-date. The operating cash flow in the first 9 months of 2021, reached a record high of EUR 4.2 billion, mainly driven by attractive reinsurance growth as well as very favorable results on the investment side. The figure for the first quarter included a positive one-off from the restructuring within our U.S. mortality portfolio of EUR 640 million. Overall, the positive cash flow fueled the strong growth in assets under own management to an all-time high of about EUR 55 billion. This growth was additionally supported by ForEx effects and the issuance of EUR 750 million in hybrid capital, already known in March. This bond issuance is also visible on the next slide, bringing our total hybrid capital to EUR 3 billion. Despite this issuance, we still have material flexibility in regard to our total hybrid capacity. On the right-hand side, you can see that our strong profitability is the main reason for the increase in shareholders' equity. And additionally, the change in OCI was slightly positive because negative valuation effects were offset by positive currency translation. On that note, I'd like to hand over to Clemens, who will explain the figures in more detail.

Yes. Thank you, Jean-Jacques, and good morning, everyone. I would dive straight into the reporting for our business groups. And start with P&C, we now look back at all important renewal dates in 2021. You can see gross and net premium in P&C reinsurance grew by a remarkable 18% adjusted for currency effects. The growth is highly diversified with particularly strong momentum in North America, in Germany and in Southeast Asia. On top of this, we successfully expanded our structured reinsurance book and we also were able to increase the volume of our facultative reinsurance book. As in previous years, we would expect the growth in gross premium to slow down somewhat, however, the net premium growth should remain more stable. As you all know, the impact from large losses was significant in the third quarter of 2021. For Hannover Re, this resulted in net large losses of EUR 1.07 billion for the first 9 months, clearly above our budget of EUR 849 million for the first 9 months. The net loss estimate for COVID-19-related losses, however, remained unchanged at EUR 950 million. Altogether, the combined ratio of 97.9% for the first 9 months is very solid in light of the observed loss activity and the underlying figures are in line with our targets. Net investment income in P&C increased based on strong ordinary income, higher realized gains and lower impairments. Other income and expenses include negative currency effects of EUR 105 million. In the previous year, we had almost the same amount as a positive contribution. And I alluded to that already in the second quarter, that it is mainly an accounting mismatch as we have a similar movement in our equity. Altogether, the EBIT increased strongly to EUR 161 million, thanks to the improved investment results and the favorable underwriting results which have been heavily impacted by COVID losses in the previous year. Finally, the tax ratio is at normal level. On the next slide, as mentioned, total net large losses accounted for EUR 1.07 billion. That's EUR 221 million above budget. This means that we have already almost reached the level of EUR 1.1 billion budgeted for the full year after the first 9 months. Of course, the year-to-date budget overrun is absorbed in the Q3 result and hence, the EUR 251 million budgeted for Q3 -- for Q4 are still available. On the next slide, looking at our large loss list, the 2 largest events were unsurprisingly the European flood with a net loss of EUR 214 million and Hurricane Ida with EUR 306 million net for our account. On top of this, we have seen further increases in the loss estimates for Storm Volker and the Texas freeze on the NatCat side. However, man-made losses also increased by slightly more than EUR 100 million in Q3, almost entirely due to the rise in South Africa, which are included in the property losses with an amount of EUR 94 million. Altogether, the impact from both NatCat and man-made losses was significant in Q3, pushing the actual loss experience above the budget for the first 9 months. The next slide, as usual, shows the technical profitability of our P&C portfolio by reporting line. The picture, I'd say, very much reflects the large loss situation. I've just explained, combined ratios for EMEA are affected by the European floods and by the rise in South Africa. While the Americas include significant losses from Hurricane Ida and the Texas freeze. The worldwide markets show a rather mixed picture, facultative and agricultural business are mainly impacted by large losses. And the technical profitability in credit and surety, as well as in aviation and marine is really excellent, driven by favorable underlying loss development and positive reserve runoffs. Let's move on to life and health then. On the next slide, the pleasing business growth is reflected in both the premium and in value of new business. And really, I'd say, comes from all our 4 reporting categories. Growth is actually quite diversified by region as well. And as Jean-Jacques mentioned, the technical result was still affected by losses in connection with COVID-19. Around 85% of the losses stemmed from 2 markets, EUR 197 million from the U.S. and EUR 149 million from South Africa. The losses in South Africa were particularly significant in the third quarter, whereas the losses from the U.S. were lower than in previous quarters. On the positive side, we recorded a positive effect of EUR 99 million from reserve releases for our longevity portfolio in part, just to really avoid misunderstandings, I think this need some additional explanation. You might be wondering how we can have the reserve releases when we have locked-in assumptions according to IFRS 4 accounting and usually we do not even have to set up reserves for these kinds of treaties. The reason is that we have so-called provisions for adverse developments and as Claude already explained at our Investors Day not long ago, in recent months, we have received updated mortality data from our clients, showing that the mortality within our in-force portfolio has been higher than expected. Hence, we could release those provisions for adverse developments of those paths because more people in our portfolio have actually died than initially assumed, not because we assume any different mortality trends for the future. In other words, the impact does not reflect any general change in assumptions for our longevity business, which would be uncertain, but only higher mortality in the in-force book, which, of course, is completely certain. Furthermore, it is also important to note that the updated mortality data is largely for pre-COVID period and not affected by the pandemic. Finally, as explained in our Q1 conference call, the restructuring of parts of the ING portfolio in U.S. mortality led to a positive one-off effects affecting various line items in the P&L. In total, the positive impact was EUR 129 million. The ordinary investment income was in line with expectations. The fair value of financial instruments decreased materially. The negative impact was driven by the valuation of the derivative embedded in a life reinsurance contract in the U.K. Additionally, the previous year had benefited from positive valuation gains from an equity participation. Other income and expenses, mainly driven by a further increase in the contribution from our financial solutions business, a large portion of which is recognized according to the deposit accounting method. Currency effect here, in life and health had a rather minor impact. Altogether, the EBIT of EUR 220 million is satisfactory, reflecting the aforementioned positive and negative extraordinary effects. On the next slide, as usual, a quick look at the non-IFRS metric for business growth in life and health, the value of new business according to Solvency II. In Q3, we again took advantage of the attractive opportunities for financial solutions in the U.S., but also in China, and we further expanded our longevity book in the U.K. The total value of new business for the first 9 months supports our full year minimum target of EUR 250 million. Furthermore, the pipeline currently looks very promising, and I would say we are well on track in terms of new business production. On the next slide, the development of our investments. I think it's fair to say that the development in the first quarter -- in the first 9 months of the year was very satisfactory. The ordinary investment income is particularly strong. The main drivers for this development are the excellent returns from our alternative investment portfolio, then the overall asset growth fueled by our very positive cash flow as well as the impact from increased actual inflation numbers and the associated positive impact on the amortization of our inflation-linked bonds. Realized gains have also increased compared to last year and mainly the results of routine portfolio management as well as some strategic sales. We mentioned the sale of listed equities in the first quarter, which have contributed EUR 50 million to the realized gains. Impairments and depreciations decreased compared to the previous year, where we had recorded some impairment in the more volatile market environment. So this year's number is more or less at expected low levels to a large extent, comprising regular depreciation on our real estate portfolio. As explained in my comments on life and health, the derivative valuation was negative. So the overall return on investment was 2.9%. Hence, we expect to achieve a higher return than our initial full year expectation of roughly 2.4%. Unrealized gains, as you can see here, decreased by around EUR 500 million, mainly due to the increase in interest rates compared to year-end 2020. On the next slide, well known, I think the asset allocation developed in line with our strategy. The most notable change is the reallocation from government bonds to corporate bonds. The focus here is on large and small corporates in developed markets. The contribution to ordinary investment income is diversified as usual. The highlight, as mentioned, is probably the recovery in the contribution from private equity to the strong levels we had seen before the market volatility caused by the pandemic. To conclude my remarks, the first 9 months and in particular, the third quarter proved to be a challenging period for the reinsurance industry. Therefore, the overall result and the fact that we have confirmed our full year profit guidance for 2021, highlights Hannover Re's strong ability to manage and absorb volatility. On that note, I hand back to you, Jean-Jacques, for the comments on the outlook.

Thank you very much, Clemens. On the next slide, the target matrix confirms Clemens' summary, most notably our main profitability target for the group. The return on equity is well above our minimum target, even though the underwriting results in both P&C and life and health are impacted by extraordinary losses. This also means that the EBIT growth targets in P&C and life and health are somewhat distorted by COVID claims. These targets being more oriented towards normalized growth over the course of the strategic cycle. More importantly, growth is significantly ahead of the strategic targets, providing a strong basis for a successful business development in 2022. So before we move on to the outlook for next year, let's have a brief look at our guidance for the year 2021. As mentioned, the profit guidance remains unchanged. Thinking about the individual components contributing to this number, the premium growth is stronger than initially expected and together with a higher return on investment, this should be sufficient to compensate for higher-than-expected large losses in P&C and higher-than-expected COVID losses in life and health, which were also partly offset by a positive one-off effect as we've seen. For the fourth quarter, a further impact from COVID claims is likely in life and health, even though the development of the pandemic remains uncertain, the accelerating vaccination progress in South Africa, in particular, provides the basis for decreasing excess mortality in this country. The targeted ordinary dividend according to our new definition, as communicated at our Investors Day is at least the EUR 4.5 paid out this year. As before, we will consider paying a special dividend on top of this if the capitalization exceeds our capital requirements for future growth and profit targets are achieved. And as of today, I'd say that both cycle strains are being met. As usual, at this time of the year, we published our guidance for the expectations for next year. As mentioned, growth opportunities are attractive, and we therefore expect gross written premium to increase by at least 5%. As in previous years, the growth is likely to be more pronounced in P&C reinsurance. The return on investment should be at least 2.3%, the 10 basis points being a decrease, being -- versus our initial guidance for this year, reflecting the low interest rate environment with reinvestment deals below our portfolio yields. The group net income is expected to be within a range of EUR 1.4 billion to EUR 1.5 billion, an underlying improvement of around EUR 250 million compared to our guidance for this year. The main driver for the improvement is the profitable growth in this and previous years, in particular, in P&C reinsurance. And this growth is not only leading to an improved underwriting result, it has additionally led to a very positive cash flow, which in turn forms the basis for the favorable growth in assets under own management. And the increased asset base is expected to more than compensate for the slight reduction in relative returns. In life and health, growth is similarly helpful, but the profitability is also expected to improve. The uncertainty in life and health is somewhat higher due to the future development of the COVID-19 pandemic. And with this in mind, we have added a disclaimer to the effect that no material COVID losses are included in the guidance. In addition, we have not included any potential relief from our mortality retro cover, which is likely to pay out in 2022. So there is some allowance for COVID claims embedded in our guidance, but no significant numbers. Apart from this, the guidance is under the usual provisor that large losses stay within the budget. In P&C, the budget has increased to EUR 1.3 billion. And of course, also that -- there are no major distortions in the capital markets. The increased large loss budget is mainly a reflection of business growth. Last but not least, the dividend policy is the same as for this year, the ordinary dividend announced in March 2022 will be our floor for the ordinary dividend, and we have a potential special dividend on top. Altogether, our guidance reflects the positive development and the successful cycle management of the group and we're quite positive about the outlook for next year. This concludes my remarks. And as always, we would be happy to answer your questions.

[Operator Instructions] And the first question is from Andrew Ritchie, Autonomous.

Can I just dig in a little bit more to the increased cap budget for 2022, the EUR 1.3 billion. Could you split that between man-made and NatCat? Because I noticed you give that split now -- you gave a split for '21. I guess I'm just curious, the budget is growing 18%. Is that a proxy then for your expected NEP growth, or is it growing slightly ahead of NEP growth? I'm just trying to frame when you talk about it growing in line with the business to what degree it really is just the business volume, or there's anything else going on? My only other question was on the longevity release, thanks for the additional color. I'm just trying to judge, would there be like another possibly 2 years or something before we'd have mortality -- before you got more information again from cedents to update again and release further pads. Is this something who could be that much of a gap between when you look at it again because of the nature of the slow information flow from cedents?

So first question, Sven, on the NatCat budget, and Klaus will address the longevity release.

Yes. As regards to the major loss budget, happy to give you the split man-made versus NatCat. So we kept the relative percentages close to the distribution we had in 2021. So it's roughly 80-20. And to be precise, EUR 250 million out of the EUR 1.3 million (sic) [ billion ] is man-made and EUR 1.05 billion is the network catastrophe. The growth is not a proxy for our premium growth ambitions for next year. As always, it's the mix between the growth we have seen already this year, and there is a natural time lag translating this into our major loss budget, and the development of the major loss budget and some of the anticipated growth we expect for next year. The bulk of the increase on the NatCat side is growth related. There's only a smaller portion going to model changes, which we are doing on an annual basis, where we are validating our current modeling assumptions. And given the losses over the last 3 to 4 years, of course, there are always some minor changes here and there. And some of that is flowing through into the major loss budget increase for 2022.

Now happy to take the question on the longevity side. The way how it works is we -- our counterparties are either pension funds or in some cases, life and pension insurers and especially the pension funds, how do I say that tactfully, I'm not at the forefront of modern admin systems. And they are not used to reinsurance accounting. So when they take out this reinsurance is probably the first and only time they do that, and they have to change their systems to administer that. And that takes usually at least a year sometimes 2, sometimes even more. We have grown a lot in the last couple of years and got an awful lot of these border holes, and we did the pricing and when the treaty was concluded, it was also agreed that we get at least annual updates. Sometimes we get these, sometimes we didn't, sometimes we have to ask for it. So a delay of 2 years is probably the norm. And when we get these updates, of course, we get accounts, but we only see the fixed lag which is fixed from the outset. We know exactly these numbers, they don't even have to send it to us, and we see the variable lag, the monthly, quarterly pensions we have to pay. And as long as we see that the fixed lag is higher than the variable lag, we know that the treaty is basically going according to plan. And then we just book these numbers. What we get as additional information from the border holes is, are there people who died, if they are younger in terms of the annual monthly pension. It might be the same if somebody of age 60 gets 1,000 pounds or of age 90 gets 1,000 pounds. So in the monthly accounts, you don't see a difference. But if somebody who is 60 died, and we had a lot of these claims more than expected, then the impact on the profitability is much higher than if somebody at the age of 90 died because the remaining pension time would be much, much shorter. And we try to be -- as we were with these border holes. But due to some other work, especially writing new business, our people -- we're not completely up-to-date with the analysis of the border holes we received. And then we took a major effort last year to start getting this up-to-date. And again, this year -- and you can expect this for the future. If we don't update the border holes and release the pads as Clemens mentioned earlier, you should expect that our profits are improving from year-to-year in small, very small steps. And then only as soon as we take the border hole and clean up for the people who have died more than expected. And obviously, we can release all the provisions for adverse deviations for these -- that people because we definitely don't need it. Then you will see a big profit like you see this year. This should happen regularly every 2 or 3 years.

But Andrew, if I might add, you shouldn't see that as a recurring result, EUR 100 million you've seen this year. So it's really -- as Klaus meant, it's a bit of a cleanup to be honest. So there will be an effect in every year going forward. But certainly, not to that amount that we've seen here.

But just to make one point clear, this is not a new assumption setting for mortality in the future. This is cleaning up the portfolio for people who have died. And therefore, clearly, we don't need to pay any longer.

The next question is from Vinit Malhotra, Mediobanca.

So a few questions, please, if I can. First is that I'm noticing -- I mean, you're talking about solvency SCR growth, but I can't seem to recollect that it was there, for example, similar period last year, or might have been, but we didn't really mention it. The growth was similar. So just wanted to know, is there anything more remarkable in that number? And this is more a quick check, really. Second question is on the combined ratios, in credit. I think I can backcalculate 3Q is about 73%. I remember that we keep talking about how the economic recovery and insolvencies and state schemes going away. Is there any reserve movement here or anything more notable, please? Just one more question on retro, please. The burn recovery is very, very high. I mean 240 net, gross 643, I think, is one of the very strong recoveries for a single loss. Could you comment on that, with also some comments please on Texas freeze. And just lastly, please, the cash flow of EUR 1.5 billion is very, very high -- very high as well. You mentioned investment income, growth in the business, but is there anything more remarkable? For instance, I mean, there would also be payouts to be made on the EUR 1 billion plus of losses. Would that be affecting cash flows in the future as well? So I just want to understand the cash flow.

[indiscernible] Solvency II and cash flow, Clemens will give you the status and credit and surety combined ratios and large losses, Sven will comment on this.

Yes, Vinit. Let's start with the Solvency I. So it's really, as Jean-Jacques mentioned, the SCR increase. Our own funds have largely not moved at all. So if we would be looking at, let's say, a stable SCR, the Solvency II ratio would mainly be on the basis of Q2 of EUR 250 million roughly. So it's really the SCR that increased heavily. It's the usual exercise that we do in Q3. First of all, it's a reflection, as Jean-Jacques mentioned, on the current business growth that we've seen in this year, but also regularly in Q3, when we do our planning cycle for the next year, we include in our SCR model, in our internal model, the expected new business, both in P&C and in life and health -- in our SCR calculation. And that's the reason why the -- why that's the main driver of the decrease in the Solvency II ratio. Again, it's the usual exercise. I'm just looking at the Q3 numbers for the last couple of years as we speak, Vinit. And it's always been the case that we have seen a dip in Q3, actually. And I would expect with their own funds and looking at our reserving positions, et cetera, in Q4, I would expect that number to increase again in Q4. What is probably also worth mentioning is the slight reallocation in our asset portfolio and our investment -- more to a bit more alternative investments, et cetera, I think that has also contributed to an SCR increase. But again, I think that will -- when we look at our reserving, when we look at our new business from an own funds perspective, we will be reflecting that in Q4 and then in the next quarter. On the cash flow, nothing really significant. I mean, Jean-Jacques mentioned, for example, the Q1 effect from Voya and of course, the bond issuance, et cetera. But in Q3, it's really the business inflow. And I think what is probably worth mentioning here, Vinit, is the fact that we have seen very low payout ratios when it comes to our claims. I think that's probably the main driver that the cash outflows for large losses have been lower than I would have expected. I hope that answers the question, Vinit.

In the credit and surety combined ratio, what you are seeing here is the impact of positive runoff from old underwriting years. We are still reserving the young underwriting years at higher-than-average combined ratios due to the uncertainty, what will happen to the level of insolvencies once the various economic stimulus packages are phasing out. But the runoff for the older underwriting years is more positive than expected, given that we now had a period of 1.5, 2 years of economic stimulus. So the short-term level of insolvencies were below our original assumptions. And as a tail on trade credit is not particularly long, so 3 to 5 years, we could now release some ultimate loss ratios from those prior underwriting years. When it comes to the burned loss, you're right. the difference between the gross and the net is relatively high. This means that we could collect the burned losses from both our K transactions, but also particularly from our whole account protections, which explains the difference between the two numbers. Hurricane Ida, on the other hand, the bulk of the difference between gross and net, which you are seeing is actually the difference coming from the ILS business, which we are fronting. So almost EUR 180 million out of that gap is coming from our fronting activities. So on Ida, we had K -- we have booked K recoveries, but no further excess of loss recoveries towards our net position. And on the winter storm in the United States, we unfortunately had another round of negative runoff in the third quarter, which is due to the very late reporting from ceding companies on that freeze loss. So this was a little unexpected. But given the situation with loss adjusting and capacity for construction in the U.S., the reporting is slower compared to the usual reporting periods we are used to. But we are under the assumption now that we should have seen the full impact of Winter Storm Uri with the third quarter figures.

The next question is from William Hardcastle, UBS.

Just a quick follow-up on that. So essentially on the fronting business, is what you're saying, the difference between the gross and net, obviously, on the flood is bigger versus Ida? Is that because there's greater fronting on European business, is that what you're saying there?

No, not at all. That's not what I was saying or trying to say at least. When it comes to the German business, we hardly do any fronting. So the difference on burdens between gross and net is really our own retrocessions. So the gross number you're seeing is also almost exclusively our own writing. That situation is different on Ida. The U.S. portfolio is the peak portfolio in our fronting activities. So therefore, out of the EUR 527 million of gross, approximately EUR 180 million is fronted business, while on burn, it's almost 0.

Okay. So quite the opposite of what I was saying. So effectively, your retro kicked in far stronger on your own account from the floods than it has on Ida. Is there anything why that's happening? Is there specific reasons?

Well, it's a question of market share, given that our subsidiary for the German business, the E&S is from a market share perspective, the market leader in the German business. Our market share in Germany is just much, much higher on the business in general. But also the NatCat component within the business, compared to where we are in the United States, where our market share on cat-related business is underweight.

Okay. Sorry. I'll go to my actual questions now. What benefit did the reinstatement premium have in Q3 for P&C? And is this already factored in when you provide the 2022 outlook for, say, greater than 5% and perhaps any quantification of what that impact is? And the second one is -- You've touched on there on the 2022 guidance, no material COVID-19 impact in life and health. Just for clarity, it sounds like you're not assuming it's 0, but certainly less than something like EUR 100 million. Is that a very fair assumption?

On the reinstatement premium, we are immediately booking those reinstatement premiums when we are booking the losses. So there is no spillover effect into 2022 from reinstatement premiums. I don't have any precise numbers for you on how high exactly those reinstatement premiums, which we have booked in Q3 were. So rather than speculating, I guess we will have to come back to you on that.

On COVID life and health, William, I think your assumption is right. We have built in some expectation in our 2022 guidance for COVID-related claims. It's not going to be a triple-digit number. It's somewhere a double-digit number, I think that we've baked in. On top of that, though, we still have the potential coverage from our retro pandemic cover in life and health that will be most likely paid out in 2022. So that will give us an initial buffer for the year. But as Jean-Jacques mentioned, it shouldn't significantly deviate from those numbers.

And just on that pandemic retro cover. It sounds like you feel very confident that will pay out now. Is that because Q3 losses for excess mortality came in ahead of your expectations that it's effectively giving you greater certainty that it will kick in. Is that how we should read that?

Yes. Well, that's absolutely correct. Currently, the ratio stands at about 113% according to our own calculation. From a formal point of view, there will be a calculation agent who will do the calculation as soon as he gets the official statistics for the years 2020 and 2021. So that will take some time in 2022 before this information is available. But according to our own calculation, we are getting close to 113% now.

Just for clarity, when the coverage is -- it's a parametric trigger and the coverage is U.S., Australia and the U.K. So it's not South Africa.

The next question is from Thomas Fossard, HSBC.

A couple of questions. The first one would be related to work from the '22 guidance versus 2021, if you could add maybe a bit of color on the underlying assumptions you have taken. The second question will be, regarding COVID scenario for 2022, I guess that you've built something in into your 239% Solvency II ratio already given it's forward looking in terms of calculation. So would you mind saying maybe a range of what you're already expecting for 2022? And the last question would be just to come back on the 2.3% return on investment guidance for 2022 and especially knowing that you reported 2.9% or 2.8% ordinary investment income in 2021. I mean you've got the support from private equity, from inflation linkers. But I'm wondering if the 2.3% should be -- if nothing exceptional is in the reported 9 months 2021, I'm wondering if the 2.3% should be compared to the 2.4% 2020 guidance or to the 2.8% 2021 and the 2.3% seems to be super, super cautious given what you achieved this year.

Yes. Thomas, let's probably start with the guidance for 2022. So overall, I think without going too much into the details, the core question is where does the increase in net income mainly stems from. It's clearly a mix of effect in the bottom line. First of all, of course, the significant business growth that we've seen both in P&C and in life and health. And in P&C, the quality of the book should have increased over the last couple of years. So we will certainly increase -- we'll see an increase of profitability in P&C here and there. And of course, the overall amount of the growth will be reflected in higher EBIT numbers in P&C. On the life and health book, as mentioned earlier, the expectation is that we will see significant less COVID-19 claims in the life and health segment. So the underlying profitability of the business should come through in 2022. That will be another large contributor. On the investment side, I think, yes, when you look at the numbers, they do seem very cautious for 2022. We are optimistic that we will at least reach that number, the 2.3%. But I'm just conscious of the fact, of course, that we've seen sort of a rebound in the contribution from alternative investments. That amount has been significant, I think, roughly EUR 100 million of our ordinary income is only related to an increase compared to last year of the contribution of alternative investments, mainly private equity. So I wouldn't really factor that in going forward. For every year, I think that it did come a bit that's a surprise for me, to be honest, also the valuations on the private equity side, which have increased significantly. So I wouldn't really want to expect that amount for 2022. Inflation-linked bonds, the same picture there. We have seen a huge contribution probably EUR 100 million more this year as well as compared to last year, given the current inflation environment and the way the amortization of our inflation-linked bonds work. So there are 2 -- at least 2 effects in the ordinary already that we will see to some extent in next year, but we have been a bit more cautious on that end. On Solvency II, if I got the question right, Thomas, but please add. So how much from the SCR increase would we attribute to our growth in 2022. I don't have the exact number, but I think overall, it's certainly on the Solvency II ratio probably a double-digit -- low double-digit number -- a high single digit, low double-digit number that is attributable to that effect. But again...

I was more thinking about the prospective COVID-19 mortality losses that you are expecting to incur in 2022, which may already be reflected into your Solvency II ratio at Q3?

Yes. No, that is not -- I don't think that is included in the SCR and in the own funds yet. We will do an update of that planning and the effects, I think, in the fourth quarter, but it's reflected. But it wouldn't be in a substantial amount, as mentioned earlier, anyway.

Yes. Yes.

Sorry, Thomas.

The next question is from Iain Pearce, Credit Suisse.

The first one is just on the growth numbers. When we look at the impact on the Solvency II ratio and the increase in the cat budget, the implication is probably that growth is going to be significantly ahead of 5%, especially in P&C Re. So firstly, do you think that's a fair assumption? And then secondly, is there anything in terms of life and health growth that you're thinking is going to be lower that's leading you to maintain that 5% growth target? The second one was just a quick clarification. The life retro kicks in, is it 110% excess of normal mortality, the trigger for that parametric cover? And then the third one was just on longevity releases and the potential for these going forward. I sort of -- you sort of cautioned us against factoring in too much here. But if you think -- if I'm thinking in sort of your key longevity market, mortality has been trending favorably consistently over the last couple of years before we even factor in any impacts from COVID. Why should we not be thinking that these are going to be some -- there's going to be continued favorable longevity developments there?

Thank you. So Klaus, maybe you can address the life and health points and the growth in P&Cs and you can add a...

Okay. Let's start with the growth on the life and health side. We are quite optimistic that we are growing, but most of that will be -- and this is where our focus is on the bottom line. It's not on the top line. Top line happens every now and then. And -- you have to understand there are basically 3 ways to grow the top line here. On the -- either we really write new large blocks of business that will increase top line, or most of our treaties on the mortality side, morbidity side are YRT treaties. And as these treaties get older, you know, that mortality rates, morbidity rates grow exponentially. So the risk premium grows, even if nothing happens, even if no new policies are added. These treaties grow for the existing portfolio because we have risk premiums, which are growing. Of course, at some point in time, this goes the other way because in 50 years, all these treaties have run off. But as long as they're still young, 10, 15 -- sorry, 10, 15 years old, these treaties are growing. And then, of course, we have treaties which are open for new business, and this is another source of growth. So in general, we expect to reach the 5%, maybe a little bit more, but this mainly depends on large block transactions, especially on one of our focus areas, and that is longevity. Then your question on the retro, yes, it kicks in at 110% population mortality. And that is the, as mentioned earlier by Clemens, it's a weighted average of the U.S., U.K. and Australian population mortality weighted with the portfolio of Hannover Re. So we try to get the correlation between this parametric cover and the results in our own portfolio as high as possible. So we try to optimize that by using our own portfolio structure to define the parametric cover. And as I said earlier, it currently stands close to 113% according to our own calculations. And then the longevity release, yes, we are -- when we started 15, 20 years ago, with longevity and nobody else was doing that. We embarked on a pretty conservative way of accounting for that. So in the first couple of years, and this is still valid today, we only show about 2% to 3% profit in terms of an EBIT margin. And if the portfolio developed as expected, we would see and you have seen that now, a release of these pads, especially when we do these cleanup of portfolios. With COVID, especially in the U.K. because the U.K. is the largest market. We had a lot of claims and most of these claims have not been accounted for fully because the release, you have seen probably only includes the updated portfolio information 12 months ago. So an awful lot of COVID is still not in there. That is something what we hope to release sometime in the future as soon as we know that we have valid data for that from the client.

On P&C growth, Sven, you want to add...

Yes. As I said earlier, the increase in the major loss budget is not a good proxy for our expected growth in net earned premium on the P&C side next year. From a process point of view, we are fixing the major loss budget in the autumn of the previous year, so like we are doing now. So the EUR 1.3 billion is fixed for 2022. Same, of course, goes for the EUR 1.1 billion we fixed for 2021. And when we were fixing it at the time, we did not expect a premium growth of above 14% after 3 quarters on the P&C side, but we were more expecting a growth in the 5% to 7.5% range. So a good part of the increase in the major loss budget is explained by catching up with the actual growth which we have achieved in 2021 plus then the expected growth for 2022. As Jean-Jacques said, for 2022. We are expecting a more pronounced growth than the 5% on the P&C side. But you should think more along the lines of the midterm average I gave you during the Investors Day, i.e., the at least 7% number I gave you a few weeks ago rather than the 14% after 3 quarters. By the way, the growth number will come slightly back more towards a 10% growth number on the P&C side on the -- for the full year. The reason why the growth rate in the third quarter was particularly high, as said on our biggest structured contract, we have increased our share. So there was a significant premium entry booked in the third quarter. But under that contract, we -- every year, to have the appropriate premium distribution on an earned basis and written basis, there will be a significant number of premium booked out in the fourth quarter in 2022 on that particular contract. And that's why the final number for P&C will be closer to the 10% rather than staying at the 14% and above percent where we are after 3 quarters.

The next question is from Darius Satkauskas of KBW.

So your Solvency II ratio have declined 11 percentage points since the end of July. Could you tell us how many Solvency II points did the expected growth account for? And then -- Is this capturing the next 12 months, so the full Q -- 2022 as well? Or -- sorry, is it catching the next 12 months or the entire 2022? And then lastly, do you have a comparable figure for last year? Because if I look at the Solvency II decline in 3Q 2020 relative to 2Q, 1H '20, it's much less pronounced. So Yes. Could you give us a comparable figure if possible?

Yes. On Solvency II, it's actually the business growth that we've seen in 2021 that is reflected. So we've updated our model for the current business growth, which has been significant so far. And also, it includes the full 12 months of 2022. So that's really the usual planning cycle that we complete in Q3, and then we include that in our SCR calculation for the full year 2022. So that's a new business, both in P&C and in life and health. So that increased. And then, of course, the higher capacities here and there in P&C and life and health. So that's the main driver. I don't have the exact number, but it's going to be a double-digit number, which has been offset by some other effects, but I think it's about a double-digit number, yes. And again, another contributor was, of course, the asset risk due to our slightly changed asset allocation and the increase in alternative investments, as mentioned earlier, that was another contributor.

And we have a follow-up question from Vinit Malhotra, Mediobanca.

Sorry to ask again, but on the life side, I mean, I'm just curious about a few things, please. One is that, if I just start with the operated -- the reported EBIT of EUR 41 million and [indiscernible] COVID mortality takes out the longevity EUR 83 million. And then somewhere from the presentation, I picked up that, that financial -- the deposit accounting was also EUR 95 million. So X deposit accounting, we actually have a loss of about EUR 12 million. And I've been made aware that there are some derivatives which went against the financial statement. I mean, is there anything that you could comment on this surprisingly negative results on the life side, please? That's really my question. And second question is on this cover on the pandemic, I think there was a conversation also in the 2Q results. It was mentioned that the cover wasn't being activated yet because of Australian mortality trends, if I expect. Has that changed? Or is there some update on that, that makes you think that next year you could choose cover? And last follow-up is I'm getting a question from [indiscernible] as well, is there any idea to break out this burn between K and the whole account, please?

Okay. The first question was. The EBIT. I fully understand that you do a little bit of, let's say, recalculation, take a few things out and add others back in. But the COVID reporting of COVID claims is, let's say, at least very delayed, if not completely unreliable. So making calculations, especially on a quarterly basis, what the usual number would be is quite difficult. We don't get correct information from all our clients, and we definitely don't get it in time. So adding or subtracting COVID claims from, let's say, audited claims numbers is -- it's a nice intellectual exercise, but I would not necessarily rely on the outcome here. I can't see that we have a negative. Of course, we had a negative result if you look at the COVID claims on mortality side, it's highly negative. But we have a very stable financial solutions result. What you have seen in the other result here is the EUR 351 million of which EUR 278 million is deposit accounting treaties, and they are completely unaffected by COVID. We also have a very positive longevity results plus even if you ignore the one-off of nearly EUR 100 million, which is also only slightly positive, impacted by COVID. And the 400 million COVID claims, of course, drag it down, but the underlying profitability is extremely high and stable. The great unknown for us is how the next COVID variant will develop in '22. And nobody can tell you anything about that.

We need to briefly add, probably it just brings to my mind, what is the driver and which might explain what you have observed is in part what Klaus mentioned the profitability of the underlying business, but has probably been a bit more pronounced in the first and the second quarter and less in the third quarter. But then on top of that, I think the investment result on the life and health side is less pronounced than on the P&C side. That's mainly attributable to the fact that alternative investments are mainly sitting within our P&C book. and also the contribution from inflation linker is mainly P&C. And then we have the mentioned derivative in the U.K. results. And that is -- that was a deviation in the third quarter of roughly EUR 10 million. So overall, that should round up the picture probably.

But definitely, the reported COVID claims, not necessarily booked claims, but as the identified COVID claims have a reporting lag of 4 to 6 weeks. And even then, they are not necessarily reliable because an awful lot of people -- everybody who gets into a hospital gets tested on COVID. And if it's positive, even if this has nothing to do with the fact that he just had a car accident and ends up there. And if he dies, he will be reported as a COVID claim in many countries. That stuff happens. So I don't really rely on this analysis, definitely not on a quarterly basis. And then could you just repeat your question on the retro, whether we have included that already in 2021?

[indiscernible] the life pandemic cover was already running at a higher -- and I think at 2Q, you had said that you were not yet counting it in or factoring it in because of Australian mortality trend. Maybe I'm misunderstanding the whole thing. But...

No, we have -- The cover is for all 3 countries in total. So it's a parametric cover, and this stands at 100% and close to 113% right now. If nobody dies for the rest of the year, this will fall below the 110%, and we don't get anything. It's unlikely that we don't even see normal mortality. So I expect definitely something in -- for this year, but it will only be calculated next year because the calculation agent relies on official statistics and official statistics -- population statistics for 2021 will only be available sometime in 2022. And sometime is not January, February or anything like that, but the second half of the year. These are civil servants who produce that. And the calculation agent will only start calculating the final recuperation for us here as soon as he has all the official statistics from the U.S., from Australia, from the U.K.

And the 32 million booked in the U.S. COVID 3Q, that looked a bit lower, and that could be also this late reporting, Klaus, that you mentioned? That -- in the third quarter, the U.S. was rather low mortality booking of 32 million versus the deaths in the excess rate was nearly 100,000...

Sorry, I think the effect in Q3, the overall effect in Q3 was EUR 140 million, EUR 70 million to EUR 80 million stemming out of South Africa. So that was the bulk. And I think probably a bit higher number than you assumed for the U.S. actually. But that was as expected, Klaus, wasn't it, in life and health in the U.S.

Yes. And on burn, Vinit, you know that we have placed a little over 300 million of whole account coverage. So you should think about burns in the terms of being a substantial partial loss against our whole account tower. I would not be comfortable to give you the precise split for the simple reason that the loss happened in the quarter. So therefore, we have not received enough information yet to book each and every element of the loss on a bottom-up basis. So there are still some top-down assumptions included in our gross number for burn. And depending on how that will fall in the end on individual contracts, the split between K and whole account is subject to change. So whatever split I would give you today would be subject to that change. So therefore, I would feel uncomfortable to giving you very precise numbers. But as I said, you should think about burn as a substantial partial launch against our whole account structure with the remainder going to K.

[Operator Instructions] We do have a follow-up from Thomas Fossard, HSBC. Your line is now open again.

Yes, two quick questions. The first one would be on the Life Re side, this longevity pad. I guess it was included in your EUR 600 million EBIT contribution initially targeted for 2023 and that you move to 2024. But just wanted to -- I guess it was included at the time of the Investor Day, but just wanted to update on that just to be fully aligned and fully clear. And second question will be on the P&C side, P&C NatCat. What's your overall assessment of the profitability of your book? Maybe you could share with us the year-to-date combined ratio or the return on allocated capital you're getting on this book despite running ahead of budget.

So the EBIT, Thomas, is indeed taking into account the longevity benefits. So that's including the EUR 600 million.

On the NatCat, so as Silke explained in the Q&A during the Investors Day, the net portfolio is modeling well against our profitability hurdle rate. So from a pricing point of view, the last 2 rounds of rate increases certainly helped to get that portfolio to a better level of profitability. We expect further rate increases on the loss-impacted business into 2022. So from that point of view, we are okay with our profitability on the NatCat side, but at the same time, as we already mentioned on the Investors Day, we will keep our relative risk appetite for NatCat stable. Nonetheless, we are not seeing rates yet, which would make us fundamentally change our risk appetite. On the results point of view, I'm afraid I don't have those numbers for you. NatCat is not a separate segment we are reporting upon, as you know, for few quarters now. So I would not be able to give you those numbers, but I can get back to you on those.

And there are no further questions at this point. So I hand back to the speakers for closing remarks.

Well, thank you very much for joining, and thank you for the great questions. I think we covered the ground very, very well. You've seen a year impacted by large losses on both business segments, but the numbers demonstrating resilience. Net income improved the ROE above 10%. And I think the key message is that profit guidance has been conferred for this year, with a positive outlook for 2022. The guidance for '22 shows both the growth trajectory of the company and the improved quality of the book. So I think the key messages were addressed today. Thank you very much for the questions, and see you next time.