Hannover Rück SE (HNR1) Earnings Call Transcript & Summary

Thank you very much. Good morning, everyone. A warm welcome to our conference call with an update on IFRS 17 and with the full year guidance for the financial year 2023 for the first time based on the new accounting standards, IFRS 17 and IFRS 9. We thought it would also be useful to share some preliminary key figures for the financial year 2022 today and not as usual in our renewals call next week. So I'll start with these numbers, which are still based on IFRS 4, of course, and then walk through the guidance by way of -- by commenting on both the underlying and the accounting implications around the key figures. And we will make sure we leave enough time for your questions later in the Q&A session. Starting on Slide 4 with the 2022 financials. It is pleasing to see that the group net income of EUR 1.4 billion is within the initial target range, and pretty much in line with the refined guidance towards the lower end of the range, which we provided with our Q3 results. Gross written premium increased by 12.7% adjusted for FX rates. The nominal growth was even higher at about 20%. Overall, the result is a reflection of the strong resilience of Hannover Re even in volatile times, and 2022 was certainly a challenging year for the reinsurance industry. In P&C, large losses came in above the full year budget in particularly driven by our precautionary reserving for the Ukraine war. Additionally, we have recorded a negative runoff for large losses from prior years, and a high claims frequency from our accident and health business in Southeast Asia. A part of the negative development has been mitigated by reserve releases for COVID-19, and also by other reserve releases. In life and health, both the reported earnings and the underlying developments were favorable. Our pandemic retro and some positive effects from equity participations in the fourth quarter, have mitigated the negative but decreasing impact from COVID-19 claims. With a return on investments of 3.2%, the investment income was very strong. On top of the favorable positive effect from increasing interest rates, we have benefited from a very strong contribution from our inflation-linked bond portfolio. Altogether, the return on equity of 14.1% is clearly above our target range, supported by both the underlying business development and the decrease in shareholders' equity from valuation effects. Looking ahead into 2023 on Slide 5. We have worked very hard to implement the new accounting standard IFRS 17 and IFRS 9. I'm not going to repeat what you will have heard many times over the last couple of months that this is only accounting, but I do want to reiterate our message from our Investor Day that we have adopted the new standard in a way that truly adds value for our stakeholders as opposed to just taking a regulatory box. This is also the reason why we went for the GMM approach for our entire life and health and P&C book and not the simplified PAA approach. This was, as mentioned in our Investor Day, a conscious decision in order to have a consistent and harmonized approach across our book using current estimates and assumptions and not looking at different measurement models within one segment. We also wanted to align the accounting as much as possible with our internal economic view. And on top of that, use the regulatory spend is leverage for transformational benefit, for example, on data granularity and consistency and on strengthening our system landscape and through our processes. So we are ready now, and we have put together our first plan based on the new accounting regime from which we derive cautiously our guidance for the financial year 2023, which you can find on Slide 8. So let's start with the overview on Slide 8 and with first line items in our newly established IFRS 17 profit and loss accounts, the revenue number, which, in our case, we will be referring to as reinsurance revenue going forward. I will comment later on how this reinsurance revenue under IFRS 14 can be viewed compared to a gross written premium number under IFRS 4. Based on the underlying business opportunities, we expect the growth in reinsurance revenue of at least 5%. The minimum of 5% growth is based on the underlying development. We will comment on the outcome of our P&C renewals in detail in our renewals call next week. So I do not want to preempt that call, but I can say that on the back of last year's strong growth, we have managed to remain disciplined and focus on further improving the quality of our P&C portfolio, which I believe we have managed quite successfully in the recent renewal. This is, to some extent, also reflected in our growth target, which, of course, includes both P&C and life and health. The return on investments is expected to reach a level of at least 2.4%. So there are a couple of thoughts behind this admittedly cautious number. So let me start with the underlying developments. On the one hand, the ordinary investment income will clearly benefit from the increased interest rate levels. On the other hand, the contribution from inflation-linked bonds within the ordinary income is expected to decrease quite substantially compared to the year 2022. For realized gains and losses, our current expectation is rather neutral in terms of P&L impact. And when it comes to the accounting impact from IFRS 9, there are only minor impacts on the general, let's say, level of investment income. However, as you know, the new regime comes with some greater volatility and due to the higher share of assets accounted at fair value through the P&L. I will come to the composition of our investment portfolio later and what that means in terms of IFRS 9, and you will see that we have managed to keep that fair value through P&L part still quite low. The relevant asset classes for us in this category are mainly private equity and real estate. And in particular, for those 2 asset classes, which have performed very strongly over the last couple of years, we do see some risks for valuation adjustments in the financial year 2023. And given the size of this portfolio, we have left quite some room in our ROI target for negative effects to reflect on this uncertainty. In both P&C and life and health, we are very confident that the quality of our portfolio is strong and particularly in P&C reinsurance, it has clearly further improved in the 1/1 renewals. These margin improvements are providing us with flexibility to add to our reserve buffers. And we are committed to not only restore these buffers, but also to materially increase the buffers in the current market environment. This approach, as you know, is very much in line with our overall reserving philosophy and cycle management. And on top of that, it should put us in a strong position in light of elevated inflation levels, which we also expect for 2023. In life and health reinsurance, the favorable underlying developments are accompanied by a moderate earnings uplift from the transition to IFRS 17 due to the unlocking of best estimate liabilities, we had to reflect some expected future losses in particular for U.S. mortality business in the equity at the transition date. This will have a positive impact on future reported earnings without changing the underlying expectations for the business. As this is a business with a long duration, the impact should also be seen as sustainable distributed over the lifetime of the treaties. The expected uplift of the pretax earnings level is in the mid- to high double-digit million euros. Taking all factors into account, the incorporated uncertainties, the potential for higher volatility into account, et cetera. We do aim for a group net income of at least EUR 1.7 billion in 2023. It is fair to say that this does reflect a cautious approach, but we are fully committed to deliver on this target even in volatile times. Last but not least, we have not changed our dividend policy. You will be aware that our dividends based on German GAAP financials and the dividend for the year 2022 will be announced in March together with the disclosure application of our annual report 2022. So on the next slide, let me add some more color to the guidance by way of going through the key metrics and see how they are being influenced by the current market environment on the one hand and by accounting changes on the other hand. Let's start with a general view on the potential impacts on this slide, and I'll start with P&C. So in a steady state in P&C, we do not expect major impact on the overall earnings level, on the volatility side, the IFRS 17, let's say, inherent asymmetric treatment of profits, which have to be spread for the lifetime of the contract and losses, which have to be recognized immediately could lead potentially to some seasonal effect on profit recognition in the quarter. However, we believe that our overall prudent reserving position and our strong retro strategy will even allow for compensating some of that effect. The discounting on the P&C cycle current assumptions will certainly provide a better view on the economics but it might come with some volatility. We have applied the so-called OCI option to align with our hold and sell approach under IFRS 9 and also to mitigate P&L volatility driven by interest rate fluctuations. In life and health, as mentioned earlier, we do expect an overall EBIT uplift and the huge benefit, I believe, is that the standard should allow for much greater stability of overall earnings given the steady CSM release over a long period of time, which will be further fueled by business growth. On investments, also in a steady state, no structural changes in the overall earnings level, we believe, in terms of volatility, there are different drivers, generally, clear the volatility is higher. However, the new standard will also remove some of the accounting mismatches for example, the material currency losses in P&C that we've seen because the currency gains, as you know, from our U.S. dollar private equity investments were presented in OCI as opposed to the P&L and those will be reflected in a separate P&L line item going forward. Also the U.K. derivatives that has produced more than EUR 100 million noneconomic accounting loss, I would call it in the investment income will going forward be part of the overall valuation of the reinsurance contract. On Slide 10, on the reinsurance revenue. Unsurprisingly, the newly defined top line, the reinsurance revenue was lower. Then the gross written premium is presented under IFRS 4 or U.S. GAAP. So why is that? Because IFRS 17 makes it very clear that the reinsurer should only present premium information in the P&L as purely, let's say, remuneration for reinsurance services and therefore, for example, reinsurance commission on a reinsurance treaty the IFRS 17 revenue will not be the ceded premium, but the ceded premium net of this commission. In summary, insurance premiums include also so-called investment component hence, an amount that will be paid back to the cedent and the cede and repayment of these non-distinct investment components do not relate to the provision of insurance services. Therefore, such amounts are not presented as part of the interest revenue or the insurance service expenses. Examples of these non-distinct investments components are profit commission sliding scales, no claims bonus and alike. In our place, structured business, which has used the written premium quite significantly over the last couple of years will have some of those features. On the life and health side, we have, for example, the financial solutions business under IFRS 4 -- or yes, under IFRS 4, these were classified as reinsurance contracts, and were accounted on the U.S. GAAP as deposit accounting with basically the fee being part of other income. Usually, those treaties come with the cash settlements of the reinsurance fee payable to the reinsurer, therefore, under IFRS 17, the CSM at inception is the present value of the fee income, and that net fee income is going forward part of the reinsurance revenue. So the minimum 5% growth of reinsurance revenue for the financial year 2023 does reflect partly those accounting changes, and as mentioned earlier, also a healthy pipeline, both in life and health and in P&C. On the next slide, you will find some comments around the earnings expectations in our P&C reinsurance segment and how the new accounting regime will have an effect on both the P&L and the combined ratio. Again, we are a strong forward opinion that the current environment is extremely attractive. And many of our underwriters I have been in touch with over the last couple of weeks, did mention that they haven't seen this for many, many years, if not decades, and we have already taken advantage of this environment by growing our book in the past and by further increasing the quality in the recent renewals. And we are also fully prepared to take full advantage of the market in the upcoming renewals. At the same time, the reinsurance industry has seen a couple of years with heavy loss burdens, and therefore, we will be using some of these substantial margin increases that we undoubtedly expect to find its way into our earnings and to increase our resilience results. Because we are fully committed to maintain our approach of prudent initial loss picks and overall prudent reserving, which will ultimately lead to positive runoff results being visible in the actual over expected development as part of the reinsurance expenses going forward. And we will keep reporting on our resiliency levels in our reserves on the back of the external actuarial report currently performed by Willis Towers Watson. We've also increased our large loss budget from EUR 1.4 billion to EUR 1.725 billion. This is a reflection of our overall net growth of our book and also, again, on the overall net position of our P&C book. So I did comment already on the discounting earlier. The current interest rate development should be temporarily slightly beneficial for earnings since the locked-in years and hence the interest accretion or the unwind of the initially locked-in years in the finance result should be lower than the discount effect on our new business, but it's difficult to foresee how volatile interest rates are going to be in 2023 and how exactly the impact is on our P&C earnings. On the next slide, #12, some thoughts on how you could think of the combined ratio under the new accounting regime, on the top of this graph, you can see that we will provide the combined ratio on a net/net basis given that this, we believe, is a better reflection of our business model. And if we were to take, let's say, if we look at the waterfall down there, we were to take, let's say, our strategic target of 96% from recent years, the combined ratio would be lower. There are some structural effects like the deduction of the aforementioned non-distinct investment components and commissions, which will lead to a lower combined ratio per se when you deduct those items from both the nominator and the denominator that effect could be in the area of somewhere around 1.5 to 2 percentage points on the combined ratio. Then the directly attributable expenses as part of the reinsurance service results are lower than the reinsurance admin expenses from IFRS 4, which will bring down the combined ratio by another roughly 0.6 percentage points. But the largest and certainly more volatile part is the discounting. So here, we use risk-free rates plus a liquidity premium. So this part of the combined ratio very much depends on the interest rate levels, which has been quite volatile over the last 1 or 2 years, as you know, and can actually spend from a low to high single-digit percentage point impact on the combined ratio. And we will be providing an update on these effects, I guess, with our first set of IFRS in Q1 numbers in May. So let's turn to life and health and to Page 13. The main drivers in terms of accounting change in life and health is that there are no locked-in assumptions under IFRS 17 as they were existing under U.S. GAAP. So this unlocking, if you like, at the transition date, together with the creation of the contractual service margin has caused a reduction in equity transition and will also lead to higher and more stable results in our life and health reinsurance segment. In terms of transparency and presentation, you will find the value creation and the CSM on the face of the audited balance sheet. And the insurance or reinsurance service results will now include the results from our previously deposit accounted financial solutions deals. Which I believe is really a huge step forward in helping you to understand the earnings and also the future earning patterns. This development is supported by a healthy pipeline of new business and particularly in financial solutions and longevity we want to grow our book further and also increase our regional footprint. So overall, quite positive outlook on the life and health side, if COVID claims further wind down as expected. Next slide, let's briefly look at investments. On the accounting side, I would certainly not call it a revolution like IFRS 17, but quite a substantial evolution, let's say, ultimately leading to more volatility in the P&L., not necessarily in equity. In terms of classification, the standard IFRS 9 changes from the previous concept of the holders intend to hold and sell investments to a more cash flow view, hence, how foreseeable are the cash flows of the underlying financial instruments. We have adopted, as mentioned earlier, the hold & sell model across the group. So the majority of the financial instrument continue to be classified as fair value through OCI, which should currently be around 90% or more of our portfolio. Then we have a certain percentage points of investments that are at amortized costs, probably around 2% to 3% that are mainly -- those are mainly direct held property investments. Previously, that class also included held to maturity in loans and receivables. And then probably around 7.5% of our portfolio are classified as fair value through the P&L. That number was previously around -- probably less than 1% actually. So those are mainly our private equity and real estate funds, infrastructure, derivatives, financial hedges, cat bonds, et cetera. We have already actively reduced some of that exposure. For example, we sold our listed shares in form of EPS. And we have also restructured some of the fixed income funds that did not pass the SPPI test before. We do not expect a major impact from the new impairment or ECL regime, given the high quality of our portfolio. So as mentioned earlier, with respect to our 2023 guidance, we have allowed for increased volatility and particularly in the asset classes mentioned on the slide, given the size of the portfolio, and the high valuations that is an elevated risk of a one-off correction in 2023, purely due to the time lag in valuation of these funds. But midterm, we do remain quite optimistic on these asset classes, of course, and we do see the increase in interest rates overall as a very positive, which will find its way into our ordinary income. On the next slide, ROE, as mentioned on our Investors Day, ROE will remain our main KPI. We are not planning to make adjustments to the way we calculate the return on equity but we have reflected on the accounting impact in light of our strategic ROE target, which we have, therefore, increased by 100 basis points to 1,000 basis points above risk-free. This is largely the uplift we expect from life and health. So the mid- to high double-digit EBIT increase, which translates roughly into that 100 basis point increase. Needless to say, that our ROE ambition is certainly higher. So of course, we are committed to outperform the target as we did in the past. So the following slide, starting on Slide 17, we have included some thoughts on selected topics. Here on 17, you can see interest rates and risk adjustment methodology just to share that with you how we have -- how we went over these 2 topics. As for the discount rates and risk adjustments, we have generally tried to align our view to Solvency II. But if we were, the opinion is our internal view is even more closer to the economic reality, we decided to go for the internal view like we did, for example, for the risk adjustment. We have fully aligned the risk adjustment to our view of the risk that we form in our pricing. And therefore, we have called it a margin approach. As you can see the details on the slide here on interest rates, similarly to Solvency II yield curves, the IFRS 17 yield curves are derived by a bottom-up approach, meaning we apply a risk-free rate plus illiquidity premium. The IFRS 17, illiquidity premium is based on the Solvency II methodology. However, on an individual asset portfolio, which is used for deriving the ILP instead of the EIOPA portfolio. Motivation here is really to better align the movement of the liability and the assets and hence, reduce the overall OCI movements. On Slide 18, we have included some details on the CSM transition. No surprise that the larger part is in life and health, which will support sustainable and stable earnings and will most likely replace the value of new business in our target. So let me pause here and briefly reiterate that we do believe that the new accounting standard. So I'm on Slide 19 now, that we do believe that the new accounting standard does come with long-term benefits for the reasons that you see here on the slides, and we will go to any length to be in dialogue with all of you to become fluent in this new language, as I usually call it. On the guidance, some of you will see this as very prudent. And yes, we have allowed for more uncertainty and volatility because of the new accounting regimes, but also to reflect on the current economic environment. Nevertheless, we are optimistic, particularly given the hard market in P&C, our growth opportunities and the positive performance of our life and health. We will use some of these underlying margins to further strengthen our resiliency to keep producing reliable and stable results and ultimately delivering on our promises and achieve our targets even in difficult years like we have done in 2022. So I close my presentation, and I'm looking forward to your questions and comments.

[Operator Instructions] We have the first question from Kamran Rosen from JPMorgan.

I've got a couple of questions on the guidance. I'm just trying to kind of square the circle. You started off with EUR 1.4 billion to EUR 1.5 billion of earnings guidance for 2022. You had a positive impact in life and health from the new regime. The P&C market, as you said, some of your underwriters are saying this is the best market you've seen in decades. I kind of understand the reserve piece. But are we kind of underestimating how much you needed to add to buffers. I'm just trying to understand, EUR 1.4 billion to EUR 1.5 billion, I mean only moving to EUR 1.7 billion, it's a good result. But whether there's extreme caution there or whether actually you're saying EUR 1.7 billion is a flow, it will be no lower than that at all. So just trying to understand or get some more kind of comments and kind of clarity around that guidance relative to last year. The second question is on the cat budget. You've increased this. I mean it's more than 20% up year-on-year. And clearly, we've seen climate change effects. We've seen NatCat budgets being blown across the sector for a number of years. But you're talking about revenue growth of 5%, and so your cat budget is up more than 20%, your revenue is up 5%. Does this in like change in assumptions? Or does it signal that actually you've taken on a lot more cat risk. Or is this metric? I'm sure a lot of the questions we answered next week as well, but I'm just intrigued about those 2 moving parts because it feels a little bit like classic Hannover Re conservatism, but I just wanted to get your thoughts on that.

Kamran, thank you for your questions, very valid questions, of course. I mean on the guidance, I think when you take the EUR 1.4 billion to EUR 1.5 billion as a starting point and try to derive at the EUR 1.7 billion. I think you're perfectly right. I think we need to start probably with the 2022 year. So we have seen a year, particularly on the P&C side, where we have seen substantial large losses. We have exceeded our large loss budget. We've also seen run-off losses from prior years partly due to inflation, partly due to currency losses. And then on top of that, we have seen frequency claims as we reported in Q3. And we have seen a couple of more of those claims also in Q4 on the accident and health portfolio in Southeast Asia. And we have certainly -- we will have to confirm that number in May 2023 when we will report about the reserve redundancies at the 31st of December 2022. That is to be confirmed, but it's pretty certain that we will have used some of the buffers our reserve buffers in 2022 to support our guidance. So therefore, that's one element. Yes, so there is an element in the guidance we have built an element of prudency that we usually do in terms of loss takes. So we will usually not see a huge margin increase that we do expect, undoubtedly, common but we will not see that necessarily in our earnings, but we want to restore some of the buffers that we use in 2022. But also, we want to build -- further build our reserves and strengthen our reserves with the growth of the book. So those are the main factors. And then as mentioned, Kamran, I think the overall uncertainty that comes with the new accounting standard because we are guiding and net income under the new accounting regime, not the comprehensive income. So therefore, there is potential for volatility. Some of the reasons we mentioned, of course, interest rate development, but also the -- particularly the expected valuation corrections on private equity. So all those factors putting together, we have been cautiously positioning ourselves on the guidance. Yes, the at least does leave some room for an uplift. But given the volatility, there's also a potential for a downturn of that. So therefore, there is increased uncertainty and I believe, given the market environment, given the accounting changes, which we apply for the first time and also reflecting on 2022, I think I would name these 3 factors into that. And then when you look at investments, for example, to have that briefly, we do not exactly know how the performance of the inflation linkers will contribute to the investment income. We have seen a substantial contribution in our 2022 numbers, roughly EUR 450 million in our 2022 EBIT stems from inflation-linked bonds. And we have been also cautious in planning this number for 2023. On the NatCat budget, I think the increase of the NatCat budget is not only a reflection of the growth that we are expecting in 2023 at the renewals. And yes, Sven will be commenting on that in the next week. It is also, to some extent, a reflection that we've grown substantially last year and even more than we expected. So there's kind of a catch-up effect there as well. I think our NatCat budget or cat exposure has grown in line with our overall book. So you shouldn't expect a huge increase in our NatCat exposure on this base. And we will comment on that how that is composed by gross -- by a gross number in terms of growth and our retro next week.

The next question comes from Vinit Malhotra from Mediobanca.

Just for me -- okay, so my 2 questions. If I can start with the revenue growth of at least 5%. Could you just comment -- I mean, it doesn't look like it's reflecting all of these hard market volumes we keep talking about. Is it because of the structured reinsurance effect from IFRS 17 that you are a bit more careful about this number? That's the first question. The second question is just on the reserving commentary, if I go back 1 year, I think there's a bit of a deja vu here because even in '21 fourth quarter, we had similar comments that there was a gain from inflation linkers and then that continues to buffer for inflation reserves in fourth quarter. Now how different is this scenario in this fourth quarter? So you mentioned the Southeast Asia accident claims in this [indiscernible]. Did you -- is there anything else noteworthy about the fourth quarter reserving that you could shed light on or would you have to wait for next week as well.

Thank you, Vinit, happy to comment on those. So on the reinsurance revenue growth, I think, yes, to some extent, the growth numbers, at least if you compare it to recent years, was fueled by a huge portion of structured reinsurance. That will, as mentioned, only in terms of the margin [ fee ] into the revenue number. So it's not easy to compare that really with the gross written premium, which is, if you like, a bit inflated by this number, we've always been very clear also on the margins, et cetera, because it's a bit more risk remote. So that's one element. It's also that clearly, on the at least 1/1 renewal. Yes, we have been very disciplined in terms of underwriting, there is an element of portfolio managing in there, but there's also an element of the composition of the portfolio. So if you shift the portfolio from, let's say, more pro rata, which we have been heavily taken on board given the development on the primary insurance side in the recent years, if you shift that portfolio rather to excess of loss, that also comes with a volume effect, although the quality of our book has probably increased substantially. So there is also a volume effect on there. But please bear with us just until next week, for Sven to comment on the details of that. On the reserving side, yes, you are right. I mean even in difficult years 2020 and 2021, we will be able to increase our reserve buffers. Last year, we have used roughly EUR 100 million of the inflation-linked bonds contribution in the P&L to strengthen our reserves. This year, the comparable number in the P&L from the inflation linker is roughly EUR 450 million. and we will not have used any of this contribution to strengthen our reserves on the P&C side. So at least not directly. So therefore, we, again, will certainly have used some of the buffers in 2022, if you take all the effects together that I mentioned earlier.

And just to clarify Kamran -- the answer to Kamran. You said that the at least EUR 1.7 billion does leave some room for an uplift but not much. Is that the correct understanding? Sorry, I missed that last sales you used?

No, I wouldn't say that. I think it's fair to say that in general, the market environment, but also the accounting regimes leave room for higher volatility around this EUR 1.7 million, and it can go in both directions. But again, we've tried to be cautious also in light of the reserving development really in being prepared to take particularly some of the P&C margin improvements and increase our buffers. That was the main driver here.

The next question comes from Will Hardcastle from UBS.

Sorry to ask another one on reserves. It's always a danger when you give us good data so we want to ask it. I guess how do you view this as a buffer? I guess when I'm trying to think about it and think about the replenishment, should we think about this as a percentage of reserves, percentage of your premium or an absolute number. I guess how do you think about it or we end up or we can try and work out what can be added. The second one is a question really about the investment volatility that you mentioned it's increasing. It's led to what seems to be a minor change so far on the investment portfolio. I guess given that you've mentioned those actions, could we expect a continuation of that trend and you look to reduce volatility further, so a change in asset plus investment?

Will, I'll start with the last one on investments. I think despite the fact that a larger portion of our investments will be categorized at fair value through the P&L. I do not expect that volatility to be at certain elevated levels as we would expect in 2023. I think it's rather particularly on the private equity and real estate portfolio, sort of a time lag in reporting net asset values because those are valued on net asset value form. So I do believe there is a time lag in there, some of the corrections we've seen in the market, in the equity market in 2022, we would expect to also show up in our private equity portfolio. So I would rather say that's particularly a 2023 effect. We haven't seen that yet, to be clear but I would at least expect it at least leave some room for that in our guidance. That's why we've been cautious about it. In terms of our asset portfolio, no, I would say we are very committed to these asset classes. They are stable contributors. And I think we will manage volatility on the investment side in general, quite well. For example, if we go for listed equities, we will rather go for the OCI option on listed equities in order to reduce volatility, P&L volatility. But again, also in terms of structures of fixed income funds, et cetera, and also the question of is in investment and financial instruments and insurance contract orders that fail SPPI test, et cetera, we have put processes in place really to manage volatility on our investment income. So no short answer, no major changes in our asset portfolio mix. On the reserve buffers, we do not really have a percentage of our overall reserves in mind. We are rather thinking in terms of absolute numbers. As you know, we have reported EUR 1.7 billion of redundancies on the 31st of December 2021. And we want to rebuild that number. And we want to further increase that number as we grow our book. We want to use particularly this very hard market to replenish some of the buffers. And to prepare for, let's say, the cycle management and volatility management also using some of the buffers in other market times. So it's really an exercise that we rather do at year-end. But the reason why we've been cautious on the guidance this time is really to use this market environment to build further reserve buffers in absolute numbers.

Next question comes from Freya Kong from Bank of America.

I was wondering if you could just repeat your answer on how you use the benefits of the inflation linkers to that EUR 450 million in 2022. Did you use that to -- did you book it in the margins? Or have you just taken the benefit? I didn't really understand that. And secondly, generally, you provide a through-the-cycle combined ratio guidance. Will this IFRS 17 number be given next week or with full year results? And will there be some sort of bridge between IFRS 4 and IFRS 17? And how should we think about adjusting for the volatility in the combined ratio from rate changes going forward?

Yes, Freya, on the inflation linker, I mean that we -- this is not, let's say, a one-to-one exercise, even what we did in 2021. So we have not literally taken EUR 100 million of the inflation linker increase and increase our reserve buffers in Q4. But at least we have increased the reserve buffers. I would I would say that, to some extent, reflect on potential increased inflation levels, which we haven't seen last year, but it was really to add some prudency. But I think it's fair to say when we look at our overall redundancy development in 2022 that we have not used the inflation-linked bond contribution one-to-one to increase our redundancy level on the contrary. In overall terms, we will have lost some of the buffers of the EUR 1.7 billion in 2022. So these inflation-linked bonds, or had to be clear, have contributed to our earnings. And of course, you should see that also I would say -- I reiterate that all the time, these inflation-linked bonds are not part of our investment strategy, they have to be seen in connection, I think, with the P&C segment, it's a hedging strategy for inflation in P&C. And therefore, to some extent, you have to see that also in light with the combined ratio. On the second question on the combined ratio, I mean, with this waterfall that we've included here, we've tried to give sort of a sense of what the accounting implication is on the combined ratio at the first place. So again, these, let's say, these disclosure changes when it comes to non-distinctive investment components when it comes to directly attribute to the costs, both these elements have changed and will bring the combined rate ratio structurally down to, let's say, by 2 to 2.5 percentage points. And then the main driver is really the discount rate. It's very difficult to put a number on that. I mean if we look at discount rates, let's say, a transition and then, let's say, today, and the Q2 2022, there are differences in effect on the percentage points of combined ratio changes between 2% to, let's say, 6%, 7%, 8%. So there's a huge variety on that. So therefore, we -- I think we will give a first glance on that in our Q1 numbers, which we will be presenting in May and in terms of the strategic targets in terms of, let's say, margin improvements. Apart from the accounting side, I think you will get a first impression probably next week on the call with Sven and Jean-Jacques.

Next question comes from Thomas Fossard from HSBC.

I had actually 2 questions to better understand the life and health re, and the new numbers that you're providing today on the risk adjustment on the CSM. The first question would be and again, specifically focusing on life and health. If I were to look at the -- how much is the risk adjustment lighten as we risk adjustment at the total of the risk adjustment plus CSM, the risk adjustment is 40% of the total number. And benchmarking this calculation to what Munich Re has provided, and this is the only one we can benchmark your numbers, too. The risk adjustment at Munich Re seems to be 28%. So it seems to be that your risk adjustment is higher. And I was wondering if, I don't know, if you taken specific caution as well in building this number? And the second question would be related to the amortization profile of your risk adjustment and CSM going forward. If you could provide some indication just to better understand approximate what could be the life and health recontribution to your IFRS 17 P&L in the coming years.

Thomas, thank you for the question. So let me start with life and health. And then I'll try to comment on the release patterns and the second question. So the first one, the risk adjustment, I mean, I can't comment on the peers, to be honest, but I'm happy to share the details of how we go about this. So as mentioned, it's the standard leaves room for tailoring this risk adjustment to your own portfolio, which we have done here. We have taken the so-called margin approach. So very much linked it to our internal metrics when we look at the risk from a pricing perspective. Our capital costs that we've then applied is 4.5% under IFRS. And that might be the difference, Thomas. We then apply that ratio to the available capital as opposed to the required capital. And that could be a reason for your observation, Thomas because when you look at Solvency II ratios, when you then compare, of course, available to require capital, that could drive some of that -- the difference, that could be at least an explanation. It could be an explanation why we're a bit more on the prudent side on the risk adjustment. On the reserve patterns, I would see the risk adjustment in life and health, not necessarily on P&C, but the release patterns on life and health of CSM and risk adjustment should be fairly similar -- probably slightly different, but fairly similar, and you can see on the Page 18, the release pattern of the CSM. So that should be fairly in line with the release pattern of the risk adjustment. In terms of contribution, I don't know the numbers off hand. And it's really difficult to put a number on these contributions. But of course, the bulk of the EBIT from life and health from the insurance -- in the insurance revenue or the insurance service results will be stemming from those 2 components. Let me try to answer it in a different way. I mean you know we have a strategic target of EUR 600 million EBIT contribution from life and health, which Claude and Klaus have presented. And of course, given the uplift on the EBIT on life and health stemming from the accounting change, I would at least add on this effect to this strategic target going forward. So there is an -- and I think the colleagues will comment on that probably on the Investor Day. But I would see the contribution in connection with that strategic target and the EBIT uplift from IFRS 17.

Right. Maybe one follow-up on the first part of your answers because you did mention that actually you tried to follow to actually to implement since to be closely aligned to Solvency II. So when you're talking of applying the cost of capital to available capital rather than SCR. I thought that potentially if you were to be closer to '22, you should have rather use SCR than the available capital? Is my understanding wrong? Or maybe something I missed.

Yes, Thomas, fully right. In general, we have tried to be close -- we've tried really to close to Solvency II. But if we thought our internal metrics and our internal approach here, the margin approach on pricing, is more appropriate to reflect on economics and the specifics of our book, then we have diverted from Solvency II. And this is what we've done on the risk adjustment side. So on Solvency II, the approach is actually different from what we do here under IFRS 17 because we thought it's a better reflection of the economics.

[Operator Instructions] The next question is from Jochen Schmitt from Metzler.

I have one question on your remarks about higher-than-expected losses from prior years. Could you just clarify? I would assume that on a net basis, you still had a positive runoff result from prior years, even though probably impacted by some adverse ease of movements included in the growth number. Could you comment on whether my assumption is right? That's my question.