Hannover Rück SE (HNR1) Q2 FY2025 Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our earnings call on the half year results 2025. Today's speakers are Clemens Jungsthofel, our CEO; and Christian Hermelingmeier, the CFO of Hannover Re. For the Q&A, they will be joined by Claude Chèvre and Sven Althoff. And with that, I hand over to you, Clemens.

Thank you, Axel, and good morning from Hannover. So I'm pleased to report that the business performance in the first half of 2025 leaves us very well positioned to deliver on our profit target for the full year. The group net income of EUR 1.3 billion reflects a strong underlying profitability and additional positive effects from currency translation and from tax. As we had not planned for such positive effects to be explicit, this left us in a very comfortable position where we could use the extra level of profits to further strengthen our company's balance sheet. We have added additional prudency to our P&C reserves. We've taken a more cautious view on certain pockets in our life and health portfolio, and we have realized some losses in our fixed income portfolio. All of this improves our already strong capability to manage volatility, deliver on targets and to pay a steadily increasing dividend. In P&C reinsurance, we have continued to grow our portfolio in an attractive rate environment. As explained at our Q1 conference call in May, the refinement in the calculation for the nondistinct investment component has a negative base effect on reported growth numbers. As it does not impact earnings, this is no cause for concern, also not when comparing to our 7% growth target. On an adjusted basis, the growth is in the double digits, clearly ahead of the 7% mark. The large loss experience in Q2 was rather benign, particularly on the NatCat side, mitigating the significant overshoot of the budget in Q1. Hence, the overall impact from large losses only slightly exceeded the budget for the first half of 2025. As mentioned, we have used the overall positive result situation to add further prudency to our P&C reserves with a corresponding effect on the reported combined ratio. Nevertheless, adjusted for the large loss impact, the reported 88.4% is in line with our target, clearly pointing to a better underlying number. In life and health, reinsurance revenue remained rather stable. More importantly, the new business generation was clearly positive at EUR 365 million, supporting our growth targets for the overall CSM. The reinsurance service result of EUR 445 million reflects the overall positive business development and a precautionary increase in the risk adjustment for morbidity business in China. Altogether, we are well on track to deliver on our target for life and health for 2025. The investment performance was very satisfactory. The return on investment of 3.3% is in line with the target despite around EUR 60 million in active realization of fixed income losses in the second quarter. Finally, the capitalization remains strong with a solvency ratio of 261%. The decrease versus Q1 is mainly driven by the redemption of the hybrid bond, some smaller model changes and the next step in our quarterly accrual of foreseeable dividend. Furthermore, the additional prudency in reserving is dampening the operating capital generation in P&C. Shareholders' equity decreased by 6%. Major driver here is the negative impact from currency translation. Economically, our asset liability matching is very good, not only for duration, but also for currency. However, an accounting asymmetry is artificially splitting the valuation impact of the weakening U.S. dollar, leading to a positive P&L effect and the negative OCI impact. The CSM increased by 3.8%, mainly reflecting the new business generated by both business groups, partly mitigated by negative currency effects. The risk adjustment decreased by 9.2%, mainly driven by some model refinements in P&C as well as negative currency effects and a new retail cession in life and health. Altogether, the performance of both business groups and our strong balance sheet, including the CSM and risk adjustment, give me considerable confidence in current and future earnings growth. The return on equity of 23% in a period with a large loss experience around the expected level is further confirmation of our success. On that note, I'll hand over to you, Christian.

Yes. Thank you, Clemens, and good morning, everyone. Our P&C business is growing nicely on a diversified basis, including a strong contribution from structured reinsurance. The top line growth is slightly below our 7% target for the full year. As Clemens mentioned, the reported number is impacted by a refinement in our accounting. However, this modification was not fully reflected in the first half of 2024, resulting in a one-off effect when comparing the revenue to the current year. Excluding this base effect, reinsurance revenue would have increased by more than 10%, clearly supporting the target achievement. Importantly, there is no impact on earnings due to the corresponding effects in the service expenses. Furthermore, the accounting impact on reported growth should decline over the course of the year, and I would still expect that the reported FX adjusted growth will also end up in line with our target of at least 7%. The combined ratio of 88.4% includes a moderate negative impact from large losses, ending up EUR 41 million above our budget. As Clemens already explained, the underlying profitability was even stronger in light of the additional balance sheet strengthening with an increase in reserve prudency. Finally, the combined ratio includes a discount effect of around 9%. As usual, the increase in prudency for our reserves is biased towards long tail lines with a higher level of discounting. Overall, the discount effect is still higher than the interest accretion in the reinsurance finance result. As explained before, we have been very prudent on the reserving side as an offset. The favorable investment result primarily stems from the increased ordinary income from fixed income securities and very solid returns from alternative assets. For the sake of completeness, the amortization of our inflation-linked bonds added EUR 69 million. Furthermore, we have used the opportunity offered by a strong result overall to moderately realize hidden losses on our fixed income portfolio. In Q2, this effect amounted to around EUR 60 million. The currency result was significantly positive at EUR 232 million, driven by the accelerated weakening of the U.S. dollar over the course of the first half year. The main contributor to the P&C service result is the CSM release, reflecting the recent renewals in a very attractive market environment. As in 2024, the CSM release includes smaller catch-up effects due to a prudent release in previous periods. The experience variance mainly reflects our prudent reserving on the business earned from current underwriting years and the overshoot of our large loss budget. The runoff result has been positive in most regions and lines of business. But as explained, we have used the strong underlying profitability and the overall strong result situation to add additional prudency to our reserves. This is the reason why we are reporting a negative runoff result of minus EUR 419 million. Apart from this, the runoff result also includes our updated view on the Russia-Ukraine aviation loss and a moderate increase in the best estimate for some pockets of U.S. liability business. The loss component from new business is quite low, confirming the attractive rate environment in P&C reinsurance. The CSM growth is mainly determined by the successful renewal period in 2025, resulting in a strong new business CSM of EUR 2 billion. Compared to the previous year, the number increased moderately. This development mirrors our renewal reporting, growth at slightly lower risk-adjusted prices and the reduced cession rate to our retro program. Let's now move on to life and health. Reinsurance revenue was rather stable, increasing by 0.3%, adjusted for FX. The revenue increase in financial solutions and longevity was offset by a decline in traditional business in Greater China and the U.S. The new term traditional business refers to our combined mortality and morbidity business, reflecting a change in our internal reporting lines. The results for the first half of 2025 are based on favorable underlying profitability with a positive experience variance in all reporting categories. This strong basis allowed us to take a more cautious position with regards to our mobility business, in particular, in Greater China. Altogether, the reinsurance service result of EUR 445 million is fully in line with our full year target. The investment result mainly reflects good ordinary income from fixed income. Altogether, the EBIT contribution from our life and Health business group was EUR 470 million. Looking now at the IFRS 17 components of the service result. The CSM release is the main profit driver, and the release in Q1 is within the expected range. The risk adjustment release has normalized after an extraordinary low release in the first quarter. The experience variance is clearly positive, based on a diversified contribution by line of business. Looked at in isolation, the experience variance for the second quarter was negative. This is connected to our U.S. mortality business and includes an adverse impact from large claims. Overall, this should be viewed in connection with the first quarter, where we have recorded a positive impact from the same business. Overall, developments are within normal quarterly volatility and not connected to any underlying trend. The main driver for the loss component is our morbidity business, particularly the critical illness business in Greater China. Here, the negative impact is not based on new trends resulting in assumption changes, but rather the overall level of profitability allowed for a more cautious positioning, reflected in an increase in the risk adjustment. With a more holistic and economic view on assumption changes and experience variance, I would like to point out that both the sum of assumption changes in the CSM and the loss component as well as the experience variance are positive in the first half of 2025. This again confirms the overall cautious initial assumptions in our diversified portfolio. The CSM development on the right side is clearly impacted by the currency effects. The CSM generation, which includes the new business CSM and extensions on existing contracts, together amounted to EUR 365 million based on a diversified contribution from financial solutions and our traditional business. Changes in estimates are driven by updated assumptions for our longevity business. Altogether, the total CSM would have increased by 3.8%, excluding the currency effects, so nicely ahead of our 2% target. The development of our investments was again very satisfactory. The ordinary investment income reflects the continued rollover in a higher yield environment and a strong operating cash flow. Inflation in bonds contributed EUR 69 million. Additionally, the contribution from alternatives was very solid. In light of the positive currency result and a rather low tax rate in the second quarter, we decided to also strengthen our balance sheet on the investment side and took the opportunity to moderately realize some losses in our fixed income book. The income from the change in ECL and the fair value of financial instruments remained moderate. All in all, the return on investment of 3.3% is slightly above our 3.2% target despite realizing around EUR 60 million in losses in our fixed income portfolio. At the bottom of this slide, you can see that the unrealized gains within the OCI have changed materially in the category Others. This reflects our participation in Viridium accounted as an asset held for sale. You have probably seen the latest news on this topic. We have decided to sell our entire stake later in 2025, concluding a highly successful financial investment for Hannover Re. To conclude my remarks, the business performance in the first half of the year was satisfactory. The positive impact from currency and tax has been used to further strengthen our balance sheet, we are well positioned to deliver on our targets in 2025 and in our continued positive earnings trends going forward. And on that note, I'll hand back to you, Clemens, for your comments on the outlook.

Thank you, Christian. So the midyear renewals, I would say, lined up well with the trends reported in January and in April. The market environment is characterized by an increase in reinsurance capital and the willingness to deploy this capital in an attractive market environment. The resulting increase in competition has created some pressure on pricing, most pronounced in property cat. Renewals in other lines of business are more stable. Casualty pricing in the U.S. was stable or up slightly, supported by the underlying rate increase in primary business. The overall risk-adjusted change in price was minus 2.9%. Terms and conditions, though, as well as attachment points remain broadly unchanged. Overall, the rate and accuracy remain attractive, and we continue to expand our portfolio on a diversified basis. Looking at the outcome of the midyear renewals. This has been marked by a reduced placement for a large individual treaty in the U.S. Adjusted for this, the premium growth would have been 4.5%. On top of this, we benefited from favorable demand for structured reinsurance, posting double-digit growth in the first half of 2025. To summarize the year-to-date renewals in 2025, Hannover Re has grown the premium volume by 5.4% and despite the reduced volume from one large treaty. The underwriting year 2025 marks the third consecutive one in a very attractive market environment. The quality of our portfolio and the business we earn going forward will remain strong. As the result of the first half year fully supports our expectation for 2025, we've kept our guidance unchanged. We continue to expect growth in P&C revenue of at least 7%. On an underlying basis, we are very well on track. While on a reported basis, including the aforementioned accounting impact, we might end up closer to the target. The combined ratio is expected to come in below 88%. The large loss experience in the first half year was close to expectations. This means that we have almost a full budget available for the second half. Additionally, the overall level of prudency and the added amount in Q1 and in Q2 provide considerable confidence in our target delivery. The life and health service result is expected to come in above EUR 875 million, and we are targeting a return on investment of at least 3.2%. Altogether, we are highly confident that we will achieve our net income guidance of at least EUR 2.4 billion. This concludes my remarks, and we would be happy to answer your questions.

[Operator Instructions] And the first question comes from Michael Huttner from Berenberg.

I had two questions on numbers. The first one is on solvency. I just wondered if you could give us the detailed breakdown of the move from 272% to 261%. I guess the more detail we have, the better to understand it because that's the number which I can't square at all. And then on Viridium, so I'm looking at Slide 13. I see the others, and you highlighted the difference in participations, would mostly be the Viridium coming out of it. So plus 355 to minus 58, that's kind of I guess, the EUR 410 million gain. I just wondered if that is the gain you would expect? And how will that be booked? Is it part of your EUR 2.4 billion profit target? And how much cash will you get?

Yes. Thanks, Michael, for your questions. The first, if I got it right, concerning the delta in the Solvency II ratio, can elaborate a bit on that. So half of the 11 percentage point difference is just related to the repayment of the EUR 500 million hybrid bond. So this was communicated before and as expected. And the second half of the movement is quite a mix of different effects. So some, of course, growth related impact, minor model updates, spread movement and updating of the underlying data. And you have to consider that our very prudent reserving approach dampened with the operational own fund's generation, so this is also reflected here in the solvency ratio.

Just the last, would you -- could you give us a little bit more -- any numbers on these things so kind, but I understand if you'd rather be vague.

Yes. So consider them all to be in a low single-digit space. So there's really none of them outstanding. This is, from my point of view, really the quarterly volatility in internal model when you rerun it. So nothing standing out there.

Michael, on Viridium, you've pointed at the number. I don't have an exact number off top of my head, but the overall gain will be in, I would say, the mid triple-digit million area. And that is due to the accounting regime, the accumulated value and gain in the other comprehensive income as we have opted for valuing this investment through the OCI and not through the P&L. This will be basically a recycling from OCI to retained earnings straight away. So this will not touch our P&L. So this is not part of our EUR 2.4 billion guidance. And in terms of cash -- sorry, Mike?

Yes, yes, that's exactly -- sorry.

No. And in terms of cash, that's largely the amount. Our book value is sort of has been in the double-digit area, I think, clearly, the fair value on our IFRS balance sheet, as mentioned, but that is largely sort of the cash that we will receive.

Can you help me on that? And I don't know where to look for this other item you just mentioned.

Yes. The cash position, you won't see in our half year financial statements, I think. So it's part of the overall cash flow, of course, and that will show up in our cash flow -- in our operating cash flow.

I understand, but just -- I don't know, it's hard to ask the question. How much cash will you get? I think that's the best way I can ask it.

Yes. So given that it's a double-digit accrued book value on Viridium, it's mainly -- so the number -- sort of the triple-digit million number that I alluded to earlier, Michael, is roughly also the amount of cash that we will get.

And the next question comes from Andrew Baker from Goldman Sachs.

First one, just on P&C Re. I mean, you've alluded yourself that the underlying combined ratio when you sort of normalize for prudency taken in current year reserves, the runoff results versus a normalized assumption. Obviously, large losses versus budget is running very favorably versus your planning target. As we think about the rest of the year, obviously, I appreciate it will depend on losses, but just assuming large losses are in line with budget, should we expect you to show any of this underlying combined ratio strength into earnings? Or will your preference continue to be sort of strengthen the balance sheet and look more towards that 88% combined ratio level? So that's the first. And then the second one, just on the Russia-Ukraine reserve. Can you just remind me, or I guess, tell me what the reserve stands at now? And then also, was the increase just prudence? Or as a result of any specific new information that you've had in the period?

I'll start with the second question, Andrew. So our aviation reserve on Russia-Ukraine is in the mid-triple-digit region. The reason why we have now increased this number by a low triple-digit figure is related to the decision of the High Court in the U.K. We still have the situation that we don't have reserves given to us by our ceding companies for the most part. So therefore, our reserving is based on the scenario analysis. And given the ruling in the U.K., we have somewhat adjusted our assumption on the average settlement values across all claims and how these are split across the risk coverage and the war coverage and that adjustment in our scenario analysis led to a low triple-digit increase and the overall loss still stays in the mid-triple digit region. On the P&C side, well I'm sure Christian and Clemens will add to that. It's, of course, too early to tell. It all depends on how the losses fall. You know that we do our reserve study in the fourth quarter. And taking all of this together will then put us into a position, how much are we going to let through the -- into the P&L at this stage. All we can say is that we are happy with our guidance of being below 88% for the full year. And the rest depends on both the reserve study and the major loss experience.

Then the next question comes from Shanti Kang from Bank of America.

So I just had one question on the P&C reserve strengthening. So I was just wondering if you could possibly quantify how much that contributed to the combined ratio for this quarter or this half of the year? Or perhaps if you can't give the exact figure, if you could frame it in terms of what the impact would have been without having the additional prudence on the combined ratio? And then the second question is just on the increase in the risk adjustment relating to China morbidity. Could you just give us an update on these lines and the philosophy going forward of how that drag is going to continue? I know that you guys have taken action here in the past. So just what has changed now to kind of warrant that further increase would be helpful.

Yes. Thanks for your questions. And maybe I'll start with the P&C reserve strengthening. If you look at our runoff result of EUR 419 million. So as Clemens just at the beginning already mentioned, you could assume that by the running business, we would see a positive impact here and the positive runoff result. And even if we consider the Ukraine reserve strengthening that Sven just mentioned, it would still be above 0, so non-negative. And the rest, and as you know, we do not fully detail reserve study at this point of the year. But just to give you a feeling for the volume, this could be the -- yes, today, today estimated amount of prudency buildup. So if you start with the 88% (sic) [ 88.4% ] combined ratio, you could deduct a couple of percentage points, but it's too early to be really precise here.

Yes, maybe on your question on CI China, I mean, we haven't seen -- observed any negative trends or any additional more claims in this portfolio. It's simply that we have had very good results, as Chris and Clemens already alluded to in life and health, and this allowed us to take just a more prudent approach with this portfolio. So that's why we increased the risk adjustment.

And just -- sorry, just on that, how -- what's the kind of time horizon you're expecting that to sort of continue that -- those additions? Can you kind of conceptualize that for us? Or is it still quite unknown?

But the point is that on life and health, you are always on the best estimate assumption. So in principle, what we have done right now with our best estimate. But as you know, best estimate is always 50-50. So I cannot give you any time horizon on this one.

And the next question comes from Kamran Hossain from JPMorgan.

I just want to come back to the kind of underlying profitability and kind of what the implications are. I guess given the math, I think at Q1, you said 100 triple-digit positive development should happen every quarter. So you take the EUR 400 million, you had a couple of hundred million on for each quarter. You take off for Russia-Ukraine, you're probably like EUR 500 million for -- to the first half. So it gets you to kind of low 80s combined. Just really interested in kind of the philosophical view about this within Hannover Re. Clearly, there's a material gap between your target. So the better 88 and kind of where you're actually watching the business. When do you start to close that gap? Is this something where you've got the EBIT target, obviously, kind of 5% growth out to 2026 so no need to kind of dip in and do a little bit more at this stage? Just interested in kind of views on that. And then the second question is just on the reinsurance treaty that you kind of flagged. Kind of what kind of treaty it was that you gave up and why, in particular, you decided to come off that business?

Yes, Kamran, I'll start with the second question. So this was a U.S. proportional treaty. The ceding company was what you call an insurtech. It could have been written in the structured bucket because the risk transfer on that transaction was not very significant. We wrote it in the traditional basket. The reason why we have less revenue coming from that contract is the fact that the ceding company significantly increased their net retention on the quota share. When you look at the cession that is remaining, we could actually increase our share. So from a market share perspective, you could argue, we even increased. But overall, the cession reduced significantly. And without that, we, as we said, would have grown by 4.5% at the first of January -- first of July renewal, which gives you an idea about the potential size of the loss premium. But as I said, we could also have written that on the structured side, which also means that from a reinsurance service result point of view, the margin on this, as it is a risk remote quota share, was not significantly high. So we don't expect a significant impact on our reinsurance service result capabilities.

Yes. Regarding, Kamran, your first question. So first of all, to comment on your back of the envelop calculation, that sounds plausible, to confirm that. But looking forward, as said, we have to stay prudent here. We will wait for the hurricane season and the loss development. And in Q2 or November, we will look at this where we stand and then it's time to decide if there is an impact or where to go at.

Sorry, I was probably more thinking about not '25 because you're quite a long way through the year just in terms of what that might mean into next year. And I know you're not going to have guidance until Q3, but just philosophically, is there any incentive for you to kind of push the EBIT a little bit harder than, I guess, the '24 to '26 target suggests?

Yes. I guess I have to disappoint you here. But unfortunately, the same comments refer to that. So we think it's not the time to already give an outlook on that.

And the next question comes from Chris Hartwell from Autonomous.

Just a couple of questions from me. First of all, on the life side of the business, it seems to be quite a few sorts of moving parts within that. I was wondering if you could sort of help me understand a little bit around some of the sources of volatility. I mean U.S. mortality, I'm assuming is the same type of thing that we've seen emerge from some of your peers, but I wonder if you could just comment a little bit more on why you're experiencing that? And also on the CSM change on longevity. And actually, I think you mentioned earlier in your opening remarks that you have a new retrocession on the life side. I was wondering if you can maybe let us know what that is going to help with. That was a big first question, of course. And the second question is just sort of keeping on the philosophy subject on the investment side this time. You've taken EUR 60 million of realized losses. I mean, that's -- it's a very, very small sort of drip in the ocean of what the ultimate unrealized loss position is on the fixed income book. So I was kind of wondering really on this philosophy of taking that? And I presume there's a benefit on the other side of that through the reinvestment rate. So I was wondering if you can maybe help understand where that's moving to and effectively the benefit to that.

Maybe I'll start with the last one. Good question. So it's not a change in philosophy, but as towards quarter end, we could already see that we would have another very positive, at least very positive accounting FX results under IFRS, and the tax ratio would be quite low. We just took the opportunity because of the overall good results to start realizing here this EUR 60 million. And as you said, it's reinvested immediately. So the running yield in the book will go up, and we will see the returns then in the future. So it's just a shift of that, and we think this is the right environment to do this. Will this continue? This depends on the overall development. So it's not the target at all. It's a reaction to the overall high profitability we saw in all the business groups. And this is just one option to reduce the hidden losses. So let's see how the next quarter looks like.

Yes, maybe on the life and health, I mean, first of all, I mean, what Christian also said in his introduction is that you need always look into experience variances, the loss component and changing estimates together because it's mainly the same concept and the three together are positive and you know that our best estimate assumptions are very positive. Now on experience analysis -- sorry, on the experience variance in Q2 stand-alone, you're right that it was negative. And you're absolutely right that we were suffering the same as some of our competitors, which was some volatility on the mortality book in the U.S. It's not due to any trend and negative trend that we're seeing, but it's a few bigger risks that cost us a bit of money. So you could say it in a way the wrong people have died, the people with a higher sum assured have died in this quarter, and that led to this negative experience variances from the U.S. mortality. On the change in estimates in Q2, it's as you said, also, it's mainly due to the longevity business. You need to see that the longevity book is quite big and minor changes in best estimates leads to this change in estimates, which appear to be quite big. So it is -- it is not a trend that we're seeing. We're not expecting these change of estimates for the next 10 years being positive every single quarter. But it's really that we check, we analyze our portfolio once a year, and we go and treaty by treaty. And when we see slight positive deviations, then we see this positive change in estimates. The last one was on the retro, I think, Clemens, do you want to take that one?

Just a retrocession on one portfolio that we have and that had an impact on the KPIs in that sense. It was just one retrocession contract that we have implemented in life and health.

Okay. So if I can just come back to the first question on the reinvestment return, I'm wondering if you could just let me know where the reinvestment rate is relative to the running yield, please? I don't know whether that's somewhere in the disclosure. I haven't seen that yet.

Yes, absolutely. Happy to do that. So we are at a running yield of 3.4%, and the reinvestment yield is around 4.1 percentage points.

And the next question comes from Will Hardcastle from UBS.

Let me take the questions. I guess, first of all, just what's the thinking on P&C retro at this juncture? Are you more likely to increase or decrease your assessment rate in what's a declining pricing environment, but what you still consider very strong margin availability? The second one is, there was two post events disclosed in the report, and you've discussed Viridium, so thanks for that. And the second one is related to German tax reduction. I guess, are you able to discuss what percentage of your earnings get paid this way or any sort of impact and timing of how this would be through earnings?

Well, on the P&C retro side, we are currently in the planning phase for next year. Our base assumption is that when it comes to our property and specialty protections, we will buy more or less exactly what we have purchased in '25. So no intention to buy significantly more or less. Of course, we will observe the market. And if we should find later in the year that the pricing offered by the retro market is particularly attractive, we may buy a little more. But of course, also, the retro pricing is fully dependent on how the rest of the year is going to perform from a major loss point of view. So therefore, base assumption is we are going to place what we have placed in 2025 again.

I'll take that one with the potential tax impact. So to clarify on this, nothing is considered in the Q2 figures for that legal change we have in Germany. I don't have the exact share of the taxable income here at hand. But as we write a lot of business out of Hannover, you can consider this to be substantial. And as we book deferred tax liability and for the future, we have this 1 percentage point reduction over -- per year over 5 years. We expect that this will have a positive impact. We will see this in the second half of the year. We are working on the exact calculation, so we are ready to disclose and book this.

Then the next question comes from Iain Pearce from Exane BNP Paribas.

The first one is just coming back to the solvency, the sort of 6-point negative organic capital generation or sort of ex-debt movements in the solvency. Can we just get some more detail because we really can't square this? You flagged a few small headwinds from model updates from booking growth, but you clearly made some good profits in Q2. You've written some profitable business. The IFRS framework allows for prudency a lot more than the Solvency II framework does. So it feels like there must be something a bit bigger than what you're sort of alluding to as a headwind. So can we just get a bit more detail on the moving parts on that number? And the second one is on the 7% P&C revenue growth guidance. So 6% on constant currency basis in H1. The renewal volumes are obviously down in the June/July renewals. If you could just give us some confidence as to why you think you'll get there, particularly with the accounting change as well and how much of a headwind that's expected to be in H2?

So on the first one, the asset cost, the ex-debt, 6% impact, maybe to give some more view on that. So yes, there is a positive operating profit flowing into or in the direction of the own funds. But on the other hand, you have to consider that we have to deduct the pro rata dividend. So this balances out to a certain extent. And then the big impact besides all this low single-digit point I already made, it's really the reserving and the runoff loss that you saw, this also is reflected under Solvency II. The reserve is increased, the reserve risk on that is calculated via Solvency II. So this is the main -- or one of the substantial impacts that reduces the otherwise positive capital generation that you related to.

Yes. And on the premium development P&C, as you can see on the outlook slide, we have grown from an underwriting year perspective on the traditional side by 5.4%. We keep growing double digits on the structured side. So from an underwriting year perspective, this is there or thereabouts when it comes to the 7% calendar year, financial year guidance and the tailwinds we are certainly getting is from underwriting year '24. So as you have seen on our slide, the underlying growth has been double digit. And the only reason why it's showing up at 6% is the accounting change we did last year on the non-distinct investment component. So the variable commissions in a proportionate business, and we expect that the effect from that change is going to reduce in the second half of the year. So that overall, we are confident that the 6% will move towards the 7%.

And the next question comes from James Shuck from Citi.

Two things. Sorry to do this, but I wanted to return to the solvency roll forward since Q1 into Q2. And I listened to your answer just then, but I'm still confused. You mentioned positive own funds generation in the quarter, and you deduct the pro rata dividend, and that gets you roughly kind of neutral-ish, which I find surprising because the OFG certainly on a full year run rate basis should be well in excess of the dividend. And you then mentioned that the reserving and the runoff losses need to be deducted from that as well. It seems to be double counting because it's either deducted already from the OFG or you deducted afterwards. I kind of end up in the same place that Iain is at, and that is, I can't reconcile the 6-point decline in Q2, excluding the debt. Now the only piece that's kind of left to me is growth. And I'm kind of keen to see, has there been a material step up in the growth expectations or the expected increase in the FCR for the year ahead? But perhaps you have another go at reconciling that; I'd find that helpful. And then secondly, the growth that you're putting on to the books now as it was last year, is coming a lot from structured business. So I think that's what's giving you the confidence in the top line growth outlook, you mentioned 10% in structured in this period. I guess another way of answering -- asking questions, kind of are there any mix effects when you think about the combined ratio? So it's structured to come on to the books at a higher rate than the rest of the treaty book. Ultimately, what I'm trying to get at is for a P&C reinsurance company, is growth is getting harder to come by. The P&C Re CSM -- new business CSM growth was plus 7% in the period. So you're still confident that you can grow that at similar sort of levels next year? Thank you very much.

Yes. I'm happy to start with the second question. So we are growing stronger in structured, but I would argue that was 5.4% in the underwriting year. We keep growing strongly also on the traditional side. But the impact under IFRS 17, unlike IFRS 4, of a more pronounced growth in structured, this is not diluting, for example, the combined ratio. Most of the growth in structure is coming from a proportionate business where we have significant ceding commission structures, which is the way how to minimize the risk transfer under those contracts. So therefore, from an IFRS revenue point of view, the -- it's considerably less compared to the old IFRS 4 premium view. What's the margin of staying, of course, the same in the reinsurance service results. So therefore, from a combined ratio point of view, we don't back the dilution from a stronger growth trajectory in the structured business, and the same goes for the CSM generation.

And regarding solvency -- and thanks for the opportunity to clarify again here as you are completely right. So the on funds or the profit generation is not completely neutralized or balanced. This is not what I meant by dampened. And so there is an effect. But as you also pointed to, of course, the FCR is also increasing. I mean, we talked about the growth, you have to take all the accounting effect from the nondistinct investment component, we see under IFRS out of the equation. So it's a double-digit growth in the P&C business, and this leads, of course, to a higher FCR. But I have to repeat here. This is really quite a substantial list of different points like also update in these spreads. The prudency booking, as I elaborated on, we have a small impact from currency. We have minor model updates and data updates. We have the growth impact, anti-hybrid. So it's really several things and not the one big point that is changing here, the solvency ratio.

And the next question comes from Vinit Malhotra from Mediobanca.

So I have two questions, please. The first one is on the growth. So the 5.4%, Sven, you mentioned. And I agree with you, it seems to be a bit more -- a bit stronger than some of the peer group. And I'm just curious whether you think there's any line, you're winning some share? Or do you have a different view from the market in some areas? So that's the question on where this is coming from. And second question is on the purpose of the higher reserve buffer, I understand that you have the ability because of the Q2 being very low last quarter. But also, if I go back to 1Q, you had mentioned that -- or I think you had mentioned that some of the reserve buffer is to manage the cycle. Now with such more higher level of reserve buffer buildup, is it because you think the cycle is turning a bit quicker? Or it has nothing to do with that? So I'm just curious about the purpose of this much stronger reserve buffer than expectations.

Well, the growth, Vinit, is really coming from almost all of our segments. So it's very diversified. The main driver continues to be the underlying growth of our ceding companies. So even if we keep our shares the same, we often can show some growth. We keep growing our NatCat risk appetite a little bit where in many parts of the world, we are underweight, and we still -- despite the softening in rates, feel that we are an attractive rate environment. So this is an area where we have a little stronger growth than the 5.4%. But other than that, with maybe the exception of APAC, where the premium volume is more stable, we are really showing growth in all the segments and the most pronounced as we said, is on the structured side. So a very pleasing situation from that point of view that it's not only coming out of one basket, but that is a true reflection on our global diversified portfolio.

And the NatCat region is somewhere U.S.-driven or EMEA driven, you think, Sven?

Well, that's again, I mean, global development. So there's some growth in the U.S. as well, definitely, but we are also growing in the rest of the world. So it's not one region in particular. But the U.S. is a growth area for us as well as we still feel that the rating environment that is offered for U.S. cat business is attractive despite the first reductions.

And regarding your question on the steering of buffers and the cycle, so there is no change in the philosophy, how we deal with this to be here on the prudent side, to be able to cover the volatility, of course, from large losses, but also from the cycle and deliver stable results. But we have to see and have in mind, this is just 1 quarter, and this is a long-term -- mid- and long-term steering philosophy and policy, and this is not changing because of 3 months. So let's see how the year develops. And then we can take our conclusions where we stand and how much room is to maneuver.

And the next question comes from Michael Huttner from Berenberg.

Sorry about that. And still on Viridium, what's the solvency impact? And then the other question, I think it's pretty much been asked in many different ways already, but maybe this way is slightly different. Your peers have also mentioned that their earnings through the 2024 pricing, so not '25 and not the lower, the more the higher. So I just wondered whether the many adjustments you've made in terms of reserving, et cetera, is effectively to correct for what I would regard as overearning? And it's probably not the right term, but earning 2024 profit levels which are probably not going to recur for a while?

So maybe on the first one, solvency impact of Viridium, I don't see a substantial impact from that. So we just changed the investment into, yes, cash at the balance sheet. So this is just shifting between the categories. So no substantial impact, stand-alone.

Well, on the P&C underwriting environment and how this is earning through, I mean, as Clemens and Christian said, I mean, the headwind we really had this half year was from the currency and partly also from the tax side. So this has triggered certain adjustment in our reserve position. The earning of the underwriting year 2024 and the profitability coming with us is very much in line with our original expectations. So the tailwind we are talking about is really coming more from the currency and from the tax side.

And the next question comes from Henry Heathfield from Morningstar.

I was just wondering if you could talk a little bit about the risk-adjusted pricing? It's kind of been increasing from 2.1%, and the January renewals, 2.4%, and then 2.9%. And I was just wondering if you could kind of elaborate a bit on how much that's impacted by the shape of the renewals really, if at all? And then on the second question, in the first quarter, the running yield was, I think, 3.5%, reinvestment of 4.3% and the return on investment, 3.5%. And then in the second quarter, that's come down -- the return on investments come down to around 3.3%. And so I was just wondering if you could talk a little bit as well about your confidence around the return on investment target of 3.2% and you're meeting that at the year-end?

On the P&C pricing side, I mean, the situation throughout the year has not really changed in the sense that outside property cat, the business is plateauing at a very high level. So very few reductions on the pricing side. Terms and conditions are stable, retentions are stable. And that was also true for the material renewals, where we continue to see a softening in terms and conditions when it comes to price is in property cat. And of course, the midyear renewals are particularly heavy in peak territories like the U.S. and Australia. And here on the excess of loss side, we did see high single digit or lower double-digit reductions throughout most of the renewals. The exception, of course, for the U.S. with those programs that had an impact from the California wildfires. They, of course, did see some increases. And that mix of the portfolio has resulted in the minus 2.9. But the fundamental situation is still the same that for the most part of the business, we are talking about, rather stable renewals at a high level. With pressure on pricing, but not retention, not terms and conditions on the property cat side.

Yes. Looking again at the investment result. So as you said, we have 3.3% return on investment for the first half year. If I just take out the EUR 60 million of active realizations, this is just shifting through the accounting, we would have had 3.5%. As also mentioned already, we have a reinvestment yield slightly above 4%. So if there are no surprises or substantial shifts in capital markets, I have no reason to think that we should not meet our target of at least 3.2%.

Then the next question comes from Darius Satkauskas from KBW.

Just two, please. I'm really sorry to come back to Solvency II, but I'm still a bit confused. Are you telling us that including the prudence added, the net operating capital generation match the dividend accrual in the quarter? Are you able to tell us what the gross capital generation was? Or rough idea how it compares to 2024 first half? The second question is on just life and health reserve additions. So you get reserves at sort of best estimate, but clearly, you've added to the risk adjustment. Are you happy with the stock of risk adjustment right now? Or should we expect that you may continue to opportunistically add to this going forward because of all the inherent uncertainty in some of the portfolios?

Yes. Coming back to solvency then again. And sorry, if I confuse some of you. So to reiterate that the dividend accrual, the pro rata is not offsetting the complete operating profit generation here, and you have to consider here especially that we only accrue the ordinary dividend here, and this is not what I meant. So to clarify that again, this is not the case here. And I think I don't have to repeat all the several influences on solvency.

Yes, on your life and health question on the risk adjustment, I mean, this is really pure prudency that we're adding here. And whenever we can, we will continue to add prudence into our risk adjustment. Risk adjustment ultimately is going to become results, obviously. It's just a question of timing, when the results are going to be shown.

Then the next question comes from Jochen Schmitt from Metzler.

I have one question only for taxes. You mentioned a potential gain in the second half. Could you consider to use this headroom to realize, for example, some losses on fixed income? Or would the potential tax gain just lift net income? That's my question.

I think that's too early to tell for us. Let's see how big the impact really is. As I said, we expect a positive one with the tax liability and the lower tax rate in the future. This should be the direction, but let's see how this works and then let's see the overall results development and then we can see if there is room for renewal.

[Operator Instructions] And the next question comes from Emanuele Musio from Intesa Sanpaolo.

The first one is on the structured reinsurance growth. You said 10% growth, and I was wondering what proportion of your book is in structured solutions nowadays. And what is essentially the key driver of demand here, given most companies nowadays have a strong balance sheet? Is this perhaps related to the softening cycle? Then what do you think it is a sustainable trend, a sustainable rate of growth for this line of business? And if you can remind me what is the capital absorption for this growth contributor? And then another one, perhaps not an easy one. A few years ago, basically, you topped your reserve buffer and were not able to add redundancy significantly. I'm wondering how far are you from that point, if you can give some guidance, please?

Yes, I'll start with your first questions on structured reinsurance. So this is a lower double-digit percentage of our overall portfolio on the P&C side as measured by revenue. When it comes to your question, is this a sustainable area for growth? The answer to that from our point of view, is a clear yes. I mean, more and more ceding companies are embedding this into their overall capital planning. They are running sophisticated internal capital models, whatever the solvency regime they're in. And so it's just an alternative way of how to capitalize the company and the underwriting side of things. So that demand will not go away. Where there is a certain degree of cyclicality included certainty in relation to the higher retention levels, which we have seen in the market since the underwriting year 2023 because this is potentially giving ceding companies a concern from a frequency earnings volatility point of view, and there are excess of loss structures available that can deal with that volatility over time. So to the extent that the retention levels are holding up also in the future traditional reinsurance renewals, that demand will stay intact in case the market should be prepared towards the traditional business at lower retention levels. This demand may slightly drop, but the most significant part of our structured reinsurance business is coming from the capital management solvency related side of the equation in any case, where we see that demand to continuously grow.

No, no, I was just reminding you about the reserves, if you can answer that, please?

Yes. If you could please say that again because we could not understand here every part of your question regarding the reserves.

Yes, I think it was 2015, and you were not able basically to add substantially to your reserve redundancies. So I was wondering whether you are close to a situation on the debt or there is still a little bit of room ahead to add more to your reserve buffer to your redundancies?

Yes. Now I got it. Thanks for repeating this. So I don't see that we are hitting here, a certain limit. Of course, this has all to be managed within the different regimes we have to apply. But I don't see that we are already limited there in a remarkable -- to a remarkable extent. So this is still manageable from my point of view.

Then the next question comes from Michael Huttner from Berenberg.

This is last one. Germany P&C motors turning around incredibly fast. Is that part of the reason you're so confident on the margins? Could you maybe give some light, please?

Well, I mean, German motor, of course, is turning around, as you say. As part of the overall portfolio, it's not a dominant part of the portfolio. But of course, it's supporting both our revenue growth ambitions and our overall profitability ambition. So it's baked in. But it's only a part of the overall portfolio. So it's not carrying the global portfolio because at this stage, as you can see from the still, rather low loss component, which we are showing in the first half of the year. The business is still rated attractively on a global basis across product lines.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Clemens Jungsthofel for any closing remarks.

Yes. Thank you all very much for your questions. We fully appreciate that these numbers need a bit of effort to look through this. It gives you an indication, I hope, as we have been able to deliver the message that we have applied prudency really across our profit engines, not only because the underlying results in P&C and in life and health are very strong already. Also, the investments are faring well. And then as Sven reiterated again, we really had the tailwind from taxes and from currency, which we didn't just want to let fall through to the P&L this early in the year. So on P&C is really that we have added, again, substantial prudency and just philosophically because we've heard that question rightly a couple of times. That has not changed at all. And just to remind you, the way we look at our combined ratio, the way we look at our guidance on our combined ratio is very much through the cycle, mid- to long term. So the fact that even if we go into softer market environment, this combined ratio will most likely remain where it sits at the moment. So therefore, it's really our philosophy to look through the cycle when it comes to that. On life and health -- just a reminder, I think this quarter as well that there is imparity between loss component and CSM. And I think it's fair to say that in the first 6 months of this year as well in the recent financial years, we've been able to demonstrate that if you sum those two up, if you look at the results of CSM and loss component, hence, our experience has been on the positive side, which I think is an indicator to your question, and Claude alluded to it, that we are more on the prudent side, even excluding the risk adjustment, more on the prudent side, in our best estimate setting. And then the risk adjustment, of course, adds a layer of prudency. All that allows us to deliver on our targets through the cycle. And I think these first 6 months have been able to even increase that capability to deliver on our targets and to manage really mid-, long-term through the cycle. So thanks again for your questions and have a good day.