Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (MUV2) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call operator. Welcome, and thank you for joining the Munich Re Analyst and Investor Call on annual results and January renewals. [Operator Instructions] I would now like to turn the conference over to Christian Becker-Hussong. Please go ahead.

Yes. Thank you, Natalie. Good afternoon to all of you, and a warm welcome to our call on Munich Re's fiscal year 2021 earnings and the outlook on 2022. Today's speakers are our CEO, Joachim Wenning; and our CFO, Christoph Jurecka. And the procedure is pretty much straightforward. As always, I will now hand it over in a second to Joachim for his messages and Christoph will add his statement afterwards. Then we should have plenty of time for your questions. And with that, I'm happy to pass it on to Joachim for his statement.

Excellent. Thank you very much, Christian, and colleagues, everyone out there in the call. A warm welcome also from my side, and good afternoon. 2021 was a successful year for Munich Re. And despite significant challenges imposed by a sharp rise in inflation levels, high nat cat losses and ongoing claims from the COVID-19 pandemic, we delivered an excellent result of EUR 2.9 billion. Hence, we even exceeded our ambitious financial target because the strong operational performance of all business segments offset the multiple challenges we had to face. We're, simply speaking, diversification and earnings power at work. What is of equal importance is the earnings level we achieved is a very solid one because despite high earnings, we, at the same time, strengthened the prudency of our balance sheet in various dimensions. And we want our shareholders to immediately participate in this pleasing outcome, and we proposed to increase the dividend per share to EUR 11. And we've also decided to resume share buybacks in the order of EUR 1 billion until the AGM next year, as you are aware of, since our ad-hoc publicity yesterday. Now on Page 5, let's have a closer look at how the achievements in 2021 compared to our promises, which we gave with our Ambition 2025. The profitability level in terms of return of equity is already very good, within the range we are aiming for by 2025. We set the normalized result of EUR 2.8 billion as basis for our earnings per share growth. And with close to 5%, we are delivering on our promise, which is quite remarkable, given the challenges I described in the beginning and the fact that for last year, we hadn't yet expected any EPS growth. As you all know, Munich Re is committed to sustainably growing dividends and with an increase of over 12%, we are well above plan. Shareholders can rely on us and continue to participate in our earnings growth. That's the story. And our capital position remains strong. The Solvency II ratio is even slightly above our optimal range of 220% even after the proposed dividend and also after the announced share buyback. The strong operating performance in 2021 was supported by both fields of business, so ERGO and Reinsurance. If you look on Page 6, ERGO performed remarkably well with an ROE of around 10%, and this despite the flood losses in July. In particular, the German and international business posted pleasing profitable growth. And this puts ERGO in a very good position to deliver on Ambition 2025 targets and also to continue to upstream substantial dividends to Munich Re. And by the way, operationally something that you wouldn't necessarily see in the numbers is good progress was made to replace legacy systems and further enhance customer satisfaction through digitization. Now Page 7 is maybe a busy one and a technical one. What it means is in 2017, we decided to separate the German Life back book from new business. After diligently evaluating a disposal of the portfolio, we came to the conclusion that an internal runoff represented the most valuable option. The decision to keep the back book turned out to be the right one from a financial, strategic, customer distribution and reputation perspective. Today, we can say that we fixed all issues, effectively protecting downside risk with hedging and reinsurance solutions. And now we can focus on the upside potential as the portfolio has become a reliable contributor to Munich Re's earnings. Through focused management of the back book only, stringent cost control and a balanced consideration of different stakeholder groups, we more than doubled the average dividend since then while keeping high reserves, providing sustainable returns to customers and benefiting the risk diversification within Munich Re group. Or simply speaking, we do what specialized runoff companies are doing or would be doing but we retain the margins. The portfolio transformation, as you can see in the middle of the slide, is on track. The share of the back book in premiums is continuously decreasing, naturally as we wanted, and new business, that's to say capital light and biometric products, is boosting. And with the new IT platform, which we developed together with IBM, we will be able to offer third-party administration services to other insurers, thus generating economies of scale and additional earnings. I'd like to add some words about growth at ERGO on the next slide, 8, which was very pleasing in 2021, plus 3.7% in gross written premiums. In P&C Germany, we did very well with far above-market growth -- market average growth while maintaining high profitability. Here, the growth came both from our retail business as well as commercial and industrial business. And the international segment also showed some pretty substantial growth. Please keep in mind that we are running off our Life business in Belgium and that the growth from our joint ventures in India and China is not included in this figure. So the main drivers for the figure that you can see were the strong P&C business in Poland and Austria as well as the increasing demand for health insurance in Belgium and Spain. Coming now to Reinsurance, Page 9. With a return on equity of 13.5% in 2021, we are already close to the upper end of what we deem a sustainable level. To preserve ongoing high profitability, we are seizing market opportunities in core business, which currently, as you know, benefits from a favorable cycle. At the same time, of course, we are fostering our market-leading position in business fields like cyber or structured solutions. In our Risk Solutions business, we continue to make good progress with further increased top and bottom line. And in life and health reinsurance, we delivered an excellent result when adjusted for COVID losses of, yes, almost EUR 800 million last year. So the underlying profitability of our biometrics business or our biometric portfolio in Life continued to be very sound. And in addition, the financially motivated Reinsurance business, that's to say, the financing and the capital relief type of business, delivers stable earnings streams. And to push the boundaries of insurability, as you know, we keep investing in digitized business models with more than 50 initiatives within 6 focused domains, which you can see in the footnote of the slide. I am personally very happy that these investments are starting to pay off. By 2025, both top and bottom line should benefit visibly. On the next slide, #10, I'd like to talk you through our January renewals where we have seen a continuation of the upward price trend. This was driven by the recent high loss experience, of course, ongoing low interest rates and inflationary pressure, enforcing the need for adequate margins. An increased demand for protection met with stable or even tightened and disciplined capacity supply, which in the end was supported for further rate increases. However, a large share of the significant nominal price increases we have seen in the market was mitigated by adjusted loss expectations. So in-depth investigation of business-specific inflation impact played a big role in underwriting in this renewal. Some parts of European and North American property business are now expected to be more exposed to inflation than before. And among the drivers for this is that demand for building materials currently exceeds supply by far, leading to strongly increasing overall building cost. At the same time, we continue to choose cautious loss picks for long-tailed casualty lines, taking account of social inflation trends. Hence, the 0.7% price increase that you can see on this slide, as usual, is fully risk and business mix adjusted, considering diligent loss trend assumptions. So this rate change is a good proxy for the real margin improvement we expect to be reflected in the combined ratio going forward. Overall, Munich Re benefited from a flight to quality with a substantial premium increase of 14.5%. Our growth, however, was quite selective, including a further expansion of structured quota share business, while the share of nat cat business in the overall premium volume remained unchanged. At the same time, we were increasingly restrictive on covering event frequency and aggregate covers, further improving the risk return profile of our portfolio. I would now like to put some attention to the cyber insurance business on the next slide as 1 other area of business expansion where we have grown by slightly more than 70% last year. This growth largely reflects nominal price increases, less so an increase of exposure. While capacity supply in the market overall has abated, Munich Re's hasn't. But it is important for me to stress that we continue to strictly follow a very disciplined underwriting and risk management approach, and we continuously refine our models, of course, with particular focus on accumulation risk, taking several measures to increase resilience. With this in place, this line of business, yes, it's risky but very rewarding, including last year. Starting Page 2, I'd like to highlight the key challenges or 2 key challenges the insurance industry is facing these days, namely inflation and then volatility that comes with natural catastrophe. After the economic downturn during the beginning of the COVID-19 pandemic, then strong and fast recovery with increasing demand, at the same time, supply shortages and a surge in energy prices, inflation pushed to a multi-decade high. The insurance industry is affected by this development as even more pronounced price increases in certain segments have relevance for insurance claims, if you just take the construction materials like timber as an example. As seen in the January renewals, nat cat volatility leads to higher insurance rates, on the one hand, which is good for our industry. On the other, it affects earnings, which is a particular concern of analysts and investors these days. However, volatility is our business. It is at the heart of our value proposition as a reinsurer, and it is the reason why our clients do business with us. So with my next slide, I will go into some more detail with regard to these 2 items. Page 13. For some industries, noninsurance, inflation is a real concern if companies cannot pass on higher prices to their clients. Either they lose margin or they lose business, don't they? Insurers are differently exposed to inflation, depending on the line of business. Munich Re's business essentially falls into 3 buckets that are reflected in the slide. The first one, there is business with no or with lower inflation risk. Either the underlying risk is uncorrelated to inflation. For example, with regard to biometric risk, it rather benefits from high inflation as the guarantees are all on a nominal basis, or there is the possibility to pass higher inflation on to clients within a short time frame. Then business in the next 2 buckets, if you move further up this slide, is more exposed to inflation. And this is the case for core P&C reinsurance business. And here, we have to differentiate between the new and the existing book. As treaty business can be renewed on an annual basis, we, of course, do consider higher inflation in pricing or in risk selection. But this is not possible for our existing book because the premiums have been paid for this already in the past and the assumptions are locked in. But when we set reserves with initial loss picks, we build in significant margins to buffer adverse development. So for calendar year 2021, we reacted to inflation trades by picking higher reserving loss ratios, especially for short-tail lines of business but also added reserves to prior contract years for some longer tail lines. I think Christoph is going to elaborate on this later more. To further reduce inflation risks, we also invest in inflation-sensitive asset losses in our investment portfolios, think of inflation-linked bonds. And even though we only can buy protection for consumer price inflation and there remains some basic risk, these investments provide a good hedge. So -- and there is, of course, other real values like equities, but there is infrastructure investments, you could name real estate, all, to an extent, are additional hedges to inflation developments. So all in all, our diversified book of business, the prudent setting of reserves and the reflection of inflation risk in our investment portfolio make inflation a manageable risk, which does not concern us too much. Next slide, with regard to the nat cat business. In terms of nat cat business, we have demonstrated that we can manage volatility through earnings diversification. And furthermore, we have a strong balance sheet and an excellent capital position to manage inflation affecting the business. There are a lot of discussions in the market, as you know, about model quality in the context of climate change. We deem our models state-of-the-art, reflecting a long data history, recent insights from academic research and forward-looking findings. Within our portfolio management, we incorporate this know-how, taking active measures to contain risks. Considering our business growth and recent loss cost trends, which are fully reflected in pricing, our expectation for outlier losses increases to 13% from 12% previously, partially driven by a higher expectation for major nat cat claims. This, however, has no impact on the combined ratio and also has no impact on the profitability of our business as it is simply a shift between basic and major losses. But what I would like to emphasize most of all are the opportunities presented by nat cat business. There is a huge protection gap while increasing uncertainty is driving demand, not least due to climate change. Munich Re can provide significant capacity which is much sought after in the current market environment. Nat cat is one of our most profitable lines with promising business potential going forward. And cycle-wise, it's now that you would like to be in the market and harvest. However, if you move on to the next slide, 1 single line of business, of course, should not be the only or the dominant driver of earnings. That's why we defined our strategy in the Ambition 2025 with the aim to continuously expand the share of more stable lines of business such as ERGO, Life & Health Reinsurance, Risk Solutions, I could also add the structured reinsurance and P&C, thereby reducing earnings volatility. If we move on to the next slide, I'd like to reemphasize how committed Munich Re is contributing to the climate targets of the Paris Agreement. Munich Re's climate approach contains disabling and enabling elements. Our climate ambition is based on a clear road map to reduce CO2 emissions in business operations as well as on both sides of the balance sheet. On the asset side, ambitious interim targets are set to achieve a net zero investment portfolio by 2050 at the latest. And on the liability side, we have implemented strict underwriting guidelines, for example, internal coal and oil and gas production. But at least as important is our enabling approach, which means, for us, ensuring risks in the context of new energies and thus enabling the transformation from fossil to renewable energies and its respective funding. And as you can see on Slide 17, our decarbonization pathway is well on track. When putting 2021 into perspective of our climate Ambition 2025, please note that on the asset side, we also see a COVID dip in the emissions reduction. On the liability side, 2021 is a transition year to prepare our clients for the more restrictive climate-driven underwriting policies, so we will report our achievements from next year onwards. And with regard to our own emissions, Munich Re's path to carbon net zero in 2030 is supported by our target of 12% less CO2 per employee by 2025. We will achieve this goal step-by-step by remaining carbon-neutral until the net zero target is achieved group-wide. Page 18, as from the beginning of last year, January 2021, we set ourselves a target of achieving 40% share of women in leadership positions throughout the end time, Munich Re Group by 2025. And I personally, as well as the entire Board, have this very high on their agenda. Diversity and inclusion measures are taking already effect. The share of women in leadership positions increased in all business fields, and at 37.8%, we are well on track towards our global voluntary commitment of 40% women in leadership roles. Our consistent improvement of talent management activities has led to an increase from 31 up to 38 in our group management platform. That's the name for our potential program for top executives around the globe. General diversity was an important starting point for us. In terms of diversity and inclusion, now is time to take the next steps and fully embrace all other relevant aspects of it and anchor them in our organization. Let me summarize on Page 19. Our strategy is paying off. With an ROE clearly above cost of capital, combined with strong profitable growth, we are creating value. Shareholders participate in Munich Re's success via attractive payouts and actually, share price appreciation. And this is reflected in a leading long-term total shareholder return among our peers since we care for this KPI since 2018. And this brings me on the last page to the end of my presentation with the financial outlook on 2022. We expect a net result of EUR 3.3 billion, driven by ongoing premium growth and further improving profitability. With this set of figures, we want to take the next big step towards delivering on our Ambition 2025 targets. Christoph, I think, will now lead you through the financials in more detail. Thank you very much.

Yes. Thank you, Joachim, and good afternoon also from my side. I will start on Page 22 actually to lead you through the financials. As Joachim pointed out already, 2021 was a successful year for Munich Re. Based on the strong underlying performance in reinsurance, we were able to digest high nat cat losses and ongoing claims from the COVID-19 pandemic. Also ERGO did very well, contributing an excellent EUR 600 million to the group result of EUR 2.9 billion, which exceeded our guidance. I'm pleased that we achieved a solid investment result, contributing significantly to the group result, reflecting the high earnings diversification in our group. To support the stabilization and the diversification of earnings and capital and to manage volatility, it is very important for us to have strong reserves on the assets as well as liability side. In 2021, we further strengthened the already high prudency of our balance sheet in various dimensions. Here, it is important to add that this was a deliberate decision and there was no need at all to do that. Our strong performance is also reflected in economic terms. The Solvency II ratio of 227% is clearly above our target capitalization. And considering buyback, which will be deducted in Q1 only, we will remain at the upper end of the target range. The economic earnings came in very high with EUR 8 billion, much higher than IFRS, underlining both the strategic operating -- as is the strong operating performance as well as the impact of favorable capital markets supporting the economic earnings. We'll release more details on the sources of these economic earnings with our annual report on the 17th of March. Due to the strong business growth, our required capital increased accordingly. However, I would like to stress already here, and I will elaborate on that further later on, that the premiums and the SCR grew in the same relative order of magnitude, so in a capital-efficient way. Also, the German GAAP result benefited from the pleasing business development, in addition to a positive one-off from changes in the setting of the equalization provision. I will go into that in more detail later on. Our increased stock of distributable earnings continues to support the capital management strategy we outlined in our Ambition 2025. On Page 23, just an update on COVID-19. The earnings impact of COVID-19 was smaller in 2020 than before. However, in reinsurance, we still had EUR 1 billion of additional claims, almost 80% of which coming from Life & Health reinsurance. We are confident that we are solidly reserved here, referring specifically to P&C, still 60% of the accumulated losses are . This indicates the high degree of uncertainty still existing in these estimates but also the degree to which we have built provisions for losses even if we don't know exactly when they will eventually be reported to us. Similar or the same like in the second half of 2021, we do not expect losses in P&C Re in 2022. And also at ERGO, the COVID-related earnings impact turned out to be lower than expected. With hardly any impact in 2021, we also don't expect further losses from COVID in 2022 for ERGO. Still, I have to say the pandemic is continuing to be dynamic, which makes projections for the future mortality development challenging. We base our central scenario on an evidence-based approach, meaning that our outlook takes account of the currently observed situation and of our expectations how this situation will evolve further into the future. On this basis, we expect significantly lower claims in Life & Health Re compared to 2021 of around EUR 300 million. But of course, the uncertainty around that estimate is high. Let's have a quick look only at our Q4 results on Page 24. Q4 came in somewhat higher than consensus expectations. The profitable business growth in P&C reinsurance continued to contribute to the strong earnings and was complemented by high investment results. Net earnings could have been even higher, had we refrained from further strengthening the prudency of our balance sheet. I will go into more details then later on. Life & Health posted an excellent result when adjusting for COVID losses, which by the way, were also booked including a prudent IBNR. The Q4 results benefited from positive experience beyond COVID-19 and the positive impact from the year-end reserve revenue. The good development makes us very confident with respect to the underlying earnings power of our Life & Health reinsurance business. ERGO has, once again, delivered a very strong operating performance. In particular, German P&C business pointed an excellent combined ratio, driven by higher premium income and lower claims. The good result of the international business was supported by a strong financial development, especially in Poland, Greece and Belgium. Finally, the technical result of the German Life & Health business improved based on an ongoing good performance in Health. The operating result is negative in the quarter due to an investment result below the technical interest rate. This is due to the fact that we refrained from compensating losses from hedging derivatives by disposal gains, thus deliberately reserving unrealized gains. On Page 25, you see the investment result. With an ROI of 2.8%, the investment result was above expectations. And if you go through the components, you can see that the expected -- that the running yield, as expected, declined by 10 basis points as the low interest rate environment continued. And the latest uptick of interest rates, which is, of course, beneficial will still take quite a while until the higher investment yields will have a noticeable impact on the investment result. Compared to the volatile year 2020, the capital market development in 2021 was benign. And as mentioned, we hedge part of our interest rate and equity risks. These friendly markets come along with derivative losses of hedging instruments. We are very happy to have these hedges in place despite that earning impact because they help us to reduce P&L volatility and to optimize our economic risk. As mentioned, in Q4, we decided to preserve the valuation reserves, refraining from realizing the gains to compensate for the loss from hedging derivatives. However, for the full year, due to technical asset allocation set at our financing and outsourcing activities to third-party asset managers, the disposal gains still have been a significant driver within the ROI. Turning to the 2021 financial development, I'd like to start with ERGO on Page 26, which exceeded the full year guidance significantly. And this is even more positive because the heavy flood losses in July were very significant for ERGO as well. But on the other hand, the COVID-19 impact was lower than anticipated at ERGO. Overall, as Joachim pointed out, the growth was very pleasing at ERGO. All segments contributed to the strong bottom line performance so I can make that brief. Life & Health business, the earnings increased due to good development in Health and due to lower claims activity in travel insurance related to COVID-19. The German P&C business delivered a very strong operating performance, and ERGO was able to keep the combined ratio stable despite taking the burden from the European flood losses and also despite some year-end reserve strengthening also at ERGO. The international segment also showed very good results. The operating performance further improved despite also some large losses in the Baltics and Austria. Just a reminder, please bear in mind that the last year figures include a positive accounting one-off impact from the merger of our joint venture activities in India. Page 27, reinsurance. In reinsurance, we recorded a very strong business growth in P&C and a substantial increase of our return on equity to 13.5%. I think Joachim covered the premium growth already, so I will focus on earnings and on the impact of that growth on our economic capital position later in my slide deck. The strong earnings increase in P&C was driven by a much lower amount of COVID-19 claims and the continuously improving underlying combined ratio. Here, we clearly see the benefit of the hardening market. Based on the pleasing outcome of the general renewals, the trend of improving underlying combined ratios will at least persist until the end of this year. Please bear in mind that it will take a continuous earning through of the rate increases before the year-to-date normalized combined ratio will be trending down from 95% to around 94% by the end of this year then. Even though the Life & Health reinsurance result fell short of the full year ambition, the underlying performance is very healthy. And despite having to digest corporate claims of almost EUR 800 million, we delivered a technical result, including fee income of EUR 218 million. Adjusting for some positive one-off effects, the business is running at an underlying level of EUR 700 million this year. This includes an ongoing very pleasing development of the fee income business. On Page 28, a few words on Risk Solutions. Our Risk Solutions business showed a very pleasing development again, increasing premiums by around EUR 1 billion while improving the combined ratio by another 4 percentage points. This is even more impressive as the nat cat experience for our U.S. carriers was again elevated due to several storms and wildfires. We took advantage from the favorable market conditions in the hardening markets and expanded our footprint in a number of attractive lines of business. Risk Solutions remained a rapidly growing and profitable segment within P&C reinsurance. Over the last 2 years, the premiums grew by more than 40%, with a combined ratio improvement of 8 percentage points. And on the slide, you'll find some more details of some of -- one of the other entities which we are showing in that segment. I'd like to close my chapter on IFRS with a closer look at our reserving position on Page 29. And this was reserving position, as you know, always was very conservative, has always been very conservative and continues to be equally conservative. But we added conservativism on top of that so it's even more sound than it was ever before. Let me explain. The result of the actual versus expected analysis has, for more than 10 years now, consistently shown very favorable indications. Therefore, also in 2021, we see a sizable positive impact from a reserve runoff, 4 percentage points, fully aligned with the expectation at the beginning of the year. But at the same time, we even strengthened our overall reserve prudency across all segments as we have considered different inflationary drivers in a particularly conservative way. In contract year 2021, we increased reserves for short-tail lines to address effects related to, for example, current supply chain constraints or labor shortages. But then we also added reserves to [ prior year ] contracts to address first signs of wage inflation increases that could impact our long tail lines. On top of that, we were also careful with respect to social inflation. The actual versus expected analysis has shown very favorable developments actually during 2021 for all U.S. casualty portfolios, with reported losses significantly below previous year's levels. However, we remain very cautious with loss picks in the reserve review for liability reinsurance business as we see no signs at all that the U.S. social inflation trend has weakened. Certainly, the reduced U.S. court activity during the lockdown periods in 2020 and 2021 contributed to the currently low loss reporting as well. And therefore, there is a significant risk of future catch-ups. Not only did we keep the current reserve level to address these risks, we even strengthened the U.S. liability reserves deliberately on top of keeping the level stable. As mentioned earlier, in terms of COVID-19, we still observe a slow pace of the loss adjustment process. In 2021, additional losses in P&C reinsurance were actually lower than expected 1 year ago, and with an IBNR level of 60%, we continue to feel comfortable. In the context of our Ambition 2025, we expect ongoing substantial reserve releases with around 4% of net earned premiums being a suitable guidance. I personally would like to highlight that this is quite remarkable, given the strong growth of our business, which means finally that even a constant 4% figure leads to substantially growing reserve releases over time. Coming from basic losses to major losses on my next slide, Page 30. And here, I'd like to explain in some more detailed effect Joachim has been mentioning already, which is the increase of our major loss expectation from 12% to 13%. The first question you may ask is if this will structurally reduce Munich Re's profitability going forward. And there, I have to very clearly say that the answer is no, as this increase of large loss expectation is simply a shift between basic loss ratio and outlier expectation, which reflects a slightly different portfolio characteristics. Therefore, this change has no impact on our combined ratio guidance for 2022 and is certainly not indicative of any lower profitability of our book. Given the fact that the large loss threshold of EUR 10 million has not been changed since 2006, the major loss expectation has, in my view, been remarkably stable. However, due to the ongoing business growth in recent years, a prudent consideration of inflation trends, as mentioned before, and also due to continued model updates, our probabilistic bottom-up portfolio analysis now indicated a slight shift from basic to major losses. As you can see on the slide, in reality, this is not a step change at all. The internal large loss expectation has been fluctuating around 12% as a rounded number in each single year anyway. It now has just moved up a bit further and we consider 13% a more realistic guidance. Please remember the large loss expectation is not an input parameter for managing our portfolio and it's not a budget. It's just the outcome of an export exposure-specific analysis after the renewal, with the intention to give an indication for external communication. We are aware of the fact that analysts and investors have been speculating about an increase of our large loss guidance already in the past. As mentioned at various points in the slide deck, we are expanding our nat cat exposure with a well-defined risk appetite and parallel related internal budgets into a market which is benefiting from significant price increases. While the loss assumptions increase, the premiums do so as well. We continue considering nat cat business to be one of our most profitable lines. Furthermore, we are growing our business across many scenarios, many lines of business, many geographies, including also large and relatively stable structured quota share treaties. In terms of premiums, the share of nat cat remained stable at the 1/1 renewal at around 11%. As you can see on the slide, the increase of the outlier expectation is then finally also not only driven by nat cat business but also, to the same extent, by man-made losses. On Page 31, I'd like to just quickly comment on our Solvency II ratio, which is 227%, very strong, driven by the good operating performance and the favorable capital markets development. Strong economic earnings of around EUR 8 billion outweighed the increase in required capital due to the growth of our book and the weaker euro. The capitalization supports both business growth and attractive capital repatriation. Please note that the 2021 figure already includes the dividend, while the share buyback will be deducted in Q1 only. Adjusting for the buyback already now in a pro forma calculation, our Solvency II ratio would be at the upper end of our self-defined optimal range. So finally, the conclusion can only be that it's easy for us, we can easily pay the EUR 2.5 billion repatriation to our shareholders, which corresponds to a cash yield of more than 6%, starting, at the same time, into 2022, perfectly well prepared with a very strong capitalization. Page 32. What you can see on that slide is that the business growth over the last year is reflected in the continuously increasing relative share of insurance risks against investment risks. In our Ambition 2025, we stated a largely unchanged risk appetite as regards investments while improving the risk return profile and being more active in seizing tactical opportunities. To some extent, the lower share of investment risks is related to capital market parameters like the increasing interest rates last year as well. The balanced approach how we grow our insurance business safeguards capital efficiency, which means the required capital growth at a similar order of magnitude as the premiums. Even though we have expanded our exposure to nat cat risks, we have grown as well in various other lines of businesses across products and markets. For all these reasons, we have a very stable diversification benefit between all risk categories of more than 30% for many years now based on prudently calibrated risk models. And finally, our overall risk profile continues to be very well balanced. Page 33, the SCR development. If you look at the numbers here, you find out that the overall increase is close to 7%, and that number is even a little bit lower than the premium increase of our sister group, which was 8.5%. As mentioned, the investment risks were largely unchanged. And if you look into the details, you will see that the higher market risk, which is related to the equity exposure, was offset by lower credit risks related to higher interest rates. Insurance risk, on the other hand, or more specifically, the property casualty risk, increased, which is not a surprise at all, given the organic business growth. And again, this increase is in roughly the same order of magnitude like the volume increase. Page 34, German GAAP. The result of EUR 4.1 billion came in much higher than the IFRS result, which was solely driven by the much higher underwriting result. On the 1 hand side, this is due to the good business development across all segments. On the other hand, due to the change in the calculation of the equalization provision, which led to a pretax one-off gain of EUR 1.6 billion. I will provide more details on that fact on the next slide. The increase in distributable earnings to a level of EUR 7 billion built a strong foundation to support the capital management targets we outlined at our 2020 Investor Day. Page 35, now the equalization provision. What we did is we have reviewed the mapping 2 lines of business for the calculation of this provision. The mapping was then refined and nonmandatory lines excluded from the calculation of this provision to closely align local GAAP with IFRS and Solvency II. As a result, our net income and the retained earnings increased. In the future, this means that claims events follow into nonmandatory classes of business will then directly impact our local GAAP P&L as we do not hold the provision there anymore. But on the other hand, higher retained earnings support us in capital management and lead to a higher capital flexibility. Because what happens is that the reallocation of capital from equalization provision to equity ensures a higher and more flexible overall loss-absorbing capacity. Aside from nat cat claims, in the future, the increased level of equity will then be able to also absorb man-made losses or capital market-induced losses. So in other words, we will see a diversification benefit also in our local GAAP balance sheet. Going forward, we expect higher local GAAP earnings in most of the years due to a reduced equalization provision buildup. Only years with significant outlier losses will show lower results. To safeguard our dividend commitment even in years with extraordinarily high losses, we will hold higher retained earnings in the future in a low single-digit billion euro amount. While the new framework provides an increased capital flexibility, it will strongly support but not change our capital management strategy. Now on my last 2 slides, I have 2 more overarching CFO topics. I'd like to quickly cover. The first one is the introduction of IFRS 17. We are making good progress in the implementation of the new standard across all companies, across all systems, across all processes. Albeit changing all these processes that fundamentally like needed for IFRS 17 is a challenging task. Currently, we are preparing the production of our opening balance sheet and then the comparative quarters during the year 2022, which we then will be releasing next year together with our actuals. Content-wise, what we expect is a higher transparency of the numbers but also a higher volatility due to a valuation principle which is much closer to market consistent valuation than where we are today. On top of that, insurance revenue will probably be lower than the premiums today, particularly for our reinsurance business as a significant part of reinsurance commissions will no longer be regarded as revenue. Our reserve prudency and our reserving strategy will be unaffected. And finally, I think a very important remark that operationally, the economic steering of our business will not change. On my last slide, a few words on taxonomy. For 2021, we have, for the first time, to report about taxonomy KPIs also in our annual report. As you can see on Slide 37, already looking at the numbers, at the face value of the numbers, you'll see quite a mismatch between the numbers of insurance and investments. You can see there a 55% of our premiums non-life on the insurance side, and you can find 9% on the investment side. Many of our investments are not eligible for taxonomy already by definition. So government bonds would be an example, non-EU investments would be another one. On the insurance side, on the other hand, certain lines of business are fully eligible for climate change adoption. However, insurance products enabling activities to mitigate climate change, so for example, the insurance of solar panels is not eligible at all by definition already. Both in insurance as well as investment, we expect the taxonomy-aligned portion of our business to be smaller than the eligible volumes only, but the aligned portion has to be released only 1 year later so we cannot give you any numbers yet. As you can see, the interpretation of all these numbers is not straightforward at all if you ask me. But sustainable investments have to be able to build on simple, transparent and meaningful reporting rules, which should be comparable across the industry and ideally should be global as capital markets are global as well, of course. Therefore, in my view of the current status of the taxonomy can only be the starting point for the further development of -- and then ideally globally consistent standard to be achieved, hopefully, anytime soon. With these remarks on nonfinancial reporting, I'm at the end of my presentation, which mostly delve on financial reporting, and I'm looking forward to your questions. Back to Christian.

Yes. Thank you, gentlemen, for your presentation. Before we go into Q&A, I'd like to add 1 topic. There was a question this morning that came up in the press conference and on which in the IR team, we received some calls. And it was a question on Nord Stream 2, and Joachim is happy to give you some color. Joachim, please?

Yes. Thank you, Christian. Let me be clear. So the contract between the policyholder and Munich Re Syndicate, daughter of Munich Re, was terminated by Munich Re Syndicate more than a year ago. That was back last January, January 2021, as had been reported back then. The contract essentially covered the construction of the Nord Stream 2 pipeline, and Munich Re Syndicate is one of numerous insurers that have withdrawn from the project. We are not aware of any pending legal action against our termination. But I'd also, with this, ask for your understanding that we will not give any further detail as to protect the data and the interest of the contract partners as best as possible. Thank you. Christian?

Thank you, Joachim. So now we can go right into Q&A, and I'll give it back to you, Natalie, for your introduction.

[Operator Instructions] And the first question is from the line of Kamran Hossain from JPMorgan.

Two questions on conservatism really. The first 1 is on the life reinsurance business. I guess in the fourth quarter, you booked more than EUR 315 million, and I'd look at that versus the EUR 300 million kind of expected to claim through 2022. One of the numbers doesn't seem to make sense. You've either been very, very, very overly present in Q4 or the number for next year doesn't seem right. I think it's that Q4 was very prudent. So could you give us a sense of how much of Q4 is prudent? And maybe kind of a little bit more background on why you decided to do that at this point. And the second question, I've -- as you know, I've been kind of fairly focused on the IBNRs for P&C COVID claims in the last year or so. With the 60% IBNR and I think the total number is over EUR 3 billion for the COVID claims, getting to 2 years on, that 60% is far too high. And at what point do we really see that begin to run off?

Yes. Kamran, Christoph here. I'll take both of your questions. Thank you, first. I start with the P&C part. The loss adjustment process takes significantly longer than also what I would have personally expected. I think I mentioned it a number of times already in these calls, and it continues to be taking more time than expected. One of the reason is that many of our clients have not enough clarity on their side still. And also for reinsurance, it's a much more difficult process because this loss complex is something we never experienced before. And then there's also still call activity in some countries with some primary insurers. So there are many good reasons, unfortunately, why it takes so much longer to have a clear picture on the claims here compared to many other loss complexes. Now our reserving approach is generally to await developments before we would release prematurely any reserves. Therefore, at this point in time, I think I can only reiterate that we feel comfortable with our reserve level and that we are adequately reserved. But it would be too early also, given the lack of information we'll be having from some of our clients to talk about releases already now. On the Life Re side, I fully agree that if you look at the Q4 number and our guidance for the full year, that given that they are the same order of magnitude, that this raises some questions. Therefore, I'd like to maybe explain both of them a little bit deeper. The year-end number, you have to see it in the context that in Life Re, what is very typically is that you get a very late reporting as a reinsurer about the actual deaths coming in. So when then end of last year, the Omicron wave surfaced, which was end of November, more or less, we were facing a situation that we had to set up reserves for the business without having a lot of data to build on. And in this wave, as you know, came in very heavily starting in South Africa but then quickly affecting other markets. And also, I mean, case numbers have seemed to go up quite significant, which we reflected then in IBNR in our year-end closing. As I said, actual data is not available. So therefore, what you're saying is correct. The Q4 number is very heavily building on IBNR bookings, much more than individual claims already, specifically due to Omicron but also due to a prudent setting of that IBNR. And there I would be reluctant to give you an order of magnitude for a single quarter doesn't make so much sense about prudence of a single quarter in a number like that. But I could give you some color about the overall amount of IBNR we are having in our life reserves for COVID-19, and this is roughly 50%, so roughly 50% of the overall life reserves for COVID-19 IBNR. So that should give you some color on our Q4 booking maybe. The outlook for this year is evidence-based, and evidence-based mean we build that on our experience we have currently with Omicron. We have some experience from the past with Delta. But what we don't know yet is that after that Omicron wave, if another big wave is going to hit our markets, so that there might be, for example, in autumn this year, there might be another mutant, another variation -- variant of the virus hitting again Europe, the United States, South Africa, India, so our major markets potentially. And this is something we would not have reflected at all in our EUR 300 million guidance for this year because there's no evidence for that. That's what we mean when we say it's an evidence-based estimate. Similarly, if you remember last year, our initial guidance was EUR 200 million for the year. That was given at the point in time when we weren't aware of a Delta variant and we weren't aware of the Omicron because they just didn't exist at that point in time. And then over time, other variants came in and we unfortunately had to increase our guidance because the evidence changed. So in a sense, I have to tell you that the EUR 300 million, therefore, is the first guess, what can be happening in the year but the uncertainties are just high. We all do hope very much that with Omicron, this pandemic will start to really dampen and then that there will be nothing significant on top of that. But if this is really going to happen, we don't know. And as we don't know it, we cannot build any estimates in our numbers. So I think that can give us color around these 2 numbers.

The next question is from the line of Andrew Ritchie from Autonomous.

Very detailed. Can I just ask a question on Slide 10? There's a comment and it says at the bottom right of that slide, while implementing targeted exposure limitations and risk-mitigating features in new and existing nat cat contracts. Could you just give us a bit more color on that? Were you unhappy with your positioning in nat cat in terms of frequency or layer? You mentioned that you'd reduced aggregate, again, although I thought you were already very underway aggregate. So just give us a bit of color on exactly what you did particularly on January renewals. I guess my second question is a more general one. I'm just trying to understand, Christoph, the buffers that might help you still to deliver 2022 guidance. Let's put COVID to 1 side. You did realize a lot of gains on the investment side already in 2021. You have set aside additional prudence in P&C buffers, but you've intimated that, that isn't going to be let back into the P&L anytime soon unless inflation dramatically drops. So what are the buffers, as I'm struggling a bit, to understand what the buffers are for your guidance for '22? Maybe just give us a color on that would be helpful.

Andrew, this is Joachim. I will take the first question. The second one is prepared by Christoph. So I think you were right in understanding what we meant on Slide 10 with the comments so I'll give you concrete examples. What we want to say is why we were growing our book by 14.5%, at the same time, we have improved the quality of the book or we have improved the risk return profile of the book. And how have we done that? We have done that by limiting, if you, let's say, vastly reducing our frequency or aggregate coverages. In a commercial context, you can never exclude it totally but you can be so restrictive that you limit it so much that you get enough of the other parts. Or give you another example where you just put sublimits into your contracts for risk issues like wildfires, for example, or other secondary perils, where you think you don't want to offer the full capacity but just a sublimit to it. That type of features, we have built in rigorously into the contracts. That's what it means.

Andrew, your question on the buffer is, first of all, already wording, why is a tricky one because finally, we are, in many balance sheet positions, talking about best estimates. And I think what I would confirm is that if there's a range of possible estimates, we would always tend to take the most conservative one. The wording buffer, as a CFO, you're always having difficulties with just the wording. But let me answer the questions where we may be having picked conservative estimates, right? And I mean, you asked from a perspective of the 2022 guidance. I think I'd like to start from there. The 2022 guidance is not relying at all of any buffer on our balance sheet. So this is something very -- we are very confident that we are operationally delivering the EUR 3.3 billion. So there's no need at all for any buffers to achieve that number. And as you could see this year, we were delivering our target and even building up buffer this year. So in that regard, I just wanted to make that clear. But where do these buffers, let's call them buffers for a moment, or these conservative areas sit? Well, I mean, if you look -- go through our balance sheet, asset as well as liability side, I mean, on the assets, of course, still a big amount of unrealized gains. On the interest rates, very much going away with rising interest rates. But then on equities or on other assets, on real estate, there are unrealized gains. And then on the liability side, when we set up provisions, I mean, probably all the provisions where we have some room for maneuver, would be culturally already setting them on the conservative side. So that would, of course, affect all technical provisions, be it P&C or be it Life. But I would go as far that probably also our tax provision is a conservative one. So you would probably have a hard time finding single items in our balance sheet, which are not, in a sense, conservative. But do I expect to use them anytime soon for the expected value of our target? No, never. But it gives us optionality in case something unexpected happens. And that is, I think, the good news in having these buffers on the balance sheet. It helps us to manage volatility and it helps us in capital management as well as in achieving our targets also in years where something unexpected happens. And then that's why we have these.

Great. That's very useful. Joachim, just to go back to your -- the first question. It's fair that you were already -- because I thought you'd already gone quite underweight aggregates and things like wildfire supplements. This is just another step again. This is not the first time you're doing it.

That's right.

The next question is from the line of Vinit Malhotra from Mediobanca.

Yes. My first question is on inflation. And I can -- I mean, I can see that you mentioned the word diligent inflation assumptions eating away some of the pricing gains achieved nominally, though I mean, they have been quantified. But on the reserving side, have you booked any reserves or charges for inflation? Could be long-term wage inflation or something. Or are you already happy with what you had, which could have been conservative already? So that's the first question. Second question is just back to the outlier/large losses, which is -- which if you think of it as a 1-point increase on 12%, which is about 8.5%. But when I see the P&Ls on one of the slides, it seems to be that some of the P&Ls are increasing much more like the Atlantic hurricane is 20% increased in 2021 already. So I'm just curious as to how should we see this difference. How should we use this number? Because you are quite at pains to reiterate that this is not an input variable. So how should we look at this in the context of the 94% combined ratio?

Yes, Vinit, thank you. I'll take both of your questions. First of all, on the reserving side, as you know, we are usually conducting our reserve review always in the fourth quarter of the year. And then a very relevant part of that exercise is to take the most recent inflation assumptions into consideration when really, line by line, portfolio by portfolio, our reserves are being analyzed. And that's also what we did this year based on the most recent economic view of our chief economist when it comes to inflation, and then adapting that for the particular lines of business because, as Joachim mentioned before, CPI is 1 thing but then claims inflation for the respective portfolio is a completely different thing. And then really portfolio by portfolio, we took into consideration what we think the inflation might be, to what level it would be elevated into the future and until when based on the best estimate we're having. And then on top of that, we increased the prudency because in times where the inflation assumptions are changing, the uncertainty around this assumption, of course, is elevated as well. So you do something where you think it's the best estimate, you do in the prudent way already, but still the increased uncertainty is asking them for an additional level of prudency, which we also implemented. And then finally, it's very similar like in pricing. It is really treaty by treaty, portfolio by portfolio, a very in-depth detailed analysis fully reflected in our reserves. The second question, when you asked about the value risk numbers in our deck and compared that to the increase of 12% to 13%. First of all, these value-add risk numbers, of course, are peril by peril, whereas the 12% to 13% increase or 8% to 8.5% increase, of course, is an aggregated view, so it includes full diversification. But there's a second difference, which is very important. The 12% to 13% or 8% to 8.5% increase, there we're talking about the expected value, whereas the value-add risk number is the tail of the distribution, which obviously then also, in terms of an absolute difference, looks different because the shape of the distribution function is varying heavily between each of these perils. It's always different. And then only the aggregation also for the expected value already, only the aggregation of these distribution functions finally results in the increase from 12% to 13%. So it's all consistent, but it's different ways of looking at the various things. And again, I think I mentioned in my presentation already, the 12% to 13%, therefore, also has nothing to do with budgeting really because what we budget is risk purchase usually with capital and the economic owned funds we are holding to cover the risk capital. And therefore, for budgeting purposes, we are relying on value-add risk-based numbers peril by peril and have a very clear strategy by each of these perils and then they're all fully covered by the risk strategy. And the 12% versus 13%, that's just a statistic output after the renewal where we just aggregate everything into the calculation. But it's -- if you want, and there you are correct, it's different angles to look at the same topic, fully consistent.

The next question is from the line of Ivan Bokhmat from Barclays.

A couple of questions for me, please. The first one would be on the EUR 3.3 billion earnings target and placing it in the context of the Ambition 2025. Clearly, the target implies a far stronger increase in EPS than 5%. And I'm just wondering, once you reach that level, should we assume that it can keep growing by 5% every year or it will be at a more moderate pace onwards? And the second question would be on the buyback. I mean, it's great that you've restated them. You're now at the top end of the Solvency II target, in fact, above to 20%. I'm just wondering if you were tempted on launching a bigger program or maybe a larger multiyear buyback program. Could there be any benefits to that?

Thank you, Ivan. This is Joachim. Good afternoon. So the EUR 3.3 billion and all of that in the context of Ambition 2025 and the earnings per share growth ambition of at least 5%. So first of all, I wouldn't read anything else than EUR 3.3 billion commitment this year in terms of IFRS, you cannot just project 5% more of that into 2023, 2024, 2025. You haven't asked that question but I just take this opportunity to clarify that because whether we're going to grow our IFRS results also depends on where the cycle is going, how much capacity we will give to the market. We might reduce it at some point and deliberately accept lower IFRS results and then give capital back to the capital market but making sure that the ROE will end up in the targeted range of 12% to 14%. This is more relevant to us than any IFRS result per se. With regard to the dividend increase, now it increased 12% or 12.2%. Is it the best expectation going forward that from then on, it will be rather 5%? I think you should not expect 12% every year. I think that would be slightly outrageous. For us, it was a good opportunity to also make up, if you like, a year of no increase last time. And the 12% is compensating, if you like, 2020 where we kept the dividend stable. Going forward, really, you should expect that we increase it at 5% or higher, or in very bad years, just keep the dividend unchanged. So the dividend policy is unchanged. The buybacks, we will not go for any program committing a multiyear buyback program because we think it's advantageous to us to look at that question year after year depending on how the market or growth opportunities look like and then decide whether we rather want to employ capital for business growth or give it back to shareholders. That has worked out. But that said, you can trust us that when the capital situation is in excess position and the market opportunities aren't there, we are very happy to consider buybacks.

Maybe just a follow-up. If I think about how you've returned capital this year, it's EUR 2.9 billion earnings and EUR 2.5 billion of capital return. Next year, the capital generation capacity is expected to grow considerably. And even if I put on another 5% in EPS, that still leaves substantial room for further buyback increase. And at the same time, your growth targets, maybe -- I'm sorry, it sounds like a third question, but your growth targets only imply low single-digit growth in premiums. What do you plan to do with that extra capital?

We haven't defined the plan yet. We will look at that towards the end of next year.

The next question is from the line of Iain Pearce from Credit Suisse.

The first one was just on the HGB result. Christoph, correct me if I'm wrong, but I think you said you were sort of looking at holding low single-digit billions in distributable earnings in the HGB result. Obviously, after the capital return from this year, you'll be at sort of EUR 4.5 billion. So I guess following on from Ivan's question there, should we be expecting capital returns in excess of the HGB result, given where you are relative to the low single-digit number that you sort of highlighted? And then following on from that on the HGB results, so why would you be confident holding a low single-digit billion number with a lower equalization provision and higher potential volatility in the HGB result going forward from the changes that you've made? Just trying to understand that.

Yes. Iain, thank you for these questions. Well, what you can see in our HGB equity reserves or retained earnings, what you can see there is that we are facing much less restrictions than in the past. So the flexibility is higher, which gives us optionality, which is good. What I don't like is having restrictions which are not in the hand of management but restrictions just given by stupid accounting practices or something. And therefore, I think it's a big step forward. A lot of additional flexibility for us, but of course, it doesn't automatically mean that we are fully using that flexibility because what Joachim has been saying before that we will always balance growth versus capital repatriation continues to be true. And that's why we emphasize that the general capital management strategy is unchanged. Having said that, on your second question, why are we feeling comfortable with that amount? The amount is basically to finance the ability to pay at least the dividend also in years where we have very high claims. Well, what we did is actually simulations, so stochastic simulation calculation and including different loss pattern, loss scenarios, events in these calculations and try to find a compromise between being overly cautious on the one hand side because then you hold too much capital. But also we wouldn't like to be overly aggressive in a sense that already a small storm would then eat into our dividend. That's something we don't appreciate because, as you know, we're very proud on the fact that the dividend has always been stable or being increased. So we did these simulations and came up with a certain range. What is the ideal amount of retained earnings to be held, and then we implemented kind of a traffic-light logic on that range, which still gives management flexibility to deal with that question every single year. To what extent and how much retained earnings we're then finally really needing to stabilize, but still giving an indication. So it's also not a hard limit or anything. It's more traffic-light risk budget logic similarly like we're having for other KPIs as well. But that's more or less how we came up with the numbers. So it's really -- again, I mean, we like models. It's again very much model-driven.

The next question is from the line of Will Hardcastle from UBS.

Two questions. The first one is just on the nat cat large loss budget, I'm possibly being a bit slow here. Just working out, is the 12 points to 13 points move simply left pocket to right pocket and no actual increase in prudency overall? So should we expect the ex large loss ratio to reduce equally? And is there any element there of higher prudency year-on-year? And then just a quick one on Slide 60. It suggests the off-balance sheet reserve and associates has increased over EUR 1 billion in Q4. I'm just trying to work out what that relates to.

Sure. Yes, the first question, to be very clear, yes, it's only a shift, nothing else. And to make it even clearer, the 94 target we have, our internal breakdown would be 13% outlier, 51 basic losses, 30 expenses. That's our expectation, how the 94 in the plan would develop. So I hope that's clear. It's really -- it's only a shift and nothing else. On the unrealized gains on the various asset classes, as mentioned, I think you mentioned Page 60. And then you're looking at the associates, if I understand correctly?

Yes, the associates.

One of the main drivers here is ERGO India. As you know, we are holding a minority position there. It's a very successful business and that's the way we account for value creation there.

Sorry. But was there a reclassification or did the valuation of that basket simply go up by over EUR 1 billion quarter-on-quarter? It suggests it went from EUR 1.5 billion to EUR 2.6 billion in Q4.

Well, I mean, it's not a listed or liquid assets so the valuation is not done every single time we close, especially not when it comes to just showing reserves. So it's -- in reality, it's a smoother development like what you would probably read out of that slide. But as a matter of fact, it's actual value creation.

The next question is from the line of Mr. Fossard from HSBC.

Two questions on my side. The first one would be, Christoph, could you come back on additional conservatism or building your buffers? Can you quantify for us, not precisely, but give us a range of how much additional [indiscernible] has been built into this additional prudence buffer over the full year 2021, if you had to guess estimate them? The second question is, I would like to come back to the 0.7% increase in average price. Could you provide us with the kind of work from the nominal price increase that you achieved on your book to the 0.7%, just to better understand how inflation assumptions have been taken into account, change in models, maybe also the business mix? Any color on that would be interesting.

Yes, Thomas, thank you. The question on the buffer. First of all, let me explain why it's so difficult to address that because finally, what are buffers and where are we always overconservative? I could start with the P&C Re reserves. I could ERGO P&C reserving. Then in the fourth quarter, we didn't realize unrealized gains on equities where we had the losses on derivatives. That's also something which I would, at least, of course, categorize as buffers. We talked about the IBNR Life Re already. I could probably continue my list also with probably tax provisions, I don't know. So it's a little bit hard to really define where does always -- all these alleged buffers or let's call them conservative valuations in our balance sheet. But to give you maybe some color, I mean, already during Q3 and also in some one-on-one with investors, I was often being asked how much the admiral sale is contributing to our results in the fourth quarter. And also there, we did not give a number. So I would at least go as far and say that the admiral gain was easily compensated by buffers we have been setting up. Second question. Yes, okay. Nominal to 0.7%, that's unfortunately something we do not have ourselves as already deep in the system when our underwriters locked in their assumptions and then we aggregate the information to have this aggregated 0.7%. We do not collect nominal price increases. So therefore, the only thing I can give you is maybe some indicative information, if at all, how we dealt with inflation in various lines. And I think I covered it already for reserving. It's a big difference between social inflation and inflation in various property lines. Inflation contract is something completely different than if you're having a proportional treaty. Motor businesses as we can complete it differently as well than, if you talk, for example, about third-party liability. So all these things have to be captured. And therefore, the range of inflation assumptions we have been using is a wide one, with the highest numbers being clearly double digit, the lowest numbers being significantly lower than that and maybe an average being somewhere in a mid-single-digit order of magnitude, something like that on average. But again, you have to be very careful using the number because it's differing so much from the biggest to the smallest number applied.

Understood, Christoph. Can I squeeze just 1 question for Joachim? Joachim, what is your assessment of pricing adequacy at the present time? I mean, do you believe that we are reaching something which is more in line with your expectations or is still far away? I know that you also that we depend from lines of business, but will be interesting to get to your assessment at the present time.

Yes. My qualification would be the following. If we hadn't considered the parts that we have grown as price adequate or technically adequate, we wouldn't have grown into it, so pricing is adequate there. Is it adequate and even better than the year before? Yes. It's increasing margin over the whole renewed portfolio by 1.1%, for example, by 0.7%. And last year, by the way, it was at 2.3% or 2.4%. So that means pricing is adequate and is becoming more and more adequate as the market is hardening. That is true for the whole portfolio. And as you highlighted yourself, you have to differentiate because there is also lines of business or regions where pricing is inadequate. They become less -- but just to give you 1 concrete example, in the U.S. in the casualty business, I think we have seen a couple of years where the original market but also the reinsurers had to catch up increasing their rates. We see this trend carrying on, on the regional side, but we already see the first attempt that reinsurers would have to increase their commissions, which they pay to cedents, and we have stayed very restrictive in this aspect. So that is the overall picture, but what we've renewed, very price adequate.

The next question is from the line of Ashik Musaddi from Morgan Stanley.

Just a couple of questions I have is, first of all, I just want to go back to the premium growth number you have given. I think you have given EUR 61 billion premium for the full year for group versus your last year of EUR 59.5 billion. So that reflects like 2%, 3% growth. I'm just trying to understand. I mean, are you kind of suggesting that there is not much of top line growth you are expecting to print this year and that is the reason why you are doing this share buyback? Or would you say that you're doing the share buyback because you thought there is excess capital, but there is still enough capital left, which can still help you grow the premiums a bit faster just like what you have done in 2021? I mean, the reason I'm asking is like I just feel like 2% to 3% is a bit on the lower end. And I mean, even a 5% higher growth in P&C premium can add about EUR 100 million of earnings. So just trying to square what am I missing here. So that's the first question. Second thing -- second question is, I mean, on -- I think in your remarks, you did mention that you are being a bit more on the cautious side on the long-tail casualty lines. But on the property, you are still, more or less, maintaining the proportion. So would you give some color as to how does that cautious view has been reflected in the January renewals? Have you cut back on long-tail casualty lines? Or would you say you have taken extra protection or something like that? So some color on that would be very helpful.

Yes. Thank you very much, Ashik. So premium growth-wise, you're right, this EUR 61 billion compares to last year like a 2% to 3% increase or growth only. I must admit my first read of this number was exactly yours. It was exactly yours and I challenged my colleagues. I said, are we certain that it is 2% to 3% or shouldn't it be something like, I don't know, 3%, 4% or 5%, something more? And that is the outcome of the bottom-up planning of the whole organization. And of course, what we have to take into account, sometimes there is larger deals, larger quota shares that are just running out, which were written for financing purposes. And when the purpose is reached and accomplished, then they fall out of the equation and you have to produce against them. So bottom up, that is the best view. But I wouldn't be totally surprised if in the end, we would see EUR 62 billion. But as you know, we don't plan this with, by far, not the same diligence that we plan the technical results or the bottom line of it. But by no means is capital is gas resource to support even the stronger growth, if a stronger growth makes sense to us. Then your second question with regard to our annual target composition of the portfolio, more property, less property, more casualty, more XL, more proportional, et cetera, I would say in the -- we do have preferences. And we do have portfolio preferences where we say you have a better alignment with your clients with regard to certain reinsurance contract structures like proportional in casualty, for example, or nonproportional in property, et cetera. So applying those preferences, applying those, if you like, historic experiences, it's almost truth is what we have done. And the portfolio outcome is reflecting our preferences to a better extent or a larger extent and that is possible in a weaker market before 2017. But then you also have to face market reality. So if you grow, for example, the specialty business, which we have grown and are growing in the U.S., then you have to grow into casualty because 2/3 of the primary market in the U.S. is casualty business and the remainder is property business. But then, of course, you have to select those parts where you have better lines, which is then the smaller and the midsized commercial business and maybe not the heavyweight one. So all of that is reflected, and we think that the outcome also of the 1/1 renewal brings the portfolio quality closer to our, if you like, wish list.

That's very clear.

The next question is from the line of Dominic O'Mahony from Exane BNP Paribas.

My first question is really just on the cyber business. You mentioned, Joachim, that you're very focused on accumulation risk and controlling that. I wonder if you could just help us understand how you do that maybe with an example or 2, to sort of really sort of bring that to life because I think it's a question that I think a lot of investors have about the cyber market as a whole, how accumulation risk is controlled. The second question, just on Page 7, really interesting detail on the management of the life book in ERGO. Thank you for this. It goes to me, looking at this, you're one of the few companies in the German Life sector that can really claim to be at scale and can share that with others through the third-party administration proposition. I just wonder whether there's anything to stop you absolutely acquiring books and deploying capital into this. There's clearly a market for this. And it sounds like you folks are good at running this sort of book. So I was just wondering whether there's any impediment from a strategic or operational or even sort of an accounting perspective.

Yes. Dominic, thanks. This is Joachim. So with regard to the Life backlog, is there a market already for third-party administration of the back books? Not for us because what currently is still ongoing is the migration of the ERGO back book into the new platform, which we built with IBM. When that is finished, then we -- and let's say, this will take 1, 2 more years, then IBM and ERGO, that would be ready to go to attract third parties to give them their portfolios for administration. Will there be a market? We think there should be one. We do not know how big the demand and the willingness to pay for it is at this point. There should be a demand because ERGO is not the only company in the market that had legacy issues. I think there is a whole bunch of companies who have legacy systems in place, which just no longer do the job of administering the portfolio. So either they're going to build themselves a new IT platform, which comes at a pretty massive cost or they look for a third party or they sell the whole book. So we believe there should be a market, but we need to see how attractive it is once we see what player is going to pay for it. With regard to cyber, I mean, I'm not going to disclose how we do the accumulation risk modeling. However, we do consider, of course, what type of risks are of a systemic nature. So when we, for example, consider the part of an Internet or of infrastructure or communications infrastructure, so things that would cause immediately a loss everywhere and accumulated those losses to uncontrollable limits, then we do exclude such risks from coverage at all. And for the others, where we say they should rather diversify even if they don't 100% diversify, they shouldn't accumulate totally and broadly. There, we come up with calculations of how much, I would say, diversification leakage could we afford and how should we adjust our capacity limits so that the downside that we run doesn't exceed our risk appetite. That's pretty much the -- I would say, the way that we look at it and how we give ourselves this cyber risk appetite and translate that then into a cyber underwriting strategy. May I add one thing because Christoph kindly added that the question with regard to the Life back book is not only about the TPA business, but if we had the appetite, once the new platform is ready for new clients, whether we would buy back books. So including the risks, whether we would become risk carriers of the others, clear no.

And the next question is from the line of Vikram Gandhi from Societe Generale.

I hope you can hear me all right. Just 2 quick ones from me. First is, and maybe you can say this is probably a philosophical debate, but when I look at the increase in the large loss budget from 12% to 13%, that's about 8.3%, so let's round it up to 10%. I'm just thinking why that was considered as a better option versus just increasing the EUR 10 million threshold to EUR 11 million. Because as it is, for the past 15 years, the group hasn't really taken into account the inflation on the threshold limit. So moving that would have probably solved the puzzle more simplistically, I would say, just pushing that from EUR 10 million to EUR 11 million. I don't know if that really makes sense but that's my question. And the second one is, can you help us with the implications of the new S&P capital model as well as the global minimum tax rate, that is being flagged at around 15%. So any moving parts or any color there would be really helpful.

Yes, Vik. I'll take all of your questions. Yes, let's start with the 12% to 13% versus the EUR 10 million threshold. And as you can imagine, a large organization can debate things like that endlessly and we have a lot of experience with that. And frankly, both options are viable options and we might also discuss them again in the future. But finally, what is holding us back, increasing the EUR 10 million just by the way, well, many internal processes also use the same threshold. And then you have to decide if you change your internal processes or if you want -- would accept a deviation between what you do internally versus what you use for external communication. All of that is not straightforward and not ideal on first sight. And then on the other end, of course, 12% to 13% is implying something. If you look at the EUR 10 million has been unchanged since 2006, the 12% to 13% is a nonevent basically because it had to be expected anyway much earlier already, just given the normal inflation over such a long time. So yes, I understand that you're asking the questions and we're asking the question ourselves, ask ourselves regularly as well. But neither the one nor the other option is 100% ideal. And therefore, you can argue a long time about that. Let's end it with that. I mean, I could go into that for much longer but I don't think it's really worth it. In the S&P model, I mean, that's obviously very early days because I mean, the request for comment, this is just out from S&P and there is many moving parts in there. But first of all, what I'd like to underline is that what we -- that what we generally are happy with is that this request is out there now and that there is an intense discussion plan also with the industry about potential improvements in the model because what we saw in the past is quite significant deviations in some parts of the model from where we stand in our internal risk modeling. So the S&P model historically is not everywhere fully economic, at least according to our understanding. So that's probably necessary anyway because their model is a simple Excel model and what we are using is a complex stochastic modeling technique. But still, we always felt that aligning the rating agencies, as put it more generally, closer to what our internal model proposes would be beneficial for us. Now if the outcome of the review then finally will be beneficial or not, that remains to be seen, depending then on the decision to be taken by S&P on each of these model elements where now we have proposed this out there but then obviously, input from ourselves as well as many other industry players still needs to be discussed and also potentially considered by the rating agencies. And so therefore, it's probably early days to come up with a final assessment. But put it that way, I'm not right and I'm really -- I mean, it's more the opposite. I'm really welcoming that the model is up for review now. So that was S&P and then minimum tax rate. I mean, there are so many aspects we discussed there that would also be a long session to come up with conclusions. First of all, what is my -- the biggest concern operationally, it's really extremely burdensome as it is being proposed right now because you basically need to establish a completely new tax ledger. And even questions like materiality for consolidation purposes asked again by the OECD to potentially change that compared to what we are doing today. So that's potentially extremely burdensome with a lot of administration effort, additional administration effort. That's the concern. Tax-wise, it remains to be seen because many jurisdictions where we have been doing business as are anyway not deviating a lot from the 15% minimum tax thresholds are on the move towards the 15%. So therefore, tax-wise, I don't think it will be making a very big difference for us at all. It's rather probably accelerating a journey we are seeing anyway.

We have a follow-up question from Vinit Malhotra from Mediobanca.

So 2 follow-ups or 2, rather, questions left from my side. One is on the Risk Solutions, which has produced very good 92.8% combined ratio despite your comment on the slide that there was heavy nat cat. Please, could you quantify what's the number without nat cat? And what, if any, reserve movements are involved in this 92.8%? And second question is just on the non-mandatory HGB lines that you have reviewed and I've taken on board your comments, Christoph, that you want management to be in control. Could you just say, were any external agencies or bodies involved or needed to be involved in this division? Or would it purely something that has been sitting in the book for so many years and then was just discovered? Or how did this decision happen is what I'm trying to understand.

Vin, I'll take the first one and then I ask back on the second because I'm not really sure what you meant. But for the first 1 on the Risk Solutions, I'm sorry, I do not have that number so I cannot give you any answer on that. And then [indiscernible] just don't have it. And on the second part, can you maybe please rephrase? I wasn't sure about the [indiscernible] what your question was.

Sorry. So how did this -- so I understand what happened in the process and how you -- but why did you choose to do it now? Or did you need to consult any external bodies, auditors? How has the process been to actually do this? And I'm happy to take it offline as well. It's not...

So I can maybe quickly cover it, and if there are any follow-ups, we can take them offline. I mean, what we did is we just reviewed that for various reasons. First of all, I wasn't happy with the big difference between local GAAP and IFRS and Solvency II. On top of that, as you know, we are preparing for IFRS 17, which in itself is already extremely burdensome when it comes to data management, providing the data into accounting systems. So therefore, also that was kind of a starting point to look into processes data and how we manage or how we map lines for the various accounting purposes. So maybe a number of reasons. And then reviewing all of that, it's not like you do it in half a day or so. It was a 1.5-year project. So it was really in-depth work analyzing and really -- because I mean, on the reinsurance side, we have many, many contracts and you have to look into all of them more or less and review how they are mapped onto the various lines. The difficulty is that according to German GAAP, this regulation is defining lines of business in the context of a German primary insurance market, and we are doing reinsurance business globally. So therefore, at first place, the mapping is necessary because the lines in Germany are just containing different elements, different business. Then if you look at reinsurance recovery we be offering, for example, in Australia, Japan or the United States. But it has all to be covered by that calculation so therefore, somehow we have to map it. So that was the starting point. It was a long effort. When we started it, we just wanted to review it. We didn't know what the outcome would be. And then after 1.5-year intense work, the project team came up with what we have been implementing here and now. And obviously, we are not living without any reviews or any external parties. The opposite is the case so our accounts are audited, of course, by our auditor. And then also, of course, we are working in a German regulated environment when it comes to our insurance business. So we have a regulator as well. So I hope that's enough for a first one. Anything else, we are happy to take it offline.

More than enough.

There are no further questions at this time. And I would like to hand back to Christian Becker-Hussong for closing comments.

Yes. Thank you, Natalie, for leading us through the call. It's time to close the session. Thank you very much for joining us this afternoon. Our pleasure as always, and also, as always, happy to follow up with you on the phone for further questions. Thanks, again, and see you all soon. Bye-bye.

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