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

Thank you. Good morning. Ladies and gentlemen, friends and family, a very warm welcome on this very cold and snowy morning here in Munich. Today, everything is about IFRS 9 and IFRS 17. And I'm not sure how many of you are looking forward to the new accounting standards, I can safely say we actually are. And in particular, our today's speaker, Christoph Jurecka, of course, our CFO, is here, and he will take you through the slide pack we just published this morning, and which you hopefully found helpful. Procedure is pretty straightforward. We will start with Christoph's presentation which is going to take about an hour. And then we will have plenty of time for Q&A. And it's now my pleasure to hand it over to Christoph.

Well, thank you, Christian, and good morning also from my side. A very warm welcome. And indeed, I'm looking forward to IFRS 17, and I'm looking forward to be able to finally present it to you today. Then -- Munich Re's Christmas present this year indeed is a deep dive into IFRS 17. So -- and I hope it will be insightful for you. And again, it's my pleasure to present it today. Let's start with a quick view on the agenda on my Page 3. Here we are. I will start with a quick introduction, giving some overview and also some guiding principle, which led us to the implementation of IFRS 17. Then more detailed chapters will deal with the balance sheet and with the P&L. Chapter 4 will then go through the various segments we are regularly reporting, and explain how the P&L works in those segments. The idea is that once you finally get the real numbers next year, that you can look back into that presentation and then it works kind of a recipe how to interpret the numbers. And then finally, Chapter 5 will give me the opportunity to comment on the outlook and on the numbers we have been pre-releasing yesterday. Now let's start with introduction on Page 5. Here we are. I think the most important message on that slide is that we are well prepared for the transition into the new accounting regime. We are close to finally going into that regime. As you know, as of next Q1, we will be reporting according to IFRS 9 and IFRS 17. Internally, it has been a long journey already. We have been working many, many years on the implementation. And already this year, we have been preparing comparative numbers, which we are going to release next year as prior year figures. And it's important to mention here that these comparative numbers only involve IFRS 17, they will not include IFRS 9 because we decided to stick for the prior year to IRS 39 for the investments. And we will use the so-called overlay approach to avoid accounting mismatches. This overlay approach allows us to have a valuation of certain assets -- certain asset classes in some segments already according to IFRS 9 to avoid accounting mismatches. And that is what we are going to do for the VFA business for ERGO Life and Health as I will also show you later in the presentation. Beginning of 2023, then also IFRS 9 will have the transition. And then again, Q1 and in the following quarters, we will be fully in the new regime with IFRS 17 and IFRS 9. A few high-level statements on Page 6, just to set the stage. We are welcoming IFRS 9 and IFRS 17 to very -- for a very clear reason. It's much closer to the economic steering, and it's much closer to our internal steering compared to the current accounting regime. So therefore, our clear expectation is that our strength will be better visible and our economic earnings power will also be more transparent compared to the past. And this is basically for 3 main reasons. The first is it's consistent, the market consistence, and accounting mismatches we are suffering today will be gone. The second reason is clarity. There's a very clear definition and separation also what is insurance business, what is investment. And -- so this will be much more appropriate than in the past. And also revenue will be more appropriately reflected in the new world. And the third one, transparency. This standard allows us to also show you future earnings as part of the CSM. So the future margins, which we have in our long-tail business, will be visible. But there's also a lot which doesn't change. And I think it's very clear, business strategy doesn't change. Our capital management strategy, dividend strategy, share buyback strategy, it does not change. Our prudent reserving strategy also is not affected at all, which is very important. As you know, this prudent reserving strategy is a key part of the way how we conduct the business. So it's very relevant for us that we were able to maintain it fully. Local GAAP obviously is unaffected as well as Solvency II and also our capital strength clearly unaffected. So it's a change in accounting. It's a change which will hopefully help you to better understand what's going on in Munich Re, but it does not alter our business and it does not alter our DNA. What IFRS 17 does though is it's principle-based, and therefore, there are options, which companies can use or not use or where companies have the opportunity to interpret the standard individually. And so company-specific decisions are relevant in the context of IFRS 9 and 17. And when we initially thought about how to decide on those options, we thought -- well, a few guiding principles to lead us through these optionalities would be helpful. And those guiding principles are depicted here on my Slide 7. First of all, we wanted to have the maximum possible alignment with Solvency II and internal steering just to make sure that we do not add to the confusion, we sometimes already have given the multitude of different accounting standards we have to apply. The next point, we have to maintain the prudency as an integral part of how we steer our business. We wanted to have a P&L volatility, which is acceptable, so not too high. And we wanted to make sure we show all earnings in the P&L so that no source of earnings is excluded from being eventually shown in our bottom line. If you take those guiding principles, and then derive what they mean for the various accounting options, you end up with the decisions as shown on the lower half of the slide. First of all, discount rates, where we try to as much as possible, use the identical curves than in Solvency II, so really use the EIOPA Solvency II curves wherever possible. The risk adjustment is also based on Solvency II. I'll come back later to that again, use the cost of capital approach here. The reserving level, as mentioned, unchanged. OCI, we used the OCI option in order to dampen volatility wherever possible. Distinction of expenses, so all KPIs will be consistently defined based on the IFRS 17 definition of costs to make sure we have a full consistency between our financial statements and all KPIs we are using. So in our case, it will be possible for you to do the calculation, so to derive the KPIs from our financial statements. We thought that was important for consistency reasons. And finally, equity instruments, we use fair value through P&L in order to make sure that also value increase, an appreciation of stock prices will show up in our P&L. My next 2 slides will deal with IFRS 9, so the accounting change we are facing on the asset side. What you see here is that we use, as mentioned, the OCI option for fixed income instruments and loans in general, wherever possible. And possible means that we are aligned with the so-called SPPI criteria. And all other assets will be booked through P&L. And you can see that this would include equities, private equity, infrastructure, real estate for VFA business. We have to book the situation in credit risk through P&L and also derivatives. Now what is the impact on Munich Re? Well, first of all, the OCI option reduces the accounting mismatch on the asset liability management. The share of fully P&L sensitive investments will go up significantly, from 1% today to 17% in the future. Now this includes the VFA business. And as I will show you later, in the VFA, we have different mechanics to dampen volatility. So therefore, to have a good picture of future volatility, it's fair to exclude the VFA investments from the assessment here. But even if we do so, still the fully P&L sensitive investments would go up from 1% of our assets to 13%. So still a significant increase of volatility to be expected. The expected credit loss will not have a major impact on our numbers, given the high credit quality of our book. And at the last point, we'll have a very clear separation now of insurance contracts and of investment type contracts, which we sometimes, as you know, conduct out of our insurance business. But from an accounting perspective, it's very clearly defined now, and we will clearly show you what is investment and what is insurance. Also in our P&L, as I will also come back to later. On Slide 9, a little bit more detail of how the various assets are booked in the future compared to today. Today, we have 31% of amortized cost investments, which will go down to 4% in the future. Fair value OCI will increase to 79 and then fair value P&L as mentioned from 1% to 17% increasing the volatility. On the right-hand side of the slide, you see that the total investment volume goes up. And this is a reflection of the large amount of assets we value according to fair value, so with market values. And therefore, the value is higher. On Page 10, we will go now to IFRS 17, and I'd like to start with a few general remarks. What are the key features of IFRS 17? Just to remind you, you're aware of that anyway, it's a current measurement of the liabilities with discounting across all lines of business based on current yield curves. We will explicitly report future profit margins from long-tail business. And we will have to immediately recognize losses where they arise. And also, we'll have, particularly in our reinsurance business, a more adequate reflection of revenues. Now what does that mean for Munich Re? First of all, the discounting will lower the combined ratio. And I think we'll all have to get used to the concept of a combined ratio which is interest rate dependent due to the discounting. It's something which doesn't sound very familiar yet. But I'm very optimistic, over time, we'll get used to it. And economically, it makes sense. Long tail business has a different characteristic, a different profitability than short-term business. So discounting makes sense in that context. Also -- we still have to get used to it, I admit that. Next point, the CSM will better reflect the value of the long-term business. We will have in the balance sheet, the CSM and be able to show you what our expectation of future earnings is from the in-force business. The VFA business at ERGO Life and Health will deliver much more stable earnings patterns than in the past. That was a business which was always kind of volatile. This will be much better predictable and much more stable based on the so-called VFA approach. And then we'll have onerous contracts. So if you wanted an accounting sense, loss-making contracts, which we have to recognize immediately with the expected loss in a so-called loss component. But here -- already here on that slide, and I'll repeat that later, I'll have to really make the remark that this loss component is really driven by our conservative accounting assumptions and by the high granularity of our interpretation of how we implemented the standard. So if you want this loss component is an additional element of prudency, we have been establishing when we introduced IFRS 17. On Page 11, and you're aware of that anyway, that is how the standard works. So I will not go through that. You know that we are basically looking at discounted cash flows, deducting a risk adjustment and then end up either with the CSM, which then would lead to earnings over the lifetime of the policies or we would lead -- or it would lead to a loss component where losses would have to be recognized immediately. On the next slide, you see that there are 2 types of liabilities we have to book in IFRS 17. They are quite similar, not in detail, but from a conceptual point of view to IFRS 4. So we have a liability for remaining coverage and a liability for incurred claims. And now the world would be very simple if there were if there weren't 3 different measurement models in IFRS 17. And this is also shown on the slide here, there is the so-called general measurement model, there's the premium allocation approach, and the variable fee approach. And as you can see, many of the concepts are quite similar for the 3 approaches. But the devil is in the detail. And even if you have tick marks implying on that page here that it's quite similar, it might still differ in the details. And therefore, we'll have to revisit all of them later on anyway, and just here that you see that they are quite common in some sense, at least. Page 13. What you see here is our implementation and how it -- so which measurement model we did implement for which business in our group. We have 30% of the general measurement model which is the basic model and properly reflects the characteristics of long tail business. This 30% are including the reinsurance Life and Health business. And they are including quite a bit of the ERGO business, ERGO P&C Germany, for example, and also ERGO International business. The premium allocation approach is a simplified approach, which you can use for shorter tail business, so a simplification. We use it for 56% of our group, reinsurance P&C, most importantly, and then also across all the 3 ERGO segments the PAA is being applied. And then finally, the variable fee approach. This is the approach specifically for participating contracts, so contracts where policyholders get a certain share of investment income. And that's an approach we then use for the Life and Health business in ERGO Germany and also in ERGO International. On the next slide, just a few words on the transition approaches. And transition means how to get from IFRS 4 to IFRS 17. And the standard allows for 3 different approaches. The first one, the full retrospective approach, is the most fundamental one because what it's saying is more or less that we -- that you take each of your insurance contracts, go back to the inception of the policy, and then do the accounting as if IFRS 17 would have been in place back then already. Now as in theory, that's the best possible approach. Practically, it's very hard to do so. given data constraints. And given that for some of our policies, we would have to go back decades. So therefore, in reality, it was only possible to apply that approach to 10% of our book. If you are not able to do this full retrospective approach, you have 2 options. You have the option of a modified retrospective approach in which you go back less years, not fully to inception of the policies, but a few years, or you do the fair value approach, if you do not have data at all, to go back a number of years. And the fair value approach, there the transition is based on the current market performance based on a cost of capital approach to determine that value. Whereas in the modified retrospective approach, we do an approximation on the historic development and try to then come as close as possible to what the value would have been with a full retrospective approach. But by this -- by the means of this approximation. As you can see, 40% fair value approach, 50% modified retrospective approach. With that, I'm at the last slide of the introduction, and we can jump right away into the balance sheet. On this first slide, and don't be frightened, this slide is just really took an overview how the balance sheet will look like in the future in our IFRS 9, IFRS 17 world. It's meant to start being used to new concepts already today. We also did publish today a straw man of our future financial supplement to give you also there the opportunity to prepare already how would the financial supplement look in the future, obviously, without any concrete numbers yet. But the structure is there already. You can download that on our web page. If you look on the slide here on the balance sheet, you can see that a significant amount of positions is really changing. We color coded them. A few of them changing due to IFRS 9, others due to IFRS 17. If you look into the liability section into D, you'll find liability incurred claims. Again, you'll find the liability for remaining coverage again, it's all consistent. And don't be surprised, you also find some insurance contracts issued on the asset side, depending on the cash flow pattern that can happen. And there, the standard does not allow you to offset assets and liabilities. So you show both of them. Everything else, I think there will be plenty of opportunity also to discuss the details then next year quarter-by-quarter. And we will obviously also support you in interpreting those new numbers in the very details we'll provide you with, then. Therefore, I'd like to go on to Page 17 now, and this is one of the core pages of today's presentation. This is the equity reconciliation from IFRS 4 to IFRS 17. The IFRS 4 equity at the end of '21 was EUR 30.9 billion. And then you can see here on the slide several steps how we can -- how we go from this IFRS 4 equity to the IFRS 17 equity. The first reconciliation step is just a change in the valuation base. The second then, a risk adjustment. Third one is CSM, loss component, taxes, and then we finally end up with IFRS 17 equity. Now what's behind those various items? The change in valuation base, in that number, you basically have all the methodological changes. So we go from an IFRS 4 methodology, which is completely different from what we will be doing in the future, to an IFRS 17 methodology based off -- based on best estimate cash flows, based on discounting across all lines of business, also as mentioned in P&C. And then also some off-balance sheet reserves in the current world will be fully included in the valuation of the CSM going forward, the valuation of the liabilities also going forward in the so-called overlay approach. Particularly I'm talking about the loans ERGO is holding here and also real estate. So this is all included here in these valuation differences change in valuation base. This adds EUR 25.2 billion to the equity. We then deduct a risk adjustment based on the cost of capital approach in line with Solvency II. There are some methodological differences still from diversification. I'll come back to that later. And after having deducted that, you end up with a CSM of EUR 22.3 billion. which includes also unearned profits, including to the IFRS 17 valuation of certain unrealized gains, which in the past were in the OCI. So there's also a certain shift from OCI into the CSM, and for the VFA business included in here. And then we have a loss component based on the conservative reserving approach we apply as before and also the granular grouping. And if you deduct all those items, then finally, you end up with the equity of 28.4%, slightly below the equity we had the IFRS 4. But again, the CSM, this is future earnings potential, those are the future crystallized earnings. So the transparency of the equity value of our group this is much higher in that number. And also the numbers by themselves are higher, if you include the CSM, than before. Last point on that slide, the adjusted equity is 24.2. And just as a reminder, the adjusted equity is the equity we use for the calculation of the ROE, and that's basically the equity where we exclude the OCI components, in particular, the unrealized gains and losses and the currency translation reserve. A few words on discounting and interest rates. We decided to use a bottom-up approach, and we will apply EIOPA Solvency II yield curves as risk-free rates in our approach. And for exactly those companies and our groups where we use the volatility adjustment, which is a few we will also use the volatility adjustment for IFRS 17. For others, we will not use an illiquidity premium at all. The reason for that is that we would like to be as close as possible to Solvency II to make reconciliations simple and not to distract anybody from what is really the core reason for differences by using different rate curves. And -- yes, using the identical curves is, for sure, the simplest possible way of aligning the two, both economic concepts, Solvency II and IFRS 17. There might be situations where we have to deviate from that approach. Just to be very open here. So for example, if we do a closing once the EIOPA curves are not yet published, then we couldn't do the calculation ourselves, a derivation of the EIOPA curve. But we cannot exclude that there is a difference of a few basis points given that we might not be able to fully replicate the official EIOPA calculation that's one topic which might arise. The other thing is that if the EIOPA curve would be so far out of what IFRS 17 would allow us to do, in that case, we would also be forced to adjust our approach. This did not happen in the past. And so far, we always fully were able to use the Solvency II curves. So the disclaimer I just made, you can, if you want, immediately forget it again. But for the sake of completeness, I just wanted to mention that. So wherever possible and whenever possible, we fully apply EIOPA Solvency II curves also for IFRS 17. Changes in the discount rates, and this is mentioned here for the first time, we'll come back later to that. Anyway, changes in the discount rate will be absorbed by the CSM and the VFA approach and booked into OCI elsewhere. The next slide is on the risk adjustment -- and difficulties with clicking here. Yes. Thank you. The risk adjustment, we derive it by cost of capital approach, very similar to Solvency II. So we take the Solvency II risk capital based fully on our internal model. We focus on insurance risks, as prescribed by the standard and then apply a cost of capital rate of 6% also fully in line with Solvency II. And the only difference then to Solvency II is that we allow for diversification in our group, which is currently not allowed in Solvency II. But we do allow for it in internal steering. And it's such a core and important part of our business model. This global diversification in the cat business, you're all aware of that, that's so key for us that we decided not only to use it in internal steering rate anyway makes sense, but also to use it for IFRS 17 and here consciously deviate from what Solvency II is asking us to do. But other than that diversification topic, we are fully aligned, and it feels -- also in that area, feels good to be aligned to that maximum extent. You see the numbers here. I will not go through them. So the risk adjustment is EUR 5.6 billion on a group level, and you see the number segment by segment on the slide. Just a comment because this cost of capital approach is deviating from the so-called confidence level approach. If we translate our approach into a confidence level, overall for us as the group overall, the confidence level would be around 90%, 9-0 percent. I would then look into it by line of business, then for P&C, it would be probably below that 90%, whereas for the long tail businesses 90% or maybe even slightly higher than 90% is the right way to look at it. Why did we choose to have it lower on the P&C side? First of all, it's more short tail kind of business. So it makes sense anyway to have a lower number. But please keep in mind, we have so many sources for prudency in P&C already, traditionally, but also new ones in IFRS 17, we didn't want to exaggerate here on the risk adjustment side for P&C. Next slide, CSM. Again, the unearned profits. And you can see them here also segment by segment. And -- as a quick reminder, it's COO in P&C reinsurance, of course, by definition, as we only use the PAA approach there. Other that you can see that roughly reinsurance as well as ERGO are contributing 50% each to that CSM. And you see the lines who contribute -- which contribute to the CSM on the right-hand side of the slide. What I would like to emphasize here is that, of course, the interest rate choice we make influences numbers like that. And using the EIOPA curve we are for sure at a very low end as I mentioned, for many of our businesses, not using illiquidity premiums at all. And where we use it using the volatility adjustment, which is also in many quarters, quite a low number, and would result generally in very low interest rate curves for us. Keep that in mind when looking at our CSM numbers. The loss component of EUR 1.4 billion is primarily driven by the reinsurance P&C segment. And there are 2 main reasons for that. The first reason is that we use our prudent reserving loss picks. You're all aware of them. We also use them for the derivation of the loss component, which then drives business, which on the long run, after run off, we would still expect to be profitable, would drive that business initially into being unprofitable -- being perceived as being unprofitable and being booked with a loss component. So that is the first reason. And the second one is the granularity. We have a very high number of group of contracts on which level we have to do the accounting here. And given that high number, obviously, what you do is you have not a lot of diversification. So for example, if we want a reinsurance treaty and several parallels in that, we would occasionally also cut the treaty and divide it into a separate group of contracts. And then the offset of a profitable piece of that treaty versus an unprofitable piece is not fully reflected or not at all reflected in the way we do the accounting. And therefore, we have quite a significant loss component also based on that granularity, cutting sometimes even below the treaty level. We called it internally the treaty section level, which is of course, then drives up the loss component quite significantly. On Page 21, let's look at the return on equity calculation. First of all, on the left-hand side, again, the adjusted equity, so the basis we used for the calculation of the return on equity as our formalized just the consolidated net income, consolidated results divided by the average adjusted equity. And as you can see, that number is stable, very much so due to the fact that basically we took out OCI already in the past with IFRS 4. There's not a lot of change now. If I look at the segments, there's a certain element of shift. So an increase of the adjusted equity in reinsurance and the reduction at ERGO based on the new valuation methodology we have to apply with IFRS 17. I first view here on profitability. We expect the return on equity to increase at ERGO due to slightly higher earnings and in this lower capital. So low equity base here. On the reinsurance side, we will benefit from a higher consolidated result and also having then a higher return on equity going forward. So I think the positive summary of that slide is that our group ROE benefits from a higher consolidated result going forward. And that's also something you could see already in our ROE numbers in our disclosure and yesterday also, of course, when it comes to next year in the outlook. Page 22, leverage. And you see on the right-hand side, a slightly revised definition of debt leverage. We add the CSM to equity and strategic debt and divide then strategic debt by the sum. And the number is just smaller then, by doing that calculation, 10.7% now. Continues to be one of the lowest in the industry. Nothing changed strategically. I'd like to comment on the second bullet point on the slide, though. The IFRS 17 equities is less interest rate sensitive, as had to be expected. At half year already the IFRS 17 equity is higher compared to the IFRS 4 equity. So completely changed when I compare it to the transition. Well, I think that's it for the balance sheet. And let's now go into the P&L, and I'll start on Page 24. And this is a busy slide with a lot of information. So I'll try to guide you through. But we wanted to summarize the main effects on one slide to help you a little bit throughout the more technical details I'm going to show you later. The P&L better reflects the economic value creation and we see an increase of the overall earnings level due to the transition to IFRS 9, 17. And so let's look at that segment by segment. In Life and Health reinsurance, we have an earlier recognition of the earnings. So cash flow is obviously unchanged. But IFRS 4 was very much back-ended in the way earnings would then be realized. The earnings recognition is earlier with IFRS 17. So that's the main effect here. The earnings itself is just defined by the release. That's basically what defines the earnings going forward. And therefore, it's much more stable, and we would expect earnings to be very predictable on the technical side. On the investment side, we face high volatility given IFRS 9. That's also something we covered already. The impact of interest rates is that at the transition, we locked in relatively small interest rates. New business now will be booked with current market rates with comparatively higher interest rates for now at least. P&C reinsurance, there we would expect some earnings volatility from interest rates and also higher volatility from the investment results. So we have to get used to the idea that P&C will be more volatile than Life. That was probably at least, coming from interest rate, the opposite in the past and the future, it's more the P&C result, which will show a big interest rate dependency or a bigger interest rate dependency. Also here, the low interest rate at transition has been locked in. And therefore, the relatively low unwind of those interest rates will somewhat increased poly the earnings. And the current claims are being discounted at the current rates. We currently have [ somewhat ] higher rates, which will then be a positive discounting impact on the combined ratio. As this interest difference will close -- this capital close eventually with the runoff of the book and the more new business, you're write. This is a temporary effect only. Therefore, generally, the earnings level should be stable in P&C reinsurance. Currently, temporarily, there is a benefit from the increased interest rates we currently see. ERGO. There we have CSM, VFA approach which serves as a buffer also for the fluctuations in the capital markets. So therefore, the earnings stability would be even higher than on the Life Re side. And P&C at ERGO will feel very similar to what we experienced on the reinsurance side. So therefore, Life more stable, but on the P&C side, also particularly on the asset side, we will see some volatility. Altogether at ERGO, we would expect slightly higher earnings compared to IFRS 4. Page 25. This is how a P&L will look in the future. We will continue to release gross premiums written as a non-GAAP measure to indicate sales performance. But the actual IFRS 17 P&L starts with insurance revenue and expenses. Expenses would also include claims here and then you end up having the insurance service result. The next line then, the so-called result from insurance related financial instruments, is the Munich Re specific. So that's something we decided to include in our P&L. And this line will cover what in the past we called fee business in Life Re, mostly. So this is to make fully transparent and be fully consistent with our financial statements, what we define also externally as KPI, we introduced that line. And as you know, we are writing that business out of our insurance or reinsurance organization. So therefore, as it makes sense also to have a proper presentation of responsibilities in the P&L to show that separately from the general investment result. So therefore, we have this result from insurance related financial instruments. We add that to the insurance service results. And what the outcome of the 2 is then is the sum of insurance activities independently if we book it according to IFRS 17 or IFRS 9 and the sum of the 2 we call total technical result. That's also a Munich Re specific term you'll probably not find that anywhere else. This total technical result is then also what will replace the fee income going forward. And for Life Re, our target, as you could see already in our prerelease yesterday, is in the future based on this total technical result number, which is the biggest advantage that we are able to fully see it in our financial statements, which was never the case for the fee business in the past. So what we said before, clarity as a basic principle for the introduction of the new accounting regime is clearly manifested in the way we do it here. And it should help all of you interpret our numbers in the future and see what we do in that particular business here. We then have the investment in the currency result, currency result now in the operating result, as part -- an integral part of our investment activities anyway. And then in the so-called net insurance finance income or expenses, the unwind of the discount happens. So that's usually a negative number to be deducted from the investment result, reflecting the discount we have in our technical provisions. This all adds then to the operating result and outside the operating result, we have only finance costs and taxes. So no other operating only finance costs and expenses to make it less confusing. On the next slide, insurance revenue. They will be significantly lower, particularly in reinsurance. So I have to spend some time here because this is also something which is different for reinsurance compared to primary insurance. As you can see for ERGO, it's comparatively stable. So I will not talk about ERGO here. But for reinsurance, we have a significant reduction of insurance revenue compared to premiums in the past. So what is the reason? The reason is that we have to exclude fixed commissions or commissions, which go back to the client, not to a broker, Go back to the client. Those commissions have to be netted off the turnover. And so the reinsurance revenue is significantly smaller than the GWP. And there are also profit commissions similar things, which are in the accounting language called the non distinct investment component, they also have to be deducted. In simple terms, every cash flow which under all circumstances, would flow back to the client has to be deducted from the turnover to reduce it to a comparable level. And this is what's happening here. And therefore, this insurance revenue number is so much smaller. Page 27, you can see the impact on earnings in these 3 measurement model. If -- for example, if you have changed interest rate assumptions or experienced variances or assumption changes, as you can see, there's quite a bit of dampening in the IFRS 17 framework. So interest rate assumptions are, for example, either booked in OCI or in CSM. Experience variances, by the way, go through P&L in [ GMM ] and PAA. And you can read the slide for yourself, so you can see how the various P&L or OCI items are being affected. On the lower half of the slide, a few comments on the change in interest rate more generally. I mean, as mentioned, they are booked in OCI and thereby remove the interest rate volatility from that change from the P&L. But we discount new business at initial recognition with the current interest rate in the current environment. And so therefore, even if you use the OCI option, there's a certain influence of the current rate environment on your results, for example, in your combined ratio. And the unwind of the in-force has a negative P&L effect quite regularly, but is a reflection of the interest level of the past, and it will unwind over the duration of the book. And so there can be differences between the interest rate you use for new business versus the unwind from the past. The -- Page 28. This shows how CSM could develop going forward. I say could because, first of all, it's an illustrative slide. But what you see here is that the in-force by releasing into earnings will decrease over time quite significantly and then eventually go down to 0, but only far beyond 2050. And then we will replenish the CSM by new business and then writing new business, which will then add to the CSM. And as you can see, obviously, the idea is to grow the overall block of CSM. And we would expect that to work nicely in life reinsurance. There's just a technical topic I would like to mention where we do not have the data. We have to use with so-called extended contract boundaries so that we do book the new business then is operating change, not this new business in the standard, but still new business, and it will still increase the CSM. So therefore, in Life Re, the expectation clearly is that the CSM of the new business will replenish the release and we will overall have a growing CSM. On the ERGO side, this is not the expectation that this will happen. For 2 reasons. First of all, as you know, we put our Life back book into runoff. So a significant part of the CSM is Life back book. And there due to the runoff new business can increase the CSM again. So that's one of the reasons. And the other reason is that also in health quite a number of years, we changed the strategy already and focus a lot on short-term health business. And the short-term health business is booked in the PAA and not in the CSM. So therefore, by this strategy, you move your business away from VSA into PAA and therefore also have in the future less CSM, but obviously, you have higher profitability from a PAA business, which will not show up in the CSM because in PAA as it's simplified, you do not have any. So therefore, there is also this effect from Health. Page 29, expenses. In IFRS 17, there are 2 kinds of expenses, attributable and nonattributable expenses. The directly attributable expenses are the ones which are directly related to an insurance context, nonattributable, could say overhead expenses. And those are the only 2 categories we are allowing for in our IFRS 17 world. And what we see is that roughly 10% of the former admin expenses are now shifted into the non-attributable and other expenses. And this leads to a reduction of combined ratio between 1% and 2% [tich] points, depending on each -- of which business segment you are looking at. We decided, therefore, to fully use this expense definition also for all KPIs and in particular, this combined ratio because we thought consistency with the financial statements, again, would make a lot of sense and the difference of 1 to 2 percentage [tich] points does not matter anyway if everybody is aware that we have this shift here. By the way, a shift which, of course, is not affecting the P&L at all, given that it's only a transfer from the insurance service result into the other operating result. Page 30, reconciliation to Solvency II. First of all, I think that the basic input here is that we use the same interest rate curves, which makes it, of course, much more consistent than if you would use different curves. On the right-hand side, you also see then that eligible owned funds plus CSM -- sorry, the IFRS 17 equity plus CSM is nearly is matching quite well the owned funds. There's another position which is just a cumulative effect for many and various methodological differences. But in a nutshell, it works quite well that those numbers are similar. It should be the case anyway because it's both economic machines. So numbers should be similar. On the left-hand side, the earnings. We, as you know, use economic earnings to explain the change in Solvency II owned funds -- so the change in your own funds more or less, if I exclude capital management for a moment, more or less the change in the own funds is economic earnings. And now in IFRS 17, this economic earnings is distributed across various items. It starts with the IFRS 17 result. Then you have the change in the unrealized gain on have a change in CSM. And then the risk margin is different from the risk adjustment, so there could also be a difference how the risk margin or the risk adjustment, the change in a quarter or in a year. If you add all those components together, it's an illustrative picture, but our internal calculations are not far away from that shows that also there, the alignment is quite good, which also, again, makes sense both economic regimes, they should be consistent. Now -- in the next chapter, I will talk a little bit about segment specifics, and I'll try to hurry a little bit, given that we are in quite advanced in time already. I'd like to start with P&C reinsurance. And there, generally, the operating result will be quite stable to where we currently are. Short term, temporarily there will be a benefit from increased -- or the increased or increasing interest rates, which we saw. If I then look at the insurance revenue, the insurance revenue is, as I mentioned, significantly smaller in that segment due to the reduction of commissions, profit commissions or the nondistinct investment component. The insurance service result in itself is in its component not far away from we are used to in the past. So there you have the cash flows, you have expenses, you have claims, you have your insurance revenue. discounted numbers though. So that's, I think, a significant difference here. And then you have, of course, risk adjustment, which has to be set up again in this runoff then at the same time. So there are certain timing differences when you set up things newly for new business versus the unwind from the past. But other than that, I think it will feel pretty familiar anyway. The investment result is going to be more volatile. And as mentioned, the net insurance finance income or expenses will show the unwind of the discount of our liabilities. And then the operating result, fairly stable, but again, currently benefiting from the difference of the unwind interest rate compared to the interest rate we use for the discounting of a new business. The next slide is the idea to show you a reconciliation of the combined ratio in the old world to the new world. And to start with, our definition is on the lower right-hand side of the slide. Our definition for the combined ratio continues to be a net-net definition. So we take the net insurance service expenses and divide it by the net insurance revenue. So both are after reinsurance or retrocession as we defined it. If I then go in the picture from left to right to explain one after the other of those changes, the first one already is very significant. And the first one is a methodological change, mostly the commissions. As mentioned, the turnover that the insurance revenue is significantly lower to the exclusion of the profit commissions. Obviously, then the commissions are also smaller. And so in simple words, we go from -- let's take as an example, 80% combined ratio, from dividing 80 by 100, 80%, you could in a simplified way, say, well, instead of 80 divided by 100, in the future, it's 60 divided by 80. And then just for mathematical reasons, the number is significantly lower as long as the combined ratio, that the IFRS comment ratio initially is below 100%. Otherwise, it goes the other way around, and you end up having a significantly higher combined ratio. But only due to that commission exclusion effect, the nominal value of the combined ratio looks much smaller, profitability completely unchanged. It's just a different way of booking the commissions. So everybody has to be aware of that now a combined ratio in the 80s does not mean we are 10% more profitable compared to the past. The next item on the combine ratio discounting. And discounting, that's something which is also the case for primary insurers. The discounting would also reduced at the combined ratio. Loss component could go either way. There's also some seasonality in the loss component development. change in risk adjustment could also go either way. And then the expected major loss ratio here depicted as being stable. But actually, there are 2 developments in there, 13% we had today. We also expect it to be 13% subject to one renewal for next year. But revenue is smaller, so you would expect the 13% to go up. But then we also will change the definition of our major losses. The major loss threshold will go up from EUR 10 million to EUR 30 million, and this will then reduce it back to 13%. So therefore, 13% major loss expectation, still nominally the right number, but the content is slightly different compared to the past. And the last position here, as mentioned, 1 to 2 percentage points deduction of expenses due to the IFRS 17 cost classification. Slide 34, a few words on prudency. I've been mentioning a couple of times already that we stick to our conservative reserving approach, which basically means that the loss picks are completely unchanged. So the loss picks our actuaries are taking do not change at all. The triangles look the same. It's all unchanged. But what we have is, of course, we add the risk adjustment on top of that. And this is an additional element of prudency, as mentioned before. And then the discount is the time value of money. So we have to discount the reserves that this time will of money has also to be reflected. Then from the initial setup of a provision over time, and this is what's shown on the picture here, will converge towards the final loss amount. In the course of this convergence, we'll obviously have the unwind of the discount. But more importantly on this slide, we will release the prudency as we did today. And one element of prudence we are going to release is the prudency we have in the loss picks. So our so-called famous 4%, which we, in the past, in IFRS 4 always showed you -- by the way, this number is going to be the 5% in the future instead of 4%, given the different definition of insurance revenue versus premiums of 5% of reserve releases based on the conservative loss picks. And on top of that, we will have the release of the risk adjustment. And this is my next slide now, an additional element of prudence, the loss component, as you can see on the slide here, which will also, over time, when the final loss amount is there and will be transferred and will be released. So also, the loss component is an additional element of prudence. We have -- you get it more or less automatically as I mentioned before, you use our general conservative reserving loss picks and the high granularity we do the accounting in. So it's not a surprise. But again, as it's booked against equity already a transition, it's an additional piece of prudence. There is seasonality in there. So as you know, our renewal dates are not equal when it comes to volume. And therefore, in the renewals where we have higher volumes, which we renew, we obviously also set up higher loss components compared to the smaller renewals. Next slide is on Reinsurance, Life & Health. There are again, the P&L looks pretty much similar. I again would like to underline on that slide here, the result from insurance-related financial instruments. This is the form of fee business, which we show now in a separate line and to be fully transparent. And then the total technical result would then include the business we are writing out of the Reinsurance organization, independently of the accounting standard we have to apply to the particularly treaty, and be it an insurance contract with IFRS 17, albeit financial instrument and then it's IFRS 9. The investment result will be more volatile. I mentioned that already. And the other operating income is mostly driven then by the non-attributable expenses which are booked in other operating results. Page 37, the reconciliation of the CSM. This is how this could look like in the future than with real numbers because the CSM EUR 13.7 billion is a starting value, then you add new contracts. You have an interest accretion. You have operating changes, change in financial effects. Then most importantly, the release, there is the P&L impact, which is then delivered and then you have the CSM at closing. We expect the P&L impact to be 8% of the CSM per annum. So the amortization should be around 8%. That's our current expectation. Obviously, this can change with business mix with development of new business and so on and so forth. But for now, 8% is our estimate. Page 39, ERGO Life & Health. Here we use this year as the VFA approach. And the VFA approach goes beyond what we have been seeing for Life Re in a sense that the -- in the VFA approach, the CSM is also buffering the change of financial parameters. So if you have an interest rate change, the CSM will fully buffer the effect. Capital market parameters, everything else and also technical result development, it will all be buffered in the CSM. So in a way, you can expect the result in a very reliable way to be the CSM release. And therefore, also this insurance finance income and expenses line is has to be interpreted differently in the VFA approach. It's the unwind in the other segments. But in the VFA approach is -- this line is just used to neutralize the P&L effect from investment income because the P&L effect should only be the release of the VFA. So you have to neutralize somewhere the investment income that's done in these insurance finance income and expenses line. The CSM reconciliation on the next page is very similar to Life Re, just simpler because basically, you only have new business, or new contracts added and then you have operating changes. But these operating changes also include the changes in capital market parameters as long as you have a positive CSM. And then you have a release. And this release for ERGO is expected to be 4% to 8% per annum of the CSM, but careful. This includes 50% of the so-called over return. And this is something I think I need to explain a little bit further. The CSM as we do the calculation is all based on risk-free projections. And the risk-free rate is the EIOPA rate curve. Of course, we expect our asset managers to deliver higher returns. And this expected higher return leads to then also higher liabilities to our policyholders, but obviously also the shareholder gets a share from it. And the shareholder share of the higher expected performance of our asset managers compared to risk-free. That shareholder share is the so-called over return, which is already part of the 4% to 8% CSM amortization, as mentioned on the slide. This is explained again on this Page 41 here. So we do the valuation based on risk-free and again, based on our very low risk-free EIOPA curves, then the over-return comes in, so this is a difference between risk-free and the expected return in our plan. And this difference then is distributed between fulfillment cash flow, so between what our policyholders get and the share that these shareholder will get is then immediately released through P&L, and it's roughly 50% of the CSM release in our case. Why so much, why 50%? Well, the reason is that our low risk-free curve is comparatively low versus the real world interest you could expect from your asset manager nowadays. And therefore, a relatively big portion of it is over-return. If you would have chosen higher yield curves instead of the EIOPA curves, Obviously, the yield expectation would have been unchanged. So the distribution, what is expected CSM release versus what this over-return, that would have shifted the overall amount to some of the 2 would have still been the same. Just you have to be careful when you look at our expected CSM releases. So if the trajectory you have been showing you before, that number is comparatively small as it's based on the EIOPA curve. Next slide, ERGO P&C. I think nothing to add here on that slide. That's very similar to Reinsurance P&C. And then also here a reconciliation of the combined ratio from IFRS 4 to IFRS 17. The one big difference to Reinsurance is that methodological changes here do not play a major role. In Reinsurance, the commissions, as mentioned, did lead to a significant reduction of the combined ratio. We do not have that effect in primary insurance. So ERGO is unaffected from that. All the other items are pretty similar. And also for ERGO, of course, consistently, we define the combined ratio as a net-net combined ratio. Next slide, ERGO International. ERGO International is a mix of various businesses, be it P&C, be it Health, be it Life. So therefore, also all measurement models are being applied with PAA with GMM, and we have also VFA in that business. So therefore, looking at the P&L of that segment, it will be a combination of the 3 and therefore, a little bit harder to interpret. This brings me to the end now of the conceptual part of the presentation, and I'll jump to the outlook. And please let me comment a little bit on the outlook and explaining a little bit or giving a little bit of color around the numbers as we have been pre-releasing them. The way we do the planning, we always start on an operational plan level. And operationally, the plan as we are presenting it is a realistic and well substantiated plan. This operational plan now had to be translated into the IFRS 17 world, which was the first time exercise for us based on tools which we are just being building or have been built recently only, and we don't have a long time series yet. So as much as operationally the plan is realistic and very well substantiated, the IFRS 17 component of translation, there were a little bit conservative, let me put it that way, just given the uncertainties and the methodology and that we lack experience and times here, yes. So the gut feeling is also still not there, really, which means our ambition to operationally improve and deliver our targets, of course, completely unchanged. But if you look for a certain element of conservatism in our plan, you will find it in the way how to interpret IFRS 17 in the context of those KPIs and in the context of our plan. I think that this is true for all segments. Therefore, I wanted to start my comments with that. Now maybe a little bit more specific P&C Re to start with. We expect, of course, a continued profitable growth. We expect to capitalize on our superior market position particularly also now in the 1/1 renewal, which is upcoming, where we still continue to expect a widespread rate hardening in a very positive environment. In that context, then, of course, the combined ratio improvement, you see here down to the 80% -- 86%, is not only driven by the translation of the old number into the IFRS 17 world, but of course, there's also an element of operational improvement in there, given the very favorable market environment, which is then fully reflected also in this plan number. What we fully keep up is our prudent reserving strategy, as mentioned before. And what we also expect to happen is a certain positive impact from interest rates to that IFRS 17 transition. And also this combined ratio, just to remind you, it's a discounted combined ratio fully in line with the IFRS 17 methodology. A few comments on Life Re. There, we continue to be on that favorable trajectory. You can see here the total technical results of this new KPI you'll be able to fully see in our P&L, fully transparent. And there's this EUR 1 billion is just a continuation of the trajectory which we have been showing in the past. Additionally somewhat supported by the change to IFRS 17, where I mentioned before already that we expect a somewhat earlier profit recognition in IFRS 17 compared to IFRS 4 before. My next comment then relates to ERGO. ERGO continues to be fully on track to deliver the ambition. And also at ERGO, I mentioned that before, we see a slight upside from IFRS 17. For example, you see that in the combined ratios here. So that the around EUR 0.7 billion ERGO target is the continuation of their path of operational improvements with some methodological changes, which also have an impact here. And my final comment then on the return on investment, the 2.2% maybe a little bit low, maybe a little bit surprisingly low even. On the ROI guidance, I think the key assumption you have to keep in mind always is how much realization of unrealized losses do you allow for in your plan? And we said we do want to have quite a few of them next year. So therefore, the return on investment is lower than what we expected for this year and for last year and realization of losses obviously means that you reinvested higher yields and that then the higher yield environment will earlier earn through into also then higher P&L in the future. But in the year, you do the higher turnover. Obviously, your result is burdened. And this is why this -- the reason why this ROI number is maybe comparatively small. It's also smaller compared to the numbers, at least I'm aware of what has been discussed in the capital markets as a consensus before. So the reason is really higher turnover from bonds where we realize unrealized losses. So my summary on the outlook is then finally that operationally well on track, fully benefiting from a very positive environment, particularly in P&C Re when I'm looking at the 1/1 renewal. This all reflected in the usual way we do that in our operational planning. But then the translation into IFRS 17 done and it may be even a little bit more cautious way than in the past. Maybe of course as we then yes, then the planning has been done generally. In the past, we didn't do IFRS 17, I have to say. So that's on the outlook. Next slide, Ambition 2025. There's an update on the return on equity target. It's no update on our strategy, and it's no update on our operational Ambition 2025. So this is a mechanical translation. 12% to 14% will translate into 14% to 16%. Again, this translation done in a cautious way. So 12% to 14% translated into 14% to 16%. And this 14% to 16% then as in the past the 12% to 14% would equally apply to Reinsurance and to ERGO. Well, that's it. So a little bit more than an hour. I hope it was not too tiring. It's a big shift. I would really say an accounting revolution, but I hope I was able to convince you and to show you that it makes sense, closer to economic perspective, closer to internal steering and more consistent with what we're doing elsewhere. And therefore, it should be helping you in the future to assess what we are doing our capital strength, our financial strength and our operational excellence. Thank you very much for your attention. And with that, I'm very happy to hand back over to Christian.

Thank you, Christoph. That was very comprehensive and detailed. And therefore, I do expect quite a few questions. And as usual, I would like to ask you to reduce or limit the number of your questions to a maximum of 2 per person. And with that, yes, please go ahead.

[Operator Instructions] We have the first question from Andrew Ritchie from Autonomous.

First question, Christoph, you mentioned the phrase you used were that there's lots of new areas for prudence outside of the risk adjustment. Can you just clarify what those areas are? And maybe just give us a sense as to what how you've dealt with that? Could I also ask on the loss component, the second question, what should I do with that? I mean, what's the period of time I should expect that loss component to reverse into the P&L? Or would I be just incorporating that within my reserve releases? And linked to the loss component, does this mean that your underwriting -- sorry, your service result in P&C Re will be very depressed in Q1 and Q2 with renewals?

Yes. Well, thank you, Andrew. So what I meant with the additional areas of prudency, I mean, starting with the loss picks, which are unchanged I actually meant the risk adjustment which comes on top, and I meant the loss component. So basically, those 2 things. And the loss component. So how does it move into earnings? Basically, it's parallel to the release of the prudency out of the reserves. Now you have to be careful. The loss component, of course, for new business is then also being set up again. So in a steady state, year-on-year, there shouldn't be a lot of change then. So only once we would run off our company, you would really benefit then from the releases. So therefore, it's more like of a conservativism where in the state, not a lot happens really. Similar like the 4%, 4% in reserving, release them after a number of years, but also for new business, we set it up again. So it's a similar kind of mechanics for the loss component like for the prudency in our reserves. Seasonality, well, there's various sources for seasonality. One is the loss component. So indeed, in Q1 and Q3, depending on the renewals, the loss component could be bigger or smaller. On top of that, all these items are discounted. So interest rate shifts between the quarters can make a difference would also lead them to seasonality or to volatility between the quarters, let's put it that way. And then on top of that, also the reserve releases. In the past, we booked the 4% releases pretty stable over the quarters. There might also be more volatility in that going forward, maybe even offsetting part of the loss component volatility, which then again would dampen it to some extent again. If I summarize all of that, I think it's a little bit too early to give a final judgment how really the individual quarter would look like. But generally, I would expect the volatility to be significantly higher. And today, already alone due to the interest rate component.

The next question comes from Kamran Hossain from JPMorgan.

Amazing comprehensive presentation. I just -- I had one question on onerous contracts. When you're in a growth stage, and it's probably step your question, should we expect that to be a bigger drag on earnings for now? So I guess if you're growing, there's more onerous contracts and over time, if you start to shrink or start to hold the top line, then that unwinds a little bit faster. And then secondly, I guess on the combined ratio, clearly, it's a very, very, very different basis. How should we think about the 86% on a discounted basis versus the 94% target last year. Just interested if you got any thoughts on that, if you look at that on a discounted basis?

Sure. So onerous in my view, no drag on earnings at all because the loss component, we book at the transition already in equity. And then as I said, in a steady state, it should be pretty stable. When we grow our business, there might be a certain financing to be done, but generally, nothing I would be concerned with at all. So no drag to be expected from that. It's just a different presentation. The combined ratio, we did not do an IFRS 4 planning process. So therefore, what I cannot tell you also because I don't know is how the 86% would look in an IFRS 4 plan, which we don't have. What I can tell you is that, of course, going down from 94% to 86%, a very significant part of that reduction is driven by methodology. But on top of that, there's the operational improvement. And you know us, so ahead of 1/1, we're very reluctant in sharing particularly concrete numbers. So therefore, we would try not to say anything today. But yes, I mean the environment is very positive, and we short and we do expect an improvement, which would then also be clearly beyond what the inflation currently would mean.

The next question is from Vikram Gandhi from Societe Generale.

Clearly, very detailed presentation. A couple of quick ones from my side. One is, Christoph, on the various choices the group has made with respect to this principle-based approach. I'm just curious to understand why IAS-39 overlay and not IFRS 9, why equities movement through P&L and not OCI or why no retro results separately. And so far, that's the impression I got by attending the presentations from primary insurance companies that they have a reinsurance results separately. So likewise, I would have expected a reinsurance and retro result. So that's really question one. And the second one is, it's a pleasant surprise to see the 2023 net income target ahead of the 1/1 renewals. So can I ask to what extent have you factored in the positive development that the industry is expecting for 1/1? Or in other words, the risk to the EUR 4 billion figure is to the upside or the downside is all I'm trying to gauge.

Yes, Vikram. Thank you. I'm sorry, I didn't get the third one of the choices you were mentioning. So may I ask back, please, the first one was the overlay approach, second was the equities through P&L. The third one I didn't get really.

It was from the IFRS 17 presentations that we've had from the prime reinsurance companies, what I understand is there is a gross insurance result and then there is a net reinsurance result that they would report to arrive at the insurance service results. So likewise, I would have expected from a reinsurer to report a pure reinsurance result or which is an issuance result for you and then a net retro result.

Yes. Okay. Thank you. Got it. Well, Choice is overlay approach, a very simple choice. If you would have done IFRS 9 completely already for the prior year numbers, so for the comparative period. The costs would have been significantly higher. We would have had to upgrade our systems quite significantly, which would be just an expense for a 1-year transitional period, which we just didn't want to bear. So that was only for cost reasons. Equities to P&L. Well, I showed you one of our guiding principles, which was that we want to have all earnings components eventually in the P&L. And if you would have gone for equity through OCI, the increase in value would never be booked in the P&L, which we just think is fundamentally wrong and an accounting framework should eventually show all earnings components in the bottom line. Otherwise, I don't know really what the bottom line is all about. Therefore, we decided to go for the fundamentally correct way despite the volatility, which will be significant. On the volatility, on the other hand, you still have to see that anyway in our case, we are facing volatility quite regularly on the loss side already. And the biggest volatility I would be afraid of still not on the asset side, it's really in case a large storm hits us, it's still the liability side. And therefore, I think we are quite used to bearing volatility, and I think also our investors and you as our analysts, you understand what's going on anyway. And therefore, we thought, let's take a choice that everything will show up in the P&L eventually and accept the volatility. [indiscernible] net-net, there the driver for the decision was the alignment with our internal view. Everybody is so used to net-net, that's also what we do for ageas internally. And we also looked at the numbers and they look very similar in our case. As far as neither retro nor external reinsurance on the ERGO side plays such a significant role that if you look at the nominal values, they would be very similar, and everybody is so used on net-net that we said, well, no reason really to change it. And net-net is what we did in the past. Yes, you were mentioning the 1/1 renewal, the positive environment. I think I can only repeat myself. In the guidance, it's included to the extent we are aware of it already. I mean, we do not know everything yet. I mean the renewal is still ongoing. It's in various parts of the market, a very late renewal, so things are still ongoing. And so what we know already is reflected in there. But as it's still early, of course, in a somewhat conservative way as we always do it. And again, I'm in no position to speak about a more concrete expectation for 1/1 today. Of course, we are very optimistic and the environment is a very favorable one. But that's something you know anyway. So sorry, nothing to add.

The next question comes from Will Hardcastle from UBS.

Two questions, please. What's the strategic or macro thinking behind making things if the program be selling more bonds in 2023 to realizing the losses in order to reinvest in those higher yields. And then secondly, just thinking about cap budget change -- decide what assumption in threshold. Can you maybe talk behind the rationale behind the uplift? And have you done any back testing what this would have done to the cap budget and what added volatility it would create what we sort of so called the underlying combined ratio?

Yes, sure. So capital losses, it is not like that we will be driving a huge initiative to realize losses. But what we want to give our asset managers is the liberty to really trade and do what they want without a lot of restrictions. And this very natural will lead to higher loss realizations. And then therefore, we included budgets for that. And then we'll decide in the course of next year, to what extent we will use them or not use them. Maybe we go even beyond them. But as a planning assumption, we included really loss budgets for the asset managers in order to be able allow them to act as unrestricted as possible to make sure they can capture opportunities in the capital markets as they arise. The changed large loss threshold. Well, we did a few internal calculations, of course, we did that. But the driver for doing so was not so much driven by any numbers and also not driven by IFRS 17, but merely by the fact that we have been growing our books so much. And where in the past, the EUR 10 million threshold seem to be adequate. Now as we are so much bigger, we ended up having more and more, let's call them, big attritional losses, being part of our large loss ratio. And therefore, we said EUR 30 million would be more adequate. If you are above EUR 30 million, then it's really fair to say that it's a large and exceptionally large loss and makes sense to handle it separately, whereas loss is around EUR 10 million given the size of our book, they are not so spectacular. And therefore, also in alignment with our internal steering approach, we increased the threshold to 13%. We will also, in the future, provide you with a normalization of our combined ratios. I mentioned the 13% already to be reviewed after 1/1. So if the composition of our book would change drastically, maybe the 13% will still change. For now, the 13% is our best estimate. We will also normalize for reserve releases. I mentioned in my presentation that the 4% we have today will develop closer to something maybe 5%. So that's due to the reason that the premiums are now insurance revenue, they are smaller. So the 4%, it becomes a higher number then. And will also normalize, that's the plan of today for the loss component volatility. At least when we look at individual quarters. And then in order to make -- because in a steady state over the year, it should be more or less 0, but in a quarter could be very much distorted by the setup by the release of a loss component. Therefore, the plan is also to normalize for that. There will still remain more uncertainty in that calculation because as I said, the combined ratios will all be interest rate dependent. So even after those normalization steps, if you then compare with the combined ratio with what has been the plan, at least have to take a step back and look, if interest rates did change significantly or not? And what the impact of that shift was on the combined ratio. And that's something we could then also provide you with an additional piece of information.

[Operator Instructions] We have the next question from Thomas Fossard from HSBC.

Maybe 2 questions related to reserving because clearly, this is a key feature of our investment story for investors and also providing a lot of reaction on your shock-absorbance capacity. So just I understand everything you said on maintaining the level of prudence in your reserving. I think that in the past, you talked as well about on a located bulk IBNR reserves, which was on top of every conservatism you have already in the balance sheet. I mean, can you say this on a located bulk IBNR are still available to you under IFRS 17? That would be the first question. The second question is, can you help me to understand and maybe is now with the benefit of inside of all the presentations. But a couple of a quarters ago, I thought that the overall message of the industry is that keeping such high level of conservatism in the balance sheet will be probably more difficult because everything will have to move to best estimates, right? And now I think that the message we are getting from the company this as, oh, we find ways to transfer part of this peripheral. So was my understanding wrong at the beginning? Or I mean, is it just because the framework is principle-based and so bring a lot of optionality and way to construct the norm. And the third question, if you allow me, would be on probably in 2022, it's fair to say that in order to keep the guidance, the net profit guidance unchanged, you have potentially used up some of this conservatism you had in the balance sheet. How should we think about potentially replenishing this reserving buffer into 2023 or 2024 in order to come back to the initial starting point?

Sure. Thomas, thank you. Yes, first, I think I can very quickly and very easily confirm that all the various components of our reserves we had -- or we still have in IFRS 4. They will also live and all still be available in IFRS 17 or be it individual in speed bulk positions we hold all these various items, they are still available. So no change. When it comes to your question, if it's a surprising or not that there is still a lot of conservativism possible in the framework of IFRS 17? Well, I mean, the way we define our reserving for a long time already is anyway that what we do is the best estimate. And it has to be because we use it for Solvency II and be in the past for IFRS 4. And now the reserving is used IFRS 17. And the only big difference basically is that we discounted as suggested by the standard. So that's pretty much unchanged. And I wouldn't say that, that is a surprise that something at least we wanted to be intended all the time. And given that it always was the best estimate, it was, for us, clear that also in the future, it would be the best estimate. Admittedly, it's a cautious or prudent best estimate. So what our actuaries do is you always have a range of possible outcomes, how the reserve could be defined. And what we do is we try to be at the upper end of the possible range, but the complete range would be a positive estimate and therefore, on that reserving side, not a lot really change for us at least. What comes on top, though, when it comes to conservatism or prudence or however you would like to call it. And the risk adjustment is something where the standard is just suggesting we have to book it. I think we could have a long debate if we really need the risk adjustment, particularly in our P&C business. And that's also why I've been commenting that the quantile for us in P&C is lower than on the Life side. But if I look at all the various elements of prudence, we have already to we really need that risk adjustment on top of that or is it just similar like the CSM future earning component? And there, I leave the judgment to you. I mean it's your view if that's really -- is it future earnings? Or is it importance prudence we need really? Eventually, we will anyway then transfer it into the P&L. But that's clearly something the standard is suggesting we do and the whole industry does. So I think there's a broad alignment. Anyway, in line with how we interpret financial steering, I think it's no surprise that our quantity with 90% is maybe a little bit higher than what you could hear elsewhere here and there. But I think that's the consistent again with what we are doing everywhere. And I personally also still feel very comfortable being really market phase in the business itself, but doing the steering, the risk management, the financial reflection of everything we do in a very conservative way and given also the peak risks we are taking, just makes me feel much more comfortable. And I think it's a perfect base also to make use of the opportunities we find in particularly the current market environment. This is a great environment to grow, but you need to be able to afford the growth based on the prudence on the balance sheet. And where we are extremely well positioned and just continued that position into the IFRS 17 world now. And last question was if you stop some conservatism. I think it was your assumption, we would use some of the conservatism and going forward now to achieve our target this year. Let's discuss that when we finally are there, if and to what extent we really use stop some conservatism. That's a debate I'm happy to have then in February next year when we release our Q4 numbers. What I can say though is in a more long time horizon, obviously, we do have the buffers to make use of them once they are needed. And then in very good quarters of very good years, you have to refill them. Otherwise, you don't have them. But that's part of this overall integrated let's call the prudence financial and risk steering, which is the basis for us to grow significantly and successfully into very attractive markets right now and taking quite a portion of peak risks also based on strong capital, strong Solvency II ratio, strong financials, strong reserves. This is just the basis to conduct business like we do. And therefore, we'll always continue with that, but be prepared in case we used our buffers we would also, of course, then fill them up over time or eventually whenever we can afford it again.

We have a follow-up question from Vikram Gandhi.

Just a couple more from my side. One is now that we should expect more volatility going through the P&L. Is there a temptation to introduce a range for the net income instead of a single point figure? And secondly, how closely do the P&C results on a nominal basis under IFRS 17 resemble those in the solvency calculations or put differently, what are key areas of divergence?

Sorry, can you repeat the second one? I didn't really hear it.

Yes, on a nominal basis or P&C results, how closely do the IFRS 17 reserves resemble those under the Solvency II calculations or there -- or are there any areas of apparent difference?

Okay. Thank you. So we started the reserving question, it fits nicely to the other discussions we had already today. It is more or less identical because there's one best estimate for us and the best estimate we use it for Solvency II equally like for IFRS 17. And then also the discount rates are similar. So there's a lot of similarity in that. It was like that also in the past with IFRS 4, but there we didn't have any discount. So the major difference now is the discounting going forward. Data and the data flows, these kind of things might differ between Solvency II. The loss component is different. Risk adjustment is different. So there are certain differences, but really nominally on an aggregated level, they are highly consistent between IFRS 17 and Solvency II. Again, it may only makes sense to have one best estimate. We shouldn't have different ones also not to confuse ourselves or confuse our external stakeholders. The question on the range for result target is always a good to the relevant one. We've been asking ourselves quite regularly if we should have a range or not. But what happened in the past, whenever we had a range, given that we are famous for being a little bit conservative. What happened with the range is that nobody accepted the range, but it was always the upper end of the range, which had been found its way into the consensus anyway. So therefore, the reality arrange never worked. And then that's why we stick to point estimates. And in real life point estimate always comes with the range. And given that volatility and also the reduced steering possibilities, we have in a new framework. I did it -- of course, there will be noise around that point target. But then we think that, first of all, a standard is made like that. So it's intentionally like that. We also think the public will understand that. And [indiscernible] will be able to explain it. So therefore, I'm not really concerned by that.

We have another follow-up from Andrew Ritchie.

Just a slightly odd one maybe. Do you think you'll have to communicate a different combined ratio to your clients? I guess my concern is that 86% looks like a low number. I appreciate one of the big factors is the ceding commission has been taken out of numerator and dominator and you're still paying that ceding commission. But if you see what I mean, given -- the last month of the industry will have a different combined. You don't want to be looking like your making excess profit. So is there a sort of supplemental communication required? That's just one question. Second question, tax. Is there a issue on your tax rate because there's a bit more variance between local and IFRS group now going forward. Final question. One of your 2025 targets is economic earnings. I think it was EUR 20 billion over by that point. Economic earnings should be higher than IFRS 17 broadly. You've given us EUR 4 billion for next year already in IFRS 17. When will you update your 2025 economic earnings number?

Yes, Andrew, thank you. Yes, the client communication is a relevant point. I mean the good news is our clients are professionals, they're all insurers, they know what's going on. So I think we will be able to explain to them at the very low nominal value of the combined ratio is a calculation effect and does not imply the margins are so much higher than before. But obviously, we will have to communicate that very carefully and very openly. And obviously, also internally, we have to make all our underwriters, all our staff aware of the effect. And that's something we, of course, are doing and intensively discussing with them. On top of that, for operational steering, we use the management view and management view is not based on IFRS 17. So therefore, also for the operational steering, nothing changes, really, which I think is also relevant in that context. So therefore, as much as I would see the risk you're mentioning or you're guiding it. I think we can control it, and we should be able to control it. There was also no other way over the combined ratio. I mean that's how the standard works. Our revenue goes down significantly. And then this is a reinsurance topic. So for primary insurance is different. So we rather explain it in a good way, but not sticking to the standard, I think, would have been the diverse option. And the target economic earnings. Yes. I mean in the strategy presentation, I think we said illustrative to some extent. But I would not even say that -- I mean you -- I mean that's a fair base for your question. I mean we're doing well, EUR 4 billion is quite a good number. I showed you the transition, there's also CSM change. There's the change in OCI. So there are more components, as you mentioned. So I think what you can take from that is that we are doing well in our strategy execution. In the economic earnings term, similarly like also in IFRS and also like operationally, we refused so far from updating our operational targets for the strategy and also today, the idea is to give an update on the accounting, not on the operational development. But what I can say, of course, is that when we first gave those targets. The assumption was not that markets would be hardening so much and so long. So we have more support than what we assumed when we defined our Ambition 2025. Now it's on you if you think this hard market is going to last until 2025. If yes, I think it's a simple calculation that there would be upside then. If no in the market would soften again, obviously, would then have faced a more difficult market environment in traditional reinsurance. Again, was the assumption anyway when we did set up the strategy. And as you remember, the idea was then to replace it with a specialty business and replace it with stronger contributions from Life Re and from ERGO. And this is also something which we're doing in parallel. So therefore, to cut a long story short, we are benefiting more from the traditional reinsurance business than we thought. And the longer it lasts, the more we are going to enjoy it, enjoy it. And if it lasts until 2025, it will provide us with upside compared to what our initial strategic targets were.

The next question is from Vinit Malhotra from Mediobanca.

Yes. Just one thing that I would like to just check on. Christoph, you said that the 86% was not just a mechanical translation was also considering the market environment? And what have you quantified that? I'm sorry if I missed it and quantify whether it's, say, 1% or something like what is this benefit that you are assuming?

Yes, sorry, I can't. To be honest, for 2 reasons. First of all, we do not have an IFRS 4 plan, which is comparable, wherever I could compare the IFRS 4 combined ratio to our current run rate. We just don't have that. And on top of that, if I would do so, I would already guide you today what 1/1 renewal outcome would be. And that's also something, as you know, we don't do ahead of the renewal once it's still ongoing. Also due to the fact that in reality, we don't know really. So therefore, the only thing -- the only point I can make is that, obviously, everything we know how positive the environment is, how really broadly, we see hardening terms and conditions and prices across very relevant markets for us that that's included in the guidance, but I cannot give you a number.

The next question is from Freya Kong from Bank of America.

I was wondering -- I'm sorry if you explained it already. Could you help give a little more color on the updated major loss budget of 13% in the context of your 86% combined ratio target? And any color on how this might go on a like-for-like basis has this increased? And then secondly, on reserve releases, historically 4% contribution or benefit to your combined ratio? And I think you mentioned it would be 5% going forward. And would you give the breakdown of the runoff from liabilities versus risk adjustment? Or should this be fairly stable?

Yes. The EUR 30 million threshold reduces the large losses we expect, but then if you look at the ratio, the ratio will go up due to the fact that we have a lower insurance revenue compared to premiums. And the 2 effects having less large losses above EUR 30 million, then today above EUR 10 million and at the same time, have lower insurance revenue versus premium. They can let other out more or less. So that nominally 13% large loss loading was the number in the past and also is the number in the future, but the content is different. And the reason why we updated the EUR 10 million threshold to EUR 30 million is basically the growth we have been seeing in recent years in order to avoid to have too many attritional or similar to attritional losses in our large loss number. You are right, I mentioned the reserve release number from 4% to go to 5% approximately. That's a number we didn't mention in writing in the presentation because it still might depend on insurance revenue, detailed numbers and so on and so forth. But roughly 5%. We'll update on the normalization of the combined ratio then in more detail in one of the next releases anyway. But 5% is the right number to look at for today. The release of the reserves and the release of the risk adjustment when the reserves they are released in line with the claims settlement. And the risk adjustment is released in line with how long are we at risk? And this is not dissimilar to put it that way, although there might be, of course, a few differences in the details. But largely, largely comparable, that's what I would say.

The next question comes from Darius Satkauskas from KBW.

Could you help me understand how you think about the upcoming renewal closure for what you able to achieved in January, April and June, July renewal? I'm not sure the risk adjusted will be comparable due to the past. So what changes do you expect? And will you help us bridge you to delivered in the past?

The line was a little bit broken here. Did you ask about the regional distribution?

I didn't get the question. We didn't get the question, Darius.

So I'll repeat. I'm just wanting to get some color on how I should think about your upcoming renewals disclosure in terms of what we will have achieved January, April, June and July because I'm not sure the risk-adjusted rate increases will be comparable to how you sort of measure that? And do you expect any changes kind of tell what and will help us bridge it?

So that's something we have not finally decided, but we clearly have to look into that before updating you on the 1/1 renewal early next year. So there's nothing I can really talk about already today. But obviously, you have a point, we have to make sure that we somehow bridge the old renewal disclosure versus the new IFRS 17 world or gives you some help at least to interpret it. That's something we are working on.

That was our last question for today, and I hand back to Christian Becker-Hussong for closing comments.

Thank you very much, and thank you to all of you for your questions and for attending our presentation today. I hope that was comprehensive and detailed enough for you. We are happy to help you with further questions. Please get in touch with the Investor Relations team. Happy to help. And aside from that, there's only one thing left for us. And this is to say, again, thank you, and happy holidays to all of you looking very much forward to seeing you early next year. Again. Bye-bye for now.