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

Good afternoon, everyone. Welcome to our earnings call on our fiscal year 2022. This afternoon. The speakers are Joachim Wenning, our CEO; and Christoph Jurecka, the CFO of Munich Re. And the procedures, as always, you are familiar. With that, we will start with a round of presentations and then have ample of opportunity for Q&A. So now I would like to ask Joachim in to kick it off. Thank you.

Thank you very much, Christian. Good afternoon, everybody. Last year was another year of significant challenges for the whole industry. Against this background, I'm all the more delighted to say that it has been a very good year for Munich Re. In a world that is all out of joint almost, we have remained firmly on track and have even exceeded our full year profit target with a net income of EUR 3.4 billion. I must underline it, that was not so clear half a year back. So we find this an overwhelming achievement. At the same time, we strengthened our reserves to comprehensively account for inflation risk. We could afford to do so without affecting our financial targets while, of course, increasing earnings resilience going forward. Nobody, I think, could have known what geopolitical and macroeconomic turbulence 2022 would bring; the Russian war related economic distortions, spiking inflation, the trend upwards in interest rates, heavily fluctuating capital markets. Consequence of all this, our investment result came under pressure. However, and the good news is this was more than compensated for by a strong operational performance of all business segments. Simply speaking, diversification and earnings power just working as it should. And we want our shareholders to continue to participate in our strong financial performance. So we propose to increase the dividend from EUR 11 to EUR 11.6 and also decided a new share buyback in the order of EUR 1 billion until the AGM 2024. The next slide that you see is one that demonstrates what I just mentioned, is the Munich Re diversification benefits. ERGO with more than EUR 800 million, delivered a very strong result, which compensated for the slightly, very slightly weaker but still very strong reinsurance result. And within our reinsurance business, again, life reinsurance exceeded the target by more than double. In fact, I think the strategic course we have set ourselves as part of our Ambition 2025 is already coming to fruition. Meaning the greater the profit contributed by our less cycle exposed businesses, [Technical Difficulty] the more diversified our overall earnings profile becomes. And this is exactly what we have laid down. The achievements we made in 2022 fully support the trajectory towards 2025 targets because the return on equity, we are already at the level we aim for by 2025 both for reinsurance as well as for ERGO stand-alone. And as announced in our Investor Day last December already, we increased the ROE guidance to 14% to 16% because IFRS 17 rules will just recognize earnings earlier than IFRS 14. With an earnings per share growth of 11%, we are clearly ahead of our guidance. And with 5.5% dividend growth, we also deliver on [Technical Difficulty] . Our capital position remains very strong. The ratio is well above our optimal range, supporting the capital management strategy of the Ambition 2025, every leeway that we may need for further growth of [Technical Difficulty]. We have the financial flexibility to grow our business, increase the dividend and execute a share buyback of EUR 1 billion at the same time. Inflation further increased and persisted at a multi-decade high, as you know. And even though we have seen some signs of easing recently, we here, we do not expect to see pre-2021 levels anytime soon or to be more concrete to see inflation rates going down to 2% or lower. The substantial cost from natural catastrophes also in 2022, were, to some extent, already driven by those inflation trends. Positive side, of course, ongoing high nat cat losses and inflation are supporting the hard market to persist. On the other side, it's a matter of good risk management to prudently reflect their impact both in underwriting and in reserving. By thoroughly doing so, our reserve prudency remains largely unchanged. Christoph, I think, is going to give you some more details later on this. I come to the January renewals, they revealed a clear distinction between different client strategies. It's fair to say that [indiscernible] honored reliable partners. It provides us clearly benefit from that. Munich Re benefited from just the early, clear and consistent messaging throughout the renewal with regard to risk appetite and return expectations. High nominal price increases we have seen in the markets were necessary to protect margins as these were mitigated by conservative loss and inflation expectations. And the 2.3% price increase that you can see on the slide, for our whole portfolio is fully risk-adjusted, considering most recent loss trend assumptions [Technical Difficulty] important. So this rate change, therefore, is a good proxy for the real margin improvement we expect to be reflected in the combined ratio going forward just to be very concrete and includes material business mix effects of almost 1 percentage [Technical Difficulty] as we have substantially expanded our property nonproportional business. The 2.3% is expected to deal margin increase after compensation, [Technical Difficulty] so important. Recently, we were asked sometimes how is it possible that some of our peers are highlighting double-digit rate increases. Please go back to them and ask if they also expect and commit to double-digit margin increases. In addition, which is also important is there are material positive changes in terms of -- in terms and conditions which are not fully capturable, of course, in price increases. They -- in any case, they enhance the portfolio quality. So this includes wording improvements, it includes clearer definitions of what's included, what's excluded, but also higher attachment points in pricing of so-called secondary perils make the portfolio more robust. There is one slide where we look into the rate increases and to the volume impact [Technical Difficulty] business, cautious assumptions as regards loss cost trends [Technical Difficulty] quite obvious. Looking into this, particularly in casualty business, prudent inflation expectations largely offset nominal price increases or in other words, we don't expect margin increase after compensating for it. Hence, we reduced our exposure to proportional casualty line, especially in the U.S., whereas casualty nonproportional shares benefited from some very material rate increases. In properties, we have executed a strategic growth impulse into nonproportional programs, which, together with some specialty lines, provided opportunities that we haven't seen for 20 years. We took advantage of those material rate increases by further expanding our nat cat exposure. But as the nonproportional property programs only account for about 10% of the renewal portfolio in the January renewals, these price improvements are underproportionately reflected in the 2.3% overall price change. However, we are pretty optimistic with respect to the upcoming renewals on the 1.4, but more even the 1.6 and 1.7 renewal this year that, which will naturally include higher shares of nat cat business. This will correspondingly reflect in [Technical Difficulty]. As a consequence of high inflation, we also saw a sharp increase in global bond yields which can already be observed in the substantial increase of our Solvency II ratio. In our P&L, we see the benefit with some delay after several years of a declining running yield 2022 marks the turning point. We are now investing new money at much higher yields, which will increase regular income over time and sustainably. We are even voluntarily accelerating this trajectory by portfolio reallocations to seize market opportunities, deliberately accepting that this will be leading to temporarily unavoidable disposal losses. Going forward, this is going to improve the quality of our investment result [Technical Difficulty] of sustainable income will increase. Let's turn to the other big industry challenge, high nat cat volatility. As mentioned in the January renewals, we have grown our cat exposure materially and for good reasons. Nat cat is one of our most profitable lines of business despite above-average industry losses in recent [Technical Difficulty]. We have demonstrated that we can manage volatility through diversification, a strong balance sheet and an excellent capital discipline. There has been a lot of discussion in the market about model quality in the context of climate change and industry losses of above $100 billion being the new normal. We reiterate, we deem our model as state-of-the-art, reflecting a long data history, recent insights from academic research and forward-looking findings. And within our portfolio management, we incorporate this know-how, taking active measures to contain risk. And when you look at the past 5 years, on average, actual major nat cat losses fully met our expectations despite industry losses of more than $90 billion. In 2022, we even came out below budget. And this is not just luck, but the result of diligent risk selection, diversification and disciplined risk management. In other words, we do not overexpose to any risk, however attractive. And even though nat cat is cyclical, there are business opportunities deriving from the still huge protection gap and increasing risk awareness, which are driving their demand. However, we do not solely focus on nat cat. One single line of business should not be a dominant driver of earnings. That's why we define our strategy in the Ambition 2025 with the aim to continuously expand the share of more stable and less cyclical lines of business, thereby improving overall earnings diversification. Aside from further increasing diversification within our core P&C reinsurance business, we will achieve a more balanced composition by further expanding risk solutions Life & Health reinsurance and ERGO business. Underlying this message, let me provide some more color on the fields of business, primary fields of business, I start with risk solutions, which includes various primary insurance businesses. From this year on, this will be managed together in a new global specialty insurance division, which we call GSI, and the division, as you know, will be headed by Michael Kerner. The aim of this reorganization is to continue to support the very good business performance our primary insurers have seen and to drive forward further expansion in [Technical Difficulty] powerful global player in this field. The more efficient governance structure will enable us to leverage synergies in underwriting, distribution and operations and thus enhance our specialty proposition to the [Technical Difficulty] Till 2025, we expect this division to grow to some EUR 10 billion top line. By then, bottom line of say, up to EUR 1 billion per annum, to me, wouldn't look totally unrealistic. And then there is ERGO, which has significantly increased its earnings over recent years and has again achieved an excellent net result of more than EUR 800 million in 2022, EUR 600 million of which is sustainable and EUR 200 million based on a one-off effect. Strong profitable growth across all segments, all regions of around 5% last year was supported by superior underwriting and continued cost discipline. Going forward, ERGO strives for above-market growth in all major markets, with further increasing earnings and profitability. And ERGO has proven its ability and determination to deliver since 2016 with no exception. Also, therefore, I am confident that ERGO will continue to sustainably contribute to Munich Re's earnings diversification. [Technical Difficulty] In 2022, we've not only made progress in terms of our financial performance, but also worked on our climate agenda. As you can see, our decarbonization pathway is well on track. The asset side, we achieved a total reduction of CO2 emissions of 46% and compared to the base year 2019. Also on the insurance side, you see material CO2 reduction with regards to coal-fired power plants, thermal coal and especially oil and gas. And also our own emissions from [Technical Difficulty] business travel got reduced by 22%. As from January 2021, we set ourselves a target of achieving a 40% share of women in leadership positions throughout the entire Munich Re group by 2025. It started with 35.1% 2 years later, end of year '22, we already stood at 38.5%. So 40% is within reach yet will require every effort as refilling the pools of female talent will take more time than exhausting them. Our gender ambition has been an important starting point, but it's a starting point only locally and regionally. In the course of this year, we will add more dimensions of diversity to it and also what to be leading in all these aspects. Let me summarize. Our strategy is paying off. Well-diversified business portfolio benefits earnings stability. Very favorable market environment will further benefit our growth and profitability in P&C [Technical Difficulty] is well managed. In the absence of any severe political or macroeconomic shock, [Technical Difficulty] confidence in fully delivering on Ambition 2025. And we are happy that the capital markets except today are rewarding our profitable growth path. In terms of total shareholder return, in the past 4 years, we have outperformed all our leading peers in global reinsurance and European primary insurance. But what is really more important than this to us is in 2022, there is not one significant item I'm aware of or Christoph is aware of in which Munich Re hasn't done a better job than the market. This makes me very proud of our people. I've come to the end of my presentation, with the unchanged guidance, we are heading for a net result this year 2023 for EUR 4 billion, and Christoph will now lead you through the financials in more detail.

Yes. Thank you, Joachim, and good afternoon also from my side. And as Joachim just pointed out, 2022 was a very successful year for Munich Re. Based on the strong business growth and pleasing underlying performance in our insurance business, we were able to compensate for lower investment return, which was still solid against the backdrop of a challenging year in the capital markets. In particular, ERGO and also Life & Health Reinsurance delivered excellent results, exceeding the full year guidance and once again proving their significant contribution to Munich Re Group's overall earnings diversification. P&C reinsurance was very resilient to high industry large losses and to the impact of the spiking inflation. Rising interest rates and a good operating development materially increased our economic capital position. Required capital decreased noticeably mainly due to the sharp increase of interest rates that are overcompensating the effects from business growth. And with the Solvency II ratio of 260%, we are well exceeding our target capitalization also after deducting the next year buyback, which will be accounted for only in Q1 this year. Economic earnings of EUR 2.6 billion came in lower than IFRS as good operating performance was offset by negative market reliance. More details on the sources of economic earnings will be provided with the release of our annual report on 16th of March. The German GAAP result was more burdened by the higher interest rates compared to IFRS due to higher write-downs on fixed income investments recorded in the P&L. Moreover, last year's results reflected a positive one-off from the changes in the setting of the equalization provision. Our high stock of distributable earnings continues to fully support the capital management strategy. On Slide 23. Before we turn to the full year figures, let's have a quick look only at our Q4 results, which came in above consensus expectations. An ongoing positive underlying performance and lower-than-expected major losses contributed to strong earnings in P&C reinsurance. Although more remarkable that net earnings included a noticeable reaction to additional inflation risks. I'll go into more detail later on. Life & Health Reinsurance posted another excellent result. Q4 earnings benefited from an aggregate positive experience and lower-than-expected COVID claims, besides rising interest rates had an overall positive impact. With almost EUR 100 million, fee income continues to be a strong earnings contributor. Also ERGO has once again delivered a very good operating performance, in particular, the German Life & Health business benefited from its own technical result. P&C business continued to show a very pleasing combined ratio in Germany, while internationally, the combined ratio was somewhat affected by inflation, for example, in the Polish market. The annualized return on investment of 3.6% in the quarter was supported by disposal gains from public and private equity investments. To some extent, these were offset by disposal losses in the fixed income portfolio which were realized to support the future regular income. When we now look at the full year investment return on Page 24, the return on investment of 2.1% was below our guidance. In 2022, as you know, we were facing heavily fluctuating capital markets with a sharp increase in interest rates. As a result, we had to digest significant write-downs in our portfolio. At the same time, we also benefited from higher interest rates and from currency effects. The running yield improved by remarkable 40 basis points and is expected to further increase with the reinvestment yield of 3.9% in the fourth quarter, the level which we have not seen for a long time. In the context of our economic asset liability management, we hedged part of the interest rate risks using fixed income derivatives. IFRS 4 accounting mismatches led to uneconomic losses of about EUR 1 billion in reinsurance. Finally, I would like to stress that currency is not part of the ROI, albeit part of our investment management process as an asset class in its own right. Including currency gains, we would have almost reached our initial full year guidance of 2.5%. All in all, we achieved a resilient performance given the very volatile capital markets. Now turning to the 2022 financial development of the 2 business fields. I'd like to start with ERGO on Page 25, and ERGO clearly exceeded, as mentioned, the full year guidance. Within ERGO, all segments contributed to the strong bottom line performance. In Life & Health Germany, we benefited from a EUR 200 million one-off effect related to higher interest rates. In the rising yield environment, the German Life Book clearly benefits and shows its value, which is also visible in our economic figures and specifically in the Solvency II ratio. The German P&C business delivered again a very strong technical performance with a further improved combined ratio of 90.6%. From my point of view, this is an outstanding result in the competitive German market. International segment showed pleasing results. Please bear in mind that last year's figures included a positive one-off effect. While P&C business felt the impact of the difficult macroeconomic environment, health business performed better than expected. Turning to reinsurance on Page 26. We continue to record strong business growth at a high profitability level of 13.8% return on equity. Life & Health reinsurance substantially exceeded the full year ambition based on its very healthy underlying performance. COVID claims of around EUR 350 million were offset by the impact of higher interest rates and positive experience beyond COVID. Fee income continued to be very strong. I would like to underline that the outperformance in Life & Health reinsurance is very much driven by the operational performance, which also underlines the very strong conservatism in our outlook '23 for the total technical result in Life Re, which additionally, as you know, as it's based on IFRS 17 will benefit from methodological changes. Now turning to P&C, with 96.2%, the combined ratio in P&C was higher than expected, even though major losses were slightly lower than anticipated. We catered for additional inflation risks which is visible in an elevated normalized combined ratio. This is clearly a one-off effect. As for the future, we fully reflected the inflation in pricing. I'll add more explanation in a minute. On Page 27, what you see there is the combined ratio of risk solutions, which was pretty much the same level as the overall P&C reinsurance book as higher inflation elevated nat cat losses also left the mark. Business growth was even higher than anticipated. Premium increased by more than 1/3 last year. As highlighted by Joachim, Risk Solutions remains a rapidly growing and profitable segment within P&C reinsurance. Over the last 3 years, the premiums have almost doubled. We took advantage from the favorable market conditions, expanding our footprint in attractive lines of business, in particular, Hartford Steam Boiler once again delivered excellent top and bottom line results, while Munich Re Specialty Insurance was impacted by Hurricane Ian. On Page 28, I would like to conclude the IFRS sector with a closer look at our reserving position which remains rock solid. And this is despite the impact of inflation, which has been consistently reflected in the reserving loss picks at year-end and which I will explain in more detail on the next slide. Overall, the outcome of the reserve review again very positive. The result of the actual versus expected analysis now is has for 11 consecutive years consistently shown very favorable indications and allowed for releasing the usual 4 percentage points of reserves despite growth and despite inflation. All lines of business have developed favorably, the main drivers being property and motor while the release for third-party liability was small. And this is a cautious reaction due to U.S. casualty where social inflation trends have not abated. An unchanged level of 4 percentage points reserve releases on basic losses despite inflation in the growth is a remarkable outcome of this year's reserve review. On that basis, we expect to be able to release the same level of reserves also going forward, which in the language of IFRS 17 will be 5 percentage points. Also with respect to large loss complexes, we have taken a prudent approach. For the war in Ukraine, we have increased our reserves by another around EUR 200 million in Q4. For COVID, we only released reserve of around EUR 140 million at year-end, still holding an IBNR level of around 50%. Given the gradually reducing uncertainties, one could interpret this IBNR level is even more prudent now than a year ago. In terms of inflation, we have taken decisive action, as described on Page 29. Our regular reserve review revealed an additional inflation impact. of EUR 1.3 billion in our actuarial segments, which was distributed in roughly equal parts to 2022 and prior years. For 2022, this corresponds to approximately 2 combined ratio points, which largely explains the increase of a normalized combined ratio of around 96% compared to the outlook of 94%. As mentioned for prior years, the outcome of the reserve review was overall very positive and even better than I had expected personally at the time of our Q3 analyst call. It not only allowed for releasing those usual 4 percentage points of reserve despite the growth, also the favorable runoff helped to cover the inflation impact. And in addition, we reallocated a specific reserve that had been built in the past for a scenario of economic inflation to the actuarial segment. In essence, despite fully Reflecting the unforeseen inflation spike, our traditionally very high reserve potency remains largely unchanged. On the next page, we show the reconciliation of the combined ratio to our outlook of 86%. As already outlined by Joachim, we are benefiting from one of the most favorable markets in P&C reinsurance in many years. Before I turn to the impact this is expected to have on our profitability in 2023, a few words on the starting point of the combined ratio walk, which has also been heavily discussed today. The underlying performance of P&C reinsurance are very healthy. And over the course of 2022, we made progress on our initially expected trajectory towards around 94% based on the continued earning through of the rate increases achieved in 2021 and 2022. As discussed, we reacted to increasing inflation trends early and holistically most importantly, setting loss assumptions cautiously. Still in hindsight and after assessing all relevant data in our annual reserve review, our initial loss picks for the new business in 2022 had to be adjusted by, we already mentioned, around 2 percentage points in order to reflect the upward trend in the most recent inflation assumptions. And this is reflected in the normalized combined ratio of 96.2% in 2022. I'd like to emphasize that those 2 percentage points, they are a one-off. And therefore, this elevated level of 96% should not be considered as starting point for the expected underlying combined ratio for the financial year 2023. On the one hand, for new business in 2023, we have fully reflected the ongoing high inflation levels in pricing. And on the other hand, we cannot just simply deduct the full 2 percentage points that impacted our 2022 combined ratio as the resetting of inflation assumptions also affects business written in 2022 but which we will only earn in 2023. If you consider all these aspects, the underlying combined ratio is a starting point of the combined ratio walk on the slide is around 95%. From here, let's turn to the impact of the January renewals. We were not only able to fully capture the current inflation environment in pricing, we also secured a fully risk-adjusted rate change of 2.3%, as Joachim already outlined. And again, this 2.3% is fully on top of inflation, fully on top of any model adjustments we made for large losses for climate change for whatever could drive up the claims going forward. So fully risk-adjusted increased 2.3%. We will earn most but not the full impact of this 2.3% in 2023. We are very optimistic also for the upcoming renewals so therefore, we say we would expect the positive impact in 2023 to be around 2 percentage points. And also, given our reserve strength, we do not expect to use the improved margin for reserve increases. In other words, the price increase we achieved will fully translate into a better combined ratio and will fully translate into higher earnings. When we presented our outlook for 2023 under IFRS 17 in December, a similar order of magnitude of price improvement was already considered in the 86% combined ratio guidance, given the strong market environment observed already back then. We also presented the main building blocks of the reconciliation of the combined ratio to IFRS 17 back in December. First, the change in methodology which means the fact that the insurance revenue is much lower than net earned premiums due to exclusion of fixed commissions and [indiscernible] leads to a lower combined ratio of around 1% to 2%. Then we already quantified the expense reclassification also at 1% to 2%. This accounting accounts for the remaining difference to the IFRS 17 number of 86%, while you have to keep in mind that in reality, a wide range of outcomes is possible, depending on the actual interest rates. Given that we have set targets under IFRS 9/17, for the first time, there's an element of caution in here, which clearly goes beyond the usual Munich Re conservatism. When disaggregating the 86% combined ratio, the basic losses are expected at around 57% to 58%, expenses at 14% to 15% and major losses at around 14%. In December, we first quantified these with around 13%, however, subject to the 1/1 renewals. As the share of property XL business has increased in our portfolio, and this business comes with almost no attritional losses, there is a shift from basic to major losses that is reflected in the 14% major loss expectation based on a large loss threshold of EUR 30 million. Accordingly, we are now expecting major nat cat losses of around 10%, while the expectation for man-made losses has slightly reduced to 4%. Now coming to the economic disclosure on Slide 31. Capital generation was very strong, and our Solvency II ratio increased substantially to 260%, benefiting from rising interest rates in some of our books even overproportionately. And this is due to second order effects like an interest rate-driven change in profit sharing assumptions at ERGO or due to deferred tax effects. To remind you, certain parts of our internal model are only updated at Q2 and/or Q4. Our capitalization supports both business growth and the attractive capital repatriation. Please note that the 2022 figure already includes the dividend, while the share buyback will be deducted in Q1 only. Even adjusting for the buyback, our Solvency II ratio remains well above the upper end of our self-defined optimal range, which is a very good starting point into a year in which we again expect to grow substantially and in which uncertainties continue to be high. On Slide 32, you can see that business growth is also reflected in a continuously increasing relative share of insurance risks against investment risks. We've had a stable diversification benefit between all risk categories of more than 30% for many years based on our prudently calibrated risk models. Our overall risk profile, therefore, continues to be very balanced. Looking into the SCR development in 2022 on Page 33, it is striking that higher interest rates had a major impact on the overall decline of 14%. In particular, capital requirements for our German Life business at ERGO reduced significantly, as financing policyholder guarantees has become a lot easier with higher interest rates. Given the diversification of our global P&C reinsurance portfolio, we were able to expand our business in a capital-efficient way, which means required capital growth at a similar order of magnitude as the premiums. Now on my last slide, let's look at our third capital metric, HGB or local GAAP. And this German GAAP result of EUR 1.1 billion mentioned on the slide came in much lower than the 2022 IFRS result and also lower than the prior year local GAAP earnings. And this is due to a significant reduction of both, the underwriting as well as the investment result. The decline of the underwriting result is mainly driven by the change in the calculation of the equalization provision, which led to a pretax gain of EUR 1.6 billion in 2021. Excluding this one-off effect, the underlying result has increased. The negative investment result is due to a very large -- largely or -- very largely strong increase of interest rate reflected in quite rigid accounting rules according to German GAAP. So in other words, significant write-downs on fixed income bonds and derivatives, which don't make sense really given that the liability side is not reacting at all to interest rates according to German GAAP. However, and this is, I think, the key message here, distributable earnings remain on a very comfortable level, supporting the capital management targets we outlined, and therefore, everything as planned and very much under control. Now with these final remarks, Joachim and I look forward to answering your questions. But first, I'll hand back to questions.

Yes. Thank you, gentlemen, not much to add from my side. Aside from just confirming, we now have plenty of opportunity for questions and answers and happy to start with the session. And please feel free to ask your questions while bearing in mind that you please limit the number of your questions to a maximum of 2 questions each.

[Operator Instructions] And our first question comes from Andrew Ritchie, with Autonomous.

First question, just want to understand exposure growth. Because in your opening comments, you used the phrase that you've grown at cat exposure materially at 1/1. When I look at your renewal disclosure, allowing for guesstimating what nominal price increases are allowing for the fact you seem to have reduced some cat exposure that would have been within the property proportional. I don't get that your cat exposure would have grown that much materially at 1/1, even allowing for the [ XOL ] growth. So maybe just clarify that. In relation to that, I guess, what I'm curious about is if that is or is not the case, what the sort of dry powder is for further nat cat growth over remaining renewals. Second question, could you just clarify what the thinking is again behind the ROI guidance for 2023? I mean, I guess, I'm thinking here, this is an IFRS 17 guidance. You have also -- you've assumed, I think, some realized losses. But I'm wondering if you've also put some allowance for any fair value through P&L noise as well?

Yes. Andrew, this is Joachim. Thanks for your first question. The second one goes to Christoph. So the -- in the 1/1 renewal our cat exposure has expanded with regard to the nonproportional programs, it has shrunk in the context of the property proportional programs. The reason why the latter is because if you just take, for example, in the U.S., if you take the admitted businesses, up there as a primary carrier, you go over 50 states and have to apply for the approval of your new tariffs. This causes some delay, which is not very good in reinsurance. That is why, deliberately, we have shrunk it. Our power or powder -- dry powder for the remaining renewals is, if I say unlimited, that's nonsense, but it's very high in all the scenarios, except for the peak scenario, which we have highlighted already last year where we have reached, I would say, amounts that we do not want to voluntarily expand any further because then the balance of diversification would be at our expense. Otherwise, the powder is dry. Thanks, Christoph?

Sure. Yes, Andrew, good afternoon also from my side. The ROI of 2.2%, as you mentioned already, is indeed affected by the assumption that there's a decent amount of turnover in our fixed income book, which would realize unrealized losses then into the P&L. On top of that, the assumption we generally take is what we call the naive prognosis. So we basically are ignorant to whatever could happen at the capital markets, which are saying that they stay where they are. So at constant interest rate level, no movement at all. And for equities and equity-like investments, we generally take total return assumptions, like for example, I don't know, 6%, which would then include already the dividend also. So a stable, decent return, which in other words, means for fair value P&L, we neither have a lot of upside in that number, but also no significant buffers for potential downside.

Our next question comes from Freya Kong with Bank of America.

Given your comments just now and the 2% combined ratio improvement shown on Slide 30, it seems to imply you expect some risk-adjusted rate increases of maybe 3.5% to 4% over '23 as we go through renewals. Is this a fair way to think about things? And do you expect positive earn-through of 2022 written business this year? Secondly, reserve prudence is largely unchanged despite the inflationary impacts. Could you give us some of the moving parts between positive runoff and reallocation of the special inflation scenario reserve? This would suggest that your underlying runoff was more positive than usual? Any color you can share on this?

Yes. On the combined ratio, the risk-adjusted number is 2%. But I think we have to be very clear what the basis for that is. In our in-force, we expect every inflationary effect to be fully covered already with what we did. So there's no -- and also in pricing for new business. So inflation is fully covered. So if you, for a moment, believe that, then the plus 2% we have is the full margin improvement. And so these 2% can be immediately deducted from the running combined ratio our in-force book has. And this is what we're doing on my slide where we show how the combined ratio develops from the 95% starting point to the 86%. So we deduct the full 2% because that is a fully risk-adjusted number. But inflation is already fully covered in the 95% starting point number. When it comes to prior year development, I think it's fair to say, I mean, we released 4% into the P&L as we generally do. But we also use part of the prior year development also to the finance inflation effect, and therefore, without inflation, I think it's very fair to say that then the 4% would have been a higher number.

Our next question comes from Kamran Hossain with JPMorgan.

Two questions from me. The first one is just on the -- I guess, on the prices and renewals. Clearly, I have heard your comments around kind of what peers are saying versus what you are saying. But the [ 2.3% ] even on your basis feels pretty cautious, prudent versus history, and if I had to look back at 2021, you're actually above that level 2.4% Jan '21 renewals. So should we look at these renewals and think, okay, you've made very prudent risk adjustments. Are we talking kind of further special inflation reserve type prudence or just kind of regular [ Munich ] prudence? So just interested in comments around that because it feels like it's a really good market, but 2.3% doesn't necessarily suggest that. I thought it's good, but it's not great. And the second question is on dividend growth and capital returns. Clearly, you're aiming for EUR 4 billion of earnings this year. And obviously, we're very early in the year. But if you were to achieve that number, should that flow straight through to local GAAP earnings, and therefore, theoretically, can it all be distributable?

Yes, Kamran. This is Joachim. I take the first question, Christoph, takes. So is the 2.3% rate increase that we indicated prudent, is that overly prudent? Is that good? Well, I can tell you, we haven't seen renewal like this one, if you just give us credit. Second, that this is the overwhelming perception of business selling. Now you can say they are [Audio Gap]. Now the 2.3% if you compare it as you did and rightly so, you compare it to some other January renewal outcomes, then I would say it's maybe underwhelming because we have seen one, it was, I think [Audio Gap]. However, we didn't have inflation [Audio Gap] then we get a full compensation [indiscernible] for a book of EUR 15 billion to [Audio Gap]. Technically, that is a matter of fact, and I would agree with you, but you get all of that funded -- funds not over 1 or 2 or [indiscernible] that's a big achievement and to get in addition to the 2.3%, frankly, it's 2.3%. These are amounts I wouldn't underestimate. Are we still conservative or more conservative than before? Maybe, but I would be cautious, maybe our inflation assumptions are on the cautious side, but frankly, I love them to be on the caution side [indiscernible]. This will be my long answer. Thank you. Christoph?

Sure, Kamran. So the local GAAP results can only be structurally lower than IFRS. I think you're well aware of that. The reason is that we are not always able to upstream all of our earnings to the mother company based on local capitalization requirements given the growth in subsidiaries and branches and similar things. But what I can confirm is that the local GAAP earnings will be, for sure, high enough that together with the stock of distributable earnings we are holding already on group level, they will be, in any case, sufficient not to be any relevant restriction to continue to have an attractive capital management policy also going forward.

Our next question comes from Will Hardcastle with UBS.

First of all, regarding that current year inflation uplift, I guess, what lines of business has seen the highest allocation? How long are you assuming inflation stays elevated in this uplift? And should we a portion is relatively evenly across the quarters in 2022. I know it's all coming in Q4, but -- or has that shortfall or possible shortfall been increasing as the years progressed? And the second question is just related to January renewals. It might sound a bit cheeky, but I guess why have you not growing volume more? It's a hard market, peers were constrained. You got better margin here. Is it because you're expecting even better later renewals? Or was it simply primary demand reduced so much?

Yes. Well, on the inflation, I think what is very important to underline that the outcome we are booking in Q4 is really the result of an in-depth analysis in our annual reserve review. So it's not something which is obvious, and we could have booked early on already. And why is that? Well, the reason is we don't see it in our data at all yet. There are just very few lines of businesses where we actually have increased claims already. So what we had to do is have a detailed database analysis our actuaries have been running over the last couple of months in order to find out what the potential impact from the higher inflation is on our books. And the way we did it is twofold. We started into the exercise from a more top-down perspective based on CPI, but also other inflation numbers available in inflation indices and these kind of things, and started with the top-down assessment, what they might -- those indices might mean for our reserves, but then very much went into the details of each and every book we are holding together with the underwriters understanding in reality what inflation might mean for those books also looking into the terms of conditions on the individual treaty in a very detailed way. And then coming up with a number like that, what inflation would mean to those books and then we were only in a position to book it. And the difficult and the risky thing is if you don't do an exercise like that, you could easily be on the wrong foot and not book anything at all. And then you'll find out 1, 2, 3 years later, maybe that the claims is a surprisingly high for you. And that's why we are underlying -- underlining so much that this exercise was very important. It was important to have this thorough assessment of inflation. And also this prudent stance we have on inflation is something really based on data and based on the intelligence of a whole organization after 2 or 3 months exercise going into all the details.

That's great. But just to clarify, is this held as some sort of [indiscernible] at the top level? Or it must have been allocated out of thought to lines of business. I mean are you able to say if it's some of the long tail or the shorter tail lines?

Yes. We did it really on the individual actuarial segments. So it's not a bulk booking. It was in the past. So that was the reason why the special reserve we reallocated for the prior years. So we were holding this reserve already for inflation. But this year, the exercise was really a very detailed one based on really book by book by book. And what we observed, and I think this is also mentioned in our presentation is that we had a rather better-than-expected actual performance in casualty lines of business, which we didn't give a lot of credibility. So we maintained the prudence in there, didn't really release a lot. And actually, the inflation, which we had to cover now by this additional EUR 1.3 billion for current and prior years, this was much more on the property side and less so on the casualty side.

Yes. I take the second question, which was why haven't we grown more. First of all, it's important to state, we have grown as much as we wanted. Second question is, I must admit I had the same question when I got the first renewal report into my hands because I saw that the growth was -- what was it, 1.3%, I think, which is a lower growth rate than compared to past renewals where the market wasn't as hard as this time. So I had exactly the same reaction as you did, but then I know the reasons and acknowledging that the reasons is, there is one large transaction where we deliberately reduced our share significantly, which accounts for a huge amount. If you normalize for this, then our growth would have been towards -- not exactly, but towards 10%. And that gave me all the comfort that we did everything right.

That's a lot clearer. So just to be clear, are you able to say what line of business that was in? Or is it a whole account sort of multi-facets at large?

Your estimate is right. And there is 1 risk area where recently, I think, already made a public statement that they retained some of the business that the reinsurers didn't want that exactly us.

Our next question comes from Ivan Bokhmat with Barclays.

I would like to ask you a couple of questions. The first one is maybe about the timing of the earn-out of those price changes in the new accounting framework under IFRS 17. Showing the 2 percentage points combined ratio benefits to the new target, which comes out of 86%. And I'm just wondering, of those 2%, how much comes from the 1/1 renewals? And how much comes from 2022 business? And by extension, I guess, the point of the question is to understand how much is carried over into the following year, into 2024? Maybe another way of looking at it, I'm wondering if, under the new accounting methodology, would your combined ratio be more or less sensitive to the reinsurance market cycle? Would it be a quicker response than before? And then the second question I have is regarding the regular income yield, maybe expanding a little bit on one of the first questions you've had from Andrew. When you think about those potential realized losses that you would take, do you think in terms of the range of improvements to your regular income yield, as in under normal circumstances, it would generally improve by 10, 15 basis points per annum. But with some of those active portfolio management actions, you get a quicker response. Maybe you could try to quantify that, if possible?

Ivan, the first question, how the 2% would develop in IFRS 17. I think generally, very similarly, the 2% are really only the renewal. So there are -- as you know, consistency is really important for us. And in our renewal numbers, we really make sure that they fit into the combined ratio guidance and they're fully consistent so that we are not using 2 disjoint methodologies, which don't really relate to each other in any way. So the 2% are really the renewal. And in IFRS 17, I mean, of course, the methodology is slightly different. So you do no longer divide by net on premium, but the insurance revenue but you're aware of those things. Other than that, it's pretty much the same. It will flow through in the same speed, same velocity. And other than that, there can be some noise from changing interest rates, discounting going up and down a little bit, but I think that's like second order effects. Other than that, it will be pretty much the same also going forward. So the renewal will really quickly be earned through mostly in the first year than in the second year to a lesser extent, and to a very small extent, only going into the third year. That's our general pattern. And I would expect it to be pretty much unchanged. With the earn through, this is the realized losses on the fixed income book, and how quickly we'll be able to increase the yield with that? It depends on the number of parameters. So it's not so easy to give you a general answer to that. It will also depend on duration and spreads and in which book you do it, in which currency and so on and so forth. What I can tell you, though, is that we did realize some losses deliberately in the fourth quarter of EUR 270 million. And our estimate back then was that, that would lead to a pickup of the running yield of 30 basis points. So that maybe gives you a kind of indication of how orders of magnitude could look like also going forward.

And maybe just a quick follow-up on the first question. So on the carried over benefit into the 2024, I know it's early to give the indications. When I think about the, let's say, 2.3% rate improvement that you achieved with the bulk in 2023, that would assume that a little bit will get carried over, correct?

Absolutely, absolutely. I would estimate it to be between 1/3 and 1/4.

Our next question comes from Vinit Malhotra with Mediobanca.

Yes. Just 2 topics for me. One is inflation and one is foreign exchange. On inflation, I mean, I've noted your comment that you were quite conservative, and this is relevant because obviously, when we see headlines and energy and everything inflation is turning, already looks like it's turning. But then when I see your solvency sensitivities on Slide, I think it's 64, I see that an increase of inflation is almost improving the solvency by 2 points. So I'm just wondering, is that because you assume interest rates go up? Or what's happening there? And the second question is the FX volatility. I mean, I think you're very clear in the 3Q call, Christoph, that FX is part of asset management. And when you are seeing such big swings, obviously, the R&D market. So, I mean, how comfortable are you that this volatility persists and that you remain in this position? And also on a similar line, the Slide 64 has very low solvency sensitivity for FX again. Could you just comment on that, if possible, please, as well?

Yes. Well, thank you for the questions. Vinit, it's always hard to relate the development over a full year -- earnings impact over a full year with sensitivities, which we are publishing based on the end of December numbers. On the FX side, for example, we have closed positions to a large extent, particularly U.S. dollar positions where we have been benefiting significantly over the year. Over the fourth quarter, we have been gradually closing those positions. Our FX position at year-end is significantly lower than at the end of the year compared to the average level we had during the year. The inflation sensitivity, this is and can only be, according to Solvency II, a very rough approximation, to be very frank. I mean this is a CPI-based inflation, I think more focusing on the assets anyway. But in any more indirect impacts you would have, I don't know, from construction cost inflation from whatever happens on the claims liabilities that's extremely hard to capture by those sensitivities. So I would not read too much detail into those sensitivities, except maybe the core message that our capitalization is extremely stable also when it comes to changes on inflation level. So we are not afraid of inflation up or down ticks with looking at our sensitivities and looking at Solvency II ratio.

And would you say that you are quite conservatively reserved for inflation? Would you say your conservatively reserved for inflation? You did say that, I just want to hear it again.

Yes, I think we confirmed it already.

Our next question comes from Fossard with HSBC.

Two questions. The first one would be on the 1/1 renewals. We've seen across the broad a lot of shift from proportional to excess of loss. And the question which keeps coming from our clients is, at the end of the day, clearly, this is creating a drag on the volume since this is less rich -- premium rich business. But is it possible to make any comparison in terms of what it means in terms of relative returns or additional margins? Or I mean how much -- can you -- are you able to quantify how the shift in the business is making better sense for you from a margin point of view? And the second question will be related to U.S. Casualty. Clearly, a very stable market, despite all people, especially in the U.S., being concerned with the reopening of the court of COVID and long-term loss cost trend being still relatively adverse. So I think, from our point of view, it's fairly difficult to understand why this is not starting to push a bit more on the prices? I know that some corrections have been made on the primary side, but I would have expected maybe some form of casualty pricing reaction as well in the reinsurance.

Thank you for both questions. I take both. I think with regard to -- I start with your second question, which was about social inflation and the pickup of court cases or court activity due to the outflowing pandemics, et cetera. In theory, we would expect that the court activities would go up to pre-COVID levels. And from there, take the trend that we expected pre-COVID. Where this will stop, how quickly, how speedy this will develop or accelerate, that's difficult to predict. But if you are on the conservative side, then you expect social inflation to stay being a massive burden for the industry for some more time. This is what we expect. With regard to your first question, the shift from proportional business to nonproportional business, yes, has a volume impact, frankly, we don't bother, we don't care, but we do care for the margin impact. And you asked for an indication of what that margin impact is. In our case, the new business mix, so more in favor of nonproportional at the expense of proportional, corresponds to a 1% price increase.

Our next question comes from Andrew Ritchie, Autonomous.

I'm afraid I came back for a follow-up. Can I just ask about Risk Solutions. I see the 3 points increase in combined ratio. I guess, I was a bit surprised that, particularly given, for example, things like the weight of cyber within Risk Solutions, where you indicate profitability has improved. So what -- can you give us a sense of sort of, I don't know, a clean of cat or clean of inflation or something as to what the underlying profitability of Risk Solutions did in '22 versus '21? That's the first question. Second question, I just want to follow up on the question on cat load. Have you done anything to rerun 2022 based on any changes to term structures? And particularly, I'm thinking attachment points on your cat exposure. I just want to get a bit more flavor as to the degree to which your book may have lifted up in terms of layers, attachments away from some of the working layer and sort of more attritionally type cat noise of recent years?

Andrew, this is Joachim. Risk Solutions. So let me try to give you a straightforward answer. The -- if we normalize the Risk Solutions business for cat volatility, which the book has seen actually, then I would say their earnings level would have reached something like -- I'm not 100% sure. I'm looking into Christoph, about EUR 500 million or EUR 600 million. That's the Risk Solutions in total. And this is the base from which we -- I mentally then start making the statement that I would not find it unrealistic that, that whole book reaches up to EUR 1 billion bottom line by 2025 through further growth. The cyber bit is one pillar in it, has not changed in quality compared to what we have reported in the last quarters or the last years. So the combined ratio is an ongoing stable, say, approximately 85%. The second question with regard to attachment points and how that has evolved during this renewal? We have seen high attachment points, no doubt and -- which improves the quality, which improves the alignment, of course, of interest. And besides attachment points, we have seen quite significant improvements on clauses or conditions or definitions with regard to what's covered and what's excluded? Because as you may recall, the pandemic has shown us, the Ukraine war has shown us, when the conditions leave some gray areas for interpretation, of course, and others, it always comes at some cost. To avoid those we have brought through more accurate definitions.

Can I just follow up?

Sure.

On cyber, then the implication is you've not recognized in the loss picks or PYD, any of the improvements that have clearly happened with respect to pricing and terms in the last 12, 18 months, I guess. I think that's the implication because I think there's a comment on the reserve page saying you haven't done that yet. But let me just clarify none of that's really recognized yet. And then just on the attachment, do you think your cat losses would be lower dollar -- in dollar terms like-for-like in '22 if you had written based on the renewals you've seen?

I'll take the cyber one. Actually, I mean, our cyber book always was profitable, nicely growing, and there was never any period where we're not having an overall combined ratio, what was it around 85% or so. So based on that high level of profitability, it just feels good to build up all the prudence just to be prepared in case something happens, so some aggregation, some bigger loss happens. And here, I'm talking about really a loss, which is not a single event. They are all easily digestible, but something where really you have accumulation across -- maybe not globally, but across a number of countries or a number of regions. Because the big risks we have is the aggregation or accumulation, and that never happened really. So profitability was always good, but we continue to build up reserves to be prepared just in case something happens.

Then you had one very concrete question like if we had applied the attachment points of the January renewal 2023 already to exercise 2022, would the nat cat losses then have been lower? I haven't done the math, right? We would need to do it approximately. Probably, yes, but as I haven't seen the math, I would be a little bit hesitant to give you a precise answer here, but we can take that offline.

Sorry, is there another question?

Our next question comes from Vinit Malhotra with MedioBanca.

So just on the large low 50s, could you just -- if you look at the nat cat, the prior year, the reserve movements, so I can recall that the last time such a notable [ EUR 500 million ] , [ EUR 600 million ], [ EUR 700 million ] at nat cat or large loss reserve release was reported was 2018, and now we are seeing it in this year. Are you able to comment, please, Christoph, where this comes from? Is it that we should expect every 2, 3 years, some kind of release if needed? So I'm just curious about the nat cat reserve release, and of EUR 649 million reported, of which I understand EUR [ 140 ] is COVID. And second is the very high man-made. Could you just comment on that because it's -- you're lowering the guidance on man-made -- on the budget of man-made to 4%, but this was probably one of the high -- fourth quarter was probably one of the highest man-made quarters in -- since at least -- I mean, since at least 2021. So I'm just curious if there's any commentary there that you could help us with?

Sure, Vinit. Thank you for the question. Christoph, I'll take the 2 questions. First on PYD, on the large losses, there, indeed, I mean, what I can confirm, and you see it on the slide as well is that the PYD this year has been relatively high for large losses. And higher than the last couple of years, but we had other years where we had a lot of magnitude already. So there's no pattern in that. It's really happening as we make progress with loss adjustment. This year, maybe even increased a little bit due to the release of COVID, I was referring to before, as mentioned, EUR 140 million of that out of COVID. But other than that, I think it's something, which just more or less happens depending on the actual development, and of course, also based a little bit on how much did happen in the years before because the more reserves you have, the more potential for lot of release areas. But other than that, nothing specific really. The second question, the man-made, in Q4, particularly, we had a relatively high amount of man-made, but nothing really out of the ordinary. To be honest, nothing I could mention. Anyway, we -- it's a little bit harder time commenting on individual claims on man-made we generally don't do that. But even if I would look at it in a more holistic way, not a single claims, but if there's a pattern or anything, I wouldn't be able to find out something just a coincidence maybe.

Are there no more questions? Now I hand back to Christian Becker for closing comments.

Yes. Thanks very much to everyone for your questions. Happy to follow up with you on the phone later on and hope to see all of you soon again. Thanks again for joining. Bye-bye.