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

Ladies and gentlemen, welcome to the Munich Re Analyst and Investor Call on Annual Results and January renewals. I'm Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Becker-Hussong. Please go ahead, sir.

Thank you, Sandra. Good morning, everyone. Welcome to our Analyst and Investor Call on Munich Re's 2023 Earnings Release. I have the pleasure to welcome our CEO, Joachim Wenning, and our CFO, Christoph Jurecka. We will start with the opening remarks of both gentlemen. Afterwards, there will be the usual time and ample opportunity for Q&A. And with that, I hand it over to Joachim.

Thank you very much, Christian, and welcome, everybody, to our call today. I must say 2023 was a very successful year for Munich Re. We have exceeded our profit target with a net income of EUR 4.6 billion, thanks to a very strong operating performance across all segments and the year-end rally in Capital Markets, we met all our outlook KPIs. We think this is all the more impressive that the result could have been even higher hadn't we taken deliberate measures to strengthen our balance sheet and also future investment income. Given challenging geopolitics, it remains paramount to have a strong capital base. We focus on what we can control. Munich Re's resilience is based on broad diversification of business operations and of investment. And the strength of our balance sheet and the prudency of our reserves, in particular, will protect our capital and earnings going forward. On the other hand, uncertainty provides business opportunities. This includes reducing the impact of volatile natural catastrophe losses, which once again hit the USD 100 billion mark last year. As we have not been observing neither significant inflow of new capacity into the market nor any softening appetite by our peers, we remain confident that the hard market will continue to persist. We want our shareholders to continue to participate in our strong financial performance, so we decided to step up the dividend per share to EUR 15. And in addition, we continue with share buybacks, also on a larger scale of EUR 1.5 billion. Over the last 4 years, Munich Re significantly outperformed its European primary insurance and global reinsurance peers with a total shareholder return of almost 70%. Shareholders can rely on us, we are fully focused to deliver on the targets of our Ambition 2025. As regards ROE, we are already now at the level we aim for by 2025. Earnings and dividend growth are well ahead of guidance and our capital position continues to remain very strong. So we have the financial flexibility to grow our business, increase the dividend and execute share buybacks at the same time. Since we set the targets for our ambition 2025 and we did that end of 2020, a lot has changed in the general framework, which we, of course, could not anticipate at that point in time. I already mentioned geopolitical uncertainties. With regard to inflation, the challenge remains to adequately reflect higher claims cost and pricing. This has been working well so far. In addition, we responded to higher inflation risk in a timely manner by a prudent setting of reserves. And the positive flip side of high inflation was the increase of interest rates, which allowed us to reinvest at higher yields and increased investment income. Also, our Solvency II ratio benefited. So where do we stand now 3 years into the 5 years ambition? Munich Re has successfully expanded business without diluting ROE. We've allocated capital to markets and perils that are most attractive. But improving ROEs, of course, also driven by us repatriating a significant share of the earnings via dividends and share buybacks. Over the last 10 years, we have repatriated more than 85% of net earnings to shareholders in absolute numbers, almost EUR 23 billion. Dividend growth is particularly close to our hearts. During the last decade, the dividend almost doubled. We have a track record of more than 50 years of Munich Re not cutting the dividend even in dire times. And with the rebasing of the 2023 dividend, we give a strong commitment that we are fully convinced that we can finance this level going forward. And to manage excess capital, we make use of share buybacks, which are a very flexible tool as regards to size and frequency, we plan this time to increase it to EUR 1.5 billion. The engine of improving ROE and capital repatriation is earnings growth. Over the past years, we have benefited from strong earnings contribution of our P&C Reinsurance business. However, we all know that the hard market cycle will not last forever. Therefore, we are strategically growing earnings from less cyclical and less volatile business segment. Over the past years, earnings contribution to Munich Re Group's result of Global Specialty Insurance, Life and Health Reinsurance and ERGO has substantially increased, and we expect this trajectory to continue. We thereby achieve a better diversification and protection of our earnings profile. In P&C Reinsurance, we have seen a continuation of the upward price trend in the January renewals. To us, it was a successful renewal as historically high profitability levels could be sustained. This positive market development enabled us to protect margins while further optimizing the quality of our portfolio. In other words, we participated in the high nominal price increases of the original market. While on a risk-adjusted basis, these were mitigated by our conservative loss and inflation expectations. Hence, the 0.3% price increase for our portfolio is, as always, fully risk-adjusted, considering most recent loss trend assumptions. And as always, our methodology of calculating price change continues to be a good proxy for the real margin improvement we expect to be reflected in the combined ratio, also under the new IFRS 17 standards. Now let's have a look at the development per line of business, in particular in Casualty business, excluding Motor, our prudent inflation expectations more than offset nominal price increases. So remaining disciplined, we substantially reduced exposure to these casualty lines, especially in the U.S. However, we still consider the business we retained as attractive. And a Motor proportional, on the other hand, significant volume increases were driven by growing partly fast-growing original rates. And in Property Proportional business, we did what we call active management. We reduced the businesses, which failed to meet our requirements with respect to price and conditions while expanding partnerships with good prospects. As nat cat continues to offer very good opportunities and margins, we further expanded exposure. In Global Specialty Insurance, premiums are expected to grow by around 25% over the next 2 years at attractive margins similar to our core P&C Reinsurance business. To accomplish this goal, we boast a collective steering of the unit as one unified specialty company under the leadership of Mike Kerner, and we established C-suite positions, who drive best practices and procedures through leadership that leverages the strength of its individual parts. The aim of this reorganization is to drive forward further expansion in specialty primary business in order to become a powerful global player in this field. In Life and Health Reinsurance, earnings are developing much better than anticipated. Total technical result has grown strongly because the underlying performance of the business has improved noticeably. We see very positive development of what we call the financially motivated reinsurance business, which is driven by ongoing high demand as just seen at the end of last year with very large transactions. Strong new business development also continues to gradually increase the stock of the contractual service margin, which is expected to release around 8% per annum into earnings. So together with the release of risk adjustment, the business generates certainly more than EUR 1 billion of earnings on an annual basis. Our primary insurance unit, ERGO, continued its successful development with a strong net profit in 2023 as well. The good development in '23 was enabled by the continued focus on 3 major drivers, really: one, further top line growth in core markets; two, good technical performance through underwriting excellence and cost discipline; three, achieving digital leadership and superior customer experience. By continuing to pursue these goals, ERGO will further strengthen its competitive position and steadily increase the contribution to Munich Re's earnings. You will see some more details on growth, underwriting excellence and digital leadership on the following slide. Let me turn to the international business. The expansion in Asian growth market is a major driver for growth and profitability at ERGO. ERGO is growing above market, even far above market in India, mainly Non-life; in China, mainly Life; and Thailand, mainly Non-life. In India, our joint venture utilize synergies from the bank partnership with HDFC Bank, now holds a top 3 position among the private P&C insurers in India. And after entering the Chinese Life market, again, via a joint venture, ERGO recorded strong organic growth and performed a step-up to majority last year. ERGO started its business in Thailand in 2016, again, with a joint venture and boosted its market position through organic growth and M&A activities to #1 last year while stepping up to majority. I think this is remarkable because, in our view, Thailand is one of the most attractive P&C markets in Southeast Asia. And I should add ERGO has the ambition to, if possible, even further improve its position in this market. Not only the insurance environment has been favorable, also the capital markets have seen some tailwind. We are currently investing new money at around 4.5%. So tremendously better than just 1 or 2 years ago. In order to leverage the earnings potential from our investment portfolio, in essence, we use 3 major levers: we seize short-term market opportunities by monitoring the financial markets; two, a more longer-term strategy is to earn an illiquidity premium by the continuous expansion of alternative investments; and the third lever refers to implementation of our investment strategies and selecting the best owner in any specific asset class and region to generate outperformance. With these elements, our ambition is to noticeably increase contribution to return on investment through active management. And over the last 4 years, we added some 10 basis points per year on average. And going forward, we should be able to maybe double this. There is a slide on AI. It's on everybody's list. Gen AI has created huge global attention. I should briefly say at Munich Re, we have been actively using what we call traditional AI for more than 10 years. It's an effective tool. It helps us better assess risk, improve efficiency, retain existing and generate new business. The progress of Gen AI arises from the way users can leverage data, while traditional has typically been focusing on internal and structured data, the quantum leap with Gen AI is that whilst the amount of external data open up new opportunities in the automation of complex processes that traditional AI simply cannot deal with. You should just take away Munich Re is well prepared to harvest the potential of Gen AI. We also worked hard on our climate ambition 2025. Bottom line, we have even exceeded our emission reduction targets. And on the social dimension, we set ourselves the target of achieving 40% share of women in leadership positions throughout the entire group with 39.5% end of last year, we're almost there. So this brings me to the end of my presentation, which I would like to conclude with the financial outlook on 2024. Our guidance is unchanged to the latest update given in last December, we are heading for a net result of EUR 5 billion. And with this, I hand over to Christoph for more details. Thanks.

Thank you, Joachim, and good morning also from my side. Let's start on Slide 24, and I'll give you an overview over the financial results 2023, first. I mean, Joachim pointed it out already, 2023 was another successful year for Munich Re. A very pleasing financial development across all business segments led to a net result of EUR 4.6 billion, which is clearly above our original target of EUR 4 billion and then also slightly higher even than the increased guidance of Q3, which was EUR 4.6 billion. And we met or even exceeded each single outlook KPI. And in addition to that, and I'm sure we are going to discuss that during this call also, we strengthened our balance sheet significantly, in particular, by increasing the reserve prudency even further. Our Solvency II ratio of 267% remains at a very strong level, even slightly higher than last year and despite growth and despite the proposed increased dividend payout. Main driver was like in IFRS, the strong operating performance, which is also reflected in high economic earnings of around EUR 5.6 billion. The German GAAP result mirrors the strong performance according to IFRS as well and increased to EUR 3.9 billion. Our high stock of distributable earnings continues to comfortably support the rebased capital return for 2023 and also our capital management strategy going forward. On Slide 25, just a few words on our steering approach. The financial result last year clearly reflects our value and risk-based steering. Our result of EUR 4.6 billion net earnings, not only represents an excellent result level, but also a very solid result quality. We implemented significant financial steering measures, increasing the balance sheet strength, reducing 2023 earnings and aiming at a steadily increasing future earnings trajectory. Our shareholders will benefit for more predictable earnings going forward. Let's move to Slide 26. As the interest rates dropped in Q4 last year, we keep getting questions on our earnings sensitivity to interest rates and also to other macroeconomic parameters. As you can see on the slide, the impact of lower interest rates on the investment result is limited as several counterweighting effects largely offset each other. This is also due to management actions, not least our strict asset liability management, which contains interest rate risks. Before turning to the full year figures, now let's have a look at the financial development in the fourth quarter on Page 27. Due to various anticipated seasonality effects, we expected Q4 results to fall somewhat short of the high earnings levels of the first 3 quarters. Now the actual Q4 net earnings of EUR 1 billion came in higher than expected, reflecting a strong underlying performance and a positive tax result. Building on the strong underlying performance, we could easily afford to consistently implement the mentioned financial steering measures also in the last quarter. Concretely, the realized losses on our fixed income assets, again, and we strengthened the prudency of our reserves. Starting with reinsurance. Life and Health, again, showed a very positive development in Q4. The insurance service result benefited from extraordinarily high new business, in-force management and a positive outcome of the annual reserve review. Experience adjustments were once more negative in the U.S., mortality business there, but were more than compensated for by positive experience in the remainder of the book. Also, the underlying result from insurance-related instruments remains on a good level. Negative currency effects were partly offset by interest rate and other fair value changes. Now in Property Casualty Reinsurance, the strong underlying profitability of our business also remained unchanged. While the IFRS result was as expected below the level of the quarters 1 to 3 driven by seasonality effects. Let me just name the Q4 buildup of the loss component as opposed to the first 3 quarters where we saw releases and seasonally higher expenses that impacted both the service result and the other operating result. Please note that the lower result is also an expression of continued prudency. First, this shows in the relatively high buildup of a loss component that was partly driven by lower interest rates, but also by the reflection of weaker-than-expected performance in a few parts of our book, where we booked the loss component assumptions, pre [ 1/1 ] renewal and therefore, prudently. And second, we again booked additional reserve prudency for basic losses, but this quarter not being offset by higher-than-expected discounting benefits. The normalized combined ratio of 89% still looks high. But please have in mind, we don't normalize for the seasonally higher expenses and also not for the extra prudency. And therefore, I would like to just emphasize again, this is by no means indicating any change of the underlying profitability. And then finally, I think the discount effect of only 5 percentage points in the quarter -- and the combined ratio in the quarter, stand-alone after we saw 9 percentage points for the first 9 months, certainly also needs some explanation. I think some effect from lower interest rates in Q4 was expected anyway. And we also modified assumptions on the timing of loss occurrence, which are essentially in a reinsurance as we generally do not know when exactly claims did occur. Claims expectations for the full year will now be more evenly distributed across the single quarters. This leads to a true-up effect in Q4. The discount effect of approximately 8 percentage points for full year 2023 is consistent with guidance. Although this 8 percentage point level is a discount assumption also for 2024 is under some pressure given in tendency, lower interest rates, this is not at all expected to have any impact on our combined ratio outlook for 2024. Just very briefly on ERGO. In Q4, ERGO achieved a net result below the quarterly run rate of the full year earnings guidance. In the last quarter, P&C Germany had to digest seasonally high acquisition costs due to the main renewal of Motor business. In addition, large losses exceeded the budget. Based on an ongoing good underlying trend, the combined ratio amounts to 97.5%. In the Life and Health Germany segment, declining interest rates had a burdening impact on the CSM and the related CSM release. Thanks to a continuation of the favorable technical performance, ERGO International achieved a very good net result with a combined ratio of 89.5%. Back to the group. The investment results came in very high with an ROI of 4.4%. While we once more deliberately incurred disposal losses aiming at accelerating the increase of future regular income, this time around EUR 100 million in reinsurance and EUR 100 million at ERGO. We benefited from significant fair value changes. However, the high contribution of the investment result was diluted by a negative currency result of almost EUR 500 million in the quarter. And then finally, we posted an unusually high tax income, driven by an accumulation of various unrelated positive effects. Coming back to the full year now on Slide 28. Let me start with the investment result. With 2.5% ROI exceeds our guidance of at least 2.2%. By the end of the year 2023, the reinvestment yield had materially risen to 4.5%. Net disposal gains and losses include those losses on fixed income investments, we incurred to accelerate the increase of the regular income going forward. The full year 2023 was hardly affected by fair value changes despite some intra-year fluctuations. Turning to the 2023 financial development of the 2 business fields, starting with ERGO on Slide 29. All 3 ERGO segments contributed to the strong bottom line performance and a return on equity of 13.5%. The technical performance of Life and Health Germany remains sound, but is influenced by a reduced CSM release due to lower interest rates. In P&C Germany, the combined ratio of around 89% fully meets the guidance. The strong technical results confirms ERGO's outstanding portfolio quality. The achievements of ERGO International are particularly pleasing. Profitable growth and a significantly enhanced technical performance are reflected in a 90% combined ratio, also exactly in line with expectations. Let's move to Slide 30. Our strategy of back book runoff and growth in capital light and biometric products in Life as well as the shift to short-term health business will be clearly visible in our IFRS 17 numbers going forward. We expect that the CSM will not grow over the next 10 years as new business in long-term health and growth in Life new business, which has roughly offset the runoff in our Life back book. However, our book of short-term business accounted for PAA business will grow and contribute a higher share of the increasing technical result. With Slide 31, I would then like to remind you that we apply EIOPA Solvency II yield curve as interest rates also for IFRS 17. Only for a few entities, just like in Solvency II, we use an illiquidity premium, concretely exactly the volatility adjustment as in Solvency II. As a result of this choice, in particular, the very limited use of this illiquidity premium, we use relatively low interest rates compared to the current market rates, leading to a prudent level of the CSM and relatively low new business value compared to the CSM release. At the same time, we report a high so-called over-return as a difference between the risk-free and the expected real investment return based on our asset allocation and the investment risk we take. This over-return is recognized year-by-year in operating changes and in the CSM release. Accordingly, the over-return is not included in the stock of CSM and not in the new business CSM. In a nutshell, due to the low and thereby prudent interest rate choice, our new business CSM is relatively small compared with the CSM release, which includes the over-return. Now let's move to reinsurance on Slide 32. The reinsurance field of business continued to record strong business growth at a high profitability level of a 16.2% return on equity. Life and Health reinsurance substantially exceeds its original net income guidance and finally achieved the full year target that was revised upwards to EUR 1.4 billion at Q3. What I mentioned for Q4 also applies for the full year. Overall, a very strong performance with the CSM and risk adjustment release in line with expectations with healthy new business, effective in-force management and a positive reserve review. Also, FinMoRe business developed very favorably. In P&C Reinsurance, we took advantage of attractive market conditions and expanded our business in nat cat and GSI in particular. With 12.6 percentage points in the combined ratio, major losses for the full year were slightly lower than expected and strengthening of basic loss reserves by adding an extra prudency of EUR 0.9 billion for the full year, more than compensated for the approximately 3 percentage point discount benefit in excess of the 5 percentage point expectation and also exceeds the around EUR 0.5 billion after-tax difference between discount and IFIE. The headline combined ratio of 85.2% and the normalized combined ratio of 86.5% are both very much in line with guidance, confirming a further improved underlying profitability of our book. On Slide 33, just a quick view on Global Specialty Insurance. After an improvement of 7 percentage points year-on-year, the 85.4% combined ratio is on the same level as for the overall P&C Reinsurance book, with 10% growth is substantial based on business expansion benefiting from favorable market conditions. Let's take a closer look on our reserving position on Slide 34. Our reserves are even stronger than last year, including the mentioned additional EUR 0.9 billion prudency. And this is despite the impact of inflation, which has been consistently reflected in the reserving loss picks at year-end and our cautious reaction to other trends like social inflation in the U.S. Overall, the outcome of the reserve review again was very positive. The result of the actual versus expected analysis now has for 12 consecutive years consistently shown very favorable indications and allowed for releasing the aspired 5 percentage points of reserves. All lines of business have developed favorably. The main driver in property, where underlying rate improvements clearly have a positive impact. The release for third-party liability was small. This cautious reaction is owed to U.S. casualty where social inflation trends have not abated. Having released the aspired 5 percentage points of reserves, despite a substantially growing portfolio and managing potential upcoming loss trends, is a clear statement on the strength of our reserves. Coming to the economic disclosure on Slide 35. Capital generation was very strong and our Solvency II ratio remained at a very convenient level of 267%, benefiting from strong operating earnings and only slightly increased required capital. Please note that the ratio already includes the dividend where the share buyback will only be deducted in Q1. Even adjusting for the buyback, our Solvency II ratio remains well above the upper end of our self-defined optimal range. So our resilience remains very high. Even after significant shock events, we would still be above our optimal range. As you can see on Slide 36, we maintained an overall balanced risk profile in 2023 after a continuously increasing relative share of insurance risks against investment risks in past years. Overall, we continue to have a stable diversification between all risk categories of more than 30% -- for many years, basically calibrated models. Details of SCR development are then shown on Slide 37. Looking into more detail on the SCR development, the overall level remained largely stable as diversification largely absorbed a moderate risk expansion and the impact of lower interest rates. Given the diversification of our reinsurance portfolio, we were able to expand our business in a capital-efficient way, while further optimizing the risk-return profile also through retrocession. Finally, coming to our third capital metric, local GAAP, HGB on Slide 38. I can be very brief here also given the substantially improved result of EUR 3.9 billion. Distributable earnings of EUR 7.7 billion provides a comfortable cushion for continued attractive capital return. With these final remarks, Joachim and I look forward to answering your questions, but first, I will hand back to Christian.

Yes. Thank you very much to the both of you. Now time for Q&A. My usual request, please limit the number of your questions to a maximum of 2 per person. If you have further questions, please rejoin the queue. And with that, please go ahead.

[Operator Instructions] Our first question comes from Andrew Ritchie from Autonomous.

First of all, thanks very much for the bounce in the dividend. But I just wanted to know a bit more about how you came up with the EUR 15, so roughly EUR 2 billion in euro terms. You talked about -- you used the word rebase, you talked in the slide pack about a new level of earnings. So just how did you come up with the EUR 15? Clearly, just to be clear, I'm not complaining, but I just wondered what is that based on? Was it a target payout on some kind of level of what you think the new sustainable earnings are? So really, just a bit more color on why that particular number. Second question. There appears to be quite a contrast in approach to U.S. casualty between reinsurance and primary. I was curious, looking at Slide 100, where I can see a 36% growth in casualty of the Primary Specialty business, including 30% in U.S. I'm just curious, what are the opportunities on the primary side in the Specialty business on casualty that you don't see or aren't related in any way to the Reinsurance? Because I mean the underlying pricing dynamics and claims dynamics should be fairly similar.

Andrew, this is Joachim. Thanks for the first question. The truth is, Andrew, that Christoph and I, we were sitting together and said, let us think about what the possible range of dividend for year 2023 could be before we go to the Board of Management and then go this through. And it's really true. So we said we can sustain easily a higher dividend, and the dividend growth promise that we gave out in the context of Ambition 2025 was, by far, no limiting factor. So we said, where do we go? And then we said, okay, we start EUR 11.6, that was last year; okay, EUR 12, EUR 12.50, EUR 13, EUR 14. And we then said, what's the dividend yield that our peers are performing? And there, you are in the range of between 3% and 7% roughly, 3% and 7%. And we were at the bottom end of this. So we thought, let's think about 4%. What would that mean? And back then, the share price was EUR 375 and 4% of that amount was EUR 15. And then we thought, what if the stock price crashes by 20%, which can easily happen at any point in time. Well, then it would be 4.8%. It would still make sense. Can we sustainably earn this dividend? Yes, we can, EUR 2 billion. Just look at the earnings of our so-called less volatile businesses. Andrew, this is how we started coming up with it, honestly. It could have been EUR 14, it could have been EUR 16. U.S. Casualty, do you want to take this one, Chris?

Happy to take that one. Thank you, Joachim. And I think there is not so much a specific answer like that reinsurance is so much different from primary insurance. We are really looking at the business more or less piece by piece, terms and conditions, prices, all these things matter. And what we saw is that in specialty insurance and particularly in the E&S space, there were strong rate changes. So a lot of the growth was just driven by these rate changes, significantly supporting then also our business in 2023. And this is obviously then the backdrop for the maybe perceived difference in global specialty insurance versus reinsurance. But in reality, the approach is very similar.

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

Just firstly, on the expense ratio of P&C rate. I think 15.4% was a little above the guidance that you gave at the start of the year. Can you help us understand what drove the seasonality in Q4 and if there's any one-off elements within this number in 2023? And maybe an outlook for 24? And then the second question is just how do we think about the EUR 0.9 billion of reserve prudence you booked in 2023. How should that -- how should we expect that to unwind over time, i.e., which lines it be allocated to?

Yes. Well, thank you for the questions. Seasonality I mean, already in the past, the development of the expense from one quarter to the other quarter, there were always a little bit of ups and downs. Q4 was always a little bit elevated. This time more pronounced than what we saw in the past years. But the reasons are very similar. So there are certain items which you booked just in the fourth quarter. On top of that, then some of the expenses are just project driven and then also the expenses depend on how much focus you're making, for example, in bigger IT projects or something. So nothing really big to interpret into that increase. And I'd say the overall expense run rate has not changed -- didn't change significantly at all from Q3 to Q4. So maybe that's on the seasonality on the expenses. On the reserve prudency. First of all I would like to emphasize again, this is really prudency. So there was not at all any need to put additional money into the reserves. As you could see, the release was still 5%, as expected. And as I mentioned already in my introduction also because also the reserve review went as well as it can go. And I think I also mentioned already in the call we had before Christmas on our outlook that the level of our reserves is very close to the maximum already. So no doubt at all about our reserve prudency, and what we did during the year was really just an addition to the prudency to make our reserves even more resilient starting from a very high level already to some extent also because we could afford it. If there was this difference in the discount between the actual and the expected discount rate, so there was some support for the result, which we thought would be just a good background for further reserve strengthening. Now the unwind. Given that it's, in a way, a little bit of unspecific reserve strengthening, so not very much related to any data points you already have, but rather for events, not in data yet. It's a little bit difficult to predict how it will unwind, but it will clearly give us additional protection against unexpected events. So against also unexpected volatility. And this is what I meant to say also with our steering approach as quickly shown also in one of the slides. As much as we can smoothen our earnings trajectory going forward and as much as we can make sure that our earnings are predictable, I think this will be very much to the benefit of shareholders as much as for all our stakeholders, of course, as well.

The next question comes from Tryfonas Spyrou from Berenberg.

I've got 2 questions. So the first one is on Life and Health. We -- can you maybe comment on where has the substantial increase in the new business CSM came from in Q4? And what is the level of your business you should expect in 2024 across the Life and Health Re business? Any reason that we shouldn't expect the higher system stock to feed through to the P&L potentially resulting in a higher technical result that you previously outlined to the EUR 1.45 billion? The second one is in Casualty Reinsurance, you mentioned that you're anticipating some inflation impact to come to selected portfolios. And overall, it appears that you come across somewhat more cautious on the end of year as well post '19. Can you perhaps elaborate a little bit more on what you're seeing here? And I was wondering if you can also comment on what is the level of claims inflation you have experienced over the underwriting years? Is there anything you can say that can alleviate any concerns across this space?

Okay. Tryfonas, this is Joachim. I take the first question, and Christoph is happy to take the second one. The new business momentum, the most recent one and very outspoken one in Life and Health Reinsurance is big transactions. And what are they about? What we provide to our clients, as always, is financing effect and/or capital releases. And as a reward for that, they see portfolios containing biometric risk to us, which contains margin, which over time materialize in terms of annual earnings or results. So that's it. And the demand for such type of deals depends, in crisis times, financially distressed times, the demand is very high. And sometimes, you have company-specific situations where companies do these transactions to improve their financials to the capital markets. Bottom line, last year, we could do some large transactions. And as we are aware that there is still quite a number of pretty nice transactions in our pipeline, we would expect this momentum to sustain at least into this year, if not also into the next years. And how does this then impact the earnings going forward? Well, roughly, with that 8% per annum CSM release into earnings. Christoph?

Yes, Casualty. I'm not 100% sure if you were referring to the Motor, I was mentioning in the context of the loss component of more, let's say, general U.S. Casualty topic. So therefore, let me comment on both of them very quickly. In Motor, we saw really inflation-related increases of claims in some of our proportional treaties, which now with price increases, as we saw during 1/1 will be very much mitigated, and we expect profitability to benefit from that quite a bit. Now in the assumptions we took for the loss component in Q4, we did not reflect that improvement yet. But we used reserving assumptions, which do not give any credit to any 1/1 renewal assumptions. So that's an additional piece of prudence in our loss component on top of the reserve prudency we have been booking in Q4 anyway and which, of course, is part of the Q4 story, which on first side comes in a little bit probably higher than expected also on the technical result side. On the U.S. Casualty side, maybe then the comment, what we observed during 2023 is a higher loss of merchants in some soft market years, so specifically 2015 to 2018. There are still some social inflation impacts in those years despite the fact that we -- and we discussed it a number of times already in the past, we reacted quite strictly to U.S. casualty developments already over the last few years. And therefore, I think the impact we saw in the soft markets years was still relatively limited, but we still did see it, and we reacted to that again. I'm emphasizing so much that I'm talking about the soft market years because in U.S. other than that, we saw a really different development, which was significantly better than in those soft market years. And therefore, all together, we were quite content with the overall development of our reserve position in Casualty and specifically in U.S. Casualty overall. But these soft market years, they just were developing a little bit worse than what we would have thought a year ago.

The next question comes from Kamran Hossain from JPMorgan.

Two questions from me. The first one is just on, I guess, earnings progression. In the recent past, you talked about wanting to show smooth earnings progression. And I understand that in 2024, you've got some resilience in the guidance. But how difficult does the interest rate environment kind of seeing declines make this ambition of smooth earnings progression. I guess you've got reserve buffers and all sort of prudence to back on. So how comfortable are you with that for the next couple of years? The second question, just coming back to the share buyback and dividends and the total EUR 3.5 billion payout. Is this a signal that this is where you now think trough earnings are given, as you said, the addition of nonvolatile, less cyclical earnings from a number of areas. So if we get into a cyclical downturn in reinsurance, will that level of payout likely to still be okay? I suppose, are my two.

Yes, Kamran, let me start with the interest rate question, and then Joachim will take the second question. Well, I think I had one slide on interest rate already. As long as rates do not move too much, they are offsetting parts, which would more or less than cancel out any impact from changing rates. And I don't think that should be very surprising because our ALM approach, also from an economic perspective is, of course, already to hedge interest rate impact at least on the balance sheet level. And then, of course, with higher yields, you have higher new investments, so somewhat benefit from that. But there's a lot of offset. Now IFRS 17 and 9 is much closer to the economic view anyway so that the mismatches you have in the accounting world, they should be smaller. There's still some timing differences. You're all aware of the IFIE versus discount in P&C Re. But more generally spoken, there are still many offsetting effects and also in the investment result with lower yields, you have lower regular income, but then maybe also less unrealized losses you realized. So there's a lot of offset also in that area. Therefore, generally, I would say that we are relatively well hedged when it comes to interest rate levels. Obviously, higher yields are always kind of positive for an insurer or that's still the case. But we are also not concerned with lower rates and a lot will be dampened anyway if rates would just go down EBIT, that wouldn't be of any concern.

Kamran,, let me take the dividend and the share buyback question. So each time we have to look at 3 factors: one is -- are -- is the earnings trajectory favorable enough or sustainable enough that we can finance dividends and share buybacks? You can tick this box easily. We do at least. Then we look into the German GAAP position that the technical aspects, which is paying the dividends actually and paying the buyback. Christoph referred to this. There is one slide with -- I don't know, EUR 7 billion to EUR 8 billion. This is well funded. We can tick this box. Then there is the Solvency II position with 267 solvency ratio or anything, even going in excess of our optimal position, we can also tick this box. So from that angle, I think we can be all, we as the executive management, but also investors, very confident in the outlook of dividend. But we don't make any new promises. So we have brought it to a new level. And I would say the old promise of -- on dividends on a 5% CAGR going forward is the new promise. And with regard to the buybacks, we look into this every year as we approach them the end of the year. But I'm just telling the view allows us to be confident.

The next question comes from Will Hardcastle from UBS.

First of all, can you help to quantify the reserve prudence additions in Q4 stand-alone? You mentioned the EUR 900 million for the full year. These are on the basic losses. And is there any risk here that being forced to release more here in the coming years given the high level of buffers that you have? And just one extension to that, sorry, on the loss component. I guess here, can you give us any more color in terms of within that, how much the additional reserve prudence is and which lines they relate to? Secondly, just wanted to -- it's interesting the major step up and the confidence that you're messaging here in terms of the dividend. I'm just trying to clarify, is the dividend rebate more to align with the peer yield? You touched on there or to send that clear messaging on the forward earnings power? And I guess, what stopped you from doing the more classic Munich Re of the sort of regular growth in excess of, let's say, that 5% level?

Well, I'll start with the first question. The reserve prudence in the fourth quarter stand-alone was around 1% of the combined ratio, order of magnitude. It's harder to quantify the prudence in the loss component because then we would have to have to do the entire calculation again with pricing assumptions, which we generally don't do. So therefore, it's -- I could only guess. And before I'm wrong, I'd rather not guess. But I would expect it to be significant, whatever that means. Sorry for that.

With regards to the dividend question. I mean, why have we rebased it to the new level? Because the earnings level, not only in 2023, but also going forward also is at a new level. We then look into how much have we repatriated on average in the past decade? It was 85%. And look at recently the Solvency II ratio -- and I'm not complaining, I'm just enjoying it, is increasing. So from that angle, I think it makes a lot of sense of repatriating bigger amounts back. Now asking ourselves, do we then rather prefer a EUR 2 billion one-off payback to a more pronounced dividend increase? We think the more valuable increase is on the dividend because there you have a very, very long-term promise sitting behind. And this signal we wanted to send out. This is not a one-off like share buyback. This is a long-term promise on a new level. This is it, honestly.

The next question comes from James Shuck from Citi.

So the first question is just around the outlook for the Solvency ratio. So obviously, the payout is about 65% to 70%, including the buyback and the dividend. Are you able to give any insight into how the SCR growth will develop in '24 and possibly into '25? I noticed it was stable in '23, you bought more retro, P&C down, Life and Health up a lot. I guess my question is kind of aligned to the fact that we would expect the SCR to grow, and therefore, is the new capital management policy just neutralizing that capital build going forward based on your growth projections. The second question was really on the renewals. So I'm looking at Slide 12 and I have 2 associated questions here: one is the Motor proportional, which you're showing is kind of barely showing any improvement in risk-adjusted pricing, and I get the fact that you're pretty cautious on this. I just would have thought that many primary companies would disagree with that view. We've heard a lot from primary insurers about how the markets are turning and the rate is improving even on a risk-adjusted basis and therefore margins should get a lot better. I don't see that in that Motor proportional blob. So perhaps you could expand on that. And I guess I was also interested in the casualty ex Motor proportional and some of the cautiousness you've put into your loss cost assumptions, I'm presuming those are kind of ex inflation to non-U.S. Casualty where you're taking a more conservative outlook, particularly on the loss cost trends.

I'll start with the SCR outlook and the development of the Solvency II ratio. And let me start with a very general statement. Ourselves to find optimal range is called optimal range because we really believe it would be optimal to be in that range. Having said that, it clearly means that we wouldn't mind at all if the Solvency II ratio would be smaller. Now the question could then be why didn't we give back more capital even to bring down the ratio down earlier or quicker? Or however you would like to phrase it. And there, the answer is more or less also what Joachim already said, we want to be sustainable in what we're doing also in the capital repatriation. Everybody should be able to very much rely on us being also continuously doing what we did in the past, sustainably continue with the capital repatriation. And then on top of that, of course, we would also very much like to have some flexibility when it comes to growth opportunities. So if -- I mean the risk profile is very balanced, but if you would find an outstanding opportunity for growth, which would then maybe also cost a little bit more of SCR as what we saw in last year, for example, would probably still go for it as we can afford it. Obviously, always has to be a balanced view and the profitability has to be attractive enough that we're really good to go for it. But we would really like to keep that profitability also going forward. So in other words, we could imagine giving back more capital than just the excess capital we are creating and reducing the ratio would not harm at all. And by the way, to add that, I mean, we are on a long-term track of increasing also debt leverage. We have not been very successful very recently with that because we have been so profitable, and the equity went up so much. But the idea is still to by issuing over time, more and more debt, strengthening capitalization by having a higher leverage and also use the capacity we generate from that for additional repatriation. Again, having in mind local GAAP restrictions, it's never possible to do that at once. It's a long-term project, but we are still on the trajectory of that course, and like we started it probably 5 years ago, we are still doing it.

And James, with regard to your Motor question. First of all, it's important to acknowledge that we, as Munich Re Insurer, we don't have Motor shares across regions and across many, many clients. So our Motor book in reinsurance is relatively select. That's important. It means that it may well be that the book of primaries looks different or what they see in their book is not exactly the same thing that we see on our books and vice versa. The second statement would be that it has been an industry phenomenon, I would say that the underwriting year is '22 and '23 in Motor worldwide, maybe with very little exception, was not really great, to be polite. And also, our book, which is a select Motor book, for those years looked poorer than for the previous years. But the more, the partly very massive original rate increases that we have seen in the primary market in 2024, they will -- they come through into the reinsurance book. So when we show on Slide 12, when we show a price -- a positive price change, this is internally really after very prudent assumptions with regard to Motor claims inflation because in '22 and in '23, it wasn't great. It is after very conservative assumptions. And yes, at our end, this book now looks really good.

The next question comes from Darius Satkauskas from KBW.

Two questions. So the first one is on the renewals. At 3.5% growth doesn't seem too high to me. Any reasons why growth wasn't any higher? And did it meet management's expectations? And also do you expect it to pick up in the remainder renewals? Any color on that would be helpful. The second question is, so normalized combined ratio is becoming less helpful as you yourself alluded that it doesn't capture prudence, it doesn't capture some expense seasonality. So I was just wondering if management could share with us what the real normalized underlying combined ratio figure for either 2023 or the fourth quarter actually is?

Darius, this is Joachim. The 3.5% growth, you say may not look great. Honestly, had you asked me before, I couldn't have told you if it would be anything between 0 and 6% or 7% because we don't steer on that basis. So in the end, we accept what the outcome is. It sounds unserious, but I mean it. We are totally, totally and only bottom line focused and a 3.5% growth is the outcome of what we could find in the market given our risk appetite, which is fine.

Normalized combined ratio. So my recommendation, how to look at it will be the following: if you look at the full year number, a lot of the seasonality is just out of that number because then you cover 4 quarters anyway and then you average out a lot of the quarterly noise, let's put it that way. And then the only thing you still have to have in mind is that we did strengthen reserves significantly as discussed with the prudency significantly and at the same time, had the benefit from the discount. So you could take the full year normalized combined ratio and then adjusted for the difference between the reserve strengthening of EUR 0.9 billion versus the 3% advantage we had on a full year basis on the discount, take that difference deducted from the 86.5% full year normalized combined ratio, you will end up with something around 86% as a starting point for maybe looking into the future. And I think that's the best possible way to look at it.

Can I maybe -- this is an exception that I add a further comment on question one, sorry. I think it's important, Darius, to maybe share this on growth. We are in a hard market, right? And in the hard market, there is 2 types of extreme reaction -- not extreme, but totally -- fundamentally different reactions in the market. One is that peers would start growing very fast at the expense of the margin development. This hasn't happened. But that will be bad because that would be the entry into a softening cycle again, right? So in that sense, I'm happy that we don't see too high growth rates at the expense of margin evolution. The other fundamentally different reaction is that our clients, the primaries, they rebalance their reinsurance portfolio. We're saying, well, in a hard market, maybe I retain a little bit more and I accept that the market is where it is. But that means that the growth is a little bit lower. It's a little bit a lower growth, but at very attractive rates and conditions. And I think this is reflected in our numbers.

The next question comes from Ivan Bokhmat from Barclays.

I've got 2 questions, please. The first one is on Global Specialty. I think in the past, you have mentioned the EUR 1 billion earnings ambition from that business. I suppose you're already achieving that on the underwriting results. But I was just wondering if you could maybe share this non-P&C Re traditional earnings pool where you have Global Specialty, you have Life and Health Re, you have ERGO. I mean, what it is right now and how should we expect this to grow? And the second question, a little bit smaller, is just on the cyber. I've seen that the cyber premiums have reduced in 2023. So I was just wondering if that's a function of the market or maybe Munich Re becoming more selective? Or maybe you could share color on the loss experience and the combined ratio in cyber?

Yes. Ivan, let me start with the cyber question. This is Joachim. The cyber volume development has been a 2-digit growth, a deep 2-digit growth now for quite some time. And this time, for the first time, this has halted, if you like, or plateaued at that level for 1 year. I think there is -- as we read it, 2 reasons for this: one is that the cyber cycle or the cyber market has become also hard with very, very little sort of softening intent, and those reinsurers who do not want to respond to that first softening intent, like us, they just reject. And the second thing is, this last round, we are focused on bringing into the markets. We think for the good of the whole market, new wordings. And those wordings should protect both primary insurers and reinsurers as best as possible against any litigations with regard to covering critical infrastructure, attacks or cyber war. And this takes some time. And here and there, of course, the clients may say, we need a little bit more time. We give to them. But that -- those 2 things explain why the very recent growth was remote to what it used to be going forward because the connectedness of the whole world is just growing double digit. And the cyber risk exposures of private households but also corporate is growing as we speak. I expect this market to continue to grow very fast.

Maybe on the GSI financials. I think what we all see is that the level of transparency we give on those numbers is smaller compared to other segments as we're currently offering them on a regular basis in the quarters. And also, methodology-wise, if you look at the targets, there's still IFRS 4 based. There is a certain gap between what we do for GSI versus what we do for the other segments. And this is then driving questions like the one you had before, and we can only very high level, say, well, we're generally on track to achieve our targets. This is clearly deficiency of our financial reporting with respect to GSI and we are working hard to change that going forward. I mean, we have been pretty busy with IFRS 17. Otherwise, we would have done it earlier, probably. But the intention really is to introduce an own IFRS 17 segment for GSI as of next year, so Q1 next year, we'll have that. And by then, obviously, transparency will be significantly better because we can then separate out GSI from the P&C Reinsurance segment, show it as a separate column in our disclosure and do that on a quarterly basis. And this will, I think, be very helpful for all of you and as well as for us also internally to have that on a more regular basis. So this is an announcement. So you could ask, why does it take another year to get there? Well, first of all, there's an IT work involved in that. We have to implement it first. And then also, we have to have prior year numbers. And so we have to start collecting figures this year already to be able to release them next year. And this is where it takes quite some time. And again, to start earlier with that during IFRS 17 implementation -- was unfortunately a little bit too much for the organization here, but we'll get there.

The next question comes from Faizan Lakhani from HSBC.

The first one is coming back to a normalized combined ratio for Q4. You mentioned sort of expense seasonality being 1 point higher, prudence being sort of 1 point as well. So if I start off with the 89% combined ratio, that gets you to 87%. Can you just help me bridge the 87% to 86% for Q4? And the second question is coming back to the SCR development for 2024. Despite strong growth, it stayed -- directionally it has come down. Can you just help understand how much more you could do in terms of optimizing the diversification within that and what that could mean for the SCR growth for 2024 as you currently see it?

Yes, sure. So combined ratio, I mean your calculation is exactly right, but both 1% items you were mentioning are rounded figures. So your calculation pretty much gets you already to the target. I don't think there's a lot you can add. I mean the full year normalized combined ratio was at 86.5%. You're not that far away if you start with 89%, deduct 2x the 1% rounded numbers, and then you're pretty much there. So nothing really to comment on top of that. The SCR development, I mean, I think we're pretty optimized already when it comes to diversification. I mean, we have a big global broadly diversified book across Primary Insurance, Reinsurance, Life, Health, Non-life across all geographies. So I think this is very well diversified already on the business side. The models themselves, they show the diversification -- on the slide, I think I say above 30%. And then we are talking about prudently calibrated model. And this means we are not exaggerating the diversification. So if you would calibrate our models, maybe a little bit more aggressively, I think it would be possible to come up with significantly higher numbers than the 30% mentioned on the slide. Again, I mean, whatever we do, we are prudent. We don't want to stress too much because we don't want to be wrong. And again, this financial strength is not just something we would like to have. You really need that as a requirement to be able to really take business on our book. We underwrite a lot on a gross basis. If you want the risk takeoff the last we saw for the entire industry, so we'd rather be a little bit prudent taking all these peak risks on our balance sheet. And therefore, also when it comes to diversification, I think the models, they are not optimized to the largest possible extent, but it's also not necessary to do that. And we feel very comfortable both with the business footprint, but also with how we model it and with the above 30% diversification, I think we are fine.

So just to clarify, given your prudent stance, I guess, it would be fair to grow the SCR broadly in line with what we think exposure growth will be, and that would be a fair reflection for 2024?

We wouldn't mind at all. And as I said before, if there would be one piece of business, let's say, a big, big treaty, which comes with high enough margins that we deem it to be very attractive, I think we would even write it on the cost of -- certain reduction of the diversification because we can afford it, yes.

The next question comes from Vinit Malhotra from Mediobanca.

Yes. So my first one is just a little bit looking at the nat cat picture, where you've helpfully shown the 5.3% renewal growth. But also on Slide 66, the -- for example, the U.S. hurricane PML has quite a bit of contraction there. And you mentioned something about extended retrocession instruments. So I, mean maybe this can be one topic, but is the growth of 5.3% a bit low because obviously, the nominal pricing would have been much more? And could you comment on that extended retrocession and the PML big change, please? Second thing is just on the GSI. And I appreciate, we look forward to the new data next year. But nevertheless, there's about 7 points of combined ratio improvement, '22 to '23. That feels like maybe a bit more than what we would have expected. Is that the only nat cat? Is it some reserving movements that you could comment about, please?

So with it, let me start with the SCR question and on cat and the various parts. I think there is a number of developments where the P&C Reinsurance SCR goes down. First reason is that our portfolio is more balanced than it was a year ago, which is basically a function of how much business we did write outside of the U.S. We've been growing quite a bit also in Europe and in other areas of the world. So it's a little bit more balanced than it was a year ago. That helps, obviously. On top of that, there's always currency impact, and you saw the U.S. dollar going down, so there's a significant currency component also in that respect. And then all the retrocession, which we increased a bit, not massively, but reasonably well, I would still -- I mean, I think the overall story line is still that our retrocession is pretty stable over time with some ups and downs from one year to the other. So nothing really in a strategic way, it has changed also. But we were able to get a little bit more of protection at reasonable terms and prices than a year ago, and we made benefit from that. So that's also one of the reasons why some of the peak [ payers ] are a little bit lower than maybe a year ago. And I would all summarize with its portfolio management. It's really the core of what we are doing, making sure that the overall book we have is balanced and optimal, optimal also in a way that we can grow the book in a very capital-efficient way and optimizing return on capital for all our stakeholders, and in particular, of course, for the investors. So nothing really spectacular to add on that side. And also not any reluctance when it comes to any business in any geography. As long as prices are fine, we're very happy to write that. And particularly, in the nat cat space, we continue to be very positive given the hard market and the still very attractive prices and terms and conditions.

The next question comes from Roland Pfander from ODDO.

Two questions from my side, please. First of all, I would like to come back to the U.S. primary specialty business. You still have quite high growth targets out there for the next 2 years. Prices are obviously softening a little bit. So where has this positivity coming from? Is it from the reorganization of your distribution approach? Or is it market growth? Or what are you banking on for achieving this growth? Second question is on ERGO International. Could you explain here a little bit your strategic direction you want to go? Is it still the Asian time zone? Or do you look for M&A outside of Europe? So how do you want to develop this segment further?

Yes. Thank you very much, Roland. This is Joachim. With regard to the growth perspectives of Global Specialty insurance, I think the market that the companies are operating in, they are developing very dynamically themselves. So if you like, we are growing with the market. But in some segments, of course, we outgrow the market. In others, we are a little bit more restrictive, all depending on risk appetite or risk return preferences that the players are having. So the outlook of expecting a 25% growth in the next 2 years is to us, nothing really outstanding. On ERGO International, we focus on organic growth and the organic growth comes from the core markets in which ERGO is operating, honestly. And that ranges from Health business from Spain and Belgium and Germany into P&C business in the Asian corners. So it's organic. It is growing roughly, say, with a 5% rate. Sustainably, I think the double-digit growth would be too much. And if there are M&A opportunities in the markets in which ERGO already has a core presence, then we are happy to consider them because that would open up new scaling potentials as we have seen concretely in Thailand, as we have seen recently in Scandinavia, et cetera. Thanks.

The last question for today comes from Freya Kong from Bank of America.

Can I just quickly ask on the reinvestment yield at Q4. It was basically the same as Q3 despite the drop-off in interest rates we saw at the end of the quarter? Is there any reason for this holding up better than the market yields has there been some [indiscernible] portfolio?

Thank you. 4.5% in Q4 reinvestment yield, nothing spectacular which happened, but we invested a little bit more into credit in the fourth quarter compared to the third quarter.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Christian Becker for closing comments.

Yes. Thank you very much to everyone for joining us this morning. If you have further questions, please don't hesitate to get in touch with the Investor Relations team. Other than that, we hope to see all of you soon, and have a nice remaining day. Thanks again. Bye-bye.

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