Ladies and gentlemen, welcome to the Hannover Re conference call on annual results 2023. I'm Moritz, the Chorus Call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Karl Steinle. Please go ahead, sir.
Good afternoon, everyone, and welcome to our earnings call on our financial results for the full year 2023. Today's speakers will be Jean-Jacques Henchoz, our CEO, and Clemens Jungsthöfel, our CFO. During the Q&A session, we will be joined by Sven Althoff and Klaus Miller. With that, I hand over to you, Jean-Jacques.
Well, thank you very much, Karl, and good afternoon, everyone. I'm very pleased with the development of our business in the financial year 2023. With a group net income of EUR 1.8 billion, we have delivered on our profit target. Additionally, the balance sheet strength of the company has improved materially last year. We have increased the reserve resiliency in our P&C business significantly above the targeted level of EUR 1.7 billion. Based on current discussions and internal estimates, the reserve resiliency at year-end 2023 should be around EUR 2 billion. Additionally, I'd like to point out that the external actuaries might not recognize the full year-end reserving action as a resiliency reserve as some of the extra reserves have been allocated to the current or most recent underwriting years. The final numbers from Willis Towers Watson will be published together with our Q1 results.
The basis that allowed us to replenish the reserve resiliency as planned is the very solid underlying profitability of our P&C business. On top of this, the overall results, including a positive one-off tax effect in the fourth quarter, gave us additional headroom to further increase the confidence level of our P&C reserves. This provides us with additional comfort on the earnings outlook for 2024 and also our ability to deliver on targeted results even in a more challenging period in the future. Both the favorable business development last year and the positive earnings outlook are reflected in our dividend proposal. The ordinary dividend will be increased by 20% to EUR 6 per share. The additional special dividend of EUR 1.2 brings the total payout per share to EUR 7.2 for last year. Let me quickly comment on the main developments in our two business groups.
Based on the attractive market environment, the underlying development in P&C was favorable and in line with our expectations in respect to both growth and profitability. The operating results for P&C reinsurance of EUR 1.1 billion were impacted by the previously mentioned reserving actions and hence came in below the target of EUR 1.6 billion. Driven by the successful renewals in 2023 and the resulting new business CSM of more than EUR 2.3 billion, the stock of CSM increased by around 60%, providing a very healthy basis for the year 2024 and beyond. The operating results in our life and health business group reached EUR 871 million, beating our guidance of at least EUR 750 million. The strong performance was driven by the solid underlying quality of the business. Growth in reinsurance revenue is somewhat muted due to in-force management actions in mortality and morbidity.
More importantly, the new business generation was successful last year, reflected in the overall growth in CSM of 9% to almost EUR 6 billion. The return on investment of 2.8% is very satisfactory. The strong ordinary income is mainly driven by the combination of higher interest rates and a strong operating cash flow of EUR 5.8 billion. The contribution from inflation-linked bonds was another positive factor, even though it declined as expected compared to the previous year. Cost efficiency is another very important metric for Hannover Re, with a group cost ratio of 3.3%. We can confirm our continued success in maintaining our competitive edge in this respect. Finally, our capitalization remains very strong, with the solvency ratio standing at 269% at year-end 2023. On the next slide, our strong capitalization is also the starting point for our dividend proposal for the financial year 2023.
It provides us with the necessary flexibility to act on future growth opportunities in an attractive market environment. While paying an attractive dividend to shareholders, the increased ordinary dividend of EUR 6 reflects the favorable business development last year and our strong confidence in future earnings growth. The EUR 6 will be the new baseline for our targeted progressive growth in ordinary dividends in this three-year strategy cycle. The special dividend is a tool we use to fine-tune the overall balance between retained earnings and capital return to shareholders. The proposed EUR 1.2 special dividend results in an overall payout ratio of 48%, which is broadly in line with historic levels for years with results according to expectations. On the next slide, shareholders' equity increased by 12%, mainly driven by the group net income for the period.
The change in OCI includes the impact of changes in interest rates and currency. The overall result was a small negative for the full year 2023. On a positive note, the more economic view of IFRS 17 clearly rewards our strong asset liability management with a significantly more moderate sensitivity to changing interest rates. The CSM increased by about 17%, driven by the new business value generated in both life and health and P&C. Additionally, updated assumptions for in-force business had a positive impact in life and health. The risk adjustment remained rather stable overall. In P&C, the risk adjustment increased with business growth. In life and health, we recorded a high one-off release of the risk adjustment. Part of this is connected to in-force management actions for U.S. mortality business. However, the decrease in the risk adjustment was mitigated by declining interest rates towards year-end.
On the next slide, looking at the long-term ROE performance, it's pleasing to see that the ROE is at a healthy level in the double digits, with a solid spread over our minimum target, no matter whether we look at the 5, 10, or 15-year average. The fact that Hannover Re's return on equity in 2023 is higher than the long-term average can be explained by the increase in earnings in an attractive trading environment following the sharp increase in reinsurance rates and interest rates. Additionally, of course, the transition to IFRS 17 led to a decrease in shareholders' equity compared to prior years. In relative terms, too, our ROE performance screens favorably compared to peers. As you know, we aspire to achieve not only a high ROE but also a less volatile ROE.
And as you can see in the chart on the right-hand side, comparing the 10-year ROE performance with the market, we continue to deliver on this ambition. In the top left quadrant, Hannover Re remains well-placed with clearly above-average ROE and below-average volatility. On that note, I'll hand over to Clemens, who will go through the key figures.
Thank you, Jean-Jacques. Good afternoon, everyone. On the next slide, P&C, with FX-adjusted growth of 6.5%, P&C reinsurance revenue is fully in line with our expectations. And as you know, this includes our portfolio management with a shift towards non-proportional business and some portfolio pruning for larger proportional treaties in the 2023 renewals. At 46.5%, the increase in the new business CSM and loss component was significantly higher than the revenue growth driven by the material increase in expected profitability from the business renewed in 2023. Large losses totaled EUR 1.6 billion, EUR 104 million below budget. COVID-related claims from our accident and health business in Southeast Asia amount to around EUR 122 million, decreasing significantly compared to last year as we expected. The positive impact of discounting on the combined ratio is 6.5%.
The stronger increase in this number in the fourth quarter can be explained sort of by the natural roll-over into a higher interest rate environment. On top of this, the material increase in reserve resiliency at year-end led to a higher level of overall reserves. The average duration of additional reserves is higher than the average duration because a larger part of those reserves is built in long tail lines. The reinsurance finance expenses are roughly EUR 200 million lower than the discount effect. As this tailwind is considered temporary, we have kept it in the reserves for now. On the topic of reserving, there's not too much to add from my side, what Jean-Jacques already mentioned. Importantly, the favorable underlying profitability allowed for the planned rebuild in resiliency throughout the year before doing the extra step of adding to the reserve resiliency at year-end.
The analysis of Willis Towers Watson is expected to confirm an increase in resiliency to around EUR 2 billion. Furthermore, we expect additional tailwind for this number in the coming years because we have also added reserves to the current or younger underwriting years. This also means that the reported combined ratio of 94% reflects not only the difference between the numbers reported by Willis Towers Watson but also additional prudence on younger underwriting years. The amount of the latter should show up in the resiliency reserve numbers provided in the following years. The investment income in P&C is favorable based on strong ordinary income, mainly driven by higher fixed income yields. As a reminder, in Q4 2022, we reported more than EUR 500 million in realized gains from our private equity portfolio. That was under the IAS 39 accounting as we brought our portfolio into a joint venture.
In an IFRS 9 world, our private equity funds were already recognized at market value in the transition balance sheet. Hence, unrealized gains were already part of OCI of retained earnings. Hence, the deconsolidation in Q4 2022 did not result in realized gains as in the old accounting regime. The other result contains the currency result as well as other income and expenses. The latter amounted to -EUR 299 million. This number mainly includes non-directly attributable expenses and is, I'd say, at the normal level. The currency result was a positive EUR 100 million, mainly driven by the strengthening of the euro against the US dollar towards the end of the year. Altogether, the EBIT of EUR 1.1 billion is based on very healthy underlying profitability. Excluding the extraordinary addition to our reserve resiliency, the EBIT is fully in line with the target EUR 1.6 billion.
On the next slide, the main contributor to the reinsurance service result, as you can see, is the regular CSM release of EUR 1.8 billion. Overall, the full-year CSM release is not at an unexpected level and reflects our normal release pattern, similar to the pattern of earnings premiums from underwriting years in the previous accounting regime. The release in the fourth quarter was higher than in previous quarters. Over the course of the year, we were probably a bit more cautious in our release pattern and adjusted this in Q4. Therefore, the CSM release in Q4 does include some catch-up effects from prior quarters. The high negative experience variance can mainly be explained by two factors. Firstly, we bought material retro protection in 2023.
Looking at the actual losses, we have seen a rather high frequency of Nat Cat losses in non-peak areas, which resulted in a below-average recovery from our retro protection in the financial year. Combining both effects, the ceded result was significantly higher than expected. Secondly, a part of our year-end reserve additions was allocated to the current underwriting year, which also creates a negative experience variance in this presentation of the service result. Altogether, the experience variance is a negative EUR 1.3 billion. The material increase in reserve resiliency over the course of the year and in particular in the fourth quarter also had a visible impact on the runoff result, of course.
The majority of the increase in resiliency is attributed to prior years and hence has an impact on the runoff result in that it either limits a positive runoff or even results in a negative runoff as in the Q4 standalone. For the full year, the runoff result was still a positive EUR 400 million as the underlying development was favorable in most regions and lines of business. The release of risk adjustment within the LIC, the liability for incurred claims as part of the total runoff, was EUR 247 million. Finally, the new business loss component was rather small at EUR 40 million. Using the general measurement model, we are disclosing additional numbers on the value of business written over the course of the year. Looking at the CSM development, the new business significantly increases the CSM.
The fact that the new business CSM is higher than the CSM release highlights the significantly improved quality of the underwriting year 2023 and results in a CSM of more than EUR 1.7 billion at year-end 2023, a very strong starting point for the financial year 2024. On the next slide on large losses, so the overall impact was EUR 104 million below budget. The year 2023 was characterized again by a very high frequency of large losses both on the Nat Cat and on the man-made side. Still, the total net impact from natural catastrophes remained within the budget. As explained, a number of the Nat Cat losses occurred outside peak risk perils and therefore the recovery from our retrocession program was smaller than usual. At the same time, the cession rate for our proportional retrocession was higher than in previous years.
Hence, the net result benefited from a lower than expected level of natural catastrophes but the increased cession rate somewhat limited further upside potential. I'm still very happy with the retro program we had and currently have in place. It is normal that the effectiveness can be volatile depending on the loss profile for an individual financial year. Importantly, our budgeting process for large losses is working well. With 2023, we can add another data point to our long-term track record with the average large loss experience being within budget. Man-made losses totaled EUR 272 million for the full year, slightly above expectation. Let's move on to life and health. The reinsurance revenue increased moderately by 1.6% adjusted for FX. Growth is mainly coming from longevity. However, this has been mitigated by in-force management actions in US mortality and in morbidity.
The reinsurance service result of EUR 810 million is based on a strong operating performance and above our target range of EUR 750 million-EUR 800 million. The increase is mainly driven by mortality and the contribution from financial solutions and longevity remained at very favorable levels. The reinsurance finance result is -EUR 158 million, more or less in line with expectations. The ordinary investment income increased driven by higher interest rates. In addition, the fair value of financial instruments contributed around EUR 70 million due to valuation effects on insurance-related derivatives. Other income and expenses amounted to -EUR 182 million. And this does not include any larger extraordinary effects. Currency effects were slightly negative at -EUR 13 million. So let's move on to the IFRS 17 components of the life and health reinsurance service result.
The CSM release of EUR 852 million reflects the favorable underlying profitability of our life and health portfolio. On the right-hand side of this slide, you can see that both new business and positive changes in estimates led to an increase in the CSM over the course of the year, gradually feeding through the CSM release. Overall, the annualized release is within the 12%-14% range we have indicated for the year. The risk adjustment release of EUR 441 million that you can see here was higher than planned. The main factor is connected to our in-force management actions in US mortality. The settlement of one of the arbitrations led to a release of the risk adjustment in the region of around EUR 200 million. At the same time, a similar amount shows up as a negative experience variance.
Combining the effects, the total P&L impact is very small. On this note, I can also report that this was the last settlement of the arbitration relating to our 2018 enforced management actions for US mortality business. The loss component is mainly driven by changes in estimates and not new business. As such, we have done our regular review of assumptions for larger blocks of business in Q4 in both mortality and morbidity, which increased the loss component to EUR 260 million. The CSM increased by 9% over the course of 2023. The diversified contribution from new business and extensions of existing business add up to a favorable EUR 786 million. In general, the development of this number reflects the transactional character of life and health business for 2023. The new business generation was above the planned level.
The change in estimates is another positive EUR 531 million, mainly driven by updated assumptions in longevity and to a smaller extent by other business. Overall, the level of the CSM at year-end 2023 supports our planning for the year 2024. On the next slide, the performance of our investments was very satisfactory. The ordinary investment income increased thanks to higher interest rate environment and positive operating cash flow. As expected, contribution from inflation-linked bonds within the ordinary income decreased compared to the previous year but still supported the results of EUR 180 million, slightly more than initially expected. Realized losses are mainly driven by normal portfolio maintenance and some opportunities to accelerate reinvestment in a higher yield environment in the fourth quarter.
Decreasing valuations of direct real estate in the US and Europe had a moderate impact of around EUR 80 million on the result, which is well within the level we had expected for the year. Private equity valuations actually remained rather stable. Altogether, the ROI is a strong 2.8% beating our guidance of at least 2.4%. The overall level of unrealized losses on our investments dropped significantly in 2023 driven by the decreasing yield curves at the end of the year and the regular pull-to-par effect in the portfolio. On the next slide, a couple of words on solvency too. The ratio, as you can see here, the increase from 252%-269% in 2023. The increase in own funds was driven mostly by operating capital generation of EUR 2.1 billion.
Here, the main factors were the strong investment performance and favorable new business contributions from both P&C and life and health. The increase in the SCR from business growth was mitigated by currency effects and improved diversification. The ratio remained stable in the fourth quarter. The favorable operating capital generation and the positive impact from market movements was offset by the announced dividend, which is considered only in the fourth quarter. So to conclude my remarks, the business performance in 2023 was strong, additionally supported by some extraordinary tax effects. We used the opportunity to materially strengthen our balance sheet. We have delivered on our targets, and we are confident for the future. And on that note, I'll hand back to you, Jean-Jacques, for the comments on the outlook.
Thank you very much, Clemens. So on the guidance first, based on the pleasing business development in 2023 and the very satisfactory outcome of the January P&C renewals, we can fully confirm our guidance for the financial year 2024. Furthermore, we're entering the year with an even improved balance sheet strength, providing additional confidence on the delivery of our targets. The P&C renewals fully support our growth outlook for the reinsurance revenue of more than 5%. Within that 5% target for the group, we'd expect a stronger contribution to growth from P&C reinsurance versus life and health given the current market dynamics in P&C. The strong and further improved quality of our P&C portfolio should put us in a good position to deliver on our combined ratio target of below 89%.
Due to the time lag in earning the underwriting year premium, the financial year 2024 will also benefit from the strong quality of the underwriting year 2023. As explained in Berlin at our Investors' Day, the P&C targets do not include any extraordinary actions on the reserving side. Hence, the reporting numbers will be a better reflection of strong underlying profitability of our book. The reinsurance service result in life and health is expected to increase as well, reflecting the good quality of our portfolio and new business written in 2023. Interest rates have decreased since our planning process, but the overall investment income expected for 2024 is still in line with our assumptions. Therefore, I can also confirm our minimum target of 2.8% for the return on investments. The volatility in the valuation of real estate and private equity remains the slightly more uncertain part of this equation.
As of today, we do not expect any developments which are not within our assumptions for this target. Altogether, we aim to deliver a group net income of at least EUR 2.1 billion in 2024. As always, this net income expectation is under the proviso that incurred large losses remain within our budget for 2024. This amounts now at EUR 1.825 billion. Also under the proviso that we do not see any unexpected turmoil on the capital markets. In summary, very pleased with our performance in 2023. We have delivered on our targets and more than delivered on our plan to increase the resiliency of our balance sheet. We're therefore confident on the outlook for 2024 and beyond.
So against this backdrop, we want to continue to create value for our shareholders by distributing a fair share of the profits while increasing the shareholders' equity, our risk adjustment, and contractual service margin. With that, I conclude our remarks. As always, we're happy to answer your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star followed by one at this time. One moment for the first question, please.
The first question comes from Freya Kong from Bank of America.
Please go ahead. Hi. Good afternoon. And thanks for taking the questions. Firstly, thank you for giving us an early preview of the Willis Towers Watson Reserve resiliency figure. Could you also give us a sense of the EUR 2 billion reserve buffers, maybe as a percentage of undiscounted claims reserves, or at least how you estimate this percentage has developed year-over-year? I think last year was around 3.4% of gross reserves. And secondly, as you suggested yourself, the EUR 0.3 billion increase in reserve resiliency doesn't oh, sorry, 0.6 doesn't reflect all the actions that you've taken and will emerge over the coming years. How many years do you think it will take for this resiliency to emerge? And last question. You talked about PE valuations holding up quite well in 2023.
Can you just remind us of what your assumptions are for PE and real estate within the 2.8% ROI guidance for 2024? Thank you.
Good afternoon, Freya. It's Clemens. So on the reserve resiliency, if you compare that to the nominal P&C reserves that will bring us nearly from the 3.4% that you mentioned to nearly 5%, I think it's actually around 4.9%. But again, that's roughly where we land. On the underwriting years that are not so mature, that's usually that we see those resiliency coming through after two to three years. That's roughly the estimate of when we will see it be more developed. And then both our internal estimates from our actuaries as well as Willis Towers Watson will pick those up as resiliency. On the private equity valuation, yes, I think we have seen some markdowns in 2023, probably around EUR 70 million-EUR 80 million.
However, they have been overcompensated by strong distributions from private equity funds. And as we are putting these valuations through at equity, but you don't see it in the line item fair value through P&L, but in the at equity valuation of the private equity investments. So they're actually overcompensated so that the overall amount of private equity contribution to our earnings is actually positive in 2023. As for 2024, I think it's fair to say that we have been a bit more cautious. I don't have the exact number, but we have been a bit more cautious on both private equity and real estate valuations. So we have allowed for a time lag of potential reporting, which we haven't seen yet and which we haven't seen yet until mid-March, to be honest. But again, there's both on our direct real estate portfolio as well as on our indirect portfolio.
There's always a time lag when it comes to valuations. So we're still a bit cautious in our guidance. So the 2.8% does allow for some revaluations on both portfolios.
Okay. Thank you.
And the next question comes from Tryfonas Spyrou from Berenberg. Please go ahead.
Hi there. Good afternoon. Thank you for the presentation. And thank you for the additional color on the life and health moving parts. I was wondering maybe you can come a little bit more on how hard-driven the change in the loss component, the -EUR 260 million charge in that, just a little bit more color. And I guess looking ahead, how should we square the EUR 850 million target in reinsurance service result in life and health? I think if we take the midpoint of the guidance from CSM and risk adjustment amortization, we get to around EUR 920 million.
Is there anything that we should expect to offset this? It looks like this is coming up quite strongly. And then the other question I had is on the hail storm from Italy. It looks like your loss has more than doubled since Q3. I was wondering if you can comment on what the industry loss estimate you base that on. I guess the reason I ask is because it appears the industry estimate is now even bigger, more than sort of EUR 5 billion. My thinking was that your new loss estimate could also be reflective of the new industry data loss figure. Thank you
Shall I start with the life and health question? The risk adjustment was something what we have set up also in transition to IFRS 17. And as you know, we had a couple of arbitrations.
But basically, this was not linked to the rate increases we did in 2018. There, we got everything what we wanted, and we did not make any adjustments to the rate increases. This was an alike increase, and this was carried through with all the companies. But an additional block of business ceded to Hannover Re US also had an arbitration, and we did not know how this would end up. And by the transition time to IFRS 17, we had to make a decision whether we set up a reserve, a liability, what we didn't think was appropriate, or we put it into a risk adjustment. And then two years later, this was decided, and the bill was reduced accordingly, and the amount was paid out. So there is nothing else to be expected from this year.
Just on the last component, probably briefly add to that, what is the main contributor is really morbidity. That's the bulk of it. That's critical illness mainly in China, other bits and pieces here and there. But that's mainly the loss component contributor. However, we've also strengthened the reserves in some jurisdictions when it comes to mortality updates. And in those areas where we didn't carry a CSM on those mortality books, we've also come up with a loss component here. So those are the main contributors. And so your question to the run rate on the reinsurance service result, I think the EUR 850 million that we communicated in December where we said, "Well, we want to at least in the financial year 2024, at least create a service result, a reinsurance service result of EUR 850 million." And I think it's a good starting point. Can be slightly volatile.
However, it's going to be a rather stable numbers given Klaus pointed out on risk adjustment and CSM. So if we just take this as a starting point, I think it's a good proxy. And as you know, we have also said that over the strategic cycle, we want to grow our stock of CSM by at least 2%. So I would imagine this reinsurance service result, of course, over the course of the strategic cycle to also increase.
Maybe just a comment. This is in the course of good ordinary business. We do an analysis of all our portfolio regularly each and every year. So small things should always be expected.
Yeah. When it comes to the hailstorm in Italy, unfortunately, you are right. Already during the course of the fourth quarter, we have seen more losses reported and the average loss per claim also trending up.
So in our bottom-up analysis, we therefore, as you said, had already significantly strengthened our reserve position for that loss. Unfortunately, what we can report during Q1, that trend is continuing. We are still analyzing this, but we do expect a significant double-digit figure also in Q1 coming from this loss. We are reserving this claims complex on a bottom-up figure. So therefore, I would not be able to give you the corresponding market loss. But it has continued to go up also in Q1.
That was really helpful. Just maybe a quick follow-up. Do you expect to get any recovery on the retro side from this given that it's so much bigger, or is there any recovery expected? Thank you.
Well, it may eventually end up in our vertical whole account per event protections, but it's not in those covers yet. But once it is, it would certainly slow our increase of our net claim down. But we are not at that stage yet.
Thank you. Very clear. And well done for a very good year. Thank you.
And the next question comes from Will Hardcastle from UBS. Please go ahead.
Afternoon, everyone. On slide 17, you highlighted the spread of own funds over and above the 200%. That's stating, supporting future business growth. I think the surplus over 200% is about EUR 5 billion. I guess I'm trying to now understand how high do you want that threshold? And if we think about losses that would be needed to get anywhere close, it feels unlikely. Just trying to understand what further business growth really means here. And secondly, you've mentioned most lines saw favorable development. I guess just a little bit of added color here, stripping out anything in terms of the Bermuda tax recycling on lines of business would be helpful, particularly how liability lines developed year on year would be great. Thank you.
Yes. We're happy to take the questions. On the first one, so capital, yes, the 269, of course, they look very strong. But as you know, we have other capital regimes to look at. So that's not the only capital regime we are observing. So, of course, the rating capital regimes are very important. Having said that, the rating agencies have made adjustments to their model, as you know, and we will see the final outcome of that capital assessment throughout the year 2024.
I would expect more clarity in the second quarter, particularly on the Standard & Poor's capital model, which is and the adjustments are favorable, and I'm optimistic that we also benefit from the new capital model under S&P. So that's good news both in terms of business opportunities. I think there is opportunity to grow our inwards book in P&C. And of course, there's also an opportunity to always revisit our retro position. So that gives us some breathing space in 2024. But also on the life and health side, we have a very healthy pipeline.
And then, of course, which we would always do at the end of the year, is look at our capitalization both from rating and solvency perspective and then see we always have the instrument of special dividend, as you know, and we will then consider how we go about the special dividend in probably around the fourth quarter. On the resiliency reserves and the strengthening, particularly that we did in Q4, so at the end of the year, the tax regime, the new corporate tax regime in Bermuda was only announced in December. So we revisited our resiliency position, our reserve position late in December. The main lines of business you will find that in the reporting lines is going to be Americas, of course, and EMEA. But generally, I think we've been a bit more prudent on all lines of business when it comes to reserving and reserve strengthening.
But again, those reporting lines will have seen most of the contributions. And having said that, to be clear, what you see there also in terms of runoff results, that's really an increase in resiliency and not the need to reserve strengthening. Particularly, as you mentioned with the liability casualty lines, there was no need for any resiliency increase other than really using that opportunity.
And the next question comes from the line of James Shuck from Citi. Please go ahead.
Hi. Good afternoon. Thanks for taking my questions. On the runoff result in PCRE, so EUR 399 million, obviously, that's after the margin build that you've mentioned. It looks like excluding the margin build is about 8 points of PYD that's essentially running through the combined ratios. Is that a high number versus history? Obviously, we've moved to IFRS 17 now, and there's the risk adjustment included in there.
But is around 8 points what we should expect going forward? Then on the underlying combined ratio, I think you previously guided kind of a combined ratio of 88%-89% excluding margin build. Looks like you come in at around 88%. You do mention that 2023 was an active period for some of the larger losses, so outside of the Nat Cats. What's the kind of base underlying that we should be thinking about for 2024? Is 88% kind of inflated a little bit, and we should see some margin improvement? Or I know you guided to below 89%, but I'm really looking at the underlying figure. And then finally, obviously, since the January renewals, interested to get your perspective on what you expect for the P&C Re new business CSM. That was up 30% in 2023. At this point, where would you expect 2024 to land, please?
Thank you very much. So James, this is Clemens. I'll start with the runoff result at the EUR 400 million. So that includes regular runoff of our liability for incurred claims and the risk adjustment, which you know is a new feature. And I should reiterate that on top of the EUR 2 billion of resiliency that we are expecting, again, to be confirmed by Willis Towers Watson, but there's still EUR 845 million of risk adjustment sitting on top of that. So there is a regular release from both elements.
If you sort of take the EUR 600 million of resiliency increase, so starting at the EUR 1.4 billion that we were reporting at year-end 2022, and if we expect now EUR 2 billion, that would be mainly in the runoff result. So I guess that brings you together with, again, with the EUR 600 million to a very strong runoff result.
I think this is really a proof that the underlying portfolio is running very well. As you know, the accident and health claims in Asia-Pacific that I mentioned earlier of EUR 122 million is even showing up as a runoff loss here. A very strong runoff result here. I think that's fair to say. The normalized combined ratio, if we just start at, let's say, the reported combined ratio for the financial year 2023, that's the 94%. If we then take if we try to normalize that combined ratio, if we just start with the EUR 100 million of below-budget large losses, that will bring you to a 94.8, let's say, on a normalized basis. Then we have the additional resiliency increase that we did in Q4 of EUR 500 million. If you take that out, that will bring you to a combined ratio of 91.2%-ish.
Then the regular planned resiliency increase of 325 that we planned for the financial year would bring you down to an 86.7. In this 86.7, as you know, and I mentioned this also earlier, is that we kept the difference between the discount impact of 6.5% on this combined ratio and the EFI; we kept that in the reserves. That's included in the 86.7. If you take that effect out, then you land at a sort of 84 and half-ish. That's roughly where we would look at, really, on a regular basis. Sorry, to an 87.5. That is an 87.5. That would be roughly the normalized number for the financial year. I was mixing it up with Q4. Again, 94% starting point, 94.8 if you take the underutilization of the budget. Then the resiliency increase, both, we would land at an 88.9.
That's the roughly EUR 800 million of increase in resiliency. If you take the discount versus EFI effect into equation, then it's an 87.5%. I guess that would be a good expectation. We reported that we expect the combined ratio below 89%. That was our guidance. Of course, the recent renewal is giving us confidence. The increase in resiliency is giving us confidence. So I would expect this number to be a good starting point for the underlying also in 2024. When it comes to new business CSM, we don't have a number yet. Of course, we will have that in May when we report on the Q1 numbers, at least for the quarter. But as we reported, we do expect a slight margin increase. And we have, of course, a lower retro on the 1/1/2024 renewal.
So I would expect the new business CSM on a net basis to have increased. And again, I don't have an exact number, but we would expect it to have increased. Hope that answers your question, James.
Yeah. Thank you very much.
And the next question comes from Kamran Hossain from J.P. Morgan. Please go ahead.
Hi. Good afternoon. Two questions from me. The first one is just on the kind of thinking behind the reserve resiliency and adding more to kind of more recently is. You're very well reserved, more than kind of around EUR 2 billion overall. But when I think about the uses of it, you could have if you had allocated more to kind of later or older years, you'd be able to recognize more in regulatory capital, which I think is more of a constraint. Just interested in the thought process behind that.
The second question is just on kind of dividend, and it's kind of also playing to the kind of question that Will asked earlier. What's the mindset on the dividend? What are the actual constraints on paying out? It feels like at the moment, you've got very high returns. You've got a massive surplus on the balance sheet. What stops you paying out a little bit more? And should we assume for next year's dividend, it's at least in line with the earnings growth that you suggested year-over-year? Thank you.
Yes. On reserve resiliency, Kamran, I think it was not really an academic exercise. I mean, we said, again, our plan was the EUR 1.7 billion. Then we had the opportunity to increase it further.
We just took the chance and added another again; it's still up for confirmation, but we added another EUR 300 million to the Liability for Incurred Claims, so rather mature underwriting years. The delta was just general prudency in the more recent underwriting year as they develop. Again, it was just not an academic exercise when it comes to that. On the dividend, I think it's really just we always said that we want to increase our ordinary dividend. This is what you've seen here. The special dividend, again, always, of course, a tool for us when it comes to capital management, capital efficiency. We still have not full clarity on the capital model of the rating agencies, so we need that to be confirmed. But again, the EUR 720 million was really just a reflection on our confidence, particularly when it comes to the ordinary dividend.
That's also what we said on our Investors' Day in December. We said, "Well, we want to increase the ordinary dividend over the strategic cycles. And this is what you see there." When, again, we will revisit the special dividend then at year-end 2024.
And the next question comes from Vinit Malhotra from Mediobanca. Please go ahead.
Yes. Good afternoon. Thank you very much. I hope you can hear me. Just the first one is that I see the 6.5% growth. But now the main I mean, when I look at the net reinsurance revenue, it's actually a bit more muted. I understand about 1 odd percent FX. I mean, that's the retro effect. How should we look at that line as well, please? Because ultimately, that's what, I think, goes into the P&L. So that's something I'm more curious to hear your thoughts about the outlook.
Second question is on the tax. So I understand from speaking with the IR team that the Bermudian tax change is about a $200 million lower $200 million lower tax spread over 10 years. Now, I don't imagine the Bermudian government would have anticipated that everybody would be paying them lower taxes as a part of their plan, at least even for 10 years. Do you expect, or are you hearing anything that suggests that they might change something there? Is that something you're looking at as well? Because it's quite, I mean, if you're the government, it's a surprising move. So I'm just curious on that. And lastly, the discounting. If I can pick up that it's coming from interest rate moves and also your reserve charge now, your reserve redundancy.
Now, assuming both are at this level, should we expect a similar in the future, like 2024, at the 6.5 or rather the close to 10% or 9.5% that we saw in 4Q? How should we look at that for 2024, if any guidance there? Thank you.
So on the revenue growth, Vinit, of course, you're right. The 6.9 we were reporting for the January renewals was a gross figure. And given that we have particularly reduced our proportional cession, the net equivalent will come in higher than that. But you have to bear in mind that K, of course, is only covering a smaller part of our overall portfolio, namely the peak peril cap and the aviation marine excess of loss portfolio.
So I don't have the exact number for you, but the overall, in fact, impact of that should be maybe 1.5 or 2 points.
Okay. Thank you.
So on the tax, I tried to make it simple. Although with tax, it's always not that easy. So it's a tax regime that was so corporate tax implemented from 1/1/2025 in Bermuda. That's the starting point. That law was enacted in December 2023. And within that legislation, there is, let's say, an option to do sort of an economic transition, which means that you create a tax balance sheet, of course. And that's the starting point for any taxation also in Bermuda. That's the tax balance sheet.
In contrast to IFRS balance sheets, in your tax balance sheet, you are able to step up intangible assets, which, of course, in Bermuda will be most pronounced the renewal rights that we have in Bermuda. So you can step up those renewal rights in your tax balance sheet from the 1st of January 2025. Then you have the option to write off these assets over a period of 10 years. So this is not actually a tax, let's say, a tax reduction this year, if you like. This is only a reduction of future tax payments that will take place from 2025 in Bermuda. And the deduction effect will only last for 10 years. However, IAS 12, so the IFRS accounting regime, forces you to recognize this deferred tax asset, nothing else it is.
What you see, the $200 million you're referring to, Vinit, is a deferred tax asset in the group IFRS financial statements according to IAS 12. So that's basically the economic outcome of a future reduction in tax payments for a period of 10 years. So that's $20 million per year, just to have this clear. Of course, in those 10 years, the tax base will be lower. And again, there is some deduction. I haven't seen and I'm not—I don't have any views or any news on the regulators in Bermuda to change that.
On discounting, yeah. No, not discounting, Vinit. Just your last question. So discounting 6.5 for 2023 overall, I would expect that number to slightly increase. As you know, with the GMM approach, it's not only discounting of actual claims.
It's discounting of the new business and the earnings patterns, which is also sort of the CSM release, is, of course, also then contributing from prior years. So in this 6.5%, there's also some release 2022 at lower discount rates. So I would expect that number, the 6.5, to go up. I don't have an exact number, but I would assume it to be 7% and higher. It's not going to be 10%, but it could be somewhere in the range of 7%-8%, to the best of my knowledge today.
Sure. Thank you very much.
You're welcome, Vinit.
As a reminder, anyone who wishes to ask a question may press star followed by 1 at this time. And the next question comes from Dardeep Goel from RBC. Please go ahead.
Hey. Afternoon, everyone. The first one, just a clarification, Clemens. So you mentioned that while running through the normalized combined ratio exercise, did I hear correctly? It was a EUR 500 million reserve add in Q4 and then yet another EUR 25 million of the planned reserve addition, meaning to say that if the buffer were to include those young underwriting years, then it would have been around EUR 2.2 billion instead of EUR 2 billion.
The second question, it's on your confidence interval. So if you look at your annual report, it looks to be flat year-on-year at 83%. But presumably, that's a group number, right? Does that mean that life and health has actually gone down? Why is that? And what is the confidence level for P&C? The third question, so it's on solvency. You mentioned dividends. They're only deducted year-end. That's 12 points. Quite a big number. That sounds like there's quite a strong positive CAPGEN that was offsetting it.
Does that CAPGEN include some businesses that you've written at 1/1 already, or this purely is businesses that you've only earned in Q4? And my last question, if that's okay, just a short one on debt leverage. What is the metric that you measure internally? Does that include CSM and risk adjustment in your denominator? And do you have kind of a preferred range that you want to steer the business to? Thank you.
Yes. On the combined ratio, so if we really just do the normalization and bring us from 94% to 87.5%, yes, that includes EUR 500 million that we did in resiliency increase in the fourth quarter plus EUR 325 million that we were already planning in resiliency increase throughout the year. So that's EUR 825 million, which I would normalize the combined ratio with.
We believe that roughly EUR 600 million of that EUR 825 million will already show up in the Willis Towers Watson report that we will be releasing in May. All nominal numbers, of course, but that would be sort of our rough estimate at this point in time. And the rest of that, so EUR 200 million-ish, would then mean they would show up in rather younger underwriting years.
As for the confidence level, I mean, that's the confidence level on the risk adjustment, of course. And you know the resiliency in P&C is mainly held, of course, in our liability for incurred claims. So that number, that confidence level, doesn't include any confidence, of course, any confidence level in our P&C reserves. So that's really just on the risk adjustment. And again, that comes on top of the resiliency reserves that we are talking about here.
So the roughly EUR 850 million of risk adjustment in P&C, that would be the confidence level. I don't know. I don't have the exact numbers to hand, but it's clear that the P&C risk adjustment confidence level is lower than the life and health risk adjustment.
On the Solvency II so the dividend. Oh, yes. The dividend. So the accrual of the proposed dividend is only showing up in Solvency II numbers. Why did the number still was the number still stable? That's mainly interest rate changes and some currency. The business written in life and health in P&C is already included in their own funds. So that's basically, if you like, compensating the dividend with sensitivities of interest rates and currency.
Yep. Clemens, can I quickly check on that point, please? So you said that the business is that business written or is business earned?
No. It's business written.
So new business written in both P&C and life and health is included in the own funds. So the benefit of this business that we write in P&C and life and health to a certain amount I don't know the exact numbers. I don't have it to hand. But that's basically included in the Solvency II ratio, both in SCR and own funds, of course.
Yep. And just on debt leverage?
Yes. On the debt leverage ratio, it really depends on which capital regime, which rating agency regime we look at. So again, we consider CSM and risk adjustment, of course, as future profits, therefore as equity. So, of course, we would always look at it this way. But we don't have a special number to really where we target at when it comes to leverage ratio. We feel comfortable with the leverage ratio as it stands now.
Again, we'll see also where we land on Standard & Poor's capitalization, most likely in the second quarter. Got it.
Thank you very much.
You're welcome.
And the next question comes from Roland Pfänder from ODDO BHF. Please go ahead.
Yes. Good afternoon. Thank you for taking my questions. On life and health reinsurance, new business EUR 359 million. Could you split this up in financial solutions, mortality, and longevity? What would you think is the target run rate for this number maybe in the current year? And looking at the extension of existing contracts, the number is larger than new business. Will this change anytime soon that new business will be the bigger number, so to say, in comparison to the just prolongations? And secondly, coming just back to the taxation, what would you think is the normalized tax rate for the group in the current year? Thank you.
Yeah. I can start with the last question. On the new business split, you should expect that most of the value of new business comes from larger deals. This is, on one hand side, financial solutions. On the other side, longevity deals. We have written less longevity deals in 2023 than we had in 2022. So this is very volatile. The number of longevity deals we write per annum is anything between 3 and 8 or 9. Sorry. What was the second question? The extension, the prolongation. Oh, yeah. The life business, on the mortality side, is longer. On longevity, it's longer. Financial solutions is more like average maybe 8, 9 years. So the new business CSM, being volatile, could become larger than prolongation.
But on average, I would expect that prolongation will be a little bit larger, at least as long as we write longevity and long-term mortality business because these treaties are usually open for new business for a couple of years. So prolongation will always add a significant amount of new business to that. But whenever we do one large longevity transaction, that could change the picture in any given year. Same applies to financial solutions. If there is a really big deal, that could change the picture significantly. But on average, I would still expect that prolongation is slightly bigger than pure new business.
Do you have a target level for the new business, so to say?
I don't know. Do we have anything in our target matrix? There was once in the old IFRS 4, we had something but Clemens wanted to say something. Yeah.
Well, we had value of new business and the Solvency II was around EUR 250 million. Roland, if you ask me what was our sort of ambition for 2023 prolongation and new business, I would say probably around EUR 430-EUR 450 million. So we are well above that number. And that would be our targeted level. And again, as I said earlier, I mean, we are committed to increase the stock of CSM on the life and health side, which means that we believe that with new business, with prolongation, the contributing number will be higher than the release of CSM or any valuation adjustment. So that should be a growing number. Okay. Thank you. Roland, on tax yep. Yeah. Sorry. Go ahead, Roland.
No, no. Just on the tax issue. Just on the tax.
Yes. On the tax topic. So just to clarify that the current tax rate is really a reflection of both the Bermuda corporate income tax and the fact that I mentioned earlier, so the EUR 200 million. But there's also a large impact, of course, on part of the EBIT stemming from jurisdictions where the tax rate is generally lower. That's, for example, Bermuda and Ireland. And the structure of our losses, as Sven alluded to earlier, so the structure of our large losses was as such that we had very strong results both in Bermuda but also in Ireland. So therefore, that's also a huge contributor. If I would look at the normalized tax rate going forward, that's still in the area of 20%-25%. And historically, we've been around that level.
We have also incorporated in our guidance and in our plans, of course, any potential tax impact from that corporate taxation in Bermuda. So again, Roland, 20%-25% is still a good run rate going forward.
Thank you very much.
You're welcome.
So there are no further questions at this time. And I would now like to turn the conference back over to Jean-Jacques Henchoz for any closing remarks.
Well, thank you very much. I won't be long because I think we've covered the ground very, very well. We wanted to express the fact that we're very satisfied with our 2023 performance. We used the very good result to increase the resiliency, as we've discussed a few minutes earlier.
Generally, the outlook we see with increased confidence, and that's reflected in our guidance but also in the dividend payments with a commitment to increase the base dividend over the current strategy cycle. But I think we covered the ground very well. Thank you very much for your questions. See you next time.