Good afternoon, ladies and gentlemen. I welcome you to today's Hannover Re International Analysts Conference Call on the 2021 annual results. For your information, this conference is being recorded. At this time, I would like to hand the call over to your host today, Mr. Jean-Jacques Henchoz, Chief Executive Officer. Please go ahead, sir.
Well, thank you very much, and good afternoon, everyone. Welcome to our conference call. We're presenting our results for the financial year 2021, and we will comment on the outlook for 2022. Before that, I'd like to express our deepest sympathy to the people of Ukraine. We're looking at the situation there in shock and with great concern. This war of aggression on a democratic country in Europe shakes all the foundations of peaceful coexistence and our values of freedom, democracy, and human rights. As reinsurers, we work to protect life and property, as does the entire insurance industry, and I would therefore like to take this opportunity to express our hope that diplomacy will prevail and that the war in Ukraine will end soon. Let me now come to our results.
After my overview of fiscal year 2021, Clemens will explain our financial figures in detail. I'll then comment on the outlook as usual for the year. For the Q&A, I'm additionally joined by my board colleagues, Klaus Miller on the life side and Sven Althoff for P&C. 2021, as we know, was a very challenging year for the reinsurance industry, and Hannover Re has again proved its resilience and strong earnings power. Despite significant COVID-19-related losses in life and health and an elevated level of large losses affecting the P&C markets, Hannover Re delivered group net income of EUR 1.23 billion, which is in the upper range of our guidance.
The return on equity is back to double digits and well above our minimum targets, and the growth in earnings was stronger than the increase in the top line. Gross premium increased by 12.8% adjusted for currency effect, providing a strong basis for a successful 2022 financial year. The capitalization of the group continues to be excellent, reflected in our solvency ratio of 243% at year-end 2021. This means that we're not only in a position to follow our dividend strategy for the ordinary dividend, but we are also able to pay an additional special dividend. The total dividend proposal of EUR 5.75 per share is 28% above the dividend we paid for 2020. In P&C reinsurance, the premium growth was particularly strong at 16.3%.
Large losses exceeded the budget by EUR 150 million, predominantly driven by loss events in the third quarter. On the positive side, the reserving strength is maintained. On an absolute level, the reserve buffer should have increased in 2021 based on initial indications. Finally, the 2020 net estimate for COVID-19-related losses in P&C remained stable in the course of 2021. As reported in previous quarters, the ongoing global pandemic continues to have a significant impact in life and health reinsurance. Within our portfolio, the main markets affected by COVID-related excess mortality are the U.S. and South Africa. All in all, these losses amounted to EUR 582 million. Most notably, the losses connected to the Omicron wave in the second half of the year were not part of our initial expectation for the full year.
As already disclosed in Q1, the restructuring within our U.S. mortality portfolio led to a positive one-off effect of EUR 132 million. Additionally, we recorded a positive effect of EUR 122 million from reserve releases in longevity in Q3, as you already know, but also in Q4, partly mitigating the COVID-19 impact. At 3.2%, the return on investment is significantly ahead of our expectations, mainly driven by favorable ordinary income. One of the drivers for the outperformance is the return on our inflation-linked bond portfolio. In light of increased uncertainty around the inflation development going forward, we have used a part of the uplift on the investment side to further strengthen our reserving for the P&C business.
Reflecting the favorable per-performance in 2021, we will, as mentioned, propose an ordinary dividend of EUR 4.5 per share in line with last year, plus a special dividend of EUR 1.25. The total dividend of EUR 5.75 results in a payout ratio of 56%, well in line with previous years. This proposal meets our desire to both pay an attractive return to our shareholders, as well as to reinvest part of our earnings in future profitable growth. The operating cash flow in 2021 reached a record high of almost EUR 5 billion, mainly driven by attractive reinsurance growth, as well as very favorable results on the investment side. As you can see, this is the main driver for the strong growth in assets under management.
On top of this, as you know, the issuance of EUR 750 million in hybrid capital in March, and the stronger U.S. Dollar had a positive impact. Looking at the development over the last five years, it becomes quite evident that the positive cash flow and corresponding asset growth enabled us not only to stabilize, but also to grow our ordinary investment income in a low yield environment. On slide six, shareholders equity increased by 8.1%, and the policyholder surplus grew by 11.8%, including the additional hybrid capital. On a five year basis, the policyholder surplus has grown by 46%, which is particularly pleasing given the challenges facing the reinsurance industry over the past five years.
On the right-hand side, you can see that our strong profitability is the main reason for the increase in shareholders' equity. Additionally, market movements had a small net positive impact on the OCI. Given the continuous growth in the equity, it is quite pleasing that the ROE returned to double-digit levels in 2021. Even more important to us is the long-term outperformance of our targets. On the right-hand side, you can see that our ROE clearly exceeds the target levels for all observation periods. Secondly, you will note that the spread over our minimum target is rather stable when comparing the 10 and the 15 year period. The five year average is affected, in particular, by the extraordinary hurricane season in 2017, with COVID-19 clearly impacting 2020 as well as 2021.
Nevertheless, we're still comfortably above our target level. The next slide provides an overview in comparison to our peers. Hannover Re maintained its number one position on a five-year average. Our high profitability, low volatility profile is confirmed by the fact that we are in the top three for each individual year. The average return on equity at the bottom of the slide can be seen as a reflection of the overall state of the reinsurance market's profitability. On the one hand, the five-year average of 6.4% can't be seen as satisfactory for investors in terms of returns above the cost of capital. On the other hand, Hannover Re's outperformance of 4.7 percentage points compared to the average highlights our ability to consistently provide attractive returns for our shareholders. On that note, I'd like to hand over to Clemens, who will explain the figures in further detail.
Yes. Thank you, Jean-Jacques, and good afternoon, everyone. We start with our P&C business group. As usual, we continue to see very favorable growth opportunities in 2021, and successfully expanded both our traditional and our structured reinsurance books. Gross premium growth amounted to 16.3%, adjusted for currency effects. Net premium growth was even slightly higher at 18.4%. The growth is highly diversified, with particularly strong momentum in North America, in Germany, and in Southeast Asia. On top of this, we successfully expanded our structured reinsurance book beyond now at roughly EUR 4.5 billion. We also increased the volume of our facultative reinsurance book at a stronger pace than the average P&C growth. As Jean-Jacques mentioned, the net impact from large losses was significant at EUR 1.5 billion.
This means that we exceeded our budget of EUR 1.1 billion by EUR 150 million. The run-up results for the full year 2021 amounted to EUR 848 million. At the same time, we have continued our conservative reserving approach for our growing new business. In particular, we have not lowered our initial loss ratio picks to the extent that we could have, given the reinsurance rate increases achieved. Furthermore, as Jean-Jacques mentioned, we have used a part of the extraordinary returns from our inflation-linked bond portfolio and reinvested it, if you like, into the reserves in some of our long tail lines. I would like to point out that we have not done this based on actual trends visible in our portfolio as of today, but rather as a precautionary measure in light of increased uncertainty regarding the development of inflation rates.
As you know, there are, as usual, a lot of moving parts in the assessment of the confidence level of our reserves at this stage. However, based on first indications, I would expect that we have added at least another EUR 100 million to our reserve buffer in 2021. Adjusting the reported combined ratio of 97.7 for the higher than expected large loss impact and for the increase in the reserve buffer, the underlying technical profitability is fully in line with our target of 96%. Net investment income in P&C, based on very strong ordinary income. Other income & expense include a negative currency effect of -EUR 80 million. Just to remind you, in the previous year, we had roughly twice this amount as a positive contribution.
As I mentioned in earlier calls, this is purely an accounting, in IFRS, an accounting effect. It's not an economic effect, but you should consider this when we look at the overall results from the P&C side. Altogether, the EBIT increased by 84% to EUR 1.5 billion, driven by significant improvements in both underwriting and investment results. Finally, the tax ratio, as you can see, is at a normal level. On the next slide, looking at the large loss situation, again, you can see that 2021 is the fifth consecutive year now where large losses are above expectation. This is certainly not only the case for Hannover Re, but also for the reinsurance market in general. The EUR 2.7 billion gross loss that you can see here represents the highest number in Hannover Re's history.
However, the significant relief from our retrocession program reduced the loss quite remarkably by almost EUR 1 billion. The remaining difference between gross and net, I should mention that it's associated with our ILS business. Moving on to our large loss list on the next slide. The two largest events were unsurprisingly, the European floods and Hurricane Ida. Looking at the gross numbers, both losses are comparable, in both cases, and our retrocession worked well with parallel relief from our K-Quota Share and our whole account cover. The reason why the net loss is even lower for the European flood is the lower attachment point for non-peak scenarios protected by our whole account. Apart from these two events, the Texas freeze was a large and rather unusual loss early in the year 2021.
On the man-made side, we recorded 14 large losses in total, the biggest being attributable to the social unrest in South Africa. This amount is included in the property losses with an amount of EUR 100 million in the property line. Altogether, the impact from both nat cat and man-made losses was higher than expected for the year as mentioned. Speaking about large losses, in the first month of 2022, a series of winter storms in Europe resulted in significant losses. A cargo ship carrying cars sank in the Atlantic Ocean. Then, of course, we see currently the ongoing rain with severe flooding in Australia.
As of today, I would expect that the impact from these events should still be within the budget for the first quarter, but as we know, there are still a couple of weeks to go. On the next slide, you can see the technical profitability of our P&C portfolio by reporting line. Picture very much reflects the large loss situation I just explained. The combined ratios for EMEA are affected by the European floods and the riot in South Africa, while the Americas includes the losses from Hurricane Ida and the Texas freeze. Additionally, our prudent reserving at year-end was primarily associated with U.S. liability business. By contrast, the APAC region was largely spared any significant nat cat losses. The worldwide market shows strong technical profitability overall. Only in agricultural business, the combined ratio was pushed above target by some larger losses.
In Credit and Surety, the combined ratio was positively impacted by a moderate release of reserve for COVID-19 related losses. However, this amount has been, I should mention, reallocated to other lines, like, liability. Therefore, the overall EUR 950 million estimate for COVID-19 related losses remained unchanged. Let's move on to Life and Health. The pleasing business growth is reflected in both the premium and in the value of new business, and really comes from all our four reporting categories. The growth is quite diversified by region as well. As Jean-Jacques mentioned earlier, the technical result was heavily impacted by losses in connection with COVID-19.
Main markets affected are the U.S., accounting for roughly 50% of the total EUR 582 million, and South Africa with 190 million euro. As you know, we have a pandemic retro cover in place, covering excess mortality for a two-year period. The underlying structure of the protection is based on swaps, hence it's under IFRS, it's a financial derivative, and we therefore had to reflect the market value of those swaps in our investment income as per year. This has been done based on a preliminary estimate and still incomplete data. There is still significant uncertainty around the final numbers, which will be calculated by an independent party during this year. In Q4 2021, a valuation effect of EUR 44 million is included in our investment return.
I think it's fair to say that there is more upside potential than downside risk to this number when we look at 2022. In longevity, we recorded a positive extraordinary effect of EUR 122 million. As explained in the Q3 call in November, this is connected with updated mortality data we reflected in our in-force portfolio, and is not due to any assumption changes for the future. EUR 99 million were already reported in Q3, you might recall. An additional amount of EUR 23 million were recorded in Q4, sort of a spillover from our data updates that we did in Q3. Finally, the restructuring of parts of the ING portfolio in U.S. mortality led to the positive one-off effect in the first quarter, affecting various line items in the P&L. In total, a positive impact of EUR 132 million.
The ordinary investment income was in line with expectations. The fair value of financial instruments decreased compared to previous year, but was a positive number overall. Looking at the details, the negative impact from the valuation of the derivatives embedded in a life reinsurance contract in the U.K. was offset by the positive impact from our pandemic retrocession cover. Additionally, the previous year benefited from positive valuation gains from an equity participation that was included in the 2020 number. Other income and expenses are mainly driven by a further increase in the contribution from our Financial Solutions business. As you know, a large portion of which is recognized according to deposit accounting. Additionally, a part of the positive one-off in Q1 has been booked in other income.
Altogether, the EBIT of EUR 223 million is satisfactory, reflecting the aforementioned positive and negative extraordinary effects. On the next slide, you can see the benefit of our well-diversified book of business in life and health reinsurance. The global pandemic, of course, affected our results with total losses of EUR 582 million, and led to a negative EBIT of EUR 376 million in mortality and morbidity. On the other hand, we have our longevity business, where any impact from excess mortality would be a positive, even though this is usually not immediately visible in IFRS earnings. Finally, we have our financial solutions business, which is, as you can see here, really a success factor and a core strength of Hannover Re. The earnings contribution in recent years has been consistently strong and growing.
The solution we offer are usually risk remote when it comes to biometric risk transfer to Hannover Re, and therefore the business was also unaffected by the pandemic and produced an EBIT of EUR 460 million in 2021. All in all, this means that the earnings power of the life and health business group was strong enough to absorb the full COVID-19 impact. When it comes to new business production in 2021, the value of new business as a key non-IFRS metric was EUR 326 million, comfortably ahead of our target of EUR 250 million. Overall, the new business written is diversified, although, looking at the numbers, the main contributor to the value of new business was our financial solutions business in the U.S. and in China. Compared to the last three years, the number is smaller.
One of the drivers is our longevity business, where we have been particularly successful with larger block transactions in the last two years. This adds a lot of value of new business with actual earnings distributed over a long contract duration. On the next slide, our investment. I think it's a fair assessment that the development of our investment was very satisfactory in 2021. The ordinary investment income is particularly strong. The main drivers are the excellent returns from our alternative investments. The overall asset growth certainly fueled by a very strong positive operating cash flow in 2021, and by a positive contribution, as mentioned earlier, of our inflation-linked bonds. Just to remind you, many of you are aware that we are buying these inflation-linked bonds to protect our P&C results, our P&C reserves against inflation.
As mentioned earlier, while commenting on the P&C results, you should read those strong contributions in 2021 together with the combined ratio in P&C. Quick glance on the realized gains. As you can see, they decreased compared to last year, and are mainly the result of the regular portfolio management. Around EUR 50 million of that number are linked to the partial disposal of listed equities in the first quarter. Impairments and depreciation decreased compared to the previous year, where we had recorded some impairments in the more volatile market environment. All this means that this year's number is more or less at expected low levels, to a large extent comprising regular depreciation on real estate. The overall return on investment was 3.2%, and therefore significantly above our initial full year expectation of 2.4%.
Unrealized gains decreased by around EUR 700 million, mainly driven by increasing interest rates, of course, affecting the valuation of our fixed income portfolio. On the other hand, valuations for alternative investments, like particularly private equity, increased significantly. As you well know, under IFRS, unlike U.S. GAAP, the increase in the fair value of those equity investments are not reflected in the P&L, hence are not part of our ROI, but are part of our increased OCI. Altogether, I think the overall level of around EUR 3 billion of unrealized gains is still very significant. Quick glance on the next page on the asset allocation that I think developed in line with our strategy for 2021. The most notable change is slight increase in corporate bonds where we took advantage of the better risk reward profile compared to government bonds.
Just to remind you, within the government bonds portfolio, we have expanded our inflation-linked bonds portfolio to over EUR 5 billion now at the beginning of Q1 2021. On the right-hand side, the contribution to ordinary investment income is diversified as usual. Private equity, as you can see, played a particularly strong part this year. Here you can see also the contribution from government bonds increased to 25% compared to 17% in previous years. This is exactly a reflection of the contribution of our inflation-linked bonds portfolio. On solvency, on the next page, our solvency ratio at the end of 2021 stood at 243%, so well above our threshold of 200% and moderately higher than in the previous year.
This provides, of course, plenty of headroom to participate in growth opportunities, both in P&C and Life and Health in the future. Looking at the developments of our solvency ratio in 2021, the favorable business growth in terms of premium and asset volume led to an increase in required capital of 12%. This was more than compensated by the 15% growth in own funds. The increase in own funds was driven by the very positive results and positive economic effects from foreign exchange rates and credit spreads. And then of course, we have the issuance of the hybrid bonds, as you know, in the first quarter 2021. The full details on the solvency balance sheet and the detailed movement analysis will be disclosed in our SFCR on 4th April .
To conclude my remarks, 2021 financial year was certainly another challenging one. Most notably, though, the fact that we absorbed the COVID-19 impact of almost EUR 600 million in life and health, and we further strengthened our balance sheet and still comfortably achieved our guidance for the group net income, I think confirms a very strong underlying performance. On that note, I'll hand back to you, Jean-Jacques, for the comments on the outlook.
Thank you, Clemens. Before coming to the outlook, let's have a brief look at our target matrix. Most importantly, the two group targets have been comfortably achieved, and the return on equity is well above our minimum target. The underwriting results in both P&C and life and health are impacted by extraordinary losses, as mentioned earlier. EBIT growth targets in P&C and life and health are somewhat distorted by COVID claims in 2021, but also in 2020. These targets should rather be seen in the context of the strategic cycle. More importantly, growth is clearly ahead of the strategic targets, providing a strong basis for successful business development in 2022.
The next slide is unchanged from the one we showed at our renewals presentation a month ago. In P&C, we see continued favorable opportunities to grow our business in almost all lines and regions, traditional business, but also structured business. More importantly, all lines are expected to earn at or above the cost of capital level. Therefore, the overall picture is quite satisfactory from our point of view. Now in life and health, the outlook remains very positive for financial solutions and in longevity. We also see further opportunities to expand our portfolio at a level of profitability above our cost of capital. In morbidity, the outlook for the profitability includes potential second order impact from COVID-19, for example, due to delays in medical treatment during the pandemic.
Mortality will see further impacts from COVID-19 deaths, in particular in the first quarter, and most likely on a lower level in the second quarter due to the trends we've seen in the U.S. This brings us to the guidance for 2022, which is unchanged since we first published it back in November of last year. In P&C, the January renewals have fully supported our positive expectation of further profitable growth in 2022. As I just explained, we anticipate further impacts from the pandemic in life and health. Overall, there is still uncertainty around the impact of excess mortality on the one hand, and the final payout of our mortality retro cover on the other hand.
The fact that our group net income guidance of EUR 1.4 billion-EUR 1.5 billion remains unchanged is clearly supported by the expected favorable impact from our inflation-linked bond portfolio in the first half of the year and rate increases achieved in our January renewals. Still, we have also kept the targets like the ROI unchanged for now as it's early in the year and the geopolitical and macroeconomic environment remains uncertain. At this point, let me make a few comments on the impact of the war in Ukraine. It is too early to fully assess the potential impact in detail today, even though the group exposure in terms of premium and assets in the affected region is not material.
There are a number of uncertainties around the impact of sanctions and restrictions of international payments, as well as the post-war order to be expected. This all might have an impact on insurance coverage in one way or the other. The underwriting of new risks or the renewal of contracts with customers in Russia is currently on hold. The same is true for Belarus, although we don't have any business in that country. Finally, our dividend policy remains the same as for this year. The ordinary dividend announced in March 2022 will be the floor for the ordinary dividend with potentially a special dividend on top. Altogether, our guidance reflects the continued positive development of Hannover Re. With this, I'd like to conclude my remarks and we would be happy to answer your questions.
Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero and two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Kamran Hossain, JP Morgan. Your line is now open. Please go ahead, sir.
Hi. Afternoon, everyone. Two questions from me. The first one is just on the ordinary dividend. I mean, I guess, you know, you achieved your target this year. Solvency is very strong. You know, you did grow, but it, in theory, you should have plenty of surplus capital. Are there any constraints that we should worry about kind of from externally? You know, maybe a kind of brief comment around S&P surplus, there would be helpful. The second question, I guess on the guidance for 2022, you've talked about inflation-linked bonds having a, you know, a positive impact in the first half. In terms of the life retrocession benefit in 2022, could you maybe kind of clarify exactly how much you think that will be? Maybe kind of what percentage above the 110% mortality you think that things are kind of running at this point? Thank you.
Thank you, Kamran. On the dividend, you know, we try to look at different criteria to set it. I think, you know, we stated last year that we wanted to have the ordinary at least at the level of the prior year. That's what we did. Then we had a balance between, you know, having a very strong capitalization performance, but also the growth outlook, which is favorable. We see some flight to quality. We see some transactional opportunities. We ended up with that consideration. We don't have, you know, the decision was not driven by any concern on the S&P capitalization.
We're in good shape now, thanks to the growth in the earnings, but also thanks to the hybrid capital which we issued earlier in 2021. This was not really driving it. It was a consideration between, you know, performance, capitalization. Growth outlook. That would be on dividends. Maybe I'll give a floor to Clemens on other question or maybe on the pandemic cover.
Yeah, I can start probably, yeah.
Maybe you can start, Clemens, and then we'll go into the pandemic cover with Klaus.
Yes, coming on the inflation-linked bonds, as mentioned, they have been a large contributor in 2021. We do expect, particularly now with the outlook, a contribution from those in 2022. The mechanics are, of course, that a bulk of that significant increase in inflation expectation has been part of our 2021 earnings. However, there will be an amortization effect in 2022. I don't have an exact number, but I would assume at least, let's say a high double digit, probably a low triple digit billion number also for 2022 on the inflation-linked bonds.
I'll probably start with the pandemic cover, Klaus, and then just to probably give a complete picture of our expectation and planning for 2022 to complete that picture a bit. On the extreme mortality cover, as mentioned earlier, we have done a valuation on preliminary basis on preliminary data. We would assume that the final calculation will be in the second half of the year. It's all still preliminary, and I don't know if Klaus is able to provide an exact trigger number as of now. We've done a rough calculation. I would assume that we could expect probably a mid- to high double-digit million number from those, but still really up in the air.
That could be the outcome in 2022. At the same time, that's why I'm mentioning it, Kamran Hossain, at the same time, we have also increased the expectation on COVID claims. Klaus Miller can comment. When we released our guidance in November, we had particularly stated that we are not expecting or not have included significant COVID claims. As we all know, with the Omicron variant, that expectation has developed over time. We see claims in the first month of the year coming in, particularly in the U.S. Therefore, we have also increased that expectation.
Overall, that picture, you know, on inflation-linked bonds, on increased COVID claims expectations, offset by the extreme mortality cover, that's actually the reason why we have left our guidance untouched as of now.
Maybe two additional comments here. The total capacity we have between 110% and 120% is $255 million. Of this, we have estimated at the best estimate at year-end 112%. 2x 25.5, that is $51 million have been accounted for in 2021. Whatever happened since the end of year when we had our best estimate and today points in the direction Clemens just mentioned that there will be a higher claim probably. The issue here is that this is a population-based cover, index cover, and this is not clients who send their claims report to us and usually want to do that as fast as possible.
These are civil servants from the Federal Statistical Office, and they send the population data as soon as they have collected it all, and this will definitely take the larger part of this year. To make things even a little bit more complicated, we had a census in all these three countries, in Australia, in the U.K., and in the U.S., so that not only the claims data changes, but also the population data changes. We expect a payout in the region Clemens mentioned. Just to confirm that this is for the year 2021. This does not take into account any claims from 2022. These would still be covered in the next measurement period from 2021 - 2022. We have even placed EUR 80 million more of coverage in 2021.
If things get really, really bad, what we currently can't see and do not expect, then we would have further cover for the measurement period, including 2022.
That, that's really clear. Really appreciate all the detail. Thanks very much.
The next question is from Iain Pearce, Credit Suisse. Your line is now open. Please go ahead.
Hi. Thanks for taking my questions. The first one was just on the guidance around the Q1 losses expected to be within budget. Could you just give a bit more color about why you feel confident in that statement, given everything that's going on with Russia and sort of the attempts to identify potential claims exposure? Or is that a statement saying, you know, in the current state as things are, you're not expecting any material claims burden from Russia and Ukraine? The second one was just a bit of guidance, please, if you could, on the potential headwinds to premium growth from the lower cessions from HDI as well. Thank you.
Yeah, Iain, it's Sven. Happy to take both questions. What we said on the major losses was based on us saying that it's too early to make an assessment on Ukraine and Russia. The losses we cited being the winter storms in Europe, the flooding in Australia and the sinking of this car carrier. This was the sum of the losses where we were saying we are currently inside our major loss budget. This is not saying that we have made an assessment on the Ukrainian situation yet, and therefore it's not included as part of that statement. It's simply too early to come up with a robust number in that respect.
On the HDI side, we have reported earlier in the year that our participation behind HDI Global Specialty is reduced to a lower percentage. This percentage in all likelihood will be a stable figure for the years to come. We don't expect any further headwinds on the top line side coming out of that relationship. It's a one-off, which we will see in 2022, but you will see a stable picture for the years to come.
It will be a growth trajectory of course. You will see growth within the allocated shares in the future and also the benefit of increasing momentum on price and terms and conditions.
Thank you.
The next question is from William Hardcastle, UBS. Your line is now open.
Good afternoon, everyone. Thanks for taking the questions. There's two of them. The first one's on inflation. I guess the first one is there any development on maybe average claim size, propensity of claim settling given the U.S. court system's reopening? And is this the inflation you're concerned about and hence the reserve addition? Or is it more general inflation? And if so, I guess where will we see this when you publish your reserve triangles? The second one is just on the gross and the net losses that you disclose. It's really helpful disclosure, so thanks for that. But the Ida loss increased sort of $250 million quarter- on- quarter. The German floods by over EUR 150 million quarter- on- quarter. Is this reflected, I guess, is this your retro or was this the ILS component?
If it's the retro, is this sort of reflected in the pricing that you've paid this year, or is there a risk to that going forward? Thank you.
Yeah, William, let me start with the second question. The movement you have seen on both Ida and Bernd was really on the gross side. The retro protection then helped us to maintain our net numbers in a relatively stable corridor, but it was really the gross side moving out. This is actually an area, linking it a little bit to your first question of where we are seeing inflation materialize. It's particularly on the short tail classes, particularly on the typical post-natural catastrophe demand surge side. Given the price of raw materials, the general disruption in supply chains is just making repairing things a longer process and a more expensive process. Of course, very often you also have business interruption components to consider.
It's not only the inflation, but it's the double effect from supply chain distortions and raw material energy inflation. From a third-party liability point of view, we have not seen anything untoward in our triangles, particularly in the North American context. The sum total behaved very well in accordance with our expectations. We saw some small deterioration on the auto liability side, but we had a matching better than expected development on the general liability side. From that point of view, nothing untoward to report.
We nonetheless felt that taking extra provisions on the inflation side by means of adding to our reserve basket is simply coming from our expectation that at some stage the CPI and raw material price hikes, which we have seen over the last 12 months, at some stage may turn into wage inflation, which then of course would be relevant for settling bodily injury claims. Because very often the basis for settling bodily injury cases is the wage of the plaintiff. Therefore, what we could benefit from the inflation linkers this year, in our mind, there's a time lag at a later stage. This will have an influence on casualty claims.
Still, William, if I may add, it's Clemens again. We will be reporting our reserve study, I guess, in the quarter one results, come up with that. As mentioned earlier, we believe that we have increased our reserve buffer by at least another EUR 100 million. Again, we will be reporting this in early May.
That's really helpful. Thank you. Just as a quick follow-up on the gross and the net. Yeah, I'd seen that was mainly on the gross. It was just checking that, I guess, when we come to think about next year and retro pricing, obviously we're a long way out at this stage. You know, had these retrocessionaires been notified of these gross loss step outs when you came to price for this year or not?
Oh, yeah. Okay. Sorry, I did miss that part of your question. Yes, of course, they were fully informed. They took that into account when we renewed our retrocessions with them at amended structures and amended pricing, as you could imagine. Our retro partners felt that prices had to go up given that loss experience.
That's great. That's really clear. Thanks for the really complete answers.
The next question is from Andrew Ritchie, Autonomous. Your line is now open. Please go ahead.
Oh, hi there. Sorry to revisit the Russia situation. I wonder, Sven, if you could just, not asking for numbers, clearly, but just maybe give us the shopping list of specialty classes where you see the uncertainty that you flagged. In that, also remind us of any retro protections you have covering those specialty classes. The second question, when I look in the annual report, I can see quite significant increases in net loss scenarios for various nat cats, you know, U.S. windstorm, European windstorm. The level of the increase in those individual scenarios is much less than the level of increase in required nat cat or premium risk capital in the Solvency II model or, for that matter, in your large loss budget. How do I get comfortable with that?
I mean, you're talking 30%, 50%, 70% increases in some of those scenarios, and I think your overall required capital is, for premium, including cat risk, only up about 16%. And just a final question. The amount of dividend you're paying out is about equal to the Hannover Rück SE, the holding company, result in German GAAP. Is that I think that's a managed number and sort of a happy coincidence, or is it not? Is there a degree of constraint in German GAAP which governs the dividend, or should I just ignore the German GAAP result? Thanks.
Andrew, this is Clemens. I'll probably start with the managed number. I shouldn't say that as the CFO. Yes, of course. I mean, it's there are no restrictions on our German GAAP numbers. Yes, when you know that we have the German strange animal, the equalization reserve, where we have put in another half a billion euros this year. In general, that was not a constraint at all. It's really a coincidence, that number. I'm happy to provide any further detail on the German GAAP number. Again, very strong German GAAP accounts, loss gains carry forward. We had a contribution to our equalization reserve last year of EUR 700 million, and that's a number I think overall we can manage quite well.
Private equity and real estate investments that are on our IFRS 9 balance sheet, sitting straight on the balance sheet, are held in vehicles under German GAAP in limited partnerships. That's also an element where we can steer results quite well. I hope that helps on that end, Andrew.
Yep.
Sven.
Yeah. Let me start with your Ukraine specialty market question. As you know, the traditional reinsurance market or insurance market is excluding things like war and political risk and all these things. That exposure is then written in the specialty market. The spectrum on potential exposures is hull war coverage on both the aviation and marine side. We have the spectrum of political risk losses from a point of view of confiscation or contract frustration. You have physical assets being covered also against war on land in the political violence market. It's mainly those classes that are potentially impacted. The trade press was reporting about aircraft repossession, aircraft leasing exposure, which is written in the aviation market.
Those are the main segments, and in each of those, the uncertainty is rather high when it comes to exposures in the region. How do sanctions prevent or influence the coverage that is provided. Very often, as you would imagine, the exposure in this part of the world is very often not the peak exposure in the reinsurance business we are covering. The level of information we have at hand from the ordinary course of looking at underwriting information is not very detailed. We have to build all that together with the ceding companies. That's where quite a bit of the uncertainties come from.
Also, for many of those coverages, a lot will depend on how the post-war regime will look like and to what kind of understanding Russia will come with the rest of the world when it comes to trade sanctions and the like. On the nat cat side, the answer to your question really is the diversification. Yes, we have grown the business substantially and therefore also the nat cat exposure coming with it over the last three to five years. The capital is, of course, very much driven by the peak scenarios here, in particular, U.S. Wind, which we have only grown disproportionately less compared to a lot of the other regions and perils. Therefore, the impact from those smaller perils towards capital consumption is not that meaningful due to effects of diversification.
Okay, that's useful. Sven, just one follow-up. What do you have retro protection on some of those specialty classes, aviation, political risk? I mean, I've seen there is a difference gross to net on aviation losses historically, but what can you tell us about the retro for those classes?
We are buying reinsurance and retro on both aviation and marine, both on a all risk and also on a war basis. At different levels and with different limits. In case we should have significant losses coming out of this conflict, then there would be some retro protection helping us. As you know, aviation and marine excess of loss is also part of our K-Quota Share. There may also be recoveries under K, particularly on the non-war side.
Okay. Very helpful. Thanks very much.
The next question is from Vinit Malhotra, Mediobanca . Your line is now open. Please go ahead. Vinit Malhotra, your line is now open. You can ask your question now.
Oh, hi there. Thank you very much. Can you hear me?
Thanks.
Yes, we can hear you.
Thank you very much. Sorry if I was, I had a bit of an interrupted call, but I'd try. I'll ask if they've been asked and please ignore. First thing is, I'm just looking at all these media stories about, you know, planes being locked away in Russia or shipbuilders not getting paid or other kind of sanctions. You did say that it's too early to say. I would say from what you know, how much do you think the war exclusion clauses are likely to, I won't say help out, but help mitigate some of the economic damage into the insurance world or the reinsurance world? Any comments on that will be very helpful.
Second thing is that just on what's happening on the reserves and inflation, I mean, I saw the number 848, and my first reaction was doesn't show much of an impact from the inflation charge that we talked about at length in the renewals call a month ago. Is that number close to EUR 100 million? And then could you confirm that, please? First thing. And could you also say there's a comment in the annual report that aviation and marine have seen some reserve releases, and I can see this 70% combined ratio. How viable is it to relieve reserves when this line is facing some risks I just asked about, you know, from Ukraine's point of view? And lastly, I would say the inflation and the retrocession changes that have happened.
You know, we talked at renewals that retrocession was much lower by what is it 70% of capacity. How comfortable are we with these kind of short-term inflation shock that we just talked about 10 minutes ago for Bernd and Ida and then retrocession? Thank you.
Yeah. Let me start with your first two questions, Vinit. You asked about war exclusions. Here you have to differentiate war exclusions in the general property and casualty business. They tend to be absolute war exclusions, so they will protect that business against what is happening in Ukraine to a very significant effect. This kind of war exclusions is on almost all traditional business. From that point of view, bulk of business we are talking about. That obviously is different in the specialty classes where this war exposure is written back. That market very often is using a war exclusion, which is making reference to the five powers being France, the U.K., the U.S., Russia, and the People's Republic of China.
That exclusion only becomes effective if two of these five powers are in war with each other, which is not the situation today. That kind of five powers war exclusion used in the specialized war market on the specialty side would only come into play, for example, in case NATO should decide to intervene in the Russia-Ukraine.
I'm sorry.
The second question.
all specialty lines or only for war?
Pardon me.
That's only for war coverage or all specialty lines have that kind of only two out of five. Only the specialty.
The war market is using that kind of exclusion.
For the war market.
Aviation and marine, for example, is not so different from other general lines of business. I mean, they first exclude war and then write it back in a specialized war market. In the general aviation and marine business, you would have those absolute exclusions, but the specialized marine and aviation war markets would then make reference to this five powers war exclusion. On the reserves, you mentioned marine and aviation reserve releases, which is correct. But those were case reserves. As we do every year, we of course reassess our individual case reserve losses, loss by loss by loss. In 2021, we could release case reserves in marine aviation, but also property.
This has nothing to do with redundancy levels at Hannover Re, because by definition, at least that's our definition, case reserves are not part of redundancy. When we put up a case reserve, we would always say this is the best estimate and would not add to redundancies. Therefore, when we release them, we are not implicitly releasing any redundancy.
a brief addition on the overall run-off result. This is Clemens again. So the EUR 848 that we have reported for 2021 appear higher, substantially higher than 2020. However, in relation to previous years, I think it's pretty much a normal run-off result that we show. It's as Sven mentioned, it's a mixed picture of case reserves for large losses, et cetera, run of positive run-off results. But that number will, to some extent, include, of course, some of the increase in prudence level in our liability lines of business, in our long tail lines, that we were referring to earlier.
Thank you.
The next question is from Thomas Fossard, HSBC. Your line is now open. Please go ahead.
Yes. Good afternoon. Couple of questions on my side. First one would be, Sven, to come back to the Russia-Ukraine conflict. I don't think that you mentioned at all trade credit, where I think that you are of a pretty strong market share. So, I mean, was it intentional that you didn't focus too much on trade credit? Here you believe that potentially war exclusion could play or, I mean, maybe a bit more granularity on that would be helpful.
The second question, I just wanted to come back to your redundant reserves, because if I were to look at and do some simulation of what was the number at the end of the year and compare that with your growth reserves, on growth on net technical reserves. Actually the ratio went down from, you know, something like initially roughly 8% back in 2016 to something which is now more around 5% at the end of 2021. As if, you know, optically, the redundant reserves or the reserve buffer have been somewhat reduced over time.
Just wanted to understand if, you know, reaching the 5% level at the end of 2021 was creating some, you know, so that actually you were starting to be at a low level, which will need to be rebuilt at a faster pace, going forward. The third question would be on the life side. You know the deposit accounting contribution, business contribution. I think that in Q4 standalone, the contribution was pretty strong. I calculate a EUR 109 million contribution in Q4, and that's compared to roughly EUR 90 million in the previous quarters of the year. Just wanted to understand if there were any one-off in Q4 in that number or if it was more a kind of setting the new normal in terms of quarterly contribution for 2022. Thank you.
Yeah. Let me start with your trade credit question. Yes, you are of course absolutely right that this could have potential exposure also into the trade credit business. Please don't misunderstand my list, which I gave two or three questions ago as a complete list. I also didn't mention cyber, for example. But on trade credit in particular, both for the Ukraine and for Russia, trade credit insurers have managed their exposure very carefully over the last number of years. From that point of view, it's well-managed insurance portfolios we are talking about here.
Very often this business is done in a way that if you have a problem for the importers of business to pay their bills, you would restructure and you have waiting periods in place. That's why I said earlier, a lot for quite a few of those classes of business we are talking about will depend on how the post-war situation is looking like and how trade may continue or will start becoming active again. From that point of view, it's something where unfortunately we can only wait and see how that situation will look like once hopefully the war is over soon. As I said, I mean this was not meant to be a complete exhaustive list.
We, for example, also have exposure, potential exposure on the cyber side. Here we as we sit here today, we have not seen anything going on the cyber side, which would make us believe that our normal ultimate loss ratio assumptions would not cater for the activity so far.
On the redundancy level, this is Clemens again. On the development of the redundancy level, I think it's a fair observation that in absolute terms, our redundancy level has increased over the last two years, where it has decreased in previous years from 2016 on. In relative terms however, I think it's a fair assessment that the quota will have decreased. There is no real goal or target for us in terms of that quota, so no concern at all at year-end. I would probably mention two or three effects that led to this development. First, the strong growth that we've seen in the last year, which of course reflected mainly in our long tail lines in terms of absolute reserve growth.
Second, the large losses, particularly in 2020, 2021. We have to keep in mind that the EUR 950 million of COVID reserves of COVID losses, there is still half of that. Roughly 50% is still IBNR. For those losses, they will not be included in that redundancy level. Overall, I think it's fair to say that the strong growth that we've seen in the last two or three years, our actuaries, as well as Willis Towers Watson, when we will be publishing our reserve study, will not include usually any reserve buffers in those numbers. We haven't really decreased our loss picks for those years. Overall, we do still feel quite comfortable and believe that some of that redundancy we will see increased in the years to come.
Klaus here. For the life and health question on the financial solutions business in the fourth quarter. In general, I would not recommend to look at life business on a quarter by quarter basis. Definitely for the financial solutions business, this does not make much sense for various reasons. One is we have lead times of up to two years for some of these treaties, and the question whether this is booked in a certain quarter depends just on various circumstances which are well beyond our control. There is no point in interpreting a certain number in a quarter.
Given that, all our clients, as we have as well to, report on an annual basis, some of them are interested to close the deal before year-end. The question is whether this covers the full year, the quarter. There is no good answer to your question. This volatility is just as it is and it should not be interpreted.
Okay. No, that makes sense. Thank you. Thank you very much.
Before we go on to the next question, just a reminder. If you would like to ask a question, please press zero and one on your telephone keypad. The next question is from Vikram Gandhi, Société Générale. Your line is now open. Please go ahead.
Well, hello. Good afternoon, everybody. Two quick ones from me. One is on the regular investment income, which is pretty strong. Can you help us with how we should think in terms of the actual run rate? Because, you know, this number would have been held by a couple of non-recurring items. I hesitate to say one-offs, but, you know, maybe a higher payout from the PE funds or the inflation-linked impacts. But what should we think when we are trying to gauge the actual so-called ordinary investment income? That's question one.
On the second one, when I look at the annual report and the split of investments in different currencies, I see the investments in Chinese yuan at around EUR 2.6 billion versus just half a billion euros about four years ago back in 2017. It's quite a steep increase. I just wonder if you can help us with you know what is driving this tremendous growth in CNY. Maybe there's business growth, but you know this seems just too high you know almost 5x in four years. Perhaps I can throw in a last one. It's on the increase in PMLs.
Is there any way we can get to understand what's in a different component of this significant increase in PMLs, i.e., I mean, how much is the exposure growth versus, you know, the inflation impact versus the Forex impact? That would be helpful. If any color on that would be very helpful. Thank you.
Vikram, it's Clemens. Good afternoon. I'll try to answer the first two questions. The first one with respect to the ordinary income. Yes, I think the effect on alternative investments and inflation-linked bonds have been extraordinarily high. If you try to look at the, let's say, a gross run rate number on our fixed income portfolio, I'd say, we have increased that number throughout 2021, probably from roughly 2% to—I don't have an exact number, but probably somewhere around 2.4% now, our book yields. And then, of course, you have to exclude the costs and admin and all that, et cetera. I think at the end of the year, that's roughly the number there.
On the Chinese investment, as you know, we follow a strict asset liability matching and currency matching there. It should be mainly attributable to business growth to liabilities that we build up there. I would have to come back to you with an exact number what is attributable to which of that. Overall, it really just follows our business there. Then, of course, capital contributions, et cetera, to any branches, et cetera. That should all be part of that.
Okay.
Unfortunately, the same is true also for your question on the PML side. Of course, we can show what are the component parts in this increase, i.e., inflation, exposure change, model change. We don't have the detailed numbers with us today.
Okay. We can take it offline, maybe. Thank you.
We'll take it offline.
We haven't received any further questions at this point, so I hand back to the speakers for closing remarks.
Well, thank you very much for your questions and the lively discussion. We wanted to convey the message that in spite of the volatile environment and the loss burdens in the past year, we're showing very satisfactory result in line with the strategy, in line with the guidance. We managed, as we discussed, to increase the redundancy level at year-end. So a good set of numbers. Of course, the outlook is marked by geopolitics and some uncertainties on the COVID-19 side. I think, as you've seen, we confirmed the guidance for 2022 and remain nevertheless optimistic about profitability in the coming quarters. We'll have a look at Q1 next time we convene for a conference call. For now, thank you so much for your attendance and see you soon. Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.