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 morning, everyone, and welcome to our earnings call on our results for the first quarter, 2024. Today's speakers are Jean-Jacques Henchoz, our CEO, and Clemens Jungsthöfel, our CFO. For the Q&A session, we will be joined by Klaus Miller and Sven Althoff. With that, I would like to hand over to you, Jean-Jacques.
Thank you very much, Karl, and good morning on my side. I'm pleased to report that we had a good start to the year 2024. The group net income growth of 15% to EUR 558 million, and the business development in general, clearly supports our targets for the full year. In P&C, reinsurance revenue increased by 5%, adjusted for currency effects. Our successful January renewals are reflected in a strong new business CSM and loss component of EUR 1.4 billion. Compared to the previous year, this is an increase of 4%, adjusted for currency effects, and in this case, also interest rates, as discounting has a meaningful impact on the new business CSM. The combined ratio of 88% is well in line with our target of below 89%.
This confirms the good underlying profitability of our P&C portfolio. We have followed our usual approach and booked the entire large loss budget in Q1, even though the actual impact from large losses was below expectation. In Life & Health , reinsurance revenue decreased moderately, driven by regular portfolio management, with a reduction of exposure in mortality and morbidity business. Due to the transactional character of a large part of our Life & Health business, the new business generation in individual calendar quarters has generally less significance. In the case of the first quarter, I can still report that the new business written in Q1 supports our targets for the full year. The same is true for the reinsurance service results of EUR 211 million. The investment performance was very satisfying.
The return on investments of 3.3%, clearly above the target and based on a strong ordinary income. Furthermore, the impact from realized losses, impairments, and the valuation of assets at fair value through P&L was very limited. Altogether, the return on equity of 21.3% and the solvency ratio of 267%, highlight our company's strong earnings power and capitalization. Shareholders' equity increased by 7.1%, mainly driven by Q1 earnings. The impact from interest rates and currency translation was moderate, but positive as well. The CSM increased by 15.2%, mainly reflecting the new business value generated by our successful January renewals in P&C. The risk adjustment increased by 4.9%, mainly due to new business in P&C and assumption changes in Life & Health .
On that note, let me hand over to Clemens, who will go through the detailed financials.
Thank you, Jean-Jacques, and good morning, everyone. Starting with the development in P&C reinsurance, the top line growth in the first quarter is in line with expectations. Main drivers for growth are here, structured reinsurance and ILS, as well as our regional markets in North America and in EMEA. The growth in net revenue is slightly more pronounced due to the reduced volume of our retrocession program. The impact from large losses from natural catastrophes was very benign in the first quarter. The largest loss event in the first quarter has been the Baltimore Bridge loss. However, there are still a number of unknown factors to this loss, such as the root cause for this accident, which might have an impact on the final insured loss. Against this backdrop, it is really too early to come up with an initial loss estimate in Q1.
But as you know, we've always reserved the full large loss budget in situations where the actual impact from large losses is below budget. And as we are very confident that the final impact from the Baltimore Bridge will comfortably fit within our reserved Q1 budget, the reserves to cover the loss are booked anyhow. Runoff result in P&C was an overall positive EUR 171 million. It includes around EUR 100 million negative runoff for the Italy hail events, 2023, which should not come as a surprise after our comments in March, and the media reports of the development of the market loss. As you know, we have added substantial reserves also to the more younger underwriting year before closing the books for year-end 2023... and a part of those have been used to cover the development of the losses in Italy.
Furthermore, I'd like to add that the overall loss from the Italy hail reflects our leading market share in this country. The combined ratio in the first quarter includes a discount effect of around 7%. This is still higher than the interest accretion in the reinsurance finance result, but our prudent initial reserving should reflect the difference. Altogether, the combined ratio of 88% is well in line with our target and reflects a very healthy underlying profitability. The strong investment result in P&C primarily stems from the increased ordinary income from fixed income securities. The increase is mainly driven by higher interest rates, supported by a strong operating cash flow. Last, not least, the amortization of our inflation-linked bonds added EUR 49 million, slightly more than expected. The other result is mainly reflecting the other income and expenses.
The currency result had a minor impact of minus EUR 7 million. The main contributor to the P&C's reinsurance service result is the CSM release, reflecting the recent renewals in a very attractive market environment. The service result includes the fully booked large loss budget, as mentioned, and is therefore not showing the underlying result in the quarter. As the large loss situation was benign, the recovery from retrocession was also low, which is the main driver for the negative experience variance that you see here on the slide. The loss component from new business is quite low, confirming the attractive rate environment in P&C. I already commented on the run-off result. Just to be, just to be for the sake of completeness, the release of adjustment within the LIC added only EUR 3 million to the overall EUR 171 million run-off result.
The CSM growth is mainly determined by our successful January renewals, reflected in a strong new business CSM of EUR 1.4 billion. And as Jean-Jacques already mentioned, the growth compared to the previous year needs to be adjusted for currency and interest rate changes to get to a comparable number. So we are looking at an increase adjusted for these effects of 4%. Let's move on to Life & Health . Reinsurance revenue decreased slightly. The growth in Financial Solutions has been offset by the developments in mortality and morbidity. Reinsurance service result is fully in line with our expectation, with favorable contributions from mortality, longevity, and Financial Solutions .
Just as a reminder, we had reported an extraordinary strong result in mortality in the previous year, and in morbidity, the result has mainly been impacted by further strengthening of the reserves for critical illness business in China. The investment result here in Life & Health mainly reflects a good ordinary income and a negative impact of around EUR 20 million from the change in fair value of financial instruments, mainly driven by derivatives for currency hedging. On top, we recorded a negative currency result of roughly -EUR 30 million in the other result. Both effects together explain why the EBIT of EUR 181 million looks slightly weaker than the reinsurance service result. But altogether, really, the performance of our Life & Health business group clearly supports our expectations for the full year.
Looking at the drivers for the reinsurance service result, both the CSM release and the risk adjustments release are within the expected range. Experience variance is not driven by one larger effect, but really just several smaller effects, adding up to the 62 million that you can see here. This largely mitigates the negative impact from the loss component of EUR 85 million. The new business loss component was only a minor, minor EUR 8 million. The main driver here has been really the reserve strengthening in morbidity. Altogether, again, reinsurance service result fully in line with our expectation.
The new business CSM and extensions on existing contracts together amounted to EUR 190 million, based on a diversified contribution from all reporting lines, adding positive currency effects and the interest accretion, the total CSM increased by 1.9%, also considering the regular CSM release and almost no impact from changes in estimates. On investments, I think it's fair to say that the development was again, very satisfactory. The ordinary investment income, as mentioned before, very strong. Several factors play a role here. The asset volume increased based on a strong operating cash flow. In addition, the reinvestment yields are still, quite nicely above our average portfolio yield, with a continued positive impact on our returns from fixed income. Our inflation-linked bonds contributed EUR 49 million to the ordinary income.
For the full year, we expect a contribution of the inflation-linked bonds of around EUR 160 million. So, Q1 was slightly ahead of our expectation. Finally, the contribution from alternative investments increased as well... Other than that, really, the investment income is pleasantly unremarkable. In particular, the ECL and any valuation impact at fair value through P&L or in the form of impairments, had only a minor impact in the first quarter. All in all, ROI of 3.3% is above our 2.8% target, which still, I should say that, still includes some allowance for negative valuation volatility later in the year. On reserving, on the next slide, as the annual reserve review by Willis Towers Watson was concluded, I am happy to provide you with their final view on our reserve adequacy at year-end 2023.
As indicated in March, the Resiliency Reserve increased to around EUR 2 billion. To be precise, final number is 2.057 billion EUR. Just as a reminder, the reserve study does not yet include any resiliency reserves in the most recent underwriting years, which, and we also stated that in March, have also been strengthened at year-end, 2023. Therefore, we will most likely see those, resiliency reserves coming through in future reserve studies. Generally, we feel very comfortable with the current reserving position, hence, we are not planning for any further extraordinary change to the confidence level of our reserves. And if you would like to perform further analysis on our reserving position, we have also published the loss triangles for the year 2023 on our website today.
To conclude my remarks, the first quarter of 2024 was a rather pleasantly uneventful one. As things stand today, the overall performance supportive to reach or exceed our group net income target of EUR 2.1 billion. On that note, I'll hand back to you, Jean-Jacques, for the comments on the outlook.
Well, thank you very much, Clemens. So firstly, the April renewals were characterized by a market environment quite similar to the January renewals. We have not observed any meaningful inflow of new capital in the market, but reinsurance capacity was generally available to fill most placements. In this market environment, we were able to grow our premium base for the April renewals by 7.1%, with an overall risk-adjusted price increase of 1.5%. The quality of our portfolio has further improved on top of a healthy starting point. Main drivers for growth have been the markets in North America, where we have mostly observed stable to slightly increasing rates, also in underlying primary insurance markets.
In the Asia Pacific region, we were able to maintain our position in slightly more competitive markets based on the limited loss impact in recent years. In Japan, we're very satisfied with a risk-adjusted flat pricing for our renewals. In marine, capacity is starting to have an impact on pricing. Overall, the premium growth of 7.1% will be reflected in reinsurance revenue over the next couple of years, supporting our general growth ambitions in P&C. As the business development in the first quarter supports our expectations for 2024, we've kept our guidance unchanged. We continue to expect growth in revenue of at least 5%, mainly supported by our P&C business. The combined ratio is expected to come in below 89%, and the Life & Health service result, above EUR 850 million.
We target a return on investments of at least 2.8%. Altogether, we've had a good start to the year and are quite confident that we will achieve our net income guidance of at least EUR 2.1 billion. This concludes our remarks, and we'd be happy to answer your questions at this stage. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone 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 Kamran Hossain from JP Morgan. Please go ahead.
Hi. Morning. A couple of questions from me. The first one is just on, I guess it's the underlying performance in your business. I'm sure you saw that one of your peers had very, very strong underlying results last week. Now, I know you're, you know, historically very cautious, you know, in that cat, that's clear, so your reported result will be much better than the one you've kind of reported today, if you, you know, took the cat benefit. But do you think the economics of the business that's on the books at the moment is much better than the reported results we're seeing, kind of, if we look through the cat's eye? I know. I appreciate that's probably a very complex question to answer. The second question is around, the S&P rating review.
Would you expect the review to, when it's concluded, I think that's kind of Q2, to free up capital when it's finalized? And do S&P take into account the reserve resilience that you've kind of talked about today in their calculations? Thank you.
Yes, good morning, Kamran . This is Clemens. So I, I'll probably start with the second one, the S&P one. So the factors that are being determined are really up for discussion yet. So we are in the discussion with S&P on the model. So really in the middle of the process, and really early to comment also on any sort of allowance for, for example, reserve resiliency, et cetera. We do expect this to be, to some extent, to be incorporated, but again, too early to say, and we will come back to you, I guess, in the August call to comment on this. On the first one, and happy for Sven to complement on this, I think on the underlying combined ratio, I think it's a fair statement, Kamran .
It's early in the year. We usually, particularly, you know, with three months of the year just being passed, we are very cautious generally on the Combined Ratio. It is overall fair to say it's a bit of a managed number in the first quarter. But it's also fair to say that the underlying profitability, the increased margins in the P&C portfolio are clearly visible in the first quarter. I mean, you mentioned the large loss budget that we fully booked in the first quarter, and I think it's also worth mentioning that we don't take any advantage on potential retro recovery on that budget that we are booking. So we only book the retro recovery on actual claims, which, as you know, have been very benign.
We have not taken advantage of the discount tailwind. That is still there, the 7% discount within the combined ratio versus the EC. So we have not taken advantage of that tailwind in the first quarter. As for the run-off losses that we mentioned, particularly on Italy in the first quarter, I mean, as mentioned earlier, Kamran , we have been quite cautious also on recent underwriting years. We've strengthened the reserve there at year-end 2023, so we were able to use some of that really to compensate for that. So therefore, it's a bit of a mixed picture. But again, the underlying profitability is, of course, becoming very, very visible. But again, let's see how the years go, and then we will adjust accordingly over the course of the year.
Thanks, Clemens.
The next question comes from Tryfonas Spyrou from Berenberg. Please go ahead.
Hi there. Thank you for taking my question. I guess maybe just to follow up on the last point on the sort of on the combined ratio, the discount versus sort of the EC benefit that you're not really taking into your combined ratio. Is it fair to say that that is around sort of running around 86.4 when we strip that out? And that would compare to sort of the 87.5% combined ratio you talked about at Q4. So the actual difference would be sort of the margins that are now early through, which appears to be slightly better than you expected. So maybe just some comments around that. The second one is on sort of Life & Health re.
I guess I was wondering if you can share some color on what is driving the reserving on the morbidity business coming from China, and whether we should expect this to be sort of one-off or part of a sort of a bigger trend. And, I guess, staying on Life & Health re, revenue growth, you can share maybe some color on what is sort of driving the reduction in the business or the top line, and how comfortable you are that this would rise throughout the year closer to the 5% run rate goal that you expect. Thank you.
Yes, happy to, to comment on the first one. A quick one - quick answer. The 1.6 percentage points, so 86.4 you mentioned, I think is a good number, if you strip out what we've taken in the reserving as for now at the tailwind. And I'll let Klaus answer on the life re.
Yeah. Your first question was about CI and China. Maybe in general terms, we do an actual to expected analysis for all our portfolios, mortality, morbidity, longevity, whatever. And usually we do that in the second and third quarter because we do it on last year's data. We receive that sometime in the first quarter, usually from our clients. This year, we have seen that we will probably over exceed our plan figures, and took the opportunity to speed up the analysis a little bit and booked a lot of the CI claims experience from China already in the first quarter. So this avoids any headwinds in the second and third quarter. Your question, is that a one-off or is it more a permanent issue?
You know that we are a little bit cautious on CI in China since, I guess, 2015, 2016, we have stopped writing business there. And on the Life & Health side, you always have to do a best estimate, including everything what you expect for the future. So this is currently our best estimate. If we would expect higher reserves by year-end, we would have to reserve for it already now. So currently, this is the best estimate. But in more general terms, you have seen in the last couple of years that we are focusing on Financial Solutions . This is the main profit driver for us. And if you ask me, not about our portfolio, but about the lines of business in general, we are more bullish about longevity.
We are more or less neutral about mortality, thinking that it's a competitive market, but we are able to get the price right, but we won't get too rich with mortality business, and we are more cautious with critical illness, long-term care, and similar lines of business. So this is why we are not writing that much pure risk business on the morbidity side currently, and this is why our reinsurance revenue is slightly decreasing. I hope that answers your question.
Yeah, yeah, yes, it does. Maybe just a follow-up on, on, sort of, should we expect the Financial Solutions part then to, to sort of pick up and, and sort of accelerate in, in the remainder of the year so that, the revenue growth, effects tested should be getting closer to that sort of 5% level?
The Financial Solutions business is more towards the end of the year, usually because people are, or companies, our clients, are looking for a balance sheet to support, and this is usually with the year-end account. So, mostly in Q3 and Q4, you should expect that there are larger deals. But, it's impossible to estimate that. Some of these treaties have lead times of up to 18 months, 24 months. It's hard to estimate what you will see as new business in the CSM by year-end. But we have a full pipeline. It's just a question when these deals are closed.
Perfect. Thank you.
The next question comes from Freya Kong from Bank of America. Please go ahead.
Hi, good morning. Thanks for taking the questions. Just to follow up on the comment you made on retro recoveries, you assumed none in Q1, but with the Baltimore Bridge loss, when you book it, do you expect it to have some retro recoveries? Secondly, on the reinsurance revenue growth of 3% is, is running a bit behind the over 5% target for the full year, and I think Jean-Jacques has previously said that we'd expect to see a return to historic growth levels of high single digits. Does your greater caution in some lines of Life & Health Re affect the growth outlook for 2024 and beyond? And, last question, if I can.
The Solvency II of 267 was a bit lighter than expected, given we would have seen strong capital generation in the quarter and what I assume would be positive market effects. Can you help me bridge this gap? Thank you.
Yeah, good morning, Freya. It's Sven. I'm happy to take the Baltimore Bridge question. As Clemens explained, there are still uncertainties given the complexity of the claim, the root cause of the claim, so therefore, we have not allocated any reserves to specific segments or contracts at this stage. But your assumption is correct, that we do expect retro recoveries on the marine side, where we have significant retrocessional protection further down the line, and hopefully, we will be able to share more details in Q2.
Maybe, Freya, on the revenue growth, generally, I can confirm that we remain confident about the year-end. We'll probably be a bit below the 5% on the Life & Health side, but we also have a very good pipeline of transactions. So I'm quite positive about Life & Health . At P&C, I think as the earn through comes in from quarter to quarter, we'll see underlying growth come in, so we'll be above, in all likelihood, well above the 5%. So all in all, I think 5% remains a very realistic target for revenue growth.
So Freya, then I had one question on solvency too, that I caught. So just to give a bit of flavor on the numbers. So the own funds in the first quarter increased by EUR 680 million due to the strong operating impact that you've mentioned. The SCR rose by EUR 325 million in the first quarter, and that's mainly due to some diversification effects that increased the SCR a bit, and that's the main driver, really, for the impact on the Solvency II ratio.
Okay. Thank you.
The next question comes from Durrant Quinn from RBC. Please go ahead.
Hey, morning, everyone. My first one is just on the reserve buffers. So I think at the end of your introductory remarks, you're saying that you're comfortable with your position and you don't plan for any, I think in your words, extraordinary change to the confidence level. But yet, you know, you spoke about not to take advantage of the discount benefit. So I guess, the question is really is: How much room do you have to add to that reserve buffer, whether, you know, you quantified within this EUR 2 billion, or do you also have a lot of pockets like younger underwriting years, risk adjustment, discount benefit, that you can actually add to that, over the course of the year?
My second question, so you've announced this new specialty reinsurance unit that will be focusing on cyber and digital risk, I believe. Is that sort of a change in risk steering, or is this more about, you know, an alignment of reporting lines and business segments, et cetera? Any more you can share behind that, please? Thank you.
Yeah, just, on the reserve part, it's Clemens. So just to be very clear here, so what we're reporting here, the roughly EUR 2 billion, is the resiliency of our reserving position within the liability for incurred claims, so within the LIC. That's the, the resiliency only within that position. It doesn't cover any reserve strengthening or resilience that we have in more younger underwriting years, hence also in the unearned part of the LRC. So that is not included. And, as mentioned earlier, we have been, a bit cautious in 2023, also on more younger underwriting years, a bit more prudent in our loss picks.
And then also on, I think that's very important to note is that the risk adjustment of roughly EUR 850 million that we reported at the end of 2023 is also not included in that number. So I think we always, when we look at, talk about resiliency, we should take these numbers together. As for any further extraordinary increases of resiliency, I think that's what I said earlier, is we have not planned for 2024 to grow that number extraordinarily. However, with the growth of our P&C book, we will, of course, see further reserve increases, but really just with the growth of the book. So overall, we feel comfortable with the 5% resiliency plus risk adjustment at this stage.
On the reorganization, you are mentioning the main change is really on the cyber side. Our digital underwriting activities have been in a centralized unit before, but we have now combined that with the centralized unit for cyber, which historically we have written in our regional accounts. This is just the evolution on how we look at our increased sophistication when it comes to pricing capability, modeling capability. But also the trends we are seeing in the market, so historically, buyers have solely concentrated on quota share and aggregate stop-loss kind of solutions. But now we see the emergence of also event-based cyber protection. And in addition, by now we have established four different types of retrocessional coverage.
And bring that all together in one unit that is concentrating on building on the development of additional risk-bearing capability, also in combination with the capital market, and having a homogeneous approach when it comes to the questions: What is a cyber event? What language are we prepared to provide? Lends itself to a centralized approach, like we have in many other specialty classes, like marine, aviation, political surety, and so on. So just an evolutionary step here.
Thanks a lot.
The next question comes from Faizan Lakhani from HSBC. Please go ahead.
Hi there. Thank you for taking my questions. The first one is on the PYD. So I can see the PYD was EUR 171 million for the quarter. Can you just remind us, when thinking about the 89% combined ratio guidance, implicitly, what are you assuming for PYD within that? And I guess in, by extension, with the hailstorm, as you mentioned, it's sort of deducted from the prudence in the newer underwriting years. Would it be fair to say that the newer underwriting years have the same level of sort of reserve margin as the prior years? If you could provide some sort of qualitative guidance on that one. My next question is coming back to the critical illness in China.
Have you seen a further adverse development from the fact that, you know, China has reopened post-COVID, and if that sort of factored in when thinking about setting your loss component for this quarter? Thank you.
That, on the first one, PYDs, so I think in general, it's fair to say that we have not changed our quite prudent reserving approach in the initial loss picks. That's also true for the underwriting year, let's say 2022, 2023, and also 2024, what you see here at the initial recognition. What I would say is that particularly at year-end 2023, we have added a bit more prudency to the younger underwriting years, which have not become visible yet in the reserve study, as mentioned before, and which you're also not being seen yet in the first quarter, apart from the fact that we've used some of that prudency to cover for the Italian runoff losses.
Generally, I would say any runoff result, somewhere, let's say on a discounted basis, above EUR 500 million-EUR 600 million per year, I think is a good number. Of course, varying a bit, on the current development, but I think that's a good proxy for the overall, discounted runoff, runoff result for the financial year 2024.
So sorry, just to touch on that, you said EUR 500 million-EUR 600 million. If I, if I annualize the 171, it's closer to EUR 700 million. So would that be fair to say that the underlying is developing better than the sort of 88 that you've posted, effectively?
Yes. Yes, I think the 170 million is a healthy runoff result. However, a bit subdued in the first quarter, first of all, by the development that we just mentioned, although that being covered a bit. But in the first quarter, we are usually a bit more prudent when it comes to runoff results. You would see those more developing within the third and the fourth quarter. So yes, I would say it's still a prudent number in the first quarter, and the 500-600 is really just a proxy. It can go above that number also in a healthy year, but it's just really just as a proxy for what we take into account for the overall year.
Mm-hmm. Thank you.
Maybe one comment on the critical illness side. You referred to China and the changes after COVID. One thing is already in 2015 and 2016, we stopped writing this business because there is much more screening, which, of course, impacts mainly cancer, not so much heart attack and stroke. But you also have seen less visits to the doctor during COVID, so there is a backlog of maybe potential heart attack and stroke cases. This has come through in the last two years. But one of the major impacts, which are difficult to quantify, is the number of agents, sales agents in China, has reduced significantly after COVID, because during COVID time, they could not sell anything.
What happens then is that nobody takes care of their customers, and healthy customers then tend to lapse. People with health issues tend not to lapse, so the lapse rates increased, and mainly with the healthy people, so the claims ratio increased. I think this is mainly over now, but it has certainly an impact on the claims ratio, but it's very, very difficult to quantify, because you have nothing to compare it to.
Mm-hmm. Mm-hmm.
The number of people are half what we have seen before the COVID pandemic. That's definitely an impact.
The next question comes from Will Hardcastle from UBS. Please go ahead.
Hey, morning, everyone. Two questions from me. The first one's just really trying to get a grip of this normalized run rate, because I kind of feel like there's a few different numbers out there. I think you said at the full year, the normalized run rate ex-reserve build was sort of around the 87.5%. Then we've got the 89% guidance, and then I think earlier on the call, there was an 86.5% comment. I guess perhaps just where do you feel like the business is running through this year would be really helpful, and how does that 1.5% rate increase reported today fit with that?
The second question is, it looks like, just going through some of the reserve triangles, that around EUR 500 million of strengthening has gone through in general liability, non-proportional across 2017 to 2022. Is that effectively where the reserve resilience build has come in, or is some of that EUR 500 million best estimate deterioration as well? Thank you.
Well, this is Clemens. Good morning. On the reserves, I'll start with that one. Yes, I think it's a good observation. When it comes to reserves, it's really the main driver of the resiliency increase of the reserves. Movement is really the strengthening of the reserves. And the largest development we've really seen in the non-proportional general liability business, where we have allocated most of the reserve strengthening. But it's not that we saw best estimates going up, it's really just adding resiliency to those reserves. That's really the main driver where the resiliency has been allocated. I think also in non-proportional motor business for Europe, and marine aviation, credit and surety, are areas where we strengthened the reserves.
But it's really, and also on that, it was really increasing the resiliency in those lines of business. We have not seen any material movements due to inflation, social inflation, et cetera. That was not the case. On the underlying Combined Ratio, appreciate that we try to understand, you know, what is the underlying run rate here. I mean, we did guide that we want to land below 89. So I think the 88, again, is in line with what we expected, given all the factors that I mentioned earlier, Will. I think the 86.4 is really just to try to take out the tailwind, the potential tailwind, that we have not fallen through to the P&L. Because we do believe it's temporary, so it will come back.
That's why we keep it in the loss picks. Yes, and I can't give you an exact number, but it's clear that in the first quarter and also in last year, the underlying profitability is clearly below the 89% that we see here. Again, we've kept some prudence in there for now, and we will give an update over the course of the year, but it's clearly below the 89%.
That's great. Thank you very much.
Thank you, Will.
The next question comes from Vinit Malhotra from Mediobanca. Please go ahead.
Thank you, Donna. Thank you. So just three, please, more or less follow-up questions. One on P&C retro, one on mortality, and one on investment alternatives. So on the P&C retro, and just, just clicking on the slide, seven, I think, where you mentioned experience variance of EUR 57 million is due to low retro recovery. Is that lower retro recovery than you would have liked, or is it just because those losses were too small and were outside those, you know, the retro programs? And would you be thinking about slight changes to retro based on such kind of lower retro recovery? So that's my question on retro. Second question is to loss, where you said you won't get richer writing mortality. I think mortality was still good last year.
I'm just curious because I thought that post-COVID, the mortality trends were still helping technical results. So just curious why you're not more optimistic or more bullish towards mortality. And lastly, the alternatives, you said, you know, there is good ordinary income contribution. Still, should we be concerned? Is this contribution coming from PE or real estate? And should we still be concerned about the future possible runoff, write-downs in this area because they continue to provide good income? Thank you.
Vinit, I'll take the first and the, the third one on P&C and investments. On the retro, what you see on the slide, the experience variance, is really just the accounting result, if you like, from the fact that we've booked the full large loss budget of EUR 378 million, and have only taken into account any retro recovery on actual incurred losses. So really just what you see on the, on the large loss list, the gross, what is it? Roughly 56 million. That's where we have taken retro into account. So technically, it's really just a result of that. For us being prudent, prudent in booking the full gross large loss budget. That's really just technical. Other than that, no, we, we, we are fine with our retro program.
It's just that in a benign, large loss, quarter, plus, when you book the full budget, then you technically end up with that result. But we are overall, absolutely fine with the, with the retro strategy, as it stands. Now, on investment income, so we are now at a run rate in the fixed income portfolio, which you know is still 84% of our portfolio, now at a run rate of roughly 3.4%, which is, very pleasing. Reinvestment yields stand now at 4.6, so that's really the main contributor, and that's the pleasing bit. Again, inflation-linked bonds had a bit of a positive impact in Q1, a bit more than we expected, but the main driver is really the ordinary income, the running yield in the fixed income portfolio.
Alternative investment have contributed nicely, also in the first quarter, stronger than we expected, particularly on the private equity side. And you know, Vinit, we always, we always, commented last year on that we would expect, given the high valuations in the private equity funds, that we would expect those numbers to come down, and that we would factor in some revaluations. We have not really seen that yet. So there is some allowance in our 2024 guidance for that, and there is also some allowance for impairments on real estate, on direct real estate, which naturally would mainly come through in the valuations Q3, Q4. So we did bake some numbers into our guidance 2024.
On the real estate side, I think we booked impairments in 2023 of roughly EUR 80 million, and I think that's probably a good number. I can't give you an exact number, but it's probably a good proxy, what we would expect at year-end. Having said that, I think, we are pleased with the performance in the first quarter, and we are a bit more optimistic now, that we, will at least reach, of course, the 2.8 or exceed the 2.8 ROI, if all goes well.
Thank you.
I can add a little bit on the mortality side. What you have to do is to differentiate between old business and new business, what you write this year. Mortality business on the Life & Health side is usually for 20, 30 years, sometimes even all of life. If you have a good book of business with good rates, this was fine in the past. It had small problems in COVID times, but now it's back to for new business you're writing this year are totally different. Going forward, you see significantly lower rates than what you had been able to charge 20 years ago. And this is the reason I have said it's difficult to get rich by the new business you're writing this year. The old business is fine in many countries.
But, we have seen, especially in the Anglo-Saxon world, I would call it terrible rates in new business, which have been quoted, and in some cases, the business was placed for what we would call loss making. And so we don't anticipate. This is the reason why we are not growing reinsurance revenue a lot.
Thank you, Klaus. Thank you.
The next question comes from James Shuck from Citi. Please go ahead.
Hi, good morning. Thanks for taking my questions. I just wanted to return to the, to the run-off result, expectations for the, for the full year, firstly. So, I think you spent EUR 500-600 million on a discounted basis, and there's EUR 171 million, including, the EUR 100 million from Italy in Q1. That's also on a discounted basis. So, it just looks to me as if you're seeing a, a larger than usual PYD effect in Q1, just simply annualizing that 171, because I think the, the Italian EUR 100 million came out of the Resiliency Reserve. So just 171 times 4 gets me a number far higher than that EUR 500-600.
So again, just keen to get some insight into what's happening there, please. Secondly, was on the P&C new business value, CSM. So appreciate that when you adjust that for FX, and for interest rates, it was up 4%. I guess I was expecting it to be up by more than that. We've been a very strong rate environment. You put volume growth on, and you've also reduced the retro. So perhaps you've just shed some light on why that hasn't risen by a little bit more than the 4%. And my final question, just in terms of your stake in Viridium, can you just remind me what the carrying value is of that, and whether there's any potential for a write down on that stake, please? Thank you.
James, I'll start with the run-off result. I wouldn't again, it was really just a, you know, a rough estimate. It's not that we really plan for a run-off result, it's just that we historically have seen run-off results, undiscounted, in the area between EUR 600 million. We've seen years where we had EUR 900 million of run-off results on an undiscounted basis. And, you know, the roughly, let's say, EUR 500 million-EUR 600 million is really just a proxy, what we would expect, as a normal year. So, even if you, you know, if you take the first quarter and times four, I think it's still a good proxy.
We again might see more run-off results coming through in the third and fourth quarter, but it's really not a completely academic exercise that we're doing here, but it's a good range. I just wanted to give you a range, right, to where we could land in this year. On the CSM of new business, I think there's one effect, you know, where we say, well, of course, we've clearly seen also in the initial recognition, James, this year, that the CSM of new business on the gross business is clearly above the 4% adjusted. So it's mainly...
So if we adjust it for interest rates, as you know, and you have to do that because in the current interest rate environment, it's also due to our prudent reserving approach. I think that's also fair to say, because that reduces the CSM. We're still quite prudent in our initial loss picks, so that has also a dampening effect on the CSM of new business.
It's fair to say that the gross number is higher than the net number than the net 4%, purely due to the fact that we have, and we recorded that, I think, in Q2 or Q3, where we've done some updates on the CSM of new business over the course of the year, some true up effects on the retro side that were a bit overstated in the first quarter last year, and that is a baseline effect here on the net number. But you're perfectly right, James. The underlying number is actually a bit higher.
Yeah, I can answer the question on the Viridium. The book value has not changed since the very beginning, so there is absolutely no risk that we have to write down anything.
The market value obviously did not increase because the Zurich deal did not go through, but still, it's probably a multiple of the book value, very high multiple. I don't have the exact numbers, but there is absolutely no risk that we have to do a write down here. We are still not very happy that the Zurich deal didn't go through. That would have increased the value, but I'm pretty sure that we will see a solution to that in the next 18-24 months, maybe earlier.
The next question comes from Ismail Dabo, from Morgan Stanley. Please go ahead.
Hi, good morning. Basically, if I look at the normalized Combined Ratio, I mean, or your Combined Ratio underlying it, you basically commented that it's below 89%. You're not adding any more really to your reserves, and you are fairly well capitalized. I guess the question is, if we get to the end of the year, and all of these factors are, for the most part, still true, and profitability is running better than expected on an underlying basis, would you consider raising your net income target above EUR 2.1 billion by the end of the year? And, secondly, I guess, is just any comments on the sustainability of the reinsurance pricing environment? Maybe, I know it's probably too soon, but, you know, possibly into 2025, what are you expecting?
Are you expecting more of like a plateau or like a longer, longer, like maybe slower deceleration or maybe a blow off where we see more alternative capital? Thank you.
Well, thank you. Jean-Jacques speaking. On the outlook, I think it's too early in the year to speculate on this. Clearly, as every year, at some stage in the second part of the year, we look at the metrics and take a stance, and then compare these metrics with the guidance, so that there's always a possibility that we have some revised view on the full year. But you know, there's still a lot of time going on. The year is long, there is hurricane season, a lot of uncertainties. So for now, I think we're fine with the numbers.
We believe we have the realistic estimate of what could be the full year. But clearly, we look at the metrics from quarter to quarter, and starting in Q3, possibly Q4, you know, we will look at the guidance once again, as we always do. On the pricing environment, Sven will be able to say a few more on what we see, but generally, there is a stable environment as you've seen. We're very happy with rate adequacies. We see that programs are being filled, but there is more of an equilibrium in supply demand.
At this stage, no significant new entrants in the P&C reinsurance space, so the outlook is more of the same with a stable perspective in the P&C market. And my sense is that the same is true at this stage for the outlook for 2025. But Sven, maybe you have a couple more comments on the market.
Yeah, very, very little to add, Jean-Jacques. I mean, we are still not seeing new capital entering the market, with maybe the exception of the cat bond space. So the increase in capacity we are observing in the market is coming from net retained earnings or collateral that becomes untrapped, so from the existing market players. All the macro drivers are still there, so we have climate change, geopolitical uncertainty, and still and above the long-term average inflationary environment. So that would imply that the existing market players will continue to look for similar levels of profitability compared to where we are today from a pricing point of view. And then, of course, a lot will depend on what 2024 will produce as far as losses go. I would expect that the market will continue to react to significant loss development wherever it may arise.
Yeah. Thank you very much.
Thank you.
The next question comes from Jochen Schmitt, from Metzler. Please go ahead.
Thank you very much. Good morning. Just one question on slide 3, on the solvency ratio. You state a figure of more than 200% as your financial ambition, and I think this target has shown up for the first time in a quarterly presentation, if I'm right. So my question is, is this target from today's perspective, rather the bottom of the solvency position which you aim to have? Because you are currently comfortable, comfortably above the target, so therefore, maybe you could just clarify. Thank you.
Jochen, it's Clemens. Happy to clarify that. It's really a long-term target. I wasn't actually aware that it shows up for the first time in the quarterly slides, but it's our full year target. It's actually a threshold. The 200% is a threshold, and we have a limit of 180%, and historically, we've been comfortably above this, and those numbers have been in place for quite some years now as our limit and threshold.
So nothing has changed about your capital strategy?
No.
Thank you very much.
Not at all.
Thank you.
The next question comes from Ivan Bokhmat from Barclays. Please go ahead.
Hi, good afternoon. Thank you very much. I have a few follow-ups. Maybe the first one, just wanted to ask about the net CSM growth and P&C Re. I mean, the 4% growth is great, risk-adjusted. I'm actually also looking at what the rest of 2023 generated. There was almost EUR 900 million of net new business CSM. I was just wondering if we—when we think about the rest of this year, given the competition has picked up a little bit, maybe the-
the pipeline for reinsurance structured business is a little bit different. How you think about, that, that new business CSM in the rest of 2024? Maybe any color is helpful there. A second question. I mean, in the light of the expected very active hurricane season, I was just wondering if you could provide some more color on how, your, your severity retro tower looks like. I mean, I'm going back to Hurricane Ian, when you've booked the gross loss of, I think, EUR 1.26 billion, and net was under EUR 400 million . I mean, in the case of a large severity event, should we expect the same proportions? And maybe the final question, just very, very small. I'm just curious.
In the structured reinsurance, is there any IFRS 17 impact, any specific business that you're writing that's related to this new accounting framework? Or it's really those strong results that you've booked, is more just the ILS? Thanks.
Yeah, happy to take those. Yeah, on IFRS 17 and the structured reinsurance, we of course see a significant difference between the revenue and when we still reported about premium under IFRS 4. Quite a high proportion of that business is surplus relief, quota share structures with long sliding scales, and therefore also high commission levels. So if you deduct the commission from the premium levels, you have a considerably lower revenue compared to the premium, which is making the combined ratio be significantly lower compared to the IFRS 4 accounting regime. So that's the most notable observation here. As far as product offering is concerned, it's still a little too early.
Those of us who have to account in IFRS 17, I guess, are gaining their own experience over the last few quarters. This will clearly develop into additional demand for structured solutions, but like we have seen with Solvency II and the introduction of internal models, there is a time lag, because as the practitioners need to just gain more experience and have a better understanding what KPIs exactly they wish to steer. So, that is on the structured side. Yeah, the active hurricane season, indeed, I mean, of course, we are taking that into account when we are looking into the pricing of the business for the midyear renewals.
When it comes to the retrocessional towers, you know that we have various vehicles on the property side, one being an event tower, which is responding at different levels to all events that can happen in all regions. Then in addition, we have the aggregate tower, which is dealing more with the frequency, also the frequency of severity, but is not exposed to any individual loss. But depending on how, for example, a hurricane season may materialize, it may be a sequence of many hurricanes, then this one could come into play as well.
And then last, but not least, of course, we have our K facilities, so the proportional vehicle we have, which is protecting defined peak zones, and obviously North America would be one of those defined peak zones. So in a long-winded way, the answer to your question is yes, we have similar structures, albeit with slightly higher retentions on the event side in place compared to the situation when we first reported about Hurricane Ian at the time. And then last but not least, on the net CSM, the pipeline on that side is still good, also on the structured side.
So from that point of view, as said earlier, we feel comfortable with the premium guidance we have given for the group, but particularly also from the P&C perspective. And you have seen that, when you look at the premium comparison, we gave to you at 1-1, and now for the 1-4 renewals, we have been at around 7, and this will start earning through in later parts of the year.
Yes, Ivan, and really on the absolute number, as you mentioned, 2023, as Sven mentioned, I mean, the growth will of course have an impact on the absolute CSM of new business for the financial year 2024. On a growth basis, we have less retro in the financial year 2024. That will have an impact on the CSM new business net. And again, we will see that coming through over the course of the year. And then, you know, the bit of distortion that we had in Q1 2023 will become visible also over the course of the year 2024. So on the retro side, the distortion that I mentioned earlier on James' question, so that will level out over the course of the year. So, long story short, we do expect the CSM of new business net to be above the 2023 number.
Thank Very much.
The next question comes from Darius Satkauskas from KBW. Please go ahead.
Morning. Just one question, please. So one of your German peers is no longer keeping the discounting benefit in reserves with management suggesting that the reserves are somewhat full, so potentially creating issues with the auditors. Should this tell us anything about Hannover Re's relative reserve strength? As historically, you know, you had the highest questions. And secondly, are you planning to follow your peer, no longer keeping that discounting benefit or not? And what's the rationale for it? Why we still go on with it, if that's no longer the sort of what the industry is doing? Thank you.
Darius, so of course, I can't comment on the peers here, how to deal with it. I mean, there is still room for us without saying anything about the resiliency level. And again, I want to mention also the risk adjustment, which is quite material in our case, as you know, with the EUR 850 million. So there are no, you know, no concerns on that end. It's just that we think it's a temporarily tailwind, and I think it's, we just try to avoid that volatility that comes from interest rate changes. In our case, with the GMM approach, you know, we are fully hedged GMM also on the P&C side. That amount is not too pronounced.
So it's a, it's a high double digit number in the first quarter, and again, we just kept that within our loss picks, and we will do so over the course of the year. We might see, make a decision on that in the fourth quarter. Release some of that, we, we don't know, but that's really a decision that we're going to make late in the year. But that's our course over the, over the year.
Okay, thank you.
We do have a follow-up question from Freya Kong from Bank of America. Please go ahead.
Hi, thanks for taking the follow-up. I'm sorry, I just want to revisit PYD, which is a bit confusing, but your EUR 500 million-EUR 600 million range, even based on historical levels, looks quite low. So your underlying PYD for last year was well over EUR 1 billion, which my understanding at the time was that this was an appropriate annual run rate, which is also consistent with the underlying run rate you've given at Q1. Am I missing something here?
My apologies, if we haven't been too concrete about this. I didn't mean it as a range to EUR 500 million-EUR 600 million. I just meant it as a starting point. I would rather say it's the floor would be around EUR 500 million, and then that can even be a discounted number in the region of EUR 800 million, EUR 900 million, but we just don't know. So I would call a range, and historically, you're perfectly right. On a undiscounted basis, we've also reported EUR 900 million or in excess of EUR 900 million in good years. I just wanted to give you a starting point when we think about prior year development.
Okay, thank you.
So yes, there are no further questions at this time, so I would like to turn the conference back over to Jean-Jacques Henchoz for any closing remarks.
Yeah, thank you very much, and I'll be short because we covered the ground very well. We wanted to show that we're very satisfied with this initial quarterly performance. We have a high underlying quality of the portfolio, very successful renewals, strong pipeline in the transactional space, and an increased level of resilience. And the key message is very much that we're confirming the guidance for the full year and have an increasing confidence level on achieving on or exceeding that guidance. So that's for today, and we look forward to continuing the dialogue with you. Thank you very much.
Ladies and gentlemen, the conference is now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.