Well, thank you very much and good morning everyone. Welcome to this conference call, which will be focusing on our results for the first nine months of 2022. As usual, I'll kick things off before our CFO, Clemens Jungsthöfel, goes over the financials. I will then comment on the outlook for the year and for the Q&A. I'm additionally joined by my board colleagues, Klaus Wilhelm and Sven Althoff. The 2022 financial year has presented significant challenges for the global reinsurance industry. The COVID-19 pandemic and the ongoing war in Ukraine have caused a great deal of suffering for many people. The latter has also resulted in macroeconomic turbulence and geopolitical instability. Inflation in many countries is at levels not seen for decades.
Additionally, particularly when it comes to natural catastrophes, the large loss activity has picked up in the third quarter of the year. All these developments are having a material impact on the insurance and the reinsurance industry. Against this backdrop, the nine-month performance of Hannover Re is satisfying with a group net income of EUR 871 million. The full year profit target of EUR 1.4 billion-EUR 1.5 billion has clearly become more ambitious, but remains achievable. Growth continued to be strong on top of the 13.5% Forex adjusted premium growth. Currency effects pushed the total number to more than 20%. This is mainly driven by the expansion of our P&C portfolio in an improving pricing environment.
The net impact from large losses reached almost EUR 1.5 billion in the first nine months, already exceeding our full year budget. COVID-19 losses of EUR 228 million came on top of this in life and health reinsurance. Despite this large loss burden, we still achieved a return on equity of 11.5% above our minimum hurdle of 900 basis points. This reflects a solid underlying performance, most notably in life and health reinsurance and the risk mitigating measures we have put in place. In particular, the inflation-linked bonds we buy as protection for our P&C liabilities have paid off and pushed our return on investments to 2.9%. Also, our deliberately modest market share in Florida has helped to avoid too much exposure to the largest individual insurance event of 2022, Hurricane Ian.
With a current estimated EUR 276 million net impact for Hannover Rück, we are clearly underweight versus our global market share in P&C reinsurance. Last but not least, our conservative reserving position, for example, for COVID-19 claims in credit and surety, has provided the opportunity to release reserves to offset negative developments in other segments, in particular for large losses from prior years and an increase in COVID-19 related claims in accident and health business in Southeast Asia. The life and health reinsurance EBITDA includes COVID-19 pre-tax losses of EUR 228 million, with an extreme mortality cover providing an offset of almost EUR 100 million. As expected, COVID-19 losses have decreased quarter-over-quarter to a level of EUR 33 million in Q3.
Overall, the underlying profitability of our life and health book was very strong, particularly in longevity and financial solutions. As already mentioned, the investment performance was quite satisfactory, and also the group's capitalization remains strong as reflected in our solvency ratio of 232% at the end of the first nine months of this year. A ratio which is well above our limit and threshold levels. The decrease compared to the end of the previous year is mainly driven by an increase of credit spreads and negative Forex effects, as well as the large loss experience for the current and the prior year. On the other hand, the rise in interest rates had a slightly positive effect on the ratio as expected.
Overall, 2022 has presented a number of challenges, and the results, as well as the confirmation of our guidance, should be seen as a reflection of Hannover Rück's resilience in a volatile environment. The operating cash flow is a reflection of our continued premium growth and favorable investment income. The EUR 3.8 billion in the first nine months are providing a robust basis for the growth in assets under management. With the support of a stronger U.S. dollar, this was sufficient to more than offset the significantly negative valuation effect from higher interest rates. Overall, assets under management increased to about EUR 58 billion as of September.
As the unrealized gains and losses on our investments are also part of the OCI, the rising interest rates and widening credit spreads had a remarkable impact of EUR 5 billion on the development of shareholders' equity. Apart from this, the development is positive, with the nine-month earnings comfortably covering the dividend payment and the currency effects being positive as well. Altogether, shareholders' equity decreased by around 30% compared to year-end 2021. From an economic perspective, according to Solvency II, the capitalization of the group remains far more stable. Against the background of our asset and liability matching, this is the more relevant view. On that note, let me hand over to Clemens for the more detailed comments on the performance to date.
Thank you, Jean-Jacques, and good morning, everyone. As Jean-Jacques already mentioned, the strong growth in property and casualty reinsurance continued in the third quarter. The currency-adjusted growth of 18.6% is not only very well diversified across traditional reinsurance and structured solutions business, but also by region and by line of business within our traditional book. The large loss burden in the first nine months of 2022 was almost EUR 1.5 billion, mainly driven by net cat losses and the war in Ukraine. This means that we not only exceeded the nine-month budget for large losses, but the net loss is also above the full-year budget already. On top of this, we recorded negative prior year development for large losses.
As reported already in the second quarter, this does include the Brazil drought with an amount of EUR 130 million and other losses like the Texas winter freeze and the Malaysian floods in 2021. Sorry. A part of the negative development for large losses, I think, can be attributed to a combination of inflation, supply chain issues, and the stronger U.S. dollar. The contribution from our inflation protection in the investment income should be seen as an offset in combination with reserve releases in other lines. As Jean-Jacques also mentioned, we recorded a significantly increased claims frequency in our Accident and Health business in Southeast Asia.
The affected business is part of the overall personal lines business we support in the region, with the negative development being driven by a higher number of smaller payments for sick pay or hospital daily benefits. The losses are, in part, the result of a combination of local regulatory changes affecting coverage under the original policies and high COVID-19 case numbers due to the Omicron variant. In 2022, claims notifications from clients accelerated sharply in the third quarter. Going forward, those treaties are in run-off, and therefore, further developments should be manageable. As an offsetting factor, our conservative reserving for potential COVID-19 claims in credit and surety allowed us to release reserves, as the initially expected losses did not materialize. In total, we recorded a net negative impact in the low triple-digit EUR millions for both effects combined.
Considering all the positive and negative developments, it is difficult to give precise indication how the confidence level of our reserves have developed. However, I would assume that we have used part of our buffers, but we will give the full update when we have a better view after the year-end reserving analysis. In any case, we have continued our conservative reserving approach for new business. Altogether, these developments resulted in the combined ratio of 99.2%. Net investment income increased on the back of a very strong ordinary result. This includes a contribution of around EUR 300 million from the inflation-linked bond portfolio we buy to protect our P&C reserves, as you know. The other income and expenses include negative currency effects of EUR 139 million.
You know, the position is offset in the OCI, hence, this is really an accounting mismatch, not an economic position. However, it has added a loss of roughly this EUR 340 million to our EBITDA. Altogether, the EBITDA stands at EUR 887 million . As for large losses, as mentioned, the net impact from large losses reached almost EUR 1.5 billion. You might wonder why the difference between gross loss and net loss, rather small, is rather small this time. The reason is that some of the large losses, in particular, the Hurricane Ian, happened only at the very end of the quarter as we were in the process of closing our books. Therefore, these losses are purely booked as IBNR estimates. Excluding the expected impact from retrocession.
To be clear, the net loss reflects our view on the losses as of today, but the gross number is expected to increase when we start booking the IBNR to individual treaties in Q4. Even more important for the picture on this slide, the previous year's gross loss figures include our ILS activities, and with regard to Hurricane Ian, this is not yet the case. Finally, please keep in mind that the losses in excess of the nine months budget are absorbed in the Q3 P&L. This means we have still budgeted EUR 321 million for the fourth quarter. On the next slide, the largest net cat loss this year is Hurricane Ian at EUR 276 million net for our account.
This early loss estimate is based on an industry loss estimate of between $50 billion and $60 billion, excluding the NFIP loss. As Jean-Jacques mentioned, we have a rather low market share in Florida, which has even decreased over the last years as we have actively diversified our cat book into other regions and perils. Based on early estimates, the gross loss for Hannover, excluding ILS fronting activities, is expected to be slightly below EUR 400 million. Our retrocession program is providing the expected relief to arrive at the net number. Further large events in 2022 were the floods in Australia, the hailstorms in France, both developing negatively versus our first half year reporting.
As explained, the estimated impact from the four losses at the bottom of the slide is based on our own IBNR only, and therefore the gross and net losses are identical at this point in time. Overall, the rather long list shows not only individual large claims, but with 16 natural catastrophes, also the high frequency of events. On the manmade side, we recorded six losses adding up to around EUR 100 million, comparing favorably with our expectation. With regards to the war in Ukraine, the claims notifications from clients have slightly increased, but are still very limited. Therefore, our reserving remains almost entirely based on our own IBNR estimate, which did not change compared to our half year reporting. The next slide shows a mixed picture for the technical profitability of our P&C portfolio by reporting line.
The APAC business is impacted by a number of large losses, including the Australian floods, Malaysian floods in late 2021. Additionally, the negative development in the mentioned Accident and Health business had an impact on the combined ratio in this region. The technical profitability in EMEA and the Americas is solid in light of the significant level of large losses, reflecting a healthy underlying quality of the portfolio. In agriculture, the drought in Brazil is the main driver of the higher combined ratio in this line of business. The other specialty lines in our facultative business show a good underwriting result with credit and surety supported by COVID-19 reserve releases. Let's move to life and health then. Gross premium grew by 1.1% adjusted for currency effects, which mainly stems from our mortality business.
This was partly offset by the discontinuation of a sizable treaty in morbidity business as in Asia. As you know, the business growth in Financial Solutions is generally not fully captured in the top line because a significant portion of the business is booked according to the deposit accounting method. The technical result includes COVID losses of EUR 228 million, and I'm very pleased to see this number declining, not only compared to the previous year, but also quarter-on-quarter within 2022. Our pandemic retro cover compensates part of the losses, which is reflected in our investment income. The total benefit in 2022 now stands at EUR 97 million. In the third quarter, the positive impact was smaller than in previous quarters, and the assumed excess mortality should now be close to the final payout for the cover period 2020 and 2021.
The result of our longevity book continues to be very strong, not driven by one-offs, but rather by smaller positive developments from updated mortality data, which were favorable compared to our conservative initial assumptions. The financial solutions business again delivered a strong and growing contribution to the life and health results. Furthermore, the underlying mortality was favorable in several geographies, and overall, the result was also supported by the stronger US dollar. Just as a reminder, last year's number included a positive one-off of EUR 132 million from the restructuring within our U.S. Mortality portfolio. The investment income from assets under our management improved, mainly driven by the increased ordinary income from fixed income and the valuation effect from the pandemic bond.
This was sufficient to offset the negative impact of rising U.K. government bond yields on the fair value of the UK-embedded derivative. Here, we recorded a negative valuation effect of EUR 144 million for the first nine months. The negative impact of around EUR 50 million is split between the change in fair value of financial instruments and realized losses, as we have partially closed the derivative position in Q3. Other income and expenses are mainly driven by the result of deposit accounting and treaties in Financial Solutions. Additionally, a one-off termination fee of EUR 40 million that we received in Q2 is included in the other income. Overall, while the life and health results includes positive and negative effects, it reflects a really favorable underlying performance.
With regards to the economic view on clients, which will be part of our normal accounting from next year onwards, the development in the first three quarters of this year is favorable. The value of new business is already above our full year target of EUR 250 million. The overall contribution by line of business is diversified, and this is also true of the business written in this third quarter. We have seen particularly good business opportunities in Financial Solutions, and the pipeline there is promising as well. The same is true for our longevity business, and the fact that business opportunities are not limited to our main market in the U.K. is a positive for diversification of the portfolio. By region, the pipeline in the U.S. is currently quite promising, offering business opportunity in all lines of business.
On investments, the development of our investments was pleasing, and this is particularly true for the ordinary return of 3.3%. The main factors for the strong performance are the contribution from inflation-linked bonds at around EUR 300 million. We generally increased reinvestment years in combination with a growing asset base and a very solid returns from our real estate portfolio. Realized gains are mainly the result of the disposal of our listed equity portfolio in Q1 and Q2. Due to the strong increase in interest rates and the resulting decline in asset valuations, realized losses from our fixed income portfolio and the partial realization of the UK-embedded derivative in life and health mitigated the positive gains. The volatile market environment is also visible within our impairments and depreciation.
The increase compared to the previous year being mainly attributable to sovereign bonds from Russia and Ukraine. Depreciation on real estate is around the expected level. As mentioned in my comments on life and health, the change in fair value through P&L includes two rather large individual effects, the U.K.-embedded derivative as a negative, and the pandemic retro as a positive. Apart from that, the sum of derivative valuations was a positive. The overall return on investments of 2.9% compares favorably with our full year expectation of above 2.5%. At the bottom of the slide, you can see the remarkable impact of rising interest rates on asset valuations. That's highlighted in my recent investor day presentation. This is driven by an accounting mismatch, which will be largely resolved with the introduction of IFRS 17 and IFRS 9.
Even now, though, the development is not worrying as we follow strict asset liability duration matching and make sure that our liquidity is in place. This is visible in a much more benign movement in our Solvency II ratio during the current year. On the next slide, looking at the moderate changes in our asset allocation, I'd like to focus on two developments. On the one hand, we have reduced our corporate exposure and increased the liquidity in our portfolio with investments in government bonds and short-term investments. This makes our portfolio more defensive and improves the option to re-enter the credit market in more attractive times. On the other hand, the share of illiquid assets has increased in the portfolio. This is largely valuation driven and not due to actually increasing our positions in the respective asset classes.
The contribution to ordinary investment income is well diversified as usual. The most significant development compared to the previous year is the 35% contribution from government bonds, reflecting the strong contribution from our inflation-linked bond portfolio on the one hand, and rising interest rates on the other hand. Furthermore, the support from real estate and private equity has also helped us in volatile market. To conclude my remarks, the first nine months of 2022 proved to be challenging, and particularly in P&C reinsurance. Furthermore, non-economic effects from interest rate and currency movements had a total negative impact of almost EUR 300 million on the other income in P&C, and the derivative valuation in life and health. But our strong balance sheet and our balance sheet protection has enabled us to manage these challenges. The fact that our profit target remains achievable is a clear positive.
On that note, I'll hand back to you, Jean-Jacques, for the comments on the outlook.
Thank you, very much, Clemens. Before coming to the outlook, let me take a look at our target matrix. In this difficult environment, it is satisfying to see that our key group targets have been achieved. The return on equity is above target and the capitalization is very healthy with a solvency ratio of 232%. In our business groups, there are two factors that make me optimistic for the coming year. Firstly, the strong underlying earnings mentioned by Clemens already, and the decreasing COVID claims leading to the significantly improved results in life and health reinsurance. Secondly, our increased premium base in P&C, which is providing a very solid starting point for the January renewals, where we expect to see further broad-based rate increases. Moving on to the guidance.
We have already stated that we kept it unchanged in the first nine months. Large losses in P&C have been clearly higher than expected. This has been largely compensated by stronger than expected growth, strong investment returns, and a favorable performance in life and health reinsurance. With a group net income of EUR 871 million, as already mentioned, the profit target of EUR 1.4 billion-1.5 billion will not be easily achieved. A normal large loss experience in P&C and the expectation of moderate COVID-19 claims in life and health should provide a very solid basis for Q4 results. On top of this, we expect to see favorable investment returns from our inflation-linked bonds. Furthermore, there is a good likelihood of some one-off gains from our strategic participations.
Apart from this, there are no significant other effects or realized gains on the asset side included in our planning for the fourth quarter. On this basis, we expect to be able to achieve a full-year net income in the lower end of our target range. With regard to the dividends, the EUR 4.5 ordinary dividend paid in May 2022 is the floor for our planned ordinary dividend. The decision on a potential special dividend will, as always, be made early next year based on the actual full-year results, capitalization levels, and our future growth outlook for 2023. Usually at this time of the year, I would talk about the guidance for 2023, but as you all well know, we're going to report numbers under IFRS 17 from next year onwards.
We really want to give you reliable numbers and a transparent understanding of how those numbers are derived. That's why we have decided to provide you with the 2023 guidance at a later point in time, together with our full-year results in March 2023. Irrespective of the major change to the new accounting standards, which will lead to a different presentation of our numbers, I'm quite optimistic for 2023. We continue to see a healthy demand for reinsurance. P&C reinsurance rates will increase in a hardening market, and the higher level of interest rates is supporting our investment returns.
Last but not least, as mentioned already, COVID-19 claims in life and health are expected to play a minor role compared to the last two years, and therefore, the earnings contribution of our life and health business should continue to improve. This concludes my remarks, and we would be happy to answer your questions. Thank you.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. In the interest of time, please limit yourself to two questions only. If you are using speaker equipment, please lift the handset before making a selection. 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 Ashik Musaddi from Morgan Stanley. Please go ahead, sir.
Yeah, thank you, and good morning, Jean-Jacques Henchoz. Good morning, Clemens. Just a couple of questions I have is, first of all, I guess you mentioned that you have released half of the COVID provisions, but is it possible to get some numbers for the discrete third quarter as to what is the net COVID charge or net COVID release in the third quarter? All I'm trying to understand is what is the underlying combined ratio, because if I strip out the excess cat, it was 96.7%. I just want to understand what are the moving parts on the COVID side on this one. So that would be the first question. Second question would be about, is it possible to get some color on your running yield at the moment?
Because some of the Lloyd's companies have reported recently, and they are talking about reinvestment yield to be about 5%. Maybe they are a bit more dollar-based. Any thoughts on the current running yield or reinvestment yield would be very helpful. Thank you.
Thank you, Ashik. Clemens?
Yeah. Thank you. This is Clemens. I will start with the COVID numbers. We had released as per Q2 as reported on the credit and surety business, roughly EUR 80 million-EUR 90 million. I think it was roughly EUR 90 million in the second quarter for credit and surety, and we have released roughly another EUR 80 million in the third quarter. We look at a release of roughly EUR 170 million for those COVID IBNRs. I don't have the exact number to hand what the remaining IBNR is, but it should be roughly in excess of EUR 200 million, which is still sitting there for COVID IBNRs. That's the release bit. On the investment side, running yields, I've just pulled up the numbers here.
I think it's probably worthwhile to look at it on a currency basis. When we start with the U.S. dollar, I've actually excluded our inflation-linked bond because that's a bit of a distortion in the running yield. When I look at our running yield for the U.S. dollar, we are at roughly 2.9% at the moment. Looking at reinvestment yields, and when I say reinvestment yields, I don't mean risk minimal. I mean, if we would have to reinvest our portfolio, we would be looking at roughly 5% reinvestment yield. In the eurozone, due to our more conservative positioning there, we are looking at an ordinary yield at the moment of 1.5% running yield and reinvestment yield of 3.8%.
For pound sterling, we are looking at ordinary yields, running yields of roughly 2% and reinvestment yields of 5%. Overall, again, excluding our inflation-linked bonds, I would say our running yield is somewhere around 2.5%, and the reinvestment yield overall at 4.5%. As mentioned, you know, in the investor's day presentation, is that we have taken a bit more defensive positioning on the credit side, you know, with the duration, with the barbell strategy on the duration side. We have accumulated quite some liquidity to take advantage of the market opportunities that we see on the credit side. Therefore, the running yield, particularly in Euro and also in pound sterling, is a bit lower, as you would have probably expected.
Thank you. That's clear. Just one follow-up on the COVID thing again. I mean, if I look at the slide, it mentions that you have EUR 150 million of net charge in first nine months. If I take the release of EUR 170 million and your net charge is EUR 150 million, does it mean that the gross charge for third quarter is about EUR 320 million, or am I missing something here?
Yes. No, actually, that's perfectly right. That is mainly due to the charge in the mentioned Southeast Asia-Pacific COVID exposure.
Okay.
in the third quarter.
Thank you. Thanks a lot. Very clear.
The next question comes from Iain Pearce from Credit Suisse. Please go ahead.
Hi. Morning. Thanks for taking my questions. The first one was just on the gross to net booking. Obviously, you're expecting the gross number to move up, but is there any prospect that as you start booking these IBNRs against accounts, the net number comes down at all, particularly thinking those losses at the back end of Q3, but also if there's anything on Russia, Ukraine that we should still be thinking about? Then just on the maintenance of the profit guidance for the full year, just thinking about the walk there. The best way to think of this sort of EUR 350 million normalized run rate, EUR 100 million from inflation-linked bonds, and then the rest from the one-offs on the transactions in the life and health business?
Yeah. I think for the guidance, Ian, that's quite accurate, actually. That we do expect a bit higher contribution from our inflation-linked bonds in the fourth quarter. You have the FX effects, particularly on the life and health business, due to our strategic participations. I'm not able to exactly quantify that, but that has led to the fact that we do believe that the fourth quarter is in excess of the expected EUR 350 million that you mentioned.
Good morning. This is Sven. As regards gross to net, on the natural catastrophes, you should expect that the net numbers will stay stable. We don't have the expectation that they will go downwards, as we are going to book the gross numbers treaty specifically in the fourth quarter. Clemens already mentioned that we expect our nat loss on the gross side for own accounts to be roughly EUR 400 million. But you are, of course, aware that we have the ILS activities, so the spreads between gross and net on particularly nat cat will be more significant than the EUR 400 million versus EUR 276 million.
We are in the midst of calculating this bottom up, so I don't have any numbers for you yet on the ILS side.
Perfect. Thank you.
The next question comes from Will Hardcastle from UBS. Please go ahead.
See, going forward, how should we think about the trade-off that we should expect Hannover to be looking at between what will likely be more expensive retro protection year on year, but you've got low PMLs already relative to peers. Should we be seeing, I guess, higher top line in excess of price, or would we be expecting to see the growth come from higher retention? Trying to understand what the play is here, exposure or just a pricing opportunity. Secondly, the Q3 premiums took me by surprise. I shouldn't be surprised, I guess, because they keep beating. Also the net earned premium growth was a long way ahead of me, and the consensus. Is there any one-off impact here?
Is there reinstatement premiums perhaps influencing it that we should be stripping out, or is that a fairly clean number? Thanks.
Let me start with your second question. As far as I'm aware, it should be a fairly clean number. Of course, the euro-US dollar development led to particularly strong growth during the course of the year and the third quarter in particular. That, for me, is the main driver of why the standalone quarter premium is at this level. As regards to your first question, we are looking to renew broadly similar retro coverages compared to what we have purchased in 2022. Those will of course be challenged from both pricing and from a structural point of view. On the other hand, we do expect the price increases ahead of us to not only happen on the property cat side, but across products, across regions.
The additional spend we will have to meet on the retrocessional side will be more than outstripped by the additional pricing we will be able to achieve across all regions, all product lines. We should be in a positive position that growth is coming from rate and not from additional exposure or by us buying less retrocessional coverages.
Okay, thanks. Just as a quick follow-up on that. Trying to sort of understand roughly how much is spent on retro each year. It looks to be somewhere, and I'm not gonna pin you down to a number, but looks to be somewhere between EUR 300 million and EUR 400 million. Is that broadly a roughly accurate range?
Well, it's in that range. It's slightly lower than that when you think about our non-proportional coverages across property, aviation and marine, which are the main areas where we are buying. Of course, the overall number would be higher than that due to our proportional cession on cat.
Brilliant. Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, you may press star followed by one. The next question comes from Faizan Lakhani from HSBC. Please go ahead.
Oh, yeah. Morning, everyone. Two questions on my side. The first one would be on the Accident and Health losses coming from Southeast Asia. To be fair, this is pretty new to me, and I don't remember you talking much about it in previous quarters. Suddenly, losses seems to accumulate to a pretty significant amount on a year-to-date basis in Q3. Maybe you could dig a bit more on what is driving this, why now, and you know, where we stand in terms of losses, and if we should expect continued negative effect in the upcoming quarter. The second question would be related to the inflationary environment impact. We've seen one of your main competitor last week reporting specific inflation IBNR reserves.
I guess that you are exposed to almost the same trends, technically, but you may have chosen to treat it differently in your account. Maybe also you could shed some light on how much, you know, inflationary assumptions may have changed compared to the one you used to price the business or to write the business last year, for example. Thank you.
Yeah, let me start with your Accident and Health question, and Clemens Jungsthöfel will respond on the inflation question. To give you some context, over the last almost 10 years, we have started to develop personal lines business in a number of countries in Asia through product and data analytics partnerships with our ceding companies. Part of roughly EUR 3 billion of APAC premium, which we are writing today, roughly EUR 400 million of that business is coming from the personal lines partnerships we have developed with ceding companies. We continued with those partnerships.
We were not able, due to local regulation, to exclude coverage for COVID-19. The reason why we have not spoken about that previously, other than in the context when we talked about our APAC initiative overall, was the fact that, particularly in Taiwan, we have a change in local regulation, which redefined home quarantine as hospitalization, which was the trigger under the Accident and Health policies. Because of this change in regulation, the number of cases that were actually benefiting from the coverage provided was significantly increasing only from the second quarter, but very significantly in the third quarter of this year. The development has not been going on for many quarters.
It's the increase is really a recent increase, and that's why we have decided to put up a robust reserving position and partly counterbalance that with us releasing the already mentioned credit and surety reserves. When it comes to the question of what to expect for the remainder of the year, we have canceled those contracts when we learned about the change in regulations. That was already in the beginning of the second quarter that we did that. Those contracts are in run off for quite some time now, and the still active policies have significantly reduced, which means that we cannot say that there will be no further development in the fourth quarter. We feel that we have now reserved for the bulk of what we have to expect.
As Clemens said, if need be, we would still have EUR 200 million of IBNR on the COVID losses overall, to eventually counterbalance some further deterioration, if required. With that, Clemens.
Yeah. Thomas, on the topic of inflation, probably just broadly, where do we see inflation? I think it becomes very obvious in our large loss development in prior year developments, which we referred to, for example, you know, the floods that we mentioned, but also even the Texas winter freeze. There we see short-term inflation really biting into those results. I would see at least the inflation, the contribution from our hedging from the inflation-linked bonds as mitigating those effects. When it comes to reserving, I think that's your main point, Thomas, I think in general, our reserving position, as you know, is very conservative, even under IFRS. We have substantial buffers for prudency in our reserving.
When it comes to inflation trends, we do not see actual inflation trends in our long-term business yet. However, I would expect inflation creeping also into those numbers. We have not based our reserving historically in these lines only on observed inflation trends in the past. We have always incorporated specific factors into our assumptions. For example, social inflation, for example, additional loadings for inflation, or other adverse development. When I look at any impact from inflation in our reserving, I would say before inflation bites into our reserves or into our explicit or implicit redundancies, I think we will see that in the reserving study that we are starting to prepare now, which we will share with you then, next year.
However, I would not expect any reserve charge for 2022 due to inflation.
Okay. Thanks, Clemens. Thank you.
The next question comes from Andrew Ritchie from Autonomous. Please go ahead.
Oh, hi there. One quick one. When will we expect to get retro recoveries on the Russia, Ukraine losses? Clearly, gross equals net still at this point. I can't remember what the timetable would be. At what point you would start to recover retro, because I think there is a fair amount of retro coverage for that account. Second question. I'm sorry to go back to the Taiwanese COVID issue. I guess I'm trying to set it in context. You've had quite aggressive growth targets in Taiwan, and I'm just concerned. This product was a very recent innovation, I think, 2020 from the industry. So I'm surprised you weren't able to think ahead a bit more, given some of the problems that have emerged and some of the weaknesses in wording.
Was there something unique about the relationships you have with cedents in Asia that allows them to be fairly open with product development? I mean, is there something about the ability to control what you are providing cover for in those markets that's different? I just want some reassurance 'cause again, it does look like you have an unusually high market share, at least of the industry losses that have emerged or been talked about so far. Thanks.
Yeah. Starting with your first question, Andrew. We will give you the details on BostonNet also in respect of Ukraine when we do the Q4 reporting. As part of the year-end book closing, we will of course distribute those losses into individual treaties rather than IBNR bookings. Once we do that, the retrocessional impact will become much clearer also in the reporting to you. As regards to your question on Taiwan, the main driver for the development in the third quarter is really the regulatory change. It's not the weakness of the policy wording as such. It's the fact that the regulator just overruled the terms and conditions of the policy. You are right, we didn't expect that to happen.
Of course, if you are providing a product like this and you are prepared to cover COVID, one of the very significant parts in your underwriting is the total hospital capacity in a given country. If all of a sudden, this number is artificially increased by deeming being ill at home also being equal to being in hospital, that has certainly changed the dynamics of the product we were providing.
Is the nature of the arrangements with cedent different? Is there any more flexibility they have? 'Cause I know the rules change, but the policy, the product itself is not very old. The thing was only launched in 2020.
No, it has nothing to do with that we are eager to write more Asian business. I mean, also the Asian business has to go through the same exercise. As you know, we have a system of distributing our return on capital requirement across regions, across product lines. The same also holds true for the Asian business and also the personal alliance business here in particular. As I mentioned in the previous questions, we have over almost 10 years developed those partnerships. The historic performance of our Asian personal alliance business has been very satisfying. Combined ratios which were well above our profitability hurdles for the region.
From that point of view, this development here is very much an outlier in our experience with the business, in general, also in that region. No particular flexibility we are showing.
Okay. Thank you.
The next question comes from Derald Goh from RBC. Please go ahead.
Hi. Morning, everyone. Two questions, please. I apologize if I missed this in the opening remarks, if I joined in a bit late. So the first one is just on your run-off development at a nine-month stage. Is it still a net positive accounting for all the negative developments and large losses? And can you say if there's anything in aviation given that there's a specific update on a specific aviation business? Second one is just in the life and health longevity piece. I think you mentioned there was further assumption updates in Q3. Can you say until which year have you updated your assumptions for? Is it 2019? Is it mid-2020, et cetera? And also, can you give the magnitude of the variance in actual versus expected? Thank you.
I can start with the life part. I guess there's a misunderstanding. There are no assumption updates. What we are doing is for all the business we have, we have provisions for adverse deviations. All these provisions add up to the reserve we hold. As soon as we get updates from our portfolio information, we check whether the people are still alive and get a pension or not. Only the people who have died definitely don't need provisions for adverse deviations in our reserving. These reserves have been released.
This is the additional one-off or regular one-offs that you see in our accounting. We have not changed the underlying mortality assumptions at all. I hope that answers your question.
Yep, yep. That's very clear. Thanks. Can you say just so it's really a true up of actual versus expected, right?
I don't have these numbers. We have a very conservative reserving or had a very conservative reserving for the last 10 years, 15 years. What you see in longevity is on day one, you basically can't make any losses because you know exactly what is the portfolio, and the expected premium you get is higher than the claims on day one. The portfolio develops, and after 50 years, you also know that you can't make any further losses because everybody is dead and the reserve is zero. In between, after 15 years is the highest risk, depending on whether you got the mortality right or not. We have only shown about 2% profits in the early years, although we priced for 4% or 5% profits.
Now after 10 years, 15 years, we see that the profits are significantly higher than what we have shown in the last 10 years. This automatically comes out. It's not an assumption change, as I said. The run rate for the year is probably in the mid-double-digits, which has been positively impacted a couple of quarters in the last two years, and I would expect that to continue. You will see probably mid- to high double-digit profit numbers going forward for the next couple of years.
Yeah. Thanks, Klaus.
Would you mind, repeating your first question on the run-off results? I'm not sure if I entirely understood the question.
Yeah, sure. Just at the nine-month stage, can you say whether your run-off is still a net positive? Because I think you commented at the first half that it was still a net positive, but obviously Q3 you had some additional adverse developments from Texas and things like that. I also don't know whether, you know, there's an aviation piece that you need to consider for.
Yeah. No, I will let Sven answer the aviation bit. On the run-off results, yes, it is still a positive number, broadly in line with the number that we saw last year, at the end of the third quarter. However, as you mentioned, there are some positives and negatives in there. The negative effects are, in fact, the run-offs, so the prior years' reserve developments on those large losses. We have the Brazilian drought in there. We have the Malaysian floods from late December on in the run-off results. On the other hand, we have the reserve releases of roughly EUR 170 million for the first nine months in credit and surety from COVID. We have also taken advantage of some reserve releases that we would expect in the fourth quarter.
We've taken some reserve releases already in the third quarter to compensate for those developments. Having said that, we have kept our reserving, our prudent reserving approach for our new business. How this run-off result, this positive run-off result, will impact our reserve redundancy, our resilience, we will then see when we do our reserving study at year-end.
For aviation, there was no particular development in Q3, so we kept our reserving position on the Ukraine side unchanged. For the first nine months overall, the run-off result from aviation was positive. I would have nothing particular to report on aviation for this quarter.
Thanks, Klaus.
The next question comes from Vikram Gandhi from Société Générale. Please go ahead.
Hello, morning. Just a quick one from me. Can you update us on where the group is with respect to the BI reserves on COVID, given the favorable development in Australia, and also what your latest views are on when and where we could see things getting settled in the UK with respect to BI?
Yeah. Thank you, Vik. When it comes to the business interruption reserving under COVID, we have not changed our reserving position during Q3. We of course have followed the mostly positive court decisions, which happened both in Australia and in the U.K. We have not baked that into our numbers in Q3 yet. Once we do, and that's an exercise we will look into in Q4, we will of course do that and take that into account.
The net impact should not be very significant due to us being inside our retrocessional coverages. We can expect our gross position to change due to this positively, but the net position will not significantly change because of it. When it comes to the second part of your question, I of course have no idea myself when the BI situation in the UK is finally decided. This is still partly in the court system, and it's not possible for us to predict the timeline here.
Okay. Very helpful. Thank you.
The next question comes from Kamran Hossain from JP Morgan. Please go ahead.
Hi. Morning. Two questions from me. The first one is around capital. Can you talk about the headroom that you have on the binding constraint in capital? Clearly not solvency tiers as for most of the rest of the sector. How that headroom might interplay with kind of any special and the market opportunity ahead. The second question is on guidance. I know I'm probably gonna be a bit impatient here and try and get something out of you before next year. What's clearly very apparent from this quarter is that you can absorb losses. You now had one of the biggest insured losses of all time. You had more than EUR 300 million gross from kind of Asian Accident and Health, yet you're still kind of confirming guidance for this year.
If we try and strip out the one-offs, you know, there are things offsetting it the other way, such as inflation linkers. Do you expect earnings next year to gradually increase or maybe take a big, kind of a step up, like they have done at certain periods in the past? Thank you.
The first one was.
Binding constraint. Yeah.
On the binding constraints. Yeah, on the capital. Let's start with the capital, Kamran. I think you've seen our solvency position is still very strong. As you know, we have, of course, other capital regimes from rating agencies, et cetera. Those capital regimes are certainly impacted by the economic development. Hence, it's not, you know, as you know, not a full reflection of the economics when it comes to asset liability management, et cetera, which is not fully reflected in rating models. The capital constraints are a bit higher on the rating capital side. However, I think we have all instruments and all tools to hand, be it hybrid capital, so there's still room for a potential release of hybrid capital. There is still our retrocession, et cetera.
We do have tools to hand that will give us all the opportunities to both participate in the attractive market opportunities on the P&C and life and health side. Having said that, we are clearly prepared, given the market environment, to be very mindful of our portfolio and portfolio pruning at the same time. We do not see any limitations there. Also, when it comes to special dividends, you know that we always consider our overall capital position and decide on that. At the moment, we don't see any significant binding constraints there to potentially increase our capital base further.
As for the outlook 2023, again, yes, as Jean-Jacques mentioned, you know, we really want to have a very robust view on 2022 comparables for IFRS 17, IFRS 9. Therefore, I think when we look into 2023, we have a much more robust view earlier in the year. However, if I would have to make a comment, I would say there are probably two impacts here. One being, that of course, we have grown our portfolio both in P&C and life and health further over the last one or two years. Therefore, of course, we do expect our bottom line to increase, and then we might see an impact from the change in accounting, particularly when we look at the life and health business.
As you know, there will be the unlocking of assumptions, et cetera. There will also be an accounting effect, but both of these effects will not be substantial. I would not expect a significant increase in net income into 2023. Again, we will quantify those numbers early in 2023 there.
Okay. Thank you.
The next question comes from Vinit Malhotra from Mediobanca. Please go ahead.
Yes, good morning. Thank you. My first question is just a little bit of understanding on the credit and surety side of this, particularly COVID. I remember the EUR 950 million had about EUR 250 million of credit reserves, and now you've taken about EUR 170 million. Now, also, you know, how comfortable are you with this remaining number? The reason I ask is because in 3Q you have noticed, and in the man-made list, there is also a credit one-off of EUR 16 million. So I'm just curious, I mean, are you happy keeping the number you have given that there's potentially these large losses in credit and might not be linked to COVID, but just wanted to understand that.
Second question is on retro and, Sven, thank you for your comments earlier in the call. The one thing I would ask is that given that there was a lot of attention on, say, close to 30% retro cut in 2022, have you done the exercise to say, okay, if we had not done this retro cut, where would we be in the nine-month stage? You know, the EUR 1.5 billion versus the EUR 1.1 billion budget. Would it have looked very different? This is possibly maybe not easy to answer, but even a gut feel would be very, very helpful. Last very minor question is that the Solvency II in 3Q has a growth assumption for the next year.
Could you comment on how much of Solvency II impact, let's say, even roughly, for the growth next year? Thank you.
Yeah, I will take the first two questions, Vinit. On the credit and surety side, we are very comfortable with the numbers we are showing. I mean, the reason why we had the additional reserving related to COVID on the credit and surety side was the fact that we were expecting an increased level of insolvencies due to COVID. That never happened, as you know. I mean, due to the various programs launched by government, the level of insolvencies have actually been very low indeed. The tail of the credit portfolio is such that, when it comes to the relevant underwriting calls, those portfolios are simply more or less run off. There is no remaining exposure left, so to say.
If anything, we already had pressures from our auditors that those IBNR positions were no longer justifiable. The general performance of the portfolio has been very positive. I mean, all the major trade credit insurers are reporting very favorable loss development and also very stringent risk management at the same time as we all expect challenging economic times ahead of us. What we have to expect that the level of insolvencies goes up. This is well taken into account both in our pricing and reserving view of the business. From that point of view, we are not concerned.
The one major loss we are reporting in the first nine months of the year is actually coming more from the contract frustration political risk side of things rather than the credit side. It's truly a one-off. It's not of a systemic nature. It's one project which didn't work according to plan. I would say there is nothing unusual about having risk losses like that from time to time. It's certainly not the case that we are starting to develop a frequency of this, at least this is not what we are seeing in our portfolio. On the retrocessional question, we have not done the exercise for the nine-month stage on an as-if basis.
From a gut feeling, I can tell you that the impact of the amended retrocession structure we have in 2022 versus 2021 is not very significant. I mean, you have seen that the list of particularly natural catastrophe losses is rather long this year. It has been more a question of frequency rather than severity. From that point of view, the only loss which we have experienced right now, where the net position would have been slightly different from an excess of loss point of view, is potentially Hurricane Ian, where the lower attachment point on our whole account event protection last year would have meant that we would potentially attach earlier on the inside, but that in fact would not have been very material.
The overall general impact we have is the lower cession rate we have on cat. You know that we ceded roughly in the mid-30s% in 2021, and now we are ceding in the high 20s% on the relevant portfolios. That of course can be translated one-to-one into higher net positions. At the same time, we of course also proportionally kept more premium by not ceding in the mid-30s%, but only in the high 20s%.
From a profitability point of view, given that we are still within our annual natural cat budget, at least, even though we are over and above our major loss budget overall, including man-made would tell me from a gut feeling that from a profitability point of view, the reduced cession on K would not have changed the picture.
Right. Thank you, Sven.
On Solvency II, the numbers are hot off the press.
Yeah.
Therefore, I do not have an exact number how much is attributable to new business in P&C and life and health. It's clear that both own funds and SCR are impacted by the new business contribution also already in Q3. Although there is a bulk of the portion will be coming into Q4. Eligible own funds increase naturally at a lower pace than the Solvency II capital requirements. I think the main drivers of the solvency rate change when you look at year-end to now is really the increased level of credit spreads, then the U.S. dollar. And then, of course, also our large loss burden for the first nine months, which is then offset partly by the new business.
I hope that helps a bit to get a context around the development of the solvency duration.
Mr. Gandhi, your line is live.
Hello. Can you hear me?
Yep. Yes.
Okay, sorry about this. I lost a bit of what was being relayed. Sorry about this. One final quick question. Can you shed some light around a topic which is, you know, we had some news flow a few days ago that Hannover and Munich Re are setting up a JV on some alternative investments. Can you kind of confirm that and what and maybe give us a bit more detail into what the strategic thinking is there, and then, you know, if there is any intention to kind of move your private equity investments, which are held at the moment into that JV. That's really all.
Yes. It's, I mean, it's sort of all lined up, the joint venture, but there are still some, you know, regulatory hurdles, et cetera, to take. Therefore it's all in the planning for 2022, for the fourth quarter. However, again, this is really depending on some approvals that are still outstanding. The intent is really to combine, particularly, as you mentioned, our private equity portfolios. As you know, that is historically a growing portfolio in our books. It's quite diversified across regions, currencies and industries, et cetera. However, of course, as we were looking into 2023 and going forward, also with respect to the new accounting standard, IFRS 9, which forces us to evaluate those investments through the P&L.
We've tried to find ways to reduce volatility, future volatilities in valuation of those portfolios. Therefore we thought about further increasing the diversification of a combined portfolio together with Munich Re. That's the main intent going forward. It's really only about a small portion of our investment. It's really solely private equity for Hannover Rück. Of course, there are further advantages coming along with it. For example, you know, further expand the access to top-tier funds to obtain more significant co-investment rights or larger allocation in individual private equity funds. Also probably to achieve better terms and conditions on new investments.
There are no further questions at this time, and I hand back to Jean-Jacques Henchoz for closing comments.
Yeah. Thank you very much for the active participation. I think we covered the ground very well. We wanted to highlight the resilience of our results to date in a quite challenging environment. As we all know, large losses have affected our P&C activities, but we could benefit from the life and health performance and were supported by asset management results, particularly due to the inflation linkers, which we talked about. Guidance maintained, as we said, at the lower end of the range for net income. The outlook is very positive. I think we'll be supported by a broad-based hard market across the globe in P&C, and we'll also benefit from an increase in asset management revenues due to the interest rate environment.
From that point of view, we look ahead at 2023 with a very positive view. Look forward in any case to look back at 2022 next time we meet in this setup. With that, thank you very much indeed, and have a good day.