Good morning and a warm welcome to our Investors' Day. I'm very proud to say that this is the 28th edition of this event since our IPO in 1994. I'd like to say thank you to all of you for participating here in person in Frankfurt. Also, that so many have already logged in to follow the event via the webcast. A big thank you right at the beginning also to my team, who did a very good job to find a nice location here. Also, yesterday evening for the dinner at the Alte Oper. Also, for doing a very good job in preparing the content for today, which I think is interesting and compelling, but you will judge that. A big thank you to the entire Executive Board because all of them are here today, which is very good. I appreciate that very much.
I can tell you some of them have traveled a very long way back home from a business trip to be here on time. What should you expect at the Investors' Day today? In general, as you have recognized, we have not released anything this morning apart from the presentations, so no big news. Some of the news we have already spoiled at the beginning of this week: the payout change or the change in the dividend. From that perspective, we are not providing a new guidance or new financial targets or a new strategy. That has to wait till later times. The strategy for the next cycle, which begins for the year 2027, will be provided at next year's Investors' Day in November. The guidance for 2026 comes as usual with the numbers for Q3.
This Investors' Day is all about giving you reassurance that we are on the right track, that we deliver on what we have promised. We have a business model that is robust, that is pure, and that is lean and growing at the same time. We are still striving to achieve higher return on equities with lower volatility. As I said, today it's all about confirmation that we are on track. In this respect, our CEO, Clemens , will give us his view on the business model and how we can lever and monetize our strength and our positioning in the market. Christian Hermelingmeier, our CFO, will show us that our investments have shown a very strong track record when it comes to ROI and when it comes to low volatility of those investment returns.
Second, he will also explain that the earnings growth is supported by the growth of our investments and also by an increasing book yield. Last but not least, he will also talk about the P&L volatility, which comes from currency, and how we will decrease that over the next time. In order to spoil further content, Sven Althoff will talk about the NatCat business and showcase how we will grow that business in this current market environment and how the client relationships will support the top and the bottom line growth. Claude will give us his insights into the life and health reinsurance business and how to read the IFRS and KPIs, in particular that the service result demonstrates a high resiliency and a strength. Of course, he will also talk about the CSM and how that will feed into future earnings growth.
We have scheduled a number of Q&A sessions, to be precise, three. With that, you have plenty of opportunities to ask questions. As I said earlier, it's really important to increase the understanding of our business and the future expectations. That's all about what we are doing today and to show you or give you more insights in what we are doing. With that, I hand over to you, Clemens, for your presentation.
Thank you, Karl. Good morning, everyone, and a very warm welcome also from my side. It's a real pleasure to welcome you here in our Investors' Day 2025. Thank you to all of those who came to Frankfurt to join us here in person this morning, and thank you to everyone who's dialing in via the webcast. Thank you for your interest in Hannover Re. I just want to add on what Karl said. Karl, thank you to you and your team for all the preparation and all the hard work that went into this Investors' Day. As you know, it's not the first time that I stand here in front of you, but it's the first time that I stand here in front of you as CEO of Hannover Re, which still feels like a huge privilege to me and which still feels exciting.
Someone said this morning, "Oh, Clemens, you look quite relaxed." Rest assured, this is only good acting if I look very relaxed. Jokes aside, transitions in leadership, and particularly when it comes to the CEO roles, always raise the question, is there a change in strategy? Is there a change of direction? Will priorities probably shift with the new CEO? Let me try to answer that question this way. Over the last couple of months, as I transitioned into this new role, I've really diligently tried to take every opportunity that I could get to listen to and to engage with our clients, with our brokers, with our investors, with many of you, and with a lot of employees across the globe. Those conversations over the last couple of months have just really, I would say, reinforced what I've always believed in.
Actually, long before I joined Hannover Re, the group in 2020, Hannover Re is somewhat different. That differentiation is our strength, and I truly believe it sets us apart from our peers. We empower our people. We are solution-oriented, pragmatic, and fast. We are reliable, we are consistent, and above all, deeply committed to long-term partnership with our clients. That is actually not me observing or saying. This is what I've heard consistently in those conversations over the last couple of months. I know this, you know, when we talk about these attributes, it might sound a bit fluffy here and there, but I can assure you these intangible assets become very tangible when you sit in front of our clients, of our brokers, or when you just see what we've managed, what kind of book we've built on the back of these attributes over the last couple of years.
As I see it, these hallmarks are deeply written into our DNA, and they will remain key to our sustained success and for, as Karl said, for further profitable growth in the future. We are going to pursue this growth from a position of strength. As Karl mentioned, we are just sort of entered, let's say, the second half of our three-year strategy cycle. I think it's fair to say we've delivered on all our financial ambitions for 2024, and we are well on track to deliver on all our targets for the financial year 2025. What is pleasing is that this performance is built on all profit engines: P&C, life and health, and investments. These strong results across all profit engines have also allowed to substantially increase the resilience in our balance sheet.
This is not only in our P&C reserves, this is also in life and health and in other areas of the balance sheet. This P&C resiliency we will always share with you by way of disclosing the Willis Towers Watson report. However, delivering on our promises is not just about hitting financial targets. It's about delivering value in a consistent and in a reliable way. Higher ROE, as Karl said, with lower volatility, reliable earnings growth across the cycle, and a lean operating model that supports scalable growth going forward. This is the profile an investor gets when investing in Hannover Re. Whilst we've continuously increased our net income target, as you can see here, we've missed the guidance only in two out of 10 years. Admittedly, 2017, when I look at the slide, just slightly. Of course, COVID weighing heavily on the year 2020.
Therefore, I believe it's fair to say that we've truly delivered on our promise in the past, and even more important, we've built a highly diversified book of business that performs across the cycle. We've built a rock-solid balance sheet that ensures earnings growth even in more softer market periods. We've done this by staying true to our strength and at the same time, making the right adjustments here and there where needed. Let's quickly recap what has brought us here. First, clearly our culture, which people or people from the outside would describe as being entrepreneurial, with a spirit of empowerment and ownership, accountability, but also kindness. Our people feel really that they can contribute to this success meaningfully. There's also a genuine sense of curiosity and enthusiasm when it comes to the business. That is really true across the whole value chain.
We always joke, and I can tell you, every time in the Executive Board, and we go through the agenda and we talk about the business, you can see the temperature rising in the Executive Boardroom because everyone gets so excited when it comes to the business. I believe with this culture, we manage to create, let's say, a sense of purpose, a sense of belonging, which I think nowadays is very important to attract and to retain talent. Even more important, it forms the basis for trusted and long-lasting and deep relationships with our clients. Our pure-play reinsurance model, as you know, is a strategic choice. It allows us to stay focused. It avoids conflicts of interest because we do not compete with our clients; on the contrary, we actually help them to grow their business.
I think they really value that clarity, and I do believe this is one of the success factors for our deep and long-standing client relationships. This focus, sometimes referred to as speedboat mentality at Hannover Re, also reduces administrative complexity and overhead. It enables faster decision-making and more agile responses in a, what I would call, rapidly changing environment. Third, we just like to keep things simple. We feel that internally, but also our clients feel that. Simplicity in the sense of organizational setup, simplicity when it comes to our processes, our guidelines, governance, etc. Flat hierarchy with a high level of delegation and the speed of decision-making and the execution certainty is clearly felt by our clients.
I often hear, "It just feels easy to do business with Hannover Re. These success factors have brought us here, and they become even more relevant as we continue to grow and as we look ahead. We do believe that our focus on reinsurance and our lean operating model provide an even bigger competitive advantage in the future, given the breathtaking speed, for example, of technological change. Why is that? We do not have to cope with a fragmented landscape when it comes to our IT, to our processes. We do not have to cope with legacy systems, which are usually very difficult to switch off or to modernize. It takes ages, and you can spend a lot of money on trying to do that.
When I look at our data, when I look at our infrastructure, our IT systems, our ledgers that we've built over the last couple of years, I today look at a fairly harmonized and a fairly homogeneous landscape. For example, we have only one reinsurance administration system for our entire life and health and P&C business. Every single entity, every single branch, every single piece of business, with only tiny exceptions, are on this centralized reinsurance administration system. Adjusting or transforming a landscape from that starting point is so much easier. Having said this, we will be very rigid in further monetizing, as Karl said, this advantage. We will keep very hard on what I would call the fundamentals. That includes even further streamlining our IT landscape, particularly optimizing end-to-end automation, considering in-house solutions.
In the sense of thinking about build before buy, because I think this pure-play reinsurance model, this focus, allows us to think about it because we're not always so strongly dependent on external parties to provide support. I think, first and foremost, very important, enhance and further improve our data. I think this work on the fundamentals, and you cannot do a presentation nowadays without talking about artificial intelligence, which we see, I would say, in the context also of automation. I think this work on these fundamentals is really needed in the first place to take full advantage of our automation initiatives and to take full advantage of the possibilities that come eventually with AI. Of course, we're working a lot on AI and on automation, etc., but I would say we do it in the typical Hannover Re way with purpose and not just to chase trends.
In essence, we are fully committed to even further increase efficiency and scalability. This will not only ensure our cost advantage, we truly believe this has the potential to even further expand our cost advantage if we fully monetize this lean operating model. First and foremost, this will support further growth whilst still not increasing, let's say, organizational complexity. As mentioned earlier, we're very confident that we will be able to continue to grow, which we have been able to demonstrate in the last 10 years, both in terms of our top line growth, but also in terms of our earnings growth. This confidence is not only built on a strong track record in the past, it has its foundations in the strong pillars that I just referred to and that you can see here in the middle of the slide.
The best practical proof point for me is always when I consistently hear from clients, "We just love to do even more business with Hannover Re." With respect to the P&C market, and Sven will talk in detail about it, we consider this still to be an attractive market environment. Our ability to grow our traditional book on a diversified basis remains unchanged. We have increased, as you would have noticed, our risk appetite in NatCat over the last couple of years, and that meets continued strong demand. We should not forget, we talk about the market cycle and the softening of the market, that significant parts of our P&C portfolio are less exposed to the pricing cycle, which you will also have noticed in our renewal reports.
Not to forget, our significantly lower cost ratio will help to maintain profitability in the business, even if margins are more compressed in softer market cycles. Last but not least, our very strong reserves give us confidence in earnings growth. Let's be honest about it, only adding less to our reserves would already have a significant positive impact on our combined ratio. We would even be able to grow our earnings with stable relative buffers. Of course, as you know, drawing on this buffer is a second option, always possible to manage volatility or to manage the cycle. In life and health, we are leveraging our strengths in financial solutions and longevity, trying to expand our regional footprint in those lines of business, developing new solutions to meet evolving regulations. We're also exploring areas to increase the footprint in our traditional business in life and health.
Also, Karl alluded to this, our overall positive experience variance and the change in estimates that you can see in the IFRS regime and in disclosures, they provide very strong confidence in our assumption setting, which I would say is rather on the prudent side as we've proven over the last couple of years. Hence, there is a strong reliability in our ability to produce stable increasing earnings also on the life and health side. The continued value creation is reflected in the CSM growth, which will support future earnings growth, a nd Claude will touch on this in his presentation. Overall, I think it's fair to say that we've been able to create a very reliable and increasing run rate in our life and health business. Of course, investments. Our business is highly cash positive, leading to continued growth in assets and investment income.
We are well positioned to benefit from higher interest rates and selective opportunities. Christian will talk in detail about that. We continue to grow profitability in both business groups, and we have the ability and the willingness to use our reserving approach to support continuous earnings delivery and earnings growth over the cycle. At the beginning, I said we are going to pursue this growth from a position of strength. That is, as you can see here, because we've clearly used the hard market years to further improve our strong ability to absorb and manage volatility. The capitalization has further improved according to all capital models. We've been able to further strengthen our German GAAP balance sheet, which forms the basis for our dividends, as you will know.
This provides also more flexibility, and we will continue to use hybrid capital, of course, as a flexible tool to, let's say, optimize our capital position and our cost of capital. Our strong and improved capital position clearly provides room for further growth, and at the same time, deliver on attractive dividends. Our priorities, to be very clear, remain unchanged, and you should see our release on Sunday on the dividend in that context. First priority remains to have the ability to finance our growth ambitions. We do see continued good opportunities to deploy capital at attractive double-digit ROE, which will result in continued growth of our book value. Second priority is to return excess capital to shareholders. Our commitment to the increasing dividend remains unchanged, but at higher levels, and including the, let's say, de facto transformation of the extraordinary dividend, the special dividend into a regular dividend.
The payout ratio will be increased to a level above the historic average. That's the 55%, round about 55% we were referring to. Why 55%, you could ask? We really wanted to make sure that we can provide a sustainable run rate on the payout ratio. We really took sort of a midterm, long-term view on this, and that in no case, in no instance, we would compromise on being able to finance our growth ambitions. Special dividends are not excluded, but let's say they will be true specials for really extraordinary situations. To sum up, the environment in which we operate at the moment is, and you will all agree to it, evolving.
If we just look at the geopolitical landscape, if we look at the trends, the complexity, climate change, increasing loss trends, only being a few examples, this also clearly means that the need for reinsurance protection and managing uncertainty and volatility will keep growing. It is precisely in these times, in times like these, that resilience, long-term thinking, and a trustful partnership approach with our clients are vital. As you've heard, we're fully 100% committed to our somewhat different approach to the business, including our lean operating model, which we believe sets us apart from our peers. We are a preferred business partner, and I hear this consistently, with our clear focus on pure-play reinsurance, excellent underwriting expertise, fast execution, and a very consistent approach when it comes to our client, which they really highly value.
Our main focus at Hannover Re has always been partnering with our clients, and that has been, if you just look at the source of the growth over the last five to 10 years, that has been the success factor of our growth, expanding, deepened the partnerships with our clients. We will be fully leveraging this advantage, this strong relationship, particularly at this stage of the cycle. Therefore, we do remain confident that we continue to grow our book of business and that we will grow our earnings, again, even in softer market cycles. I think it's fair to say we look at the fortress balance sheet at the moment. I don't think that we've ever had a stronger balance sheet than now. Together with the strong capitalization, this forms a very strong basis for sustainable value creation for our shareholders. With that, I hand over to Christian, Karl.
Let me do the Q&A after.
Indeed, thank you, Clemens, for your presentation. I know you have a number of questions, but please hold back those questions for a second because we will have the next presentation by Christian. Christian is our newest addition on the Board, on the Executive Board, and it feels like he has been here for ages already. He will present about the investments and give an update, and also when it comes to the currency and how we try to reduce volatility also on this line of the P&L. I hand over to you.
Yeah, thank you, Karl. Let me start with an echo of what Karl said because it's now six months that I'm at Hannover Re in this new role, and it feels really like, yeah, I would say not six months, but at least six quarters. You know, that's the heartbeat of the CFO, the quarters. I think this confirms what Clemens just alluded to. That's also this easy onboarding, this feeling at home very fast. This is also part of the somewhat different mindset and culture. Really, the openness to share knowledge, to share experience, to work as a team, finding solutions for certain topics, no matter what department, what structure you're in. It's the mindset, it's the people, and I really feel already at home, and it makes much more fun to work in such an environment. I think this is a perfect fit and match.
It happened also quite a lot over the last six months, so there could be a lot of topics to talk about today, but my focus, as Karl already stated, will be first on our investments and how investments contribute to the overall earnings growth and resilience ambitions we have at Hannover Re. Second, I will elaborate a bit on how we manage currency with that regard, limiting currency risks and how we expand our toolset there further. Let me start and begin with a look back on the profit contribution of the investments to the overall performance of Hannover Re. We saw a similar metric and picture just moments ago for the return on equity that Clemens used as well, and here we have it for the return on investments over the last 10 years. It's a similar picture.
Attractive ROIs at eye level with the best peers, but with a significantly lower volatility, fully contributing to the overall risk return, the superior risk return characteristics of Hannover Re. What is the backbone of these results for investments? Clear strategy, consistent execution of this strategy. You see here the current strategic asset allocation, and it's fairly stable and unchanged for a long time. Clear focus on fixed income, investment-grade fixed income, high quality. It's currently a bit above 85% of the portfolio. This is complemented by a clearly defined risk appetite for yield pickup from alternative investments, talking about real estate, infrastructure, private equity, and a small portion of listed equity. It's not only the relative return attractiveness; it's, of course, also the volume growth. Clemens mentioned that already. There's a strong positive operating cash flow from the reinsurance business and from its growth.
It's also shown here on the slide, and this fueled and fuels the growth of the assets under management. This is one of the main drivers and was one of the main drivers for also in absolute terms increasing investment result. This was over the past five years an increase on average of 5%. As we have the clear ambition to further grow our business, and this will be a key topic of the presentations also from Sven and Claude, we expect also that this trend of growing assets will continue and also foster the overall investment result. Of course, no surprise, and you all are aware of this, it's not just the volume growth feeding the higher investment income, it's also the change in interest rate regime that we witnessed some years ago.
Every new fresh money we invest or every maturing bond that we reinvest lifts our average book yield upwards. Since market yields were higher than our average book yield, you see it here on the upper left, that crossing in 2022, the book yield is converging upwards to the higher level of market yield. This trend is still continuing. Our duration in the book is a bit more than four years, 4.1 for Q2. This means we reinvest approximately 15% of the fixed income book each year. You can expect this trend to continue. We are not there, there's still, and you see the gap between the lines. This trend is still continuing. We expect, assuming the current interest rate environment, that we will see another roughly 10 basis points increase in the average book yield for the next years as a continuing trend.
With an uplift in the average book yield, of course, there's a mirror side, that's the hidden losses on the balance sheet. These started in 2022 with around EUR 4 billion of hidden losses, and you can see here also on the slide on the right below the line, these saw quite substantial reduction already if we look at the figures for 2025. Of course, this trend will also continue, and these hidden losses will go down, reflecting the increase in book yield. Depending on the overall result situation, the profitability of the overall business, we might even accelerate this trend by actively and strategically realizing hidden losses, as we did with the first step in Q2, as you saw, with roughly EUR 60 million of active realizations to get the hidden losses down and the book yield even more increased.
We will assess this quarter by quarter if we have room here to act in this direction. If there is room to act in this direction, of course, the ROI will for the future benefit even by some points more. Let's have a brief look at the alternative part of our portfolio here with the two largest classes we have. That's real estate with around 6% of the portfolio and private equity with around 3%. It's shown here, and you can see that both delivered above average returns to the ordinary investment income, so above their share of the portfolio. Starting here with real estate, it was fairly stable over time. What is the key of our strategy here? That's diversification. You see here some dimensions as example. First, by geography, so the real estate investments are spread and cover more or less every large market.
Of course, there's also the sector diversification. You see it's still dominated by office with a bit shy of half of the portfolio. If we would go back like 10 years, you would see like 80% real estate in office, and you would see a huge bunch in Germany. Step by step over the years, diversification was broadened here, and we saw a sector rotation that shows we adapt to the current market opportunities. This started years ago going from office, for example, into logistics. Next move was to add a bit of energy, and these days, of course, we talk about data centers and things like this. Private equity also sound results, above average of their portfolio share. To be honest, looking for the last years, as you can see these on the slides, this is of course not meeting currently expectations.
We are not back at the pre-COVID level of double-digit ROIs here, but it's still a quite sound result above the average. The expectation for the future is that this will over the years go up again, and we follow a long-term strategy here. This is not an asset class to tactically go in and out and switch forth and back. It's a long-term view we have here, and this delivered and proved quite resilient and delivering attractive returns. First element of the strategy here is of course also broad diversification. You see here the investment styles, and even when buyout is the largest part, and this means buyout means a mid-cap and large-cap buyout. Also within the buyout style, of course, there's a broad diversification of different industries, business models, management teams. This is really broad diversification.
For me, a second really important key element is also the continuous investing, so continuously making new commitments. This is the reason why you see here a well-balanced mix of vintage years. This is the continuous investing, the long-term strategy here, creating all these vintage years with a fairly balanced split. Especially those vintage years that historically were started in downturns of the markets have proven later to be really profitable because the low valuations at these periods, of course, also offer quite attractive entry points for the GPs to add new target companies to their portfolio. I think it's not the time to go back with your commitments. It's the right thing to continuously stay with your commitment rate. Talking about the portfolio companies, just to give you a feeling for the diversification by number of underlying investments, we are invested in roughly 200 PE funds.
Let's take as a, I think, conservative proxy, just 10 portfolio companies each. This means we are talking here about 2,000 separate single management teams, business models, locations. There's really, really broad diversification. The strategy here is not like perfect market timing, finding the perfect GP, finding the perfect sector. That's a broad approach here, and this delivers the attractive and stable returns that pay into the overall characteristics and ambitions of Hannover Re. If we would look at infrastructure, the picture would be quite similar. That's roughly 2% of our portfolio. Above average returns while adding modestly to volatility. Talking a lot about volatility already, that's the point in time to talk about currency management. We all witnessed a kind of roller coaster in the US dollar exchange rate this year. I think we started around 1.10 euro versus dollar. Then it decreased quite substantially.
Actually, it feels like long ago because then we saw the huge uprise, especially after Liberation Day, beginning of April. Since then, or some weeks later, we are now at the level that is also currently in the market. Of course, this has had quite a substantial impact also on our IFRS figures, as you all have seen. Therefore, I talked a bit also about that in our earnings calls. Today, I want to use the opportunity to elaborate a bit more on how we look at currency risks and how we manage and limit volatility. Let me begin with a short view at what does currency mean? What is meaningful for Hannover Re? You can see here shown on the slide, that's the US dollar. There are a couple of other currencies, of course, but these are just tiny portions of the overall portfolio.
The meaningful topic here is to look at the dollar exposure. Starting with the asset side, around 45% of the investments are US dollar denominated. Similar on the liabilities, you see here the reinsurance liabilities with nearly the same numbers, so the LIC and the LRC. When talking about currency risks and currency management, we have a clear priority for how we view at that, and that's the economic view. What is the economic impact of the exchange rate dynamics? We take our internal model for Solvency II as a good proxy for this economic view and measuring and simulating exchange rate changes. Our target is to protect the economic value, and we do simulations and try to steer this and limit this. This sounds reasonable, sounds straightforward, but in practice, this is not that simple. Why? Because it's not just one target.
It's to protect and to limit the risk for the net asset value, obviously, but also for the Solvency ratio. In most of the scenarios we do in the model, the two are moving in opposite directions, so one going down and the other is going up. We have to balance a dual target here and find a good balance of limiting both. Our target is to get both simultaneously in a very limited thin corridor of just a few percentage points up and down. This is what we aim for. Just an example here, on the upper right, if we take a 10% appreciation of the euro, we have a 6% decrease in net asset value. In this scenario, the Solvency ratio would increase by 5 percentage points. This is according to the model. Let's do a reality check. Perfect occasion, first half of 2025.
We saw an appreciation of the euro around 12% versus the USD. You can see here the impact on Solvency, holding all other things equal. The NAV were decreased by 8%, and at the same time, the Solvency ratio increased by 8%. Giving, I think, quite good validation of the model and showing that the strategy and the limitation here work even in strong dynamics of the exchange rate. While I feel very comfortable with this approach and the clear economic view and the strategy, we have to accept and to acknowledge that IFRS accounting figures sometimes tell a bit different story. Why is that? The reason is a different treatment of certain items on the asset side of the balance sheet with regard to FX revaluation. That's the non-monetary and the monetary part. The non-monetary items, that's for Hannover Re, substantially our U.S.
dollar vehicles for our alternative investments I just spoke about. These are revalued with regard to exchange rate changes in the OCI, not the P&L. This creates an accounting mismatch with the liabilities because their revaluation goes through the P&L. Even if we were able to perfectly 100% match assets and liabilities with regard to currency, a change in the exchange rate would lead to currency gains or losses. The reason is the accounting mismatch in the background, and this is exactly what you can see in our P&L in Q2 2025 with the EUR 236 million of currency gains. This is not the economic impact. The largest part of this figure is just the accounting mismatch. Why we feel comfortable with the economic focus, we want, of course, to reduce volatility also in IFRS figures and earnings.
Therefore, going forward, we will, or we did actually extend our hedge accounting using opposing derivatives for the US dollar to bring this down and limit the volatility here. What does this mean? This means economically, nothing changes. No change to the economic priority and focus of steering and protecting the NAV and the Solvency ratio. By combining parts of the assets on the new derivatives with the liabilities they cover, we can build a block for accounting purposes. This affects the P&L in a way that, let me very roughly describe it, we can shift OCI impact into the P&L. This will reduce the accounting mismatch, and this will lead to much reduced volatility coming from currency exchange rate changes in the future. I would not expect that we will see triple-digit movements there in the future. Let me clarify this.
This was implemented during Q3, so this is in place for the future. The Q2 figures, they will not vanish, so there is no retroactive impact. The starting point is Q2, but from that on, the volatility will be much narrower. These new instruments will contribute to the overall stability and reduced volatility of our IFRS earnings. Let me summarize my two parts of the presentation briefly for you. First, the investments delivered an attractive and strong return on investment while remaining with substantially lower volatility than peers. The earnings growth will be fueled by a strong operating cash flow and increased book yield. Third, as just alluded on, the currency risks are already well managed in an economic perspective. Going forward, we will extend our hedge accounting so that also the IFRS accounting volatility will be substantially reduced.
Putting it all together, all points clearly contributing to a strong delivery of the investments into the overall targets that Clemens talked about, supporting earnings growth while also being and producing stable and robust results with low volatility. That was my part. I hope that was interesting for you and some new information. With that, back to you, Karl, I think.
Thank you, Christian, for your presentation. We will go into the Q&A session in a combined Q&A session where Clemens and Christian will answer your questions. If you have questions, please raise your hand and wait for the mic so that everybody can understand your questions. In addition, we also provided a dial-in option for those who couldn't make it to Frankfurt. Please also state your name and company. That would be helpful also for those who are following the webcast via the stream. First, we start with questions here in the room. If you keep up your hands, I will then register you and make sure that we start with those questions. Probably we start right in the with Michael, and then we go in this row and then to the next one.
The first one, you mentioned your customers want to do more business with you.
I just wondered, can you give a figure for that? The second one is on the lovely presentation on real estate and private equity. Now, on average, and I understand the point about vintages and the diversification, everything, but are there any pockets anywhere which you've looked at and you've now been CFO for like six quarters or something where you think, oh, we'd better have another look at it? I'm thinking more of here in Frankfurt. I was next to a guy on the plane, and he said the Trianon Tower is empty, so clearly there is stress in the market. That's it.
Michael, thank you for the question. I'll start with the first one. I know it's always difficult to grasp. What I wanted to do is give a flavor, particularly at this part of the cycle where we talk about growth outlook, you know, what are the opportunities, et cetera. I just wanted to give a sense on all the discussions coming out of Monte Carlo. Sven and myself just spent three days at CIB in North America, talked to our North American clients, and all the discussions, be it, you know, all the way from Canada, Europe, to Asia, to APEC. What is the outcome of these discussions? The focus was not, oh, prices have to come down in terms and conditions. Clearly, they are part of the discussion.
The flavor that I got was very much, and we talked a lot about, and Jean-Jacques always talked about, you know, is there a glass ceiling, is there a limit for Hannover Re, et cetera. I can just reassure you, and I just wanted to reassure that there are plenty of growth opportunities for us going forward, both in P&C but also in life and health. There's a general feeling in our client base that we can grow their business with them. There's a lot of appetite for us to deepen that relationship with our clients.
Again, some of the reasons I mentioned, I think there is, you know, this execution certainty, this ease of doing business is something which, again, sounds probably a bit fluffy, but it becomes very clear and very tangible when you sit in front of your clients and look at the portfolio that we've developed over the last five to 10 years with them and how much opportunity there is. We will come up, though, Michael, with a number, sort of our growth outlook for 2026, as Karl said, in November. There will be a guidance also, of course, on our growth. Bear with us until November.
Okay, then I take the real estate question. Of course, the single investments in this huge portfolio, there are better ones and not that well-running ones, but you're asking for pockets of concern. I don't see them actually, and I'll give you some evidence for that. The overall is quite a conservative portfolio, and the overall valuation change was around 5% in the downturn of the market. I'm not talking about one year, but all the years compounded. This was really robust and has proven strong. One of the reasons is that we have a large part of the real estate investments at our balance sheet. It's not indirectly via big funds and managers where you see the fair value going up and down, but over the time, we built really a reserve on that.
This can cover the downturn or some downturn when you get the new valuations before you even see really an impact in the IFRS results.
Okay, we continue with Mr. Kotz and then Hadley afterwards in the second row.
Thank you. Jochen Kotz from Karl & Kotz Capital. When looking at your strategy, it seems to me that if we imagine the next five years, you have plenty of opportunities to grow organically. Hence, we should not worry or think about any acquisitions. Because more?
Yes, in terms of M&A, and you will have heard this saying probably in the past a lot, we're a bit boring when it comes to M&A opportunities, Mr. Kotz. What is the reason for that? On the P&C side, if you just look at the growth over the last five to 10 years, I think we've roughly tripled our P&C book over the last 10 years just by way of organic growth. Clearly, we would never rule out M&A to buy a business, but it has to be accretive. Why would you pay a premium for a business that you can get by way of engaging with your clients or your brokers organically? I think that has been also part of the secret of our efficient growth. Growing with our clients is a very efficient way of grasping growth. This will be the case going forward.
We have a very strong broker business, so two-thirds of our P&C business comes via broker, the rest direct. We do see plenty of opportunities to further grow organically. I wouldn't rule it out on the life and health side if there are opportunities for M&A, if there are opportunities to engage in any larger transaction that could be, but nothing concrete on the horizon at the moment.
Thank you.
Thank you.
Hadley.
Hi, thanks very much. Hadley Cohen, Morgan Stanley. First question is around the new payout ratio. Thank you very much for that. I think you've said that the new payout ratio implies that the Solvency ratio is going to remain broadly stable or maybe potentially trend slightly lower from current levels. My question is, what's the implied growth rate that you're assuming within that to keep the Solvency ratio flat to maybe slightly down? I guess linked to that, the extent to which there's any maybe conservatism when you're calculating your Solvency ratio, maybe with regards to new business value or something like that. Then my second question is sort of linked, but around the special dividend, and that's only now for really extraordinary circumstances. Can you sort of give us more color around what a really extraordinary circumstance is?
I guess I'm asking that in the context of 2025 where, you know, all else equal, obviously there's still a few weeks to the end of the year, but all else equal, it should be a very strong year of profitability. Solvency ratio is very strong. What needs to happen? What could be better than this for you to consider specials? Thanks.
Yeah, I'll start. Probably Hadley and Christian can complement. On the growth, let's probably start with the payout ratio, and thank you for giving the opportunity to clarify it even a bit more. What we wanted to achieve with the roughly 50% payout ratio is first simplification. I think, and we've really got that feedback and listened to many of you, you know, get your heads around what's the special, you know, what is the ordinary dividend, et cetera, what's the run rate, what's the payout ratio? I think this was diligently, you know, considered. That's why we said let's really try to simplify our approach and just try to come up with a run rate that we can sustain over a longer period. Hence, 55% roughly of our IFRS net income is really considered as a run rate. Why have we done this?
I mean, we are in the context of planning, of course, at the moment, et cetera. We're coming up with our plan for 2026, but also sort of our medium-term outlook, and we did Solvency projections. If we just look at the growth assumptions that went into this plan, our Solvency II ratio will partly due to the fact that we have considered growth in P&C and life and health will gravitate towards a lower level, clearly. We should not forget, of course, rating capital models, et cetera, but that number will trend down mainly due to the assumptions on new business. Is there a prudency in that plan, Hadley? I think if we just look at the last five, 10 years in terms of our growth assumptions, et cetera, I think it's fair to say that most of the time we've actually outperformed that plan.
Prudency in the sense of have we been very cautious on that business? I would say it's a balanced view, but there's always a bit of prudency when we look at the business. Of course, because we don't want to send a message to our underwriters to chase top line. This is all about profitable business, and we will always look at the margins of the business, and therefore that's how we look at the plan. In terms of business opportunities, again, both on P&C and life and health. In terms of numbers, what's the underlying run rates, et cetera? Again, so Sven will talk about a bit. We will not give a number at this stage for 2026. However, Sven will give you a bit of a flavor where we've grown in the past, where we have appetite to growth, and where there are opportunities.
I think it will give you a bit of a broader picture where we do see areas of growth in P&C, and it might give you a sense already. Bear with us. Until
November. I hope I answered every question earlier. Otherwise.
maybe the extraordinary. What is extraordinary? Maybe I can take that one. It would not be ordinary extraordinary if we would have a list for that. I think it's our point to make clear it's not like the old special dividend that was regularly used. This would really be there to be able to act in a certain situation where there's some shift, some really fundamental change, some really extraordinary, unexpected situation. I would not expect that we would consider this just because profitability is going a bit up or down. We are quite consistent in steering results and trying to not have too much volatility. That's maybe giving a bit of flavor around extraordinary. It's nothing you should expect to just regularly happen.
To give you a sense of how we apply that payout ratio, if we just look at, let's say, our guidance for 2025, et cetera, you know, we'll see how the year goes, of course. We've got to book the budget for Q3, which has been benign, as we all know, no secret. We book the budget and we'll see how the year goes at year end. To be clear, there's no ceiling in the sense of, you know, we have a guidance out there. We have a target for 2025. There's no ceiling in that. If this is a very good year, we are also prepared, of course, to look at the guidance at year end and would just simply apply that payout ratio to that increased guidance. By way of that, I'll lead to your questions at the core.
That will flow through the P&L and will also increase the dividend.
We go to the next row and probably start from that side, Ben, and then we continue with Darius.
Thanks very much. Ben Cohen from RBC Capital Markets. I just had a couple of questions actually on the expense side. I just wonder if you could say more about the sort of underlying cost inflation that you see in the business and how you're sort of managing that kind of over the cycle. The second part, obviously, the bigger part of your overall costs is on the commission side. I just wonder the outlook. I mean, you mentioned the strength that you have with your clients, the degree to which that helps on the brokerage side versus, you know, as markets soften, whether the brokers are trying to push harder to take a bigger slice of the pie as it were. Thank you.
Yeah. No, happy to comment on this, Ben. Thank you. If we just look at our cost base, our admin costs, I would say probably half of the costs are personnel costs and half of the costs are, you know, other costs, IT, admin costs, etc. Overall cost ratio, as you've seen, 3.2%. We've managed to keep that ratio fairly stable. We have another cost ratio, if we just apply on the EBIT, so the EBIT to cost ratio, which has developed quite favorably. I always joke, as long as Karl books us into multiple one hotels, as he did here also in Frankfurt, our cost ratio is not in danger at all. He even excluded the breakfast I noticed this morning. There is a lot of cost discipline.
At the core of your question, I think some of it is the organizational simplicity that I alluded to and really trying diligently to keep things simple and challenge complexity. I think that is something that is very, very important. In my previous life, I, and I alluded to it in my intro that I've not only known Hannover Re since 2020, but also already since 2002, when I joined as a junior consultant and auditor on the audit of Hannover Re . I can tell you, negotiating fees with Hannover Re was already difficult back in those days, and it hasn't become easier. That cost consciousness, that culture is so deeply ingrained, and I think it does give us a competitive edge. Having said this, it's very clear that we have seen inflationary trends also in our cost.
If you just purely look at the personnel costs, they will, of course, increase and develop. The same is true for our administrative costs when it comes to IT costs, software costs, cloud costs, etc., all these elements. That's why I said we also consider build before buy to make us less dependent on external providers. When you look at some of the dynamics of the fee developments, and when you're very dependent on some of the providers, you are basically on the hook. That's why we try to make us independent. I do believe that this focus on reinsurance, the lean operating model does give us that opportunity to look at bits and pieces here and there, to do it ourselves, keep it really simple. Therefore, we have managed also over the last three, four years to keep that ratio quite stable. We are diligently working on this.
When I spoke about automation, AI, et cetera, we do invest, but clearly with the focus of even leveraging that simplicity, that advantage even more. On the brokerage or on the broker side, again, two-thirds of our P&C reinsurance business is roughly coming via brokers. I think that's one of the reasons why we've managed to keep our organizational setup quite efficient and simple. We are operating, for example, our business that we write in North America, I alluded to earlier, we are mainly writing out of Hannover. As we all know, that's probably not as expensive a place as some of the other big cities. That gives us an advantage. On the broker side, I think the advantage that comes with this is that it provides, these are variable costs. As we go into cycles and manage the cycle, those costs are variable. We can adjust accordingly.
I think that gives us an advantage as well.
Okay, we continue with Darius.
Darius Zakowski, SKBW. One question for Clemens and one for Christian. Clemens, thank you for increasing the payout ratio. You said your second priority is to return excess capital to the shareholders. Looking at your sort of key targets, it would be easy to assume that 260% when your target is above 200% implies excess capital. If it doesn't, can you help us gauge how should we estimate the excess capital that Hannover Re has got if 260% is not the right number? Two C's of four. Second question to Christian. I'm curious to hear your thoughts on private equity and optimism about the future.
There has been a lot of concern that the IRRs that were promised in the past are probably not going to materialize given the material rise in interest rates and some of the assets actually being stuck on their balance sheets rather than being able to upload them. Presumably some of the returns, and I've noticed a lot of your vintage years actually predate 2022, you know, 70% or so. Why is there still optimism that yield pickup will happen, instead of big markdowns when they finally come to reflect the real valuations? Thank you.
Thank you. I'll start with the payout ratio. As I said, this is more a mid-long-term view that we took on the ratio. We've done some initial projections on the solvency II ratio. With the assumed growth, and some prudency in those numbers, this will bring the solvency ratio closer to our threshold. Clearly not at a threshold because we do like to have some buffer in the solvency II ratio. Of course, we need to also look at some of the capital regimes on the rating side, which are also site conditions that come in. We will always imply some buffer, mainly really to be able to capture further growth opportunities or any other opportunities that come along the way. This is more really to take a bit of a cautious view.
We do not want to compromise any opportunities that come along the way when it comes to that assumption and that sensitivity.
On private equity? On private equity, I would describe actually the situation just like you did. As said, the returns are a bit depressed. They are not at the levels that we had pre-COVID, but, I mean, look what returns these vintage years produced. These were not just double digit; in part, that was 15 %- 20%. Even with a not that offensive portfolio. I'm not seeing this return in the near future. As said, the lower valuations are new entry points for new investments, for new business models. There is a huge realignment, reshuffling in the market. Part of the business models are not working anymore. I totally agree. It will take time. As said, I'm not expecting this next year to jump up again. This will really be a continuous development over the next years.
As said, for such a long-term strategy, the overall mix of the vintage years produce sound returns on investment. If we see that evenment, we have, as always, a quite conservative approach here with the valuations, really bringing them down as we see signs of more risk. This is all done in the balance sheet. I think there is a sound and reasonable, I wouldn't call it optimism, by the way. I think that's clearly the expectation on the fundamentals. Will we see the full pre-COVID returns? I don't know. Even if it's just going double digit, it will be a good strategy for us.
Okay. We have further questions from Vinit and Will.
Sorry, Clemens, so Vinit from Mediobanca. Clemens, one for you, one for you, Christian. So Clemens, just to back on the growth and the clients loving Hannover Re, is there some kind of an analysis you performed which suggests that per client, you're kind of outdoing your peers in terms of nature of business or volume that they give you or business they give you? Is there a perception of risk which is different that you could comment on or maybe Sven could add later about, hey, we grow differently here because you know everybody that we would ask would say their clients love them. It's not very easy to just use that as an explanation for the strong growth. The second question, Christian, is just I'm quite intrigued by the unrealized bond losses projection chart.
I think it's slide four in your pack where you seem to be taking it down by EUR 300 million a year for the next two years, which is in normal life and not a normal thing. I mean, because when you did EUR 60 million in Q2, you flagged it as an exceptional activity. It obviously implies that you intend to do EUR 60 million a quarter bond losses for the next two years, or you're just expecting interest rates to go up. In that same context, the 10 basis points, just to clarify, if you did do this bond loss realization, that 10 would be higher, right? 15 or whatever, some other number. It's just to clarify that the thought there behind that slide. Thank you.
Vinit, on the clients love to do business with Hannover topic, I've asked exactly that question to most of our clients and brokers. I said exactly what you said, Vinit. Everyone says this and everyone will say this. Come on. I mean, give me a bit more of a challenge. What can we do better? You know, what's the reason why we've grown substantially? I think what we've proven though is just by way of, and when you look at the growth on the P&C and life and health side, when you look at the growth on the life and health side over the year of the last five to 10 years, I think we've just proven it by way of that. If you just look at the portfolio, I think we've deepened the relationship with our clients quite substantially over those years.
We've really tried to come up with concrete feedback. Why is that? What could we do more? Not just by way of looking at, you know, broker service and things like that, but really sitting down with our client and having strategy days with our brokers, with our clients, and trying to find out where can we do more, you know, what would you like to see more from Hannover Re, et cetera. Again, one of the sources that always comes is it just feels easier. I've really tried hard, Vinit, you know, really to challenge that. 99% of the responses were Clemens, please don't change anything when it comes to our underwriting approach. I think this empowerment concept, having the underwriter, the decision maker at the table is, I truly believe, something that is unique.
This consistency, 99% of the responses that I get is you're consistent in your risk appetite. Coming to your question, Vinit, on what does it do to the portfolio, I think there are clearly areas where they would say, we've been showing you this business for 10, 15, 20 years, but you still don't like it. We will be very upfront about it and very clear about our risk appetite. I think this consistency, this clarity is something that clients like. We are not opportunistic. We are not transactional. We are very upfront. Even in, you know, when we did a bit of a debrief after the 1/1/2023, that reset of the market, it was always the response, you guys were tough. It was very clear, but you were always honest and upfront about it.
Second, I really believe this pure-play reinsurance model, that we don't compete with our clients, that we really sit there as a pure-play reinsurer in front of them, is something that they really like. Therefore, I think we've just proven it. Sven will provide a bit more detail probably in his presentation on what are the areas, and Claude as well, what are the areas where we still see growth opportunities.
Yeah, and on the hidden losses, and thanks for giving the opportunity to clarify this, what you saw on the slide, yeah, the walk over the next year and the years and the expectation, this is just the pull-to-par effect of the maturing part of the portfolio, plus the reinvesting in the same, yeah, same bonds or same durations again, same ratings at the current interest rates. Everything, as mentioned, that we could do in addition, like the EUR 60 million, and this is just a random example to show we are really doing this, will of course lift by a handful maybe of basis points. As said, we will not follow like EUR 60 million roughly every quarter. This will really depend on the overall situation. I mean, we have different profit drivers and contributors to the overall result.
You all know our quite conservative reserving approach using this as a tool, but we might also look in the coming quarters at the hidden losses to make some realizations there if we see room.
Okay. Even that we are a bit over time, we take your question.
Yeah, I'll make it quick. It's Will Hardcastle, UBS. It's actually linked with that last question. Is it a sign that you're starting to realize investment losses, that there's less headroom in the reserve resilience to play with? Is this therefore another lever that you can work alongside? Essentially, that's a question, is the reserve resilience closer to the upper end that you're allowed? Second of all, just coming back to the solvency new capital build and that amount within your capital consumption assumptions, how much is there more coming out of life and health, or is it more coming out of P&C? Where are you assuming a greater capital consumption in the near term? Thank you.
Should I probably, I started probably with the last one. I think it's both. I don't have numbers top of my head, but it's really growth assumption both on life and health and P&C. I start probably with the first one. On the reserve resiliency, you know that we've substantially built resiliency. The way we look at it is take sort of the number that we disclosed from Willis Towers Watson, the 2.5+ the risk adjustment, you roughly end up 31st of December 2024 at 7.7% in relative terms. You all know, and we've been clear about it without having come up with any actual analysis. We believe that we've built further resilience in the first two quarters as we reported. Is that the ceiling that we've achieved? Clearly not.
There is no number that we would give for a ceiling, but we do feel comfortable with this reserve level in general. Therefore, as Christian said, looking at the investment, looking to realize some fixed income unrealized losses is more of having that toolbox and having that ability to look at, you know, earnings management, to look at sources of future profits that will come just over time. It's just another, you know, possibility to use that. It will be probably a blend of both, Christian.
I couldn't agree more, and I can completely confirm this. I also don't see a ceiling. We could do more technically, but the question is, what is the right mix and balance? What is the level we already have? As Clemens said, we feel that is quite a good level in the reserve already. Let's maybe look a bit more to the hidden losses in the balance sheet, but it's more shifting and finding the right mix.
Great. Thank you for answering all those questions. Thank you for your questions. We will now break for a coffee, and we'll resume 20 minutes before the hour with the presentation of Sven. Thank you.
Thank you.
Thanks.
Welcome back. Thank you for being so punctual, almost. We are here for the next presentation of Sven. Sven, just as Clemens said this morning, also came back from the CIB, the Council of Insurance Agents and Brokers Conference, a P&C conference in Colorado Springs. Thank you for being here so punctual because that was indeed one of the challenges to manage, that we have an Investors' Day also presenting Sven about the NatCat business. With that, I hand over to you.
Thank you very much, Carl. I will talk about three topics during my presentation. The first topic is going to be a reminder why diversification is important for our business model and how we reflect on diversification in the context of our natural catastrophe-exposed business. I will then share with you what is our journey on the NatCat side of things and what to expect in the future. Last but not least, I will also talk a little bit about the topic of growth, both from a top line and from a bottom line point of view, not only on NatCat, but for the business group P&C in general. For the Q&A, I will be joined by Sharon- and Torsten. You will have a good time to ask your additional questions. Let's start by reminding us all why diversification is important for our business model.
As you know, we are categorizing the business into the three main components: P&C, life and health, and market risk on the investment side. The numbers you see in the chart are the solvency capital requirements for P&C, life and health, and the investment side after the internal diversification within those sectors. You can see that the diversification across the three segments is basically giving us a 34% credit from a group diversification point of view. This diversification, which as you would imagine is a major component when we are pricing the business, is given to our market divisions. We can benefit from the significant impact of diversification when we are writing the business. It is a meaningful number. Diversification is not only about capital, it's also very much about our earnings profile.
What we have done for the last 10 years in the lower chart is give you an idea of how our various segments have contributed to our technical result on the P&C side in the years mentioned. First and foremost, it's important to note that on a gross basis, we have made a technical profit in every one of the 10 years. You can see that the contribution year- on- year, depending on the profile when it comes to losses, has changed, but it's overall positive. You can also see, and that is the yellowish part of the chart, that the contribution from structured solutions and ILS, i.e. the business which is less prone to volatility in the pricing cycle of P&C, is increasingly getting important for our portfolio. Yes, and last but not least, these are gross numbers.
The earnings profile in the more challenging years, like 2020, for example, where we had a technical profit, but below the long-term averages, would of course be improved from a net point of view. Over the cycle, retro comes as a cost. It only supports in years with higher volatility. That is why we are showing the gross numbers, because at the end of the day, we have to finance the retro out of our gross results. Starting to talk about natural catastrophe business in more detail, diversification is also very important for us in our natural catastrophe portfolio. To get to a good diversification, we feel we should write different market shares for different country parallel combinations.
In practice, it means that we write the lower market shares in the larger parallels and higher market shares in those markets with a smaller parallel compared to, for example, Atlantic hurricane exposure. We have picked four examples where, in the waterfall charts, and I will not go through them in detail, every chart where we adjust through the waterfall charts, take you through a gross to net journey. Starting with U.S. hurricane, clearly the biggest market from a demand point of view, where in a one in 250-year scenario, we are starting from a gross number of a little over EUR 4 billion for our share.
With the use of retro and after tax implications, this translates to a net loss of EUR 1.8 billion, or in market share terms, we are starting with a market share of 1.3% from a gross perspective and reduce this to a net market share of 0.6% on a net basis. The same logic applies to the other three scenarios we are showing: European winter storm, U.S. West Coast earthquake, and we have also picked one of the examples where the market demand in overall terms is smaller, but where we have a relatively significant market share, just to give you a sense of what a wide range of market shares we are willing to write. The last example is therefore our exposure to Chilean earthquake, where from a gross market share of 20.4%, we are reducing to 10.2% via the use of retro.
It is quite a wide range, all the way from 0.6% in a scenario like U.S. hurricane, but it can be double-digit in other smaller scenarios. If you look at the U.S. West Coast scenario, you can see that on a net basis, we are saying that in a 250-year scenario, we expect to have a market share of 1.7%. If you take that as a proxy and look at our losses from the wildfires in California, and yes, of course, wildfires are not earthquakes, but it's from the same region, you will remember that after two quarters, we have reported a net loss of EUR 615 million. That is based on a market loss assumption of $40 billion. If you divide the one by the other, you would end up with a ratio of 1.8%. Broadly in line with the 1.7% we are showing here.
From that point of view, an expected number when it comes to the state of California. In that sense, not a surprise when it comes to our involvement in that loss. Where do we see the natural catastrophe business going? Let me start by talking about the increase in values that need to be insured and reinsured and the reasons why this is structural. The first trend we want to talk about is the trend of urbanization. In the middle of the slide, you see that there was significant growth in the world population, and most of that growth actually happened in urban areas rather than in rural areas. In the lower map, you see the dots where the growth of agglomeration has been particularly strong. The red dots are those parts where the growth has been the biggest.
You see the characteristic that many, many of the dots, or most of the dots indeed, are in coastal areas, which of course are prone to natural catastrophe exposure from both a wind and from a water point of view. The second driver of increased values is of course the underlying asset inflation coming out of general inflation. Even more importantly, you have to look at the construction cost inflation, which is more relevant compared to general CPI inflation for the question of insured values under property policies. As you know, this situation of higher inflationary numbers and particularly higher construction cost inflation has accelerated significantly in the last five years, which means that through the trend of urbanization and through underlying asset inflation, you have more concentration of values, which is fueling the demand for the product. Another driver is climate change.
We have a lot of topics under the umbrella of climate change, but just for illustration purposes, we have picked two examples how we see climate change materialize. Let me start by talking about extreme sea level events. You see the map and you see the dots of the map. The dots tell you about how the likelihood of events is increasing over time. A solid brown dot means that by the year 2040, we have to expect significant sea level events in those areas on a very frequent, if not annual, basis. If you compare this map with the map I've used on the previous slide when it comes to urbanization, you will find that many of the dots are in identical places.
You have a combination of increased urbanization at around the coastlines, which is meeting increased frequency of extreme sea level events over the next decades from a climate change point of view. This is the one example, which is giving you an idea about the increased risk landscape. Another example is hail. Hail has of course been very topical, particularly when it comes to the U.S. through the increased frequency of severe convective storms. Hail is also important when it comes to other parts of the world and how losses materialize. The maps on the lower part of the slide are giving you ideas how we see frequency developing. The red parts of the map are those areas both in Europe and in North America where the frequency for hail events and severe convective storms is increasing significantly.
The graphs we are showing here are then giving you an idea of severity. The graphs are talking about the inherent energy within a storm and/or the size of the hail, both also again from North America and from Italy. You can see that both in the maps, but also in the graphics, we are talking about increasing numbers. When it comes to the peril of hail, it's both frequency and severity increasing. We all, for example, remember the hail losses in Italy two years ago, where this has actually materialized in the southern part of Europe. Climate change is leading to an increase in exposure. On the other hand, you also have to have a very differentiated view on risk. As you can also very clearly see in the map, particularly on the hail map, not everything is having a color and not everything is green.
You have to have the capability to be very precise in your modeling and the pricing when it comes to regional exposure for the individual perils in order to have a solid and risk-consumerate offering to your clients. A one-size-fits-all approach is not working in a scenario where we have different trends in different parts of the world, peril by peril. Therefore, you have to have a very diversified and sophisticated modeling landscape in order to recognize those differences. A third area which is driving demand on the natural catastrophe side is the protection gap. You know that the insured losses from natural catastrophes have significantly increased year after year over the last five to six years. The chart on the right-hand side is talking to that. These are the numbers as published by Verisk, one of the big vendor models on natural catastrophe modeling.
Today, we are expecting as an industry an insured loss of EUR 150 billion roughly in any given year resulting out of natural catastrophe losses. That number was only EUR 82 million in the year 2020, not that long ago. The trend of insured losses resulting from natural catastrophes is a very clear one. On the other hand, and that's what the chart in the middle is talking about, there is still a huge protection gap where only a part of the economic loss, and that is the lighter blue in the chart, is insured losses versus significantly more economic losses in the years mentioned. Of course, it's our ambition and the ambition of the entire insurance and reinsurance industry to close that gap over time, which is going to give more demand for the natural catastrophe-related products in our industry. What does that mean for us?
As I explained, you need to have the capabilities and expertise to monetize the increase in this demand. You need to be able to capture all of the mentioned trends and changes and exposure in the modeling and the pricing. You have to have a good diversification in order to deal with the volatility that is inherent to this exposure. If you look at our experience of budgeting for large losses from natural catastrophe and our gross technical results for natural catastrophe, we feel that this is a class of business which we are able to manage and steer in a manner which is allowing us to access a good driver of technical profitability. The lower chart is giving you a reminder on what our journey has been on budgeting for natural catastrophe losses as part of our major loss budget. We are showing this since 2015.
Not every year was within the estimated budget for the year. In the total aggregate, we have been within the budget. With 12% below budget, we are in a relatively comfortable situation. What you also see on the upper hand chart is that over the cycle, we are making good technical profitability out of our natural catastrophe business. This again is a gross slide, so this is before retro. Obviously, retro also helps us to deal with the volatility in a number of those years. The most prominent example here on this slide would be the year 2021, where we had both Bernd in Europe and IDA in the United States. In that year, our gross profitability was negative.
As you can see in the lower chart, it translated into a situation where from a net point of view, we only exceeded our budget for the year on a very marginal basis. From that point of view, retro helps us to accept the volatility on the natural catastrophe side. Most importantly, of course, is that we are in a position to write it profitably on a gross basis over the cycle, which I feel we are nicely demonstrating here in the past. You can also see that the last number of years, the profitability numbers are getting a little more meaningful and are exceeding the long-term averages nicely. The reason for that is something I will explain on the next slide. We are currently in a period where we have grown our natural catastrophe exposure, of course, also taking advantage of the good market environment.
This means we are structurally willing to increase our share in natural catastrophe-related business. The left-hand chart gives you an idea about our journey and how we have dealt with that over the last 10 years. When we started in 2016, you can see that the contribution from the blue part of the lower blue part of the chart, which is showing you the U.S. and Caribbean total value at risk at the one in 100 centered view, has been very dominant. It was close to 2 billion TEVA out of a total of approximately 2.5 billion TEVA. Roughly 70% of our total value at risk came from U.S. hurricane and the Caribbean. In the trading conditions we had up until 2022, it was therefore of high importance to us to do something about the better diversification profile in our portfolio.
You will see that over the period 2016 - 2022, the absolute number from an exposure point of view when it comes to U.S. hurricane and Caribbean hurricane has not really changed a lot. It was relatively stable. What we have done in that period is make certain that the growth we had was in non-U.S., non-Caribbean related parallels. As a starting point, when the market turned in 2023, the contribution from U.S. wind in particular was still roughly 2 billion total value at risk. The global TEVA had moved to more than 4 billion at the time. The U.S. was only representing 50% of the total exposure base, which was exactly what we wanted to achieve, to have more diversification in our natural catastrophe exposure.
It allowed us, when the market turned in 2023, to grow in all parallel country combinations, including the U.S., without significantly changing our volatility profile. This is what the right-hand chart is talking about. What is the contribution of natural catastrophe business in terms of required capital in relation to the own funds? The bar is giving you an idea on the absolute development of the SCR for natural catastrophe business. The other bar is giving you the development of the own funds. The dots are there for the SCR for natural catastrophe as part of our own funds. You will see that since 2018, this ratio has been extremely stable in the low 20% range, despite the underlying growth, which means that with the improved diversification in NatCat , from a regional perspective, we have become more capital efficient.
It also means, from a diversification point of view, that our general growth meant that despite increased positions we have written on the natural catastrophe side, it was relatively stable in the entire portfolio of P&C. That will also be important for us in the future. We feel that we will be able to structurally grow the natural catastrophe business, which is a class where we have more and more demand for the product without changing the volatility profile of our P&C earnings. That is thanks to our strong diversification and also thanks to us using retrocession in order to steer the volatility. This is the last slide. Coming back from NatCat to the overall business group, you, of course, are asking a lot of questions about growth and what to expect in the future.
What we have done here is give you an idea of where the growth was coming from in the last 10 years. For 2026, from a trading environment point of view, we are expecting a broadly similar situation as we have found it in 2025. There will be pockets where we will see softening, most likely on the property catastrophe-related side. For the most part of our business, we expect that pricing will remain at an adequate level, and it will allow us to produce good profitability and hence also further grow the business. The period which we have chosen is 2015 - 2024. That was our profitability journey of the last 10 years.
Average growth over the period was a little over 12%, but you see also the component parts where did the growth come from. Let me start with the traditional business, which is the biggest block of our business, was roughly EUR 15 billion. Here you have seen that we have a constant growth trajectory, and in many of the years, we have been over and above the 7% we have mentioned in the past. As a figure, we feel comfortable as a growth prospect over the cycle. I mean, you already heard Clemens talk about our experience in this year's conferences and the positive feedback we have from our clients, the pricing environment we do expect. This gives us a lot of comfort that we will be able to continue on the traditional side to be on a good and healthy growth trajectory.
Therefore, we would say that the 7% figure over the cycle is still true, but of course, we also have always said it doesn't have to be 7% every year. Sometimes it will be more, sometimes it will be less. This all depends on the pricing we find and the adequacy of the pricing. From that point of view, we will not give a number for next year today, but we are comfortable from an overall pricing environment. Here, of course, on the traditional business, the lean operating model also will help us to continue growing in softer environments as it will allow us to write business at acceptable profitability levels, and we can do that longer compared to peers which have to operate with a higher expense ratio. From that point of view, a good starting point.
In the last couple of years, a particularly strong contributor to our overall growth story has been the structured and the ILS business with average growth rates in the mid-20s for a sustainable period. We see a good pipeline of new opportunities. We've also seen in the last few years increased demand on frequency-related covers on the non-proportional side. That pipeline continues to be healthy. On the other hand, growth patterns are much more difficult to predict for a structured business given the fact that the business can be very bulky. In some transactions, we are talking about hundreds of millions of dollars for our share only, sometimes even in the billions, and some of the demand, of course, is transitional. It can always be that we also have a situation where one or two meaningful transactions are placed on a significantly lower basis or disappear completely.
When it comes to the long-term average growth trends on the structured side, we are very comfortable that this will be a growing part of our business. Last but not least, I talked about natural catastrophe business a lot. You see that in the soft market environment, we have grown the natural catastrophe business very carefully. The growth trend was 9% versus 12% compared to the overall traditional business, which has been careful in the soft market years. I've mentioned that our main emphasis in those years has been the improved diversification from a regional point of view. That mission was well achieved, and we used the hard market in the last three years to have an accelerated growth pattern in natural catastrophe business where we had 23% growth versus a lower growth number on the traditional business.
Structurally, we have the risk appetite to further grow our position in the market on the natural catastrophe side, and we can expect that there will be more demand for the product given the development on the exposure side from climate change and the concentration of values. This brings me to the end of the presentation. I hope I could demonstrate to you that diversification is the key to the success throughout the cycle as it allows us to write the business with a lower cost of capital and a lower earnings volatility. The second takeaway is our success story in writing a natural catastrophe portfolio and that we do have the appetite for further growth without significantly changing the volatility profile of our business group results.
Thirdly, we are talking about the strong client relationships, which will also give us a good platform for future top and bottom line growth. I would like to add that we are, for the next years to come, also protected by our conservative reserving approach, which we have taken over the last couple of years, which will allow us to continue to show continued earnings growth also in more difficult trading conditions. With that, I would close my presentation.
Thank you for your presentation and for your insights. There will be, I'm sure, and I already see some hands up, questions. For the Q&A session, we will also have to invite the other colleagues. Please come here on stage, and I provide a microphone as well. With that, we are set. If you're just in the middle of the... Yeah, because there's the camera to capture the questionnaires. We start from the back of this room this time. Ian first, and then Will next, Vinit.
Hi, yeah, thanks. Iain Pearce from BNP Paribas Exane. The first one was just on the diversification expectations you have going forward. Do you expect that trend to continue of increasing the non-U.S. business as a proportion, or are you more comfortable with the overall diversification as it is now and everything should more grow in line, actually increasing the allocations to the U.S. wind risk? Secondly, linked to that, in terms of the SCR growth for the natural catastrophe portfolio, it looks like that's probably been high single digits versus the 13% premium CAGR. Would you expect that now to be more in line with the premium CAGR that you have going forwards?
Okay, thanks for your question. Is it on? Yeah, you can hear me, right? I answer on the NatCat question, U.S. versus non-U.S. growth potential, next renewal. We will grow both. This is our plan, but the non-U.S. portion probably even higher than the U.S. portion.
Again, the same is true on the SCR-related question. We expect a relatively stable pattern, but of course, in any given year, this can be subject to change depending on how attractive we find the business in that year. If we have very attractive market terms and conditions, we would, of course, be willing to do the same like we did in the years 2023 and 2024, accelerate the writing of natural catastrophe business in a more significant way. For the immediate years ahead, given the trading experience conditions we are expecting, we expect a more stable development.
We continue with Will. In the meantime, we all move a bit closer to the center of this room to be captured adequately by the camera.
Thank you. William Hardcastle, UBS. The first one is just looking at the chart where it had the CAGRs, traditional growth, structured growth. It's fair to say that the traditional has picked up the CAGR in more recent years as the benefit of pricing has happened. Is it impossible to believe that as the market gets a bit tougher, that could be flat year- on- year on a traditional basis and perhaps the other aspects of the growing areas? Secondly, on that EUR 150 billion assumed industry loss assumption that you've gone to now, I'd love to know what everyone else is pricing in for that. I guess any clarification on the split you'd have of that between what you think is insurance versus reinsurance weight? I know that depends on where the types of losses are. I guess how would that have compared to versus maybe five years ago?
I don't have absolute numbers for you, Will, but given how retention levels have developed since 2023, the percentange of the loss that would be accepted by the reinsurers, the insurers, of course, has reduced, which doesn't mean that the absolute number has necessarily reduced given the strong growth patterns year- on- year when it comes to the expected loss number. I also don't know what others are using as an underlying estimate for the annual aggregate loss. What I can tell you is that the development on the numbers you have seen in that chart is consistent with us setting the budget for major losses for the next financial year.
The traditional business.
A comment on the traditional business. I mean, 9% compound growth is a meaningful number, but we are not at the end of the journey. The question was if it can ever be zero. It could be potentially if the market would soften a lot, but we just don't see that scenario just yet. It's too attractive out there for reinsurers, for us. In some markets, our market share is below where we see our market share, where we want it to be. I don't see that scenario.
Okay, then we have the next question from Ryan.
Hi, yeah, it's Ryan. We're from BlackRock. I guess I'm just interested. I see, I can understand all the structural drivers between increasing values, the increased risk from climate change. You know, they're all quite concentrated increasingly. I guess I'm just interested in the large loss budget. Obviously, the standard deviation of the modeled losses has been growing over that time period as well. I'm interested if you see a scenario where actually that could come back down and what could drive you to be maybe just more confident in that sort of standard deviation. That sort of seems like quite a big risk.
Whether this will narrow, of course, is also a question on how much retrocessional coverage we are buying. We have been a constant buyer of retrocessional coverage. In relative terms, our retro protection compared to the gross exposure we have was a little less in recent years with the very strong underlying profitability profile in the business we are accepting. We have been willing to take a higher percentage of that net compared to historic averages. With the market environment changing, we have already started buying a little more non-excessive loss retro last year. We may do that in the future as well, depending on trading conditions. That, of course, is one of the major drivers of the standard deviation.
Okay, we continue with Vinit and then Ivan.
Thanks. Sorry, Vinit from Mediobanca. I don't know if there are two questions, but let's try. It's all the same topics, really, the NatCat and hurricane interaction. I can sense from your communication to the market that, okay, you had a few weeks or months of very lucky no hurricanes, but let's look at the overall picture on climate change. Let's look at the risks. What's the market telling you? If there is no hurricane this year, next year, hypothetically speaking, is there, I mean, are you going to be a little more concerned? Are you getting pushback that, okay, guys, there's no hurricanes happening nowadays? Things are changing. What should we do? I'm just curious, you have put on a very brave front here. You put on a very confident message. I'm just curious about that.
The second thing, maybe it's interlinked, the frequency cover comment you mentioned, where you're seemingly willing to do that line of business, which some people in the outside world look at like a weakening trend, but you've reiterated that you're very confident with it also from Silk Air business. Just curious on this comment on the frequency cover as well and how you see that, why you're confident about placing those covers now. Thank you.
Okay, I start with the last question on the frequency covers. Actually, indeed, as you already said, we like to look on the frequency aggregate covers on a more structured basis. Yeah, to cope with that. This is what we have done in the past where we currently see a higher demand. This is on the aggregate covers. There was more question about the modeling of NatCat losses hurricane-related. I'm not sure whether I fully understood it correctly. From the modeling as such, I mean, this year so far seems to be a good year with regards to hurricanes. It's not that we change our modeling or our underwriting behavior on what we, so based on that year. We will continue to model it, write it next year in a quite similar way. I mean, from a mathematical point of view, these underwriting years are independent.
Regarding climate change, we have to be sure that we model and price it correctly at least for one year. What will happen in five years' time? These are basically one-year contracts. To have it right for one year, and this is what Sven showed in the graphs that our modeled loss on a global basis, we are quite good to model it on a global basis. Does this answer your question? Clients, what?
Sorry, my question is, are clients accepting that you're not changing the model? I mean, are clients thinking that, oh, yeah, somebody, I'm asking the market's behavior on this.
Yeah, we are changing the model. I mean, we always have the updated model, and new scientific research and analysis are going directly into our model. We make sure that we always have the best model to assess the NatCat exposure. This can mean also that we think it should be a higher price on certain risks. We openly discuss this with our client, explain it, and try to find a good solution.
Hi, it's Ivan Bokhmat from Barclays. My first question is, I guess I'm just trying to understand the broader strategy. A lot was said about client relationships and how you would close the underweight position in certain areas such as NatCat portfolio. I was wondering if you could try to put it into some perspective. What could be the indicators that we could see? Where's your aggregate market share across the markets and where you are in NatCat? Is it by gross share of losses, for example, and specific perils? How do you think about over the medium term of closing that gap? I think that's my question number one. Now, question number two, I think of the more recent trends we're seeing, very strong cat bond issuance. We're seeing casualty sidecars being proliferated. In general, some changes in the ILS market.
I'm just wondering, what are your thoughts about that? Does it change the way risk is distributed? Is there some disintermediation? Finally, just a cheeky question. What do you think about the one-one renewals price-wise?
Yeah, let me maybe start with your first question and then I hand the microphone to the colleagues when it comes to price expectation in the ILS market in particular. We reckon we have a market share of roughly 8%- 9% in P&C reinsurance and on the natural catastrophe side. We are somewhere between 4% and 5% on a global basis. As I have shown, this can be very different region by region. When we talk about the global market share, there's appetite to do more over time. We don't have a target that we should get to our average market share, i.e., the 8%- 9% by a certain year. We have the capital and we feel comfortable with our capability to understand and write natural catastrophe business. A lot will depend on the trading conditions we find. There will be structurally more growth.
Whether it is as accelerated as we had it in 2023 and 2024, and to a certain extent also 2025, solely depends on how attractive is the business. From that point of view, we are prepared to close that gap, but we do it over a period and not in a short time frame. Maybe pricing, what do we expect at one-one?
If only I had a crystal ball. Generally, I think that for, and it's always easy to start with markets where there have been losses. While there haven't been significant losses, there still have been earthquakes and floods and everything else. In markets where there have been losses, I think the markets and the pricing will remain flat. If there's underlying increases in exposure, then that will be taken into account. Inflation, at least in the markets that I look after, is less of an issue currently. It's still something that has to be considered. In markets where it's really been clean and there haven't been any losses, there will be very interesting discussions just around how to continue with the pricing that's there. There will be pressure, absolutely. A lot of pressure tends to always come only on the natural catastrophe portfolio side.
When you look at the property and casualty reinsurance side, you look at liability and everything else because of the underlying changes in the portfolio, all that has to be taken into account. We expect flat to slightly down generally. On the natural catastrophe portfolio side, if it's clean, it's probably going to be down more than on the other lines of business.
And ILS.
Yeah, coming back to your question on ILS. As you know, we are very active in the ILS space. We think we are a market leader in the business. We are currently doing on cat bond transformer business, on collateralized fronting, and on also a few other parts. There's one missing piece for us. This is some sort of a sidecar. We are currently in the process of setting up such a sidecar, HCP, Hannover Re Capital Partners. This means for us also a new business opportunity because we write the NatCat business anyhow. We assess it, we model it, we underwrite it. It takes a volatility to our own balance sheet. As Sven explained today, we are happy and have appetite to even write more on our own balance sheet from a volatility perspective.
We can also add an extra portion on transferring it to the capital market as we do with all our other ILS activities. In that way, also generating fee income for us in diversification and less volatile business.
Okay, so there are much more requests to speak, but probably we take one or two, Roland, and then Michael, you were the first one, and then we will see how we can stretch the time a bit.
Could you speak about if the business is interlinked, meaning do you need to write more NatCat business to be able to get more traditional business? Because you are very much underweight, at least to your competitors, and I guess clients look at this relation or dynamic you might need to evolve. Is that right?
Good question. Is it interlinked? I would say not in all cases. I mean, when the bigger the client, or let me put it this way, the smaller clients are usually buying reinsurance based on a bouquet basis. Yeah, so if you write the non-CAT piece, you also get a piece of the CAT piece and often a share across the entire program. It's a strong interlink, and you want this to be interlinked. With the large global international companies, you can write business much more based on your appetite. You can overweight there, you can underweight there. Obviously, nevertheless, I mean, the strength of Hannover Re, from my perspective, and I've only joined a year ago, is if a client buys 100 reinsurance treaties, we are usually on most of them.
Let's say 80 or 90 of them we support, you know, and therefore we play to our strength that they can negotiate packages, you know, and that's what we always do. Of course, if we are underweight in NatCat on certain clients and we have appetite to write more NatCat business, as you've heard, we are using the opportunity of this very broad participation across a client relationship and try to get a higher share on the NatCat side.
Michael.
I'm here.
It was just one question. You had this lovely chart on page two showing the gross technical result, and also you talked about the capital. What's the ROAC on all these things? I spoke to Silke, and she said her ROAC is excess ROAC, which is fantastic. It's 20%. What are the figures for the others?
Regardless of what it is, we all work with the same hurdle rate. From that point of view, over time, all the business units have contributed to a positive excess return on capital. I don't have the exact numbers in my head split by year and over time.
I suppose what I'm really asking is, you know, because we had the discussion about reducing zone C, using more of your capital to write business. Clearly, it's got this NatCat and other stuff has got fantastic returns. I'm just trying to get a feel for how the mix of, are you writing richer ROE business going forward? That's what I'm writing in terms of mix. In other words, would your ROE improve even though the profitability on some lines can go down?
If history repeats itself, we will have very diversified growth again. When we look at pricing the business, we are distributing cost of capital across all the segments. You have seen in the past number of years that we had very diversified growth from a product point of view, but also from a regional point of view, which means that in all these regions, we have found business which was at or over and above capital hurdle rates. Over time, we expect that to continue. We are not expecting significant concentration shifts in our portfolio, but we expect that we will manage to continue growing very organically with how the portfolios of our clients are developing, because that's really the key for us to build longstanding relationships with clients and make them broad and make them deep.
Our portfolio will, for the most part, follow the growth pattern of the underlying client.
Very good. Due to time constraints, I only allow for the very last question for this session from James, and then we go into the next presentation.
Thank you, James Shuck from Citigroup Inc. I was interested in the slide showing the technical profitability on P&C reinsurance split between the, excuse me, structured and facultative and the other lines. It looked like on average, structured and facultative make up about a third of the technical profitability over time. I'm not sure it's difficult to know exactly what you would expect in any one year, but any kind of insight into that mix would be helpful. My question is about the outlook in terms of the industry and pricing structure and facultative and structured. Is it very different to what's happening in the core traditional treaty? I've often heard that facultative can be an early harbinger of what's to come in the wider market.
I'll take the facultative question. Yes, I think facultative tends to soften before the treaty market does, and we're already seeing that in the portfolio that we have. What's really interesting about the facultative portfolio that we write is that it doesn't come with memory. Our underwriters, which are very empowered, can accept risk because it's properly priced, because it's a good risk. They can reject it if it's not in the price point that we want or if the risk actually isn't a good risk and the terms and conditions are not good. From that perspective, the ability to steer the portfolio on a year-by-year basis has resulted in the fact that each and every year we have actually made a profit, which is good. We have taken advantage of the hot market cycle, and you see that closer linked in terms of the facultative portfolio following that cycle.
We expect when we project to a softer market cycle, you'd see that project quite closely as well with our facultative portfolio.
Would you expect structured and facultative to be more resilient through a soft cycle relative to the rest of the portfolio?
Yes, it will be more resilient because we can accept or reject risk on a year-by-year basis. You'd also see that in good years, in a harder market cycle, we can actually have better profitability. In a softer market cycle, the profitability is slightly reduced, but it's still positive.
Thank you.
One final sentence on structured. Yes, I also answered with yes, more resilient, and quite often the treaties are mightier treaties. You also cover different periods anyhow, and it's more a risk and capital management tool. Therefore, also financial stability and planning is important and not so much dependent on pricing cycles.
Yes, and the mix in the profitability you have seen over time has less to do with the quality of pricing in those various blocks. It has more to do with where do losses materialize. If you look back over the last number of years, that's where you see the traditional business, which is including our CAT writings, is showing negative years. Those are in the heavy CAT years, and it's in the COVID years. From that point of view, it's more to do about where are the losses than the underlying question, how is the quality of the rates?
Thank you for your questions on P&C, and thank you, Sven, Sharon, Torsten, and Silke. Before we go into the next presentation by Claude, I'd like to draw your attention to the feedback form that we provided on the table. It's easy to find. It's just right under the chocolate. The chocolate actually is a gratitude to you for attending today, and it's from a chocolaterie in Hanover. The feedback form, you either can fill it out in the old-fashioned way as a paper, but you also can scan the QR code on the back of it and fill it out. To be very sure that we get your feedback, we'll send out an email tomorrow.
You have another possibility to provide the feedback, which is very valuable for us because it really helps us to refine our work and to produce content for the next investors that is relevant to you. With that, I would thank you for filling it out. We go now straight into the next, I guess you are ready for the next presentation. Yes, Claude is ready, I'm sure, and he will, no surprise here, talk about life and health. Moving into IFRS 17 has caused some headache, but it also had, on the flip side, some positive things. The new metrics, the new KPIs that we have showing a CSM, showing the future profits on the face of a balance sheet is appreciated, I would say. At least that's what we hear from the market. Claude will now explain how to read those numbers in another session.
With that, I hand over to you.
Thank you, Carl. Instead of Mike, it is working. Yeah, great. It's, by the way, not very nice to remind the people of our feedback form just before I come on stage. I mean, that's not nice, really. I mean, it's terrible. Anyway, I live with it and I'm used to it, obviously. Always the last presentation. Many thanks to the guys here in the room. Many thanks to everybody who is watching us on video. There are plenty of people I heard online also who are watching us. Thank you for your interest in the life and health reinsurance. Really, really appreciate it. Now, Clemens, Christian, and also Sven, you were all mentioning the lean operating model, and you were mentioning also our cost ratio, which is very low.
One very concrete example of our low cost ratio is, I would say, the first cover sheet, because I tell you, we hate to spend money on nice-to-haves. Ron and myself, we said we stop spending money on models for our photoshoots. We said between two client meetings, we took the camera and we took the picture ourselves. This is the first example. The second one is what you see here very clearly, is that we have no age discrimination in this company, right? While 14 years ago I was a teen baby surrounded by some old men, 14 years later, I'm the oldest board member, surrounded by very young colleagues. Still, I made it on the picture, which is really, really brilliant. Anyway, some of you were here two years ago when I was for the first time talking about IFRS in the context of life and health reinsurance.
I don't know if you remember, but at that time, we were really just one year into IFRS 17. It was totally new for all of us. We had to get used to the processes, the way of reporting. At that time, what I was presenting to you were some illustrations. I don't remember. I was showing you how important cash flows as of a sudden become, how important it becomes to understand the current cash flows and understand the changes that we have in the current year cash flows having an impact, you remember, in the experience variance, having a direct impact into the P&L. I was also explaining how our estimation of the future cash flows impacts logically the CSM, positively or negatively, or if you're already in treaties which have no CSM left, the loss component. This was just illustrative.
We thought with Ronna, two years later, now that our processes are very stable, that we understand more or less what's going on with IFRS 17, that it's probably a good time to look into the real figures and look backwards and just check how did we do. No illustrations at all. There was no illustration. Let's have a look into the real figures. What I suggest to you to do today is to look into the 10 past quarters, starting from Q1 2023 up to Q2 2025 and really looking into how we did. What we're going to do, we're not going to invent anything new. What we want to do with you now is show you the figures as we usually present them in the comm calls every quarter.
You remember we're looking into the CSM, we're looking into these famous waterfall charts and the components of the CSM, and we're looking into the reinsurance service result, the waterfall charts of the reinsurance service result, and then the various components. There is one difference today, because while in the comm calls, we always look into the year-to-date data, and you remember in Q1 it's Q1, but in Q2 it's Q1 plus Q2, in Q3 it's up to Q3. We do that. We have decided today to look into the quarterly figures. Why? Because I have the feeling, and maybe I'm wrong, that some of you in this room, you still look into the quarterly figures. Yeah, you still, when we show the year-to-date figures, and you tell me if it's right or not, right?
When you look into the year-to-date in your head, you're deducting the year-to-date of the past quarter to see how did these guys do in the current quarter. I believe this is the case. Why don't we look together now into the quarterly figures, what we have never presented so far, and see how we did? I have a clicker now, which is called Andrea. Andrea, Andrea, please. Thank you very much. Let's be clear, this slide is super busy, super misleading, and you will never understand if I didn't explain it to you. Let's go step by step, and please try to follow me here because it's important that you understand what we're showing here also for the next part of the presentation. Andrea, let's reduce the complexity. What we are showing here is an average quarter.
What we have been doing, we have been looking into 10 past quarters, and we have done, in this case, for the reinsurance service result, we show you the waterfall chart of an average quarter. You see here on average, on average, you see how much CSM release we have made on average every quarter. You see the RA change, you see the experience variance, you see the loss component, and you see the reinsurance service result. You see here, and you have the whole picture on well done on your slide, you see that we were able to produce on average EUR 214 million of reinsurance result. Meaning, we talk about 10 quarters, that in the past 10 quarters, we have been able to produce more than EUR 2.1 billion of reinsurance service result. Let's start with this, Andrea, please. Let's have a look into what we're showing here.
The colored bar is the average. This is the EUR 214 million that we have been able to produce. The 10 other bars show you what we produced every single quarter, quarter by quarter, starting from Q1 2023, ending at Q2 2025. Not really. We're not showing you the real figure. We show you the difference between the average quarter and what we really achieved. You see here, and you see it down here, that the spread of the results that we have been producing goes from EUR 133 million -EUR 253 million. The EUR 133 million quarter has been Q4 2023. That was the worst quarter we ever had. You see this negative bar, the bar going down, meaning that it is the EUR 217 or EUR 214 average minus some figures leading us to the EUR 133.
The worst performing quarter was Q4 2023, while the best performing quarter, if you look into the figure with EUR 253 million, has been Q1 2023. When you see these bars going up and down, that's not positive or negative figures. It is simply slightly above average or slightly below average. We could have shown you, I agree, we'd had plenty of discussions. I could have shown you the bars from bottom up for each of these components, but you would have seen tons of bars and you wouldn't have seen what we really want to show you. What we want to show you is the volatility that we have in every single component of the reinsurance service result as well as of the CSM. We understand the way we look into these figures. It's super important. Andrea, let's open it up and let's look into the rest.
What you see here, first of all, is the CSM release. Again, there you see we released EUR 217 million and the spread, it's not that big. It was between EUR 184 million and EUR 200 million. I cannot read it. I think I need my glasses. Sorry, guys, I need my glasses. It's terrible. That's when you get old, you cannot read the figures anymore. Much better, much better. So between EUR 184 million and EUR 260 million. You see that there is relatively low volatility on the CSM release. Why is this the case? We release the CSM according to a predefined pattern. There is not too much of a surprise in the CSM release. Another part that you see is pretty stable is the loss component. The loss component has been pretty stable around the same figure, EUR 87- million , a bit more, a bit less. That's pretty normal.
We're going to get to that afterwards. I want to explain to you a few things about these things. It's logic for the portfolio of our size. It's logic that you will have every quarter some parts of a loss component. CSM release and loss component, pretty stable if you look at it. You see experience variances. That's where, when I looked into the figures with Brena, we're both a little bit surprised because we have always had the opinion experience variances, which is again, I repeat, which is a new view on our current cash flows in the current year. We always had the feeling they're very positive. That's the feeling we have, right, Brena? We said, how can it be? It's only three. We looked into the figures and we saw, oh, there is a special impact.
There is something special, a one-off impact that you all know, but you have probably forgotten by now, which happened in Q4 2023. That's where you see the bar that we showed with this kind tilda to show in principle this bar would be much, much more negative in Q3 2023 if we took the right figure, but it would be misleading. What happened is that before the transition, you remember we had all these arbitrations in the U.S. and we were not 100% sure about the outcome of these arbitrations. What we did at transition, we injected because of this insecurity on the transition, more risk adjustment for these transitions on the transition. When we had finalization of some of these arbitrations, and that happened in Q4 2023, this allowed us to release the risk adjustment. You see this in the risk adjustment change, the same in Q4 2023.
We released the amount of risk adjustment and were able to neutralize the negative impact we had on the experience variances. That was a very, very clear one-off. One way of looking into it is to say, let's forget about this one-off, but this one-off is overestimating my risk adjustment change and underestimating my experience variance. That's why you see on the risk adjustment change and on the experience variance, you see a second line with a second line of figures, which is if we neutralize for this one-off effect, then you would say the RA change on average is 60 with much less volatility, as you see. The experience variance is 23, again with much less volatility. That is much more what we would have expected. Our gut feel was saying exactly this. No change obviously on the reinsurance service result.
Now I would like to do exactly the same for the CSM. That's where it's going to get more interesting, I guess. Andrea, please. Same story, very complicated. All the components there. Let's close it down again to the most important stuff, Andrea, which is obviously the average. What you see on this slide is again the average addition to the CSM every quarter. You see that on average, we added EUR 87 million of CSM every quarter over the past 10 quarters, meaning that we added in total EUR 870 million of CSM over the past 10 quarters. Now let's look into the different components first, Andrea. I would like you to focus on two components at the same time this time, because that was very surprising, to tell you the truth. When Ron and myself looked at it, we said, Jesus, that's quite interesting.
There is a huge correlation between the currency effect on the CSM and the CSM itself. You see that whenever our CSM was below the average, you can see on the other side, the currency effects were also below the average. There is one exception. I remember this Q1 2023, I think, which is an exception. In all the other cases, the currency effects have a huge impact, obviously, on the CSM. The way you have to read the CSM here, you see 87 average. The minimum was - 122, which is Q2 2025. The maximum was 329, which was, if you look into this chart, it's Q2 2024. That is so you understand the volatility. You see, there is quite a bit of volatility on the additional CSM that we generate quarter by quarter. A big part from this is driven by the currency effects. You might say, why?
We have heard that from Christian, currency effects. In our case, the CSM is heavily determined by US dollar, obviously. There are two other currencies that you haven't mentioned, Christian, which are important for us on the life and health side, which is the GB pound, because our strong longevity portfolio in the UK, and the Australian dollar. All these currencies have a huge impact, obviously, on the CSM, on the amount of CSM that we add. They also have, and that's very important, an impact on the new business we write. If we write the new business in US dollars, it might be super looking, well looking in US dollars, converting it into euros. Again, the new business is also obviously suffering a little bit.
That was for me, and for Brena, I must say, quite surprising to see this huge, huge correlation between currency and the delta CSM that we're producing. Now let's go and look into the rest of this slide, Andrea. The new business, I tend to joke with my P&C colleagues, and you know the joke. I always say life and health, we work through the whole year. You see this year. You see the new business, the average new business that we have been creating every single year, every single quarter was $178 million, meaning we have generated EUR 1.8 billion of new business CSM over the past 10 quarters. As you see, we have been generating new business in every single quarter. From the worst quarter having been Q2 2023, the best having been Q1 2023, 85 to 63.
What you need to understand is this life business, it's very chunky. You write a deal in a quarter, you write it maybe in the next quarter, it is very, very chunky. You see quite a bit of volatility on the new business generation, the same. If for us on the life and health side, it's really just interest secretion. There is no surprise, very, very stable. We don't have to talk about it. Then comes the regular release. We have seen it already in the reinsurance service result. Nothing to add, it's just the order sign. In my opinion, one of the most interesting parts is the change in estimates. I would like us to spend a little bit of time here in what these change of estimates are and why we do have them. Andrea, please just highlight this.
It's quite an interesting chart because it's very, very, again, volatile around an average. The average is 118, but it goes from - 3, so very slightly negative, up to 366. When you look into these figures, what you see is that you have very little changes in estimates in the Q1s. That's where you have these bar plots which go down. Yeah, they're close to zero sometimes. You have very little changes in estimates in Q4, which is totally logical. In Q1, we're just coming out of renewal also sometimes. We're starting to run our models, starting the analysis. The impact of the change in estimates is coming in Q2 and Q3, usually. You see this very nicely on this chart.
You see that in Q2, for example, we usually look into the longevity assumptions, into the longevity book, which represents quite a big part of the positive deviations compared to the average. We have also many, many other books, obviously, that we're looking at and which are producing these change in estimates. Now let's stay with these change in estimates. I would really like to give you a little bit of insights and dig a little bit deeper into what that means. Okay, so Andrea, please. Again, let's take these change in estimates on the left-hand side. What I suggest you now to do is to take a very, very average quarter. The most average quarter we had, as you see here on this slide, is Q3 2024. Q3 2024 is slightly below average, but it is across EUR 100+ million changes in estimates in this quarter.
Now first of all, let's look into the comments. What kind of changes in estimates do we have? We have from the easiest ones to the most complex ones, a little bit of everything. The most easiest changes in estimates that we have are simply driven by the fact that we receive the accounts in a certain quarter. We look into the accounts and say, oh, Jesus, the client has been producing a little bit more than what we expected, so having a positive impact into the future cash flows, meaning that I have a change in estimates, positive. It could go the other way around. All these, what we call the updating of inventory data, this is a big part of these change in estimates because we're not knowing everything perfectly. If a client produces more or less, it has an impact on the future.
I showed that two years ago, remember, on these illustrations. That's number one. Easy, automated. Automated, very important. I mean, this is crazy. You cannot do this manually. The system automatically sees, oh, it's bigger than expected, so it adapts, it adjusts the CSM of the future automatically. You have the second level, which is already a bit more complex, where we say, oh, we have great models, but every now and then, let's say once in a year, maybe once in two years, we check whether the assumptions, the parameters of these models are still valid. You need to do that on life is, life is long-term, right? You look into the figures, you look into the claims. This is a longer process, manual. You look into the assumptions and then you do what we call usually assumption changes. I would say we refine the assumptions.
This can go both ways. It can go positively or negatively. We look at the models, we say the model is good, assumptions need to be changed. The third one, which is the most complex one, is when we really have to say we need to modify and improve our models. These actuarial models, and some of you who know about life business, they're super, super complex. It's not trivial. There you have these multi-stage models with Markov chains, et cetera, et cetera. I mean, this is big, big business. When we change and improve the models, automatically we're going to have changes in estimates, positive and negative ones. Now in this quarter, and this is an average quarter again, we were looking, I just asked the guys, how many groups of insurance contracts have we had to produce these changes in estimates of EUR 100 million?
We looked into the figures and we realized that we had more than 1,000 groups of insurance contracts, which had either a positive or a negative change. You remember when we have the comm call, we say change in estimates plus 100 and we give you a reason. I could give you more than 1,000 reasons for these EUR 100 million. I want you to understand this, okay? When you take the sorted view, what you see here concretely, you see these 1,000+ groups of insurance contracts and you see the biggest change in a group of insurance contracts, which has been EUR 100 million, you see number one. The smallest or the worst change, the biggest worst change, which is number two, which is at EUR - 40 million. In between, you have plenty of changes. This is the way it looks like.
What is even more interesting is when you look into the cumulative view. When you take these changes and you cumulate them, all the positive ones and then you take all the negative ones, you end up obviously with EUR 100 million change in estimates. You see that in the slide on cumulative, right? The EUR 100 million, you see them again. In reality, we had EUR 500 million, close to EUR 500 million positive changes and close to EUR 400- million changes. That's a lot. When you look into the machine room, and Clemens, you always talked about the machine room, right? The machine room of Hannover Re, this is a big beast. At the end, we tell you EUR 100+ million , you know, but it's the result of this. Now, coming to the loss component, it's exactly the same process.
The loss component is made of hundreds of groups of insurance contracts, which are in the loss component. It's not just one, it's hundreds. For each of these groups of insurance contracts, we do exactly the same. I could have shown you the loss component, by the way. Some of these contracts are performing better than expected, so positive in terms of loss components. Some are performing less good than expected, negative. What we show you in the loss component is really the result of such an analysis, which is very, very deep, obviously. Now, what I would like to do is, let's, for an instance, just suppose that the world is perfect, okay? Let's suppose that we have no changes in estimates.
Let's suppose that we're really able to know exactly how much the clients produce, how the claims are going to perform, what's going on, et cetera, that we were the guys who know everything. Zero changes in estimates. Let's make the world even more perfect, by the way, by saying we don't have any currency effects. Yeah, no currency effects, no changes in estimates. What would that mean for our CSM? Andrea, let's look into that. Let's just forget about currency effects. Let's forget about changes in estimates. Let's look into what is left. What is left is the new business CSM that we're generating. It's the interest secretion, and it's the release of the CSM. When you want, and I try to give you some hints, when you want to see whether we're maintaining the value of our portfolio, let's forget about changes in estimates.
Let's forget about currency effects. Whether we maintain this value, the best way of doing it is really adding these figures and see, are we able with the new business and the interest secretion on the portfolio, are we able to compensate the regular release? That's super important. Should you look into that on a quarterly basis? Obviously not, makes no sense. Makes no sense at all. Looking into it on a, let's say, 10 quarter basis, on two years, three years, that's very relevant. When you see that we have been able to compensate and slightly, in this case, even overcompensate the release, that's a very good story. What you need to understand is that obviously it depends on the type of business that you're writing. If you write, let's say, longevity business, longevity business would then generate a huge new business CSM.
It would take us, and it's going to take us 30 years to release, because we're releasing longevity profits over 30 years into the future. If you write financial solutions business, that's the other extreme, probably, unless we take group business, et cetera, we would have the same increase in new business, but release it much, much faster. This way of looking into it has really to be taken over, let's say, a period of time. It makes no sense to do it in one quarter or just one year because you have the type of business that obviously you're writing, which impacts how much you release and how much new business you have there. I think a very interesting way of looking at it. Let me go back to the real world because the real world is not this, right? The real world is messy.
We don't know everything perfectly. When we think about what the variables are that we as Hannover Re on the life and health side, we try to estimate all the times in these components and where we see the impact of our estimates, there are three parts. Number one, experience variances, which obviously have a direct impact on the P&L. Number two, change in estimates, which have a direct impact in the CSM. Number three, you have the loss component, which has again a direct impact in the reinsurance services. Andrea, let's have a look into that. Here we have these three components. What is interesting is to understand how good is the quality, how well are our best estimates, how well are our assumptions really.
One way of looking into it, and I try to give you some hints again here, is to say over a period of time, not in one quarter, please, that makes really no sense, over a period of time, how does the change in estimates, so the positive changes, how does the experience variance and the loss component perform, and if the sum of these three values, which are mainly the same thing, it is because of our assumptions of the future and current cash flows, if the sum of these components is positive, you can conclude that our estimate, our view of the future is probably slightly conservative because you would expect on a best estimate basis to be here at a zero level. When you look at this, and I showed you again the two values of experience variances, that's very important.
You remember, I said with the one-off, it's EUR 3+ million , without the one-off, it's EUR 23+ million . I showed you the two here, right? When you sum this up, you see that in the realistic scenario, we have EUR 50 million, around EUR 50 million per quarter of positive deviations in respect to our view of the future world. EUR 50 million, meaning that's EUR 200 million per year, where we are slightly on the conservative side. This obviously has an impact on the new business CSM. That means that we're probably slightly underestimated in the new business CSM, which then comes out via changes in estimates and experience variances. Yeah, that's a very, very important message in my opinion. Good. Andrea, this is my last slide, but I would say the most important one. What you see here is again, let's go back to the reinsurance service result.
Let's go back to the CSM. You see the variations of these components. Again, the colors, I don't have to repeat this anymore. Suppose for an instant, we might agree on that, okay? That the average over 10 quarters, the average over 10 quarters, the average waterfalls of the 10 quarters is a good indication of the life and health economics. I don't say that we do the average over 500 years. That's stupid, okay? Over 10 quarters, as we're doing here, if we suppose that this is a good indication of the economics of the life and health business. If you look now into these individual components, and we see in light violet, the volatility of each of these components that we have seen previously in every single quarter, you see the huge volatility. I mean, we have discussed them.
Yeah, the experience variances as an example, change in estimates as another example. I mean, you would probably agree that a single quarter is all but a good indication of the economics of life and health. I mean, it's kind of, I'm stating the obvious, right? You cannot take a single quarter and say this is a good indication of the economics if we believe that the average is a good indication. We have seen the average makes sense. What Ron and myself said is, is there a better view maybe? Is there a better way to look into the economics of the life and health business? We gave it a try.
What we did was to say, if you get a new quarter and you look into the rolling average of the four past quarters, including the new one, then you see, and you see this with these nice little squares here, the rose squares, you get something which is much, much, much closer to the average over the 10 quarters. You get a result which is a much, much better indication of the economics of our business. Looking into a single quarter, sincerely, does not make a lot of sense. This is, I think, a very, very important slide in my opinion. You do whatever you want, but when you do this, you get a real idea of what's going on. I mean, you see it here. This is with real figures. Mathematically, we all understand it, right? The rolling average has less variance.
I don't have to make studies here. We know that, okay? Obviously, yeah. This is real numbers and it works. It works quite well. Look at the variance we get on the delta CSM. Look at the variance we get around the reinsurance service result. Very, very close to the reality. This is really good. Okay? So, Andrea, I have three key takeaways, okay? Number one, number one, we have shown, and you remember the figures, that we have been able to produce more than EUR 2.1 billion of reinsurance service results, consistently positive quarter by quarter over the past four quarters. This demonstrates our earning strength and also the earning stability of life and health. Number one. Number two, we have shown that we have created EUR 870 million of additional CSM, 10 x EUR 87 million, remember the figures, notwithstanding very, very strong currency headwinds.
This gives us sincerely confidence into the earnings growth because this additional CSM is going to emerge into earnings, number two. Number three, we have shown you that we have generated EUR 1.7 billion of additional new CSM over these 10 quarters. We have also shown you that our new business CSM is slightly on the conservative side. This gives us confidence in our ability to grow our business into the future. Thank you very much. I ask Brena to join me for the Q&A.
Thank you, Claude, for this fascinating and well-presented insight you gave. Thank you, Brena, for joining us here for the Q&A session. Just a few words on Brena, because I want to introduce you. Brena is responsible for all the life and health regions that fall out of Claude's responsibility, namely North America, the U.K., the Ireland, the Bermuda business, as well as responsible for the longevity business.
All the big markets, all the big markets.
Yeah. With that, we are set, and we dive into the Q&A session. This time we start from the front. Hadley first, Michael, even.
Thanks very much, Hadley Cohen, Morgan Stanley. Thanks for all the detail on the sort of the volatility of the CSM and the earnings. Can we talk about the growth profile a little bit, please? I think if we adjust for, you know, the noise around the numbers, the CSM growth is quite limited. It's quite small, especially when I compare that with some of your competitors on the reinsurance side, they're seeing much stronger CSM growth on the life side. Can you sort of talk about why you think there's a difference there, whether you can expect to grow the CSM at a faster rate going forward? Linked to that, can you also talk about the growth outlook on the financial solution side, please? I think the margins there, particularly in the U.S., have halved in recent years. Are they going to continue to come down?
Is that still an attractive line of business? The growth outlook, I guess, on Asia, from the FinSol perspective as well. Thanks.
Yeah, Brena, it's for you.
Yeah, thanks for the question. On the first point about the CSM growth, in the past CSM growth, I think, as Claude explained, there has been some conservatism taken there. I think some of the new business CSM that we have shown probably is a little on the conservative side. You will see that conservatism released into earnings in the future as experience variance. I would say that for the first part. I do think we feel very optimistic about growth prospects on the life and health side. There are a number of areas that we feel there are growth opportunities in. I would say on the traditional side, there are markets where we're underweight, particularly the more mature markets. We're underweight in the U.S. and in the U.K. in traditional business. We still see a lot of growth opportunities there that we would expect. You mentioned financial solutions.
Financial solutions, there are still definitely opportunities in the U.S., but you're absolutely right that margins have come down. We need to write more business to kind of run at the current level of growth. There are opportunities in the U.S., and we continue to execute on some attractive U.S. opportunities. You rightly mentioned Asia. There is a lot of regulatory change happening in Asia. There has been a lot of change in regulation in Hong Kong, in Korea, in Japan, across many of the Asian countries. That regulation change always leads to growth in financial solutions opportunities. We've strengthened our teams in many of the Asian markets to prepare for executing on those opportunities. We do feel there's going to be opportunities to grow. We're already seeing, again, we're already executing on reasonably significant financial solutions opportunities in Asia. We would expect that to continue.
The last part of the business, just to mention, is our longevity business. We've written a lot of longevity business, mostly in the U.K., but we have executed in almost 10 countries on longevity. We see longevity opportunities growing across the world. We've quoted on longevity opportunities at this stage in more than 25 countries. That's a lot. We do feel our longevity teams are very strong. They're well able to execute. We probably feel, relative to our peers, we have that connection between our local teams and our global experts. We feel well positioned to execute on those longevity opportunities as we start to see more and more opportunities outside of the U.K.
No, you said everything. I can just tell you that there are markets and regions where we expect less growth, where we're going to grow at most with the market, because we're already market leaders. I mean, I give you examples, Latin America. We're a market leader by far. We cannot grow much more. I don't want to have 60% of the whole Latin American market either. That's stupid, right? It's diversification. In the Middle East, we're number one. In Australia, we're co-number one. In Africa, we're co-number one. In these regions, we can, at most, grow with the market. What you were mentioning was the whole rest, where we have plenty of opportunities.
We continue with Shanti, right? Next to Hadley. Yeah, thank you.
Hi. Yeah, it's Shanti Kang from Bank of America. I have two questions. The first one was just on the earnings mix of life and health. How should we think about the distribution between FinSolutions, longevity, and then the traditional kind of mortality? Do you expect that to shift in the next year or two, or what's the horizon? This is perhaps a more simplistic question, just connecting the pieces from Christian's currency hedging piece into your CSM view. How do those two interlink? Will there be an adjustment from a currency effects impact off the back of the hedging that's been put in place for Q3?
Maybe I'll take the first question on the mixture of earnings from financial solutions, longevity, and traditional business. I mean, I think what you have to recognize is most of our earnings, the vast majority of our earnings, come from our invoice book. Life and health is long-term business. It takes time to change the mix of earnings. Over the next five years, the vast majority of our earnings are going to come from that CSM that Claude showed that's already on the books. That gives confidence in how the earnings are going to emerge. It also means it takes time to change the mixture. You mentioned one or two years. No, I don't see much of a change in profile in earnings over the next one or two years.
Looking out longer, five, 10 years, yeah, we might want to see more traditional business there and less from a smaller proportion, I would say, from financial solutions. On the currency?
On the currency, I'm going to hand over to Christian. Just one second on the other question, again, on what you said. If you look into the CSM, and I was presenting the CSM two years ago, remember I was presenting the real CSM. I can tell you that the split of the CSM hasn't changed dramatically. We're still at one-third longevity.
We're one-third, one-third.
One-third, one-third, one-third. FS, one-third traditional business. There is a certain stability of the mix of the CSM, and it's this mix of the CSM which determines how quickly, as I said before, it moves into profits. If we start to write more traditional business, as you said, or longevity business, as you were just mentioning, the impact will be, yes, a new business CSM. On the reinsurance service result, the impact will be much lower because these profits take longer to emerge. That is something that you have to take in. That is why I said, look into it over a reasonable period. Do not look into it on a one-year basis or quarterly basis. Makes no sense. Over a reasonable period, we have quite a bit of stability. Yeah. Sorry, now, Christian, currency.
Happy to take that one. Perfectly ties to my presentation. We have to take a bifurcated look here. There are two answers to your question, basically. One is for the existing book of business, for the existing CSM, because this is already hedged by the approach that I presented. Why is this? What is the CSM? The CSM is basically the present value of the future profits in a specific way under IFRS measured. I explained to you before that we hedge with an economic view, and we take Solvency II as the calculation basis for this. What is in Solvency II? In the NAV, there's the basic owned funds, including the future profits. It's already included. It's not one-on-one. It's not exactly the same valuation under Solvency II. Broadly speaking, this is already covered by the hedging we do for currencies. That's the first part of the answer.
The second is, obviously, the new business, the newly written business. As Claude already explained, of course, there you have an impact. The business we write into US dollar is more or less value depending on the actual exchange rate we have at the time we write the business into our books. Okay. Great. If you hand over the microphone to Michael, then... My memory is very bad, but I remember your presentation last year in London. The mood on new business was zero. That's what I remember. Maybe it was more than zero, but it was really not very much. We were sitting on those funny squares. Today, the mood is much more positive.
My impression, and I just wondered where it's coming from, is it that because pricing on life is zero or one, you don't kind of get half a contract, you get a full contract or zero. Is it that you've taken all these positive variances into account and you're pricing a little bit more aggressively? I know aggressive is a wrong word for Hannover. The second question is, I know Shanti kind of asked the same thing, but how has the cash flow, cash emergence, you know, the cash, the dividendable cash changed? There we are. That's it. Do you want to...
Yeah, I mean, I wasn't there last year, so I don't know exactly what you heard. I think when you look at growth opportunities, you really have to look at the different segments, the different businesses, and the different markets. You mentioned that, you know, we either win or lose a contract. That's actually not the case in the U.S., for example, due to the largest protection market, the largest traditional protection market. In the U.S., reinsurance is typically ceded via pools. A reinsurance pool from a client is normally split into three, four, or five reinsurers. Our focus in the U.S., up to more recent years, was very much on stabilizing our in-force book. That work is done. We look at pricing in the U.S. We feel we're not going to write every deal, but we feel there are opportunities to grow our new business there fairly significantly.
That probably has changed over the last few years. We look at longevity. Like I said, we still see there's good opportunities, particularly outside of the U.K. On financial solutions, I think we've always, I don't think our appetite there has changed at all. We do feel we are the market leaders, or one of the market leaders in those structured financial solutions. I don't think there's any change in our desire to write as much of that business as we possibly can.
The opportunity lies in the big markets. That's exactly, that's why you're here, by the way, Brena. I know U.S. longevity, this is where the opportunity is. U.K., for us, in other markets, we're already really, we're already where we want to be. We're market leaders in so many markets. Unfortunately, these are the smaller markets. This is the big guys.
We probably have been underweight in those markets, I would say. Some of those bigger, more mature markets, we probably have had a lower share, particularly of the new business, than some of our peers. We'd like to grow that, and we think we have the ability to grow some of that.
Yeah. The other question, I'm sorry, the cash flows. Christian, I have to ask you. I'm unable to answer that one. Christian, you have the mic. Yeah.
Actually, I would have also not had numbers or a clear pattern at hand. I haven't looked too much into this. The general answer would, of course, no, the duration is quite different if you take the financial solutions part or the financing part. That comes quite quickly, obviously, but in longevity, we talk about sometimes about decades. I think there is not a big shift, but I couldn't tell you the mix today.
I just, and I said the last time, I guess, if you look into the CSM that we're having, it's now probably EUR 7 billion or whatever. This is future profits which are coming. Yeah, but this is discounted. If you don't discount the figure, you have to add 50% to the EUR 7 billion. We're ending up, that's the figure, it's a bit more complicated, EUR 11.5 billion if my calculation is right. No, EUR 10.5 billion. EUR 10.5 billion, sorry, I'm getting tired. Old and tired, EUR 10.5 billion, which is massive. Then you have the risk adjustment, which is in principle also future profits. If everything goes as expected, we're talking about EUR 3 billion. There, the discounting has a much, much bigger impact because the risk adjustment, the big part of the risk adjustment is for our long-term business. The discounting effect is 90%.
That means the real figure, if you undiscount it, and we're undiscounting it, obviously, is 90% higher than EUR 3 billion. We're talking about close to EUR 6 billion risk adjustment to EUR 10.5 billion CSM. We're talking about close to EUR 17 billion of profits which are lying there and which are coming through the reinsurance service result sometime. You need to have a little bit of patience, obviously.
Yeah.
Okay, then we move to the next question from Ivan and then Darius.
Thank you. It's Ivan Bokhmat from Baltus again. I wanted to tie together with some of the comments that Clemens and Christian have made about the capital consumption and the solvency ratio drag, and some of it will come from life and health. What I wanted to understand perhaps is what is the capital-intensive growth in life and health? Is it about the type of business, the geography, the mix altogether? If you talk about growth in closing the underweight in traditional markets in mortality, is that the most capital-intensive or maybe there's some types of FinSol, something along those lines? Secondly, again, tying back to the earlier session, we were talking about adding to the buffers in life and health. Is there a way for us to quantify it, to think about that?
I mean, very simply, if you say it's EUR 200 million of extra kind of releases in a year, should we just compare it to the stock of CSM and say, you're 3% over-reserved, so this is kind of how those buffers work if we just use the P&C analogy.
Okay, maybe just quickly on the first one. You know, what you need to understand is the way we price our business. Sven alluded to it, by the way. In the whole of Hannover Re, we have the same way of looking into business. There is no politics. We have a certain economic capital, that diversified economic capital that every piece of business is consuming. Obviously, the more volatile, the more dangerous the business is, the more capital you're going to consume. The way we price the business is that we want to have a minimum return on this capital that we have consumed. The more volatile, the bigger the margins. You write the cat business, you have much higher margins, obviously, than if you write a financial solutions deal. We look into this business in a very, let's say, agnostic way. You understand what I mean?
We look into the business, look into volatility, how much capital does it consume, how much margins do I need, and that's it. Now the question on the most capital-intensive business, Ronna, go ahead. Yeah, we could both answer it. Go ahead.
No, I would say for life and health, what drives the capital intensity is the duration and the guarantee. Long-term guarantees over a long duration are what attract large amounts of capital. We need to make sure that that business is priced to adequately reward that capital. Just as Claude said, we price assuming that capital is rewarded and assuring that that capital is rewarded. The longer the duration, and particularly if it's guaranteed, that drives the capital consumption. Is there another part of the question?
Was there another question? No, that was the question, I guess.
About the life and health buffers.
Oh, the buffers. What I tried, you know, we don't have explicit buffers, unfortunately. You know, P&C, you have that somehow. We talk about buffers. We don't have because we're always on a best estimate basis. What I tried to show you here without saying it, you know, we do have buffers because if you look into the changes in estimates, experience variance, and loss component, and you think about it, that in one year, we are 4x the 50 I was showing. EUR 200 million, you could probably interpret it, maybe I'm totally wrong here, by the way, but it is a kind of a buffer of EUR 200 million every year that we're producing somehow, right? We don't call it buffer and we don't have an explicit buffer.
I mean, I think best estimate is always a range, right? You never have a best point best estimate. Nobody knows exactly what's going to happen in the future. Best estimate is always a range. I would say we're probably at a more conservative end of the range than our competitors, but we still feel very much that we are in a best estimate range.
Can I ask one more question? For those buffers, can you add to them at will in the same way as with P&C, or is it only when you assume new business?
We are always reviewing our assumptions. Reviewing assumptions on in-force business is an annual or at least a biannual event. In that way, we always have an annual opportunity to look at those assumptions and decide where they are in that range of best estimate and where we want them to be.
You have seen it, by the way, a concrete example, which is for me, but that was quite interesting to see how many different reviews we have. Yeah.
Okay, Darius.
Thank you for a very insightful presentation. Very interesting. A few questions, I suppose. The first one is, when you do peer review, I want to know how you know that you are doing well relative to the market, some of your competitors, because you could judge the CSM stock creation, but then you've got lumpy deals. I don't know how you normalize for that. You've got different assumptions. You probably don't know what assumptions your competitors are making in arriving at CSM. Perhaps someone's being too optimistic today and will pay tomorrow. How do you know that you're on the right track, that you're not behind, more aggressive, where you shouldn't be in terms of assumptions, et cetera, et cetera? Thank you.
I would say there's no one single source for that. We look at multiple different sources of information, and then you're trying to piece it all together and put together an overriding story on how we compare with our competitors. We do have NMG, a consultancy firm, who do client surveys in all the markets. There is good information, particularly in the more mature markets. There is good information on the amount of business that each of the reinsurance companies is getting from cedants. We get information from the cedants, from the clients, particularly from friendly clients. They're typically very happy to share how we are doing relative to cedants. Often, when we price a piece of business, we will get market feedback on how we are pricing relative to other competitors. There are multiple sources of information.
We're obviously also looking at their earnings reports, and we watch their investor days. I don't think there is a single source. I think it's putting together multiple sources of information and connecting the dots, essentially, and putting together that view of how we compare to our competitors. I think that can give you quite a reasonable source of information, but you're never going to know everything.
You know, the advantage we have on the life and health side is that there are much less competitors. I mean, to do life and health reinsurance, the hurdle rate is quite high because it's quite technical, as you see. It's long-term. It's risky. It is easier, you know, to know what a handful of competitors are doing. I hate to say so, they're as good as we are. You know, they're also good. We have to admit it. Life and health reinsurers, they know what they do. We know what we do. Sometimes the differences in pricing, this is in the per mil part, right? That you get the business or you win or lose a business. It's many, many, many assumption changes. We all have professional people who look into that.
I think the place we want to be is where you do get into the price change, price differences that are very, very small, that the clients will then choose Hannover Re. It often comes down to that. Often they will have three, four quotes from reinsurance companies, all within a very small margin. We want them to choose Hannover Re for that, and often they do because they do value working with us.
is totally true. One of the reasons often is not price, but it's speed. As Clemens said, we're fast. We have empowered people, so we send people who are empowered to the clients. The clients want to talk to a decision maker and not somebody who is just a letterbox. The speed made us win a lot of business in the past two years and also in the past, by the way, absolutely amazing. Not the price, it's the speed.
Okay. I see a further indication from Vinit Malhotra and also from Andrew Baker.
Yes, thank you. Vinit from UBS Investment Bank. Just one, let's say, philosophical question, one quick life question. You know, the IFRS 17, when it came in, one of the supposed benefits was granularity. You've highlighted with the thousands of contracts that you get to see. Has it changed anything in your behavior as a manager of those contracts to see all the data? Because then we would thank the IFRS 17 effort as well. If there is, I'm just curious to know. The second thing is, just with Brena coming in, the whole financial solutions used to be a quite emphasized area. Are we sensing the emphasis a bit lower in this new world now? I'm just curious, it seems to be a bit less emphasized. You said five years later, less financials and more traditional book.
Do you want me to take the first? Or do you want to take the first? IFRS 17 is, as you have seen, it is complex. It is a new regime, obviously, where you need, previously you had actuaries here, accountants there. Now you need what we call accountaries, you know, because you need, it is more complex, I would say. I must say I like it, by the way, because it's more economic than the previous regimes. I love it, by the way. I love the fact that we don't talk about premium anymore. I love it. I always found it stupid. If you look into the way we write our business, the daily business, our underwriters, ourselves, when we take a decision on a piece of business, which is on the table, and we get excited about it, we're not talking about IFRS 17.
We talk about premium, commissions, profit sharing, claims. We take economically sound decisions. The decision-taking process, the way of pricing, looking into the economic capital we need, et cetera, et cetera, has not changed a mew, I can tell you. Nothing. This is still the same. IFRS 17 is the way we show profits, but I must say I pretty much like it. I hate to say so. Yeah.
I think we've always operated very much according to an internal model, our internal model, our economic basis. I think what's nice is that IFRS 17 aligns to that much more than IFRS 4 did. It hasn't changed any behaviors, but you probably see a much more aligned accounting to the way the business was already being run. On the second point, Claude can comment also. I love financial solutions business. I think we both love financial solutions business. Our appetite is to write as much financial solutions business as we possibly can. Just to be very clear on that, we will continue to write financial solutions business. We do see more competition in this space. We do see more and more peers coming into that financial solutions business. We will have to fight hard to maintain our growth in financial solutions.
We absolutely want to continue to grow the financial solutions business. I think we will continue to grow the financial solutions business. When I spoke about financial solutions reducing, the proportion of financial solutions reducing from where it is today, that would be by growing the traditional business, particularly where we have been underweight, I would say. It's not in any way a reduction in appetite for financial solutions business. Quite the contrary. We'd like to write as much of that as we possibly could.
What you need to understand is financial solutions, we need to be ahead of the curve. We have been one of the first guys running financial solutions with Claude, you remember, you know. We need to stay ahead of the curve. While we're doing our financial solutions business of today, we're working very hard to understand what is the potential solution we might provide our clients tomorrow for a problem that they might not even know yet. That's exactly what we're doing. We have to invest into solutions constantly, constantly.
Okay. The next question comes from Andrew.
Thank you. Andrew Baker, Goldman Sachs. Just a quick one. When we think about the EUR 200 million, the net impact of the estimates variances loss component, I appreciate there's thousands of contracts. You made that very clear. Are there any specific lines of business or geographies that are consistently contributing positively or, vice versa, acting as a drag on that number, how we should think about it? Thank you.
Let me make one example. It's resumed, by the way, longevity, but I had longevity before. That's why I know the detail there. When you look, for example, in longevity, we had positive changes in estimates. What you need to understand, it's not that we said, oh, we see that people are living less long than we expected, so we can release reserves. It's not about this. It is about the inventory. Every year, we look into our book, and I told you probably, we look into every single policy, policy by policy, right? We look into who died. Given that we have a mini reserve for adverse deviations of every single person in the book, everybody who died releases this mini reserve of adverse deviations. This is leading to a change in estimates. Don't believe that we're changing our estimates on longevity every year.
I mean, what's going on that we change our estimates on how people are dying every single year? That makes no sense, right? Longevity is certainly, I would say, systematically going to produce more positive results than expected because of this detail that I was just explaining to you. Brena, you have probably other.
Yeah, no, I think if you, longevity is the obvious example on the positive side. I think it's very spread then across, as Claude mentioned, many, many thousands of groups of insurance contracts when you combine the positive and the treaties contributing to loss components. I think it's very hard to isolate. I mean, we have referred to China CI in recent earnings quarters. We've seen some impact there. I think we've taken some pain there. Going forward, there's nothing I think we feel will stand out as a contribution to either positive or negative.
I would say there is nothing where we're the only guys who have either positive or negative results. This is pretty much market-driven. You might have heard Australia TPD claims increasing. You might have heard it. You hear it from every single life and health reinsurer. It is what it is. You need to correct it. That's very important for us also that we don't have a single thing which we are suffering or benefiting only. Benefiting is okay. Suffering is probably not that good. We don't have anything like this.
Okay, in the interest of time, I thank you for your questions. Claude and Brena, thank you for answering those. Before we are wrapping up this Investor's Day, I'd like to invite you for a light dinner outside of this room and get together. I'd also like to thank you for being here, attending the Investor's Day on behalf of the entire Investor Relations team and for your questions and contributions. With that, I hand over to you, Clemens.
Thank you, Carl. Thank you, Carl. When I made my introduction, I said there's a lot of passion when we talk about the business, a lot of love for the business at Hannover Re as you can tell. That's all the way through the Executive Board. What I didn't know, that's my key takeaway, is that there is so much passion for IFRS 17 accounting in the Executive Board, which we've just learned, Claude. Thank you very much. That was very good. I think what all presentations that you heard, we spoke about a variety of topics in those presentations, all sorts of topics. When I just reflect on them, I think what all presentations had in common was confidence. Confidence to grow, to continue to grow our business, be it in P&C reinsurance or be it in life and health reinsurance.
The confidence, and our colleagues alluded to it, Claude, Sven, you said in a given year, you know, the business can be a bit volatile when we talk about structured business, et cetera, when we talk about how do we react to market cycles. Midterm, long term, we are very confident due to many of the reasons that we alluded to, are very confident that we will continue to grow our book of business. What also was very clear is that there is a lot of confidence that we will continue to grow our earnings. By way of fueling it with new business, we've heard on the life and health reinsurance side, you could tell, I think, that there are plenty of opportunities to grow for us.
The same is true on the P&C reinsurance side, be it in a traditional business, again, all according to market cycle, be it in a structured business, where in a given year, you know, it is transactional, it can be volatile, but clearly we are very positive on the pipeline, also on the P&C reinsurance and on the life and health reinsurance side. That earnings growth is not only fueled, though, by new business that we are confident to create. It's also backed by the resilience that we've been able to build in our assumptions.
If I just start probably in a different order and start with the investments, and Christian, you alluded to it, I think we've been able to build a portfolio on the investment side that is highly diversified and that even, you know, provides stable, increasing investment income in difficult market environments, as we've seen in recent years. Reliable earnings contributions on the investment side is something that we inspect going forward with the assets under our management to grow and the higher yields that we see, the higher market yields still finding their way into the running yield of our fixed income portfolio. That will already increase the contributions from the investments. On the life and health side, I mean, one of the earnings contributors, Claude, you alluded to it, clearly the new business contribution.
Whilst that might really just on the face of the presentation of the new business creation looks like, oh, is there really a lot of new business CSM coming, or is that mainly assumption updates? I think it's true that already in the initial recognition, we are very cautious in setting the assumptions. Therefore, I would say the new business value that we show in our new business CSM is a bit subdued by the fact that we are very conservative. You will see some of that new business creation coming through by way of assumption updates later on. We spoke about, and Ivan, to your question on are there similar buffers or resiliency on the life and health side. We roughly look at EUR 6 billion of CSM at the moment on the life and health side, which are per definition, as we heard, future profits.
We are also looking at a risk adjustment on the life and health side of around EUR 3 billion, which, no coincidence, in some of the capital models are considered future profits as well, hard capital. Therefore, to that point, our confidence on the earnings on life and health are also fueled by the fact that we are sitting on EUR 3 billion of risk adjustment, which by definition of IFRS 17 are also contributing and find their way into the P&L going forward. Some of that is more fungible than other elements of the risk adjustment, but there are ways to manage our earnings also on the life and health side. On P&C, again, I think that confidence that we will continue to grow our earnings is fueled by attractive opportunities in the market. Sven alluded to the fact that this is still an attractive market environment.
I think here, really, our low-cost ratio will give us an advantage to grab market share, to grab business in a profitable way, even in more difficult markets. Growing the business will fuel that confidence. At the same time, and I just want to be clear on this, we do feel quite confident with the buffers and the resiliency that we've built over the last couple of years. Whilst this is not a ceiling, just by, let's say, we will not change our prudent reserving approach, but just by way of not adding additionally, as we did probably very substantially in the last couple of years, just by way of not adding additionally to these buffers, to this reserve resiliency, this will clearly have a positive impact on our combined ratio, on our reinsurance service result in P&C, which we expect to grow even in softer market cycles.
Overall, again, I think, and I hope you found this useful, and you have sensed that there is a lot of confidence that we will continue to grow our earnings, and that we will, in combination with the higher payout ratio on our dividends, continue to create value for our shareholders. As we saw earlier, on a sustainable and very reliable way. That's clearly our ambition. Thank you again for taking the time out of your busy schedules to come here to Frankfurt. Thank you for taking the time in the webcast and follow the sessions. Thank you again for your interest in Hannover Re. I want to repeat, Carl, thank you to you and your team. Big shout out to all the work that has gone into this. I really find it enjoyable, and I hope you all found it enjoyable. Thanks again, and see you soon.