Hannover Rück SE (ETR:HNR1)

Earnings Call: Q4 2016

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Mar 9, 2017

Good afternoon to everybody here in London at the Stock Exchange, and good afternoon to all of those joining us via the internet. Welcome to Hannover Re's analyst conference. It is my pleasure to see that so many of you have taken up our invitation and are showing, therefore, your interest in Hannover Re. Due to legal requirements, we had to release the key figures already four weeks ago. Today, we are delighted to present to you the full set of numbers in greater detail. I must say that I am rather impressed by your work over the past year. In total, you published altogether, at least to my knowledge, more than 270 reports on Hannover Re and/or the reinsurance market. This is about 30% more than in the previous year. That reflects your efforts to help and to steer investors through the current market environment. Thanks for your support and your hard work, and please do keep it up. Today, we are also offering a dial-in option for those who were not able to be physically here in London. As a reminder, the dialed-in participants will be in a listen-only mode during the presentations. If any participant has difficulty to hear the conference, please press the star key and zero on your telephone keypad for operator assistance. I would also like to draw your attention to the feedback questionnaire, which we have distributed in advance, and which you will find on your desk. As you know, we greatly appreciate your remarks, because it lays the foundation for the preparation of our investors day in October. Feel free to either leave the feedback form at the table or send it in to Julia, Axel, or myself. First of all, Ulrich Wallin, our CEO, will kick things off with a brief overview of the 2016 financial year. Roland Vogel, our CFO, will then move on to present the financials in detail. Afterwards, we will be happy to respond at length to all your questions. I would like to point out that we do please wait for the microphone before asking questions so everybody can understand your question, even those who are not in the room today. On that note, I am delighted to hand over to Ulrich. Yes, thank you, Karl. Maybe you give me the first slide as well. Good afternoon also from me, and thanks for coming on this lovely day in London. You know we put the headline of our current strategy cycle for three years. We change our strategy every three years. The current one is titled, "Long-Term Success in a Competitive Business." I can tell you our business is competitive, so that part is true. We also have the fifth consecutive year of record results. So we feel maybe we are going towards the long-term success as well. As Karl already mentioned, we gave you preliminary results about four weeks ago. Because our parent company who owns us for 50% did so, and we did not want everybody to speculate until today what our contribution to their numbers might be. What we didn't tell you then is that we plan to pay a dividend of EUR 5 per share for 2016, which is an increase in the ordinary dividend from EUR 3.25 to EUR 3.50 and an unchanged extraordinary dividend. We increased the ordinary dividend because we wanted to stay within the range of 35%-40% of the IFRS group results. While most of the news is pretty good for 2016, the top line has been decreasing slightly in line with our expectation. This has to do with the continued soft market on the P&C side, which means that we have to underwrite our business more selectively. We clearly put result over premium income at this market cycle, and this is showing here. We also saw decreased premiums in the life and health business. That has to do with some loss, single premium transactions in China, which continue to run, but we have not been writing any new ones. As they are single premiums, they are not showing up in the top line this year and next year. The other element is the U.K. enhanced annuities. We continue to see decreasing premiums there due to the change in the tax environment here in the U.K. where you can more easily and more tax efficient take a lump sum from your pension fund. The advantage of buying an annuity is not as large as it used to be, and as a result of that, less annuities being bought. The bottom line results look pretty decent considering the low interest rate environment and the soft market on the P&C side. Also considering that, as you know, last year we had a positive one-off effect to the tune of around EUR 40 million, which, of course, as it was a one-off, was not reoccurring. We didn't have another one-off to supplement it. So that had to be made up by the normal results of the business. Yes, with the group net income EUR 1.17 billion, we are slightly larger than the income was for 2015. In our 50th year of the existence of Hannover Re, we were able to report another record year. Remarkable increase of the IFRS capital of the company by 11.5%. That was more than EUR 900 million. Which meant that also the book value per share is close to EUR 75, is also at an all-time high. Since 2016, for the first time, we measure our solvency ratio through the Solvency II regulatory framework where we have for the quantitative risk, our internal capital model being improved by the BaFin, our regulator, both for the Hannover Re SE as well as for the Hannover Re Group. It's actually a partial model because the operational risk is added to the modeled results based on the standard formula. We are talking and discussing with the regulators to change that, hopefully, for 2018. That capital ratio stands at 230%, which is an increase from 220% where we were at the beginning of the year. That increase is largely the result of increased retained earnings. P&C business, we had a very good year. The combined ratio 93.7%. It's, of course, debated what the underlying quality of the underwriting result has been. As we do every year when computing the year-end result, we asked Willis Towers Watson to give us a pre-study of our reserves. That reflects like of our overall P&C reserves close to 80%. Then, of course, they do the final study. They finalize it throughout the year, and we show that to you at our investor days every year, as you know. This year, according to that, we have a little bit lift in the redundancies, but not a lot. I mean, in and large, I would say the redundancy level has kept flat. Therefore, we would say that the reported combined ratio pretty much reflects the quality of the business. However, in previous year, when we were adding to the buffer, of course, the underlying business was a bit better than we were actually reporting. That is to a large extent not the case this year. Of course, there is a little bit interesting statistics that we show on our annual report where you see a positive run-off results of previous years' loss reserves of a little bit more than EUR 800 million. This number has increased a bit. Also due to the fact that we continue to add to the buffers of the old. Of course, in the old years, first in the property business, the short tail business, but then gradually also in the long tail business. If those are actually redundant loss reserves, what you expect once the losses get settled, there's no reason to keep them and you can't keep them. That's the reason for the increasing positive run-off result. The other thing is that there's always something going wrong every year. This year, of course, we have the change in the Ogden tables, which will create some negative development on the loss reserves for the U.K. motor business. So that will, of course, then not show a positive in the run-off results. I will come to the Ogden tables later when I talk about next year. But, the high positive run-off result also shows you that again, in 2016, nothing went really wrong. We didn't have anything like U.S. transportation or some umbrella reserves or something like this that suddenly developed adversely. We didn't have anything like this in 2016. So that also is the reason for the very positive run-off results. Otherwise, large losses in 2016, slightly above about 10% above 2015, but still below the results that we saw below the budget. Life and health, I would call it a solid result. It's not as good as we reported last year because the lack of the one-off effect. It continues to be as we expected. At the investors day, I showed you a slide saying that the EBIT in the next few years will be between EUR 300 million and EUR 350 million. We come in at EUR 343 million, so well within that range. So pretty much in accordance with expectation. But the individual segments have developed quite heterogeneously. We had, again, a very positive result from the financial solutions business. Not quite as profitable as last year, because last year we had the one-off effect in that line. Our French branch business is back into profitability, so that's a EUR 65 million positive swing. But at the same time, we continue to have some negative results in the first three quarters on the large block of U.S. mortality business that we purchased in 2008. We also had random increase of frequency in larger claims in the fourth quarter. Therefore, that has nothing to do with the U.S. mortality in this case, for a change. Also nothing to do with the French branch. It was just randomly higher claims, which happens in a quarter. So the fourth quarter in life and health wasn't quite so strong. Overall, as I said, I think quite a solid result. On the investment side, 3% return on investment from assets under management. Also aided by some realized gains. Pretty much in accordance with expectation, even a little bit better than that. But I will leave the details of the number to Roland and only give you the positive overview. Thank you, Uli. At least you stole a little bit of powder, but I think that is your right as the CEO to do that. Based on your comments, it seems as if we could concentrate on reserves and U.S. mortality and dividends. We have a little bit more with us, and I will guide you through those numbers. Briefly, I will try to concentrate on some messages and comments, and start with the cash flow number. As you can see, the EUR 2.3 billion operating cash flow, far higher than the net income number. Which also I emphasize here a little bit because it should give us a little bit of an indication about reserve developments. At least a positive cash flow over and above the net income numbers. The numbers we earn on the investment side should give us a little bit of certainty that the reserves haven't been weakened. As Uli mentioned, this seems obviously to be a little bit the topic of the day, and we will come to that. The EUR 2.3 billion look a little bit volatile as compared to last year. Early last year, we did adjust the numbers for one large Chinese contract where we saw it before the end of the year, got EUR 500 million in. Early 2016, the EUR 300 million went out. If we adjust for that, which we haven't done because we want to comply with the numbers as presented in the annual report, 2016 would have even been slightly better, only slightly better than 2015. So very reliable, stable cash flow number. Which also is reflected in the assets under our management on the left-hand side. EUR 42 billion, nearly that increase, driven by exchange rates, by free additional cash flow, and also small increase in valuation reserves as you will see on the next slide. Uli mentioned already that our shareholders' equity number went up another double-digit percentage points with 11.5 or EUR 900 million. If you go back to 2012, you see that number even increased by approximately 50%. In 2016, you see the composition on the right-hand side. Here, the net income as the major contributor. Then the dividend payment, last year's dividend payment, which also included the special dividends. Then additional contributions from the valuation reserves and small contributions also from the currency translation, which then end with nearly EUR 9 billion of shareholders' equity on the left-hand side. You still see the green bar up there, which represents our issued hybrid capital. We will come to that later on, that there is potential to even increase more if that would be needed. The dividend per share. Well, you mentioned the dividend policy. I think there is nothing to add too much. I think in 2009, when there were some changes in management and we were trying to get more stability in dividend payments than before. If you look at the numbers here, I think we achieved it to quite some extent the last three years, where we didn't have that much growth, where the large losses came in under budget, where the capital position was positive. We did pay the special portions of the dividends. If that continues in 2017, I don't see any reason why the composition of the dividend next year wouldn't look alike. Of course, we always know that things can happen. I think, as demonstrated here, rather reliable and hopefully transparent approach to paying dividends. Now the ROE, our major profitability target and indicator. You see on the left-hand side the development of the E, which has always been increasing over the course of the time. Now, the profits were keeping up with that to quite some extent. We've added, if you compare this slide to the previous one, this additional percentage point numbers, which represent the spread over and above risk-free and the 900 basis points, which represent our strategic profitability target. This spread over and above the threshold or our strategic goal, is rather in line or rather stable. Yes, it had been even better last year. But with a 3.8 in 2016, that compares with 3.9. I think that should demonstrate that the profitability or the excess profitability we have been providing is again rather stable, although the ROEs go down slightly with the increase of the E. But also we should bear in mind that the risk-free rates go down as well. You see on the right-hand side that the portion over and above the threshold even has been increasing. If we compare 15 years or 10 years or the five-year average, where the excess profitability was even larger than in the long-term comparisons. A little bit of different picture as we are used to. For quite some time we had been number one here. It's, from my point of view, interesting to see the reason why we are only at number two this year, because it's not the year 2016, which has been added, because in 2016 we are still number one. The reason why we lost the prime position here is the 2011 year, which went out. You might remember that 2011 was the year of the second largest natural catastrophe burden. We had, you could say, outperformed our competitors in 2011 so remarkably that the absence of that year now leads to us being kind of downgraded to number two. That should also give you the indication that if we would have higher losses, natural catastrophes over and above the expected levels again, we would expect to potentially add another year 2011 again and show more reliable numbers. Other than that, we feel rather comfortable. You may know and remember that our prime goal was to be among the best three in the world, and we're still there. The group numbers in more detail on the next slide. I think there is not too much to be added. We have the gross premium income. The top line goes down, FX adjusted by 2.1%. Interestingly enough, if we adjust the net premium earned by the FX, we even saw a slight increase, which indicates that we have increased our net retention. That is especially true for one of the large life transactions, which Uli had already mentioned, which did not repeat itself. That was retroceded to a very large extent, so we lost the gross premium. We also lost the retro premium. This is why the numbers deviate to quite some extent. We had repaid a hybrid transactions in mid-2015, so we did benefit from half of that effect in 2015. We had a full year lower volumes of hybrid. This is why the interest on hybrids goes down. Accordingly, other income, again, in the positive range. The more positive range, it is again impacted by currency exchange rates positively, a little bit lower than before. We have, and we will come back to that, saved our LOC costs to quite some extent. So this also is reflected in the other income line. Apart from that, the tax ratio, where we did provide a little bit of cushion last year based on the result of a tax audit, didn't repeat itself, so we are back to normal. This is also why the EBIT goes down slightly, the net income goes up. That is based on the tax rate being back to normal. The P&C side, I think what is worth mentioning here, we do see that the combined ratio comes in below 94% and in the Q4 standalone even below 90. Driven by, as we've mentioned already, some positive runoffs, but also the large losses come in below expectations. To come back to the reserving levels one more time. Uli mentioned that before. As part of our year-end procedures, we have lots of people coming in and looking at the reserves. That starts with our auditors. That is our internal actuaries, as well as the pre-study from Towers Watson. Their indication was that the reserving level and the reserve redundancies have at least stayed where they were. So one should assume that if there was a positive runoff, which should have decreased reserve redundancies, that we have at least added as much to keep the reserving level where it was. Uli mentioned already we might most likely not have added as much as we did last year. You should assume that the reserving level was flat. Apart from that, I think the result extraordinary well. I think it was the best result on the P&C side we've ever produced. Which of course was taken with delight. If we look at the details, the picture becomes a little bit more mixed. If we look at the single markets and compare them with the MTCRs, which we have defined, you see that North America came in well below the MTCR. Good result. Good volumes as well. Continental Europe made it barely. Marine looks as it was a very attractive line of business, which, of course, it isn't. We will present the outlook where at least Marine is promising okay-ish profitability. It is even more so here, the positive runoff, namely Sandy, Deepwater Horizon, and Costa Concordia, did benefit this line of business remarkably. So if we could write more business with 38.5 combined, that would be great. But unfortunately, this is not available today. This is even more true for aviation. Here we feel that just by coincidence, the claims are very low. So this combined ratio does by far not represent the state of the market in aviation. Credit and Surety, here it is a little bit the other way around. You will see on the large loss list that we had one large loss. We still see the profitability as being attractive. So there are also growth expectations and goals in 2016 based on these larger single losses. Again, one of which even made it to the large loss list. We have exceeded the MTCR by quite some margin. CAT. The non-proportional CAT business, as you can see, came in again very positively. But also here the under usage of our large loss budget is reflected. Overall 93.7, the combined ratio down there well below the MTCR or at least below the MTCR. So, this demonstrates the profitability of our P&C portfolio. Remarkably large losses. A brief look, you see that the large loss burden has increased as compared to last year from EUR 570 million to EUR 630 million. Had we not increased our large loss expectations or budget, then the EUR 600 million and nearly EUR 30 million had not been too far away from EUR 690 million. So in that respect we had seen some large losses and I would also like to remind you. So if we take out the EUR 200 million out of our result, which we had not spent as large losses. If you tax those, you would come in at EUR 100 million and potentially EUR 150 million. So even with large losses in line with the budget, we would have made the billion. Well, that is the list. I think nothing to comment here. The wildfires in Canada. Hurricane Matthew. I think these were the largest, and I already mentioned the one credit claim here on the bottom of the page. So now to the other business line. You see that the life business has been increasing. I think Uli has mentioned that before. There were some discontinued larger contracts. Australia and China, Uli already explained. The enhanced annuity business here in the U.K. which came down as well. We should also always bear in mind that especially the financial solutions business written in the U.S. doesn't produce that much premium. So premium is not always the best indicator for the business, nor is the EBIT margin, especially when it comes to the financial solutions business. You see at the bottom of the page, how can you make 18% as an EBIT margin when your target is 2%? Here, if you produce business and margin without producing premium, then the EBIT margin is not the best indicator. Why do we show it? Yes, I think that goes back to the times when we had financing business, pre-financing business, where the 2% was an okay margin requirement. And again, please bear in mind that here the EBIT margin is not the best indicator for the profitability of the business. We do mention the negative impacts from the legacy business. We did that before. We have, I think done everything to improve the numbers which also is presented, as I mentioned with the savings of the LOC costs and the other income and expense line, which improves remarkably. Also, some of the deposit accounted margins show up in that line. This is not just coincidence. The other income and expense line on the life and health segment represents business results as well. Still, the higher mortality burden which we have experienced in 2015, where we had good expectations that this might not repeat itself, happened again. We are still working on it. We do commute business. We increase rates. This is a block in runoff. But unfortunately in 2016, we did not see the improvements which we have expected, which then leads to the deterioration of the net underwriting results. We should bear in mind it is not as drastic as it shows here because also the net underwriting result last year did show the one-off approximately also EUR 40 million from a commutation of a larger contract. Uli mentioned overall the results fully in line with our expectations. With nearly the EUR 350 million, which defined the upper mark and I will leave it then to Uli to show you the outlook for the next years. One other picture which might look a little bit strange, and I have to admit we are comparing apples to oranges here. Please bear with us. We look at gray MCEV numbers. The grayish MCEV numbers are even adjusted in 2015 because in 2015 we already used the capital costs which would at that point in time have been introduced by Solvency II. The blue bar represents the Pre-tax Solvency II value of new business number. Still, even if we would have adjusted for that, we would have looked at a remarkable increase. Especially by the end of the year, our colleagues all around the world, but also especially, again, financial solutions in the U.S., were able to lock in new business, which should also materialize IFRS profits in 2017. Already, as they were entered into late in the year, the P&L in 2016 was not affected by that value of new business. We are rather happy and confident that this will materialize over the future. And you see the target of EUR 220 million for the year and the achievement which was achieved. Investments, you see that the ordinary investment income goes down quite remarkably. It is, again, not as drastic as it is represented here. Please bear in mind, the EUR 39 million of the life contract, where we did get the money back last year, had to be presented as ordinary income. Moreover, we had some extraordinary gains from our private equity portfolio also in the ordinary line in 2015. Yes, it goes down slightly, but it is not as drastic. The realized gains go up. Also here, it is not actually that we were trying to use the valuation reserves to improve gains, but nearly every turnover in the portfolio is leading still to realized gains. We did not, for instance, realize any gains in our new listed equity portfolio, where we have in the impairment line, nearly EUR 30 million depreciations or impairments after Brexit. Of course, right now you see that our unrealized gains and losses have improved. A good EUR 100 million come from the listed equity portfolio. It would have been easy to realize that gains and mitigate the impairments after Brexit, which we did not do. Overall, the 3%, I think are a little bit more than we were trying to achieve. You see also the unrealized gains and losses go up. That doesn't look very impressive here. We had lots of volatility, as you might remember, over the course of the year. Short after, I think after the Brexit, in the aftermath, nearly EUR 1 billion of additional valuation reserve has been created. Then after the Trump election, within one and a half week, EUR 800 million were gone again. But with the EUR 200 million, again, EUR 100 coming from the listed equity portfolio, we still have a comfortable buffer also on the asset side. I think there is no real news from that split where the ordinary income comes from, so I will skip that one. The portfolio as it is composed today, you can see what we have introduced as the barbell strategy. If you look at the numbers, slightly so, the government bucket goes up. Also the lower corporate goes also up, or the investment grade goes down a little bit. The non-investment grade, I can tell you, goes up at least behind the dot. We have also increased the listed equities. As you can see, also the real estate goes up slightly, fully in line with our investment strategy, but no drastic changes here as well. What I have also brought with me is a little bit more detail about the preliminary Q4 numbers of our Solvency II reporting. It is interesting to learn that the German regulator, or the regulators as such, did insist on providing us to them preliminary Q4 numbers. We will then also have to publish the full year 2016 numbers. There should be no difference. Maybe we find one or the other mistake we will have to correct, but we do not expect the numbers to change. The final full-year numbers will be published in May. Uli mentioned the major points, and those who follow us for quite some time do know that we do provide different metrics here. You see it on the right-hand side, last year's numbers as a comparison. The regulatory Solvency II number did increase from 221% to 230%. We have our internal measure. You will see the differences in detail on the next slide. Here we adjust for the minority haircuts as well as the operational risk model. So internally, this is the view we see as the real economic view. Our one in 200 years measure would be 260% to the double A minus equivalent number of one in 3,333 years. Equivalent is 130%, so a comfortable buffer. I already indicated here, you see the details of the adjustments we do from the regulatory view to our group internal economic view. The haircut for minority interests represents EUR 626 million. The add-on for the standard formula risk represents EUR 436 million. Uli mentioned that we do expect to have a full model in 2018, which then should be associated with the saving of the EUR 440, or nearly EUR 440 million than as from last year. Here you see the contributors to, on the one hand, the risk capital, on the other hand, the basic own funds. The drivers here were, to some extent, of course, the profitability within the year. Also, the currency exchange rates did increase our risk capital as well as our basic own funds. I wouldn't go in too much detail. The market risk, if you compare the numbers, has increased, but also the diversification effects have increased with the increase of the standalone risks as well. We still do feel very comfortable. I also have brought with me here the reconciliation between the IFRS numbers. I think we did the exercise more than once. You see the differences. The adjustments for assets under our management. This is all the held-to-maturity or the assets which are not valued at market. Then the adjustments for the technical provisions, discounting, redundancy of loss reserves. That is reflected in the increase here or the decrease of liabilities here as well. We see some adjustments. Of course, then these adjustments have to be taxed. The minority haircut one more time. Here I did refer a few minutes ago to the unused or unutilized hybrid bucket of nearly EUR 1.7 billion, which is represented by this shaded green bar here in the middle, which then leads at the end to the basic own funds according to Solvency II. Then again, I think the full Solvency II reporting, as I mentioned, will be ready and audited by May. I think that concludes my presentation. As always, as I see the target matrix popping up, I leave it to Uli to continue. Thank you again, Roland. Okay, a little bit on the target matrix and the outlook. Target nothing too exciting here. Most targets have been met, notably the profitability targets. The growth targets, not. This is due, as explained, to the soft market, as well as the low interest rate environment. But at least we saw some increase in the net income. That then brings me right to the outlook. Going to the individual lines. North America. Of course, we already reported quite a bit on our renewal call, and so all of that is still valid. Profitable growth on North America continues into 2017, not based on single large transactions, but the many treaties that we have as our significant more than 600 clients in the U.S. Continental Europe, a little bit of mixed bag. Stable at good profitability in Germany. We see some increases in France because we managed to improve our market position there. Eastern Europe with the sanctions in Russia as well as currencies that are reduced in value, even against the EUR, is coming down a bit. Profitability should be sufficient to cover the cost of capital. Marine. We continue to believe that we have a profitable book there. Unfortunately, with the soft market, it will be a smaller profitable book, even though not much smaller. Aviation. Here we believe that the rates are no longer sufficient to cover the cost of capital. We already reduced our involvement further at 1/1, so it is clearly a soft market portfolio now that we have, like we had prior to 9/11. We also bought quite a lot of retro on it, just to safeguard the results. In spite of it is a line of business where we have the highest percentage of redundant loss reserves. Credit surety, we see some growth. We have further improved our already leading market position. We are not the market leader, but we are, I think, among the top two. Results, we should bounce back to earnings a cost of capital. In loss-making treaties, we could improve the terms and conditions for the reinsurers, and therefore, we think the business should earn the cost of capital again. U.K., we see growth. We had a very good renewal season. This is maybe a good topic to tell you a little bit how we see the Ogden tables. We write about £50 million the U.K. motor excessive loss. We write very little proportionate motor business in the U.K. We write some in our financial reinsurance section, but due to the bells and whistles on those treaties, we not see much of exposure there. Most of them, we commute the underwriting years after 24 months. Not much exposure there. But of course, from the U.K. motor excessive losses, we only write the higher layers. The minimum attachment point is £5 million. Average would be about £7.5 million to £8 million. So on the single person losses, even with the new Ogden tables, many of them will not be able to reach us there. If I look at the loss reserving on those £50 million of premium, we have £240 million of loss reserves, £260 million of those are own loss reserves. Even if you look, this is just the last four underwriting years, because we believe that the last four underwriting years will be the most exposed. If we go back further, then the overall loss reserves are in excess of £400 million. Again, of course, if you go back, the IBNR percentage a little bit lower there. It's only half of the loss reserves. If you go back all the way, are actually higher, actually own reserves. So we believe we are very conservatively reserved here, and we also pending a more detailed analysis of the individual claims, which we are currently undertaking. We would believe that our current loss reserves would probably be sufficient to deal with the new Ogden tables. We might still put some additional reserves on. But as I said, we are engaged in a rather deep dive there into the individual claims. Due to our high attachment points, we have a pretty good transparency on the claims that have the potential to hit our layers, because at £5 million or average £7.5 million to £8 million, those are serious claims that expose us there. So we know about them. Facultative, we think we will continue to improve the profitability there. It has been good, but there is room to improve it, but that will be to the detriment of the top line. The worldwide treaty business, we have readjusted our agricultural business a little bit in response to terms and conditions. We also reduced our business in China. So we will see some reduced volumes there. On the contrary, as a structured reinsurance and ILS, we see tremendous growth. As we in detail explained to you on the occasion of our renewal call, that will be also the driver for the growth of our P&C business this year. The property catastrophe, we are still underweight. However, if we have losses in line which what we have seen the last five years, we will still have a good result there. If the losses reach the expected levels, then of course, we will struggle to earn the cost of capital. That's the reason why we are underweight, and that's the reason why we bought more retrocession on the catastrophe business. Life and health. Overall, we expect increased profitability, which will largely come from our financial solutions business. This is business which is IFRS, EBIT accretive quite rapidly. The good thing is that the average duration of the treaties is twice shorter than the traditional risk treaties, particularly on the life side. It's still around 10 years, I would say. Therefore, the treaties that we already have on board will continue to provide profitability in future. We managed to write some new business, actually quite attractive new business as you have seen in the value of new business. We also managed to renew our most profitable treaty up to now in the U.S. which we did not expect, but we managed to come up with a deal that is still accretive for our client, and so will continue to produce profits for us. On the risk solution side, we see a more stable situation. We expect to earn the cost of capital. We still expect further negative impacts from the U.S. mortality business here, but that should be outweighed by the new business that we write across the world. Morbidity, improved situation here. We have new business opportunities which should increase the profitability there. Longevity, it's largely is what we write these days as pension blocks. Pension block business, the way we account it, if things go according to the actuaries plan, the margin should increase quite significantly after seven to 10 years. Unfortunately, we have very few treaties. I think it's only one of the pension blocks that is already more than seven years old. So, this will be hover around the 2%-2.5% mark as far as the EBIT margin is concerned. Bringing that all together, the guidance we increased on the occasion of our renewal call. We now expect growth of our business again, low single digit, maybe 3%, 3%-5%, something like that, driven by the P&C business, whilst the life business would be more flattish. Return on investment 2.7%, provided that the capital markets behave and we see no turmoil that we had seen in 2008. Group net income more than EUR 1 billion. We are pretty confident that we will be able to reach that, even if the large losses only stay with in the budget. So if we have EUR 825 million of large losses, we still should be more than EUR 1 billion, mainly driven also by the increased profitability that we expect from life and health. The dividend policy will be entirely unchanged if all those numbers transpire as guided. Of course, that means that the large losses stay in the budget, no turmoil in the capital markets, then we most likely will pay again, extraordinary dividend. So, the line should continue, as we have seen in the last three years. Then the rationale of the medium-term business development for Hannover Re is our continued conservative loss reserves, strong market position and better terms and conditions on our acceptances. We feel that we should be able to keep the combined ratio below 96% and the overall underwriting result should be rather stable. We still expect that the market will change when the average results of the reinsurers are deteriorating. Like in 2012 and 2009, we expect that we will be able to grow our market share then. Life and health. We thought that up until 2019, we would be within the range of EUR 300 million to EUR 350 million EBIT. We now are confident that already in 2017, we will be above the EUR 350 million upper threshold of this EUR 300 million to EUR 350 million. So this threshold should be more for 2017 between EUR 350 million and EUR 400 million. This is based, of course, on the new business that we have written and on the quite attractive pipeline of further new transactions. Net investment income, we expect rather stable. We expect continued increase in our funds under own management. We also are quite pleased to see the increased interest rates in the U.S. because almost half of our assets under own management are US dollars. So that will help with the reinvestment yield, which should aid us with keeping the investment income rather stable. That concludes our remarks, Roland's and mine, and we look forward to your questions. Thank you very much. Okay. Well, thank you. We will now begin our Q&A session. Just as a reminder, please wait for the microphone so that everybody can hear your question, especially the colleagues joining us via the conference call. For those attending digitally who would like to ask a question, please dial 01 on your telephone keypad now to enter the queue. If you find that your question is answered before it is your turn to speak, you can dial 02 on your telephone keypad to cancel the question. If you are using speaker equipment today, please lift the handset before making your selection. We shall proceed first with the questions from the attendees in the room, and then move on to the questions coming from the conference call. The first question I have already spotted by Vinit, and we continue with Kamran, and then go to the left side. Thank you. Vinit from Mediobanca. Just on the reserving, just taking up on your comment that reserves are confidence level is similar to last year. Just from looking at the full year to full year combined ratio, then adjusting for the budget, seeing where the reserve release is, it looks like it is probably that the conservatism is only increasing, I would reckon, whereas you maintain that it is at par. Because we heard for a few years that the auditors do not like this phenomena. First of all, is this understanding correct? Secondly, is the auditors okay if it is correct? Because obviously this builds up the buffer a bit. Then second, very quick check on the growth in credit. Uli, you mentioned that the treaties should improve, and there was one large loss. If we track the credit surety segments combined ratio through the quarters, the whole of 2016, each quarter was north of 100%. Is the optimism based on the fact that it's a short tail book and you're going to reprice quickly, or if you could just comment on that. Thank you, please. Well, if you look at the credit, that's clearly short tail. That has not been the driver of the higher combined ratios, maybe with the exception of one treaty of China. The driver has been more from the surety side, and they are largely, I would say, from Latin America and Spain, where we have seen increased claims. As far as the Asian situation is concerned, I think that's solved. We expect to see combined ratios below 100% there now. On the surety, it's a little bit more volatile, I would say. The only thing is, there's a tendency to reserve relatively highly at the beginning, and then often we can see recoveries at a later stage. I mean, for example, the large Spanish loss, the project that was stopped as a result of that bankruptcy meanwhile have continued to be constructed again. We expect some recoveries there, but that will take time. These things are not coming within a year. That's the reason why we expect combined ratios on the credit surety business at around, I would say, 95% for the current year. The reserving question, I would tend to Roland. Yeah. I'm not exactly sure, Vinit, what drove you to assume that we are even more conservative. As mentioned before, I think we have not added to the reserve redundancies remarkably this year. This already is a remarkable difference as if we compare it to last year, where we added more than EUR 300 million. When it comes to the auditors, I can tell you that the overall reserve volume has increased by more than EUR 1 billion, even currency adjusted. So in that regard, the confidence range they apply, I think it's the 40% as well as the 80% percentile, has increased together with the volumes and their considerations of what is in the range and what is not in the range. The red card we have received last year was a yellow card this year, because the range has increased a little bit more than that. There is, in that regard, we are still at the upper range, but there is still also flexibility to some extent. I think if I may add, I think it is still fair to say that we would have to expect an upward pressure on the combined ratio due to the continued soft market. Whilst particularly this year, the rate reductions or the rating quality did not deteriorate that much, but it did deteriorate overall. We are in the fifth year of the soft market, and therefore, we always expected that the underlying combined ratios would increase. That also is the reason why we felt so comfortable to have those buffers, because We did not expect actually at the outset of 2015 that we would increase the confidence level again. That just happened for two reasons in 2015. One, the underlying claims were particularly low. Secondly, due to a continued low inflation, the advised and paid claims that were emerging in 2015 were below the actual calculation that was performed based on the end of the 2014 numbers. I would say if you look at the emergence of the claims that we had seen paid was actually down, but the advised loss reserves from our clients, they were much more in line, which was expected by the actuaries when they computed their calculations at the end of 2015. That, of course, also has an effect. Therefore, if you have a redundancy in the loss reserve, it is difficult to look at that like money, like a fixed asset that you can look at like money because it is just the result of an actuarial calculation. What is a little bit assuring is that despite the fact that the premium did not increase the overall volume of the loss reserves also increased and also the volume of what we call the segment reserves, which is our own IBNR reserves, which we are setting in accordance with IFRS principles. This segment reserve also increased in the current year. Therefore, the main reason that the redundant loss reserves did not increase was really the emergence of the advised and paid losses in 2016. Thank you. Hi, it's Kamran Hossain from RBC. Two questions. The first one on the dividend. I guess, you showed steady growth in that this year to EUR 5 total. Next year, the way I understand it, you should get a step up in German GAAP earnings next year. Is next year the greatest opportunity to have a step up in the dividend payout ratio? That's the first question. Any kind of thoughts on that? The second question, just coming back to Ogden. We've seen some headlines in the trade press in the last few days suggesting price rises for non-proportional motor reinsurance might be in the range of 50%. By the sounds of the impact on Hannover Re, no impact at all. Maybe could you give a bit of an outlook on what we should expect for motor reinsurance prices for the rest of this year? Thanks. Then it also as well, if you have any mid-year renewals. Well, if you look at our reserving on the motor business, we are reserving combined ratios of around 135% on U.K. motor excess of loss. If that would actually be the final outcome, which of course the underwriting and pricing actuaries are not believing, then we shouldn't write that business at all. If you look at our underwriting years like between 2002 and I would say 2010, there we have combined ratios which are more mature, more in the region of 80%. Of course, if you talk to underwriters, they would expect that the 135 that we are currently booking, they think that would come down to similar levels. Particular as we have seen rate increases in the current years due to the PPOs. We probably have higher motor excess of loss rates than most of the markets because we only wrote full coverage, including full cover for PPOs. Whilst many markets would only write the capitalization of the PPOs, which has different terms and conditions. The pricing differential between the two products is about 30%. So we are already getting higher rates on our motor excess of loss. The fortunate thing is that the emergence of the PPOs have been more benign than we have actually thought. So we have a little bit of a buffer there. Nonetheless, if the annual claims costs are increasing by 10% for the U.K. motor business, which I think some early analysis of Willis Towers Watson that was published shows, of course, that will be non-proportional weighted on the excess of loss business. Particular for those carriers that buy very low down, almost all the development would then be in the excess of loss. If the price deficiency due to the Ogden rates on U.K. motor is 10%, I think a 50% increase on the motor excess of loss is a very good guess, I would say. At this point in time, we're analyzing the numbers really in order to come at this pricing. I would say that the majority of our U.K. motor excess of loss business renews at 1.1. Those that renew at 1.4, it's a particularly difficult one to tackle, but together with our clients, we will. I think there will be significant rate increases on U.K. motor. It's also because of the uncertainty. Until we've really looked at the individual claims, which we are currently doing, there's uncertainty on the impact and different underwriters uncertain. The market for U.K. motor excess of loss is not that large because of the unlimited nature that many reinsurers wouldn't even write that business. Therefore, I think we will be able to sell significant higher prices there. Maybe I can comment on the indications about the German GAAP results and their impact on, or potential impact on any dividend policy. I think we've explained the dividend policy more than once. It never did actually depend on German GAAP numbers. We don't see that much dependence on U.S. GAAP numbers. We would look at that really from an economic or IFRS point of view. Our German GAAP result in 2015 was more than EUR 900 million. At that point in time, there were some indications that our U.S. GAAP balance sheet, our German GAAP balance sheet seems to be a bit weak. We never confirmed it. We never saw it like that. We used the increase of the valuation of one of our subsidiaries. By the way, there was a tax-free measure to increase the German GAAP result. We added to retained earnings. We felt that this demonstrates that we have lots of measures to also make the German GAAP balance sheet a little bit stronger. Then, as we all know, and we have explained before, we are looking forward to a crucial impact on the equalization reserve in the 2001 year disappearing out of that equation. We have already applied some measures in 2016. Again, the German GAAP result in 2016 was extraordinarily high, was nearly EUR 950 million. Also here, we will use that amount to pay out a little bit more than EUR 600. We will have the chance to add to either the retained earnings or the profits carried forward, which gives us a dividend buffer and adds to continuity in the dividend payments. We look forward to, again, another very good German GAAP results based on the equalization reserve releases coming through this year again. But also here, I would not say that this has a direct or crucial immediate impact on our ability or our strategy to pay dividends. If that is- I think we look at two things here. One is, of course, the dividend for the current year, but also the consistency of the dividend. Of course, if you go back to the beginning of the century, due to a much lower capital base that we had then, we will not be able to pay a consistent dividend. If you look at 2001 with the World Trade Center incident, 2005 with the hurricanes, and 2008 with the financial crisis, we were not able to pay dividends in those years because we needed all those funds and that capital in order to defend our rating and at the same time, be able to benefit from the market opportunities that were following those events. We feel that we have moved on from that situation and are in a stronger position now. We would say on a reoccurrence of a situation like we had in 2001 or 2005 or even 2008, we should still be able to pay a dividend at least to the tune of the ordinary dividend. We look at both sides. Of course, the German GAAP earnings have been quite favorable two years in a row now, and we expect this continue into 2017. Which means that we have increased retained earnings and have significantly increased profit carry forward. Of course, there is room for increases in the dividend, clearly. Okay, we continue on the left-hand side with Andrew Ritchie. Hi, it's Andrew Ritchie from Autonomous. Just to clarify on reserves again, I'm afraid. Presumably then the assumption is, when you were surprised that you increased the redundancy in 2015, I presume you're surprised that you kept the redundancy stable in 2016, because I'm assuming you are expecting the redundancy to fall over the next couple of years if you really want to keep the combined ratio flat. Is that still the correct assumption? That's what you've said in the past. That is absolutely true. The reason why that didn't happen in 2016 again, is that we didn't have things that went wrong. Normally, you always expect something goes wrong. For example, in 2014, we had to strengthen our reserve on some Argentinian liability claims to quite some extent because the Argentinian courts did not reflect in their judgments the terms and conditions of the policy, because they were a little bit unhappy. If they would have done that, there would be no claims. And those things happen. In the old days from in Hannover, we had some reserve strengthening on some HMG business. But in the last couple of years, nothing like that was occurring. And that, of course, helped. If our regular to be expected level of mishaps would have happened, then the redundant levels would have decreased clearly. Of course, we try not to make too many mistakes, which we know from the last soft market at the end of the '90s, is the largest source of bad results. We are not always successful with that, but the last two years were pretty good. But of course, we are not expecting to add to the redundancies in 2017. That's very clear. We are in the fifth year of the soft market. We think that we can keep the combined ratio to have a stable underwriting profit. But due to the environment around us and the rating environment, based on the full utilization on the budget, that would then presumably mean that the redundancies would reduce slightly. That's helpful. Thanks. Just two other quick questions. The retro you mentioned in the outlook. In practical terms, how do the changes in retro help 2017? It's not helping the large loss budget, which is flat. Maybe just, Roland, if you could just clarify how that is. The final question. It seems the financial solutions business you wrote is coming through or expected to come through to IFRS quicker than we have been accustomed to. Is that the case, or is this just kind of coming through from previous years? Why is it expected to come through to IFRS income so quickly? Thanks. Well, firstly on the retro, we bought an aggregate excess of loss cover to cover our large loss budget for property catastrophe losses. We did not use that to reduce the large loss budget, which in theory we could have done. That's the reason why we are better covered. In 2017, we could better absorb, than in previous years, natural catastrophe losses that go over and above the large loss budget. On the- Large loss budget is more secure than other years, essentially, is what you mean? That's right. Then, why are we thinking? Normally, the financial solutions treaties are much more accretive and go much more quickly into IFRS earnings. Because if you look at the traditional mortality solutions cover, if you write new business, you write policies with durations on average, say 25, 30 years. Of course, also, most of these treaties have rates that are increasing throughout the duration of the underlying policies, because, of course, the risk increases with age of the insured. That means that the profitability is clearly backloaded. In the financial solutions treaties, that's not the case. Because here, for large extent, we finance redundant loss reserves or other cash flows. Those are more imminent. Most of the financing, non-cash financing treaties, are actually pretty short-dated. Many of them are only three to five years. The treaties that finance redundant reserves, they normally have durations of 20 years. They have their certain break points. They can be canceled under certain circumstances by the ceding companies. Therefore, it would not be terribly clever to backload the profitability. On those treaties, the profitability is much more front-loaded, and that is why they are accretive to our IFRS earnings more rapidly. Well, if I may add, plus you would not look at new business values for such a long time. If there is a break point, if there is a recapture right, you would only calculate the value of new business up until that date, which is a shorter duration than other longer term contracts. Okay. We continue on the left-hand side with Singh Mei, and then I've seen another question on the right-hand side from Chad. There's another on the left-hand side over there. Oh, I'm sorry. Hi, it's Singh Mei Wang from Morgan Stanley. I just wanted to ask about the life and health outlook. You're very confident on next year's results given the financial solutions. I was just wondering, given the volatility we've seen in 4Q in the mortality business, what makes you confident in reaching that number next year? Or does that 350 to 400 sort of bake in some conservatism for continued volatility? Or are you very confident that those issues are dealt with or can be dealt with now and we won't see that again? Well, I think if you look at the volatility on the mortality solutions business, that is pretty high on a quarterly basis. It's less on an annual basis. We tend to have quarters that are very good, then we tend to have quarters that are not so good. In the expectation of increased profitability, we already took into account some further losses from the mortality solutions business in the U.S. But that is outweighed by the financial solutions business. We also have attractive new business in our Bermuda company. Also in China, we were able to improve and drive significant new business, its risk business, on the back of our joint venture that we have regarding the Vitality business. That was actually quite good. There might be more of that in other Asian countries. Things are developing there, and that's why we are quite bullish on our life and health profitability, despite the fact that from that old underwriting years in the U.S., we are expecting further losses. Thank you. Okay. Then we continue with Jonny Urwin. Thank you. Jonny Urwin from UBS. Just one question from me. Could you give us some color on how you're seeing claims inflation trends develop globally? I guess, in the U.S. in particular. And where are we versus the levels you're baking into reserves? I guess we're still pretty far away. Thank you. Yeah. The actual inflation trends that we are currently seeing are still quite low, I would say. If you compare it, say, to 5 to 10 years ago, we are clearly lower. There is, of course, a clear exposure that inflation might pick up. Because I think the unemployment rate in the U.S. is quite low. One could probably talk of full employment. And also the economy is going reasonably all right. We probably have to expect some further budget deficits that might increase, and that might, in the end, lead to some high inflation. We still have some inflation protection in place through inflation linkers. But that, of course, could also be a source of reducing the redundancies and the loss reserves. But of course, if you have higher claims due to inflation picking back up, it is certainly better to come from conservative loss reserves than from strict best estimate loss reserves. Thank you. Okay. Another question is coming from Paris, and then we continue with Will Hawkins. Yes. Thank you. Paris from Credit Suisse. Very quick question from me. Given the developments you are seeing in the capital markets, can you give us an idea of how your reinvestment rate has changed? Yes, it is an interesting question. I have just prepared a presentation for next week, where we had a brief look at reinvestment rates. You know that we have presented more than once the approximately 15 basis points we lose which are then explained between the market yields and the portfolio yields. We went down from 2.9 to 2.7, which might indicate that this is even accelerating. Interestingly enough, the opposite is true. We went down with our projections in 2017 to 2.7 something, which was then rounded up, which makes it also a little bit easier for me to achieve that goal. On the other hand, the decrease in the expectation for 2018 was minimal. The reinvestment yields are picking up. There are various factors adding to that. On the one hand, especially the shorter term turnover in the portfolios, which represent the majority of the maturities in such a year, are to quite some extent already taking place again to higher rates. Especially in the U.S. dollar, where we have invested short-term money over the last one, two, three years. In the meantime, we can invest at higher rates. Moreover, the technical reinvestment rates as we usually present it, which reflects the portfolio as it is composed today, if I would reinvest exactly how I invested today. This is easy to calculate. This is why it is a reliable number. It does not include any changes in the composition. Still, we do change the composition, and I have presented in October here some opportunities where we reflect the market. The reinvestment yield right now, the technical reinvestment yield is at 1.8 something. I have indicated that we would, of course, no longer invest so much in covered bonds. Right now, the portfolio yield of my covered bonds is higher than 2%. The reinvestment yield is below 1%, so we are avoiding that area. The change in the portfolio makes itself also. Moreover, if there are maturities, and the whole portfolio moves a little bit in shorter duration, then you can reinvest a little bit longer term. All this is adding up. We again see the overall portfolio yield in 2018 nearly flat. Also going forward, we see that bottoming out, at least over 2%. The decrease in yield should decrease. Okay. Because I do not see any further questions from the conference call, just as a reminder, if you would like to ask a question, please press 01 on your telephone keypad. We continue with Will Hawkins and later after that with Ian. Hi, and thank you. William Hawkins from KBW. None of these are new questions, but I just wanted to sort of check again. When you were talking about your EUR 1.7 billion of unutilized Tier 2 capacity and the Solvency II ratio, are you just trying to communicate to us there that you've got a comfortable ratio, or are you trying to communicate that you may do something to make use of that unutilized capacity at some point? Adjunct to that point, what would the unutilized capacity be on a rating agency basis? Presumably, you don't have as much flexibility as you're implying for other leverage ratios from rating agencies. Secondly, again, it's not new, I know, but on slide 17, your capital adequacy ratio, whichever one you pick, is massively above your current threshold. Again, in theory, that would be implying that your capital management should be more aggressive than it is currently. Can you just explain, again, whichever ratio it is, the 230% versus 200% Solvency II. How do you think about, you've still got that buffer upon the buffer? I suppose a last factual question, what would the surplus against the S&P double A requirement be? Thank you. Maybe I start with the hybrid. I think your first indication was true. There is no plan to issue something today. There is no reason to do that. You've mentioned the comfortable ratios where in whichever solvency regime we are. There are no current plan. It is just demonstrating the flexibility. Maybe it's just that the CFO is in such a comfortable situation where he has never been before. Within the history of Hannover, and you know that very well. We have also always exhausted that to the extent possible because we needed it. Now we have the buffer. There are no plans to use it. But in case there are opportunities, we have the flexibility. With regard to any other solvency models, the same amount would have a full capital credit in the AM Best as well as the standard approach model. Yeah. I wouldn't lose anything. Okay. With the capital adequacy ratio according to Solvency II at 230%, this is for the subgroup. For the SE, so the company itself, as I said, it is more like 243. Why are we not being more aggressive on capital management taking into account that we are significantly above this threshold? Well, we have also seen quite a bit of volatility in that number due to market value changes. Of course, they are fully reflected in that number. Therefore, we are a little bit cautious there. It has been quite stable, I would say, the last four quarters. Prior to that, we have seen quite some volatility in those numbers, which gave us actually quite a little bit of concern, I must say. We were actually looking for various avenues that we might have to react in case the solvency number falls. It comes closer to the threshold. Luckily, it looks a little bit better now, mainly based on the retained earnings. Managing capital, we are doing that, but I agree that we could do it more aggressively. As I said, we say we want to have a long-term success, so we are not only looking at the next year, but also longer term. Well, if I could also mention, I think we are trying to explain as to why we feel that our ROEs are still very attractive. Even if we did not grow in 2016 for the first time for just a long, long time before, we do see growth opportunities. We do include in our presentations the potential volatilities from interest rate increases. In that regard, as long as the ROEs are as attractive as they are, we do not feel that pressure. As far as the excess capital on the rating agency model is concerned, unfortunately, we have not got that concrete number. That is partly also to do that these models are not static either, means they keep changing. Normally when they change, they increase the capital requirements, but we should still have a comfortable buffer in excess of a billion US dollars. Okay, we continue with Ian. Hi. Just following up on the Solvency II topic. You've added 10 points of solvency this year. Just wondering, looking forward, what type of ongoing generation do you see from the business? Secondly, the EUR 400 million that you indicated might reduce the SCR from 18, do you have any concrete plans on what you do with that? You want to take that? We have, up to now, not defined any strategic plan to increase numbers or what to do with the numbers. Strategically or politically, I must admit, I've been a member of the European CFO Forum for quite some time, so we work on a lot of numbers and regulations and do our lobby. I was always a promoter of the view that as long as we have a Solvency II defined by a regulator, we should view it as another hurdle to be jumped over. This is a number where we see political influence. Up to now, I've promoted the view that we have IFRS numbers which we will present, which are not actually showing a real economic picture. This is why we add, this is why we have introduced our own internal IVC numbers. This is why we've published MCEVs and other add-ons to show you economic values. Now with an internal model being developed and economic numbers being developed, this might change. But we've also seen, as part of the Solvency II regulations, that Greek government bonds are risk-free and other things. These things are not free from any political influence. Up to now, we've seen these numbers as, you can see, a double A minus rating from Standard & Poor's. That is something we want to make sure. We will from now on develop, and we will see in May the numbers and the long reports which will be presented. We will develop into economic balance P&Ls. The analysis of the changes in the numbers and all that. Up to now, it is more a hurdle to be jumped over, so we have not defined any strategic goal to do with it. We will find out in which direction that goes. In parallel, we are developing IFRS 17, which is an additional burden, which also is intended to present economic numbers. Again, I was also not too happy about all these strategic Solvency II goals. I felt that we are doing our own inflation in the industry a little bit. This regulation came in to make sure that we have 100%. All of a sudden, we then define 150, then you put it 200% into your strategy. Then the regulator comes in. If you have 200 in your strategy, then your amber light has to start at 220 and your red light there. So we're adding our own inflation into the whole process. To cut that long story short, we have until now not defined to say, well, we want to increase our Solvency II ratio by XY% and on that basis, we will do XY with that increase. Yeah, I would say, we need some further experience with it in order to really steer capital returns and things like that based on that number. The EUR 400 million SCR is, of course, we expect that from the operational risk model. First of all, we haven't got that as yet, and I have to make clear that the internal model number for the operational risk is not too different from the standard formula number. The saving only comes from the fact that the standard formula number, I just have to add to the quantitative model numbers. It's just an addition. If I have a full model, I can take the number from the SCR for operational risk and diversify it with the rest of the exposures. And that is the reason why on a diversified basis, the SCR reduces. But again, I think our regulator would be, he would probably almost be concerned me even talking about it, because he has not yet approved it. And whilst we believe we could convince him to approve it, once that's done we will be able to do something with it. Just to summarize what you've been saying, the 200% threshold that you have, it only works on the way down. You wouldn't go lower. But if you're materially higher, this does not affect your capital return decisions, for example. Not as yet. We need to have a little bit more experience with it. And one has to say, it is a relatively volatile number because it moves around with the currencies and it moves around with the market yields. It moves around with the mortality assumptions on the life and health side. So it has many moving parts. Therefore, for the time being, as long as we can achieve attractive ROEs, we think higher is better than lower. Let's put it that way. Okay. Some more questions. One is from Olivia and two others here from In-Yong and Winnie. Hi there. It's Olivia Brindle from Bank of America. Just to push you a little bit on two things that you said already, so sorry about that. On the point about capital and special dividends, there must have been some thinking behind the 150. Could you explain why that? Is it just because that's what it was previously? Clearly, it's not relative to the threshold, so how do we think about that number? Secondly, thinking about earnings, and the trajectory there, you talked about your auditors giving you a yellow card rather than a red card on the reserve. So it sounds like you didn't have to release quite as much as you actually released. What was the motivation there? Because you could have still more than exceeded your earnings guidance without that 10 percentage point. To play devil's advocate, why not hold back a little bit more than you did? Well, it has a number of reasons. One, of course, is when you set up the reserves, they are then audited by the auditor. Of course, at that time, we didn't know that they would increase the threshold. We will know how their calculations would end up. From that point of view, we did not want to have a red card again. So we were a little bit more cautious there, which meant more aggressive reserving. Also, of course, 2016 is the 50th anniversary of Hannover. So we had a little bit of an interest to show a record result if we could. As we were so close, we said, "Okay, fine, we do it." That was a little bit, is the thinking behind that. A special dividend. Well, we wanted to increase the dividend because the capital had actually grown quite substantially, I would say. But we didn't want to increase it too much. Then we put the increase on the ordinary dividend because we didn't want to fall below the 35% there and because we feel that, the 350, also in the future, we will be able to contain that within 35% to 40% of the IFRS group profits. So we are a little bit more optimistic than we were a year ago on the long-term profitability or medium-term profitability of the company, and therefore we decided to put the ordinary up. Then we just kept the extraordinary stable, because I think keeping a growing line to the extent we can, we will try to do that. Thank you. Finally, we got also a question from the conference call, one from Michael Haid. If we could go there before. Thank you very much. Good afternoon to everyone. Only one question. On attritional losses, I calculate that excluding prior year reserve releases and also excluding the effects from the unused large loss budget. When I go back to 2016, then in the second quarter, we have seen an extraordinarily high attritional or basic loss ratio. In the first and in the third quarter, the attritional loss ratio came down to what I thought was more a normal level. Now in the fourth quarter, it is even above the level of the second quarter. I wonder, was there more activity in frequency, and any drivers behind that? Is it fair to assume that the higher attritional losses in the second and in the fourth quarter reflect now the new reality of the soft market? Well, I think it's not entirely logical to think that the attritional losses on the business, on the accident here, are actually increasing. Because what you see as underlying losses or loss ratios is certainly the reserves for the current year. Our IBNR reserves are based on underwriting year basis. The accident year of 2016 is largely based on IBNR reserve based on premiums written in 2015 and premiums written in 2016. Here, even for the short-term lines, the loss ratios are determined by the loss ratio picks to quite some extent. That is not actually fully in line with the underlying attritional loss ratio. Because if you look at that, you would have to look at the actual advised losses and the paid losses. I can tell you that the advised and the paid losses did actually not move. Actually, the paid losses are down from last year. The advised losses, outside large losses, are pretty stable. What you really see underlying is reserve developments on the older years. If, for example, you have large losses, the large loss budget not fully utilized in the fourth quarter, we would then reduce the loss ratio picks for those segments, where the large loss budget is included in the loss reserves. Therefore, if you take that out, then you can think, well, this is just coming from the large loss budget. Therefore, that should basically be counted as increasing the underlying frequency. I think that's not necessarily a correct picture of the accident here, an underlying loss ratio. Therefore, I'm afraid without distinguishing between the actual accounted number and the reserved numbers, including IBNR, it's not that easy to get a precise number on the underlying attritional. Our feeling is that the underlying attritional in 2016 from a loss point of view, has been a little bit higher than 2015, but still below the long-term average. The question, of course, is how much premium we get to cover those. That's of course a little bit less, maybe 1 or 2 percentage points less than the year before. The volatility in there, we should probably look more at the yearly figures rather than the quarterly figures here. Yeah, if you look at the quarter, the second quarter looks high because we released and we mentioned that we specifically released some IBNR reserves that were not coming from the large loss budget. That is in particular in our Bermuda company, where we had, in particular the Canadian wildfires as a large loss. We could, of course, in theory, released loss reserves in our Bermuda company in the second quarter, which we didn't do. Because the Bermuda company is very conservatively reserved already. The actuaries had difficulties to defend their loss reserve position at year-end 2015, and therefore, they were very hesitant to already after the second quarter release loss reserves. Of course, at the year-end, that then happened. Therefore, the loss ratio of the Bermuda company then in the end matched the expected value. There was a little bit of skew in the second quarter. Okay. Fantastic. Thank you very much. Okay, please, In-Yong, continue. In-Yong from Goldman Sachs. Hopefully two quick ones from me. On Solvency II, appreciate the 10 percentage points of accretion over the year from 320, 230. But the ratio is pretty much flat versus the half year figure you disclosed. I would have thought it would be a bit higher given the market movements and the retained earnings you had in the second half. Maybe you could explain some of the components of movement there. The second question, just a quick one on the life fourth quarter results. You mentioned the frequency of large losses, just whether you could quantify that for us, please. Thank you. Well, the movement in the second quarter where the solvency ratio was even higher than year-end, that was due to the interest rate reductions following Brexit, which, of course, the valuation reserve shot up by EUR 1 billion. But in the first quarter, of course, then we had the U.S. dollar interest rate increases. So quickly, EUR 800 million of that EUR 1 billion was lost again. In Solvency II measurements, you see all those movements in the capital adequate and in the own funds, and therefore, in the capital adequate ratio. That is why I say it is rather volatile, despite the fact that over the last fourth quarter, it looked quite stable. This is the volatility why we are happy that we have a little bit of a distance to our threshold. Because, say, if there is 100 basis points increase in interest rates, that will have a negative impact on the Solvency II ratio, clearly. If it goes the other way, then it has a positive effect. It is a very volatile number because it has not got any buffers in it. Therefore, one might even argue that it not fully depicts the economic situation of the company, because for a large part, we are held to maturity investors. This billion up, EUR 800 million down, economically for us, it is not that relevant. But in the Solvency II ratio, it is very relevant. On the first quarter, I would say, I think we had an EBIT just over EUR 50 million. In a normal quarter, we would have expected that to be more, I would say like EUR 80 million. The difference in this case, we cannot even blame it on the U.S. Morbidity business. The difference is just an increase in medium to larger claims frequency, which can happen in a quarter. That is not a problem if it goes both ways, because, second and first quarter were actually quite favorable in that respect. It is not unusual to see this volatile on a quarterly basis. The only thing when you get concerned, if you see the volatility only going in the same direction all the time, because then rather than it is being volatility, it is a trend. Such a trend would not be good. But we have no evidence that this is anything else than random volatility. We cannot see that it is a trend. Well, maybe to add to the development of the Solvency II number. On the flight over, I had a look at various reports, and I was also trying to prepare my comments on the developments as you do in your P&L when you go down, this comes from here and this comes from there. We will have to learn a little bit how to cope with these numbers. For instance, if you compare the two years, the beginning and the end of the year, the difference is not that big. A lot of that development comes from also the currency exchange rates. I was trying to follow the developments through the various points. You see that in the market risk because our U.S. dollar investments got higher values than you find it in the aggregate numbers of our net cat exposures. You also find it in the capital position when our valuation reserves go up. Then overall, you would have to look at the diversification effect of all these developments in one diversification line. In that regard, it was really difficult to identify one single source of this has happened, and this is why it is gone up and down. It is a total mixture of things which then also meets in the diversification line, where in a lot of cases, we had positive movements with all the single numbers. The numbers on the asset side were a little bit higher. Plus there was an additional diversification, which then, if we compare the beginning of the year and the end of the year, ended up additional with the increase in the own funds driven by the profitability in those 10%. But it would be very difficult for me now to identify, to say that 1% stems from that one development. Go ahead, Vinit. Yeah, thanks for the opportunity. Vinit from Mediobanca again. Just following up a few things. Just on the financial solutions in the P&L. That topic, I understood it is more in the other income line. The other income line was a big number in fourth quarter. Could you just guide us a bit about how much was that? So that's the first question, even roughly. Then on slide 13 on the new business value jump up, will it be very naive to just take a tax rate and assume the growth was 20%? Or could you guide us a bit about what really the growth was in the new business value? On the asset side, one question on the de-risking, please. I've noticed that duration in the EUR portfolio is lower this quarter versus the previous quarter. Is it a deliberate attempt to prepare for some interest rate moves, or is it just a coincidence? Just last on the outlook, the retrocession you mentioned already. Will that be reflected in the famous slide of the cost of capital for nat cats going forward, or will it not really change that cost of capital slide basis for nat cat? Because this was a big topic last year, one year ago. That would reduce the net aggregate and therefore would also reduce the cost of capital. It will be reflected in that slide. On the other income line on the P&L account, that will become much more prominent this year. Because you have treaties that do not have sufficient risk transfer for IFRS insurance accounting. Therefore, which I think is not overly transparent, but that IFRS accounting, they are only shown as one number in the other income and expenses. That's all where you see them. We would probably, when we present the 2017 numbers, give you a little bit more color on that line. Because there's so many things in this other income and expenses. Of course, we have it all broken down internally to know where it comes from. Because also when we show you a currency result, it's a balance between currency gains and currency losses. The result, if you look at it, presumably maybe 20% of the gains and the losses, if you look at them individually. I think the other income, if you look at it as one number, is not overly transparent. But as I said, on the deposit accounted treaties, both life and health and P&C, but we will see them on the life and health much more. You will see them in the other income and expenses, but that's before the EBIT line. They will also show up in the EBIT. They will not show up in the technical results, though. I guess my personal view is that where they should be. Because we had one treaty in China which was deposit accounted. All we saw, that was in the 2015 P&L account. All we saw was one number in the other income and expenses of a positive EUR 2.85 million. But the German GAAP premium we booked under this treaty was EUR 1.6 billion. You can see that, yeah, the EUR 1.6 billion might be relatively high, but this is the underlying, in this case, saving premiums that were underlying that treaty. Of course, the treaties make economic sense for the buyers only when you consider those big numbers. We have to see how we report that. But one thing is absolutely sure that the other income and expenses in 2017 will be a more positive number than in 2016. The other question was value of new business. Well, the value of new business, of course, what it calculates is the actually expected future cash flows based on the expected mortality, expected lapse. If you have living benefits because of the expected payout of the living benefits. That then gets discounted and then you have its further discount factor of 6%, which is a capital margin because of the uncertainty. I would say in 2016, if you calculate '15 on a like for like basis, it's more than doubled. This is really from a relatively small number of large transactions in the U.S. I must admit that outside the U.S. and outside the U.K. longevity business, we calculate the value of new business a lot more conservative than we do it on the U.S. business. But this year on the financial solutions, because one of the transaction is actually pretty large, so we took extra prudence and reduced the value of new business. The Solvency II capital as well, which is the interesting other dynamic, just because we had to It was just a very large number, and we thought, let's see how the treaty actually performs. We also had a negative, not on the value of new business, but based on the in-force value. That is that we increased the technical provisions on the old underwriting years of the U.S. mortality business. That part will become a little bit more transparent than we have IFRS 17, but that will not be before. 21 2021. You will also see it when, in next year, we do the variation analysis on the economic balance sheet, which we have to do from 2017 onwards. And maybe to add to that, Uli, you mentioned the other income line. I should also mention that some of these contracts are to be accounted as investments, as we had seen with last year's recapture rate. That was part of the ordinary investment income. So we might take that up and be a little bit more transparent as the profits from the financial solutions business get bigger and bigger in that respect. The high number of the Q4 other income line in life and health was also driven a little bit by the currency exchange rate, because that was when the U.S. dollar got stronger. I know that by chance, because I did look at it as well. So there was also a little bit an impact from the currency exchange rate. With regards, you mentioned real estate and duration. Not real estate. Okay, not real estate. The duration in the EUR, I must admit, I don't exactly know where you've read that. Right now, we still pursue our rather strict duration matching in all the currencies. We define around the numbers we get from our actuaries about the durations of the liabilities, some flexibility for the asset managers, but there was definitely no tactical decision. This was just following the durations of the liability side. No tactical bets on durations. Okay. I don't see any further questions, at least at the moment, and there are no further questions from the conference call. So that being the case, I would like to thank you for participating in our analyst conference and also for your interest. This call has been concluded. You may now disconnect. For all the others here, we would like to invite you to join us for a snack and a drink outside of this room. Thanks again for coming.

Data Source: Quartr Last updated: Mar 9, 2017

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