Hannover Rück SE (ETR:HNR1)

Earnings Call: Q4 2011

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Mar 15, 2012

Well, good afternoon, everybody, and a very warm welcome from our side for the Hannover Re Analysts Conference. It's very nice of you that you had so nice weather today for us as a welcome. It's only a pity that we do not see any sunlight in this room. I think we have something which we have brought over, very interesting things for you today. I'd like to remind you not to forget to turn off your mobile phone after this session. After the speech of Mr. Valeen and Vogel, I would like to introduce you to the Q&A session. For that, I would like to ask you to use the microphone which will be handed to you so that everybody in this room and also those people watching from the outside can understand your questions. With that, I would like to hand over to Mr. Valeen. Yes, thank you very much, Karl. Yes, as Karl said, we can't see the sun from here, but I've decided to present you with some nice figures. Hopefully that will give a little bit of substitution. 2011, of course, for reinsurers, was not the easiest year. It was a rather difficult year. I'm pleased to say that if you look at the development of the book value creation was EUR 6.13, or 16.4% of the book value per share at the beginning of the year. This was aided, of course, by improved reinsurance conditions from the second quarter onwards. Of course, the main reason for seeing these improved conditions were the losses that we saw in the first quarter. They, of course, did not have a positive effect on the results, but rather to the contrary. In fact, in 2011, we had the second worst year on record when it comes to insured losses, insured catastrophe losses. They exceeded, last year, $100 billion and are only second to the amount in 2005. By the time everything's paid out, maybe 2011 will even overtake 2005. Of course, those high burden of capital losses had a positive effect on the rating and continues to have a positive effect on the rating. Then if you look at on the capital markets. Even the capital markets, it was not all sunshine. We had quite some volatility. We saw quite interesting development with the European sovereign debt, particularly in the southern states. So there was a fair amount of volatility, and we even for the first time saw a haircut on sovereign debt. Considering that background, I think we are relatively pleased with our result of EUR 606 million after tax, which admittedly is below our initial guidance, which we gave at the end of 2010, which was EUR 650 million. But it's well above our revised guidance, which we gave after the first quarter of EUR 500 million. We also saw a continued growth of our business in 2011, particularly on the non-life side, where the premium grew by 7.7%, FX adjusted even 9.4%. But also our life business, albeit at a slightly lower pace, grew at FX adjusted 5.2%. Large losses exceeded the budget or the expected losses by EUR 451 million and reached almost EUR 1 billion. However, if you compare that number to our net premium, it makes up about 16.5% of net premium, and that at least is a comparatively low figure with our peers. This lower figure also explains that compared with our peers, we managed to have a reasonable result, even in 2011. Our investment income increased by 9.9%, which, of course, was a big help as well. This was done by increasing ordinary income by about 10%, but also about EUR 147 million of extraordinary investment income as a balance between the realized gains and losses, which was larger than the negative balance that we had on the unrealized gains and losses. This investment income was heavily aided by very positive cash flow. We had a positive cash flow to the tune of EUR 2.5 billion. That also meant that our assets under management increased by EUR 2.9 billion. This is actually quite an important number for the sustainability of our profitability. Because if you look at the increase in the asset under management and assume that we are able to generate yield on that new cash of, say, around 3%, this is an additional EUR 75 million of pre-tax profit that we just have from the increased assets under management. That, of course, also means that we see an increase in the underlying long-term profitability of Hannover Re, where the foundation has been laid in 2011. Our return on equity reached 12.8%, which is well above our minimum target of 750 basis points in excess of the risk-free rate. We are proposing a dividend to the general shareholders meeting of EUR 2.10, which is above the EUR 2 which we gave as the minimum threshold throughout the third and fourth quarter. With that, I would hand over to Roland to give you some more detailed insight in those figures. Yes, thank you, Uli. We know the numbers in a lot of detail already, and this is why I would only try to highlight some important aspects and, of course, then give you all the chance to ask your questions afterwards. We have started the presentation with some key figures in a five-year comparison. So to a little bit demonstrate the longer-term view on those and see them in the context of what happened over the last five years. If we start with the gross premium here, Uli had already mentioned 7.5% after a currency adjustment. That is a good gross number, a little bit over above what we had expected. If we see that in a five-year comparison, so over a five-year period, we have increased the gross premium by 46%. That number for the life business is 74%, for the non-life business, 32%. So really a long-term remarkable increase. You see that in 2009, our life business makes a little bit of a jump. Please be reminded of the Scottish Re acquisition, which led us then into the area of a nearly 50/50 position. So that is a longer-term growth, which I feel is remarkable. We see similar pictures, and also that had already been mentioned, especially here with the cash flow number. Good cash flow, operating cash flow numbers over a long term, EUR 2.5 billion. That is a record number. It is a little bit inflated by the acquisition or the second acquisition of some portfolios from ING that led to an asset transfer of around $500 million USD. Fortunately enough, the tax ruling from late 2010 not only made it to the bottom line but also to the bank account in early 2011. So also that money came in. But still with a little bit of cash flow, a little bit short of EUR 2 billion, I think this is then the basis for the increase of the assets under own management. Over the five-year horizon, which you see here, a 43% increase. And that, as Uli mentioned already, is then the basis also for the investment income, which we will look at in a minute. The continued growth of the investment income. Here, we have the 2008 dip. You know that we had that on the basis of the disposal of our equity portfolio. Already 2009, nearly as good as 2007, so before crisis level. 2010, already ahead of that. And 2011, now EUR 1 billion of net investment income, more than EUR 1 billion. So also that is a record high. The ROI at 3.9%, so the definition of that number once in a while is a little bit of problem. You know that we have underwriting specific issues here as well as, namely our inflation swaps and the famous B36 ModCo derivative. If we would exclude those from the pure investment performance, we would even exceed the 4% level for 2011, and we will see the details later on. So with a little bit of luck or expertise or however you see that, we avoided any negative or remarkable negative surprises over the last three years, which I think is a remarkable performance. Well, this chart and the policyholder surplus, which comprises our hybrid issues, the minority capital, mainly the E+S minority capital, as well as our shareholder, this equity is a little bit of demonstration of the development of the financial strengths of the Group over the last years. As you can see in the headline, the equity or the shareholders' equity increased by 76% over the last three years. And already in 2009, the number was higher than 2007. I think at least even more remarkable, the development of the shareholders' equity alone. One must admit, this is also driven by the valuation of our assets, the OCI position. And if we see or if we would see rate increases, and you may know about the sensitivities which we usually publish, that of course, is a volatile number. But even without the OCI position, I think the financial strength of the company had never been better before. Another rather straightforward chart, 10 years book value per share development. There is only one dip in 2008, as you can see. But apart from that, I think a very constant development over the 10 years, which if we compare 2001 and 2011 and include the dividends which we have paid, that means a value creation more than 150%, which then also should be the basis for a comparable share price development. The dividend proposal 2010, Uli had already mentioned a little bit the background. I would be tempted to have at least one additional view on that. You know that we had started the year 2011 with a guidance of EUR 650 million. And if you take the EUR 2.1 here, that would reflect a 39% of the initial guidance we gave. The argument also would be that everybody who had invested into Hannover Re early 2011 on the basis of our first guidance should not be disappointed because we would still be very well in the range of 35%-40%, which we give as a guidance. Well, the numbers in details, and I would not go into very much details. You know most of them. The EUR 450 million over and above the large loss development, of course, had hit also the bottom line. We have the impact from the positive tax ruling of EUR 128 million. Well, you know that EUR 606 million net income led to a return on equity of 12.8%. So even if we deduct the EUR 128 million from that number, we would still arrive at a double-digit ROE, which I feel in such a year should be remarkable. The one thing, of course, which should be borne in mind is that the 8.8% as a tax ratio, this will unfortunately not be a sustainable number. That is driven by the impact of the tax ruling, and we might see different numbers again in the future. I think the first indication, for instance, is the Q4 standalone. If we here look at the tax ratio, it's already kind of normalized with nearly 24%, still a little bit on the low side. The standalone quarter impacted by the Thailand flood loss, of course. So again, one other quarter where the large loss budget was exceeded. The other extraordinary item was the investment income. We had realized some profits from the disposal, mainly of government bonds, and we had positive developments of B36 ModCo derivative, as well as the inflation swaps, as well as the currency exchange rates. This led to a very positive quarter and in the end also to our positive profit warning because, of course, some of these instances could not be foreseen by the end of the third quarter. We already mentioned what we feel are attractive ROEs. What I feel is an important message here to give, if we look at the ROE achievements here on a five-year term, on a 10-year term, or on a 15-year term, we always arrive at numbers between 13% and 15%. That means, or it should convey the message, that even if we have, as one could see on the left-hand side, one year which deviates a little bit from the rest of the years, we should still be in a position to provide attractive returns. Although, that might, in the future, be a little bit more challenging on the basis of the remarkably increased shareholders' equity numbers. Of course, the ROE is always made up of a numerator and a denominator, and if the denominator increases remarkably, it may be a bit more challenging. But still, I think it's remarkable. The leverage, from our point of view, not a very important number. Some stakeholders still see that as something important. As we increased our shareholders' equity remarkably, plus we bought back the remaining part of an outstanding bond issue. Also, the financial leverage of the company went down from 36.5% to nearly 31%. I think this is also a premiere that on a five-year average, we are on the number one position of our ROE sheet here. That is true for the year, again, as well as for the five-year average, which I think should one more time demonstrate that while on the basis of the retrocession strategy of a conservative investment strategy, we obviously outperformed the competition somewhat here. Let us look at the non-life portfolio or the non-life segment at least, and look at the highlights. The net premium, FX adjusted, even up 12%, which I feel is remarkable. The major losses mentioned more than once already. The nearly EUR 1 billion, so the EUR 981 million, represent 16.5 percentage points of net premium income. It also means that we have exceeded our large loss budget by some EUR 451 million. That, if we then calculate a normalized combined ratio, we would end up at 96.7%. The underlying combined ratio, if we back out all the large losses, was 87.8%. Well, indeed, not too far away from the previous years as well. It may be the time to comment a little bit on the run-off result. We had mentioned early last year after the first quarter that we had positive run-off result of EUR 150 million. That was kind of single instances. The rest of the year, I would say we had the regular expected positive run-off result. If you look at our triangulations as part of the annual report, you will find a number of a little bit more than EUR 300 million. Also, that is impacted by some technical issues here or there, but I think it gives you a guidance as to what we have experienced over the course of the year. It is worth mentioning at that point that on the basis of the analysis from our inside actuaries, as well as our outside actuaries, as well as our auditors, we could say that the confidence level did not go down. It rather went up also in 2011. The regular run-off plus the Q1 run-offs did not decrease our confidence level. It is just the other way around. It had increased. I think it is the only thing. Still the diversified business line. What may be remarkable here, you see the ups and downs. We have a good basic organic growth in our target areas, North America and Germany. You see the structured business going up. The global treaty, I think here, of course, we also have benefited from the reaction to the large losses of the first quarter. We have also seen reinstatement premiums, which have increased the numbers here as well. But we have, again, also concentrated on the specialty lines, and they have increased. So you see that this is not exactly the same portfolio that it had been. It is possible and it is also necessary to focus and also let some business go if it doesn't provide the necessary profits. We had spoken about the large losses of EUR 1.7 billion gross, EUR 981 million net. So a good EUR 700 million ceded to the retro markets. I think that demonstrates that the concentration on our retrocession strategy, just on cat events, does work and had kind of safeguarded us from even higher losses. Although, of course, the EUR 1 billion already reflects a large number. The single losses, nothing really to write home about. Japan, a little bit down. New Zealand, a little bit up. Overall, I think our estimates from early last year had proven to be reliable and conservative. There is really nothing remarkable when it comes to development in these losses. The life and health division, I would say expected growth. We did not see very positive surprises. This is what we had to expect, a little bit more than 5% gross premium growth. Again, this is what we had expected. We see that this business line had been affected by the ModCo derivative. I guess, in the meantime, as we had explained it more than once, you know what that means. It kind of reflects the development of the credit spreads, especially in the U.S. As they widened late last year, this derivative devalued or showed some losses. These are unrealized, and in the long run, we will see that come back. This is at least what we strongly expect. If we adjust for that amount, the EBIT margin would have been 5.7%, so just below our target of 6%. The impact of the DII reserve strengthening, which we started to discuss with you over the course of the summer, ended up with a EUR 24.5 million impact on the net income. So it is more than nothing, but again, also nothing really dramatic. Here, if you look at our five pillars of that business line, the financial solution seems to shrink. It did not. The profits went up. This is an area where, according to the IFRS statements or the rules, we cannot show premiums for larger portions of that business line because FAS 113 does not allow for that, as the risk transfer is not sufficient. This business line shows a healthy profit. It grows, and this is why the premium is not a good indicator for the development. New markets, that is the U.K. enhanced annuity, but also China, other areas which develop favorably, as well as the conventional segment. Here, we capitalize on the acquisition of the ING infrastructure. This grows nicely and profitably, and this is why the conventional reinsurance has increased most in that business line. Even a bit more fun to report about is the investment income. We already alluded on that. Ordinary investment income up by nearly 10% on the basis of a, well, nearly a flat yield, but an increased volume. You see the realized gains and losses even a little bit higher compared to the already high last year, EUR 180 million, a little bit more than EUR 60 million in Q4. We have explained to you more than once that we still have on the strategic agenda to move a little bit out from the government exposure into the corporates. When then the governments or the high-quality governments show historic low in yields, I think it is the right moment to pursue such strategy even a little bit accelerated. This is why we benefited from some profits from the disposal of these investments. Unrealized gains and losses, this more or less is the balance between the B36 and the inflation swaps, which went up by EUR 11 million. So the EUR 40 million here is a reflection of the unrealized developments of those instruments. That leads to a record net investment income. Net income from funds was held up as well on the basis of increased values. The realizations or the profits from the disposal of some of our investments have not led to decreased valuation reserves. It is just the other way around. Those went up in the available for sale bucket to EUR 639 million. If we include held to maturity and loans and receivables, that number would be slightly over and above EUR 1 billion. One look at the portfolio as it stands today, you see that the government exposure is back on 2007 levels. The corporates went up. This is what we had intended. It is, to a certain extent, also challenging to invest against the high cash flows and to keep, for instance, the numbers. You could say what happened to your real estate ratio has not, because the vol there as well. I think that with one more look at our corporate sector allocation, where one could see that we have increased, as mentioned strategically, the investment in the corporate sector rather remarkably. We have moved a little bit away from the financial area, which we had concentrated on also in 2010. So we left the banks. You also see that we do that in different currencies on a very diversified basis. We still feel equipped, even if we see some surprises over the course of the years from the capital markets. I think, Uli, that concludes my presentation, and I will forward to you for the target metrics. Thank you, Roland. That then brings us to the target metrics, which sums up the year. We at least managed to have four ticks on the blackboard. Of course, particularly gratifying that we have achieved our ROE target as well as our book value per share growth target. We also achieved the EBIT margin in the non-life of in excess of 10%, just about. This, of course, was all helped by a significant overachievement on the return on investments, which was 0.4% higher than the target. So room to improve, but overall, still quite acceptable year of 2011. That brings me to 2012. If I start with the non-life business, we have seen a relatively positive development in the 1/1 renewals on the non-proportional business, and only there it makes sense to at 1/1 give you a rate increase number. We had an increase in the rates of 6%, and we also had an increase in our volume of 6%. This shows you that we had the rather conservative approach for the business and that the growth that we had to a large extent was actually driven by rate increases. We expect these rate increases to continue for 1/4, 1/6, and 1/7. So overall, we expect to have a slightly better-rated portfolio in 2012 than we had in 2011, and that should have a positive effect on the underlying combined ratio based on normal development of the runoff result and large losses not over the budget. On life and health reinsurance, we continue to see organic growth, and we expect for 2012 that we will reach our EBIT margin of 6% on the net premium due to the composition of the portfolio as it has shaped up already at the beginning of the year. Of course, investments will be challenging again because we still target net return on investment of 3.5%, which of course with high cash flow, new money to be invested, and relatively low interest rates at this current point, means that this is a challenging number. But we are quite confident that we will reach it or reach an investment return in that region. If I put that into more concrete figures, you can see that we expect similar growth on the non-life as well as on the life business, which of course means that we expect to grow 5%-7% this year. We expect the return on investment. We also expect increased volume of the assets under management because we expect continued positive cash flow, despite the fact that we will, of course, pay out some of the losses that we have incurred in 2011 and that are largely coming into the year as loss reserves and have not been paid last year. Dividend payout ratio, which should remain between 35% and 40%. If you look at those sheet, you will observe that there is no absolute profit guidance. Before you ask me the result of this, the reason for that is that our parent company, Talanx, had asked us to be cautious with forward-looking statements, and therefore, we have, to their benefit, followed their advice not to have fixed guidance here. If I go to the individual segments of the business then, starting with the target markets. In North America, we have seen a rather positive development on the short tail lines, particular property per risk and property pro rata, where we have seen increased rates and continue to see increased rates, not only, but in particular, in cat exposed areas. Also, on the casualty lines, we feel that the bottom has been reached and that we see gradual increases of the rates there, particular general liability and workers compensation to less extent E&O, which is still reducing. We haven't as yet, on the casualty side, utilized that to write more business, which we could from our various relationships that we have in the U.S. But we want to see in the third quarter if we see rate increases on rate increases. If that happens, we might get a little bit more bullish on the U.S. casualty and actually write a bit more. Which as I said, we have more than 500 clients we do business with in the U.S., and from increasing shares on existing businesses, we could easily, significantly increase our book of business there. That is a lot more difficult in Germany because it's a more saturated market from that point of view. But we have seen some growth in the 1st of January renewal. In Germany, that, of course, is the renewal. There's hardly any other renewal because all the German business really renews at 1/1. The growth was not necessarily coming from the industrial business where the development is rather flat, also rate-wise. However, on the motor business, where through the minority shareholders of our subsidiary for Germany, E+S Rück, we are quite significantly participant in. There we have seen increases on the excessive losses, and we have also seen, for the second year in a row, increases of the underlying rates of the direct motor business, which benefits us from our participation in motor quota shares in Germany. Despite the fact that we have a sideways arrow here, we expect a slight increase on our German domestic business. Marine, we will see significant increases. Of course, last year we had significant losses in the offshore energy field, and this year already we had one also in the offshore energy field. So we see continued increases there, in particular on the excessive loss side, which is the majority of our book. And we will see further increases also as the result of the largest marine loss, excluding energy, which we had in history, which is the Costa Concordia. High value of around $500 million. And then, of course, expected significant P&I claim, which has marine liabilities due to the removal of wreck, which will easily be a significant three-digit USD million amount. And we also have seen activity on class actions in the States representing passengers, and claiming significant amounts of money from Costa Crociere and their parent company. These will have a hard time to succeed because of some terms and conditions in the tickets of the passengers. But in U.S. courts, you can never be absolutely sure. So we have taken a conservative approach when reserving it. It will be, for net account in euro terms, mid double digit, and the mid double digit will start with a five. But we still expect that we see good profitability of our marine account, despite the Costa Concordia loss. On aviation, we had an extremely benign year for losses, particularly on the airline side in 2011. So results in 2011 were just wonderful. But not only for us, and therefore, there's competitive pressure in that market. And we definitely don't see rate increases there. If anything, rates are coming down. We overall are well-positioned in that market because we have a very broad spread of business. We lead the majority of the emerging market aviation excessive loss programs. That is, programs from Russia, China, India, South America. So that's a stable, profitable book for us and don't tell our competitors, because at this point in time, it's not that competitive. So we expect some growth there, and we expect continued good profitability, maybe not to the level that we have seen this year. Credit, surety, and political risk. We had extremely good years in 2009 and 2010. But the terms and conditions are still very acceptable, certainly better than pre-crisis level. So we see continued growth at good profitability in that business. Particularly at the beginning of the year, we managed to get some increases on some of the business of our core clients there. Also, some of the emerging market business has shown good growth at very good profitability. We are quite pleased with the development that business has shown so far this year. In the structured reinsurance line, we have seen increased demand due to risk-based solvency regimes such as Solvency II, but also similar solvency regimes in non-European countries. This has led to slightly higher margins on that business and increased volume. That is a positive development. On the ILS side, we managed to facilitate the transfer of a Japanese cat bond into the capital markets. We have also good growth in that business where we take on risks and package them that they fit the appetite of the capital markets. There is some growth in that business as well. Relatively low risk for our net position and relatively good margins. On the U.K., we see growth both on the treaty side as well as on our direct activities. On the treaty side, it is driven by some niche business, but also by motor business because we see increased rates in U.K. motor, which is very necessary because of some interesting activities in the U.K. market, which is called claims farming, which has increased the frequency of bodily injury losses certainly much beyond every other country in Europe. It has led to significant increases over the last couple of years of around 50%. There are initiatives, which also have already succeeded to some extent, to reduce the claims farming activities by disallowing certain fees and other measurements. There is hope of a more normalized claims cost again, and overall, we see relatively good opportunity there. Global treaty, we see a stable development, which is characterized by growth in Southeast Asia, particularly also driven by claims. We expect some reduced incomes from Argentina due to new regulations which not allow Argentinian ceding companies to cede business to reinsurers that are not domiciled in Argentina. As we are the market leader in Argentina, we expect that we will lose some business there. We will not lose all of it, despite the fact that for various reasons, we have not decided to set up a subsidiary there. A number of our good clients have set up their own reinsurance company, so that allows them to cede us the business as retrocession. Nonetheless, we expect to see some reduction there, and therefore we have a sideways arrow here rather than an increasing arrow. We see increases in our global property catastrophe business. These will largely be price driven rather than driven by taking on additional exposures. Because we see good increases in that business, we see good profitability, but it is not high enough as yet to entice us to significantly increase the volatility of our earnings towards catastrophe exposures. Global facultative, we have a number of initiatives that already are from last year, which bear fruit, so we expect profitable growth here as well. If I come to the life business, financial solutions, beginning of the year, very active period for us. A number of very interesting new transactions we could write. They are not that much increasing the premium volume, but they are definitely increasing the profits. So we have seen, particularly from our U.S. company, a very positive development there. On the U.S. markets, we have taken a close look at that business and are quite happy with our longevity swaps. But on the enhanced annuities, we see some increased competition. As we feel that we have, probably because we do that business for the longest, we have probably a slightly better data than some of our competitors. We have taken a rather cautious approach there and have allowed in our planning for some reduction in premium volume there, which overall means that the new markets will be flat. We will see growth in the Takaful business, which is a Sharia compliant business. But the volume we have there, it is around EUR 15 million, rising to probably EUR 20 million. We see also growth in our micro-insurance business. But again, the volumes are similar to the Takaful business. We need to grow double digit for a while to become actually, in absolute terms, more meaningful. Bancassurance is a very profitable line for us, which we expect to be stable in volume as well as profitability. On the conventional reinsurance, we see growth in Asia, particularly China. But we also see good growth in our U.S., what we call the US mortality solutions business, which is a mortality protection business, where we insure the risk business. This is business we write on the platform that we have purchased from Scottish Re, and it has actually developed quite favorably. I think we have written last year about $250 million of that business, virtually from nothing in 2009. The good thing with that business is that it is a good base for growing in the future because it is all long-term business underlying. Each underwriting year that we write produces premium also in the years to come, could easily be 20 years to come. If we would stop writing new business there, those $250 million, we will see also in 2012 and 2011 and 2013. Due to the way it is structured, the premium will actually increase rather than decrease in the first, say, five to six-year period. But we are seeing continued growth of new business as well. So that has been a very positive effect of our ING acquisition, which we have not really paid for in the acquisition, at least not a whole lot. So overall, also on the life and health side, positive development, and this is rather good note. I would like to close the presentation, and we will be more than happy to answer your questions. Thank you very much. Okay. Now for the Q&A session, we would like to ask you to use the microphone, which will be handed to you. There is already one question in the last row. Please go ahead. Yes. Hi, it's Jason Kalamboussis, SocGen. Two questions. One is, your reserve releases of EUR 318 million, which is roughly 5-point something percent. If we add them back to what you said was your normalized combined ratio, we're basically sitting at around 102% in accident year in the normalized combined ratio, which seems to be quite high. What are your thoughts about this, and how do you see that progressing in 2012? More specifically, for example, your attritional ratio, how do you see that progressing? The second thing is, could you tell us, in the second quarter, you had taken some extra EUR 60 million within your combined ratio. That was the budget, if you want, that you booked. Can you tell us where that eventually went, please? Thank you. Well, to the second question, that went to the offset, the Thailand flood loss, really. If you look at the accident combined ratio, that's an excellent question. You have to look at what drives the accident here, combined ratio. The way we reserve our business is on an underwriting year. Of course, if you look at the accident here, combined ratio of 2011, it's first and foremost determined by the loss reserving that we are doing for the 2011 underwriting year. The 2011 underwriting year reserving is, of course, from an actuarial point of view, a rather difficult one to do because you haven't had a lot of losses to go from because the year is very young and it's just starting. Therefore, the way these are reserved, you look at the underwriting year ultimate loss ratios from previous years. This is, of course, the basis for the so-called loss ratio pick then for 2011. Then, of course, you also look at the quality of the business. Is it better or worse than average? So you adjust the actuarially calculated loss ratio pick accordingly. For example, on U.S. casualty, our loss ratio pick for 2011 from memory was around 90% because we felt the market is rather soft. The other element of the accident year combined ratio is the 2010 underwriting year loss ratio. This is also largely the loss ratio pick. As we are very conservative with our first year loss ratio picks, that drives a relatively high accident year combined ratio. What it also drives, certainly on the shorter lines, is what we call the normalized underwriting profitability and the normalized loss reserve releases. Because on the short tail lines, these rather high loss ratio picks would relatively quickly result in loss reserve releases. A good example for that is, the credit reinsurance business. Where, for example, in the 2010 year, our initial loss ratio pick was, I think, around 80%. It now appears that year runs at around more closer to 50% or even below that. There, of course, you cannot keep the initial loss ratio pick for very long because, it's short tail business. So, if the losses aren't there, what can you do? Due to that reasoning, I'm not concerned with those kind of accident year combined ratios. How will that progress? The accident year combined ratios in 2012, provided that the losses remain within the budget, will likely improve a bit over the 2011. Because of the increased rates, we expect some lower loss ratio picks. Also, due to the very favorable development of the loss ratio picks of, say, the previous 6 or 7 years. That of course, from an actuarial point of view, has a kind of dampening effect or reducing effects on the actuarial side of the expected loss ratios for the green underwriting years. That is a far, probably rather long-winded explanation on the combined ratio. That's also why I'm not terribly concerned if our combined ratios are somewhat higher at times than they are of our competitors. Well, if I may add, you may remember that I mentioned during my brief presentation that the overall confidence level of our loss reserves have increased rather than decreased. So far, you may imagine that for the last underwriting or accident year, or the 2011 year, we had been rather conservative. This is why a statement that around 97%, a little bit below 97%, is a underlying combined ratio or a normalized combined ratio would still be true even if your calculation of runoffs, underlying plus runoff profits from the past is, of course, technically correct. If you then are conservative in the running year again, and overall the confidence level of the reserves increases, this is why we state that this underlying combined ratio as we calculated it, is a good indication or direction. We have another question coming from Fabrizio. Yes. So a couple if I may. Sorry. Starting with the growth. In China actually, or Asia actually, is already accounted for some 10% of your premiums. So you experience huge growth in China. You also experience huge growth in life reinsurance. So how much of this could we expect going forward? If you could break up the 10% for Asia of your portfolio, how much of this is China? In terms of Costa Concordia, I'm intrigued by your description you did before. For the case of a class action, actually, would not D&O contract come into claim as well and so relieve you in that terms? Or will you have to take this? Class action are directed against management normally, no? Then about your portfolio in terms of investment. I saw that the U.S. downgrade provoked a huge shift in quality of your portfolio, given that 40% is actually in U.S. bond in terms of government. What are now the countermeasure? Do you expect the next downgrade to suffer more transition, or will you go and do some switches there, go even in some renewable or infrastructure? Okay. Our Japanese book overall. The largest countries there is China and Japan. Of course, Japan is a traditional market, and we have rather large volume. The Japanese business has also grown a little bit due to rate increases as a result of the earthquake. We have, at this point in time, rather good opportunities to increase our business in Japan. It just depends how much aggregates for earthquake we are prepared to allocate to Japan. The other countries, if you look at India, we are largely there in the specialty lines being the aviation marine. The fire business in India is rather difficult. We have big growth on the life business, but the volume is rather negligible at this point in time. Then another important country is Korea, but smaller. The big two is really Japan and China. If you look at the Costa Concordia potential D&O exposure, yes, that might be the case. That is not the aim of the class actions at this point in time. They are looking for compensation of various series of damage for a number of passengers. They try to find U.S. jurisdiction because the ultimate owner of the Costa Concordia is a U.S. company located in Florida. That is the reason why they try to establish U.S. jurisdiction. According to the verbiage of the tickets, that should be rather difficult. It will definitely cost money. At this point in time, still the majority of the liability loss would be the removal of wreck claim, and the removal of wreck can be very expensive. If the salvage companies are successful to get the vessel refloating, which is a chance. If you try to close the holes in the hull, and then pump the water out of the hull, there is a chance that the vessel may refloat again. Then, of course, the loss will come down quite substantially. If that is not the case, the removal operation will be a lot more difficult. It has been positive that they managed to get the bunker oil out of the vessel. Because as a result, we do not have to expect an environmental claim. Of course, they are not doing that for free either. Even getting that out is a fairly expensive operation. If there are D&O claims on Costa lines in the end, that is a long shot. It is long-tail business. So of course, if there is a claim bought, it will not be accepted. It will be contested. So that means that. That also if you look at the claims from the financial crisis on professional indemnity of D&O, we haven't seen a lot of yet. But it normally takes about five years at least for these claims to really surface. Because clearly if a management is being sued, it's very unlikely that you accept the claim rather easily. You would try to get your lawyers to defend the claim to the highest extent possible. And that takes time, and it takes years. After a while, probably you can gauge where the claim would be, and then maybe settlement discussions, which normally happens, start to be initiated. And normally, these claims are settled. But the timeframe is five years. And should there be D&O claims on that Costa Concordia claim, that's in my view, the timeframe you will see. On the U.S. downgrade, Roland knows much better than me, so I will hand over to him. Yeah, Fabrizio. Yes, if you look at this picture here, you see that the downgrade has changed the color of the portfolio a little bit on the latest composition. Still, I would argue that a double A plus is not a very bad rating. And for the USD, I would still see the U.S. govies as a safe harbor. And I'm obviously not alone, as the downgrade didn't really increase rates a lot when it happened. From that angle, we had looked at governments below double A plus, and it's not a coincidence that it's a double A plus. Below double A plus as compared to corporate investments. If we have implemented, for instance, the issuer limits and all that for all the investments below double A plus. In that regard, I don't foresee a huge reaction on the basis of the downgrade of the USD of the U.S. govies. It's more that the overall strategy to move a little bit away from the government exposures. And we will continue to do a little bit more in that regard, but not dramatic changes. And as we are currency matched, as this is the major principle, we will be invested in U.S. government in the future as well with a little bit lower portion. We have, for instance, introduced a U.S. mid-cap corporate mandate. So we are diversifying into that area. But again, U.S. govies will still be a part of the portfolio also in the future. With regards to infrastructure, I think we had the discussion before, and I know your position on that. I see, especially for instance, life insurers who are looking desperately for long-term, 30 years and more investments, that is an interesting field. It also is for us. We are looking into something also these days. I am still hesitant to invest into infrastructure projects which are heavily dependent on subsidies, on government support, and what have you, because if that is the case, we are still, again, a bit hesitant. I want to understand what I need. There is a new product process going on internally, and it takes a while. We are looking at it, but you would not have to expect a huge increase. I would not rule out that you see some of these investment next year here, but it won't be a huge percentage of the overall portfolio. There are quite some hands up. From Michael Klien, I have seen already before, and then be followed by Thomas Fossard. Yes, good afternoon. It's Michael Klien at Nomura. Two, hopefully, quick questions. Firstly, on your realization of gains on the shift from government bonds into corporate bonds in Q4, could you give us a little bit more granularity in terms of how much the impact was? I see the overall number in terms of the effect from higher realized gains in Q4 of EUR 39 million that you're showing on slide 9. Is this all from the shift or were there some other realizations as well? The second question is your announcement in terms of going to want to be a Société Européenne. Could you highlight your key motivations for wanting to change the legal form of the company? My understanding is one of the motivations is for solvency reasons. What exactly do you mean by that? Does it have to do with BaFin being your main regulator and/or some other reasons? Well, if I start with the Société Européenne and then on the realizations, I think Roland is much better suited than me to answer that. The reason there for the change is that, of course, we have been discussing, and very successfully discussing, with our regulator in Germany to get our internal group capital model being approved by them. We are in a pre-application phase, and we are quite advanced. That's all running terribly well. The only problem is that the Omnibus II guideline, which will be important for the implementation of Solvency II, at its current draft status, may make it rather difficult for our German regulator to approve our group internal capital model, because our parent company is located in the same country as Hannover Re Group. As we are a separately incorporated stockholding company, where we have 50% free float shareholders, we, of course, cannot steer our business in accordance with the group capital model of our parent company. Therefore, for us, it's quite important that we get our own capital model approved. This is still a good possibility that will in the end happen. However, if that is not possible due to the Omnibus II guideline, then of course, one of the options which we currently don't have is to move our headquarters or official seat of company out of Germany, so that the obstacle of being in the same state of the European Union as our parent company would no longer be there. If that's necessary, we feel probably not, but it's always better to have an option rather than not to have an option. We also, of course, have to evaluate the actual impact, which at this point in time is unknown. Because Solvency II is not existing at this point in time. Therefore, we don't know what the impact is. Of course, we will definitely get, or most definitely, get approved the internal capital model for the legal entity, Hannover Rück AG. Depending how Solvency II pans out, that might be sufficient, so then we don't have to move. But if that would be detrimental to us, we would just want to have the option. That's the reason for the change to an SE. No other reason. We are not aiming to curtail the employee participation, which is the reason of many German companies to change to an SE. Hopefully, that answers the question, and then on the- Perhaps to add that comment. It is not that we are not happy with the BaFin, that we are trying to do regulation shopping or whatever it is. So we are happy in Germany. We're happy with the BaFin. But the problem is this formality with the Omnibus II guideline, as one could read it today. With regards to the realizations, well, I have the numbers here with me. So the EUR 180 million comprise some EUR 58 million from semi-government. That is government-guaranteed municipalities or what have you. That is mostly from the U.S. It is EUR 57 million governments. So EUR 115 million out of EUR 180 million from government exposure. On top of that, we had profits from our private equity investments. That is around EUR 20 million. Moreover, we had also invested on a limited budget basis into CLOs after the crisis where we felt very comfortable. And we sold some of them very profitably. That is also a little bit more than EUR 10 million. We also very profitably sold one piece of real estate, and that was an old holding which we had, and that also made EUR 18 million. So the majority comes from the sale of government bonds, but we also had some other opportunities from our portfolio, which we took over the course of 2011. I hope that answers the question. Then the next one comes from Thomas Fossard, followed by Andrew Ritchie and Spencer Bond. Yeah. Good afternoon. I have got three questions. The first one will be a follow-up question to the ESE question. If you were to take the decision to move out of Germany with a change in the legal structure, plus new contact with the local regulator to get your internal model approved, would that mean that in terms of getting your model approved, obviously that would not be before 18 months or 2 years' time? I mean, is that significantly delaying the potentiality for getting the internal model approved? The second one would be on the operating cash flow. Obviously significant growth, even on an adjusted basis. You indicated a EUR 2 billion that will compare to EUR 1.6 billion, EUR 1.7 billion the previous years. So is the EUR 2 billion something recurring, or, I mean, there is some specific issue due to reserving or cats last year which inflated somewhat this number? The last point would be on the durations. I have seen that you have lessened quite significantly the duration, 3.5-4.2. Could you explain us what you are trying to achieve there? Thank you. Well, on the possible delay of an approval of our, first of all, of course, the basis for the not before the first half of 2013. There could, of course, potentially be some delay, but we don't believe it will be significant because, I mean, with the German regulator, we have already, of course, developed our internal model. Helped greatly also by the feedback that we got from the BaFin and by any other regulator. I mean, we have, of course, seen that recognized by those regulators where we have subsidiaries because they, for the legal entities that we have in those countries, look at our internal model as well. Yes, I mean, but one thing is very clear: if we can avoid it, we will definitely not move. I mean, the negative impact needs to be significant for us to be enticed to move because it complicates the overall organization. Because it will not be sufficient to put a postbox somewhere in another European country and say, "Well, we are now domiciled there." It entails a little bit more. Therefore, if we can, we try to avoid it. As I said, the main thing is for us having the option. I mean, on the positive cash flow is EUR 2 billion. I mean, we'll pay out some of the losses from 2011 and 2012, and that will probably have a negative impact. I mean, it's really difficult to say. I mean, we analyzed it rather detailed on the non-life side, and, I mean, it wouldn't surprise me if it would be somewhere between EUR 1.5 billion and EUR 2 billion, around that level. We expect the business to stay very cash positive, I would say. On the other one, I would say again. Duration. As we had reported more than once before, we do follow the matched approach between assets and liabilities. That goes for currency as well as for maturities. At least to define the neutral point where the duration of the liability is, and then take it from there to perhaps be tactically on the long or on the short side. This move now is not a tactical move. We had assessed the liability structure one more time, even a bit more deeply, with more sophisticated tools and measures. For instance, especially for our German subsidiary, E+S, we found out that obviously, the neutral point is a little bit longer than shorter. Our direction right now is to stay exactly at the neutral point, to make no bet on the short or on future interest rate increases, as well as speculations that yields should be down there for a long time, for a Japanese scenario, or what. We took the decision that we should be on the neutral point. It was not a tactical move. It was a reassessment of the liability structure, and then the asset portfolio did follow that, thereby, of course, yielding a little bit more than before. Okay, Andrew. Next one. It's Andrew Ritchie from Autonomous. Two related questions. Could you just give us a sense of your risk appetite for peak exposures? We have the updated stress tests in the annual report, and it looks like European windstorm has gone down quite a lot. The U.S. windstorm, Japanese windstorm, and Japanese earthquake's gone up quite a lot. What's either the room within your risk model to increase that, or what's the appetite for peak zone exposures? I guess a related question, I think you might have told us this at renewals, but on your retro in place for 2012, just remind us any sort of cost impact or combined ratio negative effect from increased cost of retro. I think you have a large European cat bond up for renewal, I think it's March or April. Maybe just give us a sense of what your plans would be for that. Thanks. Yeah. First of all, I think it's important to understand how we write our natural catastrophe exposed business. It all stems from our internal capital model, where we first allocate capital to the non-life business, the life business, and investments which are supposed to yield over and above the risk-free rate. Then on the non-life side, we allocate a part of that capital to the cat exposure. That at this point in time, is 18% of the overall economic capital. From that, we then calculate the exposure that we are prepared to tolerate, so our risk appetite for the aggregate expected losses, one in 200 years. This is the most important limiting exposure. Then, of course, we have other measure management, limits and thresholds, for 100 years, 50 years, even 10 years. Then, of course, we have what we call the local limits and thresholds, which is for U.S. quake, the various individual losses. Of course, based on that, each of the underwriting units gets allocated certain amounts of aggregate and would write the business. So, as in the cat exposure, we could easily write a lot more business if we would increase the capital allocation. There's a gravitation to the higher margin business. Of course, we also have limitations, particularly on U.S. wind and quake, because it has relatively high margin. But we are concerned with the volatility from that business, and we also feel that should there be large U.S. cat loss, which we haven't had for some while, there's room for some further increases, and we want to keep our powder dry a little bit on that. But then you saw the movement away from Europe into Japan, for example. There's a pure question of margin. We get higher margins in Japan now than we get in Europe. The other thing is in Europe, that we have a lot of retro on our European exposure, which is, of course, the cat transaction and the whole account and the aggregate excess of losses that we buy. But we also buy specific European wind cover because we have a lot of European clients. Also, we have, of course, a Eurus cat bond. The Eurus cat bond, of course, also reduces the U.S. wind exposure. We will probably renew our Eurus cat bond because it gives us good cover and good capital relief on the U.S. wind exposure. We will probably change the structure because it's currently parametric structure and as with PERILS, we now have, I think, a credible industry loss reference source. We would most likely try to put Eurus III on PERILS, but it's not yet decided. That's the likely way we are going. Then, of course, it's a question of the spread, that how much we place and if we place it. Retro pricing has gone up in 2012. We placed similar amounts, I would say. A bit more expensive. On the cat transaction, the commissions is a bit reduced because it didn't perform too well in 2011 towards the losses. But we still have a profit on each dollar we cede to the cat transaction. And we placed a little bit more on the cat transaction than we had the year before. On the whole account, which is a worldwide UNL cover, yes, it's more expensive. We pay 10% more premium on it. However, we placed a little bit less because we had more on the cat transaction, and so we decided, particularly on the first layer, which has a relatively high rate online, to place a little bit less on the whole account. So overall, the extra expenses is a low single-digit number starting with a one. So we feel that this is well bearable and has only a very limited effect on the expected combined ratio. And it's more than outweighed by the rate increases we are expecting on the cat exposed business. Sorry. There was one follow-up question from Andrew. Sorry. Just, I didn't quite understand. Just to be clear on your cat risk appetite, as things stand today with pricing, what you expect for 1/4 and 1/6 and 1/7, do you feel you can justify increasing the amount of capital allocated to Japanese and U.S. risks? We could. We could justify it. We would probably not do it for the main two reasons. We want to keep the volatility towards cat losses in check and relatively low at this point in time. At this point in time, if I say increase my exposure to Japanese and U.S. cat significantly, the additional premium volume I can get is not a lot. If I say increase, the reason is the rate online is relatively low. Particularly in Japan, yes, I get good increases, but I have, say, rate onlines of in the region of 5%, maybe 4%. In the U.S., I would probably have to allocate it largely to the probably catastrophe business. Still, the average rate online is single digit. We would significantly increase our risk appetite on U.S. cat in particular if we could generate significant volumes. Say, if I could generate, say, another EUR 200 million to EUR 300 million in volume, which would have been the case in 2006, for example, following the hurricanes then. Then, of course, I would have no hesitation to put more capital on it. That's not the case at this point in time. The reason for that, of course, is that we haven't had a major U.S. cat loss really since Ike, and really major since 2005. There's, of course, exposure to them. Okay. Next question from Spencer Horgan, and then Vinit Malhotra. Thank you. Can I just ask two questions about the economic capital position? Firstly, you've mentioned the work you're doing with BaFin in terms of getting the internal model approved. Are you foreseeing any methodological changes to your model in the pipeline as a result of that work, or are they broadly happy with what you've been doing? Then specifically on the year-end, I think you published a number of 160% calibrated to a 99.97 level. Could you indicate what that number would be on the Solvency II 99.5% value at risk? Thanks. Of course, the later one, if we get our capital model approved, that would be the Solvency. But the Solvency ratio would then be it is more like 250% because the Solvency ratio is based on the 1 in 200 year return period. And of course, the risk capital at 1 in 200 years, of course, is significantly lower than 1 in 3,000 years. We choose 1 in 3,000 years because that is the measurement from S&P for double A. That is the reason why we choose that. At this point in time, the discussions with BaFin on our internal model largely relate to a validation of parameters. Not so much on the actual, say, correlations and stuff like that. We have been there in the previous years. Of course, as I said, the legal framework does not yet exist for approving a model, but we feel we are relatively well advanced with BaFin. Another reason why we would love to stay in Germany and love to continue to work with BaFin, because we work with them for 2 years, and they understand us and we understand them, which, of course, with a new regulator would be more difficult. They even did a use test with the two of us and were rather happy with that. Yeah. They just wanted to know if even the executive board knew about the internal model. It is not just the risk managers that do their own thing in an ivory tower. That has not been the case. There is a situation there. We have, I would say, at least from a use test point of view, we are quite advanced. There is a big question on validation now because there is validation, of course, on the parameters that we purchase from external sources, like economic scenario generator that we have, and of course, we buy the cat models. Those need to be validated. But you also have, in certain cases, expert assessments, and you need to document that. That is what we are currently working at with our internal model. Okay. The next question comes from Vinit. Thank you. Vinit from Goldman Sachs. Just three small questions, probably. On page 25, Uli, you have a long career in specialty lines, and all those lines are going up. Is the mic on? Yeah. Yes. Okay. Page 25, all the specialty lines are going up, and Uli, you know the business so well. You said some lines where you see more or less competition, and because for a year now, we are seeing this as a common theme in the sector, and specialty lines is where everything is great and people want to grow. I know you've led the business for 10 years, so probably something could come up from there. Then, next question is just a comment on the reserve release. Does it really have to be such a defensive presentation of reserve releases from management side? EUR 218 million is coming from past conservatism. I'm not sure whether there should really be a defensiveness. Why I'm saying defensive, because you mentioned you've been releasing through the year, and this has been a normal course of run-offs in the year, and yet we hear about it, not every quarter, but right at the end. Which again, is maybe more a question from what you think about the market should look at that. In the U.S., it's quite common to have reserve releases quite openly and discussed. So that's my just a comment, and you're welcome to say that it's not a good question, but Well- And yeah, just third, very small question. On the life side in the fourth quarter, I noticed a major swing in the technical result, if you like. So anything other than non-investment result, literally the loss doubled between Q3 and Q4. I was just wondering if there is something more that happened, or maybe it's just a blip in the normal course of business. But it was one of the highest quarterly underwriting losses in the last 20 quarters or whatever. Thanks. Well, if I start with the last question, that has been very well observed by you. We had in the last quarter, which otherwise for the life business was actually a very good quarter and had a very good result. We had some very large losses, a handful from our ING portfolio. Which, of course, it's an operation that is not modeled, and these losses were also retroceded. However, the way this retrocession works is that there is some profit commission which were already recognized, and so we had the recovery from the losses, but also the profit commission recognition had to reverse. So that was the reason there. On the reserve releases, why are we so defensive on it? One thing, of course, is if you hear about reserve releases, I think people think of a bucket of future profits that you have sitting there in your balance sheet, and you can draw from the bucket. And then after a while, the bucket is empty and nothing is there, and you cannot draw, and so your results will deteriorate. And in that picture, our bucket is still getting more into it rather than draining out, despite the fact that we have releases. So this bucket is filling up rather than draining. And I guess that is why we are quite satisfied with the situation, but we seem to have difficulties to convey that to the people that observe our numbers. That's why we're a little bit defensive about this thing. And on the specialty lines, yeah. There is no specialty line at this point in time, which is not sought after by all the reinsurers. If you look at aviation, yes, there have been ups and downs, and we have seen people becoming more cautious in aviation, say in 2008, 2009, and 2010. Because the airline market lost money, and people said, "Well, maybe it's time to be a little bit more cautious there." Our portfolio has a slightly different mix, so we continued to make money. But now, of course, with this brilliant 2011, of course, everybody sees aviation. That's where we need to be. And we have seen, actually, also on the excessive loss, which we lead in 2011, the renewal season, around month 12, actually quite a lot more competition than we had in previous years. We tried to fight our corner but we have seen some decreases. Interestingly enough, the market, contrary to previous renewal season, hardened throughout the renewal season. People that came early with their renewal got a better treatment than people who came late. Which is unusual, but it was that way because I think the aviation underwriters got a bit nervous towards the end of the renewal that they would be the only ones that have to give in and say, "We have unfortunately given away some rate," when their colleagues in the property department actually gained rate. But we know that. That happens all the time. It is ebbs and flows on the specialty lines. Also on credit and surety. End of 2008, nobody wanted it. It was very unusual because I think in the last decade, it was the only line where there was dislocation in the market. Really the capacity was really drying up, and the clients would thank you if you give some capacity almost regardless price. But that has changed. That was only two years, and now it is very competitive again. It is still disciplined competition. It is still profitable, but it is competitive. The least competitive at this point in time is probably the marine side because I guess some people are just giving up of it. It always have claims, and things move around, so it is just not that the actuaries can grasp that very well. It is more difficult from that point of view. It also has, at times, a more cavalier attitude to underwriting, which some management is difficult to deal with, which is quite understandable. So that is probably from a rating point of view, we will see the highest increases in the immediate future. That is of course only on the larger programs. If on marine you go to the small programs, small local programs, in general, outside the first layer, they are profitable. But they are small and there is so many people chasing that business, including us, I have to say, because it is profitable. But on larger programs, yeah, we will see increases there. So that is the deal on the specialty lines. Agriculture is another one. Yeah, that is a little bit en vogue also. But we are used to deal with specialty lines for over the years, and we have been successful, but there is always competition. At this point in time, it seems to be that, as you rightly say, many people want to get involved. On my list is Michael Huttner as next one, then Brian Shea and Andy Broadfield. If I try and strip out the one-offs, and I'm not sure that's the right way of looking at it. EUR 606 million, and then you've got the tax, and you've got the gains, and you've got the disability, and you've got the reserve releases, and I get to a figure of about EUR 740 if I strip all these out. But listening to you, it seems that you actually run the business with the idea, you have a clear idea of what the bottom line should be, and that's the figure. When we strip it out, we actually get something which is wrong. I don't know whether that would be justified. Then on the reserve releases, before we came in, you very kindly kind of indicated if we took the excess reserves and the discounting, we'd get a figure which wouldn't be very different from capital. Here I'm trying to find out what that figure is. Is that shaded equity, or how do I look at all your hybrid, which is about EUR 1.7 billion? Which part of the equation should I put it in? You used to be very profitable in good years. This is slide 10. So you show 23% and then minus 4%, and then 22%, and then 16%, and then 12%. Here, obviously, there's been a change in management. So you are more responsible for the last 2 years, I guess, and the previous management was more responsible for very more volatile. Should we think in terms of run rates, not for next year, but current year, whatever, that you quite like a much lower volatility, but on average lower? Or could we imagine going back to the 20-odd percent level? Thank you. Okay. If I start with the last question. Going back to the 20-odd percent, we need a really hard market because if you look at the capital, say at the end of 2006 or end of 2007. Certainly end of 2008, our current level of profitability that we showed in 2011 of EUR 606 million, we would be over 20% because the equity was a lot lower. Nowadays, to do 20% next year, we would need a net result of above EUR 1 billion. That's why I say we need a really hard market for that. I think from that point of view, we will continue to see ROEs, which are well above, which are solidly double digit. But reaching 20% will be quite exceptional, I must say. To the first question, as far as the stripping out of everything and then you add EUR 740. Of course, we have a very clear idea because we have a plan and the first expectation. There's, of course, a number on the bottom, which would normally be the basis for our guidance. But as I said, I was advised not to do forward-looking statements, and therefore I won't. Well, how you look at the redundancies and the reserves and the discounting factor. The discounting factor in the economic capital model, as well as in the S&P capital model, is regarded as capital. That is, of course, a number which is depending on the interest rates. If the interest rate is low, then this is a lower number. If the interest rate is high, it's a higher number. Of course, you have the flip side on the asset side. If the interest rate is high, then of course you have a lower number of the bond values. But you have a higher number on the discount figure. Therefore, in the economic capital model, the stress from change in interest rates is not so high because you have the counteracting discount value. The redundancies, they are used as capital, but only to 50% in the rating agency model and also in our internal capital model. We, of course, take a lower figure than the external actuaries because we take the figure from our internal actuaries. Then there's, of course, a discount on that as well. So it's not all capital. It's only part of it. Okay. Brian? I just wanted to ask two questions about your investment yield target. I always ask this. First one is just a basic one. What is your new money yield? Then the second one, looking at the 3.5%, how we're going to get there. In 2011, your running yield was 3.6%. I would have thought that would be coming down a bit. Your ability to realize gains is pretty low given how conservative you are on the asset side. Probably close to zero. Then your investment expenses are running at, I think about 30 basis points. So when I add that all up, it's hard to get to 3.5%, and I'm just wondering, what am I getting wrong here? Well, as I said, it's Roland's target. I let Roland explain that. You are right. The running yield was 3.6%, and we have these costs. In our portion, I am not exactly how to follow your idea that there is no room for any further, at least regular or normalized profits from disposal. Because with EUR 1 billion in market value reserves, still today for the whole portfolio, 600 something million from the available for sale portfolio, I think there is still room. If we see a sharp interest rate increase tomorrow, that is, as I mentioned, is a volatile number. But then we have a different interest rate environment again, which should at least over a period of time should give us then the benefit of investing at higher yields again. So what we have, and I think we had already published it, I do not know exactly, over the course of the last Investors Day. The maturing portion is for 2012, at a rather low yield because the shorter portions are maturing. So what runs off kind of represents a yield of 2.6%. That is an area where we can reinvest today, so we would not lose that much. What we had for 2012 was around 3.4%. With at least a small contribution from disposals, we are confident that we could make the 3.5% again. If we stay where we are today, we lose approximately 10 basis points per year. Sorry. The 3.4% Just to make sure I understand. The 3.4% you mentioned, that is your expectation for the running yield in 2012? Exactly. Great. Okay. Thank you. So the next one from Andy. Hi. Andy Broadfield from Barclays Capital. Just a couple of questions. One is on your life re, and in particular the U.S., and a little bit of a brief update perhaps on how the ING/Scottish Re business is going. Also with the mind that there's a potentially large life re asset appearing for the market in the U.S. again. Just what your thoughts are about further acquisitions on that side or not, as the case may be. Second question, just on reserves, perhaps a little bit of granularity. I may have this wrong, but from memory you had been stockpiling, for lack of a better word, in the credit line, and that was relatively short duration. I think that was all due to sort of flow out at some point. A, is it right? B, if that is right, which lines are you finding opportunities to strengthen? If you like. The third question, if I may, is one which I've been asking all the companies. Which is trying to understand a little about how the losses of 2011 have influenced the way that you think about some of those risks which seem to me to be a little left field and haven't been fully worked out. In particular, I'm thinking the Thailand flood loss, where there was this concentration of value. I'm sure there must be many other places and locations which are insured or reinsured, where there's concentrations of values which we sort of missed as the global markets evolved. Just how your thoughts are developing on that and whether you've explicitly found any other areas that you're worried about. Okay. If I start with the U.S. life business. Well, the portfolios that we got as a result of the ING acquisition. Of course, the large ING block, that produces about $900 million to $1 billion of premium. Then we have two other blocks, which together are about 160 million. Then we have the new organic business, that is about 250 million and rising. So the 250 million has a very good margin, so have the two smaller blocks that we purchased. The margin on the large block has been a little bit depressed up to now. So that is where we had so far, for example, the large losses in the fourth quarter. That was on the large block. But on the large block, we also have some positive developments on the collateral expenses that are down, and so we have some windfalls there. The investment income has also been better than expected. Just the biometric risk on the large block has been somewhat disappointing. With the other three parts of the business, making up EUR 400 million altogether, very positive, much better than expected. Overall, I am still quite positive about the results from that acquisition. I also think that it also gives us good opportunities in the future, particularly with the organic business, that is the new business that we write. I would not be hesitant to look at new blocks there. I also look at some further business, not to the size as, for example, Transatlantic was, because that would make us too U.S. heavy. Therefore, we were not a contender in that one. On the reserves, yes, we had releases on credit, as I explained. Because of the short tail nature of the business and because of the concern that everybody had with that business following the financial crisis. The large parts of the valuation reserves are, for example, on our U.S. casualty business, which we have not touched since the beginning of the century. Also European motor and European liability, excess of losses. The reserves look quite comfortable. As a smaller site, we still have more than $200 million of IBNR reserves on the World Trade Center loss, for example. So there are some old babies as well there. We keep some reserves. The losses of 2011, what they have resulted in the market, that people, including us, reinsurers, have become more hesitant to write very low rate online business. Because, particularly with the New Zealand earthquake, it really shows that even on low rate onlines and low return periods, it can happen, and it can also happen in non. We have seen a general increase in those areas. Also in non-loss driven areas. We have tried to push that following the Chile earthquake loss in 2010. I must admit, we were completely unsuccessful in that. It just did not happen. It has changed now. We have seen that, for example, in the Canadian renewal season, where a lot more limits were being bought. But the minimum rate onlines clearly increased. Losses like Thailand, admittedly, Thailand was considered a non-cat zone. It was not in the end, with the flooding. We have set up a working group to detect whether or not there are similar areas with potential major losses, which come a little bit unexpectedly. Flooding is, of course, a major concern there because maybe due to global warming, we have slightly higher average temperatures, which means that the air can absorb larger amounts of moisture. That seems to me that there is more flood exposure. At least we have seen that in previous years. Even this year, we have already seen flooding in Australia, quite severe flooding in Australia. They did not hit us in losses, but overall flood losses seem to be an exposure which seems to be rising, and we are looking into that. I could point to a number of areas of low rate online business, such as the exposure for large losses. Other areas of severe flood exposure, like in Thailand, of course, exist in China, but the insurance density is less. It definitely exists in Vietnam, also where the insurance density is low. But also, it exists in Germany. Where the commercial industrial parks, such as Eastern Germany, the insurance density is high. When we had the floods in 2003, it was a close call there. It was not flooded in the end because the dikes were opened somewhere else, and those people that were living next to where that was opened were not terribly happy with it. But it saved the industrial park. It saved the insurance industry from a bit of loss. But yes, this is definitely an emerging risk which we look into very detailed. Okay, well, we are running a bit out of time, but I have seen William Hawkins have another question. William Hawkins from KBW. I just have one question, and I am sorry it is a delicate subject, but I would like a little bit of reassurance. From a corporate governance point of view, I have never found your annual earnings guidance particularly relevant or important, but it is interesting to me nevertheless that your parent shareholder, with just over 50%, has exerted some form of influence on the way you have communicated to the other 50% of your shareholders. Do you consider that simply a technical, marginal issue where you have been willing to be a good partner, or are there any other issues that we should be aware of as the years progress where you may have technical issues that you need to sort out from a governance point of view? Not really. It is really, I would say, an issue where we want a good partner because I think it has been well discussed that our parent company would probably consider to have an IPO themselves. Of course, if you do that entails that you have to have a prospectus. The lawyers are very hesitant if you put forward-looking statements in your prospectus, because there is a lot of validation needed. Naturally, for Talanx's, the earnings of Hannover Re are a major part of the Talanx's overall earnings. Actually, if you look at last year, our earnings were significantly higher than the Talanx's overall earnings, meaning that more than 50% of the Talanx's earnings came from their consolidation of Hannover Re Group. So if I would make a forward-looking statement now, it would be a forward-looking statement on the Talanx's earnings immediately. I understand that that is a problem, therefore, I am a good partner. Will I do that indefinitely? Definitely no. Because I agree that it is not that relevant, but it would be a positive influence if we would be able to give you an earnings guidance in line, say, with our current expectation, which is a rather concrete plan, which is done bottom up by each department. Then it has a plausibility check by management and normally gets a little bit of dampening in order that it looks reasonable. But in the current situation, I understand the advice and the plea from our parent company to be not giving these kind of forward-looking statements at this point in time. I understand that this will be a one-off situation because I do not think that they will continue to have IPOs every year. Okay. Well, if there are no further question, I would like to thank you for participating our analyst conference. I also like to remind you that we will bring out our Q1 results on May 3rd. Right next door, we will also like to invite you for a small snack and a drink. You have seen on your tables that there is a form for feedback, and we would really appreciate if you could fill that out, because it will help us to steer our investor relations work and also to have some ideas for the investors stay on issues you might drop. That would be very kind of you. Well, thank you very much, and have a nice evening.

Data Source: Quartr Last updated: Mar 15, 2012

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