Thank you very much, and good morning, everyone. Let me welcome you to this conference call presenting our results for the first nine months of the year. As usual, I'll start with an overview before our new Group CFO, Clemens Jungsthöfel, goes over the financials in detail, and I will then comment on the outlook for the year later on. For the Q&A, I'm additionally joined by my board colleagues, Klaus Miller on the life side, and Sven Althoff for P&C. Looking at the results for the first nine months, the Hannover Rück has again proven its resilience, bearing in mind that we have absorbed a total pre-tax impact of around EUR 860 million from COVID-19 in our P&C and Life and Health business segments. The group net income of EUR 668 million and the return on equity of 8.3% are quite satisfactory.
Additionally, the Solvency II ratio of 222% remains comfortably above our 200% threshold, and with double-digit premium growth, our new business production is fully intact in an improving market environment. Overall, there is, of course, still an element of uncertainty around the COVID-19 loss experience going forward. However, due to the provisions made for expected COVID-19-related losses, we're now in a position to provide guidance for the year-end results. As things currently stand, Hannover Rück anticipates a group net income of more than EUR 800 million for the full year 2020. Going into the details of the results of our P&C reinsurance business, the additional EUR 100 million related to COVID-19 claims in the third quarter are significantly lower than what we booked in Q1 and Q2, bringing the total loss estimate to EUR 700 million.
The major part, 71% of the EUR 700 million, are still IBNR reserves, and the affected, lines of business are also largely the same as before, namely business interruption, credit and surety , and, event cancellations. Additionally, we have reserved for expected losses in some other lines, as for instance, D&O. The COVID-19 losses, together with the NatCAT and manmade large losses, where we observed increased activity in the third quarter, exceeded our budget for the first nine months by EUR 400 million, bringing the year-to-date combined ratio to 101.4%. In Life and Health reinsurance, the COVID-19 impact on the result was EUR 160 million. The main driver here is our U.S. business. Against this backdrop, the EBIT of EUR 315 million is strong, also stripping out a positive one-off effect of EUR 55 million within the investment income.
Financial Solutions continues to perform superbly, and the U.S. mortality experience, excluding the COVID-19 effect, was in line with our expectations. Finally, at 2.8% or 2.7% adjusted for the one-off effect in Life and Health, the return on investment is satisfactory and in line with our initial and now reconfirmed new target for 2020. The profitable premium growth in the first nine months is the main reason for the very positive operating cash flow of EUR 2.6 billion in the first three quarters of 2020, which is already higher than full-year figures for the previous year. The strong cash flow, in turn, is fueling the growth in assets under management, shown on the right side of the slide, which is particularly important in the current low-yield environment because the growing asset base is helping us to mitigate the impact from low reinvestment yields.
Looking at the details of the invested assets, the positive change in valuation reserves only partly offsets the negative effects from currency translation resulting from the devaluation of the US dollar. Altogether, assets under own management stood at about EUR 49 billion at the end of the third quarter. Looking at our capital position, shareholders' equity increased by 2.8%. As you can see, the net income for the first nine months was sufficient to fully cover the dividend payment in Q2, which is even more pleasing, bearing in mind that the group absorbed a negative net COVID-19 impact of EUR 860 million. Within the OCI, the positive impact from the decrease in interest rates is more than compensating for negative effects from currency translation. On the left side of the slide, you can see that the capital composition is more or less unchanged.
You might remember that we issued EUR 500 million in hybrid capital in July. However, we also had a EUR 500 million euro hybrid bond with a first call date in September. As we exercised the call option as planned, there is no visible effect on the total hybrid position. By the way, the same is also true of our Solvency II balance sheet, which means that we have also maintained a higher degree of flexibility around our hybrid capacity. On that note, I would like to hand over to Clemens, our CFO, who will explain the figures in more detail.
Yes, good morning, and thank you, Jean-Jacques. It's a pleasure for me to present the financials of the Hannover Rück Group for the first time. So moving directly onto the segmental reporting, I will start with the development of our Property and Casualty business group on slide 7. Gross written premium grew by 16%, adjusted for currency effects. The growth is highly diversified, which is pleasing, with particularly strong contributions from North America and the APAC region. Overall, the development was driven more by property than casualty business. Looking at the large loss situation for Hannover Rück, the loss activity from natural catastrophes and manmade losses has clearly increased significantly compared to the first half year, almost exhausting the Q3 standalone budget of EUR 336 million.
On the other hand, the additional net impact from COVID-19 at EUR 100 million was materially below the numbers we saw in Q1 or Q2.
Overall, 71% of the estimated EUR 700 million of total impact still consists of IBNR reserves. As Jean-Jacques explained, there remains, of course, an elevated level of uncertainty around the further loss experience. However, the high level of IBNR also provides significant headroom for actual claims to be reported, and we do feel comfortable with our reserving position as of today. As a result of the reserving for COVID-19-related claims expectations, the large loss budget for the first nine months of 2020 was exceeded by EUR 400 million, accounting for roughly 3.8 combined ratio points. Adjusting the reported combined ratio of 101.4 for this budget overrun, the figure would have been close to our 97% target for 2020. In terms of the runoff of our reserves, it's fair to say that in the nine months 2020, our runoff result was positive and overall in line with our expectation.
Altogether, I would guess the confidence level should not have changed materially since year-end 2019, but I would at least not assume that we added anything to our reserve buffer. On the investment side, net investment income decreased by around EUR 100 million, with lower contributions mainly from private equity, from real estate, and from our inflation-linked bonds within the ordinary return. Compared to the second quarter, impairments were modest in the third quarter and, on a nine-month basis, offset by an increase in realized gains. Other income and expenses were positive by EUR 67 million, mainly driven by positive currency effects. Altogether, the EBIT margin decreased to 5.6%, mainly due to the weaker underwriting result. On slide eight, total net large losses, including COVID-19-related claims, accounted for EUR 1,149 million in the first nine months of 2020, exceeding the budget of EUR 749 million by EUR 400 million.
Compared to the first half year, the difference between the gross and net loss, as you can see on the slide, has increased. This is because the high NatCAT activity in Q3 triggered our retro program, and additionally, a part of our COVID losses are covered by our retro as well. Overall, the EUR 1.14 billion net loss already exceeds our full-year budget by EUR 175 million. This means that 2020 will be the fourth consecutive year with large losses above the expectation, which, of course, is not only true for Hannover Rück, but also applies to the industry as a whole, and that should trigger even more positive pricing moments going forward. On slide nine, you can see our large loss list. It reflects the increased loss activity, as mentioned earlier, in the third quarter.
Largest loss on the NatCAT side, as you can see here, was the so-called Derecho storm, event in the U.S., followed by Hurricane Laura. On the manmade side, the port explosion in Beirut accounted for EUR 67 million on a net basis. Due to the very benign first half year, total large losses would still have been below budget, excluding COVID-19. Looking at the numbers for COVID-19 in Q3, the gross loss increased by EUR 264 million to EUR 873 million. In comparison, the net development of EUR 100 million was significantly lower. The reason for this is that we receive more and more information from our clients, enabling us to allocate IBNR reserves to individual treaties, and we also take into consideration, of course, our retrocession protection. This was not possible with the IBNR booked in the first half year.
You will remember that, where we had reported a gross loss very close to the net, even though the underlying assumption for the gross loss was already higher. In the event of further increases in the gross position, it's fair to say, in the fourth quarter, we can at least partly expect corresponding relief from our retrocessions, which will then limit the impact, of course, on our net position. On slide 10, that shows the profitability of our P&C portfolio by line of business. Overall, COVID-19 affected several regions and lines of business, as you can see here, but Europe and credit insurance were the most severely impacted ones. The weaker technical profitability in the Americas was mainly the result of the mentioned weather-related U.S. losses in the third quarter. Agricultural business was mainly affected by the bushfires in Australia and some COVID effects.
On the positive side, the technical profitability of our facultative business, as well as our aviation and marine business, was very favorable. Altogether, the combined ratio was at 101.4%. On slide 12, looking at the development of our Life and Health business group, growth was mainly driven by a large financing treaty. You will remember that probably from last year, from earlier calls, that we wrote in Q4 2019 in Australia. However, this was partly mitigated by the expected reduction in premium volume due to the effect of recaptures in our U.S. mortality portfolio as a result of our management actions in the previous year. Altogether, gross written premium in Life and Health increased by 5%, adjusted for currency effects. The impact from COVID-19 was EUR 1,160 million in the first nine months, of which 43% is booked as IBNR.
The main driver was our US mortality book, but other areas, like, for example, our Australian disability business, are also affected. Overall, we are still seeing significant differences between population mortality and the effect on our portfolio, largely due to socioeconomic factors and a different age structure. Apart from COVID-19, the result of our Life and Health business group was quite favorable. The legacy US mortality portfolio performed in line with our expectation, and the earnings contribution from our Financial Solutions business, in particular, continued to be excellent. On top of this, we reported an extraordinary gain of EUR 55 million from an equity participation as part of our investment income, adjusting for both the EUR 160 million COVID-19 impact and this positive one-off. The EBIT would have been very favorable at around EUR 420 million.
Looking at the individual third quarter, the normalized EBIT on the Life and Health side would have been EUR 143 million. The net investment income decreased mainly due to the EUR 100 million positive one-off effect recorded in 2019. You will remember that, which was only partly offset by the one-off effect in this year. Otherwise, the ordinary income was favorably supported by an overall positive contribution from the change in fair value through P&L, even though the impact from our ModCo derivative was negative by EUR 9 million. Other income and expenses, primarily driven by further increase in contributions from our deposit-accounted Financial Solutions business, currency effects were slightly negative. At 5.3%, the tax ratio is low, mainly due to good results from subsidiaries in jurisdictions with a low tax rate and the tax-reduced investment gains from the aforementioned participation.
In the third quarter, standalone, we have seen the same effect, and in combination with losses at individual subsidiaries, the tax rate was even negative. On slide 13, sort of as additional information beyond the IFRS numbers, this slide shows an overview of the new business written in the third quarter 2020, as well as upcoming business opportunity on the Life and Health side. Both the new business and the pipeline business are rather diversified by region and reporting category, but particularly our Financial Solutions business is an area where we continue to see very healthy demand. Just for the sake of completeness, since we've focused only on the most important deals here in this overview, this, of course, does not mean that we don't see any opportunities in markets or regions not mentioned on this slide.
Altogether, the value of new business achieved in the first nine months already comfortably surpasses our full-year target of at least EUR 220 million. So moving on to our investments, on slide 15, I think it's pleasing to see that despite the very challenging market environment on the capital market, the return on investments of 2.8%, including ModCo and excluding ModCo, actually, it's so the aforementioned amount doesn't really contribute to that number. So 2.8% return on investment is still in line with our initial full-year target. Even excluding the EUR 55 million positive one-off effect in Life and Health that I mentioned earlier, the ROI would still have been 2.7%. The decrease in ordinary investment income is driven, on the one hand, by lower contribution from our inflation-linked bond portfolio.
You know that we purchased that to hedge our inflation risk, and there is some balancing effect, of course, on the underwriting side as well. On the other hand, by the returns from private equity, which were also weaker compared to our expectation in a normal market environment and compared to the very high contributions in the last, particularly the last two years. Realized gains are on a similar level to last year, where we had benefited from the restructuring of our participation in Viridium. This year, realizations are mainly coming from our fixed income portfolio, and the impairments and depreciations were higher than last year, mainly due to the impairments for alternative investments in the second quarter. Impairments recognized in the third quarter were, it's fair to say, very moderate.
Unrealized gains increased remarkably to EUR 3.2 billion, driven by significantly lower interest rates and further normalization of credit spreads due to the recovery of corporate bond markets. On the next slide, slide 16, you can see that we have actually not changed too much in our asset allocation. I think the slide is quite familiar to most of you. So we have not changed the asset allocation, and we do not intend to do so. You might remember, even before the crisis started, we had begun to sort of scale back some of some of the proportion of bonds, attributable to our US SME portfolio. We have used the price correction on the stock market in March to carefully re-enter listed equities, buying around EUR 250 million.
As mentioned in earlier quarterly result calls, we had been following a passive de-risking approach, with new money being invested in high-quality assets only. However, in the meantime, this has come to an end, and we do carefully start back to normalize our credit risk-taking. The contribution, as you can see here, on the ordinary investment income is diversified, as usual, this time with a slightly lower share from private equity. So this concludes my remarks, and I'll hand back to you, Jean-Jacques.
Thank you very much, Clemens. Let me now cover the outlook section on slide 18. And first, our updated guidance for 2020. Based on our assessment of the impact of the COVID-19 pandemic, we feel comfortable enough to provide guidance on our financial result again and expect a group net income of more than EUR 800 million for 2020.
You might ask why the Q4 performance needed to achieve the EUR 800 million looks modest. But as you already heard, some negative effects are to be expected in Life and Health, as in previous quarters. Additionally, the investment return in our assumptions is slightly lower than the 2.8% for the first nine months. For the full year, it should still be around 2.7%. Gross written premium for the group is expected to show high single-digit percentage growth at constant exchange rates. Finally, we expect to pay an ordinary dividend of EUR 4 per share for the year 2020, in line with the previous year. The payout of a special dividend will be partly dependent on the growth opportunities that actually materialize in the upcoming P&C renewals in January and the amount of capital tied up by this growth.
Based on increasing demand for reinsurance and improving market conditions, it is pleasing to see that many lines of business are growing. Even more importantly, we also expect this trend to continue in the next renewal seasons for 2021. The profitability outlook for the full year 2020 is more or less in line with the Combined Ratio overview Clemens showed earlier, largely reflecting the COVID-19 impact. In Life and Health, we can similarly see which lines of business are affected by the pandemic, namely mortality and morbidity. On the positive side, as already stated, our currently most important profit driver, Financial Solutions, continues to perform very well, and the profitability of our longevity business is also strong.
Even if hardening market cycles are generally not a theme in Life and Health reinsurance, we have seen earlier that our new business production is fully intact, fully intact, sorry, and that the pipeline looks quite healthy. The demand in Financial Solutions continues to be favorable and is also visible this time in our premium development, due in particular to a large financing deal in Australia. Additionally, we see promising growth potential in the Asian markets, and the growth of our mortality business is impacted by the effect of recaptures in our U.S. mortality portfolio. As usual, we also provide a first look at our expectations for the next financial year, together with the publication of our Q3 numbers, even though the market environment is currently more dynamic than usual.
Gross written premium is expected to grow by around 5%, and you might be surprised that the number is not higher in light of a hardening P&C market. But firstly, we didn't want to put too much pressure on our underwriters by giving a higher volume target. As usual, the focus is on the bottom-line contribution. And secondly, I would point to the potential negative impact the economic downturn might have on the primary insurance market and indirectly also possibly on proportional reinsurance business. Of course, it's early days, and we will review this target after the one-month renewals when we have more transparency on their outcome. The return on investment is impacted by the low reinvestment yields, and additionally, we expect some lower contributions from inflation-linked bonds, with a resulting decline to 2.4% in the next year.
Regarding the inflation-linked bonds, please bear in mind that we buy those to hedge the inflation risk of our P&C reserves, and therefore, economically, there is an offset in our liabilities. On the positive side, assets under management are expected to grow further due to the positive cash flow helping to mitigate the impact on the absolute investment income. Altogether, we anticipate a group net income in the range of EUR 1.15 billion-EUR 1.25 billion, and therefore, on a similar level to the initial expectation for this year. Looking at the components of this guidance, the contribution from our P&C business should improve compared to our assumptions for the last year, whereas the investment return is slightly under pressure in the low-yield environment. The development of Life and Health is expected to be more stable.
In general, there is, of course, a higher degree of uncertainty than usual, and various factors, such as the availability of COVID-19 vaccines, will have an influence on the further course of the pandemic. Therefore, our guidance is subject to the premise that we do not see a significant COVID-19 impact on our Life and Health business, and as usual, that major loss expenditure remains within the budgeted level and that there are no unforeseen distortions on capital markets. The large loss budget for the next year will be increased to EUR 1.1 billion, largely driven by the growth of our business. Finally, we will continue to adhere to our general dividend policy going forward, with a payout ratio of 35%-45% for the ordinary dividend and the addition of a special dividend if our performance is in line with expectations and the capitalization of the company remains comfortable.
This concludes my remarks, and we would be happy to answer your questions. Thank you.
We will now begin our question-and-answer session. If you have a question for our speakers, please dial zero one on the telephone feeder now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. Our first question is from Emanuele Musio, Morgan Stanley. Please go ahead. Your line is now open.
Good morning. Thanks for taking my question. Actually, I have two questions. Looking at your guidance for 2021, I am quite surprised that you are aiming at earnings in line with 2019, basically.
However, since then, the rate has gradually improved, and momentum built up quite strongly in 2020, partly as a consequence of lower investment returns that you mentioned already, right? And so I was just curious to know a bit more about your assumption for 2021, maybe in terms of COVID-19 loss expectation, or maybe you are implying that rate improvements are still not enough, or maybe you are just setting the bar low, in view of uncertainties, and maybe the idea is to gradually raise the bar as clarity emerges. Any comment on this would be much appreciated. The second one is still on objectives. I mean, it is, I think, broadly shared the view that 2021 will see further pricing improvements, although those improvements will flow through fully in 2022. As far as gross written premium growth in 2021 is concerned, you aim at just 5%.
So I struggle to understand because it might be argued that lower supply and growth in a hardening market should go to the benefit of profitability, but this is not reflected in your net income guidance. So what is the missing link here? You said you don't want to put pressure on underwriters, but, arguably, rates have gone up, by more than 5%. So even if you renew your existing book at better rates, shouldn't you see more, more than that, more than 5%? I mean, what is the average rate improvement across your book, to date? So if you can please help me understand a little bit more about these two elements.
Well, thank you very much. So, maybe just a couple of general comments, and I'll pass on to my colleagues just to go into the specifics.
I think we're faced with a situation which, of course, is rather uncertain, and it's much harder this year to anticipate the development in 2021. So the range is a little bit, the range of outcome is a bit wider. But nevertheless, you know, we've felt sufficiently confident to affirm a range in terms of net income and growth. I think in terms of growth, the biggest challenge we're facing is the uncertainty on the economic outlook. So this is very hard to quantify, and we felt this would, of course, have a bearing on the eventual growth outlook. Therefore, a 5%, which might come a bit more modest than anticipated.
So maybe, both P&C and Life and Health, I'll ask Sven to start with P&C with the assumptions, expectations for 2021, and then Klaus on the Life and Health outlook.
Yeah, thank you, Jean-Jacques. When it comes to the profitability, our expectation is that we will have substantial rate increases at the one-month and later renewals. But as I already explained during our investor day, this will not directly translate one-to-one into an improved combined ratio. It will to some degree, but the features which will eat part of the rate increase which will be achieved is our view on risk.
That has naturally changed, where we had losses, and where those model losses go into our models, and therefore our view on risk for some classes of risk, lines of business have increased, requiring part of the rate increases we will achieve. And secondly, as you know, we are buying significant amounts of retrocessional coverage, whilst we are confident that we will achieve pricing which is risk-adjusted, similar to the pricing we have in 2020. The underlying business has grown, as you can see, looking at our Q3 premium figures. So therefore, the premium for those covers will increase in line with exposure growth, also eating part of our gross rate increases that we are going to achieve. On the growth side, in addition to what Jean-Jacques has already explained, I can offer two additional comments.
One is that rate increases does not necessarily always translate into premium increases. There are lines of business, which are driven by turnover or other classes of business, which have a link to the underlying pricing of, for example, a commodity. And, in a situation of a severe economic downturn, therefore the underlying premium, or exposure base is somewhat eroded, and therefore rate increases do not necessarily mean premium increases on a one-to-one basis. And secondly, you know that the business is not only re-rated at the reinsurance level but also at the insurance level. So therefore, for certain covers, the confidence of our ceding companies will be increased, so they may retain a little more of their business net.
and, secondly, the re-rating of the reinsurance may lead to restructuring of programs, also meaning that ceding companies may take higher net positions at the more frequency part of their programs. So that would be my explanations on the P&C side.
Okay. On the life side, we basically have to look at the US and the performance there. The claims that Jean-Jacques mentioned, the EUR 160 million, are more than two-thirds from the US, and I would expect that to be the case also next year. All the other countries do not contribute significantly to any COVID claims so far. And in the US, we have certainly an expectation that for Q1, Q2 in 2020, 2021, we will still see losses of the same magnitude as we have seen in the last two quarters. This might and probably will be compensated to a large extent by new business.
We see a huge demand on Financial Solutions side. And if you look at the page 13 of the presentation where you see the value of new business, and you just do a simple calculation, you'll probably have to use your ruler to figure out the value of new business because we didn't put the number on the page, but it's about EUR 380 million. And if you deduct the EUR 160 million COVID claims, then you end up exactly with the planned value of new business. So on the life side, it looks like we are fulfilling our plan completely, and this should continue and might be even more favorable in 2021. But we will definitely see COVID claims. It all depends on the fact when the U.S. starts managing the pandemic.
Maybe just one last piece of information, on 2021. Overall, we have the 5% growth.
It is a bit of a mixed bag. The P&C growth is expected to be beyond that, while Life and Health will be slightly below in the short term. So this shows a little bit of differentiation with a hardening market, reflected in the numbers and the importance of Financial Solutions in Life and Health, which doesn't have such a strong impact on top line.
Okay. Thank you.
Our next question is from Kamran Hossain, RBC. Please go ahead, sir. Your line is now open.
Hi. Good morning, everyone. First question that is based on the dividend, and how to think about that. I guess the regular part of the dividend is very clear, so discussion there.
But what are the key trigger points to think about on capital position versus the special part of the dividend or one that you have paid in recent years? Is this S&P capital linked, or is there some other trigger? And if you were to hit your plan that you have at the moment for the renewals, you know, it doesn't sound, you know, it sounds like you're being relatively conservative on kind of what you're assuming there. Does that mean you've got enough capital to pay that special part of the dividend, or not? And the second question is, looking at next year, your cap budget's increased, I think, 13% year-on-year, well ahead of the premium growth you're suggesting. Is this mixed change assumption, assumption change or a bit of both? Any thoughts on that would be helpful. Thank you.
Thank you. Clemens, we'll respond on the dividend and capital management, and Sven on that cat.
Yes. Thank you. Well, Cameron, on the dividend, well, you can see that in our Solvency II number, which is very stable at 222% as of Q3. So in our regime, and of course, as you rightly mentioned, we do have the rating agency models, etc. We've always had good buffers, both in both regimes, I would say. And we do, at the moment, still have sufficient water under the keel in terms of our capitalization. However, I think it's fair to say that, and you've seen that in 2020, our business has grown at a stronger pace than our capital in our regimes. And if the opportunities appear, as we do expect them, particularly on the P&C side, they will absorb further capital.
We really that's why we put it slightly cautious, sort of like that on the special dividend side. I mean, we really want to be in the best possible position to take full advantage of the improving market conditions. So we really do not want to limit attractive growth opportunities by any capital need. So we will have a probably better position at the end of the year, our Q4 position. But that's the reason why we have been careful in wording our guidance in terms of the special dividend, really to make a better call when we see the Q4 numbers and when we are through the renewals, particularly on the P&C side. Thank you.
As regards your question on the major loss budget, could you please repeat your question? I didn't fully understand part of your question.
Yeah, sure. I guess that the large loss budget seems to have grown, or for next year, seems to have grown 13%. You're implying 13 sorry, 13% versus 5% premium growth. So I was just trying to understand, is this a mixed change in business? Are you writing kind of more cap business, or is this an assumption change given, you know, the last four years have been running ahead of budget, I guess, not just for you but for the industry as well?
Okay. Thank you very much. The answer to that question is that it's a mix between our overachievement in 2020. As you know, when we started the year, we didn't expect a double-digit premium growth on the P&C side. And of course, the EUR 975 million we had written down in 2019 already. So therefore, part of the adjustment is growth-related in 2020.
And the second part, of course, is then growth-related as an expectation into 2021. When it comes to mix of business, we are not expecting any fundamental changes as far as the mix of business is concerned. But what can be said is that we have made a little more room in our internal model for writing nat cat exposed business given the re-rating we are expecting. So we have adjusted our risk appetite from somewhere in the 16%-18% range of economic capital, according to Solvency II. So there is a little higher risk appetite but not substantially.
That's very clear. Thank you.
Our next question is from Vinit Malhotra, Mediobanca. Please go ahead, sir. Your line is now open.
Yes. Good morning. Thank you. I hope you can hear me.
Yep.
So, the first question is on the gross loss on COVID in the third quarter of EUR 264 million. I just wanted to better understand: is the allocation to the, you know, the IBNRs and the allocation to the individual treaties something that is just the mechanical procedure, or is that being actively driven, in other words? And also, is this gross to net already in 3Q a bit faster than we expected, or you expected? And just some commentary on that would be interesting. The second thing is just on the life mortality: the recent headline figures in the US—is the population and the portfolio, you know, the differences? I think in an earlier call, Klaus, you might have mentioned 20% population and 5% for Hannover's own book.
Is the more recent trend still in line with the earlier kind of relationship, or is it that there is a bit more divergence between the population and what you would expect from Hannover Re portfolio? And I'm more referring to even a qualitative comment from the more recent data, not just Q3, please. Thank you very much.
Thank you. So the gross net situation for COVID will be answered by Sven and US mortality by Klaus.
Therefore, the P&C COVID side, we had seen more loss reserves advised by our ceding companies in the third quarter compared to the second quarter. The IBNR setting is not a mechanical exercise. It's to a large degree a management decision. But as Jean-Jacques mentioned, we have kept the overall level of IBNR at 71%.
It's still relatively close to the 80% we were showing in the second quarter. So, it was important for us, given the ongoing uncertainty, to keep the IBNR level at a relatively similar level, compared to the second quarter. Given that we have a little more clarity, talking to our ceding companies on where we can expect those losses, it was easier for us in the third quarter to book some of the IBNR against individual contracts. And to the extent we have done that, certain retention levels are satisfied on the retrocessional side. That piece of the equation is more mechanical than at that stage. And the same goes for our K-Cession. Once business qualifies for K-Cession under K, we have a full follow-the-fortunes principle. And therefore, to the extent we are booking treaty-specific IBNRs on those contracts, this would filter through to our K-Cession.
And lastly, in Q3, we have already started to also see a lot of advisors under our ILS fronting activities. And they are, of course, directly channeled to the investor base for which we are doing the fronting.
And so even for the fourth quarter, you were still very comfortable with the situation on COVID, P&C, Sven?
We are comfortable. I wouldn't say very. I mean, the pandemic is ongoing. We have a second wave of partial lockdown mechanisms. You and I, we have both no idea whether that's a November topic or whether this will lead well into 2021. So, from that point of view, we feel that we are well reserved, that we have good questions on the IBNR side.
But there's still significant uncertainty as far as the extent and the duration of the lockdown is concerned and the economic consequences coming with that.
Okay. Thank you.
Yeah.
On the life side, I might have to disappoint you; my former answers are still valid. We don't have much new information. The second and third quarters of the U.S. population mortality has been, as you mentioned, at 20% higher than expected. And about 70% of that is explained by the COVID claims directly. That means the death certificate saying COVID. The rest is, first of all, variations in the classification of COVID claims at the state level. Reporting is not that great. Then also a significant impact might come from fewer people seeking medical treatment for serious medical issues because of a fear of COVID, so they don't go to the hospital.
There is also very likely what we would call deaths of despair, like, suicide, opioids, things like that. This translates into a portfolio death rate of perhaps less than 5% because of the age distribution. The average age of COVID death, I guess, in the U.S., and this is the market we track closely, because most of our claims come from there, is. The age is still about 68. It's significantly higher in other countries like Germany. We have 80-82. Basically no claims in our portfolio. In the U.S., you have permanent business. In the U.K., you have a little bit of what you call whole of life business. This is relatively negligible for our portfolio, at least in the U.K. The claims we see are significantly lower than the average claim what we have.
We have only seen eight claims above $1 million so far. And that is significantly lower than we would usually expect. So this explains the big difference, but it all depends on the age distribution in your own portfolio. And as you might remember, we have been able to get rid of a lot of this in the last two years by recapture. I hope that answers your question, but I'm sure you will ask it again in three months' time. And then I might have another answer.
Right. We'll look forward to that. Thank you very much.
Sorry.
Our next question is from Thomas Fossard, HSBC. Please go ahead. Your line is now open.
Oh, yes. Good morning, everyone. I've got two questions. The first one would be related to the special dividend again. Sorry about that.
I understand your remark regarding, you know, still question mark on how strong the 1/1 renewals could be. But if I remember well, you issued a EUR 500 million subordinated bond in Q2, if I'm right. And that was not for, I would say, clear refinancing purposes. I think that at that time, you indicated that you raised the bond in order to have some additional flexibility if business opportunities were stronger than expected. So, could you maybe rephrase your special DV comment, taking into consideration the EUR 500 million hybrid bond? And the second question would be related to COVID-19 additional reserves. You booked in Q3 on credit and surety and also in the other lines. That's where, obviously, the increase has been. But clearly, we have not seen yet any substantive new flows on these two lines.
So maybe you could shed some light on what has driven the increase in these two lines in terms of additional reserves. Thank you.
The good special dividend, first. Yeah. Thomas, happy to clarify, to add some information to the hybrid situation and the special dividend. In general, yes, it's perfectly right. We did raise a hybrid bond in the second quarter. However, and I probably have not been so clear on that earlier. I apologize. So I think that was only one to refinance the early call bond that we called in the third quarter. So that was actually a refinancing act, which we always knew that wouldn't really add capital to our position. As you know, yes, there is headroom for further financing activities. Of course, we will look into that.
but again, that's the reason why we've been cautious in terms of the special dividend. And of course, please bear in mind that when you look at our guidance for 2020, the more than EUR 800 million already translate to roughly 60% payout ratio for the basis dividend, of course. So that's something that we kept in mind as well. But again, we will revisit that position earlier in 2021. I hope, Thomas, that that answers the question to some extent on the hybrid front.
Yeah. Thank you. When it comes to the COVID losses, let me start with the credit side. Yes, you're right. We have relatively little news as far as individual insolvencies is concerned. Here, the various state stimulus programs for the economy are doing their job. So we have strong stimulus packages.
We have rules in place lifting the requirements for declaring insolvencies. So therefore, this problem has not gone away, but it's pushed into the future. Let me put it this way. So from a pure actuarial point of view, there would be very little need to do any reserving on the credit and surety side, as regards COVID this year. So you have to see the EUR 180 million we have booked here as a precaution for future insolvencies, which most likely will not happen in 2020 but in later years. The exact timing, of course, is unknown. The reason for the increase from Q2 to Q3 has to be understood in the context that, of course, we have earned additional premium in the third quarter.
So, therefore, we have booked some additional IBNRs on that additionally earned premium, adding to the precaution we had taken in Q2. When it comes to business interruption, we have more advisors from our ceding companies from a variety of regions. I guess the best publicized situation in the last couple of weeks has been the UK with the FCA test case and the outcome of the first ruling. Ceding companies, of course, have translated that ruling into losses as far as their portfolios is concerned, have advised those losses to us, and we have booked them accordingly. As I've mentioned before, we have taken this as yeah a requirement to proportionally build additional IBNRs on top of that in order to stay at a comfortable level when it comes to actually advised claims to IBNRs in the overall reserve situation.
Thank you. Maybe one word if you could on the other lines. So maybe the financials and D&O lines where things have increased as well.
Yeah. There was a relatively proportionate increase in all lines of business. If you look at Q2, where we had booked EUR 600 million and Q3, the EUR 873 million, which we have booked, on a gross basis. We have added to our Q2 reserves in all those lines of business. But depending on the news we received from the ceding companies, to a varying extent, the largest increase we have certainly shown is on the property business interruption side. But there were also additional bookings against lines of business like D&O.
Mm-hmm. Okay. Thanks, Sven.
Our next question is from Paris Hadjiantonis, Exane BNP Paribas. Please go ahead. Your line is now open.
Yes. Hi from my side as well. I hope everybody's doing well. The first question will be on Solvency II and what is assumed currently in terms of COVID-19 losses going forward. I think Klaus implied earlier that some low triple-digit EUR million for higher mortality claims from the US is already assumed. But can you please, you know, give us an idea both on line three? And I don't know whether there's anything on the P&C side as well. I mean, relating to that question, since you are assuming some losses from mortality and looking at your guidance for 2021, I know you're trying to provide, you know, a normalized basis, but can you be a bit more clear on whether or not these assumed losses on line three are already included in the guidance you've given for 2021?
and then a small one again on the, on the life side. Looking at your appendix, slide 23, about 1/3 of the Life and Health losses are coming from non-mortality, so morbidity and other. Can you just give us, you know, some clarity on what exactly is driving these morbidity and other losses? Thank you.
Thank you. So Clemens will come in on what baked into the Solvency II numbers. And Klaus will take the other questions then.
Yeah. Paris, exactly as you assumed, there's a different picture on P&C and on Life and Health both under IFRS and Solvency II regime. Under P&C, I think it's fair to say, I mean, what we show in our IFRS numbers is reflected in our Solvency II numbers already. So that really translates sort of into each other.
On the Life and Health side, I would probably make some general remarks and then hand over to Klaus to add a bit more specifics on the numbers probably. But in general, I think in IFRS, it's pretty much the same as on the P&C side unless you do see future losses that don't want to be too technical, but that do not surpass the loss recognition test. So then you are able to account for future losses under IFRS regime. Other than that, in our current numbers do not reflect that. But Klaus will shed some light, particularly on the Australian business. In Solvency II, I think it's fair to say we haven't really adjusted our long-term assumptions both for mortality and morbidity. That is not reflected in Solvency II.
However, on the short term, let's say probably the next quarter and probably, somewhat into 2021 is reflected in the Solvency II reserves, already. But, Klaus, you, you might be able to, to shed some more light on that.
Yeah. Let's start with the Solvency II numbers. I have, just the numbers for, for the U.S. And, this is about $100 million for the fourth quarter and 2020-21. About $30 million is, is for the fourth quarter and the rest for the, for the year 2021 under Solvency II. There is no loss recognition in the U.S. because the buffers are high under IFRS. So you won't see that in, the same, cushion or buffer you won't see under IFRS. And, the, other thing, Clemens already mentioned, in Australia, the disability business was loss-making in the last couple of years.
This has been a significant problem for us in the past. We had loss recognition under IFRS 4 so that any changes we make to our IFRS numbers would go straight to the bottom line. Here, we expect some economic downturn in 2021, which usually leads to higher disability claims in the sense that reactivation probabilities will go down. This could happen for various reasons, but definitely it will happen for COVID-19 reasons. There will be an economic downturn. That's what we expect for 2021. We have about, I guess, EUR 44 million in additional reserve put aside for the economic downturn related lower reactivation rates in 2021. So this is the cushion for next year. But this is only possible under IFRS 4 because we are already in loss recognition for the disability business in Australia.
So, Paris, to be clear, that, that is really what you see under both regimes, right, under Solvency II and IFRS, as Klaus mentioned, something that we don't see in 2020, but we expect in 2021. However, we have taken care of that already as a sort of a second-order effect, related to COVID to some, some extent. Yeah. Already in our 2020 numbers.
According to my definition, this is even a third-order effect. The first order is COVID claim, named COVID claim. The second is the claims I mentioned earlier from deaths of disparate suicides or fewer people seeking medical treatment and die of a heart attack because they don't go to hospital. And the third-order effect impact would be an economic downturn, which across the world has an impact on our disability claims. Does this answer your question?
Yes. Thank you. Just to come back to the guidance, you know, Klaus, you are saying that in the US, mortality, you're talking about EUR 70 million impact in 2021 and then also some on the morbidity side, in Australia. Are these already reflected in your guidance for 2021 in terms of IFRS profits?
Yeah.
Yep. Okay.
Our next question is from Andrew Ritchie, Autonomous Research. Please go ahead, sir. Your line is now open.
Oh, hi there. Just a very quick question. I'm assuming your willingness to talk about the dividend means that you're assuming the regulator in Germany, BaFin, will be as pragmatic for year-end dividend discussions as they were with the FY 2019. Is that your working assumption? Have you been given any indication so far on that?
So we didn't have a direct discussion yet on this, but we expect, based on the dialogue we've had in the past months, to have a pragmatic perspective from the regulator in Germany. That's the assumption. I feel optimistic that this will be confirmed as we start the new year. But my assumption is that we'll have, based on the numbers, based on the performance and the strong reserving position and the business outlook, that BaFin would confirm the dividend.
Okay. Thanks.
As a reminder, if you would like to ask a question, please dial zero one on your telephone keypad now to enter the queue. We haven't received further questions. I will hand back to the speakers.
Well, thank you very much for taking part in this call and for the questions.
So we wanted to convey the message that our year-to-date figures are now solid enough to provide guidance. Of course, some moving parts and some potential for changes in the fourth quarter. There is some NatCAT activity in particular, but we feel confident and the EUR 800 million are stated with a high confidence level. We have robust reserving with COVID-19. The impact is yet to be confirmed, but I think there is more solidity in the numbers. And we understand more and more where we are. The primary wordings are changing. The reinsurance wordings will be changing. So the exposure will be reduced quite significantly. And on the guidance 2021, clearly, lots of uncertainties. We took account of the economic outlook, which might not be very positive.
But we see increasing momentum in P&C. We expect the hardening of the market, and that that's the main opportunity for us in 2021. And once we have this highlighted and more visibility on how we fare, I think we can confirm the dividend assumptions for the next year. So we'll have an opportunity in the new year to comment on the renewals, of course. We'll give you an update on the outlook for 2021 and obviously the dividend decisions, which, as always, is being taken in the new year. Thank you very much for your attention and have a good day.