So I guess we are starting very much on time, having a Swiss CEO. We need to be very punctual. Good morning to all of you, and I'd like to wish you a very warm welcome to our Investors' Day. I'm very glad and very delighted that we are having an in-person Investors' Day again after two years having virtual ones. We have chosen London today for the Investors' Day because we thought it's most convenient for at least most of you, and therefore we have the highest show-up ratio, which is very good. So I'm very happy that so many of you are attending this Investors' Day. Just to bridge from yesterday's event to today's, first, I hope you enjoyed the dinner and had lots of inspiring conversations. We chose the Tower Bridge for some reasons.
First, we found it very fascinating, and we, or many of us, have not been there yet. It is a stunning view to the city of London. As always, we try to find a place where you can look back and remind yourself about the location and connect it probably with Hannover. So many thanks to the IR team who has done a marvelous job finding that location and creating that unforgettable atmosphere, and also for the preparation of the whole event of today. In contrast, today's part won't be as spectacular. I must say, as you know, we don't have any thrilling news to report. This is the 25th Investors' Day, and therefore it's a long-standing tradition. Even for me, it's number 13.
In all those years, I must admit, I have not seen such a strong interest in reinsurance as defensive stocks are sought after. The purpose of this Investors' Day is quite clear. We want to improve the understanding of our company and want to offer insights and explanation of what we are doing and how we are doing things. It should therefore provide guidance and at the same time a perspective for the medium-term development. Nothing else. That means also that we are not providing any update on our strategic or financial targets today because we are just in the middle of our strategic cycle. Just a few words on today's agenda. Our CEO will kick things off, and he will talk about the performance in the past, but he also will bring you up to speed regarding Hannover Re's future readiness.
Our CFO will then give you his view on the investment book and how rising interest rates and also the inflation linkers contribute to the current and future results. Sven, our coordinator for the P&C business, will share his insights into non-life reinsurance and how we have managed and will continue to manage the growth going forward. He will also share insights into the modeling and pricing, particularly in this inflationary environment. After lunch, Claude will present Life & Health reinsurance and in particular what we have learned from the pandemic. And with that, also how the pandemic has affected our business and also the fact that a lot of business that we have in our books was not affected by that event. And if you are not tired enough, Clemens will then pick up one of the most exciting topics these days, IFRS 17.
He will chart our path to IFRS 17, and in doing so, he will explain what changes and what doesn't. To even add more fun, he will also talk about IFRS 9 as well. As usual, we have a rich agenda for today, and I also have to make some organizational remarks. The event today will be recorded, and after each presentation, we have a Q&A session. For all those who are following the presentation via streaming service and have dialed into the conference call, please press 01 on the telephone keypad if you want to ask a question. If anyone in this room wants to ask a question, please wait for the microphone so everybody can hear you. I think we are set and start, so it's now my pleasure to hand over to our CEO, Mr. Jean-Jacques Henchoz. Jean-Jacques, the floor is yours.
Well, thank you. Good morning, everyone, and warm welcome to this 25th edition of our Investors' Day. The stage is set. I'm a punctual guy who has a boring presentation. That's what I heard from the introduction. I'll try to do a little bit better than that because if you look at the environment nowadays, of course, reinsurance is everything but a boring business. We would aspire to make it boring, but the news come at a regular pace. So clearly, the purpose for today is not to go into the latest events. What I should stress is that we're, of course, focusing on Hurricane Ian in particular. We're looking into the feedback from the modeling agencies. We're trying to corroborate the information which we have in our own modeling of exposures. We're in contact with clients, and we're trying to narrow the range in terms of potential market loss.
So indeed, we're not in a position today to give granularity and precise numbers. We'll do so as soon as possible and at the latest on the 3rd of November, which is the conference call for the third quarter results. What I can say today is that Florida has been a problematic market for a little while. There is a lot of political interference in the system, and price adequacy has not been in line with our perspective, which means that our market share is well below our general market share in the U.S. So that's the first point I would want to make. And also, there are some public sector schemes particularly focused on flood and storm surge. These are exposures we don't have, so we're very much cautious on that front.
So that would be on Hurricane Ian, and as I mentioned, as soon as possible, we'll make sure you get the necessary information at the latest when we present Q3. So let me come back to my presentation, which is about future readiness. Obviously, we are at a point in time where we're in the middle of our strategy cycle. We have a 3-year strategy cycle. The one currently is 2021, 2023, and we're going to work on some of the topics we want to emphasize more in the next strategy cycle, which means the next year when we're back together for Investors' Day 2023, the main topic will be our strategy cycle for the next 3 years. So at this stage, a little bit at midpoint, a bit later than midpoint, what I would like to do is basically two things. The first, just a quick look back.
You know all the numbers. I won't dwell into all the numbers on our performance, but just say a few words on what we feel is the equity story for Hannover Re and a story we want to take with us in the future. As a second point, I'd like to focus on future readiness and highlight some of the points which are very important to the executive board where we want to invest more, where we want to make sure we have a clear relevance to our clients in the future and some of the capabilities we need to invest in as a group. So that would be it in the key takeaways, and some of the topics might come back during the Q&A also later on. So on performance update, in a nutshell, I would summarize the equity story. We try to nurture in four pillars.
The first is the constant focus on profitable growth. We want to be a growing company. The second is the underwriting expertise and the culture of underwriting at Hannover Re. The third is the lean operating model, which is extremely important for the Hannover Re story and will continue to be front and center. We want to be very efficient and very focused. And last but not least, the capital returns and our constant attempt to deliver on targets and hopefully in the future to exceed the benchmarks. So again, I won't go into the nitty-gritty of the numbers. You know them very well, but the point here is that I want to reiterate how important these topics are for us today and will be also part of the equation in the next few years. So the first is very much around profitable growth.
As much as, of course, we're in an environment which is quite difficult, we were getting out of COVID where we had extra days of losses, of course, and that kind of activity which has been quite front and center in the past few years. I think the long-term trends are positive, and I think Hannover Re tries to look at them through the lens of opportunities. So if you see on this slide, whether we talk about climate change, where clearly there are short-term challenges on the pricing of the business, on managing the exposures, there is also a huge protection gap which we want to tap into, subject to, of course, structure and conditions, but we see a long-term opportunity for us. Demographic change also leads to new needs on the life and health side. In particular, longevity might be a good example for that.
Technology creates new risk categories, but also new data and new opportunities to develop new products. Of course, the growth in emerging markets, not new, but I think we see year after year an insurance penetration which goes up and creates opportunity for us indirectly. Not to forget urbanization trend. We are in a business which is tough where the technicalities are very important when we need to manage exposures, when we need to make sure the diversification of the book is strong. We're in a growing trend, and that's why we believe very much in the pure play reinsurance model because we see many opportunities. I've been talking about the glass ceiling, and there might come a time where that glass ceiling might be felt to some extent, but I feel we're far away from such a situation.
We're still in a growing trajectory, and if the cycle helps us, I'm quite confident we'll continue on that path. So another pillar, as I mentioned, is the underwriting DNA. We have a very strong perception from business partners as being responsive, as being innovative, as exemplified in our structured reinsurance activities. We have a very experienced team, long-standing experience, a lot of loyalty in our teams and people who have the corporate memory. And this is reflected in the client survey, the broker survey. We come really as a leading player. The broker world is highly complimentary about the responsiveness, the efficiency, and the focus we're showing. So I think on that front, we build on a position of strength. And that flight to quality, which we often mention, is not only a buzzword. I think it is a reality.
In times like these ones with a lot of uncertainty, you see a tendency to go to the best capitalized players. We see a trend, and we benefit from the flight to quality. Third pillar is the lean operating model. The focus is one which we have on organizational simplicity. We truly believe that there is a competitive advantage to be derived from a more efficient structure. As much as we understand that the cost of doing business is increasing and Clemens might be able to sing a song about it when we talk about IFRS 17, we're trying very much to stay nimble and lean and focus our energy and resources on value-adding activity. That doesn't mean that we're a low-budget airline. That's to make an analogy to another industry. This is not the idea.
But we have a culture of cost discipline and staying clear in terms of decision-making. So clear responsibilities. People can and have to take decisions. We empower them. And if I think of my three-year experience at Hannover, I cannot remember any moment where we're not able as an executive board to take important decisions on new business in more than 24 hours. So we're really embracing that culture of discipline, but also efficiency. This will be part of our future success. We have a keen eye on that. Capital agility is a bit of a different item, but I think I would relate it to the lean model is that we're trying to be disciplined in the capital allocation and make sure that we shift capital where we see opportunities. And I think that's an area where we will need to increasingly make progress with IFRS.
That's one of the benefits I'd see that we have more granularity on profitability trends that we can allocate, reallocate, shift capital to opportunities, respectively, when we see some challenges, make sure that we react to them. The second one under the heading of capital agility, I would put the usage of third-party capital. This is something, as you know very well, we've done in the past with great success. The retrocession program is a very important pillar of our P&C franchise. Clearly, we're at a point where the market has become more disruptive in some segments. As we know, this will have an impact on the retro market, but at the same time, we look back at a very good history and a good track record in our program, and 80%-85% of the retro providers have been with us for a decade.
So that gives us a bit of an edge when it comes to receiving capacity in a market which might be, of course, more disruptive on the retro side, but we might benefit once again from that flight to quality. And I'm seeing also some new names taking an interest in our retro program. On the life and health side, we could also leverage the protection we had on the pandemic side. It was initially not really meant for an event like COVID, but sometimes the events drive reality, and we can benefit from it today in terms of the excess mortality due to the COVID pandemic today. And last but not least, the dividend policy is key to success. We want to make sure that we calibrate the promise for an increasing trajectory on the dividend side with organic growth.
I say clearly organic growth because with the pace of growth we're seeing inorganic scenarios are not of interest to Hannover Re at this stage. I think we have what it takes to continue to expand in a diversified way in both P&C and life and health. And last but not least, the focus on capital returns. You see here the history of our ROE performance, which has been double-digit in the 10-year view, over 12%. The 5-year view is over 11%. If you compare it to the sector average, it's more than double. The sector average is not exactly our benchmark, but clearly, it's important to know that we focus on this as our indicator of success and that we want to continue on that front and having a diligent attention to incoming business, pricing the business correctly, and ensuring consistency in our model.
So ROE, our performance as a goal for us, every year is a new year, so we have to fight for it as we conduct the business. But clearly, this is an important one, and we hope we can continue on that front and deliver on the promises. And last but not least, on that first section, I just want to highlight that all these pillars of performance are anchored into a very robust risk management framework, and we try really to make sure on all fronts that we have the checks and balances and the instruments to monitor the business. Retrocession, I've mentioned earlier, on the reserving conservatism is also an aspect which is very important to us. We have excess reserves according to our actuarial expert, also external experts.
Clemens will say a few words on this in the context of IFRS 17, but that's a very helpful tool if you want in times where the extra reserve could be used to support our results. Hedging, also very important. We had some inflation linkers in place for quite some time in the past few years, and are benefiting, of course, from the inflation linkers today that will support the results in 2022. Lastly, the risk appetite, very much around budget and clarity of risk appetite. So far, the outcome has been pretty good. This brings me to the second part, which is investing in future readiness. This is a bit the segue to the next strategy cycle.
These are activities we try to invest time on, and you see them highlighted here, not entirely new topics, but topics where we feel we will derive a competitive advantage in the next few years. Let's start with the first, client centricity. It is very much one of the building blocks of our culture. I think we're on a strong position when it comes to the spirit and focus, and the feedback I gather through customer surveys in particular, but also to one-to-one meetings with our clients is very positive. I think the spirit of partnership is what we want to nurture continuously. Partnership, not in the sense of saying yes to all customers' requests, but in the sense of working together over time on some of the challenges. So we're a go-to market to a great extent. Also, across the board, not only traditional but also non-traditional structures.
The broker community is really ranking us systematically as the number one market based on their own broker survey. This has helped us tremendously in terms of organic growth the past three years. The main source of growth for Hannover Re has been related to broadening the client relationships. We were able to increase our shares on existing program, and that has been extremely helpful in making sure we can have steady growth without having to change fundamentally our structure, our operation. We've been growing steadily, and that means that we also need to adjust the way we operate. We have a very strong client management, client relationship management platform called Connex, which we'll use to make sure that all the colleagues around the world can work and operate in a holistic way with our clients.
And we have a key account management approach to the largest clients. Many clients are growing steadily themselves, and we need to adapt to that. We're not changing the organizational structure for that. We want to have the leading underwriters in charge, but we want to make sure that in the context of virtual teams that were nimble, effective, well-informed, and provide one voice to the customer. That's very much the idea. So client centricity is certainly building on an area of strength, but certainly with potential to be more systematic, more structured, more analytical, and to accompany the main clients as they grow themselves and become more complex and need our support. That's the first one. The second one is about innovation. I think in terms of culture, Hannover Re has always been very creative, innovative.
We're among the first market players entering the ILS space, as you know, historically, and we continuously try to innovate. But the scaling up of innovation is the challenge we're all facing. We decided a couple of years ago to build up some dedicated teams, so-called accelerators, focusing on digital solutions and innovation generally. We see good momentum. These teams are very close to the action. They help us build skills and capabilities in the area of digital knowledge, data analytics. Our goal is to scale up innovation, replicate new ideas, and expand some new partnerships. I was in Israel last week visiting a number of fintechs and could see how much interest there is in working with Hannover Re. We're keeping our positioning as a pure-play reinsurer, and in some instances, we're trying to connect with clients and build up some new partnerships to further growth.
It's not yet at the scale we might see in a few years, but it's gaining traction, and I think this is the right way to go. The deal pipeline is interesting. We have some good names working with us and having a long-term view. We're trying to invest a bit more in parametric solutions. It's still at its infancy. I think in principle, it's ready to go. The demand side is the constraining factor, but I think we're going to see some good traction as well in the parametric space. And lastly, cyber, which is also mentioned on this slide. We've been supporting the best underwriters in the cyberspace. There's much more to do there. We've decided last year to stabilize our portfolio. We're not going to grow exponentially into the cyberspace.
We're looking for partnerships on the retro side, and I hope that in the near term, we'll be able to operate with strong backing and support from retrocession partners in cyber. I think long-term, mid- to long-term, I hope that we'll see innovation in cyber from the capital markets. And I hope at some stage we'll see cyber cat bonds being placed. That's still early days, but I very much am of the view that this is one avenue of the future in that space. Then emerging markets, again, not new. I think we're well-positioned in Latin America. We have a strong franchise in South Africa, so this is more business as usual. We've realized a couple of years ago that we need to strengthen our franchise in Asia. I think we had some good momentum, but we're in the process of strengthening our regional hubs.
So we're hiring closer to the key markets. And you have seen a few months ago that we announced that a new member of our executive board will join, Sharon Ooi, who will be focusing starting in January on the P&C business in Asia-Pacific and working in tandem with Claude Chèvre, who is responsible for the life business in APAC. So a number of examples here. I don't want to delve into them in detail, but I think we have some good examples in Financial Solutions. The facultative team is doing very well in APAC, and we're trying to look for collaboration with monoliners and offer knowledge in exchange for reinsurance. So always a reinsurance lens on growth opportunities.
Winning talent is on everybody's map, of course, post-COVID with some of the topics we've seen: scarcity of talent, mobility of talent, great resignation in some markets, maybe less in Europe than in the United States, but this is on top of our agenda. We've worked very diligently on talent development, leadership development, making sure that our leadership team can operate in a more hybrid world, in a more interconnected team, fostering global mobility, making sure that our younger talents in particular have opportunities to grow and develop and building loyalty over time and investing in our employer value proposition. I think what we offer, if not the highest salaries in the market, I think we offer true learning opportunities for people entering the business. And as I said, a culture where decisions can be taken and are not blocked by very complex structures.
So it's an attractive value proposition, and we're building a strong human resource management platform to make sure we can support these efforts. So this will be front and center for us. We also have experienced people who will at some stage go into retirement, and we're preparing the next generation of leaders and, in particular, underwriting leaders. So very important part of what we do and certainly one of the priorities for the next strategy cycle. And last but not least, we put it as the item E for obvious reason because the focus is very much on the E lately, the ESG perspective, where we're working hard to strengthen our framework. We try to keep pace with quite a complex regulation. We hope to see some harmonized handling of the regulatory developments, but we're working diligently on that.
We have sent some signals by adhering to some of the UN declarations on responsible underwriting on sustainable finance and investment. We're gaining a lot of traction in our facultative operation, making sure that we're cautious in what we write and what we don't write. We want to make progress on measuring CO2 impact of the treaty business, which is the bigger part of what we do. It's a complex endeavor, and that's why we decided to join the Net Zero Insurance Alliance in order to collaborate and put together a strong methodology so that we have more rigor in assessing the impact of what we do. We see some good feedback from stakeholders, in particular the ESG rating agencies, and our ratings are going up. The last few years, we had some good news, which reflected the progress we're making there.
So it's, at this stage, more on transparency, disclosure, making sure we have more rigor and granularity and adhere to this double materiality in the context, in particular, of the EU Sustainability Reporting Directive. We want to see steady progress on our ratings. We see also opportunities. I think the protection gap I mentioned earlier is a big opportunity. Renewable energy is another example and changing technologies in the context of decarbonization efforts, so a long-term endeavor. We should not forget the S, the social part. We're going to put together a small foundation to support some good projects in different parts of the world. And the G remains extremely important. We don't speak a lot about the G, but very solid corporate governance remains really part of what we do. We try to strengthen this as we operate and improve our governance framework.
But I think we're steady, and we're making good progress in integrating the ESG components into our decision-making. So we'll continue to focus on that. So to conclude on the key takeaways, as Karl said, nothing new I wanted to share today. So I apologize for not having any breaking news at the beginning of this Investors' Day. But I think it was very important for me to, first of all, look back at the performance update, show how and why Hannover Re remains a very resilient player in the market in a challenging time, and reiterating these pillars of the equity story, which are those KPIs we look at constantly and want to adhere to and which will be part of the story, no doubt, in the future. And the segue to the future strategy cycle is that topic of future readiness.
We're conscious that the environment is changing, that our clients are growing and changing, and there are a few adaptations we need to put into place. There are investments we need to make in order to stay relevant. As we also grow, we're a much bigger company today than five or 10 years ago. So we need to adapt. We need to invest. But I think my assessment after now over three years with the company that we're extremely well-positioned for future growth, that we are a preferred partner and a lot of players seek our capacity. We're in a trajectory where, in spite of the short-term challenges to the industry, there is a positive trend. The pricing quality will improve, and I'm quite convinced that we'll show resilience but also agility in the decision-making to win and outperform tomorrow.
So I'll stop here in the hope that I was within the schedule. And if there is a bit of time, we can address any questions or comments you might have. Well, thank you very much, Jean-Jacques, for your presentation. I've already seen some hands up, and therefore we go straight into the Q&A. And I would say we start with the questions from the physical audience in this room, and then I'm sure we have questions also from the conference call. So for all of those who are attending via the conference call, you need to dial 01 on your telephone keypad. And if the question is answered before it's your turn to speak, you can dial 02 on your telephone keypad. And if you use speaker equipment, please lift the handset before making your selection. I would suggest we start from the right side with Will Hardcastle.
Thanks for the presentation. Will Hardcastle, UBS. If we jump straight in just thinking about the comments you made there about retro and availability of capacity there, I guess how does Hannover view the trade-off between volatility and protection? Because we've seen there about the stability of the earnings being fantastic. And I appreciate the 85% have been there for a decade or so. I guess are we looking at that as a relative advantage, or do we think that's an absolute advantage year-on-year as well? Sorry, I'll ask the second one. How much is the fee income you receive from those ILS facilitations? And is it about the income, or is it the cross synergies you get, and what would those cross synergies be by doing these? Thank you.
Very good. Sven, I might ask you to comment a bit on our ILS operation. I think on retro, of course, there's a yearly process, but it takes a lot of time to build up your portfolio. It's not very different from reinsurance. And I think over the years, we've been able to cement this real panel of people who are long-term oriented. So I think it is a competitive advantage. It's not easy to replicate, particularly not in this phase of the cycle. It's hard work. It's a multi-year effort.
Then there are strategic considerations on minimum level of protection we want to have compared to our planning and growth outlook, and then more opportunistic considerations in the sense of if there is more capacity than our minimum standard, minimum requirements, then depending on the price and terms and conditions, we might get more protection because we see an opportunity to improve our performance. The focus is very much on making sure we have that platform of minimum protection. This will remain the case. It is more difficult today than it was five years ago, no doubt, but it's not something you can replicate very easily. I remain confident each year has its own set of emotions and surprises, but I think by early November, we should be good to go.
We have also other options if we feel there is more growth opportunities in any year, like 2023 might be the case. There are also other instruments we can take, in particular, hybrid capital. And we'll talk about hybrid capital certainly next year as we have a tranche which is up for renewal. So we have, in the worst case, depending on the market condition and cycle, there is always an opportunity to manage our net exposure, which is not the desirable outcome. But if this is needed, then we would just look at the profitability per segment and be more stringent on the less profitable part of any portfolio. But I remain positive on our ability to attract some retrocession capital in spite of the turbulent environment. So maybe on the ILS space.
Yeah, happy to do that. But if I may, I would also add on the retro side, you asked about relative versus absolute advantage. For us, it's a relative advantage. It keeps our reported combined ratios in a more narrow band. That's really the design. If you look at the last 10 years, not including 2022, but 2021 and prior last 10 years, only in 2 years out of 10 did we collect more from our retro than we paid in premium. So in 8 other years, it was a drag on the combined ratio, but it helps with the volatility profile of our P&C business group. As to the ILS fronting activities we are doing, this is a very solid mid-double-digit euro figure. Most of that activity is really standalone fee income generating activity.
So it's not to be seen for the bulk of the activities in context of wider relationships. On the other hand, a number of the partners we are supporting with our fronting service are also participating in our K transaction. So it helps in that context, but we try to keep Chinese walls and not to get confused about buying and selling services. But it's a good fee income generator for us, and it has grown nicely, as you will see in my presentation over the last few years.
Thank you, Sven.
Next question from Andrew.
Hi, it's Andrew Ritchie from Autonomous Research. I've got very simple questions, actually. If you could just go back to slide 5, which is the sort of overview of growth. And I guess the questions, these are partly questions I get mostly, the most questions I get from investors. So the first question, which isn't directly on the slide, but your premiums have grown a lot, is there? And your premiums are about, what? I guess my question is your employee base is about 3,500, I think, or thereabouts. Your former company has an employee base of about 14,000. And their premium income is only about 50% higher than yours. And since 2017, when that graph is, I think your employee base is up about 8%. And I guess the question I get, it's a simple one, is everyone in Hannover working an awful lot harder? Or how can it be?
How can I get comfortable more from a risk perspective, given the difference? The sort of implied employee productivity is massive and has increased massively versus your competitors. So that's the first, and it's more angle on risk. I'm trying to understand the risk of that and the scalability. And do you actually have to go out and hire some people now or pay them a lot more because they're incredibly productive? And I guess the second related question, I look at that graph, the two bottom charts just worry me, just simplistically, because I see growth premium is 70, but pricing's up 29, I'll call it 25. I get that question from investors. How do you sit back and sort of rationalize that growth in simple terms that it's not massive exposure growth in areas that are new or not known?
That was a very fair challenge, Andrew, and I won't compare with any of my previous employers today. But I think the first thing to bear in mind is that, and I mentioned it in the context of client centricity, we've been broadening the existing relationships. This has been an incredible source of growth. This has brought us a lot of additional business by simply increasing shares on the business we know. This concerns mainly the P and C business. And clearly, this is growth which doesn't need organizational adjustment, which doesn't really create an exposure which is very different. So this has helped us quite a bit. What is important to note, of course, is that we've been extremely successful with the structured reinsurance team. We've been adding resources in that team as we continue to grow. This is, to some extent, creating deals with very large premium volume.
But in terms of managing these exposures and looking at the risk management of things, not adding a lot of complexity, but it's adding a lot of premium. So that might also create a bit of the perception that we're overgrowing on the traditional business, which is not the case. Clearly, our people are working hard, no doubt. That's one of the secrets. I think focus explains part of the differential. We're not a service-based company. We offer advice on underwriting, considerations on risk management, but we're not set up with a consulting arm, if you wish. So a number of resources, if you would benchmark with some of the players, would not be with us. Clearly, there is no doubt that with further growth, with additional complexity, if I take the Asia-Pacific strategy, we will need to staff up.
So there is a need to make sure that our risk management resources and capabilities follow not only the growth in underwriting capabilities, but we do it in a much more focused way. And we also have less complexity. We shy away from adding too many legal entities, for example. We're trying to be very nimble to our legal entity setup, our footprint. And these are cost of complexity, which we can avoid and which relieve a little bit our organization in terms of monitoring and risk management generally. So I take the challenge, and I think this is something which is on our map. And that's no doubt when I talk about talent management and winning talent, this is very much related to making sure we continue to grow while having the necessary capabilities.
But I think the nimble focused reinsurance, pure play positioning helps us to be much more efficient than many players. I might have forgotten some arguments on this. I think it's a fair challenge, but the picture here might create the perception, which is not exactly at par with the reality, to be frank. Sven, would you want to address the second topic?
Yeah, sure. So how do we make certain that we don't overexpose ourselves in unknown territories or product lines? That was the question. So a good example is our growth trajectory on the natural catastrophe side, which will be part of my presentation. But we have grown in NatCat, but we have grown the diversification in NatCat over the last years. That has been the most important driver in how we look at NatCat. So if you, for example, look at our aggregate industries peak risk, US wind, we have been very, very stable over the last five to six years. We have grown in other territories, and we will only start growing in the US wind space again once we are satisfied that other perils have come close enough to this peak peril. And then it would be capital efficient again to also grow in a peak peril.
It's much more capital efficient if you try to work on your diversification if one of the perils is leading by such a margin as it is for this industry. Another example I can give you is cyber, where we have been a player early on for cyber products. We had robust risk metrics in place for the last 5, 6 years. So once the premium started to get a little more meaningful, of course, we asked ourselves, okay, how much of a systemic risk like that are we really willing to take? We've been working towards that risk metric. In the meantime, this was very much a top-down approach. In the meantime, we have built a lot of additional bottom-up risk management capabilities. So our accuracy on how to measure where we are is much improved.
As John and Jacques already said, we have now been at roughly EUR 600 million of cyber premium. We have now, for the last two years, reached a level where we feel that's good enough. We may grow again in the medium term, but short term, that's sort of the risk level we want to have. So our focus on the last renewals was to limit the systemic part of the risk, particularly on the quota share business, which is the bulk of our cyber business. 90% of our cyber business is quota share premium by introducing loss ratio caps or other kind of limitations in order to not have open-ended risk positions on a systemic risk like cyber. So maybe these are two examples I can give.
On the other hand, and we have seen that over the last few years, I mean, there's no question about that the entire industry needs to be more precise in what it intends to cover. COVID is a good example. So I guess the reinsurance market, when it wrote property catastrophe layers, was not expecting pandemic losses in those covers. Or also the Ukraine is another example where, particularly in the more London market kind of composite products where you're bundling more lines together, the clarity on what is covered, what isn't covered is not where it needs to be. So that's a job for the entire industry to be more precise. What exactly do we want to cover?
Exactly also to Jean-Jacques' point, if we really want to make an effort as an industry to close the protection gap, it's, of course, no good reputation that each time we have a loss situation to the outside world, it looks like buyers and sellers always have an argument on what exactly is a product that was agreed upon. So that's an industry challenge.
Thank you, Andrew.
Okay, we have further requests to speak. So probably we continue with Hadley, and then we have another questioner, a question from the conference call. And then I would suggest we continue with the next presentation. And I would like to ask all others to hold on their questions for later Q&As. Hadley, please.
Thanks very much. I'll be very quick because Andrew asked my first question probably slightly more eloquently than I could have done. But my second question is around the financial solutions business because that's been, I guess, a key differentiating factor for you guys over the last few years. And I appreciate the growth opportunities in Asia and what have you. But in light of the market environment at the moment, rising bond yields and what have you, can you talk about the appetite or the demand for that type of offering in the current environment and your willingness to see the same sort of growth opportunities that you've seen over the last few years?
So I'll ask Claude to comment briefly on financial solutions, particularly in Asia. But this has been a successful few years. We have a very strong team in the U.S. We've been successful in Asia. We're trying to expand into other territories. It has to be said that we're focusing on biometric risk. We're focusing on structures which are risk remote. So we're not into trying to increase our market risk. So from that perspective, as a general statement, I would say I don't see too much concern in terms of further growth. But Claude might expand a bit on this because he's on it.
I guess, sorry, I guess in the current environment, if it's seen as a sort of solvency relief type opportunity and solvency is looking significantly more comfortable for the industry as a whole, is there as much demand for these solvency relief? I appreciate that they're on the biometric side, but given solvency as a whole is more relaxed, is there as much demand for that relief in the current environment?
Claude, I give you the floor. Just one sentence to say, of course, that solvency relief would be one case that there might be rating agency capital considerations. There might be restructuring situations. There might be sale of portfolio scenarios. So solvency relief is one part of the value proposition, but there are a wide range of situations our clients are having and therefore asking for our support. But Claude may be based on concrete experience in.
You said what I wanted to say. Exactly. It's not just about solvency relief, of course. And of course, you never know how much demand on financial solutions you will have year by year. So that's the reason why we need to reinvent ourselves all the time. We have changed our solutions that we propose every single year in the U.S., in China, in other countries. So the demand is still there. Whether it's going to be as big as we have seen in the past, I cannot tell you. During COVID, and you will see this in my presentation also, we have seen an increased demand of solvency relief or, let's say, financial solutions deal, definitely, in particular out of China, for example.
Okay, then we have another question, I think, from this side. Ashik?
Yeah. In one of the slides.
In one of the slides. Thank you. Hi, this is Ashik Musaddi from Morgan Stanley. The rate online as per Guy Carpenter has gone up by 29% over the past six years. That's basically 5% a year. How do we think about that number going forward? Because I guess we have a cat load of 5% itself now, because if cat keeps on moving exponentially higher year after year, you have a cat load of 5%, and then on top of that, you have inflation load. So how do we think about that number? And what is that number for Hannover in case you can provide that? Is it similar to Guy Carpenter or you would have a bit different number? Thank you.
I know that Sven will touch upon it. Maybe a few words from you, Sven, on that. Then you can maybe expand on this aspect in the context of climate change and pricing of the business during your presentation.
Yeah, the short-term expectation, so particularly for the 2023 renewals, is of course that the trajectory will be a bit steeper than what we have seen over the last five years. I wouldn't be able, from the top of my head, to give you a comparative number on how we would have looked at NatCat pricing from a risk-adjusted point of view in the accumulated five-year period. But given that most of the cat we are writing is from the broker market, and yes, we do write some private layers, but the bulk of the business is open market business where we write a syndicated line on the business, our numbers will not be too dissimilar. The trend and the need to adjust for NatCat pricing is obvious.
I mean, you have ever growing underlying exposure, which has accelerated over the last few years by the very high level of inflation. I will talk about that in my presentation. Plus the fact that, I mean, climate change is real. We see more frequency of perils happening, which have not happened in that frequency and severity in the past. So to continuously trend your model approach and your pricing approach to those two trends, climate change and inflation, is something which means that the mid to long-term need for adjusting cat pricing will be a topic that will stay with us for the foreseeable future.
Thank you, Ashik.
Well, thank you, Jean-Jacques, for your presentation. Thank you also for your questions. We now go into the next presentation. Before we go into a coffee break, so this next presentation is from Clemens. In this year's update, it's on the investment portfolio and on the future income it can expect to generate. On that note, I just hand over to you, Clemens.
If you're ready.
Yes. Thank you, Karl. Just give me a second. Here we are. Good morning, everyone. And Karl, I have to pick up your introduction that it's been quite boring. I mean, you know I joined in September 2020, and I'm still waiting for the first boring quarter to appear, actually. And as Jean-Jacques said, I think we make it look boring. But of course, we don't live in boring times at all, also not in the capital markets. And I remember when I did my first presentation in October 2020 on the Investors' Day in October, I started with a statement that capital markets have proven to be extremely challenging and volatile in 2020.
And while that was certainly true for equities and credits, etc., when you look back into 2020, little did we know about yield curve volatility and movements that we've seen not only in the last months, but particularly throughout 2022. So here we are again, two years later, the year being dominated by central banks trying to fight inflation, starting with the U.S. And even in Europe, the ECB has reacted quite heavily, and the wording has strengthened on fighting inflation. We still have effects from the pandemic. And then, of course, we have the war in the Ukraine, all that being together. Therefore, I want to start with a quick review on our positioning for 2022. What was our thinking when we started into the year? How have we positioned ourselves? How is our asset allocation doing? And how has that fared throughout the year?
Then we have a quick glance, as Karl mentioned already earlier, on yield curves, etc. I spare you the September one. We don't want to look at roller coaster yield curves, but particularly on how that will affect our portfolio. What does that long-term, short-term to our fixed income portfolio? And then a couple of sentences on our inflation-linked bonds, how they are yielding at the moment and what we still expect in terms of contribution going forward from those inflation-linked bonds. So let's start with our positioning. We usually begin the discussion, our strategy for the next year sort of in November, December. So we started with that in November, December 2021. We start always with a review in the investment team together with the investment team. And then we always have a session in the board in January with the whole board on investment strategy.
Then we agree upon our strategy. The review was, I think, on 2021, pretty easy. You know that we had de-risked in 2020. We had rather been on a risk-on strategy in 2021. I think that turned out to work quite well on the credit side. Our alternative investments, private equity and real estate, contributing higher than expected, actually, in 2021. We had increased our inflation-linked bond portfolio in 2021. You might remember early 2021, we decided to increase that portfolio. Overall, we achieved an ROI of 3.2%. That was actually a very good outcome for 2021. But the question was really, what is going on when we look into 2022? I've actually jotted down a couple of quotes from the discussion.
We had a presentation from the investment team, etc., and we discussed what the environment is and how 2022 can look like. A couple of quotes from the presentation were fiscal and monetary fueling will come to an end. That was one perception. Inflation pressure on central banks, particularly in the U.S., but also in Europe later on, will increase. Risk or chance will be seen in overtightening of central banks and reopening later in 2022 or probably towards 2023. Credit spreads will be volatile to some extent, but rather overall with a sideways trend in 2022. That was our perception. That was our thinking when we put together our strategy. In essence, we did expect inflationary pressure with a high probability of tightening, etc.
The investment team phrased it in their presentation when we had the discussion in the board in January. The headline was, it is a bit like being between a rock and a hard place 2022. I think that turned out to be quite true. That actually became the theme of our investment strategy 2022. Of course, we didn't know that that, of course, would be accelerated quite heavily by the conflict in the Ukraine. That has really just accelerated all that what we are seeing now. In essence, I think it's fair to say that when the crisis began, we had already positioned ourselves a bit more on the defensive side. How does it look like in our asset allocation? You can see it here, I think, quite well.
If that's end of June numbers, if you look at actual numbers now, that picture would be even more pronounced. So you will see overall our assets under management have been quite stable despite the fact, of course, that yield curve movements and spread effects, etc., have had a significant effect on market values. But that has to some extent been compensated, of course, by strong operating cash flow and also by a strong US dollar which mitigated that effect. So on the credit side, let me start probably with the credit side. You can see that we have underexposed in terms of corporate bonds. You can see we have decreased the share of investment-grade corporate bonds to a large extent and have accumulated. You can see that also down the line on short-term investments and cash. We have accumulated some dry powder.
So if you want, we have, of course, kept our strict ALM when it comes to duration matching and currencies. So no bets on interest rate as usual. But we have transformed that view, our thinking. We want to keep some dry powder to re-enter the market, if you like, in a way of a barbell strategy. So investing rather long-term to keep the ALM and short-term to accumulate some dry powder, particularly in the US dollar, but also in euro. So that was our thinking on our positioning here on the credit side. And you can see the opposite effect, of course, on the governments and semi-governments here. On the listed equity, you know from our Q1, Q2 reporting that we had sold our listed equities in two tranches, one early January and the second one in early April.
The increase here on real assets and on private equity is actually not really exposure-driven. So we have not increased our commitments here. It's really just an increase in valuations, I think, which are now at a historically high level when you look at private equity and real estate. So that's the driver between the increase here on those two lines. So let's have a look at yield curves. And again, these are end of August numbers. So that would be particularly on the U.K. yields, as you will appreciate in September, quite a roller coaster picture here. So that's really, and we've jotted down some numbers here in the table, as you can see. Those are really, I think, impressive numbers. When you think about stress tests on interest rates, etc., I think that's what you can really see down here. Again, end of August numbers.
I think if you look at September numbers, you can easily add another 100 basis points on the short end, I think, in euro and in the U.K., and probably 50 basis points in U.S. dollars. At the long end, probably 140 basis points only in September, I think, in the U.K. Germany and U.S. will be another 50 basis points that you can add here to the quarter date number, which is quite impressive. What you can also see, I think, here on the yield curves is that they are flattening. Some curves, as you know, are already being inverted. I think it's an indication that at least on the yield side, on the interest rate side, to some extent, a recession is already priced in. So what does that mean for our portfolio?
I think short-term, yes, I would admit you have to be very disciplined on cash management, etc., in terms of allocating cash to subsidiaries and all that, etc., that you're not forced to sell some of your fixed income portfolio in environments like this. And you know, I mean, last year, the year before, you could hardly touch any fixed income paper without producing realized gains, whereas now they will leave you with a P&L hit. So we are very disciplined when it comes to cash management, liquidity management, etc. So that's, I think, the only disadvantage when you operate in such an environment. And then, of course, I think what's also fair to say is that valuations on private equity and real estate will have to follow. I think they are at historic high levels.
I would expect them to come down, if not in Q4, then in 2023, because they are really, really at the peak at the moment. So that's certainly a side effect that will come with these high yields long-term. Again, and I've mentioned that a couple of times, and we will have a look at our solvency view in a minute. Long-term, of course, the overall effect is good. It will take some time for these yields to eat into our portfolio to drive ordinary income. But long-term, of course, that's the desired picture. We have not expected, of course, that all to happen within 6 or 9 months. But overall, of course, it's a profit driver. It's a good development for the industry. So you know that picture quite well.
I think from previous presentations, what we do here is as per end of August, we compare market yields. So current reinvested market yields, if we were to invest our portfolio, reinvest our portfolio as of today, you would see the market yields at the light blue bars here. So, for example, in U.S. dollar, you see market yields here at the moment roughly around 4.2%. The green light would be if you were to reinvest your portfolio only in risk-free government bonds. And the dark blue bar is our locked-in yield. So for the U.S. dollar, for example, 4.2% market yield locked-in is around 2.9% at the moment in U.S. dollar. That's our book yield, our running book yield in our fixed income portfolio. And risk-free would be at 3.2%.
Again, if you do that end of September, those bars, the light blue bar and the green bar will have even moved up further. And I think, by the way, in September, I think both yield curves and credit spread curves moved up in parallel. So talks and assumptions about negative correlations of those seem to have disappeared, apparently. You can also see here when you compare, for example, U.S. dollar with euro, that the rate increases in the U.S. that the Fed has actually started earlier. Just for comparisons, we've also excluded the inflation linkers, particularly short-term. So you will appreciate they have quite substantially contributed to our earnings, to our yields at the moment. But long-term, with the expectation of inflation, you can see that the effect is actually not too pronounced in the picture down there below.
So overall, yes, of course, these yield curve environments, these developments have, when you look at really market values, produced negative, substantially negative performances. Also, the spread widening, etc. And you've seen that impact, I think, already in our Q2 numbers. You can see here on the top, you see the OCI development in our IFRS group financial statements. That's really the OCI part in our equity. You can see that the main part of the OCI movement is driven by yield curve. So roughly EUR 4.5 billion of reduction in OCI IFRS is driven by yield curves. And roughly EUR 1.1-1.2 billion is driven by credit spread movements. Having said that, and you know we've alluded to that also in our Q2 call, Solvency II ratio. So our SCR has barely moved due to interest rates movement.
That shows actually that our asset liability management, that we have been very strict here, that pays off. And economically, you do see the ALM here quite well with our solvency ratio hardly moving around these interest rate movements. So I think if, and I come to IFRS later, as you know, but if the standard setter, the IASB, would have come up with one ad, just one advert on why we need a new accounting standard and what happens when you compare fair value investments with undiscounted liabilities, what happens to your equity, then I think it would have been probably this picture here. Because economically, again, it shows that we've actually quite effectively hedged ourselves against interest rate movements. So inflation in bonds, and you know the numbers quite well.
I think roughly EUR 5.6 billion at the moment in terms of market value, sitting in our government bonds, mainly U.S. dollar and euro, durations around. I think the bulk of duration would sit around 6 and 9. And you can see that the yield has actually quite substantially increased in 2021. You would have probably a slightly negative yield actually in 2020. So 2021, the increase, a huge contribution in 2022. I think roughly EUR 200 million already per 6 months. And we are expecting EUR 350 million-EUR 400 million contribution from those inflation linked bonds in our 2022 numbers. And the green bar is really the expectation of the contribution at the end of the maturity. And there you can see already the expectation towards inflation. So the message here is, yes, there is a substantial contribution, as John Rak already alluded to.
And I think it's a very good, it's very good to have these inflation linkers in these days. And when I think you had that number there, John Rak, I think we started thinking about those, not only inflation linked bonds, but to hedge against inflation, I think back in 2008, 2009. And we in 2010 was it actually. Yeah. So, and we invested in 2010. And again, we've increased that portfolio in 2021, which turned out to be a good decision. So overall, that effect will, of course, will come down. But whilst we are growing, we will, of course, keep the pace and reinvesting in those inflation linked bonds going forward as well. So key takeaways, I think it's a fair statement that we, that our asset allocation with our Strategy 2022 have fared quite well through this volatile market.
Our portfolio has been quite resilient against any movements that we've seen, particularly when you look at the economic side, I think, which really provides a more useful picture on our portfolio. The performance has been very robust. The contribution, again, from our real asset has been very robust. Inflation linkers have helped. And again, long-term, of course, that will have a very positive effect on our earnings. And I think the main message here in terms of our strategy is really we have built up quite substantial dry powder. Yes, you can argue you have missed out some of the carry, but the development of the credit spreads with the long duration, of course, has way outweighed, overcompensated that effect. So we would be ready to reenter. The question is, of course, when.
When I quote our investment teams, they would have said, well, the tide went out and will come back later, as always. That concludes my presentation. Probably I'll hand back to you on any questions to moderate.
Well, thank you, Clemens, for your presentation. We go indeed straight into the Q&A. This time we start with the questions coming from the conference call. There is one from Thomas Fossard. Thomas. Okay. There should be the line is not open yet or any technical issues. We start with a question in the room. Darius.
Hi, I've got two questions. Darius Satkauskas, KBW. First question is on inflation linkers. Provided quite a nice benefit to your investment returns. I suppose if you look at US break-even rates, no longer the peak. So what do you track to help you decide on the right level of sort of inflation hedging on the asset side going forward? And at what point you start sort of thinking about unwinding some of the exposures you put in 2021? Second question is to Jean-Jacques . How far away would you say you are from hitting that glass ceiling? And then once you do hit it, do you think there could be a step change in your DNA? For instance, can you still afford to be as lean? Do you need some sort of consulting ability at that point and so on? Interested in your thoughts on that. Thank you.
Yeah. Thank you, Darius. On the first one, inflation linker, I mean, we always said it's not part of our investment strategy, actually. It's really part of our P&C risk management strategy to revisit our strategy every day as part of our risk management activities. So we would look at our exposure and see, have we grown substantially in which lines of business, in which currency have we grown, etc. And really think about how much protection do we want to have on our liabilities, on our P&C liabilities. That's the rationale behind it. There is some, when we enter, of course, the inflation link markers, there is some opportunistic element in there. I would appreciate that and say, well, prices are very high at the moment.
Generally thinking and speaking, I would say if we grow, when we grow, when we build up reserves, etc., we will also increase inflation linkers in the main currencies going forward.
Maybe I just add up here on the question related to the glass ceiling. It's a bit of a difficult concept, glass ceiling. This is highly psychological in essence. It's hard to say how far away we are at this stage. It feels a bit further away than I expected three years ago. I think we still have a very good path for organic growth. I tried to highlight a bit these areas of investment for future readiness, and they are very much related to that prospect of traditional business growth, which might be a bit more difficult because at some stage our shares on existing programs might be more substantial, limiting the growth upside. Innovation will be certainly the name of the game, expanding the boundaries of insurability, being brought into the type of structure we want to consider in traditional, but also in non-traditional structure.
Generally, I feel that the focused approach might gain traction, might be difficult to be everything to everybody. So I think with focus, we will, I'm sure, identify new areas of growth together with our clients. There might be one area, which is digital solutions, where we will need to establish new partnerships. And that will lead to new capabilities we need to acquire, in particular in the area of data analytics. But I think we're talking more the 5-10 year framework here. We are on the case. We're trying to build up capabilities. But I'm of the view that the operating model, the focused approach, the efficiency play will continue to be a source of competitive advantage also in 5 years, once Hannover, hopefully, will be leading the market and having very substantial market share.
So if I compare to, there was a bit of one of the concerns when I just joined in early 2019, and I'm a bit more comfortable when I see the wealth of activities we're having, the innovation potential we're having. So it's not a big concern anymore from my standpoint.
Okay. Thank you. We continue with a minute on this side. Oh, I'm sorry. lain.
Hi. Yeah. Iain Pearce from Credit Suisse. Firstly, on the real estate and private equity portfolios, could you just talk to us about the lockups that are in place there, what the liquidity profiles of those funds are, and if there's anything you can do to reduce the exposure there, given your view of sort of the expected valuation declines there. Also, if you could talk a little bit about how you go about valuing those assets and the regularity with which that occurs. That'd be really useful. Then the second one was just on slide eight in this section of the presentation on the capital adequacy ratios and the sensitivities to those, where you see the negative impact of the 100 basis point downward shift on the capital adequacy ratio, but then no change from the positive movement in the interest rate shift.
Could you just talk us through the dynamics of why you see the negative movement, but not the positive side, and if there's anything you can do in terms of hedging or exposures that might see you benefit more from rising rates on the capital adequacy ratio?
Yeah. Let me start with the first one, probably in our private equity and real estate portfolio, which, as you've seen here, has grown over time. I think probably a general remark on those portfolios is that our private equity portfolio, for example, has been growing really over years steadily. So it's not a very bulky portfolio that has been built up for the last years. It's really been there for 15, 20 years, etc. Yes, we have increased the exposure there, but it's highly diversified in all currencies, highly diversified in all sort of industries, etc. And it's all small tickets. So it's mainly funds. And I think that gives you, to some extent, the answer on valuations. The valuations are provided by those funds, of course, on a quarterly basis.
So there will be sort of, when you look at the values at the moment, a time lag probably of three months on the valuations. So they are provided, and we take those valuations, of course, and that's what you see here. Again, I would expect those valuations to follow increased yields. I do assume that we will see a decrease here, a slight decrease at least already in Q4, if not then in 2023. At the moment, I mean, we have huge hidden reserves, both on listed equity, sorry, private equity, as well on real estate. Real estate is a bit of a different picture. Those are funds as well, so indirect funds, but also direct funds, direct investments. But overall, again, highly diversified there as well. At the moment, again, roughly EUR 500 million-EUR 600 million of hidden reserves in our OCI only attributable to those portfolios.
So if valuations would come down at the moment, I think there's a huge buffer in our balance sheet to pick up some of those valuations that will come down. However, as you will know, under IFRS 9, those funds will have to be measured through fair value, P&L through fair value. That's a change in the accounting. So there will be some volatility. And I think I alluded to that already in Q2 when we talked a bit about ROI expectations in 2023. That would produce, of course, a drag on our ROI in 2023. That's why I was not too bullish, as you know, on the ROI for the next year. But that would be a one-off, I think, probably in the next year to come. So overall, I think that probably covers it a bit.
So, second question, I think it's really just the question of how you look at the quarter. I don't know the exact rationale behind it, to be honest, why I have a difference here. I think it goes back to the model, etc. And I think it's an only Q2 2022 view that you have a different picture here with parallel shifts up and down. But I will follow up on that question with our risk management.
Okay. Then we continue with Vinit.
Thanks. Vinit from Mediobanca. So 1 for Clemens, 1 for Jack, or 1.5 for Jack. So Clemens, just if you go back to slide 27 in my pack, but the one where you show the yields on the three, the new money, the yeah, this one. I mean, yeah, the Euro chart looks very striking. I mean, so could you just comment on what's happening there? Is that do you see I see some juicy opportunities there with the new money versus the risk-free being so far out versus the rest of the world. And any comments that you think would be enlightening for that? And if you want, I can ask a second question now or come back.
Yeah. No, happy to do so. Thank you.
Okay. The second was for Jean-Jacques. The comment you made on underwriting flight to quality probably has only gotten better for you because when you came back from Monte Carlo, we heard about supply reducing and those topics. So I mean, how far do you think this massive tailwind is? Is it big enough to combat inflationary expectations? So really, the nominal pricing could do whatever, but that's really the question from my side. And maybe Sven's presentation might deal with it, but I just wanted to leave that. And the half question for Jean-Jacques was that when we joined three years ago, one of the things I think you initiated was client interactions, and I think it's called Blue Box. So has this also been, I mean, do you measure some of that effect on the business?
Or, as Andrew asked about the growth, do you see, do you actually push people to that? Do you measure that? Or is it just a soft guidance to the company to just go and talk to clients more? Thanks.
Yeah. Winnette, to start with the first one, and you're perfectly right. I think the euro one stands out here, absolutely. First, when you look at the green bar, you can see that the ECB, and those are data, I think, end of August. I'm not sure how actual they are, but you can see that the ECB started later with the rate increases. I think that's some of the picture. One part of the picture here, and in terms of our reinvestment yield, you can see that we have started with our, let's say, sideline strategy to build up some dry powder, particularly in euro. So that's the result of our defensive positioning here in euro, what you see on the running yield. But that will pick up over time.
Very good. So I might take that just in case. So on flight to quality, Winnette, clearly the situation today is a bit different from the situation in Monte Carlo. I'm certainly convinced that the dynamics has changed in Monte Carlo. I said this is not a disruptive market. I think it will be disruptive in some of the segments. Of course, we have the U.S. market and the dynamics there, but there is a capacity crunch. So the bargaining power has changed, has shifted, and it might be more accentuated in some markets than others. I feel generally that there'll be a spillover. This is not only a nat-cat game. This will be a generalized movement. What I said also in Monte Carlo very clearly is that it's not only about capacity or offer and demand.
It's also about resolve and underwriting discipline because the shareholders of many companies want to see better returns, and the underwriting discipline needs to increase. There'll be a reluctance to allocate capacity if prices don't meet some of the benchmarks. For us, as an action plan, it's clear that we need to make sure that inflation is fully reflected in our pricing for the new business. This is the way to go. I would want to see some risk-adjusted positive in terms of the renewals. That's how we enter into the renewal campaign. That's the name of the game. I think we are in a position to do so now. If in individual cases, this will not be at par with our expectations, we'll take the right measures and keep our powder dry and not renew or only partly renew some of that business.
Clearly, the psychology of the market has shifted even more now after Ian than after Monte Carlo. I have the expectation that we see inflation fully covered and considered in the pricing of the business. Hopefully more. The market will dictate the outcome. I cannot do so. Maybe on the half question, the CRM, this was not really to send people to the customers because we're very customer-friendly. It was more meant as a way to support future growth of the company. I think at some stage, and we talked about that with Andrew's question on resources, at some point, our clients are becoming quite sizable. They are more complex. They are fully international, and we need to make sure that we grow with our clients. It's more to support the teams in connecting worldwide and putting together a virtual team in order to manage accounts.
The culture, the base is there. So it's not about the culture. It's very sound, very client-oriented. But the instruments need to be strengthened, and that's why we invested into CRM because complexity is increasing, and we need to respond to the level of complexity and to the size of the partnerships we're building. So I hope this is a response to your half question. Maybe one more point from.
Maybe just a question. Blue Box, do you want to have specifically? That's.
Maybe you misunderstood. Blue Box is more of a you can say what it is, but the CRM system we've put in place for our own use is called Conex. Blue Box is a different story. Maybe you can say something.
If you want, I can just 30 seconds on Blue Box. I mean, what is important for us is that we stay relevant for our clients. I always compare it with the electric window opener in a car. I mean, if you build a car and the car has no electric window opener, you can have the best car of the world, but you would say, "What kind of a car did I buy here?" But you didn't buy it because of the electric window opener, but still, it has to be there. Blue Box is our effort also into data analytics. So we need to be able to have an informed, intelligent discussion with our clients around data analytics. But again, we don't want to hire 1,000 data analysts, data scientists, IT guys with experience in artificial intelligence and machine learning.
We want to do this in a smart way. And this is our response, if you want, to this demand from clients to be able to have this discussion. And I'm not talking about clients like Allianz and AXA. I mean, they have enough data scientists. It's all the clients in the world to have an intelligent discussion with them, to provide them a service, but which is not resource-intensive. And that's Blue Box. And I'm happy in the break to explain exactly what we do there, but that's an idea which works quite fine. Yeah.
Well, thank you, Claude, for that bridge to the break. And we are breaking now for a coffee. So thank you very much, Clemens, for your presentation. Thank you for your questions. We will resume in about 20 minutes. So at 11:00 local time here. Okay, welcome back. Welcome back to the second part of the Hannover Re's Investors' Day, and thank you for being so punctual. The next highlight that awaits us is the presentation from Sven, and admittedly, the title "Insights into P&C Reinsurance" is not very catchy, but I think you will find there is a lot more interesting content to unpack. Without giving too much away, it will show you how we look at growth and pricing, and what that means for the outlook and for our business. Without further ado, I hand over to you, Sven.
Well, thank you very much, Karl, and thank you for announcing me as a highlight, so I don't have to make any comments on the boring comment, which I guess for P&C would also not be expected by this group here. So, a very good morning also from my side. I have two topics I want to cover today. I would like to give you a summary of where did we grow over the last few years, what are particular pockets of growth, and from there, what can you expect in the future. And in the second part of the presentation, I want to talk about how we are thinking about inflation in our pricing process, and with a particular focus on natural catastrophe business, where inflation and climate change trends are, of course, a major factor in the uncertainty of pricing when we look at those perils.
Let me start with the premium side. Jean-Jacques, in his presentation, already mentioned the strategy side and the sound foundations we are having, so therefore I will concentrate on the risk selection side and how you should understand that we try to build portfolios. Let me start by saying, first of all, we are not working towards any idealistic portfolio splits, so we are not starting the year by saying we want to have so much in that region, so much in that product line. This is not how it works for us. Our main criteria for deciding whether or not we want to write business is the strict adherence to our minimum margin requirements, i.e., all business we take on board is tested against the question, is this piece of business making our hurdle rates from a cost of capital point of view, yes or no?
The percentage of the business that we can technically assess, so through models and our own models, is pretty high nowadays. It's not at 100%. It will never be at 100%. Some pockets of business you write as a reinsurer are so small that you can't build any statistical evidence around it, but the absolute majority of the business is going through a technical analysis, and that really is the determining factor. Once a piece of business is making the hurdle rates, we are happy to write the business, and the portfolio that is coming out of it at the end of the underwriting year is therefore steered by the thousands of individual underwriting decisions we are taking, and not so much by a top-down approach on how the ideal portfolio should look like.
On the other hand, it's also true that once we have written business, it tends to be rather sticky, so a lot of the business we write in any new underwriting year we would also have already written in the past underwriting years. And as Jean-Jacques already highlighted in his presentation, most of our growth is actually coming from existing clients, so the portfolio is relatively stable, even though it's created by thousands of individual decisions on particular contracts. We have been willing, in addition to our traditional business, to also support some of the more innovative products over the last number of years. The most well-known of that is cyber. As I said earlier in the Q&A, this is now a EUR 600 million portfolio for us, so very meaningful.
But we are also looking at other lines of business like parametric solutions and digital solutions, so those businesses are still significantly smaller than cyber, but they start getting traction. And from that point of view, we are willing to also go into territories where you don't have all the statistical data you would like to have, ideally, in order to evaluate the technical quality of the business. But on the other hand, we also have, and that is on the left-hand side of this box, quite a few areas of business where, by design, we have limited risk appetite. We already talked about CAT a little bit in the Q&A, so we have de-emphasized CAT over the last number of years, particularly U.S. Wind CAT.
On U.S. casualty, you may remember the presentation I gave on an investor's day a few years ago, we have very bespoke risk appetite of the do's and don'ts of U.S. casualty business, so we are not a big fan of big whole-account casualty quota shares, for example. We like to underwrite that business really very bespoke, line of business by line of business. We are not in the Fortune 500 kind of business on a high-access basis, and we are managing the limits we are engaging very carefully, and that, of course, is a good protection against social inflation. There are also a few areas which we are not doing at all, so mortgage reinsurance, even though being asked dozens of times to start engaging ourselves in that class of business, it's still not a class we like to do, and therefore we are not doing it.
Other classes we have de-emphasized over the last 4-5 years, and an example of that would be UK Motor. With all the re-rating that happened after the Ogden rate change a few years ago, we felt that the repriced business, both on an insurance and on a reinsurance level, was such that we could continue supporting it in a few client relationships, but at the same time, we have discontinued many other client relationships. So that's a portfolio which we have consolidated over the last few years, and we are only writing excess of loss business over relatively high retentions in our traditional practice, and the only proportion of business we are writing here is on our structured unit.
I'm mentioning those details to explain to you that in the individual underwriting process, we are looking at our risk appetite at a very granular level and based on technical analysis when it comes to what is the right price and what is making our capital hurdles, yes or no. How did we develop over the last few years? You know that our five-year combined average growth rate was 15.9%. On this slide here, we've split that between traditional and structured reinsurance, including ILS. As you will see, we have only really started growing our traditional business in 2018 once we felt that the pricing that was achievable in the market, and that is expressed by the green line, turned into the positive territory, and over the years, it turned more and more positive, and hence, we felt more comfortable starting to grow in our traditional practice.
Initially, in the early years, we grew stronger on the proportional side than on the non-proportional side because at the time, the primary market reacted stronger when it comes to changing terms and conditions than the reinsurance market did. That changed over the last few years where the development on the insurance side was still positive, but we felt that the reinsurance pricing was getting stronger, and therefore, we emphasized our excess of loss portfolio more, and we also expect that trend to continue into the future. Over the entire period, the strongest growth came from our advanced solutions and ILS practice, but that was already explained by Jean-Jacques, so I don't have to go into the details here. If you're interested, here you can see the split of the premium between structured reinsurance and our ILS activities.
Both lines of business have a very attractive earnings profile for us because of the relatively low risk positions we are taking on the structured business and the almost zero risk position we are taking on the fronted business. So therefore, the amount of capital we have to put behind that business is low, and the returns, as measured by xRoCA, tend to be double-digit for both segments and even a little stronger on the ILS side compared to the structured side, but both very solidly in the double-digit area. From a regional point of view, sorry.
From a regional point of view, in line with our strategy, we have emphasized the growth in Asia a little stronger over the last 5-6 years, so that is well known to you, and it's still the smallest of the regions, but we can expect that the share of the Asian APAC business will continue to increase over time and will be a stronger proportion of the overall business. But at the same time, we also managed to have quite strong growth rates in the more established EMEA and America markets. So from that point of view, we have achieved very well-diversified growth from a regional perspective. Most of the growth came from existing long-term partnerships, but overall, you can say, despite the fact that we have more than doubled our premium over the last 6-7 years, the mix of the portfolio has remained remarkably stable, actually.
So that is very important for us because diversification is one of the main drivers when we think about how to write P&C business in the most capital-efficient way. Slightly different picture is seen on the specialty side. Historically, we've always been overweight in the specialty classes, so very often, we have double-digit market shares in the specialty classes. And here, it took until 2019 before we really started to grow again. In the early part of this six-year cycle, we felt that the pricing was not good enough yet, so there were a few corners on the specialty side where we have actually actively reduced our market share, like in aviation reinsurance, for example. So the pricing here and the improvement of terms on conditions reacted slower compared to, for example, property reinsurance and casualty reinsurance.
Overall, still a very important part of our overall business, and in case our assumption is right, that we can expect a very good market for at least the next one or two underwriting years, this could be a potential area where we may decide to grow our market share again and build on the already relatively strong position we have. And that would be particularly true for marine and aviation and for the facultative business. I expect the agricultural business to stay relatively stable, and credit and surety we have already developed such a strong market share that from a risk appetite point of view and in the economic cycle we are in, this line of business would not necessarily come to mind that we want to grow into a recessionary market when one of the main topics you are covering is insolvency risk here.
But marine and aviation and facultative could be good growth factors for us in the next two or three years. So some of this was already covered when we had the Q&A, and we talked about our risk appetite for net cat. Here you can see that for the first five years of the period under review, we have actually kept our risk appetite rather stable on the natural catastrophe side. So we here use the KPI of our net cat budget and are showing to you what were the annual budgets for net cat losses in those years.
Only in the last two years, there was more significant growth with the biggest jump from 2021 to 2022, which has to do with the quality of the original pricing of the business and, of course, the fact that we have decided to buy slightly less retrocessional coverage than in the previous years because we felt that this was economically wise to do so. But nonetheless, if you look at the growth rates here, they are considerably below the growth rates we have for the premium side. And so therefore, you can see that through an active cycle management, we have only grown less than proportionate when it comes to our natural catastrophe risk appetite. And this is something you can also expect to see from us for the next years to come.
Despite all the opportunities we may find on the pricing side, but there is no real desire to significantly take much larger risk positions on the natural catastrophe business. The way we are writing natural catastrophe business is very often to be seen in context with the overall client relationship we have, so we take cat to support the client relationship. We have relatively little risk appetite to look at net cat risk on a standalone basis without any supporting business from that client also in the future. From a profitability point of view, you know that we have outperformed our ex-Roker target, so I will not dwell on the left-hand side, but maybe the right-hand side is an interesting picture for you because here we are showing not volume adjusted, so just on face value, the performance of our individual underwriting centers over the last 10 years.
You can see that if you look at the left-hand side of that chart, we make mistakes as well. I mean, we also have pockets of business where at the end of the day, despite all the efforts, we are not making our hurdle rates. You can see that the right-hand side is much more populated, and that's why diversification in our view is so important. As long as we have significantly more lines going to the right, you can tolerate to a certain extent also a few lines going to the left. In bulk and in summary, the right-going shots heavily outperformed the not-so-well-performing lines of business. Of course, we do everything to move them to the right as well.
We wanted to show you a true picture of how the business has performed without disclosing too many details, but this I think is a good illustration of the diversification in our portfolio. The strong demand we had over the last years was fueled by two things: the underlying exposure growth, but also the increasing amount of losses coming with it, particularly on the natural catastrophe side. On a forward-looking basis, we expect that the insurance market over the next 10 years is going to grow even stronger compared to the previous 10 years. From that point of view, we can expect that we will be able to grow with our clients. There are also a number of drivers for additional reinsurance demand, and we are only naming a few here on this slide.
So climate change, the overall geopolitical environment, and of course, the fact that in particularly the emerging market environment, there are still a lot of countries where the local ceding companies are looking for their reinsurance partners to help them with know-how transfer in order to increase the insurance penetration in their local markets. And that, as you know, is also a good part of the logic behind our APAC strategy, that this is exactly how we want to position ourselves. So therefore, we would say that we can remain very, very bullish and reconfirm the medium outlook we gave to you. I think it was last year's Investors' Day that for the P&C business group, we do actually expect that we will be able to grow by more than 7% over the medium term. The pricing environment is going to certainly be very helpful in that sense.
Here you see the summary of what we reported to you from a risk-adjusted rate increase point of view since January 2018. As I said earlier in the Q&A, we expect that, of course, given what's happened in 2022, the reinsurance pricing momentum will see some acceleration. We do expect that to happen across product lines and regions, but of course, with the strongest development of risk-adjusted rates in property cat given the losses of this year. Yeah, with that, I would come to the second part of my presentation. The chart in the middle is giving you an idea on our ordinary way of how we are pricing the business from an experience point of view. We start with the expected losses based on historic development, which we are then inflating to today's level and into the future, depending on the tail of the business.
On short-tail business, 3-5 years into the future. On some of the long-tail business, 20-30 years into the future. So inflation can be a significantly major component of the pricing. Then we are discounting for the fact that in a reinsurance transaction, particularly for excess of loss business, you get the premium first day, and it takes a long time to pay out the losses depending on the class of business. So we are earning some interest on that business, and we are using the risk-free interest rates for discounting here. This is giving us a present value of expected losses. Then we have to add the expenses that are associated with that contract, so for example, brokerage or ceding commission. And finally, we are adding our margin, and our margin is made out of three components. It's our own costs. It's the cost of retro.
If the piece of business under review is subject to retro protection, of course, it has to earn the cost of that retro protection as well. And finally, our cost of capital. So this is how we price every business. And over the last 1.5 years, we've often been asked, "Okay, give us an idea about how much you have increased your inflation expectation." And my answer to that was, "Well, we are using 384 different inflation indices when we are pricing our business." It's rather difficult to answer that question in one sentence. So we really dig deep here by currency, by country, by line of business.
On top of that, particularly for the Western societies, we are also using the concept of super-imposed inflation on top of that in order to cater for some trends which we cannot find from inflation statistics, like longer life expectancy on bodily injury cases if you have to pay an annuity, things like that. So this is our general approach. In view of the time, I will be very quick on this slide because it's only giving an idea how the construction cost on single-family dwellings has developed both in the U.S. and in Germany over the last 10 years. And it will be no surprise for you to see this very spiky development over the last two years, which of course is a mixture of various underlying components. So it's price, it's today's regulation.
So if you build a house today, it's more costly than building it 10 years ago for energy-saving regulation and other changes in regulation. Of course, the ongoing supply chain disruptions, which we still have in the post-COVID time, is also fueling that development of construction cost development. How do you have to think about how will we look on an individual program when we have it in front of us for the 2023 renewals, particularly on the natural catastrophe side, and how do we then think about inflation and what to cater for? From this slide, which is a little busy, but it is a three-step process. The process starts with us evaluating the exposure information that is provided to us by our ceding companies.
So the first question we're asking ourselves, in the year since we have last seen the exposure information, has our ceding company adjusted their underlying development of sum insured sufficiently for the inflation that has already happened? So let's say our inflation assumption a year ago was 12% going into the year 2022. We then see, and that's the example we are showing here, that the sum insured has only increased by 8% and that the portfolio was not stable, and it actually grew by the number of risks by 2%. And there's obviously a gap between the 12 and the 8 we are seeing plus the fact that they have actually grown their exposure base by writing more risks.
So in this very simple example, in the first step of the process, we would find that the ceding company that has provided us with that information has underestimated the inflation that has already happened by 6 percentage points. And the second step, we then ask ourselves, "Okay, what can we expect from a growth point of view as far as number of risks is concerned? Is this a static portfolio? Is this a portfolio where we can expect a reduction in risks or actually an increase?" And in the example that we are showing here, we are expecting a 3% growth in the number of risks that we are supposed to cover in the net cat program in question here. And then in the final step, and only in the final step, we are thinking about future inflation.
For short-tail business, it's a little easier compared to long-tail business because for the long-tail business, we have to think more about the geometric mean of the payout period over maybe 20, 30 years. So the short-term inflation spikes we may see for a certain period are important, but they are not the main driver. For short-tail business, it's relatively simple. I mean, you are very, very close to the actual reported inflation or the forecasts that are available for the development of, for example, building cost. But in this example, we have picked 6%. And if you add it all up, or actually if you multiply it all up, you see that in a renewal like this, going into the 2023 year, we will adjust the underlying exposure base as presented by our client by 16%, which of course is very meaningful.
If we are going to report to you then in the renewal call in February about risk-adjusted rate increases, those risk-adjusted rate increases will be over and above these kind of numbers then. I hope that makes it a little clearer on how we are using inflation in the underwriting process. Then finally, what I also wanted to share with you is how we are dealing with climate change in our modeling. I will not go through the list of things on the left-hand side, but we have embedded for a longer period the topic systematically in our modeling and risk management stress test landscape and modeling landscape. Over the last years, we have significantly increased the coverage we are modeling, as you can see by the number of country payroll combinations on the upper right-hand side.
You can also see that all of our main scenarios are fully trended for climate change and that the degree of modeling is more of 90% of that business where we exposed to the top 10 scenarios. The most important message is really in the last sentence on the right-hand side where we are saying that all the random models we are using are adjusted for our own view. These, of course, are climate change trends which we are also adjusting for. That's the very reason why if the entire industry is using the same vendor models, different market participants can have very different views on price adequacy and risk appetite depending on how they deal with vendor models. We are scrutinizing them heavily. We are validating them yearly.
And our answers after that validation exercise are more conservative than just buying the vendor models off the shelf. But that really is an important message for us that it's fully embedded, this topic, into what we are doing in modeling and pricing, that it's a well-established process, and that we are not following vendor models blindly. Okay. Yeah, with that, I'm coming to the end of my presentation. Thank you very much for your attention. And I hope I could demonstrate where we have grown, why we continue to grow profitably, and how we are dealing with the topics of inflation and climate change in the pricing of our business. Well, thank you very much, Sven, for your presentation and your food for thought. And I already see a number of hands up.
But this time, we try again, starting with the participants from the conference calls to encourage them to ask questions here as well. And the first question is coming from Thomas Fossard. Oh, yes. Good morning, everyone. Good morning, Jean-Jacques, and good morning, Sven. Two questions to start with. The first one would be, I would like you to comment a bit more on the data quality you're getting from the clients. It seems to be this year or for the next year, renewal is going to be of a specific focus.
But I mean, how can you make sure that actually the clients are enough transparent with you on how they're underwriting their book, what is the kind of pricing they are expecting to pass next year in order to match inflation, in order for you not to be in a situation of missing previous inflation as you quoted in your slides? That would be the first question. And maybe the second question to relate your presentation with Clemens's presentation earlier.
I was wondering, this drop of EUR 5.5 billion in OCI, so the drop in equity year to date, I guess that you're managing your business on a purely economic basis. But does the reported drop in the reported equity create any constraints for you in terms of capacity, in terms of ability to write some businesses, or that's completely neutral? Thank you. Yeah, thank you very much for those questions.
I mean, the data quality we receive from our clients varies from region by region. I mean, you get very, very sophisticated data, for example, out of the U.S., where everything you do on the natural catastrophe side, you would get geocoded information of the various locations. And we are very confident that the quality of the data will stay at least at the level we have found when we last looked at it. I mean, a little bit part of your question you implied, it could be advantageous for the ceding companies to maybe don't give us a full transparency. We have no concerns that this is going to happen. I mean, they are also very interested in long-term and transparent relationships. So this is not only one-way street.
Yes, of course, they are expecting, depending on what you are writing and where you're writing it, different degrees of rate increases. But it's not going to help their case if all of a sudden, two years down the line, the exposure profile looks completely different because they sort of did forget in updating us 12 months prior that that's not happening. And in our business, it would actually also be a reason why we could decline claims if we were misrepresented on the representation of exposure information. This is certainly something which we are not expecting. On your capacity and OCI question, yeah, there are various levels how to answer that. In general, given the strong solvency position we are having, it's not a major impact for us. On the other hand, but that's more currency and not so much interest rate or spread related.
We, of course, are a Euro company. So when we define our risk appetite, we do define that in Euro. And if the vast majority, or at least a very high proportion of your business, you actually write in US dollar, then, of course, the usage of Euro risk appetite limits has certainly not improved given the currency development and the strong appreciation of the US dollar. But we are a strongly capitalized company. So with very few areas, we will be able to deal with that and not be restricted in growing our portfolios.
And the two areas where we are going to continue self-restricting us, self-restricting us, as I already mentioned earlier, US wind exposure and cyber, where US wind will grow a little bit, but certainly much less than proportionate to the rest of our cat book, and cyber will stay put from a risk appetite point of view. Okay. Thank you. Many more hands are up now. So we start on the right-hand side with Freya. Then we continue with Darius and Kamran. Hi. Good morning. Freya Kong from Bank of America. This year, we've seen quite a lot of loss creep on events that have happened late 2021 and earlier this year, like the Australian floods, French hailstorms. What, in your view, is driving this phenomenon? And is this something that might persist? Is this something you're concerned about?
And second question is, there's little doubt that we will definitely see significant risk-adjusted rate increases next year. But how are you thinking about it in terms of scope for further margin expansion from here? Or will these price rises be assumed to fully offset the higher claims inflation you're seeing? So you're simply defending existing margins? Yes, thank you. Let me start with your second question. We do expect risk-adjusted rate increases more or less across all product lines or regions. So the answer is yes. We do expect that the pricing that is available for reinsurers will compensate and overcompensate inflation when we are renewing the business. We do expect, unlike last year, that the property losses we have seen, whether they are coming from creep or the new losses in this accident year, will also have a meaningful impact on client relationships.
So they will have an influence also in other classes of business, like, for example, casualty, particularly given the scarcity of natural catastrophe capacity, as you can read more or less on a daily basis in the trade press. So from that point of view, I think those reinsurers that continue to have a healthy and maybe even growing risk appetite for natural catastrophe business will, of course, try to leverage that position also on other placements in a relationship with a client. From a loss creep point of view, yes, you're absolutely right that this year has seen a lot of loss creep. And there is a variety of factors here. When you think about the 2021 losses that saw creep in 2022, here's really a question of underestimating the inflationary environment and also the supply chain situation.
So when you, for example, look at the winter storm in Texas, which happened last year, the reason for that loss creep is not that all of a sudden the insurance industry has to pay more losses in sense of number of losses. That kept relatively stable. But the average amount of losses per claim significantly was over and above historic averages or expectations. And yeah, the insurance and reinsurance industry underestimated the per claim increase in the average claim that was coming out of that claim. A few other loss creep situations can be explained differently. If you look at the drought losses coming from Brazil, I mean, drought loss develops over many weeks and many months. So towards the end of last year, it was clear that weather conditions are producing a drought in Brazil. It was not clear how long that drought condition would continue.
If it had rained like normal in the first quarter, then the losses would have been much less severe, but it didn't. So that was a claim in progress, I would say. So it was impossible to know at the end of the year how that will develop in 2022. And other loss situations like the French hail losses, I would say, the losses happened relatively late in the second quarter. So I don't think that the insurance companies had a full view of what had happened at that time when we all closed our books for Q2. And therefore, the full picture only, yeah, showed itself during the course of Q3. But I'm less concerned about the development like that because that's only from one quarter to the next quarter.
Of course, particularly on new losses, you learn a lot in the first two quarters, and you don't learn everything in the first quarter. You also learn something in the second quarter. I'm more concerned about developments like the Texas winter storm because that kept giving for 5 and 6 quarters in a row. And that, of course, is not satisfying. Darius? Just one question. Could you go to slide 5, please, in your first part of the presentation? It's a slightly difficult question, but if you just try to sort of isolate inflation, if you were to look at the change in expected return above cost of capital, knowing what you do know about inflation trends in that period, do you think that that sort of trend would still be upwards, irrespective of the cats, etc., we've seen in the period? Just inflation. Yeah.
I mean, we are not going through that exercise. I think I explained that in this February's renewal call, when a similar question came up, the curve would be flatter, but it would still be positive, would be my best guess, if we were to go through the exercise in repricing all that business again with the knowledge we have today. Okay. Cameron. Hi. So it's Kamran Hossain from J.P. Morgan. Two questions. The first one is just on, I guess, wider kind of reinsurance pricing trends. I think it's clear why NatCat pricing has to go up pretty much in all regions. We've seen losses in all regions this year. But why should pricing in other areas go up? I assume that some people will exit NatCat again. They'll have to redeploy their capacity elsewhere. So why kind of do you expect a kind of wider pricing turn?
The second question, coming back to kind of Freya's point about risk-adjusted pricing and how we might see this come through, do you expect the kind of risk-adjusted pricing to be higher than last year? So would you expect to see a positive kind of effect there? Or is it just that nominal pricing will be higher and risk-adjusted pricing might look kind of a similar level to last year? Thanks. Yeah, thank you. Again, let me start with the second question. The answer would be yes. I would expect an acceleration in the movement of risk-adjusted pricing over and above last year for various reasons. I mean, A, the volatility we have seen again. In addition, we now have a lot of geopolitical instability.
Thirdly, inflation is staying longer at peak levels than was expected 12 months ago, which is also leading me into the answer for your first question. A, we had a lot of volatility in specialty classes. I mean, just think about Ukraine and casualty classes as well with individual losses.A& B, particularly on the long-tail classes, at least we, and I guess the entire industry was working on the pricing assumption that the peak inflation would only stay for a rather limited period, that inflation would then fall not to historic levels, but significantly lower than the peak. That has not happened. So when we reconsider what is the geometric mean we have to expect, this will have an influence in how the industry is looking at inflation on the long-tail classes.
So I do expect that, and for us, I can tell you that we will work with higher inflation assumptions for the long-tail classes than we did last year, not dramatically, but nonetheless. You, of course, have to be mindful that if we talk about inflation here, we are talking about inflating things 20, 30 years into the future. So even if you only adjust your inflation assumption behind the decimal point, this has a major effect in pricing, for example, casualty excess of loss business if that tail is 20-30 years because you do it for every year. So you have a multiplying effect here. Okay. And we have another question from Ivan. Hi. Thank you very much. It's Ivan Bokhmat from Barclays. Two questions for me. One, I think my colleagues have already asked it in one form, but I'll try to apply another one.
So considering the rate-adjusted increases that would also accelerate, if we were to look at this in the most simplest way on the combined ratio targets, is it something that this 96% should be expected to go down for 2023? And if not, what would be the major drivers? Maybe one of the sub-questions here would be you've also mentioned that the retro availability might be different. Would that need to bring with itself a change in NatCat budgets? Thank you. Well, I'm afraid I mean, we are not talking about guidance for 2023 today. So from that point of view, I could only give you the same question that I gave over the last two years. I mean, a good path and an overproportionate path of our growth, as you have seen, is coming from our structured business.
We have the expectation that the structured business will continue to grow stronger compared to the traditional business also into the future, which, of course, is not producing 96% combined ratio but higher combined ratios. And we do have to expect that the cost of our protections, and we talked about our view on retro already, is going up as well. This is not going to eat up all the price increase we are going to get, but it will eat up parts of it.
And then, of course, we will also, given the growth we have shown this year, have to cater for higher risk appetite in natural catastrophe business from a budgeting point of view. So from that point of view, as I stand here today, I would say it's more likely than not that in an IFRS 4 world, that the combined ratio target would be rather similar.
You know that we have the policy to not change that target very frequently. We were at 96% for a very long period. Then we adjusted it for a few years given the structured reinsurance growth to 97%. And now we are in a period again where we are at 96% and are minded to keep it at 96% but deliver on the 96%. And that, of course, is our main ambition that after a number of years where we were not at 96%, that we deliver on that target. I mean, that's the most important going into 2023. We still have a few requests to speak left, but unfortunately, owing to time constraints, we only include two more questioners now. We start with Andrew and continue with Ashik. Hi. Andrew Ritchie from Autonomous. I think these are quick ones.
First of all, you showed a slide using the Verisk or AIR numbers of $123 billion AAL per year. I appreciate the underlying exposure of the Verisk model might be different from Hannover, but would you say that would mean within your large loss budget, you could tolerate all the things being equal, that kind of level of annual average loss? Because obviously, it's a lot higher than what we've actually seen. Second question, it's a quick one. On a quota share, for example, a very large U.S. personal lines carrier that might be based on the West Coast where you were a participant, that quota share has a lot of mechanics in it to do with things like catastrophe loss caps and sliding scale. Would you count that as structured solutions or traditional business? Because it strikes me as a hybrid of the two.
The other question, this is probably a stupid, simple one. Given your indexing exposure up 16%, if pricing was flat, all other things being equal for short-tail property business, your premiums would be rising 16%, and your cat loss budget would be rising 16% as well. Is that the right way to think about it? Okay. Let me start with the second one because that's the easiest. I think I know which client you are meaning. So if that assumption is correct, we are writing that into our traditional business because there is too much risk transfer despite those structures to consider it in our structured unit. So where would the cut off if the cat loss was a bit lower or something? Or is it because the cat cap, sorry, was a bit lower or the size of the cat cap? Yeah.
If that structure was on a non-cat deal, let me put it this way, then we would write it into structured. But as it is full of cat, we write it into our traditional unit. On your Verisk question, my answer would be, on average, yes to both of those questions. But of course, we can have scenarios where we are exactly at 121. But given how the losses have exactly fallen, we may be way above, maybe low. But on average, I can be affirmative when it comes to those two questions. And Andrew, sorry, can you, because I didn't have time to write it down, remind me of the third question? The 16, I mean, if pricing is flat and the client buys the same amount, whatever, all the things being equal. On the premium side, you can draw that analogy.
On the exposure side, that is not necessarily the case because we are talking about excess of loss structures here, and I was talking about ground-up exposures. So this can translate differently into excess of loss situations. If the exposure was just attaching to a layer and it stays in that layer even after that 16%, then for that one layer, you would be correct. But of course, ceding companies tend to buy cat protection over a multitude of layers. So it may have no effect on the lower layers because they were already fully exposed before we even did the 16%. And it may have a lot of effect in the middle to higher layers if the exposure is growing into that layer. Ashik. Thank you. Ashik Musaddi from Morgan Stanley.
Just one question on that inflation where you broke into three layers, and this is specific to the third layer. Now, if I'm not wrong, what you mentioned is the way you think about prospective inflation is you just take what, say, ECB is saying, and you use that in your inflation expectations. Would you say that there is a risk that currently the inflation is expected to come down to 2% in, say, 2024, if I'm not wrong, or 2025? So if we use that kind of high inflation for a year or two and then coming down directly to 2%, we are being a bit over-optimistic on inflation in case you are using that, or are you putting a load on top of that in your own models, or you're just using that same ECB projections? Yes, a little bit like what I said about the Wendler models.
I mean, we, of course, would take the ECB forecast as an input, but it's only an input. We would form our own view. And in the example you just mentioned, them going down to 2% in a very, very short period of time, I can guarantee you this is not what we will do. So we have much more moderate expectations on how inflation is reducing. So from that point of view, particularly for the short-tail business, we do those adjustments. On the longer-tail classes, as I said, it's a little more tricky. For the Eurozone, for example, we do understand from the ECB that they are measuring or that their policy is going to support a certain inflationary target. Of course, we would be minded to think that over a longer period, this is a relevant number for us.
So therefore, the tail of our inflation expectation, those forecasts or those policies would have a more meaningful impact on how we are thinking about inflation compared to short-tail business, where the inflation is right in your face and where you can also see that, of course, part of what the ECB is saying maybe is also market-related and making certain that the markets are behaving rationally and not irrationally. So from that point of view, we take it with a pinch of salt. Okay. Well, thank you very much for your presentation. Thank you very much for your questions. I'm really sorry that we could not answer all your questions. So there are still a number of hands which were not been able to ask a question. But we have now lunch, and there is probably also a good opportunity to ask the question directly then.
So we will now break for lunch, and we will resume 10 minutes before 1:00 P.M. for the presentation of Claude. Welcome back, everybody, and thanks for being so punctual. We are already one minute before the scheduled time, so that's over punctual. Before we go into the presentation, I would just like to draw your attention to our feedback questionnaire because that is very important for us to improve continuously our work, and we really highly appreciate your comments and suggestions for improvements. And that's where we learn the most to really improve our work. You will find the QR code on your nameplate on the backside of that, and additionally, I will send the access to that questionnaire tomorrow via email. After this prelude, we can now dive straight into the presentation of Claude. He will, no surprise here, talk about life and health.
Claude has given some remarkable presentations in the past few years, and I'm sure he will be doing that this time as well. He will be talking about the pandemic and what conclusions might be drawn so far, but that's enough from my side as a lead-in, and with that, I hand directly over to you, Claude. Yes, thank you, Karl, and welcome back. As you have maybe noted, I'm a little bit sick today. I was in Egypt last weekend in an industry conference and had to give a chap there, so I could not go to Egypt, so I was there. Egypt, as you know, is now very hot outside, very cold inside, so I got a cold. I did a COVID test, of course, this morning, and I'm negative, so everything is fine. This is maybe the introduction to the topic today.
It is our response to the COVID outbreak. I might be coughing from time to time, so I'm sorry for that. I might need to clean my nose maybe, so that's just what it is. Sorry, guys, I cannot change it, but we will go through that together, yeah? Okay, so two things I'm going to talk about. First of all, I would like to show you that the pandemic was not really a surprise. Maybe if you think about it, who in this room would have thought three years ago that the pandemic would never occur any time in the future anymore? Probably nobody. Oh, you, yeah, okay. I would say nobody. We all knew there is a high likelihood, a high likelihood that the pandemic would occur again in the future.
So I'm going to talk about that, and then afterwards show you what the impact on life and health business was of this COVID outbreak. So again, I mean, if you look into it and look a little bit into the past 100 years, I mean, there were so many pandemics. And looking just into 1918, when we had the Spanish flu, which killed, I think, 50 million people, massive. And then you had other pandemics in between. You had the swine flu, you had SARS, you had the Hong Kong flu, you had the Asian flu, and then at the end, you had COVID-19, of course, which also killed roughly 6 million people. Now, looking into these pandemics, of course, you need to understand that they're all very different.
If you take the Spanish flu, 50 million deaths, and you see that 99% of all the people who died were below the age of 65. If you compare this to our COVID-19 pandemic, you see that 13% of the deaths only were below 70. Now, there is one easy response to that. The life expectancy in 1918 was 25 years less than it is today. At that time, as you all know, it was between 55 and 60, and today it is between 80 and 85. That's one of the reasons, of course, but there are many, many other reasons why these pandemics are all very, very different. One thing is sure: we all knew a pandemic would come, and of course, we also prepared ourselves for this pandemic to come. Maybe a few figures here, but that's just statistics.
Again, on the COVID-19, we had roughly, and these were the figures in the half year. They have increased a little bit since then, of course, 550 million cases. We had 6.3 million deaths. Today, I think it's 6.5 million deaths, as far as we know. We know that the statistics are not complete, of course. You see then on the second graph here, you see how these deaths developed over the time, over the past 2.5 years. And you see then on the next pie chart, you see the regional development of these deaths. And one thing which you see there clear is Africa with only 4%. Of course, that's probably not true. We don't have all the statistics around Africa. If you look into Africa, look into South Africa, South Africa alone would make up already 2%.
So 4% for the whole of Africa is probably a little bit underestimated. The other regions, I would say, they're pretty well represented here. So that's what happened. So I told you at Hannover Re and any professional reinsurer, life and health reinsurer, has been prepared for a pandemic all the time. And the first reason, which is the first proof of the fact that we have been preparing a pandemic, is our internal model. I mean, look at our internal model. We started to launch it in 2008. It has been certified in 2016, and the internal model has calculated a pandemic capital of more than EUR 1 billion. So why would we hold a pandemic capital if we don't count it as a pandemic? So it was always clear to us that a pandemic would occur and could occur.
The problem, of course, is always you never know when and don't know how and how strongly, et cetera, et cetera. But the fact that the internal model is caring about the pandemic, is talking about the pandemic capital, is already a proof that we were preparing ourselves for a pandemic. So that's the first one, and I'm going to go into the internal model a little bit deeper afterwards. The second proof is that, of course, we have also thought about the pandemic. Jean-Jacques was mentioning it before. We bought an extreme mortality swap. We bought it for the first time in 2013, and we continue to buy it. We bought seven additional tranches, and I will go into detail afterwards of this one also. So why did we buy it? Well, first of all, it was because of capital relief, of course, in the internal model.
That's one of the reasons. But the second reason was, of course, also that we knew that the pandemic could occur. Well, we didn't think the likelihood would be very high, but we knew it could occur, and that's the reason why we bought it. So that's on the life and health side. Maybe just one more comment, and that might sound a little bit weird, but even in a pandemic where everything goes kind of into the wrong direction, we have seen that. We had losses in P&C, we had losses in life and health, we had losses across various lines of business. Even in a pandemic, diversification is key and can help you go out of it. Because first of all, as you have seen probably, the P&C losses, they occurred in 2020, Sven. They were suffering quite a bit in 2020.
Whereas the life and health losses, they came, and I will show it afterwards, they came in 2021 only. You have already the time difference between these losses. That's one thing. Of course, you have the lines of business I was already mentioning. That's also clear. Not all the lines of business have been hit in the same way, and some lines of business, and we'll see this afterwards, have not even been hit at all by the pandemic. That's very important. Then the geographic split. If you look into the pandemic into COVID-19, you perfectly remember that we had various outbreaks according to the geography. So in the south, the outbreak was probably in summer when we had our summer because it was their winter, whereas in the north, it was during wintertime. So you had, again, you had diversification all the time.
So diversification size helps even for something like a pandemic, and that's quite important in my opinion. So let me just go into the two topics I was mentioning on the top here, which is the internal model and the extreme mortality swap, and use for each of them one more slide to go into that. So this is the internal model, and let me start maybe on the lower right part of this slide. Many of you, you have maybe been with us in 2014 when we were doing our Investors' Day. I don't know who was there. I mean, at least, yeah, you see, at least 50% of all of you. And I'm absolutely convinced you remember my presentation of then where I was talking about the VNB, the value of new business, and you're nodding. That was quite a good presentation, I must admit.
This is one slide out of this presentation that I would like to show you again. You remember what we did? I explained to you how the internal model is calculating the economic capital that we need for each line of business. What we said at that time, we said that we would look into each single risk, and we would look into the statistical distributions of each single risk. Out of these distributions, we would then take a random selection of parameters, inject these parameters into our portfolio, and then look into how the portfolio would develop over time using these parameters. This is how the portfolio would develop. You see it would be positive in year one, et cetera, et cetera, et cetera.
What we would do then on the life and health side, you know everything is long-term, you would calculate the present value of these positive results, and this is what we would call the present value of future profits. Then we take this scenario and we put it down here, and we would start then to do this 10,000 20,000 times. We call this stochastic simulations. Stochastically choose the set of parameters out of these distributions, then calculate again the PVFP and plot it down there. What you see here on the bottom right of this slide, you see now the distribution, the probability density function of the possible results that Hannover Re Life and Health would have with all these scenarios that we have been calculating.
The capital that we need is simply the 0.5 percentile, or we often call it the 99.5 percentile, so the one in 200 years event. This is what we're showing here. This is the capital that we would require then for these parameters that we have been simulating. And now we do that, of course, for all the risks, and we do the same exercise also for the pandemic risks. And that's the way we have been calculating in 2019 the pandemic capital I was explaining to you just before of a little bit more than EUR 1 billion. So that's the way it goes, and I don't want to go more into detail of that. Last time, I was talking for half an hour about this. Now it's two minutes. Sorry, guys.
So out of this and out of these various single risks that we're looking at, you see on the top left side of this graph, you see now how important, how much economic capital we have within Hannover Re Life and Health we have for the various single risks. And you see that the most prominent risk that we have is mortality. Mortality is clear, and then it is followed by disability, morbidity, longevity, and only then comes what we call the catastrophe risk, which is, in other words, the pandemic risk. So the pandemic risk is smaller. The capital, the pandemic risk capital is smaller than all the others. So that's on the life and health side to give you a feeling on where we stand there.
And then I also wanted to show you on the bottom left side of this graph, I want to show you also how this capital that we hold for pandemic compares with other scenarios that we're calculating on the P&C side. And you see here a few scenarios: Hurricane US, Earthquake US West Coast, Earthquake Chile, Winter Storm Europe. You see how these relate to each other, just to give you a little bit of a feeling on how much capital we hold for a pandemic. So this on the internal model. The next slide I would like to spend a few moments on is the extreme mortality swap that we have bought. And this is quite an interesting beast in my view. So first of all, what is the risk that this extreme mortality covers?
The extreme mortality covers any kind of extreme increase in the mortality for whatever reason in our portfolio. So it does not cover only pandemic. It would also cover any other things which make mortality increase substantially. So that's the first thing. The second thing that you need to know is that this cover is not paying for the real claims that we pay at Hannover Re, but it is an index cover. And it is an index cover which hopefully represents our real claims that we're going to pay in as good a way as possible. So the way we do that, and you see this on the bottom left side of this slide, the way we do it is we take the population mortality which is coming from the U.S., from U.K., and from Australia, and we look into the age band 18-69.
This is the way we do that. So this is the index we're calculating. In addition, we weight this index with our real exposure in the portfolio. So we don't just take the index like this, but we weight it with the real exposure in our portfolio, and we think that this index is a good representation of the real risk that we're incurring in case of a pandemic. So that's the way we look into that. And now comes the more interesting side, which is how does this extreme mortality swap work? So let me give it a try. So what does this cover really do? So for a given, and don't try to understand this yet. I'm going into detail afterwards, but just listen to me this time.
For a given tranche of five years with a given capacity to cover pays 10% of the capacity for every percentage point that the observed mortality in a certain measurement period exceeds 110% of the reference mortality. It's as easy as it is. I think you have all understood what I wanted to say. So now, having that in mind, let's check it out here. So just an example, three tranches. Let me take the first tranche, which is the green tranche 2017. In 2017, we bought a capacity of EUR 96 million. First of all, I have to say that the measurement periods are always two-year periods, so we don't take the period in one year. We take two-year periods so that the index is less volatile. So that's something that we just have to keep in mind.
So we bought a tranche in 2017 from 2017 to 2021, and the reference mortality was the mortality we have observed in 2015, 2016. That's the square with the R. That's the reference mortality for the tranche 2017. So what do we do? In 2017, we checked the index. We checked how does the mortality compare in 2017 compared to 2015. And what you see on this graph is if the reference is 100%, the mortality in 2017 did not change too much. It was pretty much around 100%. What happened one year later? We were still on the green dots. The mortality didn't change too much. There was no pandemic. Nothing to say. Then afterwards, in 2019, 2020, the pandemic started to kick in. So you see that the mortality moved up to 105%, still not above 110%, so nothing happened at that time.
You see then afterwards in 2020 that the mortality moved up above the 110%. Today, we believe it's an estimation. It's around 115%. So that's where the mortality kicks in here. Now comes what I said before. If at the end, the mortality was really at 115%, what would we get out of it? We would get out 50% of our capacity. So if it stayed at 115%, which is 5 percentage points on top of 110%, that's what I just explained before, we get 50% of the EUR 96 million as a payout for this tranche. As easy as that, EUR 48 million. Two years later, we bought another tranche, 2019. Now, again, the same logic. The reference mortality of 2019 is not 2015, but it's a reference mortality in 2017, which was, as you see with the green dot, pretty much the same as the green one.
So the reference mortality 2017, pretty similar to the reference mortality 2015. Reason why you see that the reality which is happening on the blue dots is pretty much behaving the same way as the green dots. So you see the same logic. And if the mortality in 2020 ends up at roughly 115%, again, we get 50% of the total capacity of EUR 160 million. So we would get EUR 80 million out of this. Now, why do I say if? Because we're not sure yet. Even though we're one year later soon, we don't have the exact figures yet. So there's a calculation agent who is calculating that for us, and we believe that we know the final figures in 2023 only. That's the reason why we still talk about an estimate. So now, what's going on in 2021, 2022?
You see, let's go on this tranche again, the blue one. The green one is over. It's terminated. The blue one still is active. And you see that right now, the mortality is a little bit lower, of course, than it was last year because the pandemic is slowing down. So what would have to happen to get even more payout out of this tranche? What would have to happen is that the mortality goes even above the mortality we have observed a year before. If not, we would get paid twice for the same incident or the same claim, which makes no sense, of course. So that's why you see this dotted line here. So it is highly unlikely, to tell you the truth, that in 2021, 2022, in this observation period, the mortality is increasing even more than it was in 2020 and 2021.
So that's why you see we're not expecting any further payouts out of that. But what we need to check first is whether the 115% that we have there is really staying at this level, whether it's going down or going up. So maybe just the last one. We also bought a tranche in 2021. Here, the situation is very different, as you can see on this graph, because the reference mortality for the tranche 2021 is the mortality that we have observed in 1920, and the mortality we have observed in 1920, which is 100% of the orange cover, has, of course, been much, much higher. You see this with these two dots than the mortality we have observed in these tranches there.
And this is the reason why when you look now into 2021, 2022, you see that the expectation of this cover, which is a 2021 tranche, is much, much lower, of course, than the expectation of the 2019 tranche. I hope I haven't messed everything up, but that's the way it goes. Now, I know the guys who have been constructing that, they are watching me now, and they're probably laughing because I have simplified this so much and probably told it so wrongly. But that's more or less the way this pandemic swap or this extreme mortality swap works. And we're, of course, trying also for next year to buy another tranche. That's clear. But that's just to give you a little bit of insights into that one. So that was to show you that, yeah, we were preparing for a pandemic.
Now, let's have a look into what really happens to our figures, and that's part two of my presentation. And let us maybe start with the easiest part here, which is the lower left part of this graph, where you see simply how many claims we paid in every single quarter. And you see I start in here, it's per half year. I took half years here. So you see in the first half year, 2020, quite benign, EUR 60 million, while the P&C guys, Sven, you have already been seeing some claims then and quite dramatic claims on the P&C side. For us, pretty easy, EUR 60 million. In the second half year, EUR 201 million. These are figures that we have published. You know them. You know the full figures. And then you see how it moved up. So everybody understands it moved up in 2021.
2021, second half year is the maximum we had, and now it starts to decrease slowly but surely. That's what you can see here. The graph on the right shows you mainly the same thing. I mean, the blue graph, the blue line shows you really these figures and shows you how the claims developed quarter by quarter. What is interesting is that we tried here to plot another graph on top of this one, which is the orange graph, which shows you how in the full population, so we were talking about 6.3 million deaths, you remember, how the full population deaths were developing. When you look into this now, I mean, with hindsight after the war, you're always a little bit more intelligent, of course, you see that it developed nicely together.
So the speed of development of our claims that we have seen is pretty much similar to the speed of development of the deaths that we have observed in the whole population. I'm not talking about the insured population. I'm talking about the worldwide population. Again, knowing that the figures are probably not complete, but still, that's quite interesting that we see this. And one thing that we need to understand, this is on our global book, Hannover Re book. Now, if you look into the left, on the top left side of this graph, of this chart, then you see, of course, that locally, regionally, we had big, big differences. And I'm going to give you some details on some of these differences, the reasons being, of course, that the structures of the insured portfolio are not the same. That's clear.
You have some insured portfolios who do insure people with a certain high age above 65. You have other markets where you don't have any life insurance above 65. You have, of course, the response of local authorities. You have some countries, they had a full lockdown. Other countries, they said, "Well, let's take the herd immunity approach." I mean, this has such a huge impact on all these figures that the fact that you have this graph here is rather a coincidence, to tell you the truth. But I still wanted to show you this graph. So let me go into more details here, and let's just check on this graph that I was just showing you for two countries. One is the U.S. on the top and South Africa on the bottom, just two examples. And you see for the U.S., the graph looks even better.
I mean, the U.S., and we talked about it, data quality, pretty good. And of course, we did not know at that time that it would be like this, but you saw a lot of insurance and reinsurance companies saying, "Hey, X thousand deaths in the population are equal to X thousand insurance claims." That's quite different. And now we understand why this was possible because you have this really nice correlation of these two graphs in the U.S., which was incredibly good and surprising in a way. And then when you go then into South Africa, and you see a totally different picture. I mean, look at what happened in South Africa. Nothing happened in Q1, Q2, Q3. Nothing happened while the population was dying already. But we didn't see any claims. I mean, there is reporting delays. There are various reasons why this is the case.
But you see what I want to show you here without going into detail is that there are huge, huge differences from region to region, from country to country. The fact that it was looking as good as that in the previous slide is rather a coincidence than anything else. I mean, it gets even worse if you look on the left-hand side of this graph. What I try to do here is, first of all, the orange bars, they all sum up to 100%. All the orange bars together are 100%. This is the same information as I showed you in the first slide with the pie chart. You remember the 4% in Africa. This is what you see here, 4% in Africa. These are the total population deaths that we have been observing. That's interesting.
Now, what is more interesting is the light blue bar and the dark blue bar. So the dark blue bar is what is the percentage of our total mortality premium that we get out of a certain region at Hannover Re? And one would say, "Well, it could make sense to think that the percentage of claims you have been paying is rather similar to the percentage of premium that we get." One could think that this is the case. But if you look into it, you see that it's not the case. In Latin America, yes. In Latin America, we get less than 10% of the total premium, and we paid less than 10% of the total claims. Let's say it like this. Whereas in North America, we paid more claims percentage-wise than we got premium. And in Europe, the other way around. And in Africa, again, extreme.
I mean, the amount of claims we paid in Africa compared to the premium we get out of Africa, that's mainly South Africa, huge difference. So you see, it is not easy, the whole thing. I don't want to make a big theory around that. But looking into these figures, knowing, of course, that there is a statistical error also in there because we don't see all the figures. We don't have all the figures at 100% right. But looking into this is very complicated. It doesn't give you really insights into what happened. You just see it was so, so different from country to country. Now, let me make it even a little bit worse, and let's focus on the second-order effects first. Because we have been now looking into deaths. That's easy. Look into deaths. Somebody died. Okay. Perfect.
But we have a lot of second-order effects coming out of the COVID that we also need to take into account in principle. So let me go through some of these. I mean, anti-selective lapses. One thing which is interesting is the COVID, this pandemic, led to an economic downturn. And who says economic downturn also says automatically anti-selective lapses? People cannot afford their policies anymore. So who is going to cancel the policy? It's not the guy who feels sick. It's the guy who feels healthy. So if all, and I'm exaggerating a bit, if all the healthy people are canceling their policy, what happens in your book? Your claims stay at the same level. Premiums go down. That means you will see an increase in loss ratios because of anti-selective lapses. Let me give you one example. China.
China, for the first time since the existence of the insurance industry in China, we see a decrease of the number of agents who are active in China, insurance agents active. You know that they have millions of agents in China. And within the last 2.5 years, the number of agents in China has decreased by 30%-50%. Can you imagine that? 30%-50% of the agents who said, "I cannot live being an insurance agent anymore because nobody is buying any policies anymore, and you cannot even sell policies physically anymore." There was the lockdown. What did they do? They turned themselves into a delivery service. They became a delivery service. The delivery service was really up and running and still up and running in China. And they transformed themselves, and they just left the insurance industry.
You can imagine what that means. Who is taking care of the renewal of all these policies? That has a huge impact, of course. These are the second-order effects that are very complicated right now to estimate, of course. They're probably also of longer term. Also things that we all know, delays in diagnosis, for example. People haven't gone to the hospital anymore for two years. So what happens? You don't go to the hospital. You do your cancer screening two years later than usually. You will see that your cancer is maybe not at level one, but maybe at stage two or stage three if you have certain critical illness products with tiered benefits. We might see an increase of claims there because of something like that.
Then you see also, and that was also interesting, you see companies who were desperate during the COVID period to sell policies. It was difficult to sell. They were so desperate to sell policies that they started to relax their underwriting criteria. But the impact of relaxing the underwriting criteria for 2.5 years will not be seen tomorrow. It will be seen maybe in 5 or 10 years down the road. So these are second-order impacts out of the pandemic that are very difficult to estimate, of course. And then you see also the results of this. I mean, the insurance industry did a miracle, I would say, because within a few months, everybody changed from being a traditional, let's say, physical provider of policies into a digital distribution model. So they became much more digital than they were before. And of course, it's not as easy as that.
I mean, becoming digital doesn't mean that you take your underwriting questionnaire, you make a PDF out of it, and you show it on an iPad. I mean, it's a little bit more than just that. And that might also have, of course, certain impacts on the claims that we will see in the future out of something like that. So these are all these second-order impacts out of the economic downturn. And then, of course, long COVID. Long COVID, I have to tell you the truth. Nobody knows what that means. If you ask me, I don't think this is going to be a big topic for us. It's not going to be big. And if you ask me, I would say obesity is probably much more of a topic for us than long COVID. So I don't want to spend too much time on it.
But really, we don't know how much the impact of long COVID is. Then you have, of course, also some insurance companies who haven't reported COVID claims at all. So the COVID figures that I was showing you were maybe not totally correct. And you have also one thing which is very important. You had companies who were not making a distinction between did somebody die because of COVID or did somebody die with COVID. I mean, that's totally different. Somebody who died with COVID would have anyway died. Somebody who died because of COVID is something else. And we did not make these differences. So you see plenty of things, plenty of questions, and very difficult to analyze exactly what the impact is going to be also into the future.
Now, let me turn into something which is much positive, much more positive, of course, which is on the life and health side, we had also some non-negatively impacted lines of business. I say non-negatively and even maybe positively impacted lines of business. You see these two types of business that we hear on the left-hand side, which is longevity and financial solutions. I was talking about longevity in the last Investors' Day, so I don't have to explain to you how longevity works. Financial solutions, we were talking quite some time on it. But you see here the nice EBIT results we have been able to generate also during COVID. You see here, I show you the half-year results.
Now, of course, we all know that on the longevity side, there were some special impacts that we had here, in particular in the second half year of 2020 and in the second half year of 2021. You remember I explained that, I guess, also once we were releasing some PADs, PADs provisions for adverse deviation. Let me maybe explain to you again what that means. When we write a longevity deal, we're setting up reserves, provisions for adverse deviations for every single person who is in the portfolio at the very beginning. And now what happens is when these people die, of course, you can release these provisions for the people who died because they died already. And that's what we're doing. But to do that, you need, of course, to analyze the whole portfolio.
You need to make a big analysis to see who exactly died, what is exactly the provision for adverse deviation I have set up for this person, and how much can I release. And we're doing these exercises over the past few years, and we'll continue to do them. But you cannot expect, of course, to have these incredible results every single year in the future. But there will be, of course, a kind of a natural, let's say, routine to release these PADs on the portfolio on people who have died. So that's quite a bit of work. And then you see the financial solutions business. The financial solutions business, which nicely developed also with some special effects, of course. Maybe also important to say, financial solutions is not only structured financial solutions. It's also financing business, as you know.
There are the two types of business in there. What is interesting is that on the financing business, for example, where you buy, you finance the new policy generation. You finance the commissions to the company to sell new policies. You're giving the company a kind of a loan, and you recover the loan through future results. The pandemic had a positive impact. Can you imagine that? The pandemic had a positive impact, even though we had more claims. Because what happens is that you have a loan, and what happens is that you get an interest on this loan. This is a virtual deficit account, something that we call a virtual deficit account. The longer you have the loan, well, the more interest you generate out of this loan.
So if it takes you longer to recover the loan, which is the case in the case of a pandemic, as long as you recover it, of course, well, you're making higher earnings into the future. So that was even a positive impact of the pandemic on certain types of business. And then the financial solutions business, the structured financial solutions business, as you know, which is not depending on biometric risks. So by definition, it does not depend on the mortality or morbidity results that we have seen. So the financial solutions business also, which was very positive over the past. Okay? So let me maybe now put a little bit of light into the whole situation. And I think that's the most important slide now. So on the left-hand side, you see the sum of the non-negatively affected business.
That means you see the sum of the results of longevity plus financial solutions. That means structured financial solutions and financing. That's the left side. In the middle, what you see here is our EBIT out of the rest of the business, which is the negatively affected business. And if I show it like this, the advantage is that all the various uncertainties that I was explaining you before, they don't care anymore. I don't care whether somebody died of COVID or non-COVID, whether he was correctly reported or incorrectly reported. The impact of certain second-order effects are already in these figures. So these are the real figures. These are the figures we have been booking for the rest of the business, which was negatively affected by the pandemic. Okay? Then the next is the extreme mortality swap that I was explaining to you, and then the sum.
So first of all, what I would like to show you here is that I took on purpose a half-year approach, not a full-year approach, a half-year approach. You see that we have been able, through the non-negatively affected business, to more than compensate, together with the extreme mortality swap, the negative impact of the negatively affected business. And you see that in every single half-year, we have been able to show a positive EBIT out of the life and health side, even though we know that we have paid more than EUR 1 billion COVID claims. Okay? So that's what this graph shows you. And it shows you really that the diversification of the life and health business is very important. But here, what we're doing is a totally new way of diversifying it.
We show you the diversification between non-negatively affected and negatively affected business, which is something that I have never done so far. So that's why I want to show you this. Quite interesting. And this is the main reason why we were able, because we have such a huge amount of non-negatively affected business, that we were able to show you every single half-year a positive EBIT, even though we had a pandemic out of the life and health business. You see here, by the way, what we have been showing as a result out of the extreme mortality swap. So EUR 44 million in the first. That was in the second half, 2021. And then half-year later, it was EUR 88 million.
So we're getting to the EUR 130 million, which is pretty much what I was showing you before when I said that we're probably at 115%, you remember, of the two tranches together. That's pretty much what it is. Whether we can show anything else in the future, whether these rates, once we calculate them exactly, are going up or down, we don't know yet. We will see that later. So that's, I think, one of the most important graphs that I'm showing you. And we have never shown our figures like this, by the way. Okay. So conclusions. I mean, what are the options for us as a life reinsurer, really to become more resilient against pandemics? Because again, what you need to know, you don't know what kind of pandemic is coming.
One way would be to say, "Let's stop writing any kind of negatively affected business." I mean, that's not really an option for us. Okay? So we need to think about it. So first of all, I think shorten rate guarantees for pandemic-exposed product lines. That's very important so that you have less of an impact of second-order effects that I was explaining. Because the second-order effects, they really have a long-term impact. And when you have business which is really guaranteeing rates and conditions for quite some time, then you might have a problem with this kind of business. The other problem with this kind of business is also when you have long-term rate guarantees where the policyholder has an option. They have an option to stay, to keep the policy.
They have an option to cancel the policy, and they have an option maybe even to increase some such risks whenever they want. And you have these kind of products. Well, they will always, the end consumer, anti-select the insurance company, which means that we will have an anti-selection also on the reinsured portfolio. So that's why we believe that we should really refrain from offering this. We do that already for many, many years, and we continue to refrain in offering long-term whole-of-life guarantees for these kinds of lines of business. Very, very important. Then, of course, that's trivial. We're focusing on non-negatively affected business lines such as longevity and also financial solutions. I think Jean-Jacques said it already. Longevity, we try really to move out of being a UK-focused reinsurer on the longevity side.
We're looking into other regions, geographic regions, Australia being very interesting, and many, many others also. So that's one of the things. Financial solutions, exactly the same. We have, of course, our big book in the U.S. We have a big book in China. But we're now trying also to write more financial solutions business in the rest of the world, including Europe. So that makes total sense. And then last but not least, strengthening our data analytics capabilities. That's very important. Why is it important? First of all, you need to see these second-order impacts that I was explaining you before. It's not easy. It's not just looking into the figures that you see, "Oh, anti-selection. Oh, this is happening." No.
You need to have data analytics in place so that you see as soon as possible any negative or positive trends out of these potential second-order impacts on our portfolio. So that's why we need to strengthen data analytics capabilities. In addition, we need to have good data analytics also to fine-tune our internal model so that the amount of capital that we have for pandemics is more or less right. You remember that the amount of capital was EUR 1 billion? You remember that was EUR 1 billion I was showing? It's a coincidence that the total claims you have been paying was also EUR 1 billion. That's a total coincidence. We hold EUR 1 billion capital for a shock in one year. We paid EUR 1 billion claims over two and a half years.
So you see that it seems that our internal model is still sufficiently conservative on that side, but I would like to check that with data analytics. Very important. And this brings me to the last slide. I mean, pandemics, I told you. I mean, pandemics, we're sure that we will have pandemics in the future. The only thing is we don't know when. We don't know how. We don't know which kind of shape these pandemics are. Do they have a U-shape? That means young and old people are dying. Do they have a W-shape, a W-truncated shape? Do they have a shape like this one, which is we take the mortality curve and we multiply it by a certain percentage? We don't know. And we don't know how strongly we're hit. And that's something which is very clear.
The life and health business, we have been able to cope with it. How? By having a nice diversification between non-negatively and negatively affected business. And we continue to push that one. And that's it from my side. I know that it took me a little bit longer than usually, but it's because I'm sick. That's the point. We still have some room for Q&A. And we start with Andrew and continue with Darius and Vinny.
It's just a conceptual—sorry, it's Andrew Ritchie from Autonomous. When we used to get embedded values, I think the last time we got them was 2014 and 2015. All the life reinsurers showed this really scary sensitivity. Actually, you didn't show it, but your peers did, that if there was no mortality improvement assumed, their embedded value would be 60% lower on average. So in other words, there has to be a structural improvement in the mortality for the projected mortality cash flows to be right. I'm guessing that's still the case. I don't know if it's got worse or better. Just clarify, that is your understanding as well. It is quite hard to feel that there is an underlying improvement in mortality because we haven't really seen ex-COVID, I think in the US, has actually probably deteriorated.
What's your sense that we, I'm guessing as you look forward, that we return back to that structural improvement to mean that those projected cash flows are still correct, if you see what I'm not asking it very eloquently. I hope you understand what I'm driving at. I guess related to that, more short-term, do we get a period? Could there even be a period of even better than normal mortality for a bit because of displacement, and then we revert to trend? Or what are you thinking on all those issues?
Let me take the second one first. I think you're right because we had a lot of people who were dying a little bit too early, let's be clear. All these people have been dying a little bit too early. Let's say one or two years earlier, they will not die in one or two years. So we will see on a short-term basis, we will see probably a little bit better mortality. But that's just a short-term one or two-year basis, and that's it. On the mortality improvements, I mean, when we price, of course, when we price longevity business, we assume quite strong mortality improvements. You remember I was showing that last year. We have scenarios where even if there was a cure for cancer, we would still not lose money with our longevity business.
So the mortality improvements that we use when we write longevity business are much, much higher, of course, than mortality improvements that we use when we write mortality business. We do use mortality improvements, but not everywhere, by the way. So there are plenty of markets, I could tell you, where we don't use any mortality improvements in our pricing. And that's when we talk about when we always say, "The trend is your friend." So we use the current mortality, but we know that in principle, mortality goes down in the future. So we know that this trend is my friend, and this is an implicit margin I still have in my business. There are very little regions, I would say, who are really using actively mortality improvements for mortality business.
Do you think you're unusual in that respect? Why was this? You remember those sensitivity disclosures.
I think they're pretty much coming from the U.S., these sensitivities, I guess. So if you have a U.S.-heavy portfolio, then you have probably more sensitivities towards that. But if you look into the rest of the world, I would say in hardly no market we're using mortality improvements actively.
The point we will be able to reassess what mortality is really doing is 2025 or something? Or when would it be?
We're assessing mortality every year.
But I mean, for the COVID noise to drop out, positive or negative.
Yeah. This is going to take time. This is where the data analytics kick in. That's exactly my point. We need to analyze data on a granular basis to see do we have any cohorts, some cohorts of people who have better or worse mortality due to this COVID impact. And that's what we need to do. But this takes time, definitely. We don't want to overreact immediately because of what we just said. As you said, a displacement of the mortality curve, slight displacement of the mortality curve, this kicks in. So we have various effects, and it's difficult sometimes to really isolate each of these effects correctly.
Thanks.
Darius Satkauskas, KBW
I'd like to look at something you said in a slightly different way. So if you're saying that a 1-in-200-year event costs you EUR 1 billion, that's essentially the required capital you carry for the pandemic risk, I wonder if that's enough. Are we really saying that knowing what we know about the pandemic, COVID is a 1-in-200-year event going forward?
Well, I can tell you one thing. We know that, I mean, our 1-in-200-year event would have cost us, according to our internal model, EUR 1 billion in 1 year. COVID did cost us less than EUR 1 billion in 1 year. So logically, COVID was not a 1-in-200-year event yet. I don't know if I answered your question. So now the question is, are we going to change our internal model and say COVID should be a 1-in-200-year event? I don't think so. No, we keep it at least at the level at which we have it right now.
But I suppose even 1 in 100-year, it feels sort of, yeah, I don't know.
Feels over time period could be much lower than that, given how quickly it's spread and the sort of dynamics that we've seen.
What you say is that you feel that something like COVID could arrive much sooner, much more often?
Going forward, I think the landscape changed
Could be. Could be. Yeah. We don't know. But I believe that the capital we have right now for a 1 in 200-year event is okay, makes sense. Our strategy - and that's where the strategy comes from - to diversify between business which is definitely never going to be affected by a pandemic and business which might be affected by a pandemic. Because again, the next pandemic will have a totally different nature.
It will look totally differently. We will be probably as surprised by what's happening with the next pandemic as we were with this pandemic, sorry to tell you the truth. Yeah. So that's why what we need to make sure is to diversify the portfolio, that the non-negative affected business will always be, hopefully, always be able to counterbalance the effects of the negative affected business. That's all I can tell you. I mean, that's the reality. Yeah.
Vinit next, and then we have Thomas Fossard from the conference call asking a question as well.
Thanks. This is Vinit from Mediobanca. So just on the slide 9, Claude, which is you put it down to coincidence. But if I go back to the COVID times and just living through every quarterly call with yourselves and many other insurance and reinsurance companies, we were always told the population is doing whatever it is doing. But we have a portfolio which is different. Either insured portfolio, then our portfolio is better. So we always heard this multi-step difference. But yet we see this amazing chart. And for the U.S., we see a chart which is unbelievable. I mean, so what's the point of the whole insurance business?
So we're comparing two different things here, which is important to see. What I show you is the speed at which deaths developed in the population. Okay? This is the speed at which they developed. And what I show you is it is the same as the speed at which our claims developed. But of course, the level is a totally different one. So we still have a selected portfolio. So it's still much, much better, of course, than population. But what is interesting is that with the population deaths going up, our claims also went up and kind of in the same speed. The speed is a different one. But I mean, you see what I mean? You should take the first derivative of this curve now to understand this. Okay? I didn't want to show that. That would be too much.
But you have the same speed of change. That's what I wanted to say. But you don't know that. When you're here, you don't know that this is the case. Because had we known it, we could have predicted much easier probably what's going on. Yeah? You don't know it. But with hindsight, it's what we have seen. Yeah.
Okay. Then we have a question from Thomas Fossard. Have you unmuted, Thomas?
Hello. Yeah. Sorry, the line was not good. Yeah. I've got two questions. Thanks, Karl. We've got two questions. The first one would be for Claude. Some of your peers have mentioned ability to reprice a business as an outcome of COVID-19. I think that you've been a bit less talkative about this. So could you shed some light on how your pricing and your ability to reprice a business has come as an opportunity? And the second question would be related to the EUR 1 billion capital allocated for pandemic. I can understand that actually this is your computation on the mortality side of things. But I would like to better understand, maybe from Clemens or Sven, what is the outcome of the pandemic on the P&C side? Because I think that on the P&C side of COVID, clearly the BI claims were far from being expected.
Does it mean that now you have to allocate capital on the P&C for pandemic risk? Thank you.
Let me maybe quickly take the pricing thing. I mean, you need to distinguish the types of business. The non-proportional business is easy to reprice because you reprice the whole business every year. It's a little bit like on the P&C side. And we have been pushing prices up incredibly on this non-proportional business, like in Latin America and other countries where we do have this business. Very easy to be done. On the proportional business, you need to see that you're sitting on a portfolio, of course, which has a defined price and where you cannot increase the price, at least it depends on the type of treatment that you have, on the whole portfolio at the same time. It doesn't work. So you can increase the price for the new business owned in principle on the life and health side.
And here, let me explain to you quickly how it works. Let's suppose, just amongst each other, that in a COVID pandemic or in a pandemic, the mortality rates increased by 10%. Let's suppose they increased by 10%. And let's suppose that we expect every 10 years to have a pandemic. Well, on average, you would have to increase the price by 1%. Yeah? So that's the price increase you would have to do for new business, 1% of your premium. That's not a lot. And in addition, on the life and health side, you cannot set up a reserve pool somewhere and say, "Well, this is my pandemic reserve. And every single year, if there was no pandemic, I take this money and I just put it into a pot.
And there is a moment where I will have enough reserves to survive a pandemic of whatever size." So that doesn't work. What we do when we price the business is that we don't add into our best estimates the pandemic, but we add into our margins something like a pandemic. And how does this work? By looking into the pandemic capital that every single treaty that we write needs, and then by loading our pricing for the cost of this pandemic capital that we allocate to this treaty. And that's the way we increase or we include the pandemic into the pricing. And now, and that's where we come back to this question before, if our pandemic capital for what we have seen and observed is going to increase, automatically, the margins that we are asking from our business units will also increase.
That's the logic on the pricing side here. Maybe I hand over to Sven, maybe, for the P&C question. Yeah?
Yeah. Happy to take that question. I mean, we were also prepared for pandemic exposure on the P&C side. So we had various realistic disaster scenarios on that side. But what happened is that with the mortality we have seen, this would have classified as a mild pandemic in our RDS scenarios. We had the losses of the severe pandemic scenario. So we underestimated with the relatively low mortality rate from COVID, the impact from lockdowns, or to be brutally honest, in our scenario, we couldn't see that governments would be prepared to have such extensive lockdown periods in low mortality scenarios like COVID. So from that point of view, yes, we have to reassess that, which may cost a little more capital.
On the other hand, the industry is much clearer these days on what they're really wanting to cover when it comes to pandemic exposure, which will have a huge dampening effect of how much are we really covering, at least right now, which will then bring down the capital requirement. But what we all don't know is what's the pandemic solution the P&C world is going to offer going forward. I mean, you know that while COVID is still ongoing, the offering from the P&C side is next to zero. But I don't think that's the long-term solution. I mean, we talked about closing protection gaps, etc., etc. So there will be solutions going forward. How they look like, are they private-public partnerships? Are they mostly in the insurance business? We simply don't know.
Right now, I would say we have positive negative effects on the capital side, which are offsetting each other. From a long-term point of view, we just have to wait and see how the industry on the P&C side is approaching pandemic exposure.
Okay. Well, thank you. We are already overshooting a bit the time frame, but I allow for another question, which is coming from Darel. Then I kindly ask you to hold on for your question for the break.
Thanks, Karl. Darel Goh, RBC. Just one question on longevity. How much of the business today is from the UK? And I'm just curious to your comment that you're talking about pulling or shifting away from the UK longevity market because it seems as though that the bulk annuity pipeline is pretty healthy. You spoke about the overestimation of mortality improvements. I guess, is it because that's getting more competitive? Or maybe you have a different view to the bulk annuity pipeline? Any rationale there at all? Thanks.
No, no. I didn't say that I want to shift out of the UK. Not at all, by the way. I just want to concentrate on other regions too. Our business right now, I would say it's 95% is out of the UK on the longevity side. We still see tons of opportunities on longevity in the UK. Of course, the market is a bit more crowded in the UK than in Australia and other regions. That's why we say UK, yes, but then also other regions. That's logic. We don't want to go out of the UK, no, no, by no means, of course. Yeah. Sorry if that was a misunderstanding. It must be.
That's for the nightclub.
No, no. Yeah?
Okay. Well, thank you for your questions and thank you for your presentation. So just before we head into the last presentation of today, we are going to have another coffee break. Not saying that this is strictly necessary, but given the subject of IFRS 17, I just want to make sure that everybody is relaxed and receptive. So we break for 20 minutes and be back at 2:05 P.M. Enjoy.
Thank you. Thank you for being just back in time. Given that IFRS 17 is quite a lengthy and complicated accounting standard, Clemens has no easy task on his hand today, as he will try to give a quick introduction within 30 minutes. It might take a while until everyone understands these new metrics for measuring the success of a reinsurer or insurer. But just as it is with yards and meters, no matter how you measure it, in reality, it's the same length. It's simply something that we all need to get used to. The good news is IFRS 17 will create greater visibility for the future earnings, and it will also improve comparability of companies. Therefore, I guess you will like it. Clemens will take us into the world of IFRS 17.
He will show us what will and will not change, as well as how things will change. Just to manage expectations, we will not give any exact transition numbers today. This is something that we will do at a later stage. Today, it's about showing the main developments. With that, Clemens, over to you.
Thank you, Karl. I still see people smiling, not escaping the room with respect to IFRS 17. Yes, after all these exciting business insights that you've heard, at 2:00 P.M. in the afternoon, where the energy level is usually at the peak, we finally talk about accounting. I was thinking in the break just now how I could kick this session off. I was thinking about a quote related to accountants. There is a saying, "An accountant is someone who explains a problem that you didn't know you have in a way that you don't understand." I'm wondering sometimes when we talk about IFRS 17 if that relates also to IFRS 17.
Therefore, in an attempt to demystify the supposedly complex standard, etc., I will kick off today with some general comments around the introduction of IFRS 17 at 9:00 A.M., etc., really to get to grips with it, etc., and really to kick this off as a journey, as Karl said. I think it can only be a session. We have half an hour today. Again, we will be providing some more details in later sessions. I think there will be more to come. So it's a bit like learning a new language, I always say. Let's try with some vocabulary today. I think, as Karl said, once you get used to it, it can actually be fun at the end of the day. Admittedly, yes, it's true.
On the 1st of January 2023, that's only three months, we will be implementing the biggest accounting reform that we've seen globally for decades, with IFRS 17 fundamentally changing the measurement of liabilities and also the profit recognition, and IFRS 9 changing those of investments. But before we start complaining already now about the good old times where we exactly knew how to read financial statements and our beloved combined ratios, etc., let's briefly reflect on what we have today. Actually, pretty much on insurance accounting, if we are being honest, nothing. If people think, "Well, IFRS 4 is an insurance accounting standard," well, it's actually not. It's only a placeholder that has served as a placeholder since 2004, and only with the purpose to grandfather existing accounting regimes, hence German GAAP, U.S. GAAP, and whatever you want.
So if you look into group financial IFRS statements of insurance companies today, you will find all sorts of accounting regimes in there, but not IFRS. And I think we need to reflect on that when we think IFRS 17 is so complicated, what's better, etc. I think it's just that we got used to the metrics that we have now, but we should never forget that's far from ideal where we are today. And I think, to be honest, in terms of what you should expect as investors, analysts, etc., in terms of usefulness, transparency, and also in terms of comparability, that's not a place where we should all be. Admittedly, the new standard is very complex. That is true. But again, I always say learning a new language does take some time. So let's kick off today.
And in that spirit, again, we will be starting with some general remarks on the standard. Spend some time on how we have approached the transition. 1st of January 2022, that's the transition date, the official transition date, because we have to prepare for comparative numbers. When we first publish the Q1 2023 numbers, we will also be publishing comparable numbers for 2022. I also want to spend some time on the rationale behind some of the transition approaches and the options that we chose. I know there is some acknowledgment also at your side that long-term, the standard will add some benefits, long- and medium-term. However, I'm also conscious that there are concerns short-term in terms of grasping the impact, particularly of the transition.
So the question really is how much of the transition measures and options that we've taken, etc., are driving the P&L equity for the years to come. And therefore, I will address some of those concerns here as well. Therefore, we've included a section also on impact on equity, earnings, KPIs, etc., long-term, but also short-term. Again, as Karl said, we won't be preparing actual numbers. I wouldn't feel comfortable to come up with really transition balance sheet today. First of all, those numbers are not audited yet, but they are in the process of being audited. They will be final, I guess, somewhere later in the year. That's when we will schedule our session.
At the same time, I think purely looking at a transition balance sheet at 1st of January 2022 is, I think, a pretty theoretical discussion when you look at yield movements that we've seen, particularly in this year. Therefore, we will do some roll-forward numbers also into 1st of January 2023 and will share those with you probably in December. So when you look at the structure of the standard, really just reading through the IFRS 17 standard, it's quite intuitive workflow. So it really starts with the definition of an insurance contract. So what is insurance? What is a financial instrument, for example? Then you have a section on grouping, so the level on which you measure your contracts. And that's quite a different approach from where we are now with U.S. GAAP.
The level of measurement is different, and that drives some of the effects that go into transition. Third is measurement, so your initial measurement of your insurance contracts and also the subsequent measurement. Finally, presentation. This is how a balance sheet can look like. On the left-hand side, the existing regime, IFRS 9, IFRS 4, in our case, US GAAP, because that was the existing accounting regime when we transferred to IFRS. On the right-hand side, you can see the new items on the balance sheet. Status quo on the left, you know that quite well. You have your technical liabilities on the right-hand side with all the elements that you know, unknown premiums, premium reserve, etc., etc., and then provision for outstanding claims. So you have all your own reserves, your IBNR, etc., sitting in there.
On the asset side, you have your deferred acquisition cost, the DAC, and also receivables from reinsurance business, deposits would be sitting in there, etc., etc. And on the investment side, the well-known categories held to maturity, available for sale, loans and receivables, and fair value through P&L. So what does it look like going forward? And you will see there is no DAC anymore, no receivables from reinsurance business, etc. So those items will all be part of your LRC or your LIC. So those are the two items in your technical liabilities that are actually new. And the netting of those receivables, deposits, etc., has one effect, but that's really just reclassification. But when we look into some of the graphs later, I think it's important to know that those items will be part of your insurance contract liabilities going forward.
So the new items are really, if you want to classify those, it's first of all, the liability for remaining coverage, the LRC. If you want to think about it slightly in comparison to what we have now, it's somewhere sitting comparable to a UPR, and then you have a liability for incurred claims. So that's the LIC, and that is actually for claims that have already occurred. Investments are slightly different category, but I will come to that in a minute. As for the measurement, the standard offers, I wouldn't say three options, but there are three ways how you can measure your insurance contracts. First of all, the GMM, that's the general measurement approach. And as the general measurement approach says, it's the default of the standard. So that's how you have to do it usually.
You can take a shortcut, a simplified approach, the PAA, the premium allocation approach. You will have heard about it. And then for certain pieces of business that's rather life insurance business, there is another approach that is not applicable for us. I can say we, as Hannover Re, we have applied the GMM, the general measurement approach for all of our business, not only for life insurance, but also for P&C and for all lines of business within P&C. That might surprise some of you, and I want to share the rationale of that decision with you because, of course, the GMM does require you to have much more granularity on your data, on your contracts, on your insurance data. So everything that you have in your systems, etc., requires more granularity.
That's, I think, why some of the applicants will go for the PAA also on the P&C side. But for our, the driver was, first of all, I mean, it's the default of the standard. So GMM is the default solution. And if you want to go for PAA, you have to prove that the PAA and the GMM on the other side do not provide too much difference if you apply those. So it's an exception, and you have to prove it. And you have to prove it actually every year. So that was one reason that we didn't want to go there. On the other hand, you will always have pieces in your business that will not be applicable for PAA. So you have a blend, a mix of GMM approach and PAA approach sitting in your P&C segment.
For us, that was not ideal, and therefore, that has driven the decision as well. You also reduce, I think, non-GAAP measures because if you go for GMM and derive your KPIs, etc., from those, I think you're very stringent. You can really use your financial statements to derive KPIs from those. But first and foremost, the reason why we have applied GMM is that we wanted to use this standard, this regulatory change, not only to tick a regulatory box and spend millions of EUR on just complying with an accounting standard. We really wanted to get it right and use it as an opportunity to revisit our processes, our data, the granularity of data in our systems, our IT landscape, our efficiencies, our setup, how we work together, etc.
So we really have taken a broader stance on it and have seen this rather as an opportunity to, let's say, transform also our finance and actuarial functions. That was the driver behind it because, again, otherwise, you can spend tons of millions of euros, and you don't really get anything out of it, and you still have to do all your economic regimes that you have, etc. So ultimately, we think taking the GMM approach, spending all these efforts into our systems, processes, etc., particularly on data, I think eventually you will move closer to an economic view to Solvency II, so you can bridge the gap to Solvency II much better. And also, you can eventually, and that would be my desire, get rid of additional accounting that we're doing, additional performance management like IVC we are using for economic measurement, etc.
That should be the ultimate goal. Yes, it will, and it has produced a lot of work and efforts. We were talking about people burning the midnight oil for quite some time, and you can imagine there has gone a lot of work into this project. But I think it's really worth it. Imagine if you have all cash flows for your P&C and life and health business worldwide, every line of business in one single place, or let's say in two databases centrally. I think that's really the way where you should go in order to steer the business, to monitor the business, etc., and really get something out of it. That was the rationale behind it. There are other options in the standard, etc., like the OCI option, but I'll come to that in a minute. Just briefly explaining, the standard is not really rocket science.
I mean, something that Sven alluded to when we do our pricing. What you do is – it was also referred to as the building block approach, the GMM approach. How do you measure your technical liabilities? Well, you just estimate cash flows, cash inflows, cash outflows, and then you do magic discounting to it. That's why everyone refers to it. That's very complicated. It's actuarial. So that's all mystic, but it's not. I mean, it's really just discounting, of course. The methods, you have to get it right, but you discount those cash flows to reflect the time value of money. You add a risk adjustment to it, and we know that already from Solvency II.
It's a bit of a different regime, but the risk adjustment is really to reflect on the uncertainty of the amount of your cash flows and also of the timing of your cash flows. That ends up in a technical liability. Then that's it. In fact, for the risk adjustment, we have aligned the methodology to come up with a risk adjustment very much with what Sven alluded to, our internal model. That's really a margin appraising approach, again, to link that very closely to our economic view. Ideally, you'll come up with a profit out of that contract. That profit is, and that's where the prudence in this standard comes into place. That profit is not allowed to show in your P&L on day one. You have to, if you want, earn it over time, and that is a contractual service margin.
It's nothing else than a liability that you put on your balance sheet and that you just release over the time of the period of the contract. And then that's it. OCI option, it's an option really to reflect on the fact that on your investments, the bulk of the investment, we talked about fixed income earlier, the valuation will go through OCI. And that was an option in the standard, came later into the standard, actually, to immunize that so that you don't have finance expenses sitting in your insurance result. And therefore, you can apply for any changes in interest rates because you have to evaluate. You have to discount your reserves at every reporting date. And changes in interest rates, you can put those in OCI.
In an ideal world, if you are matched perfectly, those will be balanced out, and you have any economic movements from interest rates sitting in your equity and not in your P&L. That was the intention. In terms of prudent reserving approach, I'll come to that later, but I think it's important to know because I know there have been discussions around how about reserve redundancies, prudence, etc. Does that comply with IFRS 17, with the best estimate approach, etc.? Yes, it does because, of course, you can have best estimates, and you know that there is a range of best estimates that you can look at. And if you ask yourself, "Where is this prudence sitting?" It's actually mainly in here. So when you do your assessment of best estimates, etc., the prudence will sit in here. The prudence will not sit in the risk adjustment.
If we look at some of the graphs later, you will see, well, if you have prudency in your best estimate, in your liability for incurred claims already, and our redundancies will be sitting in there, and you, on top of that, have a new element that's called risk adjustment, then we've actually added prudency to it. You will see that when we look at the equity impacts, etc. So we've actually added another level of prudency because that's a new element. The risk adjustment is something that we didn't have under IFRS 4, hence US GAAP, but under Solvency II, that was there already. It's important to know when we talk about P&C reserving, etc., later. Let's do a brief detour on IFRS 9 to get that out of the way. You know the classifications already, amortized cost, etc.
So I think there are two major changes, one on classification and valuation, and the other one on impairments. The first one is really how you put those investments into those categories. And you know that previously we had roughly 1% of our portfolio sitting going through the P&L. The future depends not on the intention, what you want to do with your investments. That was the old category, so amortized cost, held to maturity, etc. The future really depends on if you pass the so-called SPPI test. In essence, roughly 93% of our portfolio will still pass the will still go through fair value through OCI, so will pass the SPPI test. So yeah, roughly 93%, so roughly EUR 52 billion of our investments will go through fair value through OCI because we have applied the hold and sell model for IFRS 9.
So those will be comparable to what we know from now. Some of the assets will not be in the scope of the standard. For example, our direct real estate exposure, which is the bulk of our real estate investments, will not be applicable for IFRS 9. They will still be sitting in the previous standards, so they are not in the scope. So what is with the 7.5% that do not apply for the SPPI test? They will have to be valued through the P&L. And I think that's the biggest change when we talk about potential volatility coming out of the standard. I think that's really the main change here on the investment side. What are those investments? That's mainly our private equity funds. So the roughly EUR 2.4 billion at the moment that are sitting in our balance sheet because they are funds, as mentioned earlier.
So therefore, they do not qualify for SPPI, and they do not qualify for an option where you can value those through OCI. So they have to be valued through the P&L. That was what I was referring to earlier. At transition, those hidden reserves will go straight into equity. And if we think about the valuations being at historic highs, so any decrease in values will hit the P&L from 1st of January 2023, potentially. That's the biggest change. Some of our real estate funds also will go through the P&L, but that's not the biggest part. And then also infrastructure funds, insurance derivatives, etc., etc. So that's the main impact. And then on the impairment side, to be honest, we just cut long story short.
I think the introduction of the expected credit loss model as opposed to an incurred loss model that we are having now under IFRS 9, the main reason being really the financial crisis. It was considered the impairment model, the actual impairment model, to be too intransparent and too slow in terms of really recognizing losses. For us, in essence, that's not much of an impact for our investments. Going back to IFRS 17, so transition. So the standard requires you to apply IFRS 17 on 1st of January 2023 in a way that you have to apply the standard in a way as if you would have always applied the standard. So you really have to go back in time and, in theory, look at every single contract when you've underwritten those contracts 20 years ago, etc., and have to do exactly what we looked at earlier.
Estimate your cash flows, your risk adjustment, discount rates, etc., etc., and you have to come up with a CSM. And then have to roll forward all these numbers to the 1st of January 2023. That would be the full retrospective approach that the standard requires you to do so. At the same time, the standard setter has appreciated that that will just not be possible because the granularity of data that you need to do that assessment is not there usually. And therefore, the standard has allowed for two other options. So if you cannot do that, the standard calls it impracticability on due efforts, etc., etc. You can apply a modified retrospective approach where you have some shortcuts, etc., some simplifications to the full retrospective approach, or a fair value approach.
The fair value approach is really something completely different from the other approaches because you measure your contracts in a way that you will look at your portfolio as if you would sell it as of today. It's really an exit value. If you know IFRS 13, it gives some rules about that, etc., how you value, how you come up with an exit value, etc. That's really the main difference here. That has driven, of course, work and also efforts on the transition itself. For us, the question was really, where do we have the data? Where can we really go back in time, etc.?
So on the P&C side, I think it's fair to say that for the older underwriting years, we have applied fair value because it was just not possible to come up with all the granular data, etc., do all the assessments, yield curves, and all that, etc. So we have applied for the bulk of older years the fair value approach, and for the recent underwriting years, the fully retrospective approach, and also for some of the underwriting years, the modified retrospective approach. So P&C, all sorts of approaches that we've used here. And on the life and health side, pretty similar. When we had a lot of Claude talked about it earlier, if you have portfolios where you have very granular data, etc., we were actually able to go for the fully or modified retrospective approach.
But for, for example, the long-standing mortality books in the U.S. or in the U.K., we've actually applied the fair value approach. Now, I think the issue is when you look at all these options. And they, of course, when you come up with a fair value approach, you go back. And if you would exit a portfolio, let's take our U.S. mortality, not the new portfolio, but the old broad portfolio. If you look at that, you all know that that portfolio is still loss-making. We have come up with management actions and mitigating actions, etc., but it's still not at the level where it initially was expected to. So you have to go back in time, and you would have to come up with a loss component, etc., etc.
If you don't have the data and you would sell that portfolio in a fair value approach, you would actually ask, or the buyer would ask for a margin. So you're actually allowed to put up a CSM for such a portfolio. And I think that's probably driving a bit of the concerns that are here and there. How much of that transition will we see in the P&L only for the next three, four, five years as one of effects, as a result of the transition? How much drives this our equity, our P&L for the next years? And I can assure you, our thinking behind this was really ensuring stability in our earnings, of course, adding some level of prudency into CSM, into risk adjustments, etc., in line with our prudent reserving that we do also on the P&C and on the life and health side.
But it was really about how can we make sure that we don't have one-off effects and that we produce non-sustainable earnings. It was really about how can we ensure to come up with sustainable earnings patterns that are really sustainable over a longer period of time. That was the thinking behind it. That has driven our transition measures here, just to be very clear on this. So how does that look like? If you look at a waterfall, start with P&C. Again, in this number, when you look at net liabilities, you would have receivables, deposits, etc., also sitting in this number already. So that's a net number, technical liabilities, UPR, claims, reserves, etc., including receivables, etc. And then on the P&C side, you, of course, have the discounting. That's the main effect that drives your liability on P&C. So that will bring your liability down, the discounting effect.
Then the risk adjustment on the P&C side, again, that brings the reserve up. It's actually a separate item within your liabilities. On the P&C side, a loss component. You might think, why do I come up with a loss component? As mentioned earlier, you have to put up a CSM when you expect profits at day one and a loss component when you expect losses at day one. You would think, well, those are onerous contracts. But that's pretty intuitive when you know that you have conservative reserving. If you have conservative assumptions, your best estimates, etc., that will regularly lead to a loss component. You shouldn't be surprised to see that item in our balance sheet because that's purely a result of our conservative reserving.
Then in transition to IFRS 17 cash flow models, that's really just cost allocation because the allocation of cost is different. That's a reclassification measure, etc., etc. On the life and health side, similar picture. That's already a netted number there with a lot of deposits, etc., sitting in there. The risk adjustment on life and health side, given the duration, of course, much higher. And that's the bulk of it. And then you have a CSM in P&C and in life and health. And intuitively, you would think, yes, the CSM, of course, is mainly driven by life and health that you will see in our balance sheet. Because on the P&C side, that will evolve into earnings pretty quickly. So I think we've covered all of this. Investments, briefly, no major effects really on equity. There's only one line item that's amortized cost.
That's health to maturity investments that now have to go through the OCI. So there's one minor effect from that. So there were hidden reserves at transition, 1st of January 2022, but I guess that number would look differently if we roll forward to 1st of January 2023. So how is the impact on our shareholders' equity? Illustrative, 1st of January 2022. That will be the picture because in life and health, two things happen. First of all, the unlocking of your assumptions. So the grouping is different. You take all these, for example, mortality books, etc. You ungroup them. So what happened in IFRS 4, US GAAP, you have grouped them together. Now you ungroup them and you unlock your initial assumptions to current assumptions. The same happens with discount rates. And both of the effects drive the equity impact on the life and health side.
That's something you would have expected, that there is an equity impact on the life and health side purely due to the unlocking, not due to the transition approach, but really the unlocking of your assumptions to current assumptions and discount rates. When you look at the effect, it's probably one-third is discount, at least one-third is purely discount effect, and the rest is really unlocking of your assumptions. P&C side, that's the discount effect offset by risk margin, by the risk adjustment, some deferred taxes, etc. But that's really the main picture here. The question is, what is this equity impact that you see? Have we lost equity at transition? I mean, we all know when we forward this picture and say, well, is our equity after transition actually lower than before?
If we do this exercise on the 1st of January 2023, given interest rates movements in 2022, that will, of course, be a completely different picture. So actually, equity might have increased due to the offsetting effects in the first quarter 2023 when you apply IFRS 17. So what happens here is really, when you look at our IFRS 17 equity, we've built, when you look at the pure equity, you would see the blue bar here in the mid. But what we've done is we've put up future profits in our balance sheet. That has reduced equity. That's the CSM. It's a huge amount. You also have another item, the risk adjustment. So you can argue economically what you've done is you've introduced two new loss-absorbing items, one being future profits and the second risk adjustment. You can argue that's at least loss-absorbing, if not future profits as well.
So economically, you should come up with a similar number of your solvency to equity. And that's what we actually did at transition, compared the two numbers, roughly really just indicative. So that's what you see here. This is just an illustration of the P&L. I don't want to go into details. We're running out of time. I think, Karl, you have to wait. But of course, the P&L will look different, but I think it will clean up some of the things that we have in our P&L at the moment. You remember that we always quote financial solutions business in life and health doesn't show up in our top line at all, doesn't show up in gross written premium. Why? Because it's risk remote and therefore it's deposit accounting. So you don't even see the margin in your underwriting result.
It's actually in our other result, in our other income. You have the fee income. So that will change, for example, in financial solutions deal, Claude is right. You will have the fee income, not the premium that comes with this deal, but the fee will be part of the reinsurance revenue. That's entirely new. And I think that's a very much more intuitive and economic reflection of that contract. And the unwind of the CSM, you will also see in the reinsurance revenue and in the results. So basically, you have the fee income sitting in your revenue and in your reinsurance service result. That here is just a reminder of the CSM and the risk adjustment, how they are sort of allocated between P&C and life and health. Again, the CSM with the P&C business being much more short-tail, you would have expected a much more lower CSM.
That's what you see here. Life and health, 85%. On the risk adjustment side, the same picture. Again, just as a reminder on the P&C side, you might see disclosures on risk adjustments and confidence levels of risk adjustments and P&C. And I think it's very important that we don't mix that up with that confidence level that we have to disclose is a requirement to mix that up with a prudence level in reserves. Again, a reminder, the prudence in our P&C reserves is in the LIC, in the liability for incurred claims. That's where we have our prudent assumptions in terms of best estimates. And the risk adjustment is really just a result. And the confidence level that we show up with, come up with, is only a result of our approach deriving from our internal model, from our margin.
I think it's very important to keep that in mind. On KPIs, you see already the disclaimer of their potential KPIs. So I admit we still, I think as an industry, we still try to find KPIs that allow you really to make the numbers comparable, etc. Of course, one, there will be an ROE, that's for sure. I think EBIT growth, that's for sure, solvency ratio unrelated anyways. I think there will be new KPIs around CSM, CSM growth numbers, etc., how they develop, etc., etc. I think that's one area where you can expect new KPIs. We are working on those. And then, of course, the P&C combined ratio. So the question is, applying GMM, do you still have a combined ratio? Of course, you just have to be clear what's going in there.
You have seen that some companies have already come up with a combined ratio, but also a lot of footnotes. Because if you, for example, go for a combined ratio and you have insurance revenue in there and you exclude a lot of business already because you say, oh, that's actually fronting business, etc., so that's nothing to do in a gross combined ratio, then you diminish, I think, the importance of the combined ratio. So there's still a lot of discussion. The reason why you see gross numbers here, that would actually be different from the way we look at a combined ratio today. We would always show you a net combined ratio. I think that's much more sensible and could be much more sensible going forward.
The only reason why you see a gross number here is because there's no requirement under IFRS 17 to come up with any net numbers. So the insurance service result that you've seen there is, in essence, a net number, but you are not required to put in any retro numbers. No gross, no retro numbers, so really just a result. And therefore, I think there will be more disclosures or you will actually spread up your P&L to provide some guidance around it. So my intention would be to say, well, keep the net view for us on the P&C side. It's much more intuitive. But again, we are working still on those numbers and I think we will give an update in December when we do the next session. Timeline. I think we don't have to touch on this again. It will be around December, Karl.
I don't know when we schedule the next session, but that will be the next piece. So key takeaways, again, I mean, we are not, you can sense that we are not fundamentally changing anything here. And Karl said that already. The overall profit of a contract, the cash flows, they remain completely unchanged. So it's really just when do we earn the profit? How does the profit emerge over the timeline of the contract? Of course, this will not change our business model. That will not change our dividend payment capacity. As you know, that is completely linked to German GAAP. It will not change our solvency position. What it will do, though, is if you do it right, I think it will add a lot of transparency. We will come up with disclosures, a lot of explanations. It will give you steering mechanisms, etc.
I think there's a lot of benefit in the standard long-term and short-term if you do it right. Okay, I'll stop here and open the floor for questions.
Well, thank you, Clemens, for your presentation. We start on this side with Ashik and Ivan and continue with Hadley and Andrew afterwards.
Hi, good afternoon. Ashik from Morgan Stanley. Just a quick question. I mean, we have put in so much effort to move towards Solvency II and towards IFRS 17. Why do we still have German GAAP or local GAAPs now? Because why can't, why is Europe not moving towards one? I mean, there's so much effort to do all this, but ultimately, everything lies in the dividend and dividend is based on German GAAP. So what's the point? So is there any?
Yeah. I think, well, the short answer is, I mean, we haven't even managed to agree on a global insurance standard worldwide because, as you know, the U.S. opted out at some point in time because it was a joint project when it started off. So we even haven't managed to do that. So how could a prudent German with a very conservative mindset ever think, well, this is a good basis, an economic view is a good basis for paying dividends with all the prudency, etc.? That's really just a stakeholder view in German GAAP. And you will have that in other jurisdictions as well. However, I think we see increasingly jurisdictions applying IFRS 17, both for statutory accounts as well as for regulatory terms.
So there is a tendency, and I will not give you the hope on Germany that we will see that eventually, but I think the tendency is there. And even when you look at U.S. GAAP, there's a separate standard, and I always get the acronyms mixed up, the LDTI or whatever. Someone might be able to help me. That addresses long-term insurance business from an accounting perspective already. It's very similar, I would say, to what we see in IFRS 17.
All right. Thank you.
Ivan Bokhmat from Barclays. Two questions. First, you mentioned that the prudence buffers for Hannover will be in the LIC. Can you help us understand how will we, as analysts, be able to estimate that in the new disclosures? And secondly, just to talk about the volatility that this standard will introduce, I don't know if it's too early to ask, but if we could look at some historical period and see how would it have been under IFRS 17 versus IFRS 4. Thank you.
Yeah. Happy to do so. So the first one on the prudence, I think there are two ways you can see that. First of all, you can assume again, when you come up with Hannover's contracts and loss components, you can assume, okay, there's apparently some consistent prudent reserving in there. Second, when we disclose the development of the LIC, be it in the P&L or in separate disclosures, you will see that the positive runoff result that you're having today and that I guess you always use as a proxy for a level of conservatism is shown in a so-called actual over-expected. So you will always revisit your initial assumptions and then see what was my expectation and what is the actual runoff. And that's a number that we will disclose.
On top of that, Ivan, we will also, of course, continue to do an external assessment of our reserve redundancies. We might not call it redundancy. We might call it resilience reserves or whatever, but we will make transparent what is an external view and what is our internal view. I think that overall gives you a good guidance on the prudency level. Again, we are very committed to stay there. Again, not to forget, you have the risk adjustment on top, and that's going to be a substantial number as well.
Volatility.
Volatility. Well, volatility, I mean, it depends on what volatility we are talking about, P&L or equity. So right when we talk about equity, I mean, you only have to look at 2022 financial statements. I mean, that volatility is crazy under IFRS 4. So that's a huge benefit under IFRS 17, I would say. Absolutely. That's a huge benefit. P&L, it really depends on we always say, well, that adds a lot of volatility that makes it very difficult. But look, when you're for let me take two items in our 2022 financial statements. First, the derivative that you see in the life and health segment that is linked to our UK, a larger UK life insurance contract, that has to be separated and is floating through our P&L. Given UK gilts, you know that we have disclosed that in Q2.
Those numbers make it very difficult for the CFO to steer any result, right? So that's EUR 80 million-EUR 90 million already per Q2. So that's one element that will disappear. That's actually a positive. Then you will remember in the P&C segment, at the moment, as per Q2, we have roughly EUR 100 million of accumulated currency losses. You know me always referring to that as being accounting mismatch. That's actually true because those currency losses stem from our private equity US dollar portfolio. And the accounting mismatch exists in that way that the liabilities have to be measured through the P&L. And under the current accounting regime, those private equity investments are measured through OCI. And the currency gains or losses are also measured through OCI because they are considered to be non-monetary items. And therefore, you have this accounting measurement. That will disappear as well.
So those are two elements of volatility that will disappear. On the other hand, of course, you have in the standard in IFRS 17, both in IFRS 17 and in IFRS 9, of course, more volatility. Those huge increases in private equity values in 2022, I think it's probably EUR 300 million, EUR 400 million compared to 1st of January 2022. You would have seen those in the P&L as a positive. And again, I repeat that, but you might see that as a negative next year. So it's really, I think it's a mix.
Okay. Hadley.
Thanks very much, Hadley Cohen, Deutsche Bank. A couple of very, I guess, conceptual questions, if I may. Firstly, around the ROE and I guess debt leverage as well. How should we, or how are you thinking about the denominator in that respect? Should we just be simply using the equity, or to what extent should we be allowing some form of concept to the CSM and the risk adjustment in those calculations? I mean, clearly, from an ROE perspective, your return would look lower, but is that more appropriate with the data available now? And then secondly, a sort of similar question around on the combined ratio side. And forgive me if I'm wrong, but as I understand it, based on what you were sort of saying, you will effectively be having the combined ratio will effectively be net results over gross earned premiums.
From a Hannover Re perspective, I guess, the difference between gross and net is wider for you than it is for your peers. So the relative benefit that you would see from that disclosure will be there. So how are you thinking about that? I mean, are you comfortable with that, given your conservative nature? Are you comfortable with that sort of disclosure? Does that mean you're going to be a bit more conservative on your initial loss picks or what have you? Or how should we think about that?
Yeah. I'll start with the second one. So I haven't been precise enough. So that is, I think, the current discussion in the industry. And you see a lot of insurers actually doing that, right? Gross number and the net number. And that would not be my approach, to be honest. And the only reason why you have that discussion in the industry at the moment is because those can be easily derived from the P&L as the P&L has to be disclosed. I would advocate, as you rightly said, for Hannover to either put in additional disclosures to come really to net numbers, entirely to net numbers, and sustain the methodology on the combined ratio on a net basis. I think that fits much more with our P&C business. It's much more intuitive.
But then you have to do separate disclosures, or you just have to increase the line items, put a bit more detail around your P&L. And on tenancy, don't quote me, but I would probably advocate with that at the moment.
About the first question of ROE?
Yes, the ROE. Well, I mean, we haven't really changed here. I mean, do you want to be very, very clear and dogmatic about which numbers you want to derive from your financial statements and think about, well, what is return on equity as it shows up in your group financial statements? And we have been very clear about that in the past, as you know. So we have never cleaned up OCI elements and there, etc., due to interest rate movements. We've been just picking the numbers as they were in the group financial statements. We haven't made up our mind on the denominator yet entirely. But I think both options are still in discussion. So it could be the CSM. I would not add the risk adjustment, to be honest, but it could be the CSM.
Okay.
Hi, Andrew Ritchie from Autonomous. Apologies. These questions might be simplistic. First of all, as a timing question, as you renew new business on the P&C side, you're going to be treating it using very conservative assumptions, which may possibly make it onerous, at least in IFRS 17 terms. There's going to be a mismatch then, isn't there, in Q1 and Q2, particularly between the new business coming on booked onerously versus the amount being released from the in force. So all other things being equal, assuming you're growing, you might even be loss-making on the P&C side. I mean, is that a correct way to think about it? Is there a way around that? I don't think there is. Second question is a conceptual one. Just to help us out, some in the industry say there's less flexibility on holding very prudent P&C reserves under IFRS 17.
Your commentary says there's more flexibility because you can tuck it into LIC. You can tuck it in possibly into the risk adjustment calculations as well. I personally tend to your interpretation, but is that what you're saying? I think that's what you're saying. You're saying, in effect, we can tuck a little bit more prudency away on top of the LIC, in effect, mechanically in the risk adjustment as well. Sorry, through a third question. Financial solutions business, I thought some of that would not be IFRS 17 because there's not enough risk transfer occurring. And the final question is, at the beginning, Jean-Jacques suggested there were new insights from IFRS 17, which may steer business differently. What would that be?
Yeah. Okay. I'll start probably with the prudence bit. I might be a bit more concrete on the messages that I want to convey. First, the risk adjustment is a new element of prudence. It just comes out of the standard. In terms of flexibility of that risk adjustment, in terms of how you calculate it and how you let that float through the P&L over time, I think you have to be consistent. You cannot just say, "Well, let's release some of the risk adjustment and change the methodology in this quarter," etc. In terms of flexibility to move around the risk adjustment, I think there's not much room in that. We have to be consistent. Again, it is a level of prudence that comes on top, I think.
As for the prudency that you have in your best estimate assumptions when you do your cash flow assumptions, of course, you have to have an unbiased view on your calculations. So you cannot come up with actual assumptions and say, "Well, that's it." And then we do just one management loading onto it. I think that's not the approach you can take. However, of course, if you are consistent, you can use prudent assumptions and say, "Well, there are a lot of events not in data," etc. There's a lot of uncertainty in long-term business. Let's add a bit of prudency there. So I think there is room. You just have to be consistent and a bit more precise and have to do it bottom-up. It does make it a bit more complicated because you have to really put it into your actual databases and your assumptions, etc.
It has to flow through. But absolutely, I think that room is there. Absolutely. On timing, I think you're referring to—I'm trying to see if I understood the question right, Andrew. I think you're referring to the fact that we have now, under IFRS, ironically, a prudence element because profits, you have to defer, and losses, you have to occur right away. So if you do prudent reserving and a lot of business coming into Q1 and Q2, you have, let's say, a front-loaded loss component, whereas the CSM is only earned over time. So your question probably is, are your Q1 and Q2 results more burdened by new business coming in? And I think if you are a growing company, if you have a lot of business coming in, that is true for some parts of the business, probably not for the structured piece.
But it is true in general. I think it is. Of course, you will have to then look into, do I have mechanisms in the LRC or whatever to react to that? But that would be then, I think, the mechanics that you're ascribing, I think, are absolutely right. And you just have to see, can I smooth the quarters a bit? Because that is certainly not the intention of the standard. Then financial solutions business, yes, you have to again, you start with a classification of an insurance contract, etc. So if it's an insurance contract, you have to pass the test, etc. So some of the business will end up in insurance. We have tried really to come to a point where we have only very rare, very rare few examples that I could name that will end up in financial instruments under IFRS 9.
The rest will really be part of insurance. And then I forgot the.
Those insights, new insights, is it changing anything?
Steering.
Steering. Yeah, yeah, I think so. Again, I mean, if you—and that's really new. We have two databases, P&C, Life and Health, all cash flows worldwide on a very granular, detailed basis because you have to force underwriters to put into your reinsurance administrative systems granular data. And I think that's very helpful if you have that all in place and can juggle around these numbers, do a lot of analytics, monitoring, etc. I think that's actually a huge benefit. And that's why I was a big fan of GMM because I didn't want to spend some really just money on a regulatory exercise. Yeah, I think it does give you insights into steering and monitoring. Absolutely.
Okay. Well, there are still a number of hands up, and we also have one from the conference call. So I would allow for one more question, and we have to clarify the other questions afterwards. Vikram Gandhi has called in the conference call. So Vikram, if you want to ask the question now.
Yes. Hello. Thanks, Karl. I hope you can hear me all right.
Very well.
Okay. Perfect. So thanks for the opportunity. It's Vik from Société Générale. Two or three quick questions. One is looking at the slide 14, where you've got the IFRS equity plus CSM, and Clemens said it's roughly equal to the Solvency II equity, but Solvency II equity would also include the hybrid and the sub debt. So I just wondered if you can clarify whether that's included when you say it's roughly equivalent and maybe goodwill is knocked off, so there is some kind of internal adjustment happening there for when you say they're roughly equivalent. So that's one.
The second is sticking onto the same slide, and if I'm trying to kind of triangulate the Solvency II world IFRS 17 and what we used to have as MCV, is it kind of fair to say that the IFRS equity under IFRS 17, the equity number is probably what would have been equivalent to ANAV or ANW under MCEV, and CSM is what VIF is? And I don't know if the risk adjustment lies somewhere in between, or that's a completely wrong way of looking at it. So that's question two. And the third is Zurich hosted an IFRS education event a few days ago, and they said they've kind of touched base with Allianz, AXA, and Generali and tried to be as close as possible in terms of achieving some kind of harmony in that disclosure. Just wondered if that's been the case between Munich Re, Hannover Re, or SCOR.
You've been talking to your peers to come up with some sort of consistency when you guys disclose it. So that's really all.
Yeah. Short but difficult question, Vik. I'll try to answer the solvency to IFRS 17 question. First, yes, I think you're perfectly right. I think the hybrid is not included. We've excluded that as you really to have the same basis. I think that would have, of course, been one huge effect that wouldn't have really made any sense here. However, I wouldn't have expected IFRS 17 equity and CSM and solvency to be at the same level for many reasons. For example, you take one example for risk adjustment or risk margin under solvency to also covers the operational risk, for example. That's an element, of course, that you do not have under IFRS 17, etc., etc.
You can have many examples where you have differences in the approach, and you know that Solvency II is much more prescriptive in terms of your methodology, how you calculate your risk adjustment, how you do discounting, etc. So there will be differences, but that was just an attempt to see, does it make sense? Do we come up with roughly the same amounts and don't look at it in a too accurate way? But in general, I think it's intuitive that both reach roughly the same level. That was really just the approach. On MCV, honestly, I simply do not know. I tend to forget and try to forget MCV, etc. We might follow up on that. On KPIs, measurements, etc., yes, I think it's very important that we reach harmonization of KPIs, etc. Yes, there are talks. We have the CFO Forum, and we have exchanges there.
We have working groups working diligently on KPIs, etc. I cannot promise that as of Q1 2023, all will be harmonized, etc., but there is a clear desire to do that. Otherwise, I mean, what's the point about it? If there are differences, I think it's all about disclosure, being transparent, what elements going into KPIs, etc., for you to make it easier to make those numbers comparable.
Fantastic. Thank you.
Okay. Well, thank you for your questions. Thank you, Clemens, for your presentation. Before I give the floor to Jean-Jacques to wrap up the investor's day today, I would like to thank you on behalf of the entire investor relations team for your contributions and participation. And I'm also being very thankful for your feedback, which the questionnaire we will send out tomorrow. So that is very helpful, as I said earlier. So it's very gratifying for us that so many of you took today and being here and showed such a keen interest in Hannover Re. And with that, I hand over to you, Jean-Jacques.
Well, thank you very much for this. I don't want to go into length. As you know, my sense of punctuality, my swiftness means that after 3 o'clock, it's already too late. So I'll be very short. I just want to thank you very much for joining yesterday today. Your questions are helping tremendously in validating our thinking. If I look at the stock price of Hannover Re today, it's -2.1%, so I'm not sure about the feedback. But since the best performance today was during the lunch break, I gather that we will rely on the feedback forms rather than the stock price for today. But in short, I think we wanted to give some information on my side on the strategic thinking, on where we stand strategically in this area of investment, this notion of future readiness, which we'll be working on.
We have a first workshop early January, and we'll build a case and determine where we want to allocate more resources and emphasize some elements of the strategy. The next investors' day in 2023 will be very much focused on these themes. Then we had information which we wanted to provide first on investment, showing the resilience of our portfolio. Secondly, P&C showing the resolve in terms of our pricing adequacy and the robustness of the process, but also highlighting the fact that we are convinced that the market is definitely turning and will take advantage of the cycle. Life and health, clearly the focus on pandemic, which was built into our pricing framework as well. I hope this was informative. The IFRS session, of course, is the first attempt to give you some of the themes which are relevant for you.
We'll have a date in December where we'll give a bit more precision on the KPIs on what to expect. Then next year, of course, we'll be more into the business-as-usual mode with the first quarterly results. With that, I'd like to close. Next time we meet virtually will be the conference call for the third quarter results on the 3rd of November. With that, I'd like to close the Investors' Day and thank you again very much for your participation.