Thank you very much. Good morning, everyone. A warm welcome to our conference call with an update on IFRS 17 and with the full year guidance for the financial year 2023. For the first time, based on the new accounting standards, IFRS 17 and IFRS 9. We thought it would also be useful to share some preliminary key figures for the financial year 2022 today, and not as usual in our renewals call next week. I'll start with these numbers which are still based on IFRS 4, of course, and then walk through the guidance by commenting on both the underlying and the accounting implications around the key figures. We will make sure that we leave enough time for your questions later in the Q&A session.
Starting on slide four with the 2022 financials, it is pleasing to see that the group net income of EUR 1.4 billion is within the initial target range and pretty much in line with the refined guidance towards the lower end of the range, which we provided with our Q3 results. Gross written premium increased by 12.7% adjusted for FX rates. The nominal growth was even higher at about 20%. Overall, the result is a reflection of the strong resilience of Hannover, even in volatile times, and 2022 was certainly a challenging year for the reinsurance industry. In P&C, large losses came in above the full-year budget, and particularly driven by our precautionary reserving for the Ukraine war.
Additionally, we have recorded a negative run-off for large losses from prior years and a high claims frequency from our accident and health business in Southeast Asia. A part of the negative development has been mitigated by reserve releases for COVID-19 and also by other reserve releases. In life and health, both the reported earnings and the underlying developments were favorable. Our pandemic retro and some positive effects from at equity participations in the Q4 have mitigated the negative but decreasing impact from COVID-19 claims. Within return on investments of 3.2%, the investment income was very strong. On top of the favorable positive effect from increasing interest rates, we have benefited from a very strong contribution from our inflation-linked bond portfolio.
Altogether, the return on equity of 14.1% is clearly above our target range, supported by both the underlying business development and the decrease in shareholders' equity from valuation effects. Looking ahead into 2023 on slide five. We have worked very hard to implement the new accounting standard, IFRS 17 and IFRS 9. I'm not going to repeat what you will have heard many times over the last couple of months that this is only accounting, but I do want to reiterate our message from our investors day that we have to adopt it to the new standard in a way that truly adds value for our stakeholders, as opposed to just ticking a regulatory box. This is also the reason why we went for the GMM approach for our entire life and health and P&C book, and not the simplified PAA approach.
This was, as mentioned in our investors day, a conscious decision in order to have a consistent and harmonized approach across our book using current estimates and assumptions, and not looking at different measurement models within one segment. We also wanted to align the accounting as much as possible with our internal economic view. On top of that, use the regulatory spend as leverage for transformational benefit. For example, on data granularity and consistency, and on strengthening our system landscape and our processes. We are ready now, and we have put together our first plan based on the new accounting regime, from which we derive cautiously our guidance for the financial year 2023, which you can find on slide eight.
Let's start with the overview on slide eight and with the first line item in our newly established IFRS 17 profit and loss accounts, the revenue number, which in our case, we will be referring to as reinsurance revenue going forward. I will comment later on how this reinsurance revenue under IFRS 14 can be viewed compared to a gross written premium number under IFRS 4. Based on the underlying business opportunities, we expect a growth in reinsurance revenue of at least 5%. The minimum of 5% growth is based on the underlying development. We will comment on the outcome of our P&C renewals in detail in our renewals call next week.
I do not want to preempt that call, but I can say that on the back of last year's strong growth, we have managed to remain disciplined and focus on further improving the quality of our P&C portfolio. Which I believe we have managed quite successfully in the recent renewal. This is to some extent, also reflected in our growth target, which of course includes both P&C and life and health. The return on investments is expected to reach a level of at least 2.4%. There are a couple of thoughts behind this admittedly cautious number. Let me start with the underlying developments.
On the one hand, the ordinary investment income will clearly benefit from the increased interest rate levels. On the other hand, the contribution from inflation-linked bonds within the ordinary income is expected to decrease quite substantially compared to the year 2022. For realized gains and losses, our current expectation is rather neutral in terms of P&L impact. When it comes to the accounting impact from IFRS 9, you know, there are only minor impacts on the general, let's say, level of investment income. As you know, the new regime comes with some greater volatility due to the higher share of assets accounted at fair value through the P&L.
I will come to the composition of our investment portfolio later and what that means in terms of IFRS 9, and you will see that we have managed to keep that fair value through P&L part still quite low. The relevant asset classes for us in this category are mainly private equity and real estate. In particular, for those two asset classes which have performed very strongly over the last couple of years, we do see some risk for valuation adjustments in the financial year 2023. Given the size of this portfolio, we have left quite some room in our ROI target for negative effects to reflect on this uncertainty.
In both P&C and life and health, we are very confident that the quality of our portfolio is strong, and in particularly in P&C reinsurance, it has clearly further improved in the 1/1 renewals. These margin improvements are providing us with flexibility to add to our reserve buffers. We are committed to not only restore these buffers, but also to materially increase the buffers in the current market environment. This approach, as you know, is very much in line with our overall reserving philosophy and cycle management. On top of that, it should put us in a strong position in light of elevated inflation levels, which we also expect for 2023. In life and health reinsurance, the favorable underlying developments are accompanied by a moderate earnings uplift from the transition to IFRS 17.
Due to the unlocking of best estimate liabilities, we had to reflect some expected future losses, in particular for U.S. mortality business in the equity at the transition date. This will have a positive impact on future reported earnings without changing the underlying expectations for the business. As it is business with a long duration, the impact should also be seen as sustainable, distributed over the lifetime of the treaties. The expected uplift of the pre-tax earnings level is in the mid to high double-digit EUR million. Taking all factors into account, the incorporated uncertainties, the potential for higher volatility into account, et cetera, we do aim for a group net income of at least EUR 1.7 billion in 2023.
It is fair to say that this does reflect a cautious approach, but we are fully committed to deliver on this target, even in volatile times. Last but not least, we have not changed our dividend policy. You will be aware that our dividends are based on German GAAP financials, the dividend for the year 2022 will be announced in March together with the disclosure publication of our annual report 2022. On the next slide, let me add some more color to the guidance by way of going through the key metrics and see how they are being influenced by the current market environment on the one hand, and by accounting changes on the other hand. Let's start with the general view on the potential impacts on this slide. Let's start with P&C.
In a steady state in P&C, we do not expect major impacts on the overall earnings level. On the volatility side, the IFRS 17, let's say, inherent asymmetric treatment of profits, which have to be spread over the lifetime of the contract, and losses which have to be recognized immediately, could lead potentially to some seasonal effects on profit recognition in the quarters. However, we believe that our overall prudent reserving position and our strong retro strategy will even allow for compensating some of that effect. The discounting on the P&C side with current assumptions will certainly provide a better view on the economics, but it might come with some volatility. We have applied the so-called OCI option to align with our hold and sell approach under IFRS 9 and also to mitigate P&L volatility driven by interest rate fluctuations.
In life and health, as mentioned earlier, we do expect an overall EBIT uplift. The huge benefit, I believe, is that the standard should allow for much greater stability of overall earnings, given the steady CSM release over a long period of time, which will be further fueled by business growth. On investments, also in a steady state, no structural changes in the overall earnings level. We believe in terms of volatility, there are different drivers. Generally, it's clear that volatility is higher. However, the new standards will also remove some of the accounting mismatches.
For example, the material currency losses in P&C that we've seen because the currency gains, as you know, from our U.S. dollar private equity investments were presented in OCI as opposed to the P&L. Those will be reflected in a separate P&L line item going forward. Also, the U.K. derivatives that has produced more than EUR 100 million noneconomic accounting loss, I would call it, in the investment income, will going forward, be part of the overall valuation of the reinsurance contract. On slide 10, on the reinsurance revenue, unsurprisingly, the newly defined top line, the reinsurance revenue is lower than the gross written premium as presented under IFRS 4 or U.S. GAAP. Why is that?
IFRS 17 makes it very clear that the reinsurer should only present premium information in the P&L that is purely, let's say, remuneration for reinsurance services. Therefore, for example, a reinsurance commission on a reinsurance treaty, the IFRS 17 revenue will not be the ceded premium, but the ceded premium net of this commission. In some reinsurance premiums include also a so-called investment component, hence an amount that will be paid back to the cedant and repayment of these non-distinct investment components do not relate to the provision of insurance services. Therefore, such amounts are not presented as part of the insurer's revenue or the insurance service expenses. Examples of these non-distinct investment components are profit commission, sliding scales, no claims bonus, and alike.
In our case, structured business, which has fueled the written premium quite significantly over the last couple of years, will have some of those features. On the life and health side, we have, for example, the Financial Solutions business under IFRS 4 or, yeah, under IFRS 4, these were classified as reinsurance contracts and were accounted under U.S. GAAP, as deposit accounting, with basically the fee being part of other income. Usually, those treaties come with a cash settlement of the reinsurance fee payable to the reinsurer, and therefore, under IFRS 17, the CSM at inception is the present value of the fee income, and that net fee income is going forward part of the reinsurance revenue. The minimum 5% growth of reinsurance revenue for the financial year 2023 does reflect partly those accounting changes.
As mentioned earlier, also a healthy pipeline, both in life and health and in P&C. On the next slide, you will find some comments around the earnings expectations in our P&C reinsurance segment and how the new accounting regime will have an effect on both the P&L and the combined ratio. Again, we are of the strong opinion that the current environment is extremely attractive, and many of our underwriters I've been in touch with over the last couple of weeks did mention that they hadn't seen this for many, many years, if not decades. We have already taken advantage of this environment by growing our book in the past and by further increasing the quality in the recent renewals. We are also fully prepared to take full advantage of the market in the upcoming renewals.
At the same time, the reinsurance industry has seen a couple of years with heavy loss burdens. Therefore, we will be using some of these substantial margin increases that we undoubtedly expect to find its way into our earnings and to increase our resilience reserves. We are fully committed to maintain our approach of prudent initial loss picks and overall prudent reserving, which will ultimately lead to positive run-off results being visible in the actual over expected development as part of the reinsurance expenses going forward. We will keep reporting on our resiliency level in our reserves on the back of the external actuarial report currently performed by Willis Towers Watson. We have also increased our large loss budget from EUR 1.4 billion- 1.725 billion.
This is a reflection of our overall net growth of our book, and also, again, on the overall net position of our P&C book. I did comment already on the discounting earlier. The current interest rate development should be temporarily slightly beneficial for earnings since the locked-in years, and hence the interest accretion or the unwind of the initially locked-in years in the finance result should be lower than the discount effect on our new business. It's difficult to foresee how volatile interest rates are going to be in 2023 and how exactly the impact is on our P&C earnings. On the next slide, number 12, some thoughts on how you could think of the combined ratio under the new accounting regime.
On the top of this graph, you can see that we will provide the combined ratio on a net basis, given that this, we believe, is a better reflection of our business model. If we were to take, let's say, if we look at the waterfall down there, if we were to take, let's say, our strategic target of 96% from recent years, the combined ratio would be lower. There are some structural effects, like the deduction of the aforementioned non-distinct investment components and commissions, which will lead to a lower combined ratio per se. When you deduct those items from both the nominator and the denominator, that effect could be in the area of somewhere around 1.5-2 percentage point on the combined ratio.
The directly attributable expenses as part of the reinsurance service result are lower than the reinsurance admin expenses from IFRS 4, which will bring down the combined ratio by another roughly 0.6 percentage points. The largest and certainly more volatile part is the discounting. Here we use risk-free rates plus an illiquidity premium. This part of the combined ratio very much depends on the interest rate levels, which has been quite volatile over the last one or two years, as you know, and can actually spend from a low to high single digit percentage point impact on the combined ratio. We will be providing an update on these effects, I guess, with our first set of IFRS 17 Q1 numbers in May. Let's turn to Life and Health and to page 13.
The main driver in terms of accounting change here in Life and Health is that there are no locked-in assumptions under IFRS 17 as they were existing under U.S. GAAP. This unlocking, if you like, at the transition date, together with the creation of the contractual service margin, has caused a reduction in equity at transition and will also lead to higher and more stable results in our Life and Health reinsurance segment. In terms of transparency and presentation, you will find the value creation and the CSM on the face of the audited balance sheet. The insurance or in-reinsurance service result will now include the results from our previously deposit accounted Financial Solutions deals, which I believe is really a huge step forward in helping you to understand the earnings and also the future earning patterns.
This development is supported by a healthy pipeline of new business, particularly in financial solutions and longevity. We want to grow our book further and also increase our regional footprint. Overall, quite positive outlook on the Life and Health side if COVID claims further wind down as expected. Next slide. Let's briefly look at investments. On the accounting side, I would certainly not call it a revolution like IFRS 17, but quite a substantial evolution, let's say, ultimately leading to more volatility in the P&L, not necessarily in equity. In terms of classification, the standard IFRS 9 changes from the previous concept of the holder's intent to hold or sell investments to a more cash flow view, hence how foreseeable are the cash flows of the underlying financial instruments. We have adopted, as mentioned earlier, the hold and sell model across the group.
The majority of the financial instrument continue to be classified as fair value through OCI, which should currently be around 90% or more of our portfolio. We have a certain percentage points of investments that are measured at amortized cost, probably around 2%-3%, that are mainly direct held property investments. Previously, that class also included held to maturity and loans and receivables. Probably around 7.5% of our portfolio are classified as fair value through the P&L. That number was previously around probably less than 1%, actually. Those are mainly our private equity and real estate funds, infrastructure, derivatives, financial hedges, cat bonds, et cetera. We have already actively reduced some of that exposure. For example, we sold our listed shares in form of ETFs.
We have also restructured some of the fixed income funds that did not pass the SPPI test before. We do not expect a major impact from the new impairment or ECL regime, given the high quality of our portfolio. As mentioned earlier, with respect to our 2023 guidance, we have allowed for increased volatility, and particularly in the asset classes mentioned on the slide. Given the size of the portfolio and the high valuations, there is an elevated risk of a one-off correction in 2023 purely due to the time lag in valuation of these funds. Midterm, we do remain quite optimistic on these asset classes, of course, and we do see the increase in interest rates overall as a very positive, which will find its way into our ordinary income. On the next slide, ROE.
As mentioned on our Investors Day, ROE will remain our main KPI. We are not planning to make adjustments to the way we calculate the return on equity, but we have reflected on the accounting impact, in light of our strategic ROE target, which we have therefore increased by 100 basis points to 1,000 basis points above risk-free. This is largely the uplift we expect from Life and Health, so the mid to high double-digit EBIT increase, which translates roughly into that 100 basis points increase. Needless to say that our ROE ambition is certainly higher. Of course, we are committed to outperform that target as we did in the past.
The following slides, starting on slide 17, we have included some thoughts on selected topics. Here on 17, you can see interest rate and risk adjustment methodology, just to share that with you, how we went over these two topics. As for the discount rates and risk adjustments, we have generally tried to align our view to Solvency II. If we were of the opinion that our internal view is even more closer to the economic reality, we decided to go for the internal view like we did, for example, for the risk adjustment. We have fully aligned the risk adjustment to our view of that risk that we form in our pricing, and therefore we have called it a margin approach. You can see the details on the slide here.
On interest rates, similarly to Solvency II yield curves, the IFRS 17 yield curves are derived by a bottom-up approach. Meaning we apply a risk-free rate plus an illiquidity premium. The IFRS 17 liquidity premium is based on the Solvency II methodology. On an individual asset portfolio, which is used for deriving the ILP instead of the EIOPA portfolio. Motivation here is really to better align the movements of the liability in the assets and hence reduce the overall OCI movements. On slide 18, we have included some details on the CSM at transition. No surprise that the larger part is in life and health, which will support sustainable and stable earnings and will most likely replace the value of new business in our target.
Let me pause here and briefly reiterate that we do believe that the new accounting standard. So I'm on slide 19 now. We do believe that the new accounting standard does come with long-term benefits for the reasons that you see here on the slides. We will go to any length to be in dialogue with all of you to become fluent in this new language, as I usually call it. On the guidance, some of you will see this as very prudent. Yes, we have allowed for more uncertainty and volatility because of the new accounting regimes, but also to reflect on the current economic environment. Nevertheless, we are optimistic, particularly given the hard market in P&C, our growth opportunities, and the positive performance of our life and health book.
We will use some of these underlying margins to further strengthen our resiliency, to keep producing reliable and stable results. Ultimately delivering on our promises and achieve our targets, even in difficult years like we have done in 2022. I close my presentation and I'm looking forward to your questions and comments.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one. If you wish to remove yourself from the question queue, you may press star followed by two. In the interest of time, please limit yourself to two questions only. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. We have the first question from Kamran Hossain from JP Morgan. Your question please.
Hi. Morning, everyone. I've got a couple of questions on the guidance. I'm just trying to square this circle. You started off with 1.4 - 1.5 billion of earnings guidance for 2022. You've had the positive impact in life and health from the move to the new regime. The P&C market, as you said, some of your underwriters are saying this is the best market you've seen in decades. I kind of understand the reserve piece, but are we kind of underestimating how much you needed to add to buffers? I'm just trying to understand, you know, 1.4- 1.5, I mean, only moving to 1.7. You know, it's a good result.
But whether there's extreme caution there or whether actually you're saying EUR 1.7 billion is a floor, you know, it will be no lower than that at all. Just trying to understand, or we get some more kind of comments and kinda clarity around that guidance relative to last year? The second question is on the cat budget. You've increased this. I mean, it's more than 20% up year-over-year. You know, clearly we've seen climate change effects. We've seen, you know, net cat budgets being blown, you know, across the sector for a number of years. But you're talking about revenue growth of 5%. Your cat budget's up more than 20, your revenue's up five. Does this signal, like, change in assumptions or does this signal that actually you've taken on a lot more cat risk?
Is this retro? I'm sure a lot of these questions will be answered next week as well. I'm just intrigued about those two moving parts because, you know, it feels a little bit like classic Hannover Re conservatism. I just want to get your thoughts on that. Thank you.
Good morning, Kamran, thank you for your questions. Very valid questions, of course. I mean, on the guidance, I think when you take the 1.4-1.5 as a starting point and try to derive at the 1.7, I think you're perfectly right. I think we need to start probably with the 2022 year. We have seen a year, particularly on the P&C side, where we have seen substantial large losses. We have exceeded our large loss budget. We've also seen run of losses from prior years. Partly due to inflation, partly due to currency losses.
Then on top of that, we have seen frequencies, the frequency claims as we reported in Q3, and we have seen a couple of more of those claims also in Q4 on the accident and health portfolio in Southeast Asia. We have, certainly we will have to confirm that number in May 2023 when we will report about the reserve redundancies at the 31st of December 2022. That is to be confirmed, but it's pretty certain that we'll have used some of the buffers, our reserve buffers in 2022 to support our guidance. Therefore that's one element, yes. There is an element in the guidance. We have built an element of prudency that we usually do in terms of loss ticks.
We will usually not see the huge margin increase that we do expect undoubtedly, Kamal, but we will not see that necessarily in our earnings. We want to restore some of the buffers that we used in 22 and 22. Also we want to build, further build, our reserves and strengthen our reserves with the growth of the book. Those are the main factors. Then as mentioned, Kamal, I think the overall, the overall uncertainty that comes with the new accounting standard because we are guiding a net income under the new accounting regime, not the comprehensive income. Therefore there is potential for volatility. Some of the reasons we mentioned, of course, interest rates developments, but also, the, particularly the expected valuation corrections on private equity.
All those factors putting together, we have been cautiously positioning ourselves on the guidance. Yes, the at least 1.7 does leave some room for an uplift, but given the volatility, there's also a potential for a downturn on that. Therefore, there is increased uncertainty and I believe, given the market environment, given the accounting changes, which we apply for the first time and also reflecting on 2022, I think I would name these three factors into that. When you look at investments, for example, to add that briefly, we do not exactly know how the performance of the inflation linkers will contribute to the investment income. We have seen a substantial contribution in our 2022 numbers.
Roughly EUR 450 million in our 2022 EBIT stems from inflation-linked bonds. We have been also cautious in planning this number for 2023. On the net CAT budget, I think the increase of the net CAT budget is not only a reflection of the growth that we are expecting in 2023 and the renewals. Yes, Sven will be commenting on that in the next week. It is also, to some extent, a reflection that we've grown substantially last year and even more than we expected. There's a kind of a catch-up effect there as well. I think our net CAT budget or CAT exposure has grown in line with our overall book, you shouldn't expect a huge increase in our net CAT exposure on an in-base.
We will comment on that, how that is composed by gross number in terms of growth, and our retro next week.
Fantastic. Thanks very much.
The next question comes from Vinit Malhotra from Mediobanca. Your question please.
Yes, good morning. Thank you. Just for me, okay, my two questions. If I can start with the revenue growth of at least 5%. Could you just comment? I mean, it doesn't look like it's reflecting all the hard market buoyancy we keep talking about. Is it because of the structured reinsurance effect from IFRS 17 that you're a bit more careful about this number? That's the first question. The second question is just on the reserving commentary. If I go back one year, I think there's a bit of a deja vu here, because even in 2021 Q4, we had similar comments that there was gains from inflation linkers and then that was used to buffer us for inflation reserve in Q4. How different is this scenario in this quarter?
You mentioned the Southeast Asia accident claims in accident. Is there anything else noteworthy about the Q4 reserving that you could shed light on or would you rather wait for next week as well? Thank you.
Thank you, Vinit. Happy to comment on those. On the reinsurance revenue growth, I think, yes, to some extent, the growth number, at least if you compare it to recent years, was fueled by a huge portion of structured reinsurance. That will, as mentioned, only in terms of the margin feed into the revenue numbers. It's not easy to compare that really with the gross written premium, which is, if you like, a bit inflated by this number. We've always, you know, been very clear on, also, on the margins, etc., because it's a bit more risk remote. That's one element. It's also that, clearly on the at least 1/1 renewal, yes, we have been very disciplined in terms of underwriting.
There is an element of portfolio managing in there. There's also an element of the composition of the portfolio. If you shift the portfolio from, let's say, more pro rata, which we have been happily taken on board, given the development on the primary insurance side in the recent years. If you shift that portfolio rather to excess of loss, that also comes with a volume effect. Although the quality of your book has probably increased substantially. There is also a volume effect on there. Please bear with us just until next week for Sven to comment on the details of that. On the reserving side, yes, you are right. Even, I mean, even in difficult years, 2020 and 2021, we were able to increase our reserve buffers.
Last year, we have used roughly EUR 100 million of the inflation-linked bonds contribution in the P&L to strengthen our reserves. This year, the comparable number in the P&L from the inflation link up is roughly EUR 450 million, and we will not have used any of this contribution to strengthen our reserves on the P&C side. At least not directly. Therefore we again, will certainly have used some of the buffers in 2022 if you take all the effects together that I mentioned earlier.
Okay. Just to clarify Kamran's, the answer to Cameron. You said that the at least EUR 1.7 billion does leave some room for an uplift, but not much. Is that the correct understanding? Sorry, I missed that last phrase you used.
No, I wouldn't say that. I think it's fair to say that in general, the market environment, but also the accounting regimes, leave room for higher volatility around this 1.7, and it can go in both directions. Again, we've tried to be cautious, also in light of the reserving development, really, and being prepared to take particularly some of the P&C margin improvements, and increase our buffers. That was the main driver here.
Okay. Thank you very much.
The next question comes from William Hardcastle from UBS. Your question, please.
Hey, morning, everyone. Thanks for taking the calls. Sorry to ask another one on reserves. It's always a danger when you give us good data that we are inclined to ask it. I guess, how do you view this reserve buffer? I guess when I'm trying to think about it and think about the replenishment, should we think about this as a % of reserves, % of premium or an absolute number? I guess, how do you think about it for when we and therefore we can try and work out what can be added. The second one is a question really about the investment volatility that you mention it's increasing. It's led to a, what seems to be a minor change so far in the investment portfolio.
I guess, given you've mentioned those actions, could we expect a continuation of that trend and you look to reduce volatility further, so a change in asset class investment? Thank you.
Thank you, Will. I'll start with the last one on investments. I think, despite the fact that a larger portion of our investments will be categorized at fair value through the P&L, I do not expect that volatility to be at such an elevated level as we would expect in 2023. I think it's rather, particularly on the private equity and real estate portfolio, sort of a time lag in reporting net asset values because those are valued on net asset values forms. I do believe there is a time lag in there. Some of the corrections we've seen in the market, in the equity market in 2022, we would expect to also show up in our private equity portfolio. I would rather say that's particularly a 2023 effect.
We haven't seen that yet, to be clear, but I would at least expect it, at least leave some room for that in our guidance. That's why I've been cautious about it. In terms of our asset portfolio, no, I would say, we are very committed to these asset classes. They are stable contributors, and I think, we will manage volatility on the investment side in general, quite well. For example, if we go for listed equities, we will rather go for the OCI option on listed equities, in order to reduce volatility, P&L volatility. Again, also in terms of structures of fixed income funds, et cetera, and also the question of is an investment in financial instrument and insurance contract? Or does it fail SPPI tests, et cetera.
We have put processes in place really to manage volatility on our investment income. No, short answer, no major changes in our asset portfolio mix. On the reserve buffers, we do not really have a percentage of our overall reserves in mind. We are rather thinking in terms of absolute numbers. You know, we have reported EUR 1.7 billion of redundancies on the 31st of December 2021. We want to rebuild that number, and we want to further increase that number as we grow our book. We want to use particularly this very hard market to replenish some of the buffers and to prepare for, let's say, the cycle management, and volatility management, also using some of the buffers in other market times.
It's really an exercise that we rather do at year-end. The reason why we've been cautious on the guidance this time is really to use this market environment to build further reserve buffers in absolute numbers.
Okay. Thank you.
The next question comes from Freya Kong from Bank of America. Your question, please.
Hi. Good morning. I was wondering if you could just repeat your answer on how you use the benefits of the inflation linkers. That EUR 450 million in 2022, did you book it in the margins or have you just taken the benefit? I didn't really understand that. Secondly, generally you provide a through the cycle combined ratio guidance. Will this IFRS 17 number be given next week or with full year results? Will there be some sort of bridge between IFRS 4 and IFRS 17? How should we think about adjusting for the volatility in the combined ratio from rate changes going forward? Thanks.
Yes, Freya. On the inflation linker, I mean, it's not that we, you know, this is not, let's say, a one-to-one exercise, even what we did in 2021. We have not literally taken EUR 100 million of the inflation linker increase and increased our reserve buffers in Q4. At least, we have increased the reserve buffers. I would say that to some extent, reflect on potential increased inflation levels, which we hadn't seen last year. It was really to add some prudency. I think it's fair to say when we look at our overall redundancy development in 2022, that we have not used the inflation-linked bonds contribution one-to-one to increase our redundancy level.
On the contrary, in overall terms, we will have lost some of the buffers of the EUR 1.7 billion in 2022.
Okay, thank you.
These inflation-linked bonds, Freya, to be clear, have contributed to our earnings.
Thank you. That's clear.
Yeah. Of course, you should see that also, I would say, you know, I reiterate that all the time, you know, these inflation-linked bonds are not part of our investment strategy. They have to be seen in connection, I think, with the P&C segment. It's a hedging strategy for inflation and P&C, and therefore, to some extent, you have to see that also in light with the combined ratio. On the second question on the combined ratio, I mean, you know, with this waterfall that we've included here, we've tried to give sort of a sense of, you know, what the accounting implication is on the combined ratio at the first place.
Again, these, let's say, these disclosure changes when it comes to non-distinct investment components and when it comes to a direct attributable cost, both these elements have changed. We will bring the combined ratio structurally down, to, let's say, by two to 2.5 percentage points. The main driver is really the discount rate. It's very difficult to put a number on that. I mean, if we look at discount rates, let's say, at transition, and then let's say today, and at Q2 2022, there are differences in effects on the percentage points of combined ratio changes, between two to, let's say, 6, 7, 8%. There's a huge variety on that.
Therefore we, I think we will give a first glance on that in our Q1 numbers, which we will be presenting in May. In terms of the strategic targets, in terms of, let's say, margin improvements, apart from the accounting side, I think you'll get a first impression probably next week on the call with Sven and Jean-Jacques.
Okay. Thank you. That's very helpful.
The next question comes from Thomas Fossard from HSBC. Your question, please.
Yes, good morning, everyone. had actually two questions to better understand the life and health Re and the new numbers that you're providing today on the risk adjustment and the CSM. The first question would be and again, specifically focusing on life and health. If I were to look at the, you know, how much is the risk adjustment, life and health Re risk adjustment at the total of the risk adjustment plus CSM. The risk adjustment is 40% of the total number. Benchmarking this calculation to what Munich Re has provided, and this is the only one we can benchmark your numbers to. The risk adjustment at Munich Re seems to be 28%.
It seems to be that your risk adjustment is higher. I was wondering if, I don't know, if you've taken specific caution as well in building this number. The second question would be related to the amortization profile of your risk adjustment and CSM going forward. If you could provide some indication, just to better understand, you know, approximate what could be the Life & Health's recontribution to your IFRS 17 P&L in the coming years. Thank you.
Thomas, thank you for the question. Let me start with Life & Health, and then I'll try to comment on the release patterns on the second question. The first one, the risk adjustment, I mean, I can't comment on the peers, to be honest, but I'm happy to share the details of how we go about this. As mentioned, it's, you know, the standard leaves room for tailoring this risk adjustment to your own portfolio, which we have done here. We have taken the so-called margin approach, so very much linked it to our internal metrics when we look at the risk from a pricing perspective. Our capital cost that we've then applied is 4.5% under IFRS.
That might be the difference, Thomas. We then apply that ratio to the available capital as opposed to the required capital. That could be a reason for your observation, Thomas. When you look at Solvency II ratios, when you then compare, of course, available to required capital, that could drive some of that, the difference. That could be at least an explanation. It could be an explanation why we a bit more on the prudent side, probably on the risk adjustment. On the reserve patterns, I would see the risk adjustment in Life & Health, not necessarily on P&C, but the release patterns on Life & Health of CSM and risk adjustment should be fairly similar. Probably slightly different, but fairly similar. You can see on the page 18, the release pattern of the CSM.
That should be fairly in line with the release pattern of the risk adjustment. In terms of contribution, I don't know the numbers offhand, and it's really difficult to put a number on these contributions. Of course, the bulk of the EBIT from Life & Health, from the insurance, in the insurance revenue, or the insurance service result, will be stemming from those two components. Let me try to answer it in a different way. I mean, you've, you know, we have a strategic target of EUR 600 million EBIT contribution from Life & Health, which Claude and Klaus have presented. Of course, you know, given the uplift on the EBIT on Life & Health, stemming from the accounting change, I will at least add on this effect to this strategic target going forward.
There is an, and I think the colleagues will comment on that probably on the Investor Day. I would see the contribution in connection with that strategic target and the EBIT uplift from IFRS 17.
All right. Thanks, Clemens. Maybe one follow-up on the first part of your answers, because you did mention that actually you try to follow to actually implement things to be closely aligned to Solvency II. When you're talking of applying the cost of capital to available capital rather than SCR, I thought that potentially if you were to be closer to Solvency II, you should have rather used SCR rather than available capital. Is my understanding wrong or maybe something I'm missing?
Yes. Thomas, fully right. In general, we have tried to be close, we've tried really to be close to Solvency II. If we thought our internal metrics and our internal approach here, the margin approach on pricing, is more appropriate to reflect on economics and the specifics of our book, then we have diverted from Solvency II. This is what we've done on the risk adjustment side. On Solvency II, the approach is actually different from what we do here under IFRS 17, because we thought it's a better reflection of the economics.
Understood. Thanks, Clemens.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by one. The next question is from Jochen Schmitt from Metzler. Your question please.
Thank you. Good morning. I have one question on your remark about higher than expected losses from prior years. Could you just clarify? I would assume that on a net basis you still had a positive run of results from prior years, even though probably impacted by some at-risk reserve movements included in the growth number. Could you comment on whether my assumption is right? That's my question. Thank you.
Jochen, although I don't have an actual number yet, but I would expect the run of results still to be positive. Yes. It's just that the large loss development from prior years has produced some run of losses. Therefore, the run of result overall is positive, but not on a level that we have probably seen in years before.
Thank you very much. Maybe just a brief follow on, if I may. I mean indirectly, could one maybe say that the gain from the inflation linkers is indirectly, partially offsetting these higher reserves from prior years? Because I assume that some of these movements were probably triggered by higher than anticipated inflation.
Absolutely, Jochen. That's perfectly right. That's why I've tried to make the connection to the combined ratio in P&C. I do believe, you know, it's to some extent, of course, if we would have been able to, we would have increased buffers in our reserves to protect against potential future inflation. Clearly, these inflation-linked bonds have also helped to mitigate some of the inflation effects in the current financial year. Yes.
Thank you very much. Bye-bye.
The next question comes from Andrew Ritchie from Autonomous. Your question please.
Hi there. First question. Could you just clarify what is the level of negative fair value through P&L impact from private equity and real estate you've assumed in the guidance? You've said there is a negative. Either give us the EUR million amount or what in basis points of the 2.4. That would be the first question. Second question, it's more a broader question. You put on slide 19 that you feel that you're gonna have greater transparency on future results. I'm struggling. I can see that for life and health because we'll have a stock of future earnings. I think we're going the opposite way on P&C, though. I struggle to see how we get more transparency.
In particular, isn't your prudence and the nature of IFRS 17 also gonna mean you're gonna be creating a loss component quite regularly, especially in the first two quarters of the year, which will be off balance sheet, and then we'll have to try and guess as to how that loss component earns back. so maybe just help me out. Why will we have better transparency on P&C? It just strikes me that there's more room for less transparency. Thanks.
Andrew, I'll start with the first one. Thank you. On the potential valuation correction on private equity. It's mainly private equity but also real estate, so these are these funds. We haven't included an actual number for these. If you think of, let's say, a correction of 10%-15% of market values, that could easily be in the range of EUR 200 million-EUR 300 million or even EUR 400 million, which we have accumulated, we had accumulated unrealized gains on this portfolio in excess of EUR 700 million as per the end of Q3. That would have gone through OCI, would have reduced the OCI, and now goes straight to the P&L. There's huge uncertainty on that number. That's why we have not really included it.
To give you a sense of the, of the magnitude that P&L impact could have, that's the number I would look at.
I guess the point being then what you're saying is your guidance would stand within that range of P&L impact.
Yes. For the, for that effect on the.
Yeah.
Yes, Andrew. On that effect, I would say yes. On P&C. Yes. I think, well, if we look what we had now, I mean, you could argue whether the combined ratio is at least a good indication. You know, we have a lot of other effects. If I look at our EBIT on the P&C side in the current regime, IFRS 4 , I would say, you know, you have currency losses of in excess of EUR 100 million. You have inflation-linked bonds, et cetera, and all this that are counted in investment income. Of course, we have prudency. I think all these effects, also in the current regime, have to seen in connection. I think it's all about putting these elements together, including the prudency. Therefore, we...
You know that, Andrew, we've always been very transparent on our reserve buffers, and that's what we are going to do in the future as well. I think the issue here is on the accounting regime. If I look at it, I would say the uncertainty really comes with the discounting effect on the combined ratio. I would view this accounting discounting effect also in line, probably with the interest accretion that you see in the finance expenses. If you purely look at the combined ratio and have a huge discount effect on your business without taking into account the interest accretion in the finance expenses, I think we need to find a way to combine these numbers, probably, or at least to find a way to interpret these numbers.
In terms of, in terms of producing loss components when you have a strong one renewal and seasonal effects. Structurally, yes, I think you're perfectly right. The standard and the asymmetry in the standard between loss recognition, which has to be done immediately, and pushing out future profits, does provide some volatility, at least across quarters. We will see how that plays out in the Q1. Again, I think, given the reserve buffers that we have, we will at least be able to compensate some of that volatility. I think we are not there yet, Andrew. I agree to that. I think we will find a way. I think it's the right approach also on P&C.
I think it's really to putting all these factors together, and being transparent about these drivers. I think that's what we need to work on.
Will there be a loss component at transition?
Yes.
Which you will tell us, isn't it?
Say it again, Andrew.
You'll indicate the number.
It's not a huge number. It's a low to, I would say a mid triple digit number in P&C.
Presumably this is a loss component that you don't really think is a loss component.
Well, I think it's both.
I know it is something that counts.
Well, yeah, it's both. Some of that is, of course, prudent reserving. I wouldn't rule out that there are also some contracts that are loss making for good reason.
Okay. Okay. Thank you. Thanks.
We have a follow-up question from Mr. Hardcastle. Your question, please.
Yeah. Thank you for taking a follow-up. Two, actually. First one's on risk adjustment. You've said it's gonna be around the 80%. Is there any split here you can provide between P&C and life and health? One of your competitors suggested it would be 90% of the group, but the P&C would be lower. Second question, just RP together the revenue, excludes the unearned premium. Just trying to do that walk and the impact year-on-year. Given how fast you grew in 2022, shouldn't that be a tailwind for your revenue growth into 2023? Because that'd be If growth in 2023 is less than 2022, you get a tailwind. Am I thinking about that right?
On the first one, I don't have the numbers to hand, but the P&C number will be lower than the 80. For the reason that we shouldn't think of the risk margin in terms of the prudence level on the P&C side, that the prudence here is in the risk margin. It's rather in the LIC, as we said. I would suggest a number around 60 confidence level, probably on the P&C side, and life and health then probably 80 and a bit higher given the composition of the overall risk adjustment. On the unearned premium, I will have to follow up on the question. I'm not entirely sure if that effect is really substantial, if that's really visible, on the revenues. I will follow up on that.
That's great. Thank you.
Thank you, Will.
There are no further questions at this time. I hand back to Clemens Jungsthöfel for closing comments.
Well, thank you very much for your participation. I think we've covered the ground quite well. Thank you for your questions. We are welcoming you to participate in the call next week on our renewables call, and also, of course, on our Q4 call in March. Thanks very much and have a good day.