Good morning, and welcome to Hannover Re's Investors Day. I'm very delighted that you made it to Berlin and are participating today in the conference. I'm also pleased that so many have already logged in to follow the webcast today and the conference today. Therefore, a good morning and good afternoon to all those, depending on the time zone you're in. The webcast will be recorded, so you have the opportunity to have a replay at a later time if you wish. A big thank you goes to investors, analysts, journalists, and brokers for covering Hannover Re constantly. This is very much appreciated from our side because it is really gratifying that you're conveying your thoughts and analysis to your clients.
And with that, you're increasing the understanding of the company and increasing also the transparency. Although we are still a pretty young reinsurance company, next year we will celebrate 30 years of being publicly traded. And I know you are interested in numbers, so the net income, the group net income in 1993 was, in today's currency, EUR 25 million. And 2023, the net income is expected, or we have guided for 80 times, 84 times of that we have achieved in 1993. So this is a reflection of the fundamental development of Hannover Re. And during that time, since the IPO in 1994, we have achieved a total shareholder return of 12.7% per year.
Delivering an attractive and at the same time less volatile return is part of our differentiation, as you know. This thought has guided us when we prepared for our next strategy. Because we want to keep our strength on the one hand side, but at the same time, we also want to increase and develop our business going forward. That was a central topic for the preparation of that strategy cycle. In this respect, our CEO, Jean-Jacques Henchoz, will chart today the course for the upcoming years. We have, as we usually do, formulated also a longer-term view in this strategy cycle, which is not called Target Matrix any longer. We call it now Financial Ambition. But it will give you a guidance of what our targets are and how we measure future success.
Our CFO will exactly explain that financial ambition, and also for all those who are interested in the shorter-term perspective, will also explain the guidance for the year 2024 in detail and for the first time. In order to spoil other contents for today, our P&C coordinator, Sven Althoff, will give a deep dive into the Nat Cat business and how we manage exposures, manage volatility, and how future profits might look like. I'm sure he won't get away without giving a status on the current market on the P&C side. Later on, Claude Chèvre will talk about Life and Health , of course, and in particular, he will talk about the drivers of the reinsurance service result, the technical result, and the potential development in the future.
I'm pretty sure this will draw your attention in particular, as it gives a good indication about the future profitability of the Life and Health business. After each presentation, we have scheduled for Q&As, and just to make sure that all of your questions are answered. During those, we also provide dial-in options for those who couldn't make it to Berlin today. I'd like to mention that we have all board members today with us, and so please use the time during the breaks and lunch to exchange ideas and to ask questions, of course. As I said earlier, the understanding of our company and the future expectation is one of the key intention of that Investor Day today. Therefore, we did our best to put together a pack of valuable and useful and hopefully interesting information for you.
With that, we are set, and, I hand over to you, Jean-Jacques.
Well, good morning, everyone. Very warm welcome here in Berlin. Thank you to all of you who are in the room who were able to join us yesterday evening. For those of you who were in London, there was no shock because the weather was really very much like in London. But I hope you enjoyed the evening and the possibility to interact with the executive board and the team of Hannover Re. I'd like to kick off today's presentations by an introduction to our group strategy. As mentioned earlier, we deferred a little bit the date of the Investors Day to today because of the strategy. We've been reviewing progress to date.
This year, we started early in the year and had a lot of iterations, also talked to some stakeholders and had a very good session with our Supervisory Board in November, and therefore wanted to share with you our thoughts. And that's what I want to do in this first presentation. The goal would be to highlight the key priorities for 2024 to 2026. As you know, we have three-year cycles, and then to renew our commitment to further profitable growth and outperformance. This is the name of the game for us. And I hope we'll be able to show through numbers, through highlighting the priorities, what we want to achieve in the years to come. So briefly, the agenda.
I'd like to come back to the current cycle, which is ending at the end of 2023. Take stock of our performance. I won't delve into too many numbers. Clemens will do so later on. And then present the strategic priorities for the next three years, and after the key takeaways, open up for questions and discussion on the strategy. So let's dive in, and let's start with a brief review of the strategy cycle, 2021 to 2023. First, looking at our key numbers, I'm very pleased to say that we delivered on our promises despite a challenging environment. You of course remember the different hurdles during these three years. The pandemic was not yet over.
It was a big burden on the industry, and on our results as well. Large losses were quite frequent, severe during that period. The Ukraine war, of course, is a big shock to all of us, an inflationary trend, which we've seen in the recent past. I think we are very pleased with the outperformance. You see the return on equity here, a key metric for the team. We look at it as something which is part of our raison d'être, to outperform on ROE, 15% during that cycle, 13.4% if you look at the 10-year view, well above industry average.
And we continue to see this as one of the key metrics for the next few years and the benchmark for our success. Group net income guidance in the period increased 12% per year in the period, and the solvency ratio is very healthy, on average, 255-270 in the latest quarterly earnings call. And I think looking at these different metrics, we can say delivery and certainly more than delivery on the targets we've set ourselves for the cycle. Looking a little bit more granularly on the different business units, we are very pleased to see that all profit engines, so to say, contributed to this outperformance. P&C performance was very good.
The EBIT grew by 6%, group gross written premium by 13%. We've been very pleased with the development of our franchise, and P&C had good success in the non-traditional space in ILS as well, and I think played the cycle in P&C. So good performance in spite of a large loss burden, to be sure. Life and Health top line a bit more muted. You know that this is due to partly recaptures, but also to the Financial Solutions business, which is not fully captured in the top line, but a very strong and steady performance over the period. Financial Solutions , longevity, driving performance, mortality coming back after the COVID pandemic.
So we're very happy to see that, we're firing on all cylinders across the business groups. And the in-force management effort have paid off, in particular with the US in-force business, where we had a lot of interactions with clients, some arbitrations, and we're done with that process. And last but not least, the investment performance has helped the group over the period. Clemens will say a few more words on investment management later on, but a very satisfying performance. The ROI has been above 3% during that period, but also since 2009, actually, so very steady contributor to our performance. Moving on now to some of the themes which were prominent during this three-year cycle.
You remember when we presented the strategy in 2020, or early 2021, we had four main themes where we felt we need to invest more in the years to come. Asia Pacific was one significant initiative. We felt that we were a bit thin on the ground. We wanted to have more people closer to the markets. We had a progressive shift of resources. And I think the market franchise and the client reach are very strong. I was in Asia a few times in the past 12-18 months, lately in Singapore, in Kuala Lumpur, and I was quite impressed by the proximity to the clients and the potential for growth.
So the footprint has been consolidated around regional hubs, and I think we have what it takes to continue the journey. We have solidified the leadership. As you know, Sharon, who will be with us in a moment, is part of the Executive Board and covering the region Asia Pacific for P&C, and we have more of an Asian perspective on the continent in the Executive Board. The results, of course, were overshadowed by the Accident and Health . COVID losses were currently, as we speak, talking to our clients and trying to find a way to settle these losses.
We've adequately reserved, but clearly, this had an impact on the results in particularly 2021, partly 2022. But I hope this will be behind us as we start the new year, 2024. Innovation and digital solutions was a second theme, which was very important for the company. We have dedicated teams who are focusing on digital opportunities, who are teaming up with fintech companies, so-called accelerator teams, composed of data analysts and underwriting experts, who are collaborating on new digital models, on new risk exposures. And here, I think the name of the game would be to create scalability.
I think we have a number of very, very good ideas around the world, very innovative transactions, which we can tap into, but we need to scale up and replicate some of these very, very good ideas. We then have client excellence, which was an attempt to support our growth in the next few years, because we have a number of growing international client relationships, and we wanted to really respond to their needs. We established client teams around some of these large client relationships, roughly the top 20, which have been growing steadily and have been very profitable. So we're making a big push on something which is a strength at Hannover Re, but we need to accompany that with some structure.
We have a CRM platform globally, which we use, called Connext, which allows us to bring people together on client matters. I think we're on a good path to support the growth of our portfolio, and the Client Excellence initiative has helped in that respect. Feedback is very strong from the broker community, P&C, from the clients. Generally, I think this ease of doing business, this connection, this solutions orientation, has been noted by the market and is very much appreciated. And last but not least, talent management. You remember three years ago, I was talking about succession planning, the fact that we have some senior underwriting people, key people in the organization who will go into retirement at some stage. This is happening as we speak.
Some of them are going to retirement, and I'm very pleased to say that, not in the room, don't worry, but in general, in the company. I see everybody looking at the executive board, so no, no, no announcement here. But with some senior underwriting people are ceding the torch to newcomers. We have very strong bench strength in the company, some people who take over the responsibilities, and I'm very pleased with the state of the succession planning as we speak. More to come. We will continue to put this as a top priority, talent management, talent development, and making sure this underwriting expertise acumen stays with the company.
Moving on to a segue to our strategy review, showing a bit the multiple trends which we looked into. No doubt, the environment has changed considerably, is much more uncertain, very hard to read to some extent. We were entering into a world which is more dynamic, and we need to take this into account. I think these are challenges and opportunities. By the way, I think it's always good to look at the opportunity side, in spite of the volatile world we're entering... and our strategy has focused on four main themes. The first already noted earlier, new technology.
Digitalization continues to drive progress with our clients, with our client relationships, but also with us, and I think data analytics will be a very important point for us and an area of competitive advantage, which we will continue to invest in. Geopolitical shifts, clearly a different world, much more uncertain, which allows us to look into our footprint and understand the trade-offs we have. Look at capital efficiency, fungibility of capital, and clearly, we need to be able to respond to potential changes in the geopolitical landscape. A hugely uncertain trend and certainly massive implications potentially. I think we are in a good stead with our lean operating model , very agile and able to respond to those challenges.
But clearly, this is on top of the list, and was probably less so a few years ago, when we reviewed the strategy at the time. Global competition for talents shows that talent management needs to be on our list. Clearly, we feel the pain in some geographies. There is a scarcity for talent in some parts of the world. And post-COVID, we will continue to invest into our own people, recruiting new people, but also develop our people internally. I think the Hannover Re culture, the responsibility element, the accountability element is something which is very much on top of everybody's mind, and that's why people stay at Hannover Re more than not.
There is a sense of empowerment at Hannover Re, and that's how we can successfully retain highly talented people. But we work on it, and we're not underestimating the massive challenge of talent scarcity in some categories. So education development will be key. And lastly, climate change, a long-term trend, evident of... because of the link with nat cat. And we continue to invest into nat cat modeling, nat cat pricing, the diversification of our book, but also protection gaps, which are increasing, unfortunately, in nat cat. And we'll be diligent in addressing environmental concerns and incorporate them in our strategy. So many trends, which we need to take into account.
These four were very much at the core of our discussion in the past few months. So let's dive into our group strategy for 2024 and 2026. The overarching theme for us reflects our operating model, the strength of our franchise, together with our intent to invest in future competitiveness, and this is summarized in this short tagline, "Staying focused and thinking ahead," and that's what we want to achieve. We've summarized that notion into three beacons. One is focus, a focus on our strength, the strength of our model. The second one is grow, which is very much about profitable growth pools and leveraging our expertise. The third is accelerate, and these are the areas of investment where we believe that winning tomorrow will require further investment.
We keep these strong foundations, which we always had, as part of our strategy, around embedded governance, a given for us, risk management, compliance, governance generally, which we keep strengthening, and sustainability with a focus on environmental responsibility and progress in that area. So these will be very, very summarized, the key topics, which will support the future growth of the company, and I'll go through them in brief, just to highlight the points, which are on our list. First, with focus, and here there is a bit of a repetition, but I think it's important to repeat these items. We want to remain a pure-play reinsurer.
We believe there is a very good growth potential, organic growth potential in this business. We see opportunities. We have a market share, which is more material today, but we see opportunities down the road. And that glass ceiling, which I've been talking about, for a few years now, doesn't seem to be so close after all. I think it's something which might be a discussion point at some stage, but we don't see it. We don't want to compete with our clients. I think it's an important one in the respect that there are different business models, but we try to be true to our strength of helping our insurance clients, and we're not into ancillary services or fee-based services. That's not what we want to do. That's not our raison d'être.
Again, there are choices to be made, and this is a choice we're making. This is probably less so in Life and Health , where there is a bit of a service component into attracting new business opportunities. But generally, this is part of the positioning. I think we see that it brings quality growth, and we will consolidate our future growth around that notion of a pure play green insurer. The second one is preferred business partner. We try to nurture long-term relationships around the world, and we've been quite successful in doing so. We're seen as a responsible, reliable, responsive partner by the broker community, by the client around the world.
The surveys give us a very clear feedback, which is stellar, and we are convinced that by building on partnerships, we will be able to continue on our growth trajectory. It doesn't mean that we're not opportunistic at all. At stages, we can play the opportunistic part, short-term opportunities, transactions, but generally, the way to go for us to secure long-term growth remains building partnerships. And last but not least, we believe that we need to continue to nurture that lean operating model, that notion of really investing where it matters for our business and staying lean and nimble in our organizational design. So we'll always fight for simplicity, for faster decision-making, notwithstanding the need for governance and checks and balance.
But being a lean operating model offers a cost advantage, which is still extremely useful in today's market dynamic. We'll focus on that. Capital efficiency, you'll hear a bit more from Clemens. Clearly, the name of the game, we want to retain that reserving approach in P&C, which has been a discussion topic in the market in the past few months, and this is something we continue to do. You know that this year, we've been using the harder market in order to build up some more reserves, and manage volatility over time. So that reserving philosophy remains part of who we are, and the capital efficiency, of course, helps on the ROE as well.
You see the total value creation, the total shareholder value over the past 10 years. Here, the number speaks a clear language. We are determined to continue on that trajectory. That's our goal, and that's certainly the metric we look at when we execute on strategy. Moving on to the second beacon, which is grow. Clearly, we see some further growth opportunities in the next 3 years. I think what has happened in the recent past continues to take place, is that the broadening of client relationships around the world has been a major source of growth for Hannover Re.
We see a continuation of that trend, and we'll continue to make everything possible to broaden, deepen some of the relationships, grow with our customers, as we are retributed, so to say, by increasing share of wallet across the accounts. And that's one of the goals we're setting ourselves. The second one is cycle management. We're certainly, from the history, intuitively cycle managers, and we are going to add a dimension to that notion by strengthening our portfolio steering. We want to make sure that we look into capital usage and profitability across lines of business, across geographies, and have a concerted effort in allocating our capital the most in the most judicious way.
We see portfolio steering as an opportunity for us to add a few points of profitability by getting the timing right, by allocating the capital in the right way. We've done so already in the past, but we want to be more granular. We'll of course also take advantage of the data granularity we're having with IFRS 17 to get even better at managing cycles and managing portfolio. This will be one of the initiatives, particularly in P&C, which we will pursue in the coming months, and is a priority for the group. Lastly, but not least, the innovation piece will increase in importance. We have part of it, which I mentioned, these accelerators who are looking into digital opportunities.
But we have also some tailored segments, like Advanced Solutions in P&C or Financial Solutions in Life and Health , the longevity area, or ILS, where we have enormous capabilities and where we want to invest into further growth. I think we are in all these areas market leaders or among the market leaders, and want to leverage these areas of excellence. Just to give some more color into segments or lines of business or geographies of interest to us at the moment, in traditional reinsurance, we're seeing very favorable development in facultative. It's a very interesting segment, particularly with the state of the market. Facultative is attractive. The specialty lines are generally areas where we have historically leading positions and continue to grow.
We'll try to, and you have a presentation on nat cat with Sven later on. We'll try to shift a bit to non-U.S. nat cat perils. We're pretty full when it comes to the U.S. nat cat market, so some diversification could be attractive, subject to price. Longevity, I mentioned, structured ILS and Financial Solutions as well, and we've continued to drive growth in Asia Pacific in a more differentiated way, probably. And Sharon might be able to say a few words later on. But with Asia Pac, we see some pools of profitable growth. Not at all costs. If competitive pressure comes in, we'll be very diligent, but we see continued opportunities in the region.
Latin America is mentioned because we are, to some extent, also a leading player. We are fit for purpose in terms of organization, design, so no need for special, additional effort, but we're pleased with our franchise in Latin America under the responsibility of Michael in P&C and Claude in Life and Health. So we continue all these efforts. As you can see, a number of attractive risk pools. We will focus on them, but they are not at the in opposition to some of the other sectors where we'll grow a bit more slowly. But these are areas where the expertise is in-house and where we have a strong basis. Moving on to the third beacon, accelerate. I've mentioned first data analytics.
This is going to be extremely important for us, and we're going to devote quite some priorities on our budget and resources on projects designed to improve our capabilities in data analytics, primarily for our own portfolio. We want to make sure the pricing of our business is continually expanded and fine-tuned. We have a central quotation platform, and Connext being built as an example of that, or we have the single risk, life and health area, very crucial to success, where we want to globalize the processes and application going forward. But the collaboration with fintech or digital players will also help us with gaining data, having more data granularity.
An example is medical data, where we might be able to manage our in-force in a better way or create new product opportunities. So data analytics will continue to be top of the list, and we'll focus our budget on some important initiatives. So it's really about pricing, modeling the business, risk selection, and in-force management. Moving on to the second important aspect of accelerate. This is operational excellence, efficiency, automation. You see a simplified example here on this slide, showing the technical accounting area, where we try to compensate the additional workload with automation initiatives.
There is more to come, and we should be able to have some, some synergies and some efficiency improvements through automation interventions in the, in the process, in order to cope with the growing workload related to, to the growth of the company. So this is a, a, an important one, which keeps us very busy as, as we speak, and is important for us to defend that notion of a lean operating model. And last but not least, I mentioned talent management. We continue to devote a lot of attention to leadership development, people development, and want to make sure we have a, a strong retention of our key people. We want to, to be an attractive employer.
We have hired quite a number of people in the last three years, 200-300 newcomers. So there is a vibrant entry of new colleagues in the company across the world, and we're very happy to see the retention level. Here you just have the Hannover office showing retention rate at 96%. This is a bit higher in some locations in the local offices, where there is a bit more competition. We're still very, very competitive in that sense, and we are able to retain our people, which is a key source of long-term success for us. So personal development and leadership development and succession planning continue to be very, very important. We try to broaden our-...
You know, talent base, diversity inclusion is important. We build this into our processes to make sure that we have more parity in our decisions on promotion or a nomination to to new roles. So clearly, people, leadership, development is part of the priority list on accelerate. And lastly, I was talking about the foundations, embedded governance, sustainability, and we are devoting a lot of attention on our environmental stewardship. We are looking into our targets for decarbonization. This is a little bit easier when it comes to our own operations, easier to assess and and manage the portfolio of assets and liabilities. Present a challenge in terms of comparability and and calculation of impact, but we're making progress in the business.
In facultative, we will make progress in the treaty area. There is an awful lot of regulation to address as well. We're ready to go, and we have very strong team looking into this. But I think what is important is that we consider opportunities going forward, when it comes to investment opportunities, but also reinsurance opportunities, like renewable energy, for example. Even if this is an emerging area, to some extent, ESG will drive opportunities for us in the coming years. We use the CDP, the Carbon Disclosure Project, as a benchmark to see where we stand. We want to achieve the management level, which is one of the higher levels.
This is a moving score, a very dynamic score, which thousands of companies and institutions are part of, and we'll see that as a benchmark of progress we're making in that field. To end up with the numbers, don't want to disappoint you all by not showing too many new numbers. There's a bit of a segue with the presentation from Clemens later on, showing our financial ambition for 2024 to 2026. We want to continue showing an industry-leading performance. We have decided to go for above 14% return on equity and above 5% EBIT growth. This is the minimum benchmark for us, and of course, we'll work hard to beat these targets.
We have opted for more than 2% CSM growth during the period. Keep, of course, the solvency ratio well ahead of 200%. And attractive dividends, a very important message, which I've heard also from you, from shareholders. We keep the philosophy of how we address dividend generally, but have decided to set ourselves a more ambitious benchmark on the base dividend, which we want to be higher every year. So this is what we set ourselves starting in the new year.
So that's a slight change, not a change of philosophy, but certainly a change of intent, which reflects the confidence level we're we've achieved with the growth and the earnings power of Hannover Re. So this is the financial ambition, which Clemens will take as a platform for his own discussion on the key numbers. Key takeaways, I can make it short. I hope I could convey the message that we're very pleased with the performance to date. We delivered on promises in a challenging environment. The group strategy, which we've been preparing, fine-tuning, takes account of some of the driving themes and key global trends, which we've built into it.
We have three beacons: Focus, really focusing on our strength, on the strength of the, the so-called somewhat different model, the Hannover Re model, which works very well and is a growing, machine. Grow is about securing profitable growth around segments and geographies, leveraging our, expertise, but also using, increasingly, portfolio steering as a way to, make sure we align capital usage with profitability. And accelerate, area where we continue to invest, with, data analytics, operational efficiency, and, and people and culture on, on top of our list. The strong foundations, are geared towards, making further improvement in environmental, stewardship, and we'll, we'll, kick off with a number of, these topics very soon.
In January, we have an Executive Board retreat, where many of these items will be on the agenda and will be part of the updates we're going to give you from time to time during conference calls or opportunities to meet in the coming months. With that, I stop. I'm a little bit over time. I hope I didn't crash the whole timing with this initial presentation, but thank you very much for your attention.
Well, thank you, Jean-Jacques, for your presentation. We go into the Q&A session.
Before we do that, before we do that, I have to make a short introduction because we have also some people from the conference call that potentially might ask questions. But in general, because Clemens will talk about the financial ambition in his presentation, which is following this one. So please keep your question all the, in, in this respect, in this regard, for Clemens later on, because then it it's combined with the with the guidance he will explain for 2024. Please wait for the microphone. So we have two microphones here and and also state your name and company.
For the participants in the conference call, so if you wish to ask a question, please dial star one on your telephone keypad now to enter the queue, and if you wish to remove yourself from the question queue, you may press star followed by two. So I already have seen two hands up, and I think, Kamran, you were first, and then we continue with Vinit.
Hi. Morning. It's Kamran Hossain from JP Morgan.
Mm-hmm.
Two questions. The first one is around, I guess, group in general. If I look at the number of employees you have, the size of your business relative to some of your peers, you've got, you know, an incredible, like, operational leverage, and a huge amounts of premium per employee. At what point does that hit a limit? You know, how do you think about that? At some point, will you have to just take on more people if the idea or ambition is to grow? The second question is on the EBIT chart. I haven't got the ruler out yet, but I was very intrigued by the kind of blue sky scenario-potentially. I'm just wondering, kind of, is that to keep us interested? Like, how should we think about that?
'Cause it didn't look like it. It kind of fanned to the downside. It just looked like it's only upside. So just interested in any high-level thoughts on something that's very blue sky. Thank you.
Very good. On your second question, tongue in cheek, of course, I should stress that the executive board had a major influence on the design of the future trend, so it tended to have an upside. There was an artistic touch to that part of the chart, so don't read too much into this. But certainly, I think as we set targets, we have a determination to beat them, and we see some good upside in the current market. Clearly, the momentum is very good across all the parts of our company, so we're quite confident.
I think the confidence level, notwithstanding, and, you know, events which might come by surprise in the coming years, the general sentiment for our own profitable growth is much more confident than it was three years ago, clearly. So we're setting an ambition. On group employees, you should not underestimate that we have hired quite a number of people. I don't have the exact number just in front of me, but we're talking about 200-300 in the last couple of years. So a lot of newcomers who are being trained or are already experienced. So we have recognized the need to adjust a little bit. There are areas of our company who are quite stretched.
The cost of doing business, whether you like it or not, is increasing, and that means that we need to hire some new people, new experts. IFRS 17 was a massive project and is being now anchored into our line organization and requires new people. This being said, clearly, and I mentioned automation, I think everything which has to do with administrative processes, back office processes, but also, you know, underwriting processes, risk management, there we need to push and accelerate in order to relieve some of our people, in order to be faster in processing some information. A lot of nitty-gritty in the day-to-day business, but many opportunities to relieve our people.
So without automation, we might not be able to sustain fully that competitive advantage. That's why it's one of the driving themes under Accelerate. This is really something we are determined to implement based on the many good experiences we've made in some areas like technical accounting, which was my example. But I think in the end, this is not only about pure efficiency play. I think the drivers of costs are often related to structure. You know, if you add the number of legal entities, as just one example, you're adding complexity, you're adding costs, and that's something we're trying to resist as much as we can. We look into organizational design, see how we can grow while staying nimble, and that's hard work.
That's something we need to, to continue to, to look at in order to avoid the complexity trap. But it's, it's not only about resources, resource allocation, it's about organizational design, and that's why we're not adding many, many locations. We're, we're very cautious on our legal entity structure around the world. That helps. It's hard work, but it can be done, and, I'm pretty confident in three years from now, where I, I'm going to, to present a review of progress, that, that this will be an area where we'll, we'll see, we'll see, good, good, momentum and, and a delta, and positive delta when it comes to the ratio. We'll use reinsurance service, you know, we won't have the, the gross premium....
Metric, but we'll use revenue and EBIT as an indicator to see how we fare. And this will help the Executive Board to steer this metric. But we'll follow that very carefully. We see this as a competitive advantage over time.
Okay. Well, Vinit, you're next.
Yes, thanks. So Vinit, Mediobanca. So, my first question is just on the very remarkable comment you made, I thought, about strengthening portfolio steering, and you said that you want to be even more granular. Now, we are already seeing that you're, you know, tightening here, tightening there, more discipline in the writing. And I'm just curious as to, is there anything you're seeing already which makes you think, "Oh, in this areas I want to be even tighter or more granular, or we need more discipline than even now?" So that's first question. Second question is just on the slide 13, which had some amazing charts on growth, obviously, on Silke's business, which is phenomenal, but also Asia Pac, which Sharon is going to lead. So if you're going to talk about it later, we can discuss those.
But I'm just curious, I mean, when we see those growth numbers about 45%-50% in last year alone, 2022, for structured, 22%, you know, in the Asia Pac, I'm just curious a little bit more about those big numbers on that slide 13, please. Thank you.
Thank you, Vinit. Maybe I'll ask later on Silke on structured and non-traditional, and Sharon on APAC. Just a few words on opportunities now for future growth. I'd say on portfolio steering, this is certainly an area where we're not targeting a specific segment. At this stage, we're of the view that we need to have a good concerted discussion on the link between capital usage and profitability across segments, and help the underwriting leadership in steering their own activities. We keep a very strong empowerment. We're not changing that.
The profit center holders are fully in charge, but we want to have a, you know, guidance on where we're heading, having a bit more consciousness of the trends impacting the business positively or negatively. And in case we are capital tight at any stage in the development of the company, we look good now, but could change over time, that we can, you know, decide on these trade-offs more easily and say, you know, "Where do we need to allocate the scarce resources so that we optimize the profitability and the mix of our book?" So there is no, you know, special reason for it.
I think we feel that with the size of our portfolio, it is time to allocate more time on this aspect and help our market leadership in steering their own activities. But there is a bit of a, you know, a planning horizon where we need to have a good conversation on what we see. And what we want is also be sure that we can capture opportunities quickly in the game. So that notion of cycle management is very important, and sometimes we need more data to have that discussion. That's what we want to do. There is no urgency, because in a way, the DNA of Hannover is very much around cycle management, so we're playing to our strength.
But we need more, more data to have, a very good conversation within the teams. That's the, the notion of, portfolio steering. The P&C colleagues will work on it in the coming months. In Life and Health is, is a bit different because we have, we're fit for, for purpose. We're very good into managing the in-force. There's no, need for, for further tools here. We need to have the resources allocated to in-force, which is so, so crucial to success for, for Life and Health. So maybe a few words, first, on, on structured and then on, on APAC, if I may. Maybe you... Yeah.
Yeah. Good morning also from my side. Happy to comment on your question, Vinit, on structured. First of all, I mean, you know, we have grown that business over 30 years now. We like to be there, the solution finder, so to speak. We talk about C-level coverage, CFO, CRO, CEO, for risk and capital efficiency. In a hard market, as we currently have, the demand is even higher because, as you know, there are the retentions are going up. This means more volatility on the primary side. So, to also cover this on a multi-year, multi-line approach, taking out volatility gives also higher demand for us. We have had never a focus on top line, always on bottom line. So this is also now the case, so and... but it's a solution focus, what really differentiates to the traditional lines.
That means we do not have a standard product or do not sell products here. It's more the active listening to the client and then finding individual tailor-made solutions, and this taking into account the individual, regulatory environment, accounting environment, and those things. And, so this, this was always our approach, still is, and also current hard market even increase that business for us. This on the structured side, the graph Jean-Jacques has shown was also on the ILS side, so it's both. It's the structured side and the ILS side. So, you know, we are very active on the collateralized fronting business, but also on the cat bond transformer business. In both segments, we have seen a nice growth also that year, and we still see.
Thank you.
Thank you.
Okay, Sharon?
Thanks, Vinit. So I think for the Asia business, what Hannover Re has done was that we strengthen our capabilities in region, while also strengthening the capabilities in Hannover office to support the growth in Asia. So that really helped us meet the trajectory numbers that you saw with the over 20% CAGR growth year-on-year. On a go-forward basis, we still see a lot of opportunities, although when we start looking at the business we have, we're also becoming a bit more focused on the profitability of it and the changing dynamics in Asia. So we will see businesses move from proportional to non-proportional. It is happening already, and that will really temper kind of that premium view.
So the teams are really focused on the profitability view of really ensuring that, because now that we're in region and we have bigger teams on the ground, the opportunities that will come to us will be quite varied. So it's not only just the proportional programs, but non-proportional also within Silke's space on the, Advanced Solutions deals and the like. So we will still continue to see growth. A lot of it also, as you know, are driven by increasing penetration rates, across all of Asia, the protection gap, which is still there, and just that growing middle class. So you will see double-digit growth. Whether we hit the 20% CAGR, remains to be seen, because the focus of the team is definitely on the profitability.
Thank you.
Oh.
Thank you. We have further requests to speak. Unfortunately, due to time constraints, we only can take one more question here. Therefore, we take Andrew Ritchie from the conference call for a short question and a short answer, and then we go to a break.
Hello, can you hear me?
Yes.
Yes, we can.
Hi. The question is, Jean-Jacques, you implied that there was a change of dividend policy here today. It is clearly quite subtle, because I can't quite see it. I thought there was always a ratchet, so at minimum flat. I guess maybe you're saying at minimum previous year plus a bit. But maybe just clarify what is the change today? And also, I also thought there was an emphasis before to think about total dividend. I guess the emphasis today is just on the ordinary, so maybe reconcile that with the ordinary and the special. I have a second question. It may not be a quick one, but maybe it is. There's a very positive picture that you've painted about how the group's sort of outperformed.
You have grown a lot. I do often worry. There was a question earlier about scale. I also worry about risk management, given the growth and how lean you are. Are there any mistakes that have been made in the last three or four years, underwriting mistakes, errors, where you've learned lessons? I'm thinking particularly some of the large loss experienced last year.
Well, thank you very much, Andrew. So far for short questions and short answers? The questions were short, as always, Andrew. On dividend policy, Clemens will come back to it in his presentation. It is a nuance, clearly. We had, you know, at least prior year dividend as a message. So it's at the same level or higher was the message so far. It will be higher from year to year. This—this is the distinction. Maybe you misunderstood, you know, it's not a change in dividend policy. It's a nuance to show that we're more confident about the outlook and feel we can go for an increasing stream of base dividend.
We'll have the extraordinary dividend, the special, as always, and implicitly, of course, we want to see that trajectory going up from year to year. So there is an implicit message here. But it is a nuance, not much more than that, but also an expression of intent on the dividend and the importance of the dividend story as well, for Hannover Re in the next three years. On outperformance, I completely see that, Andrew. I think you mentioned similar themes when we met in London for Investors Day. Clearly, this is something we look at. We have the efficiency imperative and the governance imperative, which we need to balance out. Generally, I think we have a good equilibrium.
The support functions, the risk management function, are strong, very knowledgeable, good expertise. We've been hiring experts in different fields, so we're aware of the need to staff up in these fields. So if you look at recruitment, for example, we're very balanced in our recruitment effort and have acknowledged that some of the governance areas of the house need to continue to be strengthened. So it is something we need to take into account. Clearly. On the other hand, I remember telling you in London that we've been growing by, you know, expanding our market share with our client partners, which means that often the growth is from sources we know. So the business we know, it's share of wallet improvement.
So it might see quite in an impressive light, you know, to see the growth, but it's more often than not, a business we already know. So that's certainly one point to note. Mistakes we make them every month and learn. We try to make small mistakes. We made a big mistake in Taiwan with Accident and Health . We acknowledged that there was overexposure, there was regulatory risk, which we need to take into account. There was a leadership issue and communication issue, which was partly provoked by the pandemic and some misunderstanding and monitoring questions which we have to address. So clearly, this was a big one in this cycle.
I think we're in a better shape on the checks and balance on underwriting. And as much as you know, portfolio steering is geared towards profitable growth, I think it's also going to be a help in identifying underperforming segments early in the game and detecting potential issues which we want to avoid going forward. But certainly, Accident and Health , Taiwan was a big one, which, as an Executive Board, we had to debrief on and improve on. And I think this kind of scale of exposure will not happen again with our checks and balance.
I hope it responds to your question, but on dividend policy, probably we'll take it up later on as well with Clemens.
Okay, thanks.
Thank you, Jean-Jacques, for answering the question. Thank you for your questions. We have a later Q&A session, so please hold on your unanswered questions for the late ones. We break now for a coffee and resume at 20 minutes past the hour.
Thank you.
But I can't stop you. I will open my door. My heart is here waiting. I don't need it no more. I know why you're waiting. Give me time to breathe. Before you take my heart now, you just get out from me. But I won't stop you. I will open my door. My heart is here waiting. I don't need it no more. Your love makes it cool with me. Your love makes it right. Yes, it does. Yes, it does. Yes, it does. Now it's worthless. Those weapons can leave me. Your love makes it cool with me. Your love makes it right. Yes, it does. Yes, it does. Yes, it does. Now it's worthless. Those weapons can leave me.
[Foreign language]
Hold pure pictures. She said, "Don't lose them in time." And when those lunar landings fade, they seem to distance. And when the lights and shades melt, she wants the landings so close. In one image, the lunar landings come back. One pure image, she said was all she had, all she had, all she had, all she had. And when those lunar landings fade, they seem to distance. And when the lights and shades melt, she wants the landings so close.
In the interest of time, thanks for being back, very much on time. I suspect the next presentation is eagerly awaited, although we have already published the slides and the key data this morning. Without a further explanation, I hand over to you, Clemens, to give us the outlook for 2024 and the explanation of the financial ambition.
Thank you, Karl. So a warm welcome back to all of you here in the room, and a warm welcome to all of you who are following us in the webcast. So we've heard that we have successfully delivered on our promises in the previous strategy cycle, and that we are even more excited about the upcoming strategy cycle. So what I want to do now is spend a bit of time and share with you some thoughts, how we are going to steer and how we are going to measure the progress in the next three years. So also then what we have planned for the financial year 2024, I will be sharing a bit more granular information, as we probably usually do, because, I mean, we are all still getting, and I sense that getting too used to the new IFRS 17 world.
So I will be providing targets for P&C, for Life and Health , and for investments, but also some underlying assumptions that went into the planning into those targets, which should help you to get a bit more flavor on how we approach those targets. Macroeconomic environment, still quite dynamic. I will spare you any macro details or our view on it, but I wanted to share with you some thoughts around our investment strategy, how that affects our performance, but also our strategy in 2024. Last but not least, some thoughts on costs. We heard this morning already our very low cost ratio is the result of our lean operating model. It is the result of our organizational simplicity, but it's also the result of our cost culture.
And just to give you an example, that's the reason why I have booked all colleagues into the Motel One around the corner. So that might give you an example that this is deeply ingrained, not only in the CFO DNA, but really just deeply ingrained in all of our people when it comes to costs. So why am I touching on this today? It's really, you know, with the accounting regime, with the new accounting regime, both the presentation as well as the allocation of costs have changed a bit. So therefore, I wanted to share with you how we are going to measure and steer costs, and then also probably make some comments around how we think about costs in light of our third beacon that Jean-Jacques mentioned on acceleration on investing. With that, let's get started.
So you've seen the agenda. So let's get started with the financials. So before we look into 2024 and the targets here, a bit more color around these new sets of KPIs. Karl explained it. We refer to it now as financial ambition. We thought both the new strategy cycle, as well as the new accounting regime, provides a good opportunity to revisit the previous target matrix that has been around for quite some time. But we thought about this as a refresher in light of that. We wanted these KPIs really to be clear, very simple, pragmatic, and easy to derive from our financial statements. So you will see, we haven't made any huge adjustments to those, so we can easily arrive them. And we wanted to be those KPIs very consistent with our internal steering.
Whilst these KPIs are financial year ambitions, we view and will measure them sort of over the strategic cycle because you, you will appreciate that some of those KPIs can be a bit more volatile year on year. They will then be complemented by more granular financial year KPIs that I will share with you in a minute. So key performance indicator, as mentioned, is clearly our ROE, the return on equity. That used to be 1,000 basis points above risk-free previously. I would view this at least or higher than 14%. I would view this as sort of a midterm target, a bit of a floor, because we don't want to change it all the time. So that's a bit of a steady state ROE. That's how we view it.
At the same time, our group, EBIT, is expected to grow by an average of at least 5% per year. We see this as a result of increasing contributions from both business groups, as well as from our investments. A new KPI you can see here is the CSM growth. Under the new accounting regime, you know, and with the general measurement model that we have applied across the business, so in Life and Health and P&C, we now have the economic value creation of the in-force business on the face of the balance sheet. So really like a very transparent, audited number. So you're going to have full transparency on the stock of future profits, but also on the emergence of those profits over time.
So while you know that we have already quite a substantial CSM on our balance sheet, when you look at Q3, roughly EUR 8 billion for lLife and Health and P&C. The growth of the more than 2% that you see here is a clear signal of our commitment to not only generate immediate returns from those stocks, but also deliver a long-term value to our shareholders by progressively increasing this CSM, the stock of future profits. And due to the nature of the business, of course, it will be more pronounced on the Life and Health side. And on that note, I actually have some support this time around from Claude, from Claude Chèvre, who seems to somewhat enjoying the benefits of the new accounting standard, I sense.
Claude volunteered to provide a more detailed, granular update on sort of the development of the CSM, the development of the risk adjustment. So something I think is really useful information for you. So something really to look forward to, Claude's presentation after lunch. Solvency II ratio remains very strong. You know where we're standing there, so we haven't really changed the threshold. On dividend, Jean-Jacques mentioned it already, so it's really the notion of us being a bit more upbeat. You see, we have very dynamic earnings development. We are optimistic about the outlook when it comes to our bottom line, and we want the dividends, the ordinary dividend to grow over the strategy cycle.
So it's a bit more a notion of that we're a bit more positive on the ordinary dividend. When, you know that we are not guiding a payout ratio, but if, if I would look at the payout ratio that we've sort of looked at in the past, I wouldn't, I wouldn't assume that it's materially different from the payout ratio that you've seen in the past. I mean, we are still a growing company. You've heard it. We do see a lot of business opportunities, and we don't want to limit our growth potential, on that note. So, a bit more upbeat on dividends. So now let's zoom into the targets for the financial year 2024. And before we do that, I just wanted to remind everyone sort of the net income development over the last years.
I won't go back to where Karl started, the EUR 25 million, but I just want to remind ourselves that only three years ago, our net income was at EUR 1.2 billion, then grew to EUR 1.4 billion. We've guided 2023 to EUR 1.7, and now we are already exceeding the EUR 2 billion mark, so we are expecting at least EUR 2.1 billion of net income. That is an increase of 24% to what we've guided in 2023. So what's pleasing here is that this increase is fueled really by P&C, Life and Health , and investments. Investments, we are expecting an ROI of at least 2.8%. In P&C, a substantial improvement of the combined ratio, and I come back to that in a second.
In Life and Health , we expect a strong earnings contribution in the recent years that we've seen in 2022, for the first nine months, also in 2023, to continue. We expect a reinsurance service result of over EUR 850 million on the Life and Health side. At the core of our strategy, and you've sensed it, it's our commitment to further expand our business profitably with our clients. For the financial year 2024, we do expect to grow our reinsurance revenue by more than 5%. That growth will be most certainly more pronounced on the P&C side. All numbers showing strong increases to where we are today, and they stem really from all profit engines. Let me now outline a few assumptions and details behind these numbers. As for P&C, we expect further diversified growth in 2024.
You have seen some of the risk pools, Jean-Jacques already mentioned, so on the traditional side, particularly facultative business, specialty lines, APAC, then, US non-US CAT. And then on the non-traditional side, Silke, I think, made it very clear that there is a lot of opportunity and appetite, and that with our tailor-made solutions, I think we, we are very well positioned, Silke, to pick up a lot of business on, on that end. In terms of the shift from proportional to non-proportional business and the portfolio pruning that we've done in 2023, we do believe that most of that has been done, in the recent renewals, so in, in 2023.
So some of the effects, you will see it, will still become visible in the financial year 2024, because some of that business is still earning through into 2024. But on the underwriting year 2024, we are, as you heard already, quite positive about any business opportunities there and also when it comes to rates. Therefore, I don't see any reason why our growth should not or should be structurally different from sort of the growth patterns that we've probably seen pre-2023. We also expect on the P&C side, the new business value, our new KPI, the new business CSM, to further increase on top of the and you've seen that already substantial increase that we've seen in 2023 on the new business CSM.
As always, we will be providing more details on our renewals call in the February call, and if those assumptions, those underlying assumptions, will change materially, we will give you an update. As for the combined ratio, most of you will be aware that the 2023 number is affected by a planned extraordinary increase, I would call it, of our reserve resiliency. We did report at the end of Q3 that we feel we are well on track. Of course, we have to await the reserving study, which is, you know, we are in the process now to pulling numbers together, and we'll come out with the reserving study in the new year. But our expectation for 2024 that went into those numbers is that there should not be another extraordinary effect in 2024.
So the combined ratio 2024 should be viewed as a more regular combined ratio. That doesn't mean, and I want to be very clear on this, it doesn't mean that we have changed our reserving policy, as you know. So the prudency remains to be part of the combined ratio that you see here, so we will further grow our resiliency level, but again, not extraordinary, but rather with our book, we will steadily be growing the nominal amount of our prudency. And then we should not forget the risk adjustment, another layer of prudency in our balance sheet. We're sitting on roughly EUR 800 million of risk adjustment on the P&C side, and I would really view this as an additional layer of confidence of prudency on the P&C side.
So overall, we expect the combined ratio to come in below 89%. That includes a discount effect of roughly 7%. That is still higher rates than our locked-in rates. So this tailwind, I would call it, and you've seen it already, how we have approached this in 2023, will not translate into the EBIT. So at year-end, we will then provide an update, how we think about this, how we balance out some of that tailwind, probably with investments, or just keep that in the prudence level of the reserve. So my message here is really that the underlying combined ratio looks even better. If you sort of take that difference of discount and IFIE that you see here, I would say probably roughly two percentage points that went back into the combined ratio.
So if you want to think about a run rate of the combined ratio in that sense, but the reported combined ratio will come in sort of below 89%. Now, on discounting. I appreciate that both discounting as well as the subsequent unwind is, well, let's say, a new complex topic under IFRS 17, and it has raised a couple of questions on how we go about this, how the industry goes about this. Does it add volatility? And that has been always a discussion point this year, throughout the year, particularly on the P&C side. So I wanted to provide a bit more clarity on this topic and at least provide a Hannover Re view on this. And you can sense it here.
And to be clear, again, we don't expect any major distortions from discount and IFIE on our bottom line, so no major impact there. So no material upfront benefit, hence no later headwind in the current environment. So this is mainly for three reasons, and we've tried to put them together here on the slide. So the first, we should not forget in the GMM that we have applied in P&C, that difference or the impact from the interest rate environment is much less pronounced than in the PAA. Because we still look in the GMM, look at locked-in rates from when the business is written and not when claims are occurring. And that's a huge difference, and I think we should keep that in mind.
If you think about our nine-month number, you might remember that the difference was only EUR 150 million, so there's not of a huge impact for us, even in a very dynamic interest rate environment. That will flatten out, of course. So second, as mentioned, due to our prudent reserving approach, even more so during the year, the current tailwind will not make it into the EBIT. And third, as you can see here on the slide on the right-hand side, due to our strict ALM, our investment income is nicely catching up with the increased IFIE. So I hope that provides a bit of a sense how we approach it, and put some concerns around volatility, at least at ease.
With that, let's turn to Life and Health , which again, has been a strong contributor to our earnings recently. So we do see a strong pipeline of new business, and expect to see opportunities across the lines of business that we're providing when we touch some, some of the areas already in Jean-Jacques's presentation. However, in terms of revenue growth under IFRS 17, we expect moderate growth in Life and Health . Why is that? Well, I think generally it's the new standard provides a much better reflection of the top line. I think that's a fair, fair assessment, particularly when it comes to Financial Solutions , which wasn't captured at all in our top line in the past.
However, there are still some areas where it's not fully reflected, where top line is not really the right angle to look at really our business growth on the Life and Health side. That's mainly due to the structure of our business. So, Financial Solutions , you won't see the underlying premium coming into the revenue, but the margin, for example. Second, we might also see some further impact from our in-force management. You've seen that we've been a bit more cautious on the mobility side, have done some in-force action that will benefit our bottom line, but will have an impact on the top line.
Nevertheless, I think when you look at the new KPI, and I think that's probably the right way to look at it, look at both, reinsurance revenue and the CSM, that is, that also the Financial Solutions business is well captured in this new business, CSM, so in that angle. So with the IFRS 17 metrics you will have seen—you see now both the profitability and the value of the Life and Health business. As mentioned earlier, we do expect that value, that CSM stock, to grow over time. When it comes to emergence of that CSM, you see here that we expect for 2024, a release of 11%-13%. That's also due to the structure of the business.
You will appreciate that, particularly the Financial Solutions business, the release patterns are a bit more short term, but that's, Claude will cover that in more detail, how that split will look like. And we will provide also a split of the CSM for the lines of business, and you will get a bit more information on that. So we aim to deliver a reinsurance service result of at least EUR 850 million in 2024. What makes us confident? Well, first of all, I think the wearing off of the COVID claims that we've seen, particularly in 2021, 2022. That's one element. Stringent expense management. The Financial Solutions business will be a strong contributor to our earnings in 2024, and also longevity has been a stable earnings contributor and will so in the past.
Discounting and IFIE, I think, due to the cash flow patterns on the Life and Health side, as well, due to the long-term nature of the business, is not much of an issue in Life and Health . Don't want to spend too much time on it, so we shouldn't be too worried about this. Let's move on to investments. Our investment portfolio has been a very stable contributor to our group net income, even in challenging volatile market environments. And we do expect the increase in net income also to be fueled by our investment income. On the fixed income side, we see a couple of tailwinds for an increase in the book yield. One, of course, the rollover of the portfolio and the unwind of the unrealized losses.
So replacing that with higher rates, and I come to that in a second, is one element. Our strong operating cash flow is clearly an element where we are positive, and we have accumulated quite significant short-term and cash investments to take advantage of any market opportunities, particularly on the credit side. Overall, that should sort of compensate some of the decrease, or I think a substantial decrease, of the amortization in the inflation-linked. You know, it was roughly 450-460-ish of contribution to the EBIT in 2022. We're looking at EUR 160 millions in 2023, so that will come down with the inflation. On private equity, real estate, I think it's fair to say it is very established. Both are very established asset classes.
They have been very stable because I think the high diversification just pays off on these asset classes. We do expect 2024, these asset classes to provide stable return. We're a bit cautious, though, on volatility, so we might see some PNL volatility, particularly on the funds. You know, private equity is purely funds. Real estate is to some extent funds, and that is valued in the new accounting regime, IFRS 9, through the PNL, so we might see some volatility stemming from that. Overall, 2.8%, at least. I would say we consider that number to be a fairly realistic assumption because it allows for at least some volatility, as mentioned earlier. So quick glance to our portfolio as it stands today, or to be more precise, numbers here, end of Q3.
As you might recall, we went into the year with a bit more, I would say, prudent positioning on the credit side, in particular in developed markets, while we accumulated higher cash and short term. We slightly adjusted that positioning in 2023, but not materially. So we have invested in credits on the corporate side, but a bit more opportunistic. For example, in emerging markets, where we thought, well, credit spreads have probably reached now a level where we think they are adequate. In the developed markets, we haven't really seen that, that widening of credit spreads, so there's still quite a significant amount of dry powder to take advantage of that.
And we do still expect that because I think the notion of or the perception of no lending or soft lending does appear to be a bit too optimistic. On private equity and real estate funds, I think we the strategy hasn't really changed here. We are constantly investing sort of at a constant pace, and particularly when it comes to funds. On direct real estate, though, I would say we are a bit more opportunistic, a bit more picky when we see forced sellers or valuations really coming down, and we pick and choose on those investments. We will be working on the investment strategy 2024 sort of in the next couple of weeks. If there is any updates, I'll I would do that in March, if anything comes out of that.
On slide 9, you have already seen that the ordinary income yield to our fixed income portfolio is expected to increase by roughly 40 percentage points. On the next slide, you can see the details here. In the upper chart, you see the book yield of 3.1% at Q3, and the reinvestment yield, you can see it already standing at 5%. The chart at the bottom shows that is expected, sort of how that granular, gradually feeds into our book yield over the upcoming years. So we will be benefiting from increased reinvestment yields sort of over time. On unrealized losses on fixed income, they have slightly increased due to the slight increase in interest rates, so the role of the unwind has been compensated by that slight increase.
That's why you don't see a major change here on the fixed income side. So, you can see the unwind here at the bottom. We expect the numbers to come down by over two billion over the next three years, all being equal, and if we are not actively, of course, realizing some of the lost positions. So does that worry us? My answer is still no. I mean, you know, we've been very, very, very strict on asset liability management. Our strong cash flow is very helpful here, and then also our liquidity position. So it doesn't worry me. It does worry the CFO at times when it comes to the end of the year, where probably in the past, with unrealized gains of EUR 4 billion-EUR 5 billion, there was a bit of more steering possibility, let's put it like that.
So, that has clearly changed, plus the volatility from funds makes it a bit more difficult and my December a bit more exciting, let's put it like that. So the table at the top shows that we are still sitting on substantial unrealized gains on real estate. That provides some buffer for potential markdowns in the direct space, as they are not valued through the P&L. So I said that, we have allowed for some volatility in our investment results. Speaking about volatility, I think you can see here that this is not, or let's say, not directly due to potential interest rate or spread increases or movements. It's rather because of the increased amount of real estate and private equity funds being valued through the P&L. You can see that here at the bottom of this chart.
Our private equity portfolio, again, has been, I would say, remarkably stable when it comes to distributions and valuations. We have seen markdowns, but given the size of the portfolio, again, I think the diversification just helps here. Nevertheless, and you can see that here, a portfolio shift by just 10% can provide P&L Vola of EUR 200 million. That's really the rationale behind us on, on, on the ROI. Real asset funds , I think have been, have been stable, quite stable in, in 2023. But again, also here, a bit of volatility is expected, particularly on the real estate side. So that's all I wanted to say on investments. Let's change topics to costs. As mentioned in the beginning, I really just want to share some thoughts, sort of in the notion of the new accounting regime.
You can see at the bar at the top, that our overall admin costs are actually the same under IFRS 4 and IFRS 17. I mean, that would have been something if, a new accounting regime could miraculously remove some of the costs. I think then we would all agree on, on the benefits of IFRS 17. But, as Jean-Jacques mentioned, I think it's on the contrary, I think, a substantial amount went into, both numbers here, unfortunately. So I just wanted to make sure that, that when we publish an admin expense ratio going forward, and there are two ways to look at it, you know, EBIT to costs or the cost ratio that we're providing here, then that is that we all understand that there is a different allocation between non-directly attributable and directly.
The denominator has changed, which is now the reinsurance revenue, which is lower than the gross written premium, and only that effect brings the cost ratio up. Nothing else, not the overall cost. That's what it's meant to say here. So if you saw the expense ratio that Jean-Jacques shared, which was the 1.9%, that would translate into the 3.2 that you see on the slide. So again, what I cannot emphasize enough, that I really believe that our strong cost culture remains to be a clear, very clear competitive advantage also in the upcoming strategy cycle. And that is not because we're not investing, and you've heard it, I think, particularly on the beacon of acceleration, we do invest. We want to really become ahead of the curve when it comes to automation.
We are very, very passionate and diligent about this. We've actually kicked off a huge finance transformation project in my area of responsibility, where those topics, automation, data analytics, where we completely revisit our processes, our IT landscape. And it's a huge one. I mean, I'm saying this on the back of 20 years of experience in my previous life as an auditor and consultant. I've seen many projects and IT project. I think here really comes the advantage of the pure play reinsurance into play. It's much easier to do that if you have a very clear business model, and it's much easier to do that when you look at globally harmonized and centralized systems. That's what we are looking at, and I think that's a huge advantage.
That's what I'm not scared by these large projects. So if you combine all that, you know, with the strong cost culture, some call it humbleness, others call it stinginess. So whatever you call it, I think it's just very hard to replicate. Which brings me to the last slide. I'm looking at the clock. It's brutally ticking, but I think we are okay, Karl. So you see, we've set ourselves ambitious goals for the next three years. We are very committed and confident to deliver on these promises. We want to grow our business further with our clients, with a clear commitment to increase our bottom line. We want our shareholders to benefit from this growth, not only in creating value, but also paying attractive dividends. We believe that we are well positioned-...
To benefit from higher interest rates, but also from some market opportunities that I'm hoping for in 2024. Our lean operating model, again, I think it's unique, and our strong capitalization will allow us to take full advantage of the current reinsurance market environment, but also from investments. So although I'm a North German CFO, who can't get easily excited, I am actually excited to close this year and go into the next strategy cycle. So with that, I close my presentation here. I'm happy to open up for any questions.
Well, thank you, Clemens, for your distinguished presentation, and we dive straight into Q&A. The first hand up was from Ivan.
Hi, thank you very much. It's Ivan Bokhmat from Barclays. I've got two questions. One of them is related to cycle management and, I think perhaps preempting some of the Sven's session before. But I was just wondering, where you think we are in the cycle, and why would it not be appropriate to have a higher payout ratio? You know, with the, with the thought of what you- remark you've made before the break. And secondly, just on reserving, I think probably returning a bit to the, to the point of how should we be thinking about that buffer as a percent of your, of your reserves? Where do you think you are in the confidence range, and how do you... You know, do you expect this ability to steer earnings, how much stronger it is now?
Yes, Ivan. So I'll start with the second one. So on reserving, I'd say, you know, and we've done that diligently. We said we want to come back to the level that we had at the end of 2021, where we're looking at, you know, EUR 1.7 billion of reserves. We expect to be at that level again, at least at that level, probably a bit higher at the end of this year. And sort of as a nominal amount, and I don't know exactly how it is in relative terms, but we do feel comfortable with that level of resilience that we have in our reserves. Again, Ivan, you should not forget, we still have the risk adjustment.
That's really a layer that came on top with the IFRS 17 transition, so we feel very comfortable with that, comfortable with that level of resilience. And again, and then I would say from there, we take it and gradually grow our resilience over time. On the payout ratio, it's really just, you know, on the dividend, as we said. I think in terms of the cycle, we are very confident about it, and I'm sure Sven will be commenting on this also later. We do feel comfortable of the rate environment. We're very comfortable, and you see that in the bottom line.
But it's just that we think in terms of payout ratio, that that's gonna be very much in line with what you've seen on dividend payouts in the past. So it's gonna be a steady one. It might be a bit volatile over time, and we might look at this at year-end. And, you know, it's always a decision that we made rather at the beginning of a year. So if all circumstances, if the net income looks good, if our capital looks good, then of course, we, we, we are prepared to pay a higher dividend, but it should be in the range of payout ratios that you've seen in the past.
Okay. Then we continue with James.
Thanks. It's James Shuck from Citi. On the topic of the payout ratio, when you, when you say the payout ratio of the past, are you referring to pre-COVID levels? 'Cause that level was 65% since then. It's quite a long time ago now, but things have kind of rebased to a lower level. So is 65% the base level going forward? And sort of connected with that, your stock of excess is large. You've had conversations with rating agencies. There's the risk adjustment, which I believe is now being allowed for by S&P. I'm just keen to get any indication of how you will manage that solvency down to, let's say, 200% or some sort of buffer over it.
Because there's no growth scenario I can see where you're not adding to that stock of excess, which is already large anyway. So my question is, why haven't you gone further, you know, when you're talking about the total payout potential? I think that was one question. And just a second question was around how you're managing the earnings. So I completely understand about managing the IFRS unwind and the discount rate benefit, and I look at investment income, it looks very conservatively struck. There's conservatism anywhere in this guidance. If those all come down the right side of best estimate, then will you release that into earnings, or are you looking at managing your earnings at a steady 5% going forward? Thank you.
Yes, James, on the first one, so payout ratio, again, I would. And pre-COVID levels have also included, of course, substantial extraordinary. So dividends, not only the ordinary. When we talk about payout ratios in general, and when we talk about the payout, how we think about dividend, of course, is always a part of the overall dividend, but we haven't changed the guidance that we said. Well, you know, we look at the ordinary dividend. I wouldn't say that the 65 is the right number. I mean, we have been in a range of 40-50, sometimes a bit higher. So I would rather look at it at this range, and it can be at the upper range of it, but I wouldn't-...
I wouldn't want to comment really on a range of it. It's not the way we've looked at. That's why we have not guided a payout ratio. We really want to see where we stand at year-end. And that's also true, James, when it comes to earnings management. I think, yes, if everything goes well, if all the elements and yes, we have allowed for some buffers, I think overall in the net income guidance, if everything goes well, we will either show it, and you will either see it in the P&L or in the reserve buffers or whatever, but we will be very transparent about it. I mean, if that goes well, then we will see it. We will see these earnings coming through. On risk adjustment and CSM and capitalization, yes, I would say...
We've always commented on our capitalization from two angles. The one is Solvency II. It looks a bit excessive now. That number might come down a bit. As you know, we have, for example, not accrued for the dividend throughout the year, so that number will come in Q4, naturally bringing the number a bit down, but it is still very, very strong. But the second element has always been S&P as a side constraint, to be clear. And you know that particularly the old model, the S&P model, has not been a very good reflection of the economics, particularly when we look at 2022. The haircut on the discounting of liabilities, whilst market values have been fully taken into account, was not a very good reflection of the economics.
I think with the new model, I think S&P has done a very diligent, very good job. They've taken comments really into account when they came up with a new model. I think there are a couple of downsides, but I think huge upsides. And you mentioned one, it's the risk adjustment, so they fully account for the risk adjustment, but they also fully recognize the CSM as capital. So this is clearly a very positive reflection, and that's the way we view it. I mean, we do view the CSM and the risk adjustment as future profits, which is absolutely the right reflection, I believe. There's only one uncertainty, and that hasn't been clarified even with the final model. I think it's around the notion of hard capital and soft capital. So CSM and risk adjustment being treated as soft capital.
Then we have the hybrids, as you know, so we need to see how we land there. We will have more clarity, probably in Q1, Q2, when we do our final sort of modeling, and have our discussions with S&P, and I will be providing an update, but there's still some uncertainty around it, and that's really the angle we look at. It's not the way we look at Solvency II.
Well, thank you, Clemens. We continue with Faizan.
Hi there. Faizan Khan from HSBC. I wanted to dig into the guidance of lower than 89%. So you were at 91%-92% last year. I calculate about 2.5% of reserve prudence or buffers buildup, and then the delta in discounting and IFIE is probably slightly higher this year. So how much have you really reflected in terms of underlying improvement? If I do the calculation, it seems very modest, but I guess it's the question of better than 89%, how do I think about that? A second question is back to the sort of IFIE and discounting delta that you have this year. You suggested you might use investment to sort of mask that or offset that. Is that already in the 2.8% guidance?
Yes. On the latter, for 2024, Faizan, we haven't included any unrealized, no substantial unrealized losses on fixed income side. I mean, you have to do some portfolio maintenance, et cetera, so there will be a number, let's say a mid-double-digit number, probably for unrealized losses. But we haven't diligently put in a number where we say we want to realize unrealized losses, so that's not included in the 2.8. So when you look at the run rate of, or let's say, the ordinary income rate, the book yield of our fixed income portfolio, you deduct ECL and, you know, regular impairments on real estate, you deduct expenses, et cetera. That brings you to, whatever, 2.8, 2.9. So that, that's the thinking behind it.
On the combined ratio, and I think it's the right way to look at it. If you just say, let's take the starting point, I think we've reported, what was it? A 91.9% at the end of Q3. So if you just take that and say, well, roughly 3 percentage points is reserve resiliency, we land at the 89%. We have not been too aggressive on margin improvements. Not that we don't expect them, but really just in terms of, you know, how we want to look at the combined ratio. Then you take probably 2 percentage points of discount versus IFRS, roughly, I would say. It's, it's not, it's not easy to assess that, but I would say roughly. And then, of course, you know, the regularly prudent loss picks. Then you have the risk adjustment that goes into it.
So overall, it brings you to a much lower run rate on the combined ratio. But again, the reported number, particularly sort of in the first three quarters, will be rather below the 89, around the 89, below the 89. That's the way we, we thought about it.
Okay, thank you. The next question, Freya, you still have one?
Yes.
Okay.
Hi, Freya Kong from Bank of America. Just following up on the combined ratio discussion, just to simplify it for me. So currently, we're running on 89 underlying, with a 5% discount assumption, but next year, we're guiding to below 89 with a 7% discount assumption. What am I missing there? Because on an undiscounted basis, it looks like it's getting worse.
I think the 89 that we are guiding now also includes, of course, the delta of the IFIE. And if we just look at the, you know, the 89, the way we looked at it, it's just that we look at the delta of roughly 2 percentage points. So if we try to look at the... And I don't like to do this, but if we just try to look at the old 96, we would have the margin improvement from 2023 already, of course, then we have the margin, and a further margin improvement. And again, we will see that in the renewal call, I think, or after this renewal, how much of that will come through.
But, if you just take a margin improvement there, then you take a discounting of roughly 7%, you add back IFIE, 5 percentage points, you have the risk adjustment, et cetera, and that brings you to a combined ratio around probably, I would say, 68, 60, 80s, 86, 85-ish. Again, then you add back the the delta of the IFIE, which is, which is a difficult exercise to do it, but, that brings you to, again, to a combined ratio just below 89.
Okay, thank you.
Then we continue with, Kamran.
Hey, it's Kamran Hossain from JPMorgan. Two questions. First one, just on the, I guess, the market volatility assumptions you've made in the 2024 guidance. I think in the EUR 1.7 billion you had for this year, you had some as an assumption of, I think it was several hundred or a couple of hundred million, that we haven't really seen play out this year. So how much have you baked in in the 2024 guidance? Given that you haven't, you know, things have been pretty resilient on the P/E valuations, what happens to that several hundred or couple of hundred million this year? The second question, just on reserving. Will you see a natural pickup in the reserve buffer over the next couple of years, ignoring the extraordinary additions you've made, just how kind of the...
I guess, how the reserves mature? You put a lot of, lot of growth in the preceding few years. Does that naturally increase the level of, like, relative reserve buffer? Thank you.
Yes, Kamran. On the first one, I mean, we have seen some volatility, on also some markdowns on private equity and on real estate funds. I think that has been compensated, slightly actually overcompensated by very high distributions. So we've seen very high distributions coming out of these funds. So that hasn't really made it into the P&L, only to some extent. What we have seen is, some, and we will see that in Q4, some, and I mentioned that in Q3, that we expect a couple of markdowns on the direct real estate side. We might see, you know, with the reporting lag, also to see some, some revaluations also in the funds. So there is some in there, just to clarify that when we start to think about this, about 2024.
So I'm still surprised by the resilience of both the private equity and real estate funds, and I wouldn't be surprised if some of that is just due to the time lag and the valuation lag. So we have allowed for some volatility in there. We've also allowed for some volatility when it comes to real estate. But it's not a fixed number. I think we wanted to be very clear in 2023 and said: Well, let's take that 10% here, and then we were thinking about roughly EUR 200 million. That's not the way we thought about it. It's just with our assumption when it comes to our ordinary income yield that we would normally look at on the private equity or real estate side.
We've just been a bit more cautious in general on, on this assumption. On reserve buffers, I think it's right. Yeah, I mean, and you, you might recall that, that when we published the Willis Towers Watson report, that does not include usually any resiliency that is coming out of the most recent underwriting years. And with the substantial growth that we've seen, particularly in the last years, we do expect that those numbers to come in. Again, we will see that. We might see some of that already in the upcoming reserve study, which we then will publish in 2024. So I'll do a bit more granular exercise when we do that.
Well, thank you. There are still more questions in the room, but unfortunately, we run out of time, so please keep your question for later Q&As. We have still later opportunities for those questions and answers then. We break now for another coffee, and we will resume at 11:30 AM.
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So welcome back to the third part of our Investors Day, and thanks for being so punctual. The next highlight that awaits us is the presentation of Sven Althoff. We have chosen that topic of nat cat business, because we have, in particular, the past 5-6 years, received a lot of questions in our IR meetings on this one. So I'm pretty sure you will find a lot of interesting things in that presentation. Over to you, Sven.
Well, thank you very much, Karl, and a very good morning also from my side. I will spend the next half hour to tell you a little bit about our approach on the natural catastrophe exposed business in what feel is an attractive market environment. So if we take a step back to a year ago, I guess, we would have met straight after Hurricane Ian, at a moment in time when the industry had just lost quite a bit of the dedicated capital to the reinsurance market. Mostly by means of unrealized investment losses.
But given the overall environment we are in from an inflation, geopolitical, and climate change environment, this has certainly set to reset in the allocation of capital and the natural catastrophe business was one of the areas where we saw the biggest impact, with quite a number of market players scrutinizing their risk appetite in this class of business, and some of them even withdrawing. Which has led to a relatively strong increase in the average rate on lines that is paid for the business, as you can see in the lower chart by the blue line. And given that, since then, we have not observed any material inflow of new, traditional or alternative capital.
Even though it's early days, I can report that the trading conditions going into 2024 remain at a high level, on that business, which has seen the most significant change in terms and conditions, i.e., retention levels over and above pricing. We are seeing still cash increases on that business going into 2024. This will be closer to risk based or risk-adjusted neutral, given inflation and the underlying growth of our ceding companies, but at very healthy levels. We continue to see stable to even increasing retention levels. And, on top of that, of course, 2023, as an accident year, was a busy year, and we have seen losses in many areas.
And in those areas, the early stages of the 2024 renewal are showing that we will be able to achieve retention increases and very significant risk-adjusted rate increases in those loss-affected areas. So from that point of view, we continue to be in an interactive market environment when it comes to our natural catastrophe business. So we have, over the last years, significantly grown our risk appetite for natural catastrophe business. If you look at it in absolute numbers, and that is what the left chart is talking about, where you see the blue columns. This growth and risk appetite has been very much in line with our general growth in the business. We talked about that a little earlier in Jean-Jacques's presentation.
And so from a relative point of view, at least over the last five years, this has meant that despite the growth in our absolute risk appetite, it has been relatively stable from a relative view. So we were at around the 20% mark when it comes to the required capital divided by our own funds. So from that point of view, it's important to note that in Hannover we are writing our cat business for the most part to support our long-term partnerships we have with our ceding companies. We are much less looking at it as a standalone profit center, but we are writing it to support those client relationships. So therefore, it should not be surprising that the growth trajectory is therefore mirroring the general growth in the business.
The reason, as I said, is that we see it as a supporting line in the overall business, but not necessarily the driver in those client relationships. What we have worked hard on during the same period, you can see on the right-hand chart, and that is the topic of diversification. If you look at the lower light blue part, this is our TVaR, so the tail value at risk for the various regions, and the light blue is for the U.S. and Caribbean business we are writing. So the timeline starts in 2016, and at that time, approximately two-thirds of our total value at risk was coming from that part of the world, and today we are looking at a 47%.
So from that, you can see that we have significantly improved the diversification in our natural catastrophe business over that period of time. And the winners have, in particular, been Southern Latin America, which has grown from 8% to 20%, and it has been Canada growing from 4% to 14%. And both of those growth areas are more mostly driven by the peril of earthquake, and therefore less impacted by questions around climate change and the volatility and the emergence from side perils coming from climate change. So you could ask yourself, with a 47%, are we underweight in the U.S.? For that, I would ask you to take the 47% in combination with the 14% from Canada, which is making it 61%.
To put that in perspective, only 43% of our P&C premium is coming from North America. With the 61%, we are still significantly over and above the distribution of premium. You can also see from those numbers why it was important for us, not only from a capital efficiency point of view, but also from the context of mirroring our overall client relationships, that we felt that the starting point in 2016 was higher than we wanted it to be. We are much more satisfied with today's distribution across the various regions, as it allows us to continue to grow in the natural catastrophe area in a very capital efficient way.
Because quite clearly, having a single peak by quite a margin, and the rest of the world is lagging too far behind, is not a very capital efficient way in growing your natural catastrophe exposures. Overall, we can say that, in all the major scenarios we are looking at, we have significant impact from those perils if you look at them from a Solvency II stress test scenario. Apologies that this slide is still showing the 252 rather than the 270% after three quarters. But you know how it is with those presentations. You look at them twenty-six times, and then sometimes you don't see the obvious. So apologies for that.
So the highest impact, as you would expect, given that distribution we just looked at, would still come from severe Atlantic tropical cyclone, with a 250-year stress test of 27%. And then the earthquake exposure in North America, which would include Canada, for that matter, would account for a 20% stress test scenario, and severe European winter storms, and they are all measured at 250-year return periods, would account for a 13% stress test. But I will show you some details at a later slide, particularly also the impact from our retrocessional coverage we have on those various scenarios. So what have we done over that reporting period when it comes to our pricing and to our modeling capabilities?
The lower left-hand map is giving you an idea about the distribution of risk we have in our portfolio. The map is referring to number of risks, not the value of risks. If we were to do it by value of risk, the dark blue dots would get even darker, so the picture would be even more pronounced. But as you can see, we have the highest concentration of risk in what the entire industry is referring to as peak perils, and what by coincidence is also... and of course, it's not coincidence, but what is covered in our K transaction. So if you look at that map, you know that we have North America in our K retrocessional protection. We have European storm in there. Japan is one of the portfolios which is covered... in K.
So is Australia, and for a few years now, also Chile earthquake. And this is where the concentration of the exposure is the highest in our overall portfolio, and therefore it's logical to use that retro vehicle to cover particularly those areas. So over the last number of years, and you have seen some of the numbers in previous presentations, we have certainly increased the modeling capability when it comes to country peril combinations. So today we are talking about 203 different internal models we are looking at for the various peril and country combinations, and you can see that this is a growing number over the time.
As we try to illustrate on the left-hand side, you can also see that we have hardly any white spots these days when it comes to our modeling capability. We are using a mix of internal probabilistic models, licensed probabilistic models, but also more deterministic in-house return period approaches. And the few gaps we would still show on the right-hand side of the maps you are seeing would be white spots where we would deem that there is no exposure from those perils. So for example, we are not expecting any tropical cyclone activity in South America and Africa indeed, so therefore we don't have to have any models for that for those.
But otherwise, we have a very good penetration of our modeling capability, and the sophistication and the trending we are doing for climate change, and those have certainly increased significantly over the last number of years. What is extremely important for us, and that's something we are capable of for longer than a decade now, is that we can use the same modeling approach to both when it comes to pricing and to exposure management. So for us, it's not two different things. It's one holistic approach, which is making also our pricing very consistent with the way we are seeing the exposure potentially materializing. And that, of course, is a capability which did come with some investments.
But now that we have it, we can see in the approach to the market how valuable it is to have those conversations, also with the brokers and with the clients when it comes to their view on risk and our view on risk, which of course, we do all the time when we are negotiating renewals. One of the outputs from that is the capability from our side to budget for major loss events. This timeline since 2013 is giving you our natural catastrophe major loss budgets in those years and the number which has in the end materialized. Over the last 10 years, we used 81% of our large loss budget on average, so we've stayed inside of the budget.
Over the last five years, the number was a 92, and after three quarters in 2023, the number was an 85. So from that point of view, all, all these numbers are inside our original budgets, and that, of course, is giving us comfort. It's also, for the reason I just explained, giving us comfort that we are capable of pricing the business, correctly. Despite the challenges, climate change is certainly giving us and the entire industry in anticipating how climate change is materializing in real-world losses, where historic data is only giving you limited guidance in how the world is changing in that respect. What we have also plotted, and these are the lines you are seeing there, is one standard deviation around the mean, expected mean.
And, it's pleasing to report that, in all those 10 years, even though there was some volatility, we have had an outcome that was within one standard deviation of our expected mean, which again is giving us comfort when it comes to our modeling capabilities. And, on the lower hand of the chart, you can also see that our market share, when you look at it, in relation to the total insured loss, so not the total reinsured loss, but the total insured loss in those years, has been in a relatively narrow range between 0.6% and 1.3%, which is also talking about the relatively limited volatility in our portfolio.
Here, of course, us buying substantial amount of retrocessional coverage is helping to deal with the underlying gross volatility, which we may have in our portfolio. But on a net basis, and this slide is talking to net numbers, the volatility remains in a relatively narrow band.... So on the next three slides, I show you the waterfalls coming from our expected gross position in a 250-year event. The three scenarios you will see is a U.S. tropical cyclone, European winter storm, and Chile earthquake. I walk you through the first one, and then I will be quicker on the next two. So on the left-hand side, we are starting with the gross number.
The way we have calculated the gross number, we have picked the 21 events around the 250-year expected event in order to have a more consistent view around this point in the tail. That's why we applied the average across those 21 events. We are then applying all of our retro structures, starting with K, our proportional vehicle. Then on a loss like this, we would certainly be over and above our retention on our event tower. And the aggregate recovery or the recovery from the aggregate excess of loss you are here seeing here is making the assumption that we have an average year. Otherwise, because that tower of coverage would not respond to a single event, it's looking at all the events in a given year.
But if that overall portfolio is behaving according to our assumptions, and we have this 250-year event, the resulting recovery would be the EUR 71 million you are seeing here on that slide. So this gives us a first net position, and that is the net position on just the loss side of things. Then, of course, there would be reinstatements flowing both inwards on the losses we are collecting under excess of loss contracts, but of course, also outwards on our retrocessional vehicles, which is giving you the second, and in this case, lower net loss figure compared to the first one.
And then economically, we can also look at how much of this peril was in our expected net cat budget for the year due to the loss situation. How much less of a tax do we expect to pay to give you a net loss after tax as an economic view on what would happen in a scenario like this? So on this one, it's certainly worth noting that our market share by the various cascading retrocessional coverage we are having our market share would reduce from a 1.2 to a 0.5% figure.
And not that, Hurricane Ian was a 1 in 250-year event, but you've also seen from that experience that when it comes to U.S. wind exposure, we tend to be underweight, compared to our overall market share, and that is by design, as I explained on a, on a previous slide. Then for European storm, and this is just to give you a feel for it, we've done the same exercise coming from the gross position, which, is a, market share equivalent of 6.7%, all the way down to the economic view after tax, which would, translate to a 2.13% market share then.
And the third one, which maybe is a little unexpected for you, because it's not one of the usual peak areas, but it's important for us to show you this one in order to also make you understand where are we taking risk on the net cat side. Also in line with our more general market share that we have in P&C business. And Chile earthquake would be a typical example from this.
Even though it's not as big as the US 250-year event I've just shown to you, you can see that our gross market share in this scenario was 17.8%, is substantial and over and above our general market share, which we reckon is around the 10% mark, if we assume that the overall market size is approximately EUR 240 billion. And it takes the retrocessional coverage to reduce that position from the 17.8% to the 8.3% we are showing here. So you can see that we are prepared to take significant positions in on the natural catastrophe side. And this would be a typical scenario.
Again, given that it's earthquake and not necessarily a scenario that is linked to climate change and its effects, where we are of the opinion that the terms and conditions that are available in that particular market is making us to write a portfolio which is reflecting our overall global market share. This slide gives you an idea about our profitability on the cat side. The upper chart is talking about the gross technical results, so before retrocessional coverage, for our excess of loss natural catastrophe business only. Pro rata and facultative would not be included here in that chart, and we are concentrating on the net cat excess of loss.
On average, you can see that we have made money over the last 10 years on a gross basis. So from that point of view, it's an okay-ish result, but we have certainly not earned our full cost of capital in all of these years, as you can also see from the volatility in that chart. So on a forward-looking basis, we are of the opinion that the profitability levels that are achievable in today's market and going into next market are allowing us to earn above our cost of capital. But we will continue to buy significant amounts of retrocessional coverage in order to deal with the volatility of that business. And the lower chart is giving you an idea how we have fared in that respect.
So you can see that, we have been able to reduce our gross losses, by 25% on average. The gross losses here are from all of our business and not, the excess of loss, business only. And that in years like, 2021, the retrocessional coverage, is, dealing with up to 49% in that particular financial year, significantly reducing the volatility profile, which we do have on a gross basis. So talking about, retro, also a short outlook going into 2024. As mentioned during our Q3 call, the way the losses have fallen this year on the natural catastrophe side means that we have less than expected, recovery from our key retrocessional vehicle, because the losses mostly happened outside of the, the defined peak areas.
which from a financial year point of view, of course, is lower than had we originally had expected it. On the other hand, we look at it very positively because this means that our long-term retrocessional partners will receive an accelerated payback for their deficit positions coming from previous years, which is increasing the flexibility we have in those partnerships. How to look into 2024, and the way we are looking at it today, and the renewal is also mostly at 1-1, so therefore not that far away, is that you can expect us to buy broadly similar towers of non-proportional retrocession.
That market is stable to slightly increasing from a capacity point of view, so we have no concerns that we will be able to place a program that is similar compared to last year's program in that respect. But what we will do is we will reduce our proportional K-Cession into the market. Not quite down to historic cession levels, but significantly below the 2024, 2023 levels. And yeah, we have that flexibility because 2023 from a payback point of view has been very beneficial for those retro partners, and they are supportive with that approach. So let me come to the outlook.
As you have seen, we feel that we can model and price the business, that we make money on it on a gross basis over the cycle. That we are using retrocessional coverage in order to deal with the volatility. This is what this slide is explaining, is that we can expect this to be a growing class for the entire industry and therefore also in our portfolio, supporting the growth trajectory of Hannover Re. We have a few. We have listed a few of the drivers on the exposure side why that is. We have a higher concentration of risk coming from just value increases in peak areas, but also urbanization and migration to coastlines, which is one of the drivers.
We continue to deal with inflation, which of course is increasing the underlying sums insured. We have the effects of climate change, and particularly the impact on the so-called side perils. We continue in quite a number of parts of the world to have a significant protection gap, which we and the entire industry hopefully will be able to close. We have been very active on the protection gap side. For example, in partnership with the Natural Disaster Fund Corporation, we had a few successful initiatives with the Insurance Development Forum and our portfolio of parametric solutions, which are often linked to natural catastrophe protection gap questions, is also increasing.
In the Q3 , as you will remember, the earthquake in Morocco was testament to that development, where a significant part of our claim is resulting from a parametric solution we have developed together with the state of Morocco and their brokers. All that leads to a growing exposure base and an increased trend in expected losses from natural catastrophes. If you look at the left-hand chart, I can say that in the first five years of that chart, the average actual loss in that period was $70 billion for the industry. The subsequent five years was $101 billion.
And Verisk, which is one of the vendor model providers in the industry, in their latest analysis from September of this year, are telling us that their latest expected annual average loss, according to their modeling, would be EUR 133 million. So all leading into an increased demand for reinsurance products in a line of business which is profitable for us, and where we have proven that our pricing and modeling capabilities are able to deal with those exposures. And in closing, I've already summarized all these points, and would like to open the floor for Q&A.
Well, thank you, Sven, for your presentation, and, indeed, we go straight into the Q&A. I already see a couple of hands up. Difficult to say who was first, but I start with Faizan at the very back of this room.
Hi. Faizan Khan from HSBC. I can see you've grown your net cat budget by about roughly under 6%, but when you talk about reducing your retro exposure, top-line growth being above 5%, how do I square that? Are you reducing your net cat as a percentage of your total reinsurance premium? And the second one is, clearly, a lot's been done on diversification already, and you seem to be floating around the same level of solvency to associated net cat. Are you reaching your limit in terms of how much net cat you can write, or is there further you can benefit from diversification? Thank you.
No, from a diversification point of view, if I start with that question, we will continue on that track. Overall, that period you have seen in the chart, we have grown our U.S. exposures in absolute numbers. But, given the overall growth, on the net cat side, they have fallen behind or they have reduced in importance from only a relative, yeah, from a relative point of view, and that will be exactly our policy going forward. So we do expect to continue growing our net cat exposure. We will continue to work on diversification. So, in at least in the short term, we expect the relative value of the U.S. to gradually drop over time.
No, we are not at the end of our risk-bearing capability on this side. So as an executive board, we would have room to allocate more risk capital to that side of the business. But again, we are looking at net cat business more in the context of the overall growth of our client relationships and less from a standalone perspective. So I don't expect any short-term opportunistic swings in our approach to that class of business. When it comes to the increase in risk budget, so the guidance we are giving or the major loss budget of EUR 1.825 billion, which you have seen, is fully taking into account our expected reduced retrocessional coverage.
This is all baked into the overall plan for 2024, and we don't expect any changes when we talk with you for the February renewal call. In case there should be changes, I only expect them to result from a more positive than expected renewal season. It's looking promising at this stage, but again, it's early days, so I don't want to preempt what's happening in the next three weeks.
Okay. On the right-hand side, we have a question from Trif.
Yeah, thank you for the presentation. It's Tryfonas Spyrou from Berenberg. Just a question. I was interested in getting your views on how the supply and demand dynamics may pan out in renewals. I guess we've seen some capital coming at the top layers, and I think you mentioned that the retro market is fairly... There's a lot of capacity there. So is there any risk that trickles down to the lower layers? And I guess to what extent does the significant exposure growth in the demand side more than offset the supply of capital? And then on your slide 13, the cost of capital, you mentioned that the net cat XOL market has made money, but you didn't really seem very excited about the returns.
I guess, can you maybe share what has been the return when you look at it from a standalone basis versus when you look at it as a sort of diversified within PNCRE overall? Does that make the returns be more attractive when you look at it that way? Thank you.
Yeah. So, on the supply and demand side, it's certainly true that, compared to where the industry was a year ago, that there is no shortage of supply, but at the same time, we have a very disciplined approach from market participants. So it's easier to fill placements compared to 12 months ago, but at the right price. So that discipline is not reduced, and as I said, early indications are such that we also on the business, which has seen significant increases last year, we will continue to see cash increases to deal with inflation and underlying exposure growth. So from that point of view, I guess the password is that the renewal is more orderly, but at a very sound technical level.
We do see some more demand for the product. I mean, luckily, our clients are growing themselves, and so whilst inflation is still a topic, there is also good underlying growth in exposures, which is making some clients buy more on a vertical basis. But given what I just said on the supply side, the industry should be capable of dealing with that additional demand. When it comes to the profitability side, I mean, the ten-year period you've just seen would not have made our full cost of capital after diversification. So before diversification, that would therefore also clearly not be the case.
But, on a forward-looking basis, what I can tell you is that, according to our view on pricing, we are well above the cost of capital on a forward-looking basis, and that will also apply for the 2024 underwriting year.
Okay. Then we have another question from Vinit and then, from Ivan.
Yes, thank you. Vinit from Mediobanca. So, if I could, I mean, just go back to the slide 49, somehow on the slide. I mean, the reason I'm bringing that up is that the use of model capability... If I see that slide, and just to correct my understanding, the green area... Yes, that one. Sorry.
Yep.
The green ones are the one where you just buy the model and use it as it is. Is that what it is meant to say?
No, that's not how it is. Thanks for that question, Vinit. That's not how it is. I mean, under Solvency II, we have to validate those models. We are trending those models, both from an underlying assumption basis, but we are also trending them for climate change impact. So what this green is saying, that the basis of our analysis is off-the-shelf product, hence a licensed model. But we are doing all this validation and trending according to our view on risk.
You adjust that model?
Oh, yes.
Yeah, that's what I understood. Okay.
Yeah.
The second question was on slide 47, sorry. Is, you know, when I look at the quarter just gone by, which was... Yeah, just the one where you show the diversification. Thank you. Just-
This one?
No, the next one, the one where you show-
Oh, yeah. Okay.
Yeah, yeah, this one. So on the right-hand chart, I mean, Europe, and I'm trying to read all the colors correct, but Europe is not moved up that much, by 8% on the right side. Now, I'm just curious because of what we've seen last quarter, even 3Q, and, you know, one of the fears is that, okay, maybe not climate change, but inflation, climate change, everything, and is, is that diversification enough? Or another way to ask you the question a simpler way is: what if a 3Q kind of non-peak European/other areas happens, and then we again have to face, what we just faced as an industry, or, or there are other things that can happen? Because, you know, I was thinking that the 8% might be more because it's European cat. It's...
I'm just curious as to how you think of the broader topic of if 3Q repeats again, and what is diversification? Is it enough?
Yep. I mean, the impact of Europe on that chart, if you look at it in 2024, will certainly show a growth trend. I mean, a lot of losses have materialized in Europe over the last two, three years, this year in particular, so this is making that business more attractive from an overall pricing point of view. The reason why the 8% is looking maybe lower than you would have expected it to do, is very much a reflection on how we felt about the quality of pricing for particularly the European storm exposure. Compared to the U.S., European programs tend to be smaller in many cases, and it's meeting the same worldwide supply of reinsurance capacity. And therefore, the level of pricing in the European context was more suppressed for a longer period.
Now with the impact from the losses and the repricing this business will see, it's going to allow us to work on diversification, hopefully, by making this grow a little bit.
Next question is from Ivan.
Hi, thank you very much. I just wanted to come back to the point on retro. Maybe you can help us when thinking about gross versus net growth of your business into next year, just to try to quantify how much may that help on the net side by ceding less on the K? And the second question, one thing that hasn't been in the presentation so far was cyber. Maybe you could comment on how much premiums you have right now. What's the capital intensity of that as well? And I think before you used to show it as one of the key risks, sorry, one of the, you know, the SCR consumption scenarios. Maybe you can refresh our memory of what that might be now.
Yeah. On the gross to net, revenue development, this should run very much in parallel. I mean, yes, we will reduce our cession on K, but we will not do it in a dramatic fashion. And it's only covering the excess of loss business from certain territories. So mathematically, the net revenue should therefore coming from the 2024 underwriting year, should grow a little faster compared to the gross side of things, but we are not talking full percentage points, would be my assumptions at this stage. On the cyber side, we are also getting more sophisticated on that side when it comes to pricing and modeling capabilities.
From an exposure management point of view, we are using a number of what we would call realistic disaster scenarios. If you look at the most extreme scenarios, you would come to net exposure positions we have, not dissimilar to the net loss position you have seen on the three waterfalls I've shown you for the natural catastrophe exposures. Therefore, from a risk appetite point of view, it's at par with our risk appetite from the natural catastrophe side. But we are looking at it in longer and more conservative return period categories, because a realistic disaster scenario on the property side would not necessarily stop at the 250-year event. It would look at more extreme events.
But, given that the modeling on the cyber side is still under development for the entire industry, I would hesitate to give return periods to the underlying assumptions we are using in RDS terms. Again, mathematically, we could, but we just don't have the same number of years of experience for the industry to have the same precision in our modeling capabilities here.
Can you share the premiums for cyber?
Cyber is at around EUR 600 million in the underwriting year 2023. It has slightly grown coming from 2022. And for 2024, we expect a relatively stable situation. It may even reduce a little bit. It's too early to tell that, but this is one of the classes where in the original primary market, the rates are actually trending in the wrong way, and therefore, it's certainly not a major growth ambition from our side to significantly grow our cyber exposures going into 2024.
Well, thank you, Ivan, for your question. We have another question from the conference call. I thought there is another question from the conference call. Okay.
Hello, can you hear me?
Yes.
Hi, so Andrew Ritchie from Autonomous. Thanks for the presentation, Sven. Could you just update us? I always get lost as to how you think about net cat exposure outside of the XL book. Because, I mean, I think, first of all, slide 13 in your presentation is just looking at net cat XL. I don't know if you were to incorporate the net cat exposure in the, the rest of the book, what that, what that would look like? Or just remind us, when you're looking at some of those scenarios, are you including net cat exposure outside of XL, or how do we think about that? Second question on your retro protection for next year. I'm just thinking through frequency versus severity.
I thought the advantage of the K sort of quota share is it sort of ground up frequency protection, at least on the cat XL book. So if you have less of it, does that expose you more to frequency, or is the offset that you've also restructured the inwards, but quite a lot to lift yourself out of some of the frequency type layers? So just maybe have a sort of recap on how some of the changes might impact frequency versus severity. And the final question, sorry, is a bit conceptual. Over the years, over the long term, I mean, Hannover has been a pioneer of the tactical use of retro, which has been ROE enhancing. I think you have in the past worked out what the ROE enhancement is.
I'm just more curious, given conditions have changed somewhat in the retro market structurally, do you still think there's the same scope for ROE uplift from the use of retro as there has been over, you know, most of your career?
Yeah, let me start with the last question. Over the cycle, the answer would be clearly yes. In any given year, and particularly when trading conditions are such as they are today, it would not necessarily be the case every year, but over the cycle, we clearly benefit from our retrocessional partnerships, which we have developed. And one of the ways you should think about that, Andrew, is retro is reducing the amount of capital we have to put behind the natural catastrophe business, which is freeing up capital for us to grow with the same clients on their non-net cat business.
We should never forget about that positive effect of reducing the capital required on just the net cat side. On the K question, I would say it does not change the frequency or distribution because at the end of the day, it's a proportional vehicle, so the gross and net frequency would be the same. But of course, it's dealing with the amplitude of the severity side. And so from that point of view, I hope that is clarifying our view on that, and K will continue to be a meaningful part of our retrocessional buying because of it.
And, our exposure of net cat business outside the excess of loss portfolio can be very meaningful depending on territories. So, in some territories, we are more in excess of loss market. In other territories, we are writing quite a bit of cat exposures also via proportional business. And for example, if you look at Chile, which is one of the three scenarios I talked about today, that scenario, the Chilean earthquake scenario, would actually be dominated by our proportional writings rather than the excess of loss portfolio we have. So, we are happy to provide net cat exposure also via a proportional business.
On the per risk business, again, depending on territory, we are at times capable of writing per risk business without providing coverage for elemental losses, and in other territories, the industry is providing it, including natural catastrophe exposures. We are agnostic on that side because we have the pricing capability, whether it's with or without that exposure. So from that point of view, as Silke said earlier, we listen to the clients and see what their buying needs are, and when they want to buy cat via cat excess of loss event towers, we are happy to provide that. If they want to do that by also using per risk or pro rata, then we can also do that.
So would slide 13, just everything be directionally the same, just sort of larger either way, if I include the net cat outside of XOL? So I think some of your peers report it differently. They report all net cat, including proportional.
Yeah, no, directionally, it would be the same, Andrew. I mean, there would be marginal differences one year to the next, but directionally, a bad cat excess of loss year would not turn into a good overall year because of pro rata and per risk-
Okay.
Nor, nor the other way around.
Okay, thank you.
Well, thank you, Andrew, and thank you also for your questions. Unfortunately, we have still more questions than time. With that, I've seen there were a few, at least one other hand up, but we can answer those questions later on. We are breaking now for lunch, and we'll resume at 1:30 P.M. to have Claude's presentation on the Life and Health business.
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[Foreign language] .
So welcome back, everybody! And thanks for being so punctual. Before we go into the next presentation, held by Claude, I'd like to draw your attention to the feedback questionnaire we have prepared. You have a QR code on the back of your name plates, and with that, you can access an online version of that questionnaire. But we also distribute one via email tomorrow. And any comments, suggestions are highly appreciated because that helps us to refine and improve our investor relations work. Yeah, we now dive in, and go straight into Claude's presentation, and he will, no surprise here, talk about Life and Health .
And, moving into IFRS 17 caused some headaches, not only for us, but also for many of the people the standard is made for. And, and we are very happy that Claude is, as we have last year, Clemens's presentation, Claude is also giving us a lesson in this new language. We very appreciate that, and explaining us the technical result of the Life and Health business, and all the components involved, so the CSM, the risk adjustment, which are a major part of the technical result. And with that, I hand over to you.
Thank you, and probably, I'm not going to give you any lesson, by the way, so that's, that's probably wrong, Karl. But as usual, you know, insights into Life and Health reinsurance. Hopefully, some interesting and useful insights. That's what we try to do. And with Klaus Miller, who is going to join me for the Q&A session afterwards, you promised that to me, yes? Yeah. Klaus and myself, we decided that this time we're going to talk about the reinsurance service result in Life and Health . And when you talk about the reinsurance service result, you, you automatically have to talk about the CSM and the risk adjustment, respectively, about the CSM release and the risk adjustment release. So that's what I'm going to focus on today, and, we have two chapters that I'm going to show.
So the first chapter will be really, I would say this is a graphical presentation of various cash flow scenarios and on the impact of various cash flow scenarios on the various elements of the CSM, the risk adjustment, and the reinsurance service result. This one is really much, much more a graphical representation. And in the second part of the presentation, I'm really going deep into the real figures, into the real life, and I would like to show you the future development of the CSM and the risk adjustment, respectively, of the releases of the CSM and the risk adjustment, as well as of the reinsurance service result for the portfolio, but also then afterwards for the portfolio, including new business assumptions. And I hope that you will find this very, very interesting.
So before starting with the first chapter, I would like to give you here, something that you know already. So this, this is a graph that you know, you have seen our Q3 results. You know, at least two parts of this graph. These are waterfalls. You know the CSM?... on the left-hand side, and you know also the graph of the reinsurance service results. So you see here how the CSM developed in 2023 from EUR 5.4 billion to close to EUR 6 billion, and you see the waterfall, all these elements which have helped to develop the CSM. And you have seen that. I'm not going to explain you this. We have explained this in all the details during the Q3 calls.
You have also seen the other side of the slide, which is the reinsurance service result and the various elements which have led to the reinsurance service result of EUR 677 million for the Life and Health for the first nine months. What is new on this slide is the risk adjustment, that we show you also the development of the risk adjustment, which went from EUR 3 billion down to EUR 2.7 billion. And you see that the various elements of the risk adjustments that you have here are, I would say, analogous to the various elements that you see also on the CSM. You see the elements like currency effects, new business, interest accretion, estimation changes, the regular releases, et cetera, et cetera. It's exactly the same, but it's probably, I guess, the first time that, that we show this.
That's one new information. This is just an appetizer, a starter to get us into the topic. So let's now go into an illustration, into this graphic illustration. And I have to apologize, some of you might say this is totally trivial, what I'm showing here in this first section. And yes, for some of you, it's going to be trivial, I admit. For others, maybe it's helping to understand what's going on on the Life and Health side. So the first slide that I'm going to show here is super, super busy, and I have to explain you how it works, okay? So give me a little bit of time here. What we show you here is a sample of a so-called GIC.
This is a group of insurance contracts on the Life and Health side, which started in year 1, and we show here this GIC over 7 years. This is what we are showing here. We show various elements. I'm going to explain you what you see here. We suppose for this whole illustration that we're doing, that we are currently in year 4, okay? So we see year 1 to year 7. The contracts go ahead, of course, that's long-term business. You see it's, it's kind of a run-off scenario of some business we have written in year 1, and we're currently in year 4. So what do you see on this slide? So on the left-hand side, you see some bar plots. In the middle, you see some line charts. On the right-hand side, you see some waterfalls.
If I start on the top left side, what you see there is, are the estimated cash flows for this group of insurance contracts. That's the estimated cash flows at the beginning of these contracts when you have been writing them. What are cash flows? Cash flows are as usual. It's premium minus claims, minus profit sharing, minus commission, minus costs, which are directly attributable to this treaties, et cetera, et cetera. This is cash flows as we know it for all the time. So you see here decreasing cash flows. Then on the right, right-hand side of these cash flows, you see what we call the discounted cash flows. This is nothing else than the present value of the various cash flows that you have seen on the left-hand side.
So the scale of the graphs in the middle is a totally different one than the scales of... the scale of the graphs on the left-hand side. Of course, because in the middle, we have present values. On the left-hand side, we have different values for every single year. So cash flows on the left-hand side, then afterwards, discounted cash flows in the middle. And you understand that this line is going down because the treaty is running off and the discounted cash flows are gonna be the smaller and smaller over the years. So if you move one level down, you see the expected risk adjustment releases. So this is really when we write the business, then the first thing we do once we have the cash flows, we look into the expected risk adjustment releases.
This is the risk adjustment, is kind of a measure of the variability of the cash flows. It is like the cost of capital. So we define the various risk adjustment releases year by year. And you see there, the dark blue bars are really this risk adjustment, which also is running off together with the cash flows. And on the right-hand side, you see another line chart, which is now the risk adjustment. The risk adjustment, that's what we're talking about all the time, is the present value of the expected risk-adjusted adjustment releases year by year. So that's why you see this line going down. Okay? So that's totally trivial, I know. Now, let's go down and let's look into the CSM. So let's look now into the line chart of the CSM. Why do I do that?
Because what happens when we write a new group of insurance treaties or a new treaty in general, what happens is that we look into the discounted cash flows at the very beginning of the treaty, then we deduct the risk adjustment at the very beginning of this treaty, and the difference of these two is the CSM at the very beginning of the treaty. Why do we do that? Because the initial profit should be zero of anything that we write. So this is the logic of IFRS 17, and don't ask me for more details. It stops there with me, okay? But that's very important because we - so we do it that way. So you have the discounted cash flows, minus the risk adjustment, is then what is left for the CSM.
What we then do, then we go to the left of this slide, and we distribute the CSM according to the CSM pattern. So that's the way it goes, and that's how you end up then afterwards, having the CSM pattern on the left-hand side in green down there. Yeah, that's the situation. Now, what else do we see on this chart? You see that we're on year number four. So we assume in this chart, the best world. We assume that everything goes according to best estimates. No fluctuations at all. Everything is as planned, and we're now in year four. And what you see in this chart, in the middle, in the two line charts in the middle, the risk adjustment and the CSM, you see each time two small dots.
These two dots mean for the CSM, that this is the CSM at the beginning of year four and the CSM at the end of year four, and you have the same for the risk adjustment. The risk adjustment at the beginning of year four, and the risk adjustment at the end of year four. And what you see on the right-hand side, which is the waterfall, is what we are showing to you. What I showed you in my very first slide, is a simplified version of the waterfall that we show you.
So in this case, where everything runs according to what we supposed, so all perfectly according to best estimate, you see on the bottom right that the CSM at the beginning of the year four is increased by what we call the interest accretion, and then what you deduct from this sum of the two is then the expected CSM release of year four, and that brings you then afterwards to the CSM at the end of year four. It is analogous for the risk adjustment. You see exactly the same logic. Yeah? So if everything goes according to plan, what is then on the top right of the chart, the reinsurance service result? Well, the reinsurance service result is simply the sum of the risk adjustment release and the CSM release. And you see this here.
It's, it's as easy as that. Okay? So this is really in the perfect world. Now, we know that the world is not always perfect. It would be nice if everything ran out exactly as expected, but that's of course not the case. So that's the basics. Now, let's start and look into what happens when cash flows do not perform as expected, and this often is the case, of course. So the first version that we have is a very, very easy one. Let's suppose that in the year four, which is the year that we are looking at, so let's suppose that the year one, two, three, run out according to expectation. We're in year four, and we have now, all of a sudden, the cash flows in year four, which increase (decrease) by some amount. So why would they increase?
Well, because we have maybe more premium than expected, we might have less claims than expected. For whatever reason, the cash flows increase. So what happens with all the other parameters that I was explaining before? Well, you see that mainly nothing happens, yeah? So this increase of cash flows or decrease of cash flows, if it's sufficiently small, has no impact, neither on the CSM, this is a balance sheet figure, nor on the risk adjustment, so this remains as it was before. The only impact as an increase in year four of the cash flows has, is a direct impact on the reinsurance service result. And this is one of these bar plots that you see when we show the reinsurance service result.
You remember the first slide, which is risk adjustment release, plus CSM release, plus, and we call it experience variance, and so that's a typical experience variance that we would show positively or negatively. So this is really going directly through the P&L. That's probably the easiest thing that I can show you now on with respect to the change of the expected cash flows. Let's go one level further now, and let's suppose in this example, that up to year three, everything went as planned, that year four went as planned. However, that in year four, we realize that the cash flows in year five, six, seven, and further down, are slightly higher than we did what we expected. A totally different scenario.
And what you see here is now the following: so given that we expect the cash flows of the future to increase, you see in the middle top line graph, that the discounted cash flows as of year 5, is slightly increased. This is this orange line, which is a little bit higher than the dark blue line there. Okay? So it increases logically, because the future cash flows are going to increase. Now, what is interesting is that when you move down to the CSM, you see that the CSM increases by exactly the same amount. Logically, yeah? Because you remember what we said, the CSM is the difference of the discounted cash flow, minus the risk adjustment. Risk adjustment, no change. So the CSM is going to increase by the same amount as our discounted cash flows.
You see this now also on the right, the bottom right-hand side of the chart. You see that you have now a waterfall chart, which is the CSM at the beginning of year four, plus the interest accretion, plus what we call change in estimates, minus, of course, the CSM release. This is now the new waterfall chart, which is a little bit more complicated than the previous one. What we do and what we see is that this increase of CSM. We again go and distribute this increase of the CSM over the following years. That's what you see in the chart on the bottom left there. You see that the CSM increases in the following years. Now, when you look into the reinsurance service result on the top right, you see that nothing changes. There is no change on the P&L.
However, we know already now, of course, that the reinsurance service result of the future is of course going to be higher because we see that the expected CSM release has increased because of the expected cash flows being higher. I know it's totally trivial what I tell you, but it's just a graphic explanation on what's going on. So this is the second before last example, and the very last example that I wanted to show you is the following: where again, everything works as planned up to year four. Year four works as planned, and what we realize in year four is a totally different scenario. We realize, oh, Jesus, the business is going to perform much, much worse as of year five and forward. And you see this in the graph on the top left.
So what happens again? So I'm repeating myself. We go into the discounted cash flows. The discounted cash flows logically move down because the cash flows are moving down, so we understand this. If you go to the bottom, middle bottom of the slide, you see that there is an impact on the CSM, but what happens here? The CSM is insufficient to absorb the future discounted cash flow reduction that we are expecting. So the CSM, given that they cannot be negative in this slide, goes down to zero. So we absorb the full CSM because we have a future cash flows, which are not sufficiently high to absorb both the risk adjustment and any CSM.
We have the CSM going down to zero, and any excess over the CSM is what you see on the bottom left side of the chart, which are these gray small bars on the bottom left side. These excess amounts are taken as a present value and are moved into the reinsurance service result as a loss component. You see this on the top left of the chart, where you see the loss component, which is the present value of all these excess losses in a way that we see year by year on the chart, with the on the bar chart on the left. Right?
So what we would then see is the reinsurance service result being, again, the risk adjustment release, then plus the CSM release, which is zero, of course, and then plus or minus the change in loss component, and in this case, it is really very negative, and it leads to a negative result. Okay? So that's what I wanted to say. I mean, the world is much more complicated than this. This is totally trivial, I know, and in reality, it's not always one of these scenarios which is happening in a group of insurance contracts, but you have various combinations of these and other scenarios which are happening in a group of insurance contracts. And of course, you have a combination of group of insurance contracts which behave differently.
All this together, to give you an idea, is then the waterfall chart we show you at slide one. So you have to see that what you see at slide one is pretty complicated in the background, okay? So we're really simplifying the things, but I wanted to give you a little bit of insight into that, right? So having said that, let's now move away from illustrations. Yeah, I'm tired of illustrations. Let's go into the real world with real figures, and this is the second chapter of my presentation, and I think you might be interested in this one. So what I propose you here is to look into real figures, threefold.
First of all, I'm gonna take one concrete, new reinsurance treaty for each of the reporting lines that we're showing you, just one concrete example, and show you how the CSM and the risk adjustment behave. It is just one treaty. It is not the whole segment. We will see this afterwards. So this is an example. So again, what do you see here on the left-hand side in green? The green colors is always the CSM from now on. The blue colors is always the risk adjustment. And what you see here is four concrete treaties, and you see the four reporting lines that I'm looking at. I'm looking at structured Financial Solutions . Careful, not Financial Solutions as a whole. Structured Financial Solutions is an example, a longevity treaty, a morbidity treaty, and a mortality treaty. And you see... Let me start that right with structured Financial Solutions .
So if we look into the CSM, how it behaves over the years for this concrete treaty, I can't remember which treaty it was. It's a concrete treaty. You see that the CSM reduces very quickly. So the structured financial solution is the one with the square, yeah? The longevity are the two graphs with the, with the dot, morbidity with the diamonds, and mortality with the triangle. So let's look into the two lines with the square on the CSM under RA. So you see the CSM reducing really much faster for the structured Financial Solutions business compared to all the other treaties that we have been showing. And then you see on the right-hand side, you see the risk adjustment for this concrete treaty being zero. Because it's so far away from the business, it's so risk remote, that you don't need any risk adjustment.
So for this structured Financial Solutions treaty, concretely, this risk adjustment from the day one on is zero. Yeah, so that's the way you have to read these two charts, right? And then let's take another one, which is mortality. I mean, on the mortality side, with the triangle, you see that the risk adjustment—sorry, the CSM is reducing much slower than the Financial Solutions business. You see that? And you see also, and that's quite interesting, that the risk adjustment is also reducing much slower than on than on any other of the businesses, because why is it reducing smaller, slower?
Because we know the risk adjustment is a measure for the uncertainty of the cash flows, and you can imagine that at the very beginning, on a mortality treaty, cash flows are probably more certain than at the end. So that's the reason why you keep the risk adjustment quite high, and it reduces later on. Now, it could even be, and it's not a joke, that this risk adjustment could even move up, could move up at the beginning. And why would this be? This would be because the interest accretion in a, in a special year is higher than the risk adjustment release in this particular year. And then you would see the risk adjustment even moving up before moving down again. So you see all these kind of factors that you, that you have here.
And then the other treaties, I'm not gonna mention them, because they're just very specific treaties. Now, let's move into something which is much more interesting, which is, let's have a look into each of the portfolio of the reporting lines as a whole. And what you need to understand there is that, of course, if I look into the whole of mortality and the whole of longevity, et cetera, I'm not looking into treaties which started all in the same year. I'm looking into a portfolio of treaties which started in the past, which start maybe this year. So with this, a whole portfolio of treaties of the same reporting line, and this is what you see on this slide. So again, on the top, everything which is in green is CSM. On the bottom, everything which is blue is risk adjustment.
So let's first of all look into the CSM composition. You see the EUR 6 billion that I was showing you in the very first slide. Remember, this is the level of the CSM. Under the risk adjustment, you see the EUR 2.7 billion I was mentioning. Remember, at the end of Q3 2023, these are the two main levels. And what you see here now, pretty interesting, you see these EUR 6 million, from which reporting lines do they come? And let's discover this together now. So you see the CSM composition, for example, the biggest part of the CSM composition is Financial Solutions , with 34%, and then followed by longevity and mortality, pretty equal, and morbidity, a little bit smaller. So this is the CSM distribution, and when you look into the risk adjustment composition down there, you see that it's a very different composition.
You see that the Financial Solutions business, because here we talk about Financial Solutions and not just structured Financial Solutions . So financing treaties, which do carry a risk adjustment, are included there, but they represent only 5% of the risk adjustment, while the CSM is 34%, you see? And when we go into mortality, you see that the mortality on the risk adjustment composition is playing a huge role. Huge! Why? Because it's not just mortality, it's also pandemics, which is covered by the, in there. So you see there, the split between CSM and RA is very different. And when you go now into the middle, into these line charts, you see again how the CSM, for example, develops.
You can see in general, for the whole portfolio, it is also true that Financial Solutions , this is now really FS and not SFS, that Financial Solutions develops quicker, runs down quicker than the other businesses that you see there, and at least on the CSM side. Whereas on the risk adjustment side, it's not that big the difference, because at the end, what you need to see is that the Financial Solutions , which carries a risk adjustment, is not the structured Financial Solutions business, but the standard financing business. And this has pretty much the same pattern as any other standard traditional life reinsurance treaty that we know. Okay? Now, if you move to the right, I think there it really gets interesting. Well, I'm excited about it. As you see really now the EUR million figures that we're expecting.
This is the portfolio that we're expecting to release over the next years. So we expect to release on the CSM close to EUR 600 million, and you see where these releases come from, logically. And then you see how this runs down. Under the reinsurance, on the risk adjustment release, you see exactly the same. Okay, so that's, that's quite interesting. And what I suggest you now to do is the following: is to, to move these two parts together, because at the end, who cares whether it's CSM or RA? Both go into the result. So let's now, on the next slide, sum the CSM and the risk adjustment for the whole portfolio up. Okay, let's do this together. You see it here? That's on the top part of this slide, yeah. So just concentrate on the top part.
So you see now the composition of the sum of the risk adjustment and the CSM, which is the EUR 8.7 billion. That's 6 plus 2.7, right? You see this composition, and you see that here, quite interesting, and I discovered that myself. You see that we have quite a nice distribution between FinSol, longevity, mortality, each equally distributed, more or less, and a little bit less of morbidity, yeah? So that's the composition of the sum of the two. And then you see how these develop. So both the CSM and the risk adjustment in the middle, in the line chart, each of them for the whole portfolio this time, not just each line of business, but the whole portfolio. And then you see the in-force releases, of course, which is the sum of the other graphs that we have seen before, right?
Quite interesting. Let me quickly jump back to the slide I had before, but I forgot something that I wanted absolutely to tell you. I go back to this one. What I find interesting here is that on the right-hand side, when we look just at the CSM releases, and if you started now to sum up all these bars that you have, you would end up with a figure which is much, much higher than the EUR 6 billion, logically, because the EUR 6 billion is, of course, a present value, a discount to present value of all these bars. And you know how much it would be if we sum this up compared to the EUR 6 billion? I checked it up. It would be more than EUR 9 billion.
So, the undiscounted, yeah, value would be more than 50% higher on the CSM than the EUR 6 billion we are showing here, and that's quite impressive. Where does it come from? You remember, it comes from the interest accretion, of course. You have been talking about interest accretion, accretion payments. So this is quite interesting. And now comes the very interesting part, in my opinion. What do you think happens on the risk adjustment releases? If we do the same exercise, and we sum all these bars up, of course, we will get to something which is higher than the EUR 2.7 billion, right? But how much higher? I can tell you it's 90% higher than the EUR 2.7 billion. And why is it the case?
Because you see that the CSM reduces much quicker due to the Financial Solutions business, the structured Financial Solutions business. So we have much less impact of all these discounts into the future, whereas the risk adjustment is much longer term, so the discounts, they count much more for much, much longer. So the, there's a 90% add-on on the EUR 2.7 billion, if you added just all these bars together, right? So I just want to tell you this on this slide. But let's go back or, yeah, back to the next slide. So I explained you the in-force.... But now comes the really interesting part, in my opinion, which is: what about the new business? So in force, everybody can talk about the in force, but new business, what's happens, happens there?
So what you see on the bottom chart, and this is, this in gray, there's a good reason why it's in gray, because this is now, you know, let's. You know, that's a crystal ball. Let's think into the future. That's why, that's grayish. But so far, in the first nine months, this is the composition of our new business, and here we take risk adjustment plus CSM together. And you see that in the first nine months, Financial Solutions has been great. Yeah, incredible. And it's probably a little bit more close than what we would have expected, yeah? We have never looked into these figures like this, but 42% is quite massive. And longevity is a little bit less so far than what we would have expected.
But longevity, there is a big deals and some deals, we're gonna write them by the end of the year. This takes time. So that's just the image, the snapshot after nine months. And then you see again, and obviously, as I, as before, you see then the dollar amounts or the euro amounts that we believe that we're gonna according to the risk adjustment release, the expected risk adjustment release and the expected CSM release, the amounts that we're gonna release every single year out of this business. And you might say, "Well, how can it be that in the first year, we're releasing less than in the second?" Well, as you know, in Life and Health , we write business through the whole year. In average, we write business probably in the middle of the year.
That's why in the first year, where we have only half of the value, and then afterwards, it's gonna be double of the value, yeah? So this is really the first nine months. And now what we did, and this is a purely... That's an exercise which is interesting, I think, because it gives you a little bit of a feeling. What we did is to say the following: Let's suppose that we're gonna write up to the end of the year, just one third more of what we have already written, so to fill up the whole year in the same split. And let's suppose that for the next 10 years, and this is a conservative assumption, that we're gonna do the same performance as we have done in 2023.
This is really just an illustration to show you, even under conservative assumptions, it's gonna work. And that's—this is what you see on my very last chart here, which, which is on the bottom right-hand side, where you see, first of all, the chart starts at the level where the chart up in the, in the upper right corner ends. So you see the close to EUR 800 million, which is what we're releasing in CSM and risk adjustment out of the portfolio, plus a little small bar in the first year, which is the new business we have been writing in 2023, counted for 2024, right? It's just this small business. And then you see how this new business of 2023 is then continuing to release CSM and risk adjustment over the whole duration.
What you then see is a light gray next generation of new business, which is the same, which then enters one year later. Again, the same logic, one year later, one year later, one year later. What you see under these assumptions, which are conservative, you know, we suppose that we're not gonna grow anything with respect to what we have been doing in 2023. You see that the total sum of risk adjustment and CSM release in the future is gonna increase. You see that there. By definition, if the risk adjustment and CSM increases, releases increase, of course, also CSM and risk adjustment behind the scene are going to increase. But I'm not gonna show you that because that's an obvious situation, of course, right?
So this is what I really wanted to show you here. In a nutshell, I have zero minutes left now, but I'm pretty much on time, I hope. First of all, I mean, we have seen that the future reinsurance result really consists on a best estimate basis out of the risk adjustment and the CSM releases that we expect. If this was not the case, if we knew anything which is changing in the future, we would have to take into account already now. So in principle, we can expect that the future reinsurance service result of Life and Health is the sum of the release of the expected risk adjustment and CSM release at that time. That's number one.
Then we have seen that current year deviations, you remember the first deviation in year 4, current year deviations and small, let's say, smaller deviations, or that the current year deviations, they will be impacting the reinsurance service result. But not only current year deviations, but also very, very strong future year negative deviations, they will definitely impact the reinsurance service result, and by that, also our P&L. We have seen, and this is a given, that we have different release patterns for CSM and risk adjustment for each of our reporting categories. We have seen that we have a present value of EUR 6 billion and EUR 2.7 billion that are gonna be released into the future.
We have seen, maybe not, but let me show you that maybe, that we expect, and this is what Clemens was saying, and Jean-Jacques, a Reinsurance Service Result in 2024, above EUR 850 million. Where do we see that? Let me quickly go back, sorry, to this slide, to this slide here, where you can see it. If you go into 2024, you see the in-force release is close to EUR 800 million. And if you look into the release that we expect for 2024 of the new business, then you see it's close to EUR 100 million. So if you take something which is a bit lower than 800, you add something which is close to one hundred, you get to something which is above EUR 850 million.
Again, supposing that everything runs fine, and we know that there are, of course, some things which always can happen. This is the nature of our business. So, and then last but not least, yeah, that's also very important. You have seen that we expect the future new business to more than compensate the decrease of the annual increases of the in-force portfolio, and that's quite a good messages. And with that, I invite you to ask questions, and I invite Klaus to join me here to respond to hopefully all your questions.
Well, thank you, Claude, for your presentation, and welcome Klaus to stage. We open for our Q&A. There are some hands over. We start with Trif, and then we have-
Hi, Tryfonas Spyrou from Berenberg. Thank you so much for the presentation. I guess I had a question related to the growth in the CSM. How much do you expect the growth to be driven by new business versus interest accretion? And I guess relating to that, the growth in risk adjustment, maybe you can give us a little bit more color on how that is expected to grow relative to the CSM, and the 2% guidance. Thank you.
Mm-hmm. Do we have the answer? I mean, one thing is sure, it grows. One thing is sure, it grows. If you looked into the figures of my last slide and you made the calculation, you would see that we have a CAGR of the CSM and risk adjustment releases of the future, so the reinsurance service result, which is more than 2%. It is definitely more than 2%. So I expect the CSM and the risk adjustment to grow by more than 2%. Now, if we grow over proportionally structured Financial Solutions , the CSM will grow more than the risk adjustment, and vice versa. If we start to grow over proportionally mortality, the CSM would grow less than risk adjustment, logically, because of what we have seen. That's all I can say. Klaus, I don't know if you have more.
There is something in the financial ambition that we want to grow by more than 2%, the CSM. That's one thing. You should not be confused by the risk adjustment in 2023, which reduced, and there was a very special impact from the rate increases in the U.S., and we expected that we would have to come to an agreement with some of the clients where we have agreed on rate increases. And because we reserved for that, and you have to put it somewhere under the new accounting regime, and CSM didn't sound right to us, so we put it into the risk adjustment, but this was released and then paid out, and the arbitrations have been finalized with that.
Klaus, what you say, this is shown here on this slide. I just want to demonstrate it, that we show you real figures. I didn't want to smoothen any kind of graphs. You see this here, what Klaus said? In the risk adjustment development down there for mortality, you see this drop. It went down. You see this, the gray figure, the mortality is the triangle, and on the other hand, you see the CSM, which moved up for pretty much the same reason. Yeah, yeah. Yeah.
Just on the... Sorry, the CSM growth follow-up. Do you expect the new business added during the year to more than offset the, the release of the CSM? Or, or do you require the interest accretion to add up to that for the CSM stock to grow? You see what I mean?
Well, I mean, the interest accretion is part of the CSM, you know? It always adds up, as I have shown you. So the interest accretion has to be counted with it. Now, there is always fluctuation. I mean, Life and Health business is sometimes very bulky, and you write a little bit more, some more treaties out in one year, some less treaties in another year. I think you could have various situations on average, I would say. On average, I'm absolutely expecting that the CSM is increasing and that we're overcompensating the CSM of the in-force with the CSM of the new business that we write.
Thank you.
Yeah.
Okay, the next question is coming from Vinit, and then we continue with James.
Thanks. Vinit from Mediobanca. So just a bit of the morning follow-up, bit of the afternoon. You know, the 11%-13% that you're guiding to in the morning slightly looks different from what I see behind you. But, I mean, is it that... And it's also much higher than the 10% guided in the beginning of the year when IFRS 17 was launched at Hannover Re. Is it that there's far more Financial Solutions coming in that you expected in the beginning? Is that how we should read this 11%-13%? So that's the first question.
Linked to that is, you know, at least what I can imagine, we are already at about EUR 850 million now, and when you say that you will exceed EUR 850 million, I'm hoping that there's some bit more importance of the word exceed because... we're already there. Unless-
What do you want us to say?
No, no, no. Unless, you know, I mean, you know, the starting point is flat, which is a little tricky to understand. So I'm just curious whether it's been deliberately guided to be very conservative. And before I just finish this, similar concept is this 2% CSM. Is there any experience, variances, assumption changes that you talk about within that number? Because otherwise, the world would be too simple for us. We just go back, put two numbers in a model, and ... we go home.
But maybe just the last one. The answer is a clear no.
No.
Because when, if we knew that anything would happen in the future, we would have to take, I mean, look into claimants. You know, we would have to take into account already now. So the third question is very clear, no. Why not you on the second?
The other one?
Yeah, go ahead.
Thanks for the offer to pass here. Now back to the releases. We have different kinds of business lines here, and I discussed that already with somebody, either last night or today. You should expect, for instance, for the
S tructured solutions or Financial Solutions , a decrease of around 12%. So this is the release each year, because this runs off faster. Then the traditional mortality business would be more around 8%, and longevity, where there's absolutely no optionality that runs for a long time, could be more like 4% or 5% reduction each year. And now the question is: Are we writing big deals on the longevity side one year, or is it more on the financial solution side? So this might vary from year to year, but this is the, let's say, average run rate I would expect for these different types of businesses.
And you see, even, I mean, this—I showed this slide, where you see even though we say we release, it drops by X% every year. You see that on the mortality side, an increase, for example, for some special impacts that you see. So you will always have some special impacts which will come in. And Clemens, you're adding anything? That's great. Yeah, come on. Yeah.
Yeah. He speaks IFRS 17.
Yeah, yeah.
All on stage.
No, but I think it's a good point. To the run-off rate, I think this is what you see as really running off the existing stock of CSM. What we've taken into account in 2024 is also that we do expect the pipeline on the financial solution side to be very healthy. So that will naturally increase the run-off rate. On the reinsurance service result, so how much prudence is in there when we say we want to be above 850? And you pointed to our 9M results. And I think we...
I, I just want to be clear on that one, that the results in Life and Health , although I expect them on a year-to-year basis to be more stable in the new IFRS 17 world, that's very clear, and you've, you've seen Claude explaining that because you have the risk adjustment, you have the CSM. However, when we look at assumption updates, and you've seen that, we've done longevity in Q2, we will do mortality mainly in Q4. And you should not be surprised if you would see mortality updates coming through that might be adverse in one quarter or longevity in another quarter. And then we also have been very transparent on critical illness, on morbidity, so there can be loss components.
So if you feed all of that into our guidance on the reinsurance service result in Life and Health , we would still allow for, let's say, some adverse development that is not covered by the CSM nor the risk adjustment. Hence, that would go into the loss component. So we've been a bit cautious on that end, which I think is fair on Life and Health .
Maybe just quickly on this last component, I wasn't explaining that when I was showing the example, you know, the example with the loss component. Once you are in the loss component, any future assumption changes go, of course, against the P&L, be it negative or positive, until you have, you know, absorbed the loss component and until you can set up a CSM again, which absorbs these volatilities. So as soon as you are in a loss component for a group of insurance contracts. So I sound like a CFO here. I'm sorry. Sorry, Clemens. Yeah, okay. You know, yeah, you really everything goes through the P&L, and this is very important to realize, of course. Yeah, yeah. Yeah.
Okay, we continue with James.
Thanks. It's James from Citi. To the extent that you've reserved very conservatively on the P&C side, presumably you've reserved just as conservatively on the Life and Health re side, and therefore, why shouldn't I expect to see positive experience variances when I'm modeling through? And then kind of supposed linked to that is that I seem to remember that there was something, whether it was to do with contract boundaries or to do with the renewal of some of the treaties that are not captured, so that-
Mm-hmm
E ach year you should expect again-
Yeah
For a different reason to see positive variances.
Mm-hmm.
I had another question, but I'll come back.
Okay, I take quickly the second one, and you can take the first one. I think on the reserves, well, it's clear. But the second one, the second one, maybe clearly, this is what you see... Sorry, I go back. Sorry for the... You see, this is what you see on the extensions on existing contracts. This is really what you meant, you know, that this, this business which is in force but which is in force o- for one more year. Some of these treaties are not new, new, new treaties, but they have extensions, and we take into account of these extensions there also on the CSM. Yeah, that's just on the second question. On the first, reserving, I mean, in Life and Health , you cannot build, I mean, you know, we cannot build pockets of reserves.
You don't have a big claim where you can say, "Okay, let's suppose it's a EUR 200 million claim, and at the end, it ends up being a EUR 50 million claim." We always reserve on the best estimate basis, Claude. It's-
Usually, we have much more data.
Yeah.
If you have a CAT claim last week, then we might have some flexibility in reserving for that, being a little bit more or less conservative or positive, negative. On the life side, you have to look into the data, and usually it's thousands or millions of policies, and there is not that much room, what you can use.
James, just briefly add to that is, that's on the slide here. That's the risk adjustment, you know, that you were looking at. I mean, that's... We are aiming sort of EUR 3 billion here. And you know, when that's treated as equity in the capital model, that assumes that it's going to be run-off result. If you look at it like that. That's more pronounced on the risk adjustment side, on the Life and Health side, than it is on the P&C side, where we have it sort of both on the risk adjustment as well as in the BEL.
Just to be clear, the extension on existing contracts, that's, I mean, 8% or so of the opening stock. So that's not included in the 2% CSM growth. You're not adding that into your CSM growth?
Oh, yes. So yes, everything is in. Everything is in.
Because it grows the CSM.
Yeah.
It doesn't show up in new business, but it's part of the CSM-
T hen my-
You had the third question, yeah?
Yeah.
Please go ahead.
Thank you. No, I'm just intrigued. I mean, all the move towards IFRS 17 and all the discussions about hard and soft capital, you know, you've seen very strong growth in financial motivated in insurance and life and other sides. So how do you see that, kind of the opportunities there, presumably in, you know, you're overlaying 0% growth in new business? I'm just trying to get a feel for the CSM growth if opportunities have evolved in the FinMo business.
Mm-hmm. Do you want to take the FinSol or? I take it myself. I mean, if you look into the current book of the Financial Solutions business, structured Financial Solutions business, we're heavy in the US and we're heavy in China right now. And the strategy that we are having, and Jean-Jacques alluded to it, you know, is really to try to geographically expand our financial structure, Financial Solutions business into other regions, and that's what we're doing. So we have a Financial Solutions business accelerator right now that we implemented in Europe, for example, and we're looking also into Financial Solutions in other regions like Australia, by the way, even in Africa and Latin America. So that's really where we see the opportunity, in addition to China and the US.
But just to be clear, financial solution has not the same simple definition as pure risk mortality business. Pure risk mortality business is covering death, and this hasn't changed for the last 100 years. The financial solution business we were writing in the U.S. 10 years ago was mainly Triple-X reserving, and that's basically gone these days, with principle-based reserving and other things. The business we are currently writing in China will be gone in 5 years. We need completely new, totally different solutions. So we will still report it under this reporting line, but it will be different.
And these solutions look different in every single region, every single country. I mean, in Asia, you have the Chinese FS deals, but then you have the Korean FS deals, which look totally different. These are typically mass lapse covers that we are looking at, et cetera. So they look really different in every single country. It depends on the local regulations at the end. Yeah.
Okay, we have further questions from Faizan.
Hi there. It sounds like you want to grow quicker in structured Financial Solutions , and that comes at a quicker reduction in CSM and risk adjustment. So to stand still or to grow your CSM by 2%, does that mean your new business has to be even stronger going forward? And do you effectively get a stronger earnings profile in the next few years because of that?
Hard to estimate, I...
Whatever I would say would be, I mean, I'm looking into a crystal ball, you know? I mean, let's be clear, we, we believe that - we believe, and we both believe that structured Financial Solutions will continue to grow. Longevity will also continue to grow. Now, that's why I'm-- I was thinking about it. You know, if you look into profiles of longevity and structured Financial Solutions , they're really very, very different. Let me see. You see here, so structured Financial Solutions , the CSM releases very quickly, the risk adjustment is nonexistent, and if you look into longevity, you know, it's a totally different, different, structure of, of release pat-- totally different release pattern, as we say. So now I would have in my head to combine longevity and structured Financial Solutions to give you an answer.
This is too much, I must say, for me right now. I'm unable to give you an answer. Klaus, maybe you're always good?
No, even-
Oh, okay.
Even the Financial Solutions business, the Chinese deals are two years-
Yeah
2.5 years. The U.S. deals are 10 years. It's hard to, to guess that.
and I guess second one, and, and this might be my, my ignorance, but are there any sort of business which is negative to cash flows in the short term, say, in year one, year two? so if you grow too fast, then that could have impact on near-term cash flows.
If we would know about that, we would have reserved for it.
Well, we need to see. It depends on which accounting regime. Now, I sound like a CFO again, Clemens, I'm sorry, but under HGB-
I know it.
U nder HGB, you know, if you do some kind of financing transactions, where we do some first-year financing, acquisition cost financing of insurance companies, there we would take a hit under HGB. Under IFRS 17, Clemens, no. In principle, no. So in principle, we're on the Life and Health side, not writing business of which we're not convinced that it's going to be profit-making at the very beginning, at least.
Thank you.
Thank you, Faizan. Next question is from Roland.
Hello, Roland Pfänder from Oddo. I would like to touch on the mortality business and the in-force management you are executing. Could you explain how this flows through the CSM, and are there any effects for next year, 2024? Or is it digested in a new correction in your CSM projection?
So the easy answer, without having the answer concrete on mortality, because that's yours, is that it is digested. Whatever we show here is the current view of our business, where everything is digested that we know of right now. Yeah. Now, how concretely we are digesting it on-
You can just take the rate increases we have done in the U.S. There are basically two outcomes. We have increased rates, and either client have accepted that, then we know, that was your example, as of next year, we will have significantly higher CSM, and you have seen how that follows through here, or the client recaptures the business, and then the business is gone, and you don't see it here.
Is it gone, or do you have the same expectation?
If the client recaptures the business, then it's completely gone and eliminated from the CSM or whatever it's in there.
The process is finalized in this year?
Yeah.
I t is, it is really, you know, it is really exactly this situation, you know? We increase rates, so we know as our future cash flows increase, and everything is taken into account immediately. That's exactly the situation. Yeah, yeah.
Okay. Well, thank you, Roland, for your question. Do we have any other questions left? If it's not the case, then I thank you for your questions and for answering them, Claude and Klaus.
I'm really surprised-
And-
that you not only speak English, French, German, and Spanish and Swiss German currently, but also IFRS 17.
IFRS 17, yeah. Okay, thank you, guys. Oh, sorry, this is yours.
Thank you. Well, before I hand over to you, Jean-Jacques, for wrapping up the Investors' Day today, I'd like to thank you on behalf of the entire Investor Relations team for participating today, being here, and for all your contributions. Yeah, we wrap up the day, and I hand over to you, Jean-Jacques. Yeah.
Well, thank you very much, everyone online, but also here in the room for joining. I won't attempt to summarize quite a heavy day. I hope it was useful to all of you. I tried in my presentation to focus on what we've learned from the current strategy. We delivered on promises, as we said, and have a strong base to further grow and outperform. We're committed to high-quality growth and outperformance. We have this tagline now, "Staying focused, thinking ahead," staying focused, the pure-play reinsurance model, playing to our strength, and thinking ahead, focusing on investing into future readiness. Clemens complemented this with our key figures. We see profitable growth for 2024-2026. This will support an increasing dividend.
There were nuances in the message, I gather, but, at the same time, we're very committed to tangible numbers. You'll see them as we take decisions on dividends going forward. The group net income is expected to be at or above EUR 2.1 billion in 2024, and I think on the investment side, we're very well-positioned to capture the upside on interest rates, with a strong capitalization. Clearly, which will be fine-tuned as we fully understand the details of the methodology from S&P, but I think we have a strong base.
And then in the two subsequent sessions, we tried to focus on two important themes: Nat Cat first from Sven, with a strong track record and a profitable result over the cycle, stable risk appetite, and increasing focus on diversification and very robust retro protection. A bit of fine-tuning for 2024, but we're very confident about the retro protection in this attractive line of business. And last but not least, I will not try to even attempt to summarize Claude's CFO speech today, but I think it was useful to have a deep dive on the IFRS component of Life and Health , showing our target to reach a reinsured service level above EUR 850 million in 2024.
You see the very attractive earnings pattern, a very clear earnings power of our Life and Health franchise. With that, I'd like to close our 26th Investors' Day. I'd like to thank you all very much for taking the time to join us here in Berlin and also online for today. We'll keep in touch, of course, through our Investor Relations team on any subsequent questions you're having. Thank you very much. I close our day today, and I wish you all a safe return home. Thank you.