Good morning, ladies and gentlemen. I welcome you to today's Hanoveray International Conference Call on Q2 2021 Financial Results. For your information, this conference is being recorded. At this time, I would like to hand the call over to your host today, Mr. Jean Jacques Roujeau, Chief Executive Officer.
Please go ahead, sir.
Well, thank you very much and good morning, everyone. Welcome to our conference call presenting our results for the first half of this year. As usual, I'll start with an overview before our CFO, Clement Jumstrupel, goes over the financials in detail. I'll then comment on the outlook for the year Thereafter. For the Q and A, I'm additionally joined by my Board colleagues, Klaus Miller On the Life and Health side and Sven Althoff for P&C.
I'm pleased to report that with a group Net income of €671,000,000 Hannover Re has successfully taken the next step towards Achieving its full year guidance. Additionally, we continue to grow our business at attractive terms. At 12.2%, the return on equity returned to pre COVID levels, Even though the results of our Life and Health business group were still impacted by the COVID-nineteen pandemic. Gross premium increased by 14.2% adjusted for currency effect. This is mainly driven by our Property and Casualty Business Group, where we recorded continued strong top line growth on the back of improving market conditions.
The price improvements in P and C Markets Also supports the technical profitability of our portfolio, which is in line with expectations at a very healthy level. Overall, large losses stayed within the budget, thanks to a benign impact from natural catastrophes in the first half. In addition, our net estimate for COVID-nineteen related losses remained unchanged compared to year end 2020. Hence, the combined ratio of 96% is a good reflection of the underlying profitability in the first half year. And additionally, we have built up a further buffer of €150,000,000 for large losses in the second half of the year.
As mentioned, the ongoing global pandemic is still having an impact on life and health Reinsurance results. The main insurance market affected by COVID related excess mortality continues to be the U. S, Even though as expected, the numbers decreased over the course of the first half year. Outside of the U. S, we recorded losses in particular in South Africa, where Hanover Re Also has a strong market position.
All in all, losses connected to COVID-nineteen amounted To €263,000,000 in the 1st 6 months. As already disclosed in Q1, The restructuring within our U. S. Mortality portfolio led to a positive one off effect of €129,000,000 partly mitigating the COVID impact. Finally, we recorded pleasing premium growth of 7.3% Adjusted for currency effects.
At 2.7%, the return on investment is ahead of our expectations, Driven by favorable ordinary income, the capitalization according to Solvency II continue to be excellent, Confirmed by our strong solvency ratio of 2 50% at the end of the second quarter, well above our threshold of 200%. The operating cash flow in the first Half of 2021 was particularly strong €2,700,000,000 mainly driven by attractive reinsurance growth as well as very favorable results on the investment side. The figure for the Q1 included a positive one off From the restructuring within our U. S. Mortality portfolio of €640,000,000 Driven by this positive cash flow, total assets under our own management increased to a record high of €52,800,000,000 This growth was additionally supported by ForEx effects And the issuance of €750,000,000 in hybrid capital in March this year.
This new bond issuance is also visible on the next slide, bringing Our total hybrid capital to €3,000,000,000 We still have flexibility regards to our total hybrid capacity And shareholders' equity is up by 0.5% which is quite positive bearing in mind that we pay the dividend in the second quarter. However, the group net income in the first half of twenty twenty one was already sufficient to comfortably cover this dividend payment. Finally, the change in OCI was only slightly negative because negative valuation effect were mitigated by positive currency translation. On that note, I'd like to hand over to Clemens, We will explain the figures in more detail.
Yes. Thank you, Jean Jacques. Good morning, everyone. I hope you are all well. As Jean Jacques mentioned, the performance of our P and C business group was very pleasing in the first half of twenty twenty one.
Gross written premium grew by a remarkable 17% adjusted for currency effects, which accounted for 5 percentage points. The growth is highly diversified with particularly strong momentum in North America, Germany and Southeast Asia. And on top of this, we successfully expanded our structured reinsurance book where we continued to see a very healthy demand. As already reported in the Q1, the recognition of premium from the underwriting year 2020 supported the growth. But as mentioned also in the Q1, this effect will dilute over the course of the year, bringing the premium growth closer to the growth numbers we reported for our renewals.
Major losses came in at €326,000,000 clearly below our half year budget of €476,000,000 And as you know, in line with our usual practice, we have kept the unused part of the budget within our IBNR as a buffer for the remainder of the year. Additionally, we still feel comfortable with the overall net loss estimate of €950,000,000 for COVID-nineteen and hence did not see a need to change anything on this front. The runoff of our reserves was at normal levels in the first half of twenty twenty one. Development in the second quarter was more favorable than in the first one. As we have not changed our conservative reserving approach, I would expect the confidence level of our reserves to be stable compared to year end 2020.
Altogether, the 96% combined ratio is fully in line with our expectation. Net investment income increased based on the strong ordinary income and lower impairments. Other income and expenses amounted to minus €109,000,000 mainly driven by negative currency effects as we've seen in the Q1 of €77,000,000 Altogether, the EBIT increased strongly to €778,000,000 thanks to the improved underwriting result, which was heavily impacted by COVID losses in the previous year. Finally, the tax ratio was slightly below the normal level due to a favorable earnings contribution from lower tax subsidiaries. As mentioned, the total net large losses accounted for €326,000,000 in the first quarter, €150,000,000 below our budget.
Together with the regular budget for the second half, this means we have a large loss budget of €774,000,000 available to absorb losses in the second half of this year. This is a comfortable starting point, I would say. But as we all know that we have already seen significant losses in the 3rd quarter With the biggest impact expected to come from the flooding events in Germany and neighboring countries, as well as impacts from the riots in South Africa. There is still uncertainty around The flood losses, but our initial estimate would be in the range of €200,000,000 to €250,000,000 for our net Position. For the RISE in South Africa, we expect a net high double digit million loss.
Heading up those losses, this means that we have started to utilize our actual Q3 budget, but more importantly, On the next slide, You can see that the largest individual event was the Texas winter freeze with a total net loss of 100 €36,000,000 this number reflects an increase compared to the end of the Q1, which is mainly the result of late claims notification. Still the overall impact from natural catastrophes was below expectations. On the manmade side, we have seen an above average frequency of losses. Altogether, we have already used up around 2 thirds of the full year budget set aside for manmade losses. The next slide, as usual, Shows the technical profitability of our P and C portfolio by reporting line.
The picture is a mixed one as usual for our highly diversified portfolio, Yet we also do see material deviations. We do not see material deviations from the target combined ratios. Large losses like the Texas freeze and man made losses had an impact on the combined ratios in some of the segments as you can see. But the overall 90 On the next slide, let's move To Life and Health, the pleasing business growth is reflected both in premium and in value of new business. We were particularly successful in expanding our Financial Solutions business in the APAC region.
And in longevity, the growth is Starting to also come from outside the U. K. As Jean Jacques mentioned, the technical result was still affected by losses With COVID-nineteen, the main impact is visible in our U. S. Portfolio, where we have recorded losses of 100 €67,000,000 As expected, the impact in the second quarter was lower than in the first, given the progress in vaccinations.
Apart from the U. S, the bulk of the losses are from South Africa. And as explained At our Q1 conference call, the restructuring of parts of the ING portfolio in our U. S. Mortality book led to a positive one off effect, Affecting different line items in the P and L.
In total, the positive impact was €129,000,000 partly mitigating the COVID-nineteen losses. Furthermore, the underlying mortality experience in the second quarter was more favorable than in previous years. The ordinary investment income was, I would say, in line with expectations. The fair value of financial instruments The decrease materially and the negative impact was driven by the valuation of a derivative embedded in a life insurance contract in the Q1 as we've reported In the Q1 already, while in the Q2, the valuation increased slightly. Other income and expenses These are mainly driven by a further increase in the contribution from our Financial Solutions business, a large portion of which is recognized According to the deposit accounting method, currency effects were slightly positive in the first half year and altogether the EBIT of €179,000,000 is satisfactory and adjusted for the different positive and negative extraordinary effect actually slightly better than expected.
On the next slide, as usual, we also have a look at the non IFRS metric for business growth in life and health, The value of new business according to Solvency II. On this slide, you can see that we were quite active in all reporting categories and Also the pipeline for new business remains healthy. The business opportunities we have seen and are seeing going forward are highly diversified,
But the
opportunities are particularly good in developed markets and by reporting categories in the area of Financial Solutions. Looking at the indicator for new business value at the bottom, we have achieved roughly half of the full year target. But as you know, transactions in Life and Health are often rather bulky and the value of new business is also closely linked to the duration of the business written. In any case, I think it's fair to say we are well on track in terms of new business production in life and health. Slide the next slide, the investments the development of our investments in the Q1 of 2021 It was very satisfactory in the first half.
The ordinary investment income is particularly strong. This is mainly driven by increased contribution from our Alternative investments, I wouldn't say that these contributions are extraordinary, but the distributions of our private equity funds Can naturally be volatile from quarter to quarter. This also means that one should not simply I'll extrapolate those returns for the remainder of the year. Further drivers for the strong ordinary results are the increased asset volume and the slight shift in our asset allocation, which is certainly helping to stabilize the book yield in our fixed income portfolio. Realized gains are mainly the result of normal portfolio management and around €50,000,000 are linked to the partial disposal of listed equities in the Q1.
Impairments and depreciations decreased compared to the previous quarter, Where we had recorded some impairments in the volatile market environment. So this year's number is more or less At expected low levels, I would say, to a large extent comprising regular depreciation on our real estate investment. As explained in my comments on Life and Health, the derivative valuation was negative. The overall return on investments was 2.7%, meaning that we are on a very good path to achieving our full year target of roughly 2.4%. Unrealized gains decreased by around €500,000,000 mainly due to the increase in interest rates and particularly in the first quarter.
In the Q2, we've seen some reversing trends bringing the total to a very high level of €3,000,000,000 On the next slide, a quick glance on the asset allocation. I think it's the asset allocation has developed Pretty much in line with our strategy. The most notable change, as you can see, is that we've slightly increased the share of corporates to 32%. Here we invested according to, I would say, a broad based approach with a focus on developed markets. The contribution to ordinary investment income is diversified as usual.
The highlight is probably the recovery as Mentioned in the contribution from private equity to the very strong levels we had seen before the market volatility caused by the pandemic in 2020. On the next slide, for the first time, we have also included the final results of the 2020 Annual reserve review by Willis Towers Watson, which we usually, as you know, publish for our Investors Day. This year, the report was available ahead Of the Q2 publication and hence we thought it would not make sense to withhold that information until October. So looking at the numbers, the overall redundancy level and the increase by €80,000,000 in the by €80,000,000 in the year 2020 should not be surprising because it's fully in line with our comments from March. Still, it confirms again that the results we achieved in a challenging year 2020 Was not at the cost of our reserving quality and that the buffer of more than €1,500,000,000 remains to be very comfortable.
To conclude my remarks, the overall results for the first half of twenty twenty one does include a few larger extraordinary effects, But both the reported net income and the underlying business development very much support our guidance for the full year. And I hereby hand back to you Jean Jacques for
the target metrics and for the outlook. Thank you, Clement, a look at our target matrix confirms the successful Business development in the 1st 6 months of this year. Growth is significantly ahead of the strategic targets And our main profitability target for the group, the return on equity is well above our minimum target. The EBIT growth targets in P&C and Life and Health are somewhat distorted by COVID claims. The targets are more oriented towards normalized growth over the course of the strategic cycle.
The mid year 3 tier renewals were again successful for Hanover Re. We were Able to further grow our business at improved pricing. One could argue that the price increase of 3.2% in total And 6.4% in non proportional business is a slowdown compared to the January April renewals. However, I'd like to point out That the rate increases in the mid year renewals in 2020 were the strongest in terms of rate increases For Hanover Re and therefore the 3.2% rate increase achieved this year comes on top of a higher basis Then in January April. In North America, one important driver is the continued Positive trend in primary insurance markets, both in terms of pricing and volume growth.
Both factors We have a direct positive impact on our proportional portfolio because we wrote the business at overall stable commission levels. In Australia and Latin America, rate increases were most visible in loss affected areas. The development in credit and surety was slightly more stable, but here too the quality and volume of our book went up. Altogether, the growth rate of 14.7% is the highest in this year's P and C renewals And I'm very pleased with the overall outcome of these midyear renewals. This brings us directly to the next slide.
Looking back at all important renewal dates in 2021, The expectation for the full financial year looks quite favorable. The volume in most areas is going up at attractive profitability levels For the entire portfolio, Clemens already flagged the pickup in loss activity in the 3rd quarter, Which together with the outcome of the hurricane season and other loss activity will determine the profitability levels and also The momentum for further price increases in 2022. In general, I'd expect the underlying pressure for rate increases in reinsurance To carry on to the next year, mainly because interest rates are expected to stay on a low level and also climate change related loss trends, Which again became visible with the recent flood and drought events will not only further support the need for pricing discipline, But should also act as a driver on the demand side. Finally, the currency the currently higher inflation levels Will also have to be reflected in the upcoming pricing negotiations. In Life and Health Reinsurance, growth It's expected to be well supported by our strategic initiatives and most pronounced in financial solutions And longevity.
In both cases, the profitability expectations are clearly above the cost of capital. In mortality, there remains uncertainty around the further development of the pandemic. Excess mortality will be Most visible in countries where progress with vaccination programs is slow. However, the trend in-depth In countries where vaccination programs have slowed at a higher level is also dependent on the management of the pandemic in the respective countries. In particular, in the important U.
S. Markets, we have not seen a reversal of the decreasing Numbers of COVID related death. The premium in mortality is expected to be stable and the same applies for the overall development in morbidity. As mentioned earlier by Clemens, The business development in the first half of twenty twenty one is in line with our guidance for the full year. The improved Technical results in P and C is fully in line with expectations and our COVID-nineteen reserving in P and C is confirmed To be adequate at €950,000,000 net.
Additionally, the losses already impacting The Q3 do not have an immediate impact on the guidance because we have a large loss budget of €774,000,000 Available for losses occurring in the second half. COVID losses in life and health were Slightly higher than expected. But on the other hand, the performance of our investment portfolio is ahead of expectations for the full year. So even though some factors within our guidance deviate from our initial planning, we continue to feel Comfortable with the guidance for group net income and had kept it unchanged. Also unchanged It is our positive view on the dividend policy and the potential to pay a special dividend if profit targets are reached And our capitalization remains strong.
This concludes my remarks and we would be happy to answer your questions. Thank you very much.
We will now begin our question and answer session. Now to enter the You can dial 2 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. And our first question comes from Vikram Gandhi, Susquehte Generale. Please go ahead.
Your line is now open.
Hello. Good morning, everybody. I've got 3 questions all related to P and C. Firstly, we appreciate the COVID loss estimate is unchanged at €950,000,000 But If you can shed some light on the moving parts within that $950,000,000 whether some of your Estimates are going down, some are going up, let's say, Chris and Shorty coming in a bit benign, BI going up. Any color there would be appreciated.
Secondly, can you help us with the overall Level of IBNRs within that 950,000,000 and thirdly, if you can help us Understand how the runoff result has developed over the Q2 on P&C. That would be great. Thank you.
Thank you. Sven will address your questions.
Yes. Good morning also from my side. Happy to give you a little more insight into our COVID numbers. So you already heard from Jean Jacques that the net Numbers stayed at €950,000,000 as the year end closing 2020. We had very little movement on the gross side of the loss.
We saw some additional Claims coming in from the contingency event cancellation business, which was roughly €30,000,000 higher compared To the previous quarter, all other areas developed very stable. So this is the only marketable increase on the gross loss. The reason why the net position Stated unchanged is that due to seasoned advisers more of the property claims moved from bulk IBNR into Pretty specific reserving, so that we could book those losses against our repossessional structures, keeping the Net position overall unchanged. On the credit and surety side, you're right. What we have seen so far It's relatively low level of reserves coming in, in relation to the €235,000,000 we have booked on that side, but we have not decided to reduce that number in the second quarter.
We will obviously closely monitor that situation. But I would say that in that €235,000,000 are starting to see some prudency by now. And it comes to the distribution of Paid versus IBNR losses on COVID, we saw an increase of the paid number Going from 15% from the Q1 to 21% in the 2nd quarter, which Of course, it's fully in line with expectations. The overall level of IBNR, be that Bulk or be that treaty specific IBNR is still at the level of 54%. So we We currently feel rather comfortably reserved with our €950,000,000 on the P and C side.
When it comes to the Run off results in general, the first half of the year and the second part in particular That's not show any development which were outside of expectations. So the run off the ordinary run off result For the Q2, a standalone was a positive €190,000,000 as I said fully in line with our expectations.
Perfect. Thank you very much.
And our next question comes from Andrew Ritchie, Autonomous, please go ahead. Your line is now open.
So, hi there. Good morning. First question, Apologies if I ask this every renewal, but I wonder, Sven, if you could just recap Again, how we should think about the reflection of pricing changes on proportional business. I guess, I think, yes, effectively, you're not obviously reflecting the underlying original Change in pricing, you're just reflecting any changes in ceding terms, but maybe if you could just give us a bit of color again around that to the extent to which the headline price Doesn't necessarily reflect the underlying economics of the business. 2nd question related to pricing.
I guess I'm just interested in an opinion On European cat pricing and then the outlook, I mean, for years, it's been regarded as a diversifier And therefore, it gets heavily subsidized and the pricing doesn't necessarily react too much to loss experience. Do you think that's going to change with the effect of these losses and or higher profile or higher awareness of risk? And the final question was on the reserve surplus for the year end 2020. How is COVID reflected in that? I'm assuming the COVID claims are not part of that Reserve surplus, there's no assumed surplus on the COVID claim within the reserves.
But I'm more interested in the good news that COVID helped, Particularly in terms of benign frequency because I think everyone experienced an increase, a technical increase in reserve surplus in 2020 because Ex COVID claims notifications were benign. So how have you how has that been sort of reflected in the analysis? Thanks.
Yes. Let me start with your question on the pricing side, Andrew. The pricing effect on the chlorata side is, of course, mainly driven by the same So reduction in heating commission, for example. But we are also reflecting some of the price increases You are seeing from our heating companies go in the February market when we are looking at price adjusted Improvements. We always take a haircut on the increases we are seeing on the insurance side For the simple reason that we are not in full control of what are the underlying factors when our leading companies are reporting about There are rate increases.
We not always have full transparency to what extent those reported numbers are risk adjusted. So therefore, we are taking a haircut. But the combination of the 2 would be what we are giving in with information on the When it comes to your question on European cat pricing, We as Jean Jacques already said, we still see positive momentum in both the insurance and the insurance market. So our general assumption would be that there will be a slight upward trend in eurogreen cat pricing in general. But of course, we expect higher increases on the loss impacted business.
Would be expected at this stage that This is going to be much more significant increases than we saw for 2020. I would say we don't have that expectation right now. And lastly, yes, of course, you're right. I mean, general benign environment In 2020, in many classes of business due to COVID, like for example, in motor business. But I would say, given that I don't have a precise number for you, how much debt Played into the increase in redundancy that we have reported that, that reduction in frequency is Mostly involving very young underwriting years, where normally we are not needing reflecting any redundancies in our reported summers Or if we do to a very, very limited expense, so this should not have been the main driver of us Showing a higher redundancy in the Willis Towers Watson study.
Okay. Thanks.
Our next question comes from Cameron Hussein, RBC. Your line is now open.
Hi, good morning. Just wanted to ask about the Life and Health business. You've pulled out, I guess, for the first half that South Africa was A major part of the claims that you saw in the Life business. Could you maybe talk about How this is weighted Q1 versus Q2? You didn't specifically call out just South Africa in Q1, but you did it First half, just eyeballing a chance of kind of COVID deaths in the first half of the year.
It was pretty bad There have been a Q1 and it didn't really tick up until right at the end of Q2. So just interested in whether there's any late reporting factors or something else going on there. And I guess given the ex U. S. Component of the life claims in Q2 is about €50,000,000 I think, just kind of Back for an envelope.
Is that a reasonable number for us to pencil in for the Q3? Thanks.
Thank you. I'm happy to take that. First of all, most of our claims are or have Still being from the U. S. So 60% of the claims we have seen this year is from the U.
S, about 20% was from South Africa. And this picked up especially with the delta variant in the Q2. Main issue is that the vaccination rates in South Africa are still very low, although they are now picking up. And this is what I would expect Around the world in most of the countries where we currently have been, let's say, a little bit surprised about The COVID claims, Latin America is one other example. Vaccination rates will go up significantly in the next couple of months in these countries.
So I'm not really concerned for the full year. I'm still concerned for the next 1 or 2 months. But in total, this is a small part of our bottom line result. Sorry, what was your question about the €50,000,000? I didn't quite get that.
It really is eyeballing the ex U. S. COVID claims in Q2, they look They were around €50,000,000 Given that South Africa is now going at a higher pace now in terms of debts than it was or pretty much in line with What you saw at the beginning of Q1, just trying to get an idea whether the €50,000,000 for the quarter is a reasonable number for us to pencil in?
There is certainly a little bit of late reporting here. We have, Even in developed countries, the late reporting of 4 to 6 weeks for the course of death. And you can certainly expect this in South Africa as well. What is Especially, very special in South Africa, a lot of our business in South Africa is cash financing business. And this has a certain risk, which comes with lapses and with mortality.
But there is an implicit buffer for these cash financing deals. The client usually wants to have the option to recapture the business after a certain while And especially when we believe he has paid back the initial financing amount. And this has a buffer implicitly built in. And as long as we ultimately get back our money, higher mortality claims Even increase profitability because the treaty just runs 3, 4, 5 years longer. As long as we still get back our money, we have absolutely no negative from this.
But this might take a little bit longer. So this can be seen as just an additional financing because in certain years like this year, there was a loss and there was no Repayment or recuperation of the initial amount. But if the treaty just runs 3, 4 years longer, We might not even have a claim there.
That's true to you. Klaus, thanks so much for the additional color. Thank you.
Our next question comes from Vinit Malhotra, Mediobanca. Please go ahead. Your line is now open.
Yes, thank you. Good morning, everybody. So maybe three questions and a quick follow-up. The first one, so firstly on P&C, please. The profitability outlook on Slide 23 today As America is a bit lower and Asia Pac a bit improved and also Asia Pac, you mentioned somewhere Significant premium growth under APAC growth initiatives.
Could you just help us understand what's the magnitude here? I mean, and What's rationale for the Americas lowering as well? That's really important. Then just second question on Great and surety. There is a 20,000,000 large loss mentioned.
Also the combined ratio 1H is Much worse than 1Q, 94% in 1 ish, 83% in 1Q. Is that all coming from this large loss or is there also something else? Because I think I also heard you Sven say that credit maturity is still benign for COVID. Then third question is, I've seen in your report a comment about IOKA's Harmonization policy for 3rd country reinsurance as part of the convergence plan and You highlighted it as a risk. It would be good to know whether you I mean, how big a problem you think this could be?
And just very, very quick one, 4th one is, there's a mention of another layer of extreme mortality cover placed. Could you comment on whether any life mortality has seen any recovery from some of these points?
Thank you. So, Selene will address the P and C question, the mortality, Claus. On IOPA, We don't have an immediate answer to your question. I think we might need to come back to you thereafter on exactly where the information Sven, first.
Yes.
Yes. The reason why we changed the profitability outlook From plusminus for APAC to plus and in the Americas from plus to plusminus is just a reflection on the combined ratios We are reporting after the first half of the year. You can see on slide 10 that The Americas are currently over and above their target combined ratio. The main driver here, of course, is Windsor Storm JURY, Whilst at the same time, the APAC region is significantly Below its target combined ratio in the first half of the year. There are no structural problems in those Portfolios from a profitability point of view, but we just felt it's appropriate To switch our 2 guidances around, particularly for the U.
S, because we still have the full hurricane season ahead of us. So it's always a little difficult to predict how much of a positive catch up we will have for the remainder of the year To eventually bring Americas into line with the target combined ratio. On credit and surety, Yes, you're right. As I said, the actually reported losses from COVID so far have been Below or significantly below our expectations. We have nonetheless decided going into the underwriting year 2021 To have relatively high ultimate loss ratio picks compared to the historic average For the simple reason that many economies are only just starting up after a long lockdown period From COVID, we still have positive government measures in place in many countries, Which are bound to go into runoff at some stage, which of course is leaving the question, will we see a heightened level of insolvencies later in the year.
So out of precaution, we have therefore decided to start the year conservatively From an ultimate loss ratio point of view. And of course, you're right. One of the greetings here is the Credit loss we are reporting due to payment delays for a project In Africa. Hope that answers your question on the
P and C
side. Yes. Thank you.
Then I will continue with the retro cover on the Life and Health side. I guess you're referring to our increase of the pandemic cover We have recently placed again. So far, we had or for this year and last year, we had €255,000,000 cover, Which is about to attach or has already attached. And we have placed another €80,000,000 Starting with 1st January 2021, that means we are covered this year. Same terms and conditions as previously, but the reference year is always the last year.
So we need significantly worse experience for these €80,000,000 Compared to last year, and last year obviously was higher than the year before. So it still attaches at 110%, But the reference year is last year. So it's a little bit more out of the money. But the €255,000,000 we have in place already are covering us for this year.
Right. And we have recorded some benefits already to manage?
No, no. We have not taken that into account. The reason for that is We have an expectation that currently the index is at about 112%. But if the mortality is significantly lower in the rest of the year, And we're not talking about population mortality in general. We talk about the weighted average of the population mortality in the U.
S, U. K. And Australia and the weighting is according to our portfolio. If this is significantly better and for instance in Australia that could be the case because they are all Keeping their distance, they don't let anybody into the country and they keep mortality very low. This also keeps infections very low and maybe Mortality in Australia could even be better than the attachment we currently see might disappear by year end.
That's possible. Or it grows if there is another variant of the virus. So this is the reason why carefully accounted for we didn't take that into account so far.
Thanks, Kros. Thanks, Kros.
And we'll come back
to you. We had a generic statement on IOPA more to comment on the Development of Solvency II rules and the different discussions with The commission, which is going to look at
it, there was more of
a general statement, but we'll follow-up with you on the specific topics which are Under discussion.
This is already useful if it was generic comment. That's also helpful to know. Thank you.
Yes.
Okay.
Our next question comes from William Huttigherst of UBS. Your line is now open.
Hi there, guys. Two quick ones. One long term, just thinking about the reserve redundancy, It's very good to see this going up year on year despite the tough 2020 backdrop. I didn't quite get the answer there relating to how I think about COVID at year end and how that influences year on year, is this blurring the number? Or could you just Give me a quick follow-up answer on that, if that's possible.
And how do you think about this number? Do you tend to view it as the absolute number, So the 1.5 billion or as a percentage of net reserves when considering adequacy yourselves when looking at the business? And then a bit more shorter term, I guess, is there any more information you can provide on the European flood loss, Yes. Anything to do with industry loss assumptions, how you derive your estimate and whether there's any assumption of retro attaching? And perhaps as an extension to that, is there any aggregate protection you have in place that would therefore be more likely to be
Yes. On the reserve redundancy, as Clement already mentioned, there is a zero impact From COVID in the reported numbers, so we are not reflecting any redundancy out of our P and C COVID reserve In the €1,500,000,000 we are reporting, from The way we are looking at it, we are of course not only looking at the absolute number, but also On the relative number in relation to our overall reserves, here we could see a slight uptick Coming from 5.5 percent in 2019 to 5.6% in 2020. So the increase of €80,000,000 was a little higher in proportion than our general increase in reserves, Which of course is a positive developing development considering that we have more than We have €950,000,000 of new reserves from COVID alone, which of course goes into that calculation as well. On the flat loss, we said that we are expecting a net position of €200,000,000 to €250,000,000 It's of course extremely early days in assessing the situation. But ballpark ish, we would say that The associated market loss with this range is between €5,000,000,000 €7,500,000,000 It's also a little too early to tell how exactly our reinsurance structures will our retrocessional structures will come into play, Because so far we have mostly worked on bulk numbers and in order to know the precise effects And how our retrocession cover is going to attach.
We need more treaty specific information in order to see What may trigger, what may not trigger. So we will of course be able to report on that when we are talking about our Q3 figures In a few months' time. But for now, I can't give you a precise information here. To your last question, I mean, on the property side, we are buying 3 vehicles of retrocession. 1 is a proportional contract, our K transaction.
Then we have our event tower, what we call our whole account, the excess of loss protection. And the last ingredient Yes, our aggregate cover on large losses. So to answer your question, yes, we do have an aggregate cover in place. Right now, given the general benign nat cat environment in the first half of the year, even with the flat loss, We are not near the attachment point yet. But in case we should see frequency and severity for the rest of the year, This protection, of course, potentially will come into play.
That's great. Thanks.
Our next question comes from Thomas Fossard, HSBCS. Please go ahead. Your line is now open.
Yes. Good morning, everyone. Two questions. The first one would be on the Top line growth. So since the start of the year, combining PC and Life 3, You grew your gross written premium by €1,300,000,000 It's a pretty significant number.
Could you maybe tell us how much capital This has required to support the growth in the business. That would be the first question. And the second question, just following up on Will's question regarding The redundancy on the P and C side and because you're bringing this information to us today, Can you talk a bit more about combined ratio reported combined ratio And I would say the economic combined ratio because I mean actually it's now 2 years in a row where you're Reporting nice improvement in pricing. But I mean, your combined your reported combined ratio is relatively flattish or in line with your guidance, but flattish, Implying that actually you're not showing yet any improvement in the margins. So I I guess that there is something going on in the background.
So yes, it would be interesting to talk about Economic combined ratio and at the end of the day, if there is a aim to go back to the 1.8 Or to somewhat, I would say, higher redundancy reserve as a percentage of reserves using the Current relatively hard market cycle to increase again your confidence level. Thank you.
Maybe we start with that P and C question on combined ratio, Sven.
Yes. On the combined ratio side, what we have said over the last couple of quarters when we changed our guidance from 97% to 90 6% is that this is a prudent approach from our point of view. We are not translating rate increases 1 to 1 into ultimate loss ratio reductions when it comes to our actuarial PIX, we do take haircuts on that. And by Conservative initial reserve, it's the profitability will show, but it will show over time. It will not only show in one calendar year.
So hence, we are comfortable with our 96% combined Ratio targets and of course also quite a bit of our growth is coming from the Structured business where margins are typically in the 2% to 3% area. So what the traditional P and C business is of course seeing very good levels of rate increase. The margins on the structured business are relatively unchanged. Here of course our main competition Other financing instruments and you all know what the interest rate environment looks like right now. So therefore, margins on that side have been relatively stable.
And that business standalone would Produced combined ratios over and above the 96% target combined ratio.
Thank you. Can I answer a word on capital consumption?
Yes. On capital consumption, Thomas, I mean, I don't have the exact nominal number at the top of my head. But If I try to answer the question by looking at our Solvency II ratio both at year end where we stood at a roughly 235 and now At the €250,000,000 I'd say the main driver between some movements on credit spreads and interest rates and currencies, etcetera, I think the main driver was 10 to 1 percentage point certainly the hybrid. And I would say a single digit number is really attributable to the business growth. So That has to some extent affected our Solvency II number, but not to a material extent.
I could Add something from the Life side here. I know that this is a smaller number compared to P and C. But even there, you cannot just Expect that the premium growth will be reflected 1 to 1 in the capital requirement. The main areas where we are growing is longevity and Financial Solutions. And the premium number in Financial Solutions Just comes from cash financing.
And both lines of business, longevity as well as cash financing, diversify very well in our internal model. So the additional capital requirement are minimal from the life side.
Excellent. Thank you.
Our next question comes from Ashok Pusseedi, JPMorgan. Please go ahead. Your line is now open.
Yes. Thank you and good morning everyone. Just a couple of questions I have is, first of all, starting to go back on the reserve Redundancy number, I mean, you're at 5.6% at the moment. Historically, I think Thomas was flagging this as well. I mean, you were at a higher number.
So would do you have any intention to move to a higher number? What needs to happen for you to move to a higher number? I mean, given the pricing backdrop, would you say that You will be going towards 6%, 7% or you are okay with the current level? And secondly, I mean, If I look at the life insurance results, I mean, you had like large doses on COVID in this quarter as well as investment income was Pretty low compared to historical standard, but yet the earnings were pretty strong on a relative basis like After COVID and lower investment income. So what is driving that underwriting thing in Life Business?
It would be good to get some color. And this last question is on investment income. Your ordinary investment income increased quarter on quarter by about 30,000,000, 40,000,000. Is that just a function of 2nd quarter dividend or is this some one offs from alternative investments as you mentioned on the call? Thank you.
Sorry, Clement. I'll start with the first one and I'll catch up with you. I'll probably on the last one. I didn't Fully get it, but we can probably pick up that one. So on the reserving side, to be honest, I think it's fair to say that we don't really plan The redundancy sort of as part of our planning process, we do a we will do a reserve study of course at the year end and then we see How all the elements that Sven mentioned, etcetera, how that comes into play and how we can build up redundancy.
Having said that, I think we do feel comfortable with the reserve level that we have at the moment, but we would also be prepared to build up Further buffers as the year sort of passes by. And if you wouldn't mind, would you mind repeating the last question?
Yes, sure. I mean, your ordinary investment income increased by about 30,000,000, 40,000,000 quarter on quarter. So I think last quarter was 3.30, 3.35, This quarter is 3.75. I think the increase I just want to understand is that increase just as a light because 2nd quarter is dividend heavy. So probably you got some dividend and that's why it's an increase or is it driven by any one off The revaluation or anything like that from alternative investments?
Yes. It's really coming from mainly from our private equity portfolio well spotted. It's Really, we've seen already in the Q1 that we saw a pickup particularly compared to last year on Distributions from our private equity investment portfolio and that has actually accelerated further in the second Quarter, so year on year that's really the increase in contributions in our ordinary income. There's a slight impact also from our inflation linkers. We do see a higher contribution from our inflation linkers.
But there is a time lag in the way we amortize these into our ordinary income. So we will See further impacts probably in the 3rd and in the 4th quarter.
You mean the positive impact?
Yes.
Okay. Thank you.
And Claus, when you
want Yes. I'm very happy to take the Life and Health question. We have a pretty Strong underlying profitability for our book. This has been A little bit difficult to see in the last couple of years where we had some BROC impact, Some disability impacts from Australia, so 3, 4 years ago. But the Shift you have seen in our portfolio even for the last 10 years was away from risk business Towards the Financial Solutions business and longevity, and we are working on that for about 10 years now.
And the Financial Solutions business has a profitability which is Basically stable in these times with COVID. Longevity is stable or even positively impacted. And of course, we have significant mortality claims. We have paid €260,000,000 last year, €260,000,000 already this year in the first half. So more than €500,000,000 of claims, but the underlying profitability is extremely strong and extremely stable.
On the longevity side, we expect profits profitable cash flow in the next 20, 30 years of more than €1,000,000,000 But there won't be any spikes. It will just come through in the ordinary way And the way how we calculate and have reserve for that. So I'm personally not surprised by the Relatively strong results excluding COVID.
But you would not say that this is like driven by longevity one offs Just because it's the opposite effect of mortality. You would not say just that. There is some underlying as well.
It's not run by any one off on the longevity side. The longevity result was 3.5%, and that's exactly in line with our expectation, 3.5% of premium margin. Not a really good margin. I always argue against it. We shouldn't look at it this way.
But the Expected margin on the longevity side should be something between 2% 4%, and we are just in that range right now.
That's very clear. Thank
you.
And we have not received further questions at this point. I will hand back to the speakers.
Well, thank you very much for joining this Paul, so I think we wanted to convey the key message that we're well in line with our full year guidance. We have solid growth across the board. We have good momentum in P and C with the pricing, solid pipeline, both live and non live. And we can confirm with a good level of confidence our outlook for the year and the guidance In spite of the continuing COVID burden in life and health, in P and C COVID, as discussed, It's expected to be stable and we can confirm that with this outlook and assuming Results in line with the guidance, we intend to pay an attractive dividend, which would include an extraordinary dividend if conditions are met. That would be the key messages for today.
And thank you very much for joining and see you next time.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.