Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call operator. Welcome, and thank you for joining the Munich Re Analyst and Investor Call on annual results and January renewals. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Christian Becker-Hussong. Please go ahead.
Yeah, thank you, Natalie. Good afternoon to all of you, and a warm welcome to our call on Munich Re's fiscal year 2021 earnings and the outlook on 2022. Today's speakers are our CEO, Joachim Wenning, and our CFO, Christoph Jurecka. The procedure is pretty much straightforward as always. I will now hand it over in a second to Joachim for his messages, and then Christoph will add his statement afterwards. We should have plenty of time for your questions. With that, I'm happy to pass it on to Joachim for his statement.
Excellent. Thank you very much, Christian and colleagues, everyone out there in the call. A warm welcome also from my side, and good afternoon. 2021 was a successful year for Munich Re. Despite significant challenges imposed by a sharp rise in inflation levels, high nat cat losses, and ongoing claims from the COVID-19 pandemic, we delivered an excellent result of EUR 2.9 billion. Hence, we even exceeded our ambitious financial target because a strong operational performance of all business segments offset the multiple challenges we had to face. Or simply speaking, diversification and earnings power at work. What is of equal importance is the earnings level we achieved is a very solid one because despite high earnings, we, at the same time, strengthened the prudency of our balance sheet in various dimensions.
We want our shareholders to immediately participate in this pleasing outcome, and we propose to increase the dividend per share to EUR 11. We have also decided to resume share buybacks in the order of EUR 1 billion until the AGM next year, as you are aware of, since our ad hoc publicity yesterday. Now on page five, let's have a closer look at how the achievements in 2021 compare to our promises, which we gave with our Ambition 2025. The profitability level in terms of return on equity is already very good within the range we are aiming for by 2025. We set the normalized result of EUR 2.8 billion as basis for our earnings per share growth.
With close to 5%, we are delivering on our promise, which is quite remarkable given the challenges I described in the beginning and the fact that for last year, we hadn't yet expected any EPS growth. As you all know, Munich Re is committed to sustainably growing dividends, and with an increase of over 12%, we are well above plan. Shareholders can rely on us and continue to participate in our earnings growth. That's the story. Our capital position remains strong. The Solvency II ratio is even slightly above our optimal range of 220%, even after the proposed dividend, and also after the announced share buyback. The strong operating performance in 2021 was supported by both fields of business, so ERGO and reinsurance.
If you look on page six, ERGO performed remarkably well with an RE of around 10%, and this despite the flood losses in July. In particular, the German and international business posted pleasing, profitable growth. This puts ERGO in a very good position to deliver on Ambition 2025 targets and also to continue to upstream substantial dividends to Munich Re. By the way, operationally, something that you wouldn't necessarily see in the numbers is good progress was made to replace legacy systems and further enhance customer satisfaction through digitization. Now, page seven is maybe a busy one and a technical one. What it means is in 2017, we decided to separate the German life back book from new business.
After diligently evaluating a disposal of the portfolio, we came to the conclusion that an internal run-off represented the most valuable option. The decision to keep the back book turned out to be the right one from a financial, strategic, customer distribution, and reputation perspective. Today, we can say that we fixed all issues, effectively protecting downside risk with hedging and reinsurance solutions. Now we can focus on the upside potential as the portfolio has become a reliable contributor to Munich Re's earnings. Through focused management of the back book only, stringent cost control and a balanced consideration of different stakeholder groups, we more than doubled the average dividend since then, while keeping high reserves, providing sustainable returns to customers and benefiting the risk diversification within Munich Re Group. Simply speaking, we do what specialized run-off companies are doing or would be doing, but we retain the margins.
The portfolio transformation, as you can see in the middle of the slide, is on track. The share of the back book in premiums is continuously decreasing naturally, as we wanted. New business, that's to say, capital light and biometric products, is boosting. With the new IT platform, which we developed together with IBM, we will be able to offer third-party administration services to other insurers, thus generating economies of scale and additional earnings. I'd like to add some words about growth at ERGO on the next slide, eight, which was very pleasing in 2021, +3.7% in gross written premiums. In P&C Germany, we did very well with far above market average growth, while maintaining high profitability. Here, the growth came both from our retail business as well as commercial and industrial business.
The international segment also showed some pretty substantial growth. Please keep in mind that we are running off our life business in Belgium, and that the growth from our joint ventures in India and China is not included in this figure. The main drivers for the figure that you can see were the strong P&C business in Poland and Austria, as well as the increasing demand for health insurance in Belgium and Spain. Coming now to reinsurance, page nine. With a return on equity of 13.5% in 2021, we are already close to the upper end of what we deem a sustainable level. To preserve ongoing high profitability, we are seizing market opportunities in core business, which currently, as you know, benefits from a favorable cycle.
At the same time, of course, we are fostering our market-leading position in business fields like cyber or structured solutions. In our Risk Solutions business, we continue to make good progress with further increased top and bottom line. In life and health reinsurance, we delivered an excellent result when adjusted for COVID losses of almost EUR 800 million last year. The underlying profitability of our biometrics business or our biometric portfolio in life continued to be very sound. In addition, the financially motivated reinsurance business, let's just say the financing and the capital relief type of business, delivers stable earning streams. To push the boundaries of insurability, as you know, we keep investing in digitized business models with more than 50 initiatives within six focus domains, which you can see in the footnote of the slide.
I am personally very happy that these investments are starting to pay off. By 2025, both top and bottom line should benefit visibly. On the next slide, number 10, I'd like to talk you through our January renewals, where we have seen a continuation of the upward price trend. This was driven by the recent high loss experience, of course, ongoing low interest rates and inflationary pressure enforcing the need for adequate margins. An increased demand for protection met with stable or even tightened and disciplined capacity supply, which in the end, was supported for further rate increases. However, a large share of the significant nominal price increases we have seen in the market was mitigated by adjusted loss expectations. In-depth investigation of business-specific inflation impact played a big role in underwriting in this renewal.
Some parts of European and North American property business are now expected to be more exposed to inflation than before. Among the drivers for this is that demand for building materials currently exceeds supply by far, leading to strongly increasing overall building cost. At the same time, we continue to choose cautious loss picks for long-tail casualty lines, taking account of social inflation trends. Hence, the 0.7% price increase that you can see on the slide. As usual, is fully risk and business mix adjusted considering diligent loss trend assumptions. This rate change is a good proxy for the real margin improvement we expect to be reflected in the combined ratio going forward. Overall, Munich Re benefited from a flight to quality with a substantial premium increase of 14.5%.
Our growth, however, was quite selective, including a further expansion of structured quota share business, while the share of net cat business in the overall premium volume remained unchanged. At the same time, we were increasingly restrictive on covering event frequency and aggregate covers, further improving the risk return profile of our portfolio. I would now like to put some attention to this cyber insurance business on the next slide as one other area of business expansion where we have grown by slightly more than 70% last year. This growth largely reflects nominal price increases, less so an increase of exposure. While capacity supply in the market overall has abated, Munich Re's hasn't.
It is important for me to stress that we continue to strictly follow a very disciplined underwriting and risk management approach, and we continuously refine our models, of course, with particular focus on accumulation risks, taking several measures to increase resilience. With this in place, this line of business, yes, is risky but very rewarding, including last year. Starting page two, I'd like to highlight the two key challenges the insurance industry is facing these days, namely inflation and then volatility that comes with natural catastrophe. After the economic downturn during the beginning of the COVID-19 pandemic, then strong and fast recovery with increasing demand at the same time, supply shortages and a surge in energy prices, inflation pushed to a multi-decade high.
The insurance industry is affected by this development as even more pronounced price increases in certain segments have relevance for insurance claims. If you just take the construction materials like timber as an example. As seen in the January renewals, nat cat volatility leads to higher insurance rates on the one hand, which is good for our industry. On the other, it affects earnings, which is a particular concern of analysts and investors these days. However, volatility is our business. It is at the heart of our value proposition as a reinsurer, and it is the reason why our clients do business with us. With my next slide, I will go into some more detail with regard to these two items. Page 13. For some industries, non-insurance, inflation is a real concern.
If companies cannot pass on higher prices to their clients, either they lose margin or they lose business, don't they? Insurers are differently exposed to inflation depending on the line of business. Munich Re's business essentially falls into three buckets that are reflected in these slides. The first one, there is business with no or with lower inflation risk. Either the underlying risk is uncorrelated to inflation, for example, with regard to biometric risk, it rather benefits from high inflation as the guarantees are all on a nominal basis, or there is the possibility to pass higher inflation on to clients within a short time frame. Business in the next two buckets, if you move further up this slide, is more exposed to inflation. This is the case for core P&C reinsurance business. Here we have to differentiate between the new and the existing book.
As treaty business can be renewed on an annual basis, we of course do consider higher inflation in pricing or in risk selection. This is not possible for our existing book because the premiums have been paid for this already in the past and the assumptions are locked in. When we set reserves with initial loss picks, we build in significant margins to buffer adverse development. For calendar year 2021, we reacted to inflation trades by picking higher reserving loss ratios, especially for short tail lines of business, but also added reserves to prior contract years for some longer tail lines. I think Christoph is gonna elaborate on this later, more. To further reduce inflation risks, we also invest in inflation sensitive asset classes in our investment portfolios.
Think of the inflation-linked bonds. Even though we only can buy protection for consumer price inflation and there remains some basic risk, these investments provide a good hedge. There is, of course, other real values like equities, but there is infrastructure investments. You could name real estate. All to an extent are additional hedges to inflation developments. All in all, our diversified book of business, the prudent setting of reserves and the reflection of inflation risk in our investment portfolio make inflation a manageable risk, which does not concern us too much. Next slide with regard to the nat cat business. In terms of nat cat business, we have demonstrated that we can manage volatility through earnings diversification. Furthermore, we have a strong balance sheet and an excellent capital position to manage inflation affecting the business.
There are a lot of discussions in the market, as you know, about model quality in the context of climate change. We deem our models state-of-the-art, reflecting a long data history, recent insights from academic research and forward-looking findings. Within our portfolio management, we incorporate this know-how, taking active measures to contain risks. Considering our business growth and recent loss cost trends, which are fully reflected in pricing, our expectation for outlier losses increases to 13% from 12% previously, partially driven by a higher expectation for major nat cat claims. This, however, has no impact on the combined ratio and also has no impact on the profitability of our business, as it is simply a shift between basic and major losses. What I would like to emphasize most of all are the opportunities presented by nat cat business.
There is a huge protection gap while increasing uncertainty is driving demand, not least due to climate change. Munich Re can provide significant capacity, which is much sought after in the current market environment. Nat cat is one of our most profitable lines with promising business potential going forward. Cycle-wise, it's now that you would like to be in the market at harvest. However, if you move on to the next slide, one single line of business, of course, should not be the only or the dominant driver of earnings. That's why we defined our strategy in the Ambition 2025, with the aim to continuously expand the share of more stable lines of business such as Ergo, life and health reinsurance, Risk Solutions. I could also add the structured reinsurance in P&C, thereby reducing earnings volatility.
If we move on to the next slide, I'd like to reemphasize how committed Munich Re is contributing to the climate targets of the Paris Agreement. Munich Re's climate approach contains disabling and enabling elements. Our climate ambition is based on a clear roadmap to reduce CO₂ emissions in business operations, as well as on both sides of the balance sheet. On the asset side, ambitious interim targets are set to achieve a net zero investment portfolio by 2050 at the latest. On the liability side, we have implemented strict underwriting guidelines, for example, on thermal coal and oil and gas production. At least as important is our enabling approach, which means for us ensuring risks in the context of new energies and thus enabling the transformation from fossil to renewable energies and its respective funding.
As you can see on slide 17, our decarbonization pathway is well on track. When putting 2021 into perspective of our climate ambition, 2025, please note that on the asset side, we also see a COVID dip in the emissions reduction. On the liability side, 2021 is a transition year to prepare our clients for the more restrictive climate-driven underwriting policies. We will report our achievements from next year onwards. With regard to our own emissions, Munich Re's path to carbon net zero in 2030 is supported by our target of 12% less CO₂ per employee by 2025. We will achieve this goal step by step by remaining carbon neutral until the net zero target is achieved groupwide.
Page 18, as from the beginning of last year, January 2021, we set ourselves a target of achieving 40% share of women in leadership positions for the Munich Re Group by 2025. I personally, as well as the entire board, have this very high on their agenda. Diversity and inclusion measures are already taking effect. The share of women in leadership positions increased in all business fields. At 37.8%, we are well on track towards our global voluntary commitment of 40% women in leadership roles. Our consistent improvement of talent management activities has led to an increase from 31 up to 38 in our group management platform. That's the name for our high potential program for top executives around the globe. Gender diversity was an important starting point for us in terms of diversity and inclusion.
Now it's time to take the next steps and fully embrace all other relevant aspects of it and anchor them in our organization. Let me summarize on page 19. Our strategy is paying off. With an ROE clearly above cost of capital, combined with strong profitable growth, we are creating value. Shareholders participate in Munich Re success via attractive payouts and actually share price appreciation. This is reflected in a leading long-term total shareholder return among our peers, since we care for this KPI since 2018. This brings me on the last page to the end of my presentation, with the financial outlook on 2022. We expect a net result of EUR 3.3 billion, driven by ongoing premium growth and further improving profitability.
With this set of figures, we want to take the next big step towards delivering on our Ambition 2025 targets. Christoph, I think, will now lead you through the financials in more detail. Thank you very much.
Yeah, thank you, Joachim. And good afternoon also from my side. I will start on page 22, actually, to lead you through the financials. As Joachim pointed out already, 2021 was a successful year for Munich Re. Based on the strong underlying performance in reinsurance, we were able to digest high nat cat losses and ongoing claims from the COVID-19 pandemic. Also, ERGO did very well, contributing an excellent EUR 600 million to the group result of EUR 2.9 billion, which exceeded our guidance. I'm pleased that we achieved a solid investment result, contributing significantly to the group result, reflecting the high earnings diversification in our group. To support the stabilization and the diversification of earnings and capital, and to manage volatility, it is very important for us to have strong reserves on the asset as well as liability side.
In 2021, we further strengthened the already high potency of our balance sheet in various dimensions. Here it is important to add that this was a deliberate decision, and there was no need at all to do that. Our strong performance is also reflected in economic terms. As of the Solvency II ratio of 227% is clearly above our target capitalization. Considering buyback, which will be deducted in Q1 only, we will remain at the upper end of the target range. The economic earnings came in very high with EUR 8 billion, much higher than IFRS, underlining both the strategic operating, the strong operating performance, as well as the impact of favorable capital markets supporting the economic earnings. We'll release more details on the sources of these economic earnings with our annual report on March 17.th
Due to the strong business growth, our required capital increased accordingly. However, I would like to stress already here, and I will elaborate on that further later on, that the premiums and the SCR grew in the same relative order of magnitude, so in a capital-efficient way. Also, the German GAAP result benefited from the pleasing business development in addition to a positive one-off from changes in the setting of equalization provision. I will go into that in more detail later on. Our increased stock of distributable earnings continues to support the capital management strategy we outlined in our Ambition 2025. On page 23, just an update on COVID-19. The earnings impact of COVID-19 was smaller in 2020 than before. However, in reinsurance, we still had EUR 1 billion of additional claims, almost 80% of which coming from life and health reinsurance.
We are confident that we are solidly reserved here. Referring specifically to P&C, still 60% of the accumulated losses are IBNR. This indicates the high degree of uncertainty still existing in these estimates, but also the degree to which we have built provisions for losses, even if we don't know exactly when they will eventually re-be reported to us. Similar or the same like in the H2 of 2021, we do not expect losses in P&C Re in 2022. Also at ERGO, the COVID-related earnings impact turned out to be lower than expected. With hardly any impact in 2021, we also don't expect further losses from COVID in 2022 for ERGO. Still, I have to say the pandemic is continuing to be dynamic, which makes projections for the future mortality development challenging.
We base our central scenario on an evidence-based approach, meaning that our outlook takes account of the currently observed situation and of our expectations how this situation will evolve further into the future. On this basis, we expect significantly lower claims in life and health re compared to 2021 of around EUR 300 million. Of course, the uncertainty around that estimate is high. Let's have a quick look only at our Q4 results on page 24. Q4 came in somewhat higher than consensus expectations. The profitable business growth in P&C reinsurance continued to contribute to the strong earnings and was complemented by high investment result. Net earnings could have been even higher had we refrained from further strengthening the potency of our balance sheet. I will go into more details then later on.
Life & Health posted an excellent result when adjusting for COVID losses, which, by the way, were also booked, including a prudent IBNR. The Q4 results benefited from positive experience beyond COVID-19 and a positive impact from the year-end reserve review. The good development makes us very confident with respect to the underlying earnings power of our life and health reinsurance business. ERGO has once again delivered a very strong operating performance. In particular, German P&C business printed an excellent combined ratio driven by higher premium income and lower claims. The good result of the international business was supported by a strong financial development, especially in Poland, Greece, and Belgium. Finally, the technical results of the German life and health business improved based on an ongoing good performance in health. The operating result is negative in the quarter due to an investment result below the technical interest rate.
This is due to the fact that we refrained from compensating losses from hedging derivatives by disposal gains, thus deliberately preserving unrealized gains. On page 25, you see the investment result. With an ROI of 2.8%, the investment result was above expectations. And if you go through the components, you can see that the running yield, as expected, declined by 10 basis points as the low interest rate environment continued. The latest uptick of interest rates, which is of course beneficial, will still take quite a while until the higher investment seat yields will have a noticeable impact on the investment result. Compared to the volatile year 2020, the capital market development in 2021 was benign. As mentioned, we hedge part of our interest rate and equity risks.
These friendly markets come along with derivative losses of hedging instruments. We are very happy to have these hedges in place despite that earning impact because they help us to reduce P&L volatility and to optimize our economic risk. As mentioned in Q4, we decided to preserve the valuation reserves, refraining from realizing the gains to compensate for the loss from hedging derivatives. However, for the full year, due to tactical asset allocation as well as financing and outsourcing activities to third-party asset managers, the disposal gains still have been a significant driver within the ROI. Turning to the 2021 financial development, I'd like to start with ERGO on page 26, which exceeded the full year guidance significantly. This is even more positive just because the heavy flood losses in July were very significant for ERGO as well.
On the other hand, COVID, the COVID-19 impact was lower than anticipated at ERGO. Overall, as Joachim pointed out, the growth was very pleasing at ERGO. All segments contributed to the strong bottom line performance, so I can make that brief. The life and health business, the earnings increased due to good developments in health and due to a low claims activity in travel insurance related to COVID-19. The German P&C business delivered a very strong operating performance, and ERGO was able to keep the combined ratio stable despite taking the burden from the European flood losses and also despite some year-end reserve strengthening also at ERGO. The international segment also showed very good results. The operating performance further improved despite also some large losses in the Baltics and Austria.
Just a reminder, please bear in mind that the last year figures include a positive accounting one-off impact from the merger of our joint venture activities in India. Page 27, reinsurance. In reinsurance, we recorded a very strong business growth in P&C and a substantial increase of our return on equity to 13.5%. I think Joachim covered the premium growth already, so I will focus on earnings and on the impact of that growth on our economic capital position later in my slide deck. The strong earnings increase in P&C was driven by a much lower amount of COVID-19 claims and a continuously improving underlying combined ratio. Here we clearly see the benefit of the hardening market. Based on the pleasing outcome of the general renewals, the trend of improving underlying combined ratios will at least persist until the end of this year.
Please bear in mind that it will take a continuous earning through of the rate increases before the year-to-date normalized combined ratio will be trending down from 95% to around 94% by the end of this year then. Even though the life and health reinsurance results fell short of the full year ambition, the underlying performance is very healthy. Despite having to digest COVID claims of almost EUR 800 million, we delivered a technical result including fee income of EUR 218 million. Adjusting for some positive one-off effects, the business is running at an underlying level of EUR 700 million this year. This includes an ongoing, very pleasing development of the fee income business. On page 28, a few words on Risk Solutions.
Our Risk Solutions business showed a very pleasing development, again, increasing premiums by around EUR 1 billion, while improving the combined ratio by another 4 percentage points. This is even more impressive as the nat cat experience for our U.S. carriers was again elevated due to several storms and wildfires. We took advantage from the favorable market conditions, the hardening markets, and expanded our footprint in a number of attractive lines of business. Risk Solutions remained a rapidly growing and profitable segment within P&C reinsurance. Over the last two years, the premiums grew by more than 40% with a combined ratio improvement of 8 percentage points. On the slide, you'll find some more details of some of one of the other entities which we are showing in that segment.
I'd like to close my chapter on IFRS with a closer look at our reserving position on page 29. This reserving position, as you know, always was very conservative, has always been very conservative, and continues to be equally conservative. We added conservatism on top of that, so it's even more sound than it was ever before. Let me explain. The result of the actual versus expected analysis has for more than 10 years now consistently shown very favorable indications. Therefore, also in 2021, we see a sizable positive impact from a reserve run-off, 4 percentage points, fully in line with the expectation at the beginning of the year. At the same time, we even strengthened our overall reserve position across all segments as we have considered different inflationary drivers in a particularly conservative way.
In contract year 2021, we increased reserves for short tail lines to address effects related to, for example, current supply chain constraints or labor shortages. We also added reserves to prior year contracts to address first signs of wage inflation increases that could impact our long tail lines. On top of that, we were also careful with respect to social inflation. The actual versus expected analysis has shown very favorable developments actually during 2021 for all U.S. casualty portfolios, with reported losses significantly below previous years' levels. However, we remained very cautious with loss picks in the reserve review for liability reinsurance business, as we see no signs at all that the U.S. social inflation trend has weakened.
Certainly, the reduced U.S. court activity during the lockdown periods in 2020 and 2021 contributed to the currently low loss reporting as well, and therefore there is a significant risk of future catch-ups. Not only did we keep the current reserve level to address these risks, we even strengthened the U.S. liability reserves deliberately on top of keeping the level stable. As mentioned earlier, in terms of COVID-19, we still observe a slow pace of the loss adjustment process. In 2021, additional losses in P&C reinsurance were actually lower than expected one year ago, and with an IBNR level of 60%, we continue to feel comfortable. In the context of our Ambition 2025, we expect ongoing substantial reserve releases with around 4% of net earned premiums being a suitable guidance.
I personally would like to highlight that this is quite remarkable, given the strong growth of our business, which means finally that even a constant 4% figure leads to substantially growing reserve releases over time. Coming from basic losses to major losses on my next slide, page 30. Here I'd like to explain in some more detail effect Joachim has been mentioning already, which is, the increase of our major loss expectation from 12%-13%. The first question you may ask is if this will structurally reduce Munich Re's profitability going forward. There I have to very clearly say that the answer is no. As this increase of large loss expectation is simply a shift between basic loss ratio and outlier expectation, which reflects a slightly different portfolio characteristics.
Therefore, this change has no impact on our combined ratio guidance for 2022, and is certainly not indicative of any lower profitability of our book. Given the fact that the large loss threshold of EUR 10 million has not been changed since 2006, the major loss expectation has, in my view, been remarkably stable. However, due to the ongoing business growth in recent years, a prudent consideration of inflation trends, as mentioned before, and also due to continued model updates, our probabilistic bottom-up portfolio analysis now indicated a slight shift from basic to major losses. As you can see on the slide, in reality, this is not a step change at all. The internal large loss expectation has been fluctuating around 12% as a rounded number in each single year anyway.
It now has just moved up a bit further, and we consider 13% a more realistic guidance. Please remember, the large loss expectation is not an input parameter for managing our portfolio, and it's not a budget. It's just the outcome of an ex-post exposure-specific analysis after the renewal, with the intention to give an indication for external communication. We are aware of the fact that analysts and investors have been speculating about an increase of our large loss guidance already in the past. As mentioned at various points in the slide deck, we are expanding our nat cat exposure with a well-defined risk appetite and parallel related internal budgets into a market which is benefiting from significant price increases. While the loss assumptions increase, the premiums do so as well. We continue considering nat cat business to be one of our most profitable lines.
Furthermore, we are growing our business across many scenarios, many lines of business, many geographies, including also large and relatively stable structured quota share treaties. In terms of premiums, the share of nat cat remained stable at the 1/1 renewal at around 11%. As you can see on the slide, the increase of the outlier expectation is then finally also not only driven by nat cat business, but also to the same extent by man-made losses. On page 31, I'd like to just quickly comment on our Solvency II ratio, which is 27%, very strong, driven by the good operating performance and the favorable capital market development. Strong economic earnings of around EUR 8 billion outweighed the increase in required capital due to the growth of our book and the weaker euro. The capitalization supports both business growth and attractive capital repatriation.
Please note that the 2021 figure already includes the dividend, while the share buyback will be deducted in Q1 only. Adjusting for the buyback already now in a pro forma calculation, our Solvency II ratio would be at the upper end of our self-defined optimal range. Finally, the conclusion can only be that it's easy for us. We can easily pay the EUR 2.5 billion repatriation to our shareholders, which corresponds to a cash yield of more than 6%, starting at the same time into 2022, perfectly well prepared with a very strong capitalization. Page 32. What you can see on that slide is that the business growth of the last years is reflected in the continuously increasing relative share of insurance risks against investment risks.
In our Ambition 2025, we stated a largely unchanged risk appetite as regards investments while improving the risk return profile and being more active in seizing tactical opportunities. To some extent, the lower share of investment risks is related to capital market parameters like the increasing interest rates last year as well. The balanced approach how we grow our insurance business safeguards capital efficiency, which means the required capital grows at a similar order of magnitude as the premiums. Even though we have expanded our exposure to nat cat risks, we have grown as well in various other lines of businesses across products and markets. For all these reasons, we have a very stable diversification benefit between all risk categories of more than 30% for many years now, based on prudently calibrated risk models. Finally, our overall risk profile continues to be very well balanced.
Page 33, the SCR development. If you look at the numbers here, you'll find out that the overall increase is close to 7%, and that number is even a little bit lower than the premium increase of us as a group, which was 8.5%. As mentioned, the investment risks were largely unchanged. If you look into the details, you will see that the higher market risk, which is related to the equity exposure, was offset by lower credit risks related to higher interest rates. The insurance risk, on the other hand, or more specifically the property casualty risk increased, which is not a surprise at all given the organic business growth. Again, this increase is in roughly the same order of magnitude like the volume increase. Page 34, German GAAP.
The result of EUR 4.1 billion came in much higher than the IFRS result, which was solely driven by the much higher underwriting result. On the one hand side, this is due to the good business development across all segments. On the other hand, due to the change in the calculation of the equalization provision, which led to a pretax one-off gain of EUR 1.6 billion. I will provide more details on that fact on the next slide. The increase in distributable earnings to a level of EUR 7 billion builds a strong foundation to support the capital management targets we outlined at our 2020 Investor Day. Page 35, now the equalization provision. What we did is we have reviewed the mapping to lines of business for the calculation of this provision.
The mapping was then refined and non-mandatory lines excluded from the calculation of this provision to closely align local GAAP with IFRS and Solvency II. As a result, our net income and the retained earnings increased. In the future, this means that claims events falling into non-mandatory classes of business will then directly impact our local GAAP P&L, as we do not hold the provision there anymore. On the other hand, higher retained earnings support us in capital management and lead to a higher capital flexibility. What happens is that the reallocation of capital from equalization provision to equity ensures a higher and more flexible overall loss-absorbing capacity. Aside from nat cat claims, in the future, the increased level of equity will then be able to also absorb man-made losses or capital market-induced losses.
In other words, we will see a diversification benefit also in our local GAAP balance sheet. Going forward, we expect higher local GAAP earnings in most of the years due to a reduced equalization provision build up. Only years with significant outlier losses will show lower results. To safeguard our dividend commitment, even in years with extraordinarily high losses, we will hold higher retained earnings in the future in a low single-digit billion EUR amount. While the new framework provides an increased capital flexibility, it will strongly support but not change our capital management strategy. Now on my last two slides, I have two more overarching CFO topics I'd like to quickly cover. The first one is the introduction of IFRS 17. We are making good progress in the implementation of the new standard across all companies, across all systems, across all processes.
Although changing all these processes that are fundamentally needed for IFRS 17 is a challenging task. Currently, we are preparing the production of our opening balance sheet and then the comparative quarters during the year 2022, which we then will be releasing next year together with our actuaries. Content-wise, what we expect is a higher transparency of the numbers, but also a higher volatility due to a valuation principle which is much closer to market consistent valuation than where we are today. On top of that, insurance revenue will probably be lower than the premiums today, particularly for our reinsurance business, as a significant part of reinsurance commissions will no longer be regarded as revenue. Our reserve prudency and our reserving strategy will be unaffected. Finally, I think a very important remark that operationally, the economic steering of our business will not change.
On my last slide, a few words on taxonomy. For 2021, we have for the first time to report about taxonomy KPIs also in our annual report. As you can see on slide 37, already looking at the numbers, at the face value of the numbers, you'll see quite a mismatch between the numbers of insurance and investments. You can see there are 55% of our premiums non-life on the insurance side, and you can find a 9% on the investment side. Many of our investments are not eligible for taxonomy already by definition. So government bonds would be an example. Non-EU investments were another one, would be another one. On the insurance side, on the other hand, certain lines of business are fully eligible for climate change adaptation.
However, insurance products enabling activities to mitigate climate change, so for example, the insurance of solar panels, is not eligible at all by definition already. Both in insurance as well as investment, we expect the taxonomy aligned portion of our business to be smaller than the eligible volumes only. The aligned portion has to be released only one year later, so we cannot give you any numbers yet. As you can see, the interpretation of all these numbers is not straightforward at all, if you ask me. Sustainable investments have to be able to build on simple, transparent, and meaningful reporting rules, which should be comparable across industry and ideally should be global, as capital markets are global as well, of course.
Therefore, in my view, the current status of the taxonomy can only be the starting point for the further development of it, and then ideally globally consistent standard to be achieved hopefully anytime soon. With these remarks on non-financial reporting, I'm at the end of my presentation, which mostly dealt with financial reporting, and I'm looking forward to your questions. Back to Christian.
Yeah. Thank you, gentlemen, for your presentation. Before we go into Q&A, I'd like to add one topic. There was a question this morning that came up in the press conference and, on which in the IR team we received some calls. It was a question on Nord Stream 2, and Joachim is happy to give you some color. Joachim, please.
Yeah, thank you, Christian. That should be clear. The contract between the policyholder and Munich Re Syndicate, daughter of Munich Re, was terminated by Munich Re Syndicate more than a year ago. That was back last January 2021, as had been reported back then. The contract essentially covered the construction of the Nord Stream 2 pipeline. Munich Re Syndicate is one of numerous insurers that have withdrawn from the project. We are not aware of any pending legal action against our termination. But I'd also with this ask for your understanding that we will not give any further detail, as to protect the data and the interest of the contract partners as best as possible. Thank you, Christian.
Thank you, Joachim. Now we can go right into Q&A. I'll give it back to you, Natalie, for your introduction.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Kamran Hossain from JP Morgan. Please go ahead.
Hi. Afternoon, everyone. Two questions on conservatism, really. The first one is on the life reinsurance business. I guess in the fourth quarter, you booked more than EUR 315 million. And I look at that versus the EUR 300 million, kind of, expected claims for 2022. One of the numbers doesn't seem to make sense. You're either being, like, very overly prudent in Q4 or, you know, the number for next year doesn't seem right. I think it's the Q4 was very prudent. Could you give us a sense of how much of Q4 is prudence? And maybe kind of a little bit more background on why you decided to do that at this point.
The second question, as you know, I've been kind of fairly focused on the IBNRs for P&C COVID claims in the last year or so. With the 60% IBNR, and I think the total number's over EUR 3 billion for the COVID claims. You know, getting to two years on, is that 60% just far too high, and at what point do we really see that begin to run off? Thank you.
Kamran, Christoph here. I take both of your questions. Thank you first. I start with the P&C part. The loss adjustment process takes significantly longer than also what I would have personally expected. I think I mentioned it a number of times already in these calls, and it continues to be taking more time than expected. One of the reasons is that many of our clients have not enough clarity on their side still. Also for reinsurers, it's a much more difficult process because this loss complex is something we never experienced before. Then there's also still court activity in some countries with some primary insurers.
There are many good reasons, unfortunately, why it takes so much longer to have a clear picture on the claims here, compared to many other loss complexes. Now, our reserving approach is generally to await developments before we would release prematurely any reserves. Therefore, at this point in time, I think I can only reiterate that we feel comfortable with our reserve level and that we are adequately reserved, but it would be too early also, given the lack of information we're having from some of our clients, to talk about releases already now.
On the life re side, I fully agree that if you look at the Q4 number and our guidance for the full year, that given this, they are the same order of magnitude, that this raises some questions. Therefore, I'd like to maybe explain both of them a little bit deeper. The year-end number, you have to see it in the context that in life , what is very typical is that you get a very late reporting as a reinsurer about the actual deaths coming in. So when the end of last year, the Omicron wave surfaced, which was end of November more or less, we were facing a situation that we, you know, had to set up reserves for that business without having a lot of data to build on.
This wave, as you know, came in very heavily, starting in South Africa, but then quickly affecting other markets. I mean, case numbers have seemed to go up quite significantly, which we reflected then in IBNRs in our year-end closing. As I said, actual data is not available. Therefore what you're saying is correct. The Q4 number is very heavily built, building on IBNR bookings, much more than individual claims already. Specifically due to Omicron, but also due to a prudent setting of that IBNR. There, I would be reluctant to give you an order of magnitude for a single quote. That doesn't make so much sense, about, you know, about prudence of a single quote in a number like that.
I could give you some color about the overall amount of IBNR we are having in our life reserves for COVID-19, and this is roughly 50%. Roughly 50% of the overall life reserves for COVID-19 are IBNR. That should give you some color on our Q4 booking maybe. The outlook for this year is evidence-based. Evidence-based mean we build that on our experience we have currently with Omicron. We have some experience from the past with delta. What we don't know yet is that after that Omicron wave, if another big wave is going to you know to hit our markets.
That there might be, for example, in autumn this year, there might be another mutant, another variation, variant of the virus hitting again Europe, the United States, South Africa, India, so our major markets potentially. This is something we would not have reflected at all in our EUR 300 million guidance for this year, because there's no evidence for that. That's what we mean when we say it's an evidence-based estimate. Similarly, if you remember last year, our initial guidance was EUR 200 million for the year. That was given at a point in time when we weren't aware of a delta variant, and we weren't aware of the Omicron, because they just didn't exist at that point in time. Then over time, other variants came in, and we unfortunately had to increase our guidance because the evidence changed.
In a sense, I have to tell you that the EUR 300 million, therefore, is the first guess what can be happening in the year, but the uncertainties are just high. We all do hope very much that with Omicron, this pandemic will start to really dampen and that there will be nothing significant on top of that. If this is really going to happen, we don't know. As we don't know it, we cannot build any estimates in our numbers. I think that can give us color around these two numbers. That's clear. Thanks very much for the color. Thank you.
The next question is from the line of Andrew Ritchie from Autonomous. Please go ahead.
Oh, hi there. Thanks for the presentation. Very, very detailed. Can I just ask a question on slide 10? There's a comment, and it says at the bottom right of that slide, while implementing targeted exposure limitations and risk mitigating features in new and existing nat cat contracts. Could you just give us a bit more color on that? Were you unhappy with your positioning in nat cat in terms of frequency or layer? You mentioned that you'd reduced aggregate, oh, again, although I thought you were already very underweight aggregate. Just give us a bit of color on exactly what you did, particularly on January renewals. I guess my second question is a more general one.
I'm just trying to understand, Christoph, the buffers that might help you still, you know, to deliver 2022 guidance. Let's put COVID to one side. You did realize a lot of gains on the investment side already in 2021. You have set aside additional prudence in P&C buffers, but you've intimated that that isn't gonna be, you know, let back into the P&L anytime soon unless inflation, you know, dramatically drops. So what are the buffers? I'm struggling a bit to understand what the buffers are for your guidance for 2022. Maybe just give us a color on that would be helpful. Thanks.
Hi, Andrew. This is Joachim. I will take the first question. The second one is prepared by Christoph. I think you were right in understanding what we meant on slide 10 with the comments. I give you concrete examples. What we want to say is while we were growing our book by 14.5%, we at the same time, we have improved the quality of the book, or we have improved the risk-return profile of the book. How have we done that? We have done that by limiting, if you let's say, vastly reducing our frequency or aggregate coverages. In a commercial context, you can never exclude it totally, but you can be so restrictive that you limit it so much that you get enough of the other parts.
I give you another example where you just put sub-limits into your contracts for risk issues like wildfires, for example, or other secondary perils where you think you don't wanna offer the full capacity, but just a sub-limit to it. That type of features we have built in rigorously into the contracts. That's what it means.
Andrew, your question on the buffers is, first of all, already wording-wise, a tricky one, because finally, we are, in many balance sheet positions talking about best estimates. I think what I would confirm is that if there's a range of possible best estimates, you would always tend to take the most conservative one. The wording buffers is here for you always having difficulties with just the wording.
Let me answer the questions where we may be having picked conservative estimates. Yeah, right? I mean, you asked from a perspective of the 2022 guidance. I think I'd like to start from there. The 2022 guidance is not relying at all on any buffer on our balance sheet. This is something very we are very confident that we are operationally delivering the EUR 3.3 billion. There's no need at all for any buffers to achieve that number. As you could see, this year, we were delivering our target and even building up buffers this year. In that regard, I just wanted to make that clear. Where do these buffers, let's call them buffers for a moment, or these conservative areas sit?
Well, I mean, if you look or go through our balance sheet asset as well as liability side, I mean, on the assets, of course, still a big amount of unrealized gains. On the interest rates, very much going away with rising interest rates. But then on equities, on other assets, on real estate, there are unrealized gains. And then on the liability side, when we set up provisions, I mean, probably all the provisions where we have some room for maneuver would be, you know, culturally already setting them on the conservative side. So that would, of course, affect all technical provisions, be it P&C or be it life. But I would go as far that probably also our tax provision is a conservative one.
You would probably have a hard time finding single items in our balance sheet which are not, in a sense, conservative. Do I expect to use them anytime soon for the expected value of our target? No, never. What it gives us optionality in case something unexpected happens. That is, I think the good news in having these buffers on the balance sheet. It helps us to manage volatility, and it helps us in capital management as well as in, you know, achieving our targets also in years where something unexpected happens. That's why we have these.
Great. That's very useful. Thanks. Joachim, just to go back to your first question. Is it fair to say you were already, 'cause I thought you'd already gone quite underweight aggregates and, you know, things like worldwide sub-limits. Is it just another step again? It's not. This is not the first time you're doing it.
That's right.
All right. Okay.
The next question is from the line of Vinit Malhotra from Mediobanca. Please go ahead.
Yes. Good afternoon. Thank you. My first question is on inflation. I mean, I can see that you mentioned the word diligent inflation assumptions eating away some of the pricing gains achieved nominally. Though I mean, they have been quantified. But on reserves, on the reserving side, have you booked any reserves or charges for inflation? You know, could be long-term wage inflation or something, or were you already happy with what you had, which could have been conservative already? That's the first question. Second question is just back to the outlier/large losses, which is, you know, if you think of it as a one point increase on 12%, which is about 8.5%.
When I see the PMLs on one of the slides, it seems to be that some of the PMLs are increasing much more like the Atlantic hurricane is 20% increase in 2021 already. I'm just curious as to how should we see this difference. How should we use this number? Because you are quite at pains to reiterate that this is not an input variable. How should we look at this in the context of the 94% combined ratio. Thank you very much.
Yeah. Vinit, thank you. I'll take both of your questions. First of all, on the reserving side, as you know, we are usually conducting our reserve review always in the fourth quarter of the year. A very relevant part of that exercise is to take the most recent inflation assumptions into consideration when really line by line, portfolio by portfolio, our reserves are being analyzed. That's also what we did this year based on the most recent economic view of our chief economist when it comes to inflation, and then adapting that for the particular lines of business, because as also Joachim mentioned before, CPI is one thing, but then claims inflation for the respective portfolio is a completely different thing.
Then really portfolio by portfolio, we took into consideration what we think the inflation might be, to what level it would be elevated into the future and until when, based on the best estimate we're having. Then on top of that, we increased the prudency because in times where the inflation assumptions are changing, the uncertainty around this assumption, of course, is elevated as well. You do something where you think it's the best estimate to do it in a prudent way already, but still the increased uncertainty is asking then for an additional level of prudency, which we also implemented. Then finally, it's very, you know, it's similar like in pricing. It's really treaty by treaty, portfolio by portfolio, a very in-depth, detailed analysis, fully reflected in our reserves.
The second question, when you ask about the value at risk numbers in our deck and compare that to the increase of 12%-13%. First of all, these value at risk numbers, of course, are parallel by parallel, whereas the 12%-13% increase, or 8%-8.5% increase, of course, is an aggregated view, so includes full diversification. There's a second difference, which is very important. The 12%-13% or 8%-8.5% increase, there we're talking about the expected value. Whereas the value at risk number is the tail of the distribution, which obviously then also in terms of an absolute difference, looks different because the shape of the distribution function is varying heavily between each of these parallels. It's always different.
Only the aggregation, also for the expected value already, or only the aggregation of these distribution functions finally results in the increase from 12% to 13%. It's all consistent, but it's different ways of looking at the various things. Again, I think I mentioned in my presentation already the 12%-13%, therefore also has nothing to do with budgeting really. Because what we budget is risk budgets usually is our risk capital, and the economic own funds we are holding to cover the risk capital. Therefore for budgeting purposes, we are relying on value at risk-based numbers, parallel by parallel, and have a very clear risk strategy by each of these parallels. They are all fully covered by the risk strategy.
The 12 versus 13, that's just a statistic output after the renewal where we just aggregate everything into the calculation. That's if you want, and there you are correct. It's different angles to look at the same topic, fully consistent.
Okay. Thank you, Christoph.
The next question is from the line of Ivan Bokhmat from Barclays. Please go ahead.
Hi. Good afternoon. Thank you very much. A couple questions for me, please. The first one would be on the EUR 3.3 billion earnings target and placing it in the context of the Ambition 2025. Clearly the target implies far stronger increase in EPS than 5%. I'm just wondering, once you reach that level, should we assume that it can keep growing by 5% every year or it will be a more moderate pace onwards. The second question would be on the buyback. I mean, it's great that you've reinstated them. You're now at the top end of the Solvency II target, in fact above 200%.
I'm just wondering if you were tempted on launching a bigger program or maybe a larger multi-year buyback program. Could there be any benefits to that? Thank you.
Thank you, Ivan. This is Joachim. Good afternoon. The EUR 3.3 billion and all of that in the context of Ambition 2025 and the earnings per shares growth ambition of at least 5%. First of all, I wouldn't read anything else than EUR 3.3 billion commitment this year in terms of IFRS. You cannot just project 5% more of that into 2023, 2024, 2025. You haven't asked that question, but I just take this opportunity to clarify that because whether we're gonna grow our IFRS results also depends on where the cycle is going, how much capacity we will give to the market.
We might reduce it at some point and deliberately accept lower IFRS results and then give capital back to the capital market, but making sure that the ROE will end up in the targeted range of 12%-14%. This is more relevant to us than any IFRS result per se. With regard to the dividend increase, now it increased 12% or 12.2%. Is it the best expectation going forward that from then on, it will be rather 5%? I think you should not expect 12% every year. I think that would be slightly outrageous. For us, it was a good opportunity to also make up, if you like, a year of no increase last time.
The 12% then is compensating, if you like, 2020, where we kept the dividend stable. Going forward, really, you should expect that we increase it at 5% or higher, or in very bad years, just keep the dividend unchanged. The dividend policy is unchanged. The buybacks, we will not go for any program committing a multi-year buyback program because we think it's advantageous to us to look at that question year after year, depending on how the market or growth opportunities look like, and then decide whether we rather wanna employ capital for business growth or give it back to shareholders. That has worked well. That said, you can trust us that when the capital situation is in excess position and the market opportunities are in there, we are very happy to consider buybacks.
Maybe just to follow up. If I think about how you've returned capital this year, it's EUR 2.9 billion earnings and EUR 2.5 billion of capital return. Next year, the capital generation capacity is expected to grow considerably. You know, even if I put on another 5% in DPS, that still leaves
You know, substantial room for further buyback increase. At the same time, your growth targets, maybe. I'm sorry, it sounds like a third question. Your growth targets only imply low single-digit growth in premiums. What do you plan to do with that extra capital?
We haven't defined the plan yet. We will look at that towards the end then of next year.
Thank you.
The next question is from the line of Iain Pearce from Credit Suisse. Please go ahead.
Hi. Afternoon. Thanks for taking my questions. The first one was just on the HGB result. Christoph, correct me if I'm wrong, but I think you said you were sort of looking at holding low single digit billions in distributable earnings in the HGB result. Obviously, after the capital return from this year, you'll be sat sort of EUR 4.5 billion. I guess following on from Ivan's question there, should we be expecting capital returns in excess of the HGB result given where you are relative to the low single digit number that you sort of highlighted?
Following on from that on the HGB results, sort of why would you be confident holding a low single-digit billion number with a lower equalization provision and higher potential volatility in that HGB result going forward from the changes that you've made? Just trying to understand that.
Yeah, Iain, thank you for these questions. What you can see in our HGB equity reserves or retained earnings, what you can see there is that we are facing much less restrictions than in the past. The flexibility is higher, which gives us optionality, which is good. What I don't like is having restrictions which are not in the hand of management, but restrictions just given by you know stupid accounting practices or something. Therefore, I think it's a big step forward. A lot of you know additional flexibility for us.
Of course, that doesn't automatically mean that we are fully using that flexibility, because what Joachim just has been saying before, that we will always, you know, balance growth versus capital repatriation continues to be true, and that's why we emphasize that the general capital management strategy is unchanged. Having said that, on your second question, why are we feeling comfortable with that amount? You know, the amount is basically to finance the ability to pay at least the dividend also in years where we have very high claims. Well, what we did is actually simulations.
Stochastic simulation calculation, including different loss pattern, loss scenarios, events in these calculations, and try to find a compromise between being overly cautious on the one hand side, because then you hold too much capital. Also we wouldn't like to be overly aggressive in the sense that already, you know, a small storm would then eat into our dividend. That's something we don't appreciate, because as you know, we're very proud on the fact that the dividend has always been stable or been increased. We did these simulations and came up with a certain range with what is the ideal amount of retained earnings to be held.
Then we implemented kind of a traffic light logic on that range, which still gives management flexibility to deal with the question every single year to what extent and how much retained earnings we are then finally really needing to stabilize. But still giving an indication. It's also not a hard limit or anything. It's more traffic light risk budget logic, similarly like we're having for other KPIs as well. That's more or less how we came up with the numbers. It's really again, I mean, we like models. It's again, very much model-driven.
Sure. No. Perfect. Very clear. Thank you.
The next question is from the line of Will Hardcastle from UBS. Please go ahead.
Hey. Afternoon, everyone. Two questions. The first one is just on the nat cat large loss budget. I'm possibly being a bit slow here. Just working out, is the 12 points-13 points move simply left pocket to right pocket and no actual increase in prudency overall? So should we expect the X- large loss ratio to reduce equally? And is there any element there of higher prudency year on year? And then just a quick one on slide 60. It suggests the off-balance sheet reserve in associates has increased over EUR 1 billion in Q4. I'm just trying to work out what that relates to. Thanks.
Sure. The first question, to be very clear, yes, it's only a shift and nothing else. To make it even clearer, the 94 target we have, our internal breakdown would be 13% outlier, 51 basic losses, 30 expenses. That's our expectation, how the 94 in the plan would develop.
I hope that's clear. It's really only a shift and nothing else. On the unrealized gains on the various asset classes, as mentioned, I think you mentioned page 60. And then you're looking at the associates. If I understand.
That's right.
Correctly.
Yeah, the associates.
One of the main drivers here is is ERGO India. As you know, we are holding a minority position there. It's a very successful business, and that's the way we account for value creation there.
Sorry, was there a reclassification or did the valuation of that basket simply go up by over EUR 1 billion quarter on quarter? It suggests it went from EUR 1.5 billion-EUR 2.6 billion in Q4.
Well, I mean, it's not a listed or illiquid assets, so the valuation is not done every single time we close, especially not when it comes to just showing reserves. In reality, it's actual value creation.
Understood. Thank you.
The next question is from the line of Mr. Fossard from HSBC. Please go ahead.
Yes, good afternoon, everyone. Two questions on my side. The first one would be, Christoph, could you come back on, you know, additional conservatism or building up buffers. Can you quantify for us, not precisely, but give us a range of how much additional million has been built into this additional prudence buffer over the full year 2021, if you had to guess, estimate them. The second question is, I would like to come back to the 7% increase in average price. Could you provide us with the kind of walk from the nominal price increase that you achieved on your book to the 0.7, just to better understand how inflation assumptions have been taken into account, change in models, maybe also the business mix.
Any color on that would be interesting. Thank you.
Thomas, thank you. The question on the buffers. First of all, let me explain why it's so difficult to address that. Because finally, what are buffers and where are we always over conservative? I could start with the P&C Re reserves. I could add P&C, add ERGO P&C reserving. Then in the fourth quarter, we didn't realize unrealized gains on equities, where we had the losses on derivatives. That's also something which I would at least, of course, categorize as buffers. We talked about the IBNR and Life Re already. I could probably continue my list also with probably tax provisions. I don't know. So it's a little bit hard to really define where we are just always also always fit these, you know, these alleged buffers, or let's call them conservative valuations in our balance sheet.
To give you maybe some color, I mean, already during Q3 and also in some one-on-one with investors, I was often being asked how much the Admiral sale is contributing to our result in the fourth quarter. Also there, we did not give a number. I would at least go as far and say that the Admiral gain was easily compensated by buffers we have been setting up. Second question? Yeah. Okay. The nominal to 0.7, that's unfortunately something we do not have ourselves. As already deep in the system, when our underwriters lock in their assumptions and then they aggregate the information to have this aggregated 0.7%, we do not collect nominal price increases.
Therefore, the only thing I can give you is maybe, yeah, some indicative information, if at all, how we dealt with inflation in various lines. I think I covered it already for reserving. It's a big difference between social inflation and then inflation in various property lines. Inflation itself contracted something completely different than if you're having a proportional treaty. Motor business is working completely differently as well than if you talk, for example, about, you know, third-party liability. All these things have to be captured. Therefore, the range of inflation assumptions we have been using is a wide one, with the highest numbers being clearly double digit, and the lowest numbers being significantly lower than that.
Maybe an average being somewhere in a mid-single digit order of magnitude, something like that on average. Again, you have to be very careful using the number because it's differing so much from the biggest to the smallest number applied.
Understood. Thanks, Christoph. Can I squeeze just one question for Joachim? Joachim, what is your assessment of pricing adequacy at the present time? I mean, do you believe that we are reaching something which is more in line with your expectations or is still far away? I know that you also, that will depend from lines of business, but that will be interesting to get to your assessment at the present time. Thank you.
Yeah. My qualification would be the following. If we hadn't considered the parts that we have grown as price adequate or technically adequate, we wouldn't have grown into it. Pricing is adequate there. Is it adequate and even better than the year before? Yes, it's increasing margin over the whole renewed portfolio by 1.1, for example, by 0.7%. Last year, by the way, it was 2.3% or 2.4%. That means pricing is adequate and is becoming more and more adequate as the market is hardening. That is true for the whole portfolio. As you highlighted yourself, you have to differentiate because there is also lines of business or regions
Where pricing is inadequate, they become less. Just to give you one concrete example, in the U.S., in the casualty business, I think we have seen a couple of years where the original market, but also the reinsurers had to catch up increasing their rates. We see this trend carrying on the regional side. We already see the first attempts that reinsurers would have to increase their commissions, which they pay to cedents, and we have stayed very restrictive in this aspect. That is the overall picture, but what we've renewed, very price adequate. Thanks.
Thank you, Joachim.
The next question is in the line of Ashik Musaddi from Morgan Stanley. Please go ahead.
Thank you. Good afternoon, Joachim. Good afternoon, Christoph. Just a couple of questions I have is, first of all, I just wanna go back to the premium growth number you have given. I think you have given EUR 61 billion premium for the full year for group, versus your last year of EUR 59.5 billion. That reflect like 2-3% growth. I'm just trying to understand, I mean, are you kind of suggesting that there is not much of top line growth you are expecting to print this year, and that is the reason why you are doing the share buyback?
Would you say that you're doing the share buyback because you thought there is excess capital, but there is still enough capital left, which can still help you grow the premiums, a bit faster, just like what you have done in 2021? I mean, the reason I'm asking is, like, I just feel like 2%-3% is a bit on the lower end. I mean, even a 5% higher growth in P&C premium can add about EUR 100 million of earnings. Just trying to square what am I missing here? That's the first question.
Second thing, second question is, I mean, on, I think in your remarks, you did mention that you are being a bit more on the cautious side on the long tail casualty lines, but on the property, you are still more or less maintaining the proportion. Would you give some color as to how does that cautious view has been reflected in the January renewals? Have you cut back on long tail casualty lines, or would you say you have taken extra protection or something like that? Some color on that would be very helpful. Thank you.
Yeah, thank you very much, Ashik. So premium growth-wise, you're right. The EUR 61 billion compares to the last year, like a 2%-3% increase or growth only. I must admit, my first read of this number was exactly yours. It was exactly yours. I challenged my colleagues. I said, "Are we certain that it is 2%-3%, or shouldn't it be something like, I don't know, 3%, 4% or 5%, something more?" That is the outcome of the bottom-up planning of the whole organization. Of course, what we have to take into account, sometimes there is larger deals, larger quota shares that are just running out, which were written for financing purposes.
When the purpose is reached and accomplished, then they fall out of the equation and you have to produce against them. Bottom up, that is the best view. But, you know, I wouldn't be totally surprised if in the end we would see EUR 62 billion. But as you know, we don't plan this with by far not the same diligence that we plan the technical results or the bottom line of it. But by no means is capital a scarce resource to support even a stronger growth if a stronger growth makes sense to us. Your second question, which with regard to our annual target composition of the portfolio, more property, less property, more casualty, more excel, more proportional, et cetera. I would say, in the.
We do have preferences, and we do have portfolio preferences, where we say you have a better alignment with your clients with regard to certain reinsurance contract structures, like proportional in casualty, for example, or non-proportional in property, et cetera. Applying those preferences, if you like, historic experiences is almost true, is what we have done. The portfolio outcome is reflecting our preferences to a better extent or a larger extent than that is possible in a weaker market before 2017. You also have to face market reality.
If you grow, for example, a specialty business, which we have grown and are growing in the U.S., then you have to grow into casualty because two-thirds of the primary market in the U.S. is casualty business and the remainder is property business. Then, of course, you have to select those parts where you have better likes, which is then the smaller and the mid-sized commercial business and maybe not the heavyweight one. All of that is reflected, and we think that the outcome of also of the 1-1 renewal brings the portfolio quality closer to our, if you like, wishlist.
It's very clear. Thank you. Thanks, Joachim.
The next question is in the line of Dominic O'Mahony from Exane BNP Paribas. Please go ahead.
Hello, and good afternoon. Thank you for taking questions. My first question is really just on the cyber business. You mentioned, Joachim, that you know, you're very focused on accumulation risk and controlling that. I wonder if you could just help us understand how you do that, maybe with an example or two to sort of really sort of bring that to life, because I think it's a question that I think a lot of investors have about the cyber market as a whole, how accumulation risk is controlled. The second question just on page seven, really interesting detail on the management of the life book in ERGO. Thank you for this. I
It occurs to me looking at this, you're one of the few companies in the general sector that can really claim to be at scale and can share that with others through the third-party administration proposition. I just wonder whether there's anything to stop you actually acquiring books and deploying capital into this. There's clearly a market for this, and it sounds like you folks are good at running this sort of book, so I was just wondering whether there's any impediment from a strategic or operational or even sort of an accounting perspective. Thank you.
Yeah, Dominic. Thanks. This is Joachim. With regard to the life back book, is there a market already for a third-party administration of the back books? Not for us, because what currently is still ongoing is the migration of the ERGO back book into the new platform, which we built with IBM. When that is finished, let's say this will take one or two more years, then IBM and ERGO, they would be ready to go to attract third parties to give them their portfolios for administration. Will there be a market? We think there should be one. We do not know how big the demand and the willingness to pay for it is at this point. There should be a demand because ERGO is not the only company in the market that had legacy issues.
I think there is a whole bunch of companies who have legacy systems in place which just no longer do the job of administering the portfolio. Either they're gonna build themselves a new IT platform, which comes at a pretty massive cost, or they look for a third party, or they sell the whole book. We believe there should be a market, but we need to see how attractive it is once we see what player's gonna pay for it. With regard to cyber, I mean, I'm not gonna disclose how we do the accumulation risk modeling. However, we do consider, of course, what type of risks are of a systemic nature.
When we, for example, consider the falling apart of an internet or of energy infrastructure or communications infrastructure, things that would cause immediately a loss everywhere and accumulating those losses to uncontrollable limits, then we do exclude such risks from coverage at all. For the others, where we say they should rather diversify, even if they don't 100% diversify, they shouldn't accumulate totally and broadly. There, we come up with calculations of how much, I would say, diversification leakage could we afford and how should we adjust our capacity limits so that the downside that we run doesn't exceed our risk appetite.
That's pretty much the, I would say, the way that we look at it and how we give ourselves a cyber risk appetite and translate that then into a cyber underwriting strategy.
Thank you.
The next question.
May I add one thing, because Christoph kindly added that the question with regard to the life back books is not only about the TPA business, but if we had the appetite, once the new platform is ready for new clients, whether we would buy back books. Including the risks, whether we would become risk carriers of the others. Clear no.
The next question is from the line of Vikram Gandhi from Société Générale. Please go ahead.
Oh, hello. Good afternoon, everybody. I hope you can hear me all right. Just two quick ones from me. First is, and maybe you can say this is probably a philosophical debate, but when I look at the increase in the large loss budget from 12%-13%, that's about 8.3%, so let's round it up to 10%. I'm just thinking why that was considered as a better option versus just increasing the EUR 10 million threshold to EUR 11 million, because as it is, for the past 15 years, the group hasn't really taken into account inflation on the threshold limit. Moving that would have probably solved the puzzle more simplistically, I would say, just pushing that from 10 to 11.
I don't know if that really makes sense, but that's my question. The second one is, can you help us with the implications of the new S&P capital model as well as the global minimum tax rate that is being flagged at around 15%? Any moving parts or any color there would be really helpful. Thank you.
Yeah, Vikram, I'll take all of your questions. Let's start with the 12-13 versus the EUR 10 million threshold. As you can imagine, a large organization can debate things like that endlessly. We have a lot of experience with that. Frankly, both options are viable options. We might also discuss them again in the future. Finally, what is holding us back from increasing the 10 just right away? Well, many internal processes also use the same threshold. Then you have to decide if you change your internal processes or if you would accept a deviation between what you do internally versus what you use for external communication. All of that is not straightforward and not ideal at first sight.
Then on the other end, of course, 12-13 is implying something. I mean, if you look at that the EUR 10 million has been unchanged since 2006, the 12-13 is a non-event, basically, because it had to be expected anyway much earlier already, just given the normal inflation over such a long time. Yeah, I understand that you're asking the questions and we are asking ourselves the question regularly as well. Neither the one nor the other option is 100% ideal, and therefore you can argue a long time about that. Let's end it with that.
I mean, I could go into that, I mean, for much longer, but I don't think it's really worth it. The S&P model, I mean, that's obviously very early days, because the request for comment is just out from S&P, and there's many moving parts in there. First of all, what I'd like to underline is that what we generally are happy with is that this request is out there now, and that there is an intense discussion planned also with the industry about potential improvements in the model. Because what we saw in the past is quite significant deviations in some parts of the model from where we stand in our internal risk modeling.
The S&P model historically is not everywhere fully economic, at least according to our understanding. That's probably necessary anyway because their model is a simple Excel model, and then what we are using is, you know, a complex stochastic modeling technique. Still, we always felt that aligning the rating agencies has put it more generally closer to what our internal model proposes would be beneficial for us.
Now, if the outcome of the review then finally will be beneficial or not, that remains to be seen, depending then on the decision to be taken by S&P on each of these model elements, where now a proposal is out there, but then obviously input from ourselves as well as many other industry players still needs to be discussed and also potentially considered by the rating agencies. Therefore, it's probably early days to come up with a final assessment. Put it that way, I'm really. I mean, it's more the opposite. I'm really welcoming that the model is up for review now. So that was S&P and then minimum tax rate.
I mean, there are so many aspects we discussed there that would also be, you know, a long session to come up with conclusions. First of all, what is my. The biggest concern operationally, it's really extremely burdensome as it is being proposed right now because you basically need to establish a completely new tax ledger. Even questions like materiality for consolidation purposes are asked again by the OECD to potentially change that compared to what we are doing today. That's potentially extremely burdensome with a lot of administration effort, additional administration effort. That's a concern. Tax-wise, it remains to be seen because many jurisdictions where we are doing business at are anyway not deviating a lot from the 15% minimum tax threshold.
Others are on the move towards the 15%. Therefore tax-wise, I don't think it will be making a very big difference for us at all. It's rather probably accelerating a journey we are seeing anyway.
Yeah. Fantastic. Thank you very much, Christoph.
We have a follow-up question from Vinit Malhotra from Mediobanca. Please go ahead.
Yes. Thank you very much for this opportunity. Two follow-ups or two rather questions left from my side. One is on the Risk Solutions, which has produced very good 92.8% combined ratio, despite your comment on the slide that there was heavy nat cat. Please could you quantify what's the number without nat cat and what, if any, reserve movements are involved in this 92.8%. Second question is, just on the non-mandatory HGB lines that you have reviewed, and I've taken on board your comment, Christoph, that you want management to be in control. Could you just say, were any external agencies or bodies involved or needed to be involved in this decision?
Was it purely something that has been sitting in the books for so many years and then was just discovered, or how did this decision happen is what I'm trying to understand. Thank you.
Vinit, I'll take the first one, and then I ask back on the second because I'm not really sure what you meant. The first one on the Risk Solutions, I'm sorry, I do not have that number. I cannot give you any answer on that. In that split, I just don't have it. On the second part, can you maybe please rephrase? I wasn't sure about the.
Is there any catalyst that.
What your question was.
I'm sorry. I understand what happened, as in the process and how you. Why did you choose to do it now? Did you need to consult any external bodies, auditors? I mean, how is the process going to actually do this? I'm happy to take it offline as well. It's not.
I can maybe quickly cover it, and if there are any follow-ups, we can take them offline. I mean, what we did is we just reviewed that for various reasons. First of all, I wasn't happy with the big difference between German GAAP and IFRS and Solvency II. On top of that, as you know, we are preparing for IFRS 17, which in itself is already extremely burdensome when it comes to data management, providing the data into accounting systems. Therefore, also that was kind of, you know, a starting point to look into processes, data and how we manage or how we map lines for the various accounting purposes. So the maybe a number of reasons.
Reviewing all of that, it's not like, you know, you do it in half a day or so. It was a 1.5-year project. It was really in-depth work, analyzing and, you know, really on. I mean, on the reinsurance side, we have many contracts, and you have to look into all of them more or less and review how they are mapped onto the various lines. The difficulty is that according to German GAAP, this regulation is defining lines of business in the context of a German primary insurance market, and we are doing reinsurance business globally.
Therefore, that at first place the mapping is necessary, because lines in Germany are just containing different elements, different business than if you look at reinsurance cover, we're offering, for example, in Australia, Japan, or the United States. It has all to be covered by that calculation, so therefore somehow we have to map it. That was the starting point. It was a long effort. When we started it, we just wanted to review it. We didn't know what the outcome would be. Then after one and a half year intense work, the project team came up with what we have been implementing here now. Obviously we are not living without any reviews or any external parties. The opposite is the case.
Our accounts are audited, of course, by our auditor. Of course, we are working in a German regulated environment when it comes to our insurance business, so we have a regulator as well. I hope that that's enough for a first round. Anything else, we're happy to take it offline.
No, no. More than enough. Thank you very much. Thank you.
There are no further questions at this time, and I would like to hand back to Christian Becker-Hussong for closing comments.
Yes, thank you, Natalie, for leading us through the call. It's time to close the session. Thank you very much for joining us this afternoon. Our pleasure as always. Also as always, happy to follow up with you on the phone for further questions. Thanks again and see you all soon. Bye-bye.
Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.