Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Munich Re quarterly statement as at the 31st of March 2022. 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, thanks, Nairobi. Hello, everyone. Warm welcome to our call on the occasion of our first quarter 2022 earnings. I have the pleasure to be here with our CFO, Christoph Jurecka. He will, as always, give you a few statements up front, and then we will open the floor for Q&A, for which I would like to ask you, as always, to limit yourself to two questions each. Now I'm handing over to Christoph.
Thank you, Christian, and good morning, everybody. A pleasure to present our numbers today. I'll start with a few introductory remarks. Munich Re's net income of just above EUR 600 million in Q1 was clearly affected by the backdrop of a very challenging geopolitical and macroeconomic environment, not least due to the war in Ukraine and the related sanctions in Russia. In this context, we wrote down our fixed income investments in both countries, and we booked claims incurred in Q1, while the ultimate financial impact on our underwriting result is still highly uncertain at this point in time. Despite these challenges, our overall profitability remains sound with a group return on equity of 9.8% in Q1.
With an overall investment return of 1.6%, write-downs on Russian and Ukrainian bonds of almost EUR 700 million cost, it's EUR 370 million net on currently very low market values of even below 20% for sovereign bonds left their mark on the investment result, both in reinsurance as well as ERGO. Additionally, in response to a sharp increase in bond yields, we had losses on interest rate derivatives used for hedging and duration management. Equity, credit, and commodity derivatives largely offset this effect. Disposal gains for assets that are financing, as well as gains on equities, contributed positively to the result. The reinvestment yield increased noticeably to 2.1%, almost matching the running yield, which remained quite stable at 2.3%. Turning to reinsurance.
As expected, the life and health technical result, including fee income of EUR 20 million, that was clearly below the pro rata annual ambition, owing to the prevailing pandemic. In line with our assumption that the largest share of mortality claims would be accounted for in the first half of the year, COVID-19 losses amounted to EUR 150 million in Q1. For the full year, our loss estimate still stands at around EUR 300 million. Apart from COVID-19, experience was favorable, despite a few individual large mortality claims in North America. The fee income was very strong once again and continued its pleasing growth path. We therefore consider the Q1 result to be a promising start to the year, and we are sticking with our annual guidance of a technical result of around EUR 400 million, including fee income.
In P&C reinsurance, we posted a good combined ratio of 91.3%, including major losses of only 9.2 percentage points, despite the series of major natural catastrophes. This figure includes a run of gains from prior year major losses of around EUR 100 million, which is not unusual given our prudent reserving policy and is based on updated claims reports we received from our clients during Q1. As regards losses in connection with the war in the Ukraine, we can only reserve for claims that we have already incurred and for reinstatement premiums we expect to pay under external reinsurance cover that we hold. In Q1, we had expenditures of slightly above EUR 100 million. This includes losses that we consider to be covered and also have been incurred with sufficiently high probability to meet the applicable accounting standards.
We are closely monitoring the evolving situation and potential additional losses that might emerge. In any case, also because our remaining major loss budget for the rest of the year amounts to around EUR 3.3 billion, we expect the ultimate claims burden to remain manageable for the group. The underlying performance remains healthy with a normalized combined ratio of around 94.8%, including reserve releases on basic losses of four percentage points. This is in line with our full-year guidance, considering that the number is expected to improve further in future quarters as we continue to earn through the rate increases achieved in recent renewals.
This brings me to the April renewals, which still featured the slowed, favorable trends observed in previous renewals, but in which these trends were certainly countered by increased loss cost inflation expectations. Overall, the risk and inflation adjusted price level of our portfolio remained stable despite a materially increased inflation. At the same time, we were able to expand premium volume by almost 8% by exploiting opportunities at excellent profitability, especially in Japan and India, as well as with other clients around the world. Global clients saw volume reduction partially due to inadequate terms. In primary insurance, in spite of bond write downs and high large losses, ERGO continue its pleasing financial development, posting a net result of EUR 96 million. In all segments, the underlying performance was healthy overall.
German life and health business delivered a net result of EUR 44 million, which was driven by a comparatively low investment result, especially in life, related to Russian Ukrainian fixed income investments, a decreasing ZZR requirement and negative effects from interest rate derivatives. In addition, the technical result was lower due to normalization of the operating performance after a very good prior year quarter in health and travel. Moreover, the segment recorded a higher currency result, which, however, further burdened the operating result due to the policyholder participation which we book in the operating. In P&C Germany, we achieved a strong premium growth above market estimates and a very good underlying performance. The combined ratio of 97.4% in Q1 was higher than anticipated due to manmade and Nat Cat major losses that were significantly above expectations.
In addition, we had the usual seasonal fluctuations in claims and net earned premiums in the first quarter. Considering these effects, the underlying combined ratio supports the full year guidance, albeit with an increased level of uncertainty depending on the further major loss development. The ongoing favorable development of the international business with a combined ratio of 92.6% reflects the successful strengthening of our presence in core markets. In Q1, we achieved good portfolio growth despite divestments in prior years. The quarter was particularly strong in Greece and in Poland. In addition, we improved our operating performance in legal protection. Taking seasonal effects and health into account, the underlying combined ratio is well in line with the full year guidance. Now some remarks on capital management. The group's economic position remains very strong.
Solvency II ratio increased to 231% in Q1, driven by good operating earnings and the sharp rise in risk-free interest rates, which were partly offset by write-downs on the Russian and Ukrainian bonds. Please note that the Q1 Solvency II ratio includes the deduction of EUR 1 billion in share buybacks. The two subordinate bonds which will be redeemed at the end of May will be considered within the Solvency II ratio in Q2. I would like to conclude with the outlook for 2022. With regard to our last communication at the end of February, all figures remain unchanged with the exception of our GWP outlook.
Due to currency effects, especially a stronger US dollar, higher than expected business expansion and risk solutions, and further growth in the April renewals, we expect a GWP of EUR 45 billion in reinsurance and of EUR 64 billion for the group. The Q1 results keep us on track towards achieving a net income guidance of EUR 3.3 billion, even though considerable uncertainty remains with respect to the financial impact of the Russia-Ukraine conflict. This additional uncertainty now comes on top of the usual drivers for short-term volatility, namely major losses and capital market movements. Again, we are having EUR 3.3 billion of large loss budget still available for the remainder of the year. This concludes my opening remarks. I look forward to answering your questions, but first hand it back to the operator.
Yeah, thank you, Christoph. Nothing to add from my side, so we can kick off the Q&A. As mentioned, please limit yourself to a maximum of two questions per person. Please go ahead.
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 touch-tone 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. Morning, everyone. The first question is on the guidance and sticking to EUR 3.3 billion. I guess as you outlined in the statement and I guess in the remarks just now, you know, there was some uncertainty relating to that number. You know, capital markets, who knows? I guess more on the kind of large loss side from kind of Russia, Ukraine.
When we think about, I guess when you think about your confidence in that EUR 3.3 billion number, you know, are there any obvious offsets elsewhere that you have kind of in place, you know, that could help to kind of, you know, offset, you know, claims from Russia, Ukraine, you know, that would help you get to that number, particularly thinking about kind of COVID or large loss reserves, sort of anything kind of in that bucket that might help. The second question is on the April renewals.
I think you know so price very you know risk-adjusted very slightly down. Can you maybe talk about how cautious you're being on your assumptions? You know I assume you're probably not going to give a nominal versus kind of risk-adjusted price. I'd be very interested to kind of hear about what the spread between those two numbers is, and whether kind of you know historically you're at you know kind of very high levels, given that you know what seems like a very kind of uncertain risk backdrop. Thank you.
Yeah. Kamran Hossain, good morning. Thank you. First of all, the guidance. Indeed, the uncertainties are high. I mean, they are always high for us, aren't they? The reason that I highlighted the 3.3 large loss budget so much in my introductory remarks was that this is a significant number. Also, if you look at the growth and also having in mind that 12% was last year's large loss budget, we increased it to 13%. That's a significant number. I mean, the volatility of claims we are having is anyway large. The Ukraine-Russian piece alone is not at all a concern because it's of an order of magnitude where claims could anyway be higher or lower every single year.
In a sense, it remains to be seen how the overall large loss situation will evolve. You know that our calculation doesn't work like, you know, for a particular claim, we are putting aside that much money, and the remainder is just unused. This diversification across various sources of losses and that you benefit in some years from not having as many losses, like in others, in certain lines, but in other lines you have then more losses. It all, you know, finally works in the calculation overall. I think that's, you know, part of the reason why we are still so optimistic to achieve our guidance. On top of that, yes, of course.
I mean, you mentioned COVID, but more generally, I mean, you know, our balance sheet is prudent. We have a lot of prudence in our claims reserves. When we had our Q4 call in February, I think I highlighted that we even increased the prudence without the necessity to do so, but deliberately decided to do so when we started into the current year. Now of course, we enjoy that as an additional prudence, call it buffer in our reserves, which of course will eventually support us at some point in time. There are others. There's probably not a single reserve on our balance sheet where we are not to some extent prudent, tax provisions, you name them, whatever.
That all together makes us still very optimistic at that point in time that we can achieve the EUR 3.3 net income target this year. But obviously, I mean three quarters to go. Let's wait and see. On the renewals. Yeah. I mean, we always try to be cautious in our assumptions. I think it's fair to say that this time we particularly focused on the inflation topic because it's so much on top of everybody's mind. So we really try to, as you know, as much as we can fully, you know, include that not only now in the calculation of the number we are giving you, but more importantly, particularly of course, also when we do the underwriting.
Therefore also there we focused a lot on the inflation assumption and frankly had discussions with our clients which were not always consensual. Maybe it's more kind of you know episode I can tell you. We did not continue some of the treaties we have just due to the fact that our assumptions were more conservative than what our clients would have assumed from an inflation perspective only. This gives me some comfort that we took a conservative stance this time. Then again, like for the outlook for the year as well, for the future development, who knows finally? It will remain to be seen if this is cautious enough.
To start with, it feels much better to be in a position where we fully took care of that in our numbers instead of the other way around. Now let's wait for the future development.
Many thanks, Christoph.
The next question is from the line of Andrew Ritchie for Autonomous. Please go ahead.
Oh, hi there. Just a general question. I'm just trying to think about the impact of the move in interest rates for Munich Re. I guess what I'm sort of trying to balance, and maybe Christoph, you could give us a sense on this, is it may mean less unrealized gains to help to boost IFRS investment income. But on the other hand, it's positive economically and specifically for life business. There may be lower earnings in ERGO because there's less need to fund ZZR. So how do you think about the move in interest rates, you know, weighing the sort of IFRS noise versus the economic positive? And at what point would you think the reinvestment rate, higher reinvestment rate would start to flow through to earnings?
Sorry if that's a bit vague, but I just wanted a high level perspective on as CFO, how you're thinking about what these higher interest rates mean for the group. I guess the only other question I had is in coming up to the mid-year renewals, which obviously have a higher Nat Cat component to them, what is the current thinking? There's still a lot of debate in the industry about the adequacy of Nat Cat pricing, especially given ongoing inflation and frequency. What's the appetite for Munich coming up to mid-year renewals in terms of growth of Nat Cat? Thanks.
Yeah, Andrew, thanks. Well, interest rate, I think you implicitly nearly answered the question already, at least the way you stated it. Economically, it's only positive. We will benefit hugely from the higher interest rates. Then there are all kind of accounting mismatches around, which make, you know, the lives of CFOs so enjoyable. It's, you know, it starts with, of course, IFRS, but then even more complex local GAAP and even taxes would in certain situations react differently to the impact of rising interest rates. Therefore, in reality it's very complex to steer through a phase where we currently are in. That's all short-term noise in one sense.
As soon as you've digested that, the remainder is only positive because the higher returns, the higher interest income will flow through our accounts then, and then we'll benefit from higher earnings over time. Over time, the question really is how quick will this happen? As much as we enjoyed the average yield of our book coming down slowly only, obviously it's also similar the other way around. It will also take quite a long time until we see the full impact in our running yield. And then again, in the short term, IFRS, everything you just said is right. In the past when we did portfolio transactions, we benefited automatically by gains which we realized because there was not a single security you could touch as an asset manager without realizing gains.
Now it starts to be rather on the opposite side. There's not many securities left which are in unrealized gains positions. Most of them are in unrealized loss positions on the fixed income side. You start automatically realizing losses, which obviously is burdening the IFRS result. Also the ZZR topic you mentioned is correct. Relatively quickly there will be no need anymore for additional ZZR fundings in the German market generally, but also for us. At least that as a driver for the realization of gains will fall away. It's obviously not the only driver there was in the past. It was a very significant one and this one will no longer be there. Many moving parts indeed.
The only thing I can say is that it's I mean, the whole industry and also we here have a lot of experience in you know, muddling through these various accounting standards and to balance them one or the other way. That's what we are also going to try going forward. But yes, more generally I'm very happy with the interest rate increase because long term it you know will be significant upside and everything in between will be noise anyway. But you know that. Cut renewals mid-year, I mean, yeah, I mean nothing really new here.
The general statement still is as long as a business is exceeding our profitability threshold, which is fully reflecting the cost of risk, cost of capital and these kind of things, and as long as the business is above that, we are happy to write it. Fully incorporating our most current assumption on inflation and obviously also on model changes, where we include whatever we learned from recent cat seasons and the most recent scientific research, which in itself will also drive prices up of course somewhat everything else being unchanged. If then the profitability level can still be met.
If we were able to increase prices in line with our model and inflation updates, then we continue to be very positive on that line of business because long term it continues to be one of the most profitable ones we have.
Sorry, can I just ask, on the investment return, why are you sticking with the target ROI for the year in the circumstances? I mean, you kind of almost would be forgiven for particularly cutting that particular target given the noise you've talked about. I mean, is it because you still have some unrealized gains left to fall back on or is just this Q1 noise that you think will unwind or?
Well, indeed there are some unrealized gains left but I wouldn't say that's the main reason. I mean it's early in the year still. A lot of movement still possible and then there are also asset classes which have been benefiting quite a lot in the recent environment. We were benefiting from you know, commodities for example.
Mm-hmm.
Also, inflation-linked bonds, you know, performed obviously very well. There, there's always an offset. Uncertainties are also in that area. I mentioned that the uncertainties of the capital markets are quite high as well. It remains to be seen. On the interest rate side it's clearly not helping at all. There you're right.
Okay, thanks.
The next question is from the line of Thomas Fossard from HSBC. Please go ahead.
Oh yes, good morning everyone. Had a question regarding to your slightly above EUR 100 million provision for the war in Ukraine. Just wanted to check with you if you could add a bit of a better granularity around, you know, how we should think about this number in the context of, you know, the Munich Re group and exposure. Have you potentially spotted any lines where you have overweight, underweight, exposure and maybe if you could help us to better understand how we come to this EUR 100 million number and what could be a kind of range of expectations for a kind of ultimate loss expectation. I know it's still very early days, but anything around EUR 100 could be interesting.
The second question would be related to COVID-19 mortality. So actually EUR 150 million of additional claims over EUR 300 million full year. Maybe you could say a word on, you know, how you're viewing things. Where the 150 were coming from, if you noticed any, you know, true-up from previous quarters. Here also a bit more granularity, 150, just to put in perspective the EUR 300 million unchanged guidance for the year. Thank you.
Yeah. Well, thank you, Thomas. Yeah, let's start with the first one. Let me maybe start with a quick reminder how we generally approach the way we did the reserving for the Russia-Ukraine complex in Q1. I mean, very obviously, we can only reserve for claims that already incurred and for reinstatement premiums which we expect to pay. These EUR 100 million in Q1 is for specialty lines and encompasses losses that we consider to be covered and also have been incurred with a sufficiently high probability. Both topics are relevant here because that's what the applicable accounting standards tell us. These claims have not necessarily been notified to us.
In other words, a significant part of the provision is IBNR. We're obviously closely monitoring the situation and any potential additional losses which might emerge. At this point in time, it's highly speculative because when you talk about IBNR, I mean, you could have a long debate what line really is affected because it's all speculative. Therefore, I'm also not in a position to give any breakdowns on lines of businesses. In my view, it just doesn't make sense at this point in time. More generally, on the reserving topic, a theme we heard a lot already today is the question, why didn't you reserve more? Obviously a question you could ask. Well, again, we can only reserve for claims where we think the probability is reasonably high enough.
Of course there's leeway. There's judgment in that question, as you're all aware of that. Using that judgment just to increase the prudence in our reserve position, which is anyway already very prudent, and where I highlight in our last call already that we significantly increased the prudence at Q4. What's the point to some extent, huh? Why should we have done that if there's no real evidence? Of course, we could have been more prudent. You always can. We didn't see the point why we should do that in that particular point in time, and especially also in front of the background that we increased the prudence position overall only at Q4.
There's certain limitations, even for Munich Re, how prudent you reasonably can be and should be, I think, in that business.
Christoph, if I may. I mean, the fact that you are really expecting to book some, or to have some reinstatement premium to pay, I get that this is implying that ultimately you are expecting already these, the numbers to be much higher than the EUR 100 million, because I guess that with just EUR 100 million in claims, you probably won't have, to pay a reinstatement premium. I'm not sure I understand, you know, how I can reconcile both sides of the equation. Maybe I'm wrong.
No, you're not wrong. What I can confirm is that for some of the primary business in that area we have written that we have reinsurance protection in place, which we expect to offset or which offload the claims from us into that reinsurance. I can fully confirm that.
Mr. Fossard, have you finished your question?
The second question.
Yeah, I think it.
The second was on COVID, I think. Yeah.
You're-
The COVID mortality development, I think what I can confirm is that the development is fully in line with what we expected. The 150 out of the 300 of the budget is more or less what we would have expected for the first quarter anyway. The major part of that was, well, it was from the US. And also in recent weeks, we saw also, as you know, that the COVID development in the United States being much more favorable. Claims numbers coming down significantly also in the United States in the course of the last month or so, which is also in line with what we expected. There's no true-up. We are booking all these numbers always with a significant share of IBNR.
At this point in time, there's no reason at all to believe that this IBNR is not sufficient and that any negative true-up would be necessary.
Thank you, Christoph.
The next question is from the line of Iain Pearce from Credit Suisse. Please go ahead.
Hi. Morning, everyone. Thanks for taking my questions. The first one was just on the write-downs of the fixed income assets in Russia and Ukraine. If you could just give us some sort of guidance around what the potential downside or risk of further downgrades or write-offs here is, and sort of if you were to write those down to zero, what impact that might have. Sounds like it would be less than what you've taken in Q1, but if you could just sort of give us some guidance around that would be very useful. The second one was just if you could just talk to us a little bit about how you're thinking about your leverage position. Obviously, you're redeeming some subordinated debt later this month from already a very low starting point in terms of leverage.
Just how you're thinking about that, why you want to redeem those subordinated debts later this month, that would be very useful. Thank you.
Yeah. Well, thank you. Fixed income write-downs, I think I mentioned it earlier. We wrote down the sovereign bonds to a level around 20% or close to below 20%. The corporate slightly higher. Altogether, you're still in order of magnitude of the 20s somewhere. This is our interpretation of what the market value of these bonds currently is. As you know, liquidity in these markets is very limited. So it is not always easy to come up with market values. That's our interpretation of the current market value, and therefore development is possible in the future in both ways. It could go up, could also go down. As a rule of thumb, the write-down was 80% of the exposure.
In a worst case, a write-down to zero would mean you know, 20% of the original exposure would still have to be written down. Leverage, I mean, there's a short-term and a long-term answer. The short-term answer is that these bonds are facing the first call date now. Obviously it's favorable to call them because the interest rate environment still is lower than what it was 10 years back when we issued these bonds. Therefore, the call is a very natural reaction, and I think everybody in the capital markets expected it to happen anyway. Not unusual at all. Strategically, I think we said many times that we could imagine a leverage position which is higher than where we currently are.
It now automatically increased a little bit because the equity went down. Still strategically, we always said we could imagine it to go up. This is a long-term statement and so nothing in the short term can be deducted from that. We are not always not only, of course, not looking at our own balance sheet, but also of course market environment and other things when it comes to that question. Long-term strategy, completely unchanged.
Thank you.
The next question is from the line of Ashik Musaddi from Morgan Stanley. Please go ahead.
Thank you, and good morning, Christoph. Just a couple of questions I have is, first of all, on this point about strategically, you're about leverage. I mean, clearly there is a bit of dislocation in the market. I mean, a lot of the stocks have come down quite a lot, and your balance sheet is still very, very strong. I mean, you have a solvency ratio of 230%. Your leverage is probably one of the best in the sector. Is there any view you have in terms of capitalizing your balance sheet to do M&A, given that there is a bit of dislocation in the market? Or would you say that's definitely not on the table because there's just a lot of uncertainty in the market, so probably it's better to stay away? That's the first question.
I mean, I'm just going back to your previous commentary in past. I mean, you have been, I think looking at specialty line businesses in past. Just thinking about, is there anything we should think again? Secondly, like, COVID losses have been way better than your normal budget would be, which is a bit different to what we are hearing from the other competitors or the players in the market. I mean, more or less everywhere we hear that, okay, the first quarter hadn't been that benign compared to what an expectation would have been. What really went right in this quarter? Any color on that would be very helpful. Thank you.
Yeah. Well, thank you. First, M&A, nothing changed really. I think we always set the right target with the right price. We would always look into that and then, you know, take our conclusions and then would be open at least for something. More realistically, we never saw anything attractive enough, at least not any big target, over the last decade, probably. Therefore, I think it continues to be pretty remote that something would happen anytime soon, but we would be generally open. COVID losses, frankly, it's hard-
Sorry, cat losses. I meant cat losses, not COVID losses. Sorry.
Nat Cat. Sorry, I understood COVID. Thank you.
I'm sorry for that. Sorry.
Yeah, cat losses, I'm not sure where the difference is really. I mean, if you look at the size of our Australian flood, I think it looks reasonable, given also, I mean, the event that happened there. If you then look at our exposure on the European windstorm, maybe that's a little bit smaller than you would have expected. I don't know. Generally, I think that our underwriting practices, I mean, in also in the large loss area, they have their merits, of course. I'm not sure. I mean, it's a single quarter, and I don't know exactly what's going on with our peers.
Yeah, I mean, we focus on underwriting to, you know, issuing the right risks on our balance sheet at the right price, and then eventually, maybe with the right portion of luck, you end up having a good result. I don't know. It's hard to comment further on that. Of course, in these numbers, there was this release of large loss provisions, not unusual at all for us. They're the. I mean, it's happening quite often, to be honest, that in some quarters, we release some of the large loss provisions, because they are similarly like in any other provision or like the basic loss provisions as well.
We book the initial loss picks in a very conservative way and then regularly enjoy some positive run-off eventually at some point in time. You have some flexibility when to book it, but sometimes you get client reports in which to some extent trigger or at least move you towards releasing something in a particular quarter, and then you release it. I think that that's what happened here in the first quarter overall.
Thank you. Thank you.
Next question is from the line of Vinit Malhotra from Mediobanca. Please go ahead.
Yes, good morning, Christoph. Thank you. For me, the first question would come back to sort of inflation and COVID as the topics, please. On inflation, I mean, I hear your commentary today. Then, you know, when I see some of the peers or generally, I mean, there's been some negative prior year development from Nat Cat in many other reinsurers because of inflation. How much I mean, obviously, you said Munich Re has had a history of releasing Nat Cat or large loss PYDs. But this time, the difference is inflation is quite a surprise and a shock, sort of. Could you just comment on how inflation has played a role in this release? I know it's a small EUR 100 million, but the direction is still important.
How has inflation played a role in that EUR 100 million release of Nat Cat prior years? Second question is on COVID. I remember in the fourth quarter, there was extensive discussion about how the reserve setting was quite prudent, quite conservative. I'm just curious, do you know that one more quarter has gone by, would you say that the prudence was necessary? If it can still be released, or is there some trends that indicate that it was rather too prudent, for instance? I'm not looking for a 2% up rather than a 2% down, if you like, if anything, from fourth quarter. Thank you.
Yeah. First, inflation in the context of large loss provisioning. I think I'd like to start with the statement that it's very much case by case. How this works is that our claims colleagues, they look in each individual of these large losses very much in detail, based on prudent assumptions and reserve for them with an initial loss pick, which is conservative. One of the assumptions they take, but by far not the only one, is, of course, also inflation, particularly in the cat area, a phenomenon which is called post-loss amplification. That after an event, we anyway assume that certain parts you need to replace are particularly expensive due to the lack of supply in the particular affected area.
Inflation post-loss amplification is always part of what's going on when we do reserving for cat losses. But obviously, there are much more drivers. As you can imagine, initially, a hurricane, a typhoon, whatever event is happening, you do not have a lot of information. Also, the claims reports from our clients, they come in much later. The initial pick is based on statistical evidence, scientific evidence, based on research papers, based on first insights of our teams on the ground, in a bottom-up way. But it's based to a limited extent on actual claims reporting only because you do not have any reports at the time when you have to set up the reserves for the first time.
Mm-hmm.
Therefore, the level of uncertainty is enormously high. Again, we try to be on the very prudent side, so it's not unusual that you have a positive run-off at all. The initial pick, you have a lot of leeway. You could do it either way. Inflation is probably not the most relevant part of that uncertainty.
Mm-hmm.
COVID-19, I mean, one quarter is really not a long time for developments here. EUR 300 million expectation for the year, EUR 150 million after the first quarter. I think we'll finally know much more in fall this year, because our assumption currently is, of course, that we do not see any significant wave anymore. That's also what we said when we initially said our expectation was EUR 300 million. The basis for that is, and we call it an evidence-based approach, that we budget based on the evidence we currently have. There is no evidence at this point in time for an additional wave in the second half of the year. Obviously, that doesn't mean it's impossible. If it would happen, our claims number would increase.
Therefore, at this point in time, I think a discussion about if there's prudence or not is a little bit premature. Because in any case, we would have to await the second half of the year and observe the claims development happening then in our major markets.
Sure, Christoph. I'm in the fourth quarter prudence, not first quarter. Just to be clear. If-
Yeah, we keep it on our balance, the prudence. It's still there to an extent.
Yeah. Okay. Thank you, Christoph.
The next question is from the line of Will Hardcastle from UBS. Please go ahead.
Oh, hi. Morning, everyone. Just following up on the ZZR interaction with the rapidly increasing interest rates. I guess, can you try and help us to quantify the likely year-on-year incremental cash requirement and how that compares to recent years? Or at least in terms of scale. I guess we could feasibly be concerned, given there's not many fixed income assets to realize gain from, as you said. If we look at slide 32, just a better understanding perhaps of what's included within the EUR 4 billion non-fixed income securities. Just wondering how liquid these are. Thanks. Second one, on Russia. I'll give it a go because it's not been noted yet. Just trying to confirm if there's anything in here for the aircraft leasing.
More importantly on that, even if you don't want to say for that, but do you have, you know, reinsurance or retro protection to limit the exposure here? And are we talking about this on the primary side or the reinsurance? Thanks.
Yeah, ZZR. First, maybe, if it's of general interest, a quick reminder on how the mechanics of the ZZR works in general. It it's a provision which we have to set up to close the gap between the interest rate in the market and the guaranteed interest rate, which has traditionally been sold in the German life insurance. The bigger the gap is, the more you have to fund the ZZR, but it has been funded heavily for the whole industry already, over the last decade or so. Therefore, the remaining number to be funded is very low.
On top of that now, with the interest rate going up, I think at least some players in the industry are especially if interest rates would continue to rise relatively quickly now in a situation that they would be in a position to release ZZR. To no longer fund it, but release it, given the fact that then the market rates are maybe even higher already than the relevant rate used for the ZZR calculation. It might turn depending on future interest rate development in Europe, the sort of euro rates. Therefore, from a liquidity perspective, I think that was your question, it's no concern at all because funding requirements go down significantly anyway.
At the same time, the unrealized gains we still have, they are liquid enough that we don't need to be concerned here. Despite the fact that of the reserves we still have, of course, a significant portion is also quite illiquid because we have illiquid investments, you know, that participation, some private equities. These kind of things tend to be less liquid. The part of the reserves which is still liquid, especially, for ZZR purposes, is clearly sufficient. That's our current view. On Russia, Ukraine, retro reinsurance, I think I mean, retro is a different story, but reinsurance cover we hold supporting the primary reinsurance business we have in that area.
Retro side, we do not assume that we get any offset from that.
That's great. Thank you.
The next question is from the line of James Shuck from Citi. Please go ahead.
Oh, hi. Good morning, everybody. My 2 questions. Firstly, on the inflation topic, just keen to get some insight into the 2021 and 2022 loss picks. When you set those, what were the kind of assumptions around any transitory or not view on commodities and material pricing? Obviously, things have continued to rise. I'm just wondering to what extent that was priced in in 2021 and in the current year, 2022. Also kind of to what extent, if you captured any forward-looking view on wage inflation within those loss picks. The second question, just around the P&C Re growth, which was very strong, on the GWP side. Can you just shed a bit more light into where that came from?
Perhaps giving some figures around structured products, risk solutions and the core reinsurance business. Also keen to get any view into what impact this will have on the SCR and how it's diversifying away in the capital requirements. Thank you.
Yeah, James. Thank you. In inflation picks, I mean, obviously, there's always a development. 2021, for example, we started into the year in an environment where the inflation was measured in today's terms, significantly lower than where we are today. What we did at the end of 2021, we changed some of the picks already in the first year, increased it slightly in the course of our reserve strengthening, and on top of that, put a buffer. That was the additional prudence I was commenting on before. That was part of that. In other words, we are regularly checking picks. One, we do the initial loss reserving, so the initial loss pick.
What we always take into consideration is the most recent inflation assumption, as given by our economists, but then of course adapted for the particular line of business because it's not all related to CPI, but there are various inflationary drivers behind it. We translate that. The actuary is translated into an inflation assumption for the particular line of business. Obviously also there's a certain timing in that. We do not expect inflation to remain on a very high level forever. But also our economists put in an assumption like it will be a certain percentage number this year and then another one next year, and then a third year, and so on and so forth. But it's a trajectory more than anything else.
This is reflected in also the reserving. Obviously, the actuaries look also at the duration of the particular portfolio and then also deduct the inflation to be applied to that portfolio given the expected duration. We regularly assess that, reassess that already during the first year. When during the first year we find out that the loss picks potentially have been a little bit light, we increase them immediately again. It remains to be seen if this is going to happen in 2022 again. That's too early to tell. In 2021, as I said, we did that in some lines of business where it deemed to be necessary.
If you look at the overall reserve prudence and our overall reserve position, it continues to be very, very stable, very strong. These elements, I would call them technical details in an overall set of which continues to be very strong.
Just on the wage inflation point within that.
Sorry, I didn't get that.
Sorry. Just on the wage inflation assumptions as well. I understand the commodities and materials, but are you anticipating an increase in wage inflation in your loss picks?
Yes. Yes, we do. It depends on market by market, line by line, so that there's not a single number I could give you. We are also looking at wage inflation. That is something I can confirm. The GWP growth, I think the answer is finally pretty simple across the board, more or less everywhere. We are not focusing at particular lines of business or certain geographies. It is really as long as the contract is above the minimum profitability threshold, we're happy to write that business. Over the course of the last year, that happened to be the case more or less nearly everywhere.
The impact from the SCR?
With the SCR, you—I mean, diversification is still in place, so I wouldn't expect any different development than like what we saw Q4, where you were able, I think, to see an SCR development, the SCR growing proportionally with premium growth. The reinsurance or the technical SCR, the insurance risk SCR growing proportionally with premiums. That's what we saw. The diversification is fully intact, and we do not have an over proportional risk intensity in that business.
Okay, that's great. Thank you very much, Christoph.
The next question is from the line of Roland Pfänder from ODDO BHF. Please go ahead.
Yes, good morning. Two questions on ERGO from my side, please. P&C Germany showed a very nice organic volume growth of around 9%. Is this price-driven or are there also market share gains included? Maybe you could also touch on motor pricing in Germany. What's the current trend there? And then, you had a nice improvement in legal protection in ERGO International. What's behind this? Thank you.
Yeah. P&C Germany, the growth is indeed nice. Clearly above market expectation in our view. We do not have market numbers for Q1 yet, so we cannot judge really finally, but we think it's clearly above market. To answer your question, yes, we think we gained market share in that quarter again. But some of it is also price-driven. It's not all extension of the business. Some of it is also price-driven. All in all, we think the market is our book is well intact and the market is in not an unreasonable shape when it comes to profitability. That's also one of the reason why we grow strongly into that market. This is also true for the motor business.
Legal Protection International, we have a number of entities run by ERGO, which offer legal protection insurance in various European markets, mostly European markets. We report them together because we run them as a global line. The combined ratio has been under some pressure recently, but in Q1, the result improved. That's why we highlighted in our release that the legal protection result came in better.
Okay, thank you.
We have a follow-up question from the line of Thomas Fossard from HSBC. Please go ahead.
Yes, sorry, Christoph. Just coming back to the question from James on better understanding the 25% growth in P&C Re. I think that's in your introductory comments, you specifically mentioned resilient strong growth, maybe you could say a word on this. Also given the big debate on, you know, property cat exposure, could you refresh our mind year to date, how much you grow your property cat book, and how much of this growth was price-driven versus volume-driven? Thank you.
Yeah, sure. I mean, risk solutions was a significant driver, but also the core reinsurance business. Don't forget the FX, which also supported the growth significantly because the US dollar strengthened so much. On the particular question on one/four, I think what I can report on one/four is that the CAT exposure overall was stable.
If I may, Christoph, stable at Q1, year to date, I mean, how much would that be and versus pricing, which I guess is likely to be slightly above 0.7% you reported at Q1, and the -0.1% you reported at Q1.
I mean, for the mid-year renewals, it's too early to speak about expectations anyway. What we will do is we of course incorporate all the inflation assumptions, but also the model changes into our pricing, now with the 1/6, 1/7 renewals coming up. Then again, if profitability thresholds are met, then we'll be happy to write the business, also CAT business, because it's again, long-term, one of the most profitable lines of business. We are not generally frightened by CAT business. But it has to meet certain requirements. That's very important. Otherwise we don't continue it. In 1/4, as I mentioned, it was stable. It was stable because we did write more CAT in certain areas and less CAT in other areas.
We are not innocently writing CAT wherever it, you know, comes along. Where it meets the criteria we have to apply, and we do apply, there we'll be happy to grow the business because we're convinced we are making money there.
Excellent. Thank you.
The next follow-up is from the line of Vinit Malhotra. Please go ahead.
Yes. Good morning. Thanks. Just very quickly, if I remind myself of the COVID loss booking pattern, you know, a similar situation, unknown loss, so I'm comparing it to Ukraine really at the moment. I mean, it seems that, I mean, you're following the same rule of we won't book until we know more, but many others in the market don't do that. I'm just curious if there's been a discussion in the company or in the board level that should this what's the basis for this different accounting approach to this situation? Is it possible to review it? Is it being reviewed? Is it set in stone as a Munich Re way? Just any thoughts would be helpful. Thank you.
It's not easy to comment on peers, so I better don't do that, but maybe the comparison between COVID and the situation now. I think the legal uncertainties are significantly higher this time than they were with COVID. I admit also with COVID for some lines, the legal uncertainties were quite high. I think they are significantly higher this time. On top of that, I mean, I think in the COVID crisis, after Q1, the level of claims we had to expect were much clearer than this time. The development pattern is completely different.
Thirdly, if you look back at how we did handle the COVID situation, we also did not come up with, you know, with an ultimate after Q1, given the uncertainties back then, where, again, the situation was probably even just a little bit simpler than this time. Also back then we didn't do so. I think any number I would've given you two years back for COVID in Q1, I think it would've been wrong. Also in hindsight, I think it was the right approach to wait a little bit to have clarity and then release a number which is reliable enough that it can also stand for more than just a couple of months, right? That's where we currently stand.
In any case, whatever incurred, as I said, we build up the provision based on wherever we think with the probability high enough that claims have been incurred. The other provision is fully booked. Everything else, we'll see later on. I'm sure there will be more claims, the situation develops, the war is ongoing, the sanctions are still there. Who is able to look into the future and book a number based on that? I have difficulties how to do that properly.
Yeah. Appreciate that. Thank you, Christoph.
There are no more questions at this time. I hand back to Christian Becker-Hussong for closing comments.
Yeah. Thank you. Not much to add from my side, aside from saying thanks for joining. Pleasure talking to you as always. Hope to see you all soon. And, if you have further questions, please don't hesitate to get in touch with us. Thanks again. Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.