Good morning or good afternoon. Welcome to Swiss Re annual results 2021 conference call. Please note that today's conference is being recorded. At this time, it's my pleasure to hand over to Christian Mumenthaler, Group CEO. Please go ahead, sir.
Thank you very much, and good morning or good afternoon to everyone. I hope you are healthy and safe wherever you are. I'm here with John Dacey, our Group CFO, and Thierry Léger, our Group Chief Underwriting Officer, and Thomas Bohun, our Head of Investor Relations. Before we go to Q&A, allow me to make just a few remarks around things I think might be useful for you or how I see certain things, and then we'll move over to Q&A shortly. The first one is around Life and Health and what happened Q3, Q4. I think we analyzed the data, obviously the CDC data, the official data, what you can see here.
It is quite remarkable in my mind that so little was reported around it, and that's probably part of the issue, because the U.S. has really lived through a drama in this period of time. You can see in the CDC statistics, which looks at excess mortality, that even in the younger ages, for example, age 25 to 44, where in Europe and certainly in Switzerland, we have not seen any excess mortality throughout the pandemic. And sometimes it was nearly 100% higher mortality in certain weeks in the fall. Quite dramatic, we only have hypothesis. There's no research yet done on what the cause is for that. It's probably a combination of the low vaccination rate of people in the U.S.
There might be a component of hospitals being full or people being afraid to go to the hospital. It could be linked to the general health of the population, where, for example, obesity is a key risk factor, and obviously it's much more spread in the U.S. than in Europe. In any case, you know, there was a significant wave. In contrast to Europe, where it was much smaller than the year before. In the U.S., it was all in all bigger than in the year before.
All of this said, we have now all of our peers come out with figures, and when I analyze these figures overall, compared to last year, compared to first three quarters, et cetera, I come to the conclusion that we're actually in line with them. We just have the biggest book in the U.S., but that's known. It's also one of the oldest books in the U.S., but there's nothing standing out really, apart from just what has happened to the U.S. population in terms of excess death. It's a large book, as I said. It has been very profitable in the past. As you know, we have always assumed pandemic would come. We've charged for that. The overall pandemic has helped us to increase margins now by quite a bit.
I continue to be very optimistic about this book of business, which is now more profitable than ever before. As I said this morning, I expect a payback within a reasonable period of time. To me, this looks much more like, of course, spread over time, but a natural catastrophe that is in that sense well controlled risk taking. If I go over to P&C Re, I'm actually really happy about what we have achieved. This is according to our statistics, the fourth largest year in terms of NatC at losses. In that year, we were able to end up with a combined around 97%, which I think is extremely strong.
I remember very well the same call one year ago where we presented our renewals and there was a lot of disappointment around us shrinking and cutting, and we explained that it was the lower layers, the aggregates, et cetera, that were more exposed to climate change. Certainly it was satisfying for me to see over the year how other people have come to the same conclusion, started to follow that, and how these underwriting actions have actually saved us hundreds of millions of dollars throughout the year.
Not only do we have this combined ratio here, but I would also point out that if you combine it with Corporate Solutions, which is the way that all of my peers are reporting on P&C, the combined ratio would have been 95.8 for the whole P&C book, which I think is really good. Corporate Solutions itself, I probably don't need to say much. It's really in an excellent spot in all respects. The whole turnaround is over, and it's more focused towards the future now. You've seen our targets, so we're very polished about the current situation and pricing situation in Corporate Solutions. All of that leads us to these new targets.
Obviously, we tried to give a bit of guidance around 2022 because it's a particular year with COVID continuing certainly into Q1, as you could see in the U.S. We tried to give a bit of guidance there, but we also came to conclusion, and obviously a lot of feedback from you was also involved over the years that the 700 basis points plus risk-free is really not a very you know appropriate target in this environment. This is extremely obvious. We came to a conclusion, want to give something a bit more short-term.
We chose 2024 and a target of 14% ROE, which is a combination, of course, of COVID receding and then a number of factors we have discussed in the past, like the Life and Health, you know, the pre-2004 business that has an impact until including the year 2022. We'll give some relief starting 2023. We see an environment where even if, you know, rates don't go up that much, there's possibilities to grow, and if you keep costs under control, you can achieve this 14%. We also hinted that IFRS, when in full, modeling work around IFRS, we still need to take some decisions around some accounting policies.
From everything we're gathering, this is definitely a positive for the type of business we're writing in Life and Health, because IFRS is the biggest driver in recognizing profit in a shorter period of time compared to GAAP, where any increase in profits you book in an economic way is distributed over a very long period of time. You see changes year on year are very slow compared to what you saw us do on the EVM side. To the renewals, I think we're positive about that. Which is very good about the book of business, as I said, that we wrote last year, so we built on that. We don't, you know, push growth too much, but 6% is I think a good number.
Price increases are probably the same with all competitors I've seen. Not everybody has the same method of how to show that. Basically, the outcome is that, particularly thanks to some shifts in the portfolio, we can lower further the guidance for P&C Re by 1 point. You know, the growth in that NatC at, obviously, this could be worrying. We are very happy about that, how we have positioned our book. I would also remind people that even if we were higher than budget in last year, in reality, the combined ratio was below 80%. Not being on target doesn't mean you have a bad outcome at all. To me, these were the main points I just wanted to share with all of you.
With that, I hand over to Thomas for the Q&A.
Thank you, Christian, and hello to all of you, from my side as well. Before we start, if I could remind you to limit yourself to two questions and then rejoin the queue if you have follow-up questions. With that, operator, could we have the first question, please?
The first question comes from Kamran Hossain from JP Morgan. Please go ahead.
Sorry, afternoon, everyone. The first question is just on the 2024 target of 14%. Now, this might sound slightly unfair, but I summed up the last five years return on equity, and I get something like 7%. Can you maybe talk about how to give people a little bit more confidence that, you know, from being, you know, having seen quite a lot of bad luck over the last five years as a company, that you can hit the 2024 target of 14%? Kind of within that, kind of the second part of the question, can you maybe talk about kind of to what extent you've kind of considered, you know, additional bad luck, et cetera, in the cat budget for the coming year? Thank you.
Christian, do you wanna take the first question?
Yeah, maybe. Obviously, we don't assume to continue the bad luck. We have to trust our risk assessment. We constantly, you know, adapt our risk assessment, as you know, when we see things changing. The way you get there. By the way, it's not very far away from the average analyst estimate. I think within your community, you actually have some confidence that this is where we're going. You take last year, you take COVID out, you're already at the 11.7%. There's probably other things you want to normalize. As I showed on the slide this morning, there's a series of things that are gonna help. We don't assume huge increases in prices anymore. I don't think that's realistic.
As you know, these price increases get earned over two years' time in GAAP, you have a certain smear effect, a bit of visibility around that. Then the other driver is to continue to increase the scale without increasing costs. I don't think it's a particularly challenging target, but it's not that challenging to get there mathematically from what we see today. Again, as I said, obviously we're not now, you know, increasing loss costs beyond what we think is necessary in our models or assume we're gonna have constant pandemics or above average NatC at.
Kamran, it's John Dacey. Maybe the second part, if I understand your interest, you know, we're not taking an optimistic view of losses on a going-forward basis. You've seen that we've made a material increase in the NatCat budget consistent with both some growth in the portfolio, but also an increase in the loss picks, some model adjustments along the way. We're comfortable that we've got this targeted correctly. We also think, as Christian mentioned this morning, on Life and Health, not only do we not expect a drag from COVID in 2024, but this important transition of the U.S. portfolio for the pre-2004 crossovers will have a tough impact in 2022, lightening up considerably in 2023 and 2024.
On the Life and Health side, we see that positively. The earn through gives us a high level of confidence both in P&C Re and in Corporate Solutions, that the current trajectory of improvements should continue. We don't need a lot more price increase on what we have today to, as Christian said, be fairly confident we'll find our way to the 14%.
Thank you, Kamran. Could we have the next question, please?
The next question comes from Will Hardcastle from UBS. Please go ahead.
Afternoon, everyone. Thanks for taking the questions. The first one is on this dividend. Just my starting point would be to assume some form of year-on-year growth. Now,
Maybe the wrong assumption, but given the capital base is at the midpoint of the range, even I'm assuming that's even after the January renewal, that NatCat grows. I assume that probably puts you just around the $4 billion-$5 billion above the bottom end of the range. Perhaps can you give us a bit more clarity on the opportunities that you're holding back from growing the dividend, and particularly in light of the fact that you've got an attractive 14% ROE by 2024. Second question is on casualty reserves. It looks like they've increased $500 million in 2021, of which most of that was in the second half. The report suggested North American liability and cyber. Just any more clarity you can give on that would be helpful.
Particularly maybe on the cyber, where it'd be nice to get sort of what that size is relative to the premium, which I think is only around $300 million-$400 million when we last discussed. Thanks.
Will, it's John Dacey again. On the dividend, you're right, the capital position is strong. Back a little bit to Christian's point, we see real opportunities for growth in all three of our major businesses. We leave the L&H side because of this, it's not that important in terms of capital consumption. The P&C Re, you remember we started off a year ago, the January renewals at - 11%, and we finished the year with a positive premium earned of 6% for the year.
We think during the course of the renewals in April, June and July, there's gonna be real opportunities for us to continue to write more well-priced business for P&C that we'll take advantage of as long as this price environment holds up. We've got no reason, frankly, given the demand we observed in January 1, that won't be the case. On Life and Health, you see a significant number of transactions in continental Europe especially, but also the United States that we've been booking last year and believe that we can continue to bring home this year.
When we release our economic earnings, I think you'll see some of that capital deployment show up in the EVM numbers a little more clearly than they might have been just on premiums. Again, another valuable deployment of that capital. Finally, on Corporate Solutions, I'd say, after two years of shrinking the book, premiums are up 6.5% in 2021. That trajectory will also continue strongly, partly because of the price environment that we see there, but partly because of, you know, what they see are real opportunities to grow in the lines that they're good at, not returning to those lines we exited. We exited them for a reason. Overall, I'm comfortable that that deployment is in front of us. That's on, you know, what are we gonna use capital for.
On the other question of, you know, why didn't we move it up? I guess, you know, my view is a 6% dividend yield in Swiss francs these days remains at the upper end of, you know, what we view as our competitors. It feels pretty robust for existing shareholders. I think if we find ourselves at year-end with too much capital, it'll be a nice problem to have, and we'll reevaluate what we do as we go into 2023. For now, deploying the capital makes as much sense as some cosmetic increase in that dividend number. On the casualty reserves, yes, they've been increased.
If you look on the January one renewals, this book is probably a bit bigger than what you've indicated overall for casualty. The $3.4 billion was, I think, the renewal number on the chart. Yeah, we took the opportunity to repurpose some reserves which were redundant in certain lines, property and accident and health in particular, into some of the casualty that's affected by social inflation, in particular U.S. liability. In that case, you know, we continue to evaluate what's appropriate. Net, I think it's important that the prior year development for P&C Re was positive, and we feel that we're in pretty good shape in terms of individual reserves.
Thank you, Will. Could we have the next question, please?
The next question comes from Andrew Ritchie from Autonomous Research. Please go ahead.
Oh, hi there. I have a question just on the 2022 guidance, which is 10% ROE. I mean, if I sort of back out, and obviously you've indicated the COVID allowance in that 2022 number, there isn't much implied earnings growth ex-COVID. I mean, given you're talking about growth of the P&C book and further improvements in margins, what's going the other way? Is it simply that the investment return was unsustainably high in 2021, or are there higher losses to be expected in 1Q? Or what is it that's going the other way? Because it doesn't seem that you're really expecting any earnings growth ex-COVID. I guess this is sort of linked to maybe the question you just answered.
I got a sense speaking to IR this morning that there was an element of looking at loss picks at year-end, vis-à-vis inflation. Can you give any color as to that? I'm talking about current year, I suppose, not prior year, and in terms of whether there's sort of true ups or additional prudence put in to current year loss picks in respect of the inflation topic in Q4. Thanks.
Andrew, I'll take the first one and give Thierry the question on loss picks. On this 14% return, you know, between now and then, we actually expect to retain earnings. We think we're gonna be profitable on a GAAP basis in 2022, 2023. The, you know, ceteris paribus, the E part of that equation should grow. The 14% will be on a higher base. We'll see where we land and what impact interest rates has or doesn't have along the way. We don't think that our investment income is unsustainable.
We're very clear on the yield components of that and where we've been able to benefit in some cases from the private equity portfolio, for example, in 2021. I think, you know, there's a certain level of uncertainty inherent by nature in our business. For us to put this number of 14% out, very different than, you know, say a hundred basis points over a risk-free, I think shows a certain level of confidence that we're going to achieve that. If one or two things don't go exactly the way we think we can, we still feel responsible to deliver that kind of a number on what we think will be a higher overall shareholders equity.
I don't think we're sandbagging anything here right now. Let's continue that discussion over the coming quarters as we show the profitability. Thierry ?
Andrew, this is Thierry. On the loss picks, you remember that a year ago we did elaborate quite a bit on inflation. There we differentiate between social inflation and economic inflation, and we told you about certain actions we had taken in terms of our portfolio and further actions we would take during the year because we actually were watching both social inflation and economic inflation very closely. On social inflation, we predicted that we think once the U.S. courts reopen, that social inflation would start again. We have seen some of that in the second half by the end of last year to indeed happen. On the economic inflation, we all know that the outlook has changed.
As a result of these, we have indeed been more careful in choosing our loss picks and adjust them to the environment we have seen.
It was just been pointed out to me that I might not have answered your question. As you know, excuse me for giving the answer to the question on 2024. On 2022, if that was where your focus was, I think in the result of 2021, we had strong prior year development, both for Corporate Solutions and to a lesser degree for P&C Re. We had the underlying P&C, Life and Health re actually perform very, very strongly outside of COVID. We don't think that underlying for Life and Health necessarily is going to be there. You remove COVID and we're not back up to over $1 billion, which is what we would have shown in Life and Health in 2021.
We're not counting necessarily on positive prior year in that calculation. So, you know, the 10% is based on I think some reasonably prudent estimates of what the business will deliver, and if there's upside to it, we'll welcome it.
Thank you, Andrew. Could we have the next question, please?
The next question comes from Simon Fössmeier from Vontobel. Please go ahead.
Good afternoon. It's Simon from Vontobel. Two questions. The first relates to net cats. Some of your peers, including Zurich and AXA and SCOR, have indicated that they want to reduce their Net Cat exposure, and you're growing your exposure. I understand the profitability, but maybe you could elaborate on the competitive landscape if the withdrawal of others is actually making this more attractive or not. The second question is on the divisional targets for this year, if there is a link to management compensation. If I may squeeze in question two B, any guess on the COVID-19 reserves, in particular the IBNR reserves, for business interruption? When do you think you can start to release the IBNR?
Does this depend mainly on the losses in the U.S. and the timing of when U.S. courts will hear the cases, or are there any other significant drivers for that? Thank you.
Yeah. Maybe I answer both questions. I think on NatC at, it's very dependent on what business you are and what your investor base is and what the expectations is. Clearly, some of this volatility that hit the primary companies is much less tolerated and welcome therefore, I think, for good reason. It's just a different business model. We're not astonished that you see a lot of the primary companies wanting to reduce Vola. Some of the Vola came from the cycle before. You remember that there was some excellent years in the NatC at 2012-2015, and primaries started to retain more risk, and then there was some bad surprises through all these periods. To us, that's good.
That basically means we are more in need. Then within the reinsurance sector, you have those who are heavily dependent on retrocession and those like us who are not. If you depend on retrocession, the retro prices have gone up more than the reinsurance prices. This, the average charge has become negative, and that makes it very difficult to write too much of this business. Then finally, NatC at obviously looks much better on a highly diversified balance sheet. We're very diversified in terms of P&C and with the Life & Health component, which is very significant. As we showed, I think last or the one before that Investors' Day, you boost your returns very significantly depending on your ability to diversify this business.
I think it's really dependent who you are in the market and how you see that, but we still see ourselves as a natural home for NatC at risk with, I think, a very good track record through time. In terms of divisional targets, yes, absolutely. That's part of the compensation framework. The KPIs people have to achieve, everything gets broken down. This is, I guess, as you would expect. The IBNRs you seem to imply it's gonna be released. Of course, we at every point in time try to be, you know, cautiously reserved and have the right amount ready. The fact that we keep it means that what we're saying is we will probably need all of that.
Now, we start to have discussions now. As you know, there was a huge complexity because our clients themselves don't know the exact figures because a lot depends on, you know, court rulings all over the world. These court rulings are coming one by one, and then usually they go one level higher, and then another one to the ultimate court in the respective country. All of that can significantly influence their loss and then through that, our loss. We are on top of that. I actually still chair the group that is looking at that client by client. I have to say, I'm pleasantly surprised that the number of disputes is extremely low at this stage.
The potential contentious case are not that high. You know, I certainly hope that during 2022 we get more clarity around these legal rulings and therefore can start to close some of that, some of these reserves one way or the other.
Thank you, Simon. Could we have the next question, please?
The next question comes from Vinit Malhotra from Mediobanca. Please go ahead.
Yes, good afternoon. Thank you very much. So the first question is for Andrew and maybe even Thierry, the restructuring success we had seen in previous quarters, say Q3. I mean, could you give us a bit of reassurance that that is sort of still in place, still a topic, still very much focused? You know why I ask it, for example, in fourth quarter, the normalized combined ratio is about 97%, and I've been told that that's coming from both higher loss takes but also some mid-size losses, which is sort of the peak for secondary perils. Now, if you could just help us to feel a bit more reassured about this whole restructuring process that had been there for a while now and is hopefully still there.
Second question is on the COVID outlook mortality for 2022 of $600 million. I know that the 1Q was $570 million. You know, given the change in the age cohort and the severity of COVID claims, I mean, are you comfortable? Of course you are. But how can you? I mean, can you give us a bit more color on why $600 should be enough given that it's not very far from what 1Q 2021 was, and 1Q 2022 is also, of course, lower than 2021, but not that much lower either. I'm just curious as to your thoughts on that. Thank you.
Vinit, I'll take your first one. The restructuring that we announced a year ago, you remember, and Christian mentioned it again. We did actually pull back from frequency exposed layers that are particularly exposed to climate change. That's what we did. We have totally maintained that stance. You can rest totally assured that we haven't changed our approach in that. We have even continued at the January renewals to improve our positioning within those aggregate layers. We haven't reduced, but we have improved our structuring and positioning in those. I would also not read too much into the fourth quarter. I understand that you look at the number and you wonder whether there's a new trend or anything.
I wouldn't read too much into it. Look at the full year, 1997 or the 1995 that Christian mentioned. It's a super strong year. We did adapt in Q4 for what I mentioned before, mainly inflation. But you shouldn't read too much into this one. We have looked more in detail, obviously, into the NatCat renewals in January. Again, we did not go back to the areas we actually wanted to avoid before. We find ourselves actually very comfortable with where we are. We feel we have been able to choose our places quite nicely. The market is actually in quite high demand for NatCat protection. For us, we're actually very pleased to be in a strong position and really ready to exploit the opportunities on one-one.
Like Christian said before, I'm very positive about what we have achieved. If it resulted in 24% growth, then that's a good outcome.
Vinit, maybe on the COVID outlook. Look, to be clear, the pandemic will develop as the pandemic develops. We can't influence that. What we can say is based on what we've seen develop through the fourth quarter and into, you know, deep into February, I guess, is two things. One, in the United States, the case count has come down dramatically. This was the Omicron wave that went through the United States was as infectious as anything in the U.K. or the rest of Europe, but seems to have played itself out. The hospitalizations in ICUs are down if you look at a 14-day average, by 40% in the most recent periods.
Deaths are down less 25%-30%. We're, you know, our scientists remain challenged to explain the difference in death that Christian alluded to in his introduction in the United States to Europe, but they are coming down. We think the first quarter will continue to be a fairly heavy load for us. The combination of, you know, vaccinations, which, you know, in some states is over 80%, in other states it's, you know, below 60%. That plus Omicron, plus Delta, which seems to be the source of many of the deaths still coming through today, is the combination that we think will have this tailing off with what we know today.
A heavy first quarter, improvements in the second quarter and probably not much notable in the second half of the year in terms of insured losses for COVID.
Thank you, Vinit. Could we have the next question, please?
The next question comes from Ashik Musaddi from Morgan Stanley. Please go ahead.
Thank you, and good afternoon, everyone. Just a couple of questions I have is, Can you hear me? Yeah.
Yes, we can.
Yeah, sure. Just a couple of questions. I mean, first of all, I just want to understand about this ROE. Sorry to come back to this topic. I mean, how do you get to this 14% ROE? Especially given what is happening with interest rates. I mean, for example, last year, the unrealized gains reduced by $3 billion, and your book value reduced by $3 billion. So, I mean, how should we look at this 14% and book value given that interest rates are going up? I mean, should we be treating it as like, okay, book value X AOCI, or should we be treating it as no change in AOCI going forward? So how do we square these things at 14% and book value? So that would be helpful.
Basically, all I'm trying to understand is what is the net profit number we need to think about in three years' time in simple terms? Sorry. The second question is a 1% pricing benefit, i.e., 1% combined ratio improvement. Can we get some of the moving parts on that? Because I was just looking at it, 4% pricing benefit, but then you're saying higher loss assumption at the moment, 4%. But then you have increased your cat budget as well, $1.9 billion, which looks pretty high compared to, say, 2021 premium, 8%-9%. So what are the moving parts of this? How this 1% benefit is coming through would be very helpful to know. Is it largely because you are doing more cat business?
Because of that or anything else would be helpful. Thank you.
This is John. Actually, I'll try the first part and give Thierry the second question. Look, as I mentioned before, we expect to make money on both an economic and GAAP basis in 2022 and 2023. We would expect to retain earnings in both of those years. We've, you know, got some modest interest rate increases over the period. It's not just interest rates, but also credit spreads that matter with respect to the unrealized gains in the portfolio. I think you should not assume that we're getting to 14% ROE by shrinking the E. We would expect the E, the equity, to grow.
Why don't we give you some more information at the Investors' Day, which is coming up in April 7, where we'll talk both about the economic EVM results for the full year and some of the more granular thinking behind these targets that we've put out there.
Ashik, on your second question around the combined ratio improvement, despite actually the 4% price increase you mentioned, 4% loss pick adjustment, and Christian mentioned that it had to do with a different mix. That's one driver. The different mix comes from, as you pointed out, the growth in NatCat. It also comes from growth in specialty that has typically very good combined ratios. We did reduce in certain casualty lines, such as motor. We've been very careful in the line of business. We know that after the COVID crisis, people are back on the roads, so we expect frequency and severity because of inflation to be back, and therefore we took a very cautious approach on that one.
If you add up these three, you get automatically to an improvement on the combined ratio. Christian also mentioned, and it might have fallen between the cracks a little bit. He also mentioned that the interest rate obviously went up a bit. From an economic perspective, there was an additional improvement from that.
Thank you, Ashik. Could we have the next question, please?
As a reminder, if you wish to register for a question, please press star followed by one. The next question comes from Thomas Fossard from HSBC. Please go ahead.
Oh, yes. Good afternoon. Two questions from my side. The first one is, Thierry, could you come back a bit on, you know, the bargaining power of the reinsurance industry as a whole? I mean, I think that, you know, a couple of observers say that the reinsurers have not made the cost of equity for quite a long time now. For me, there is something that I'm still struggling to understand is, you know, at the end of the day, you all need to improve your returns also to adjust for maybe climate change.
The fact is that at the end of the day, you're getting 4% on renewals, which -4 equals to, you know, optically no margin improvement. To be fair, there's something still that I got some difficulties to understand, really, about, you know, where the insurance industry is in the current environment and why, you know, why volatility, the price for volatility and the risk aversion has increased so much. Why actually you're not able to leverage this situation more into your in your favor? That would be the first question. The second question would be, John, I think that this morning, Bloomberg quoted pretty alarming risk exposure to Ukraine and Europe and Russia.
Could you be a bit more precise on potentially where you could have some exposure or maybe you need to clarify or to adjust as a statement which has been picked up? That will be my two questions. Thank you.
John.
Hi, Thomas.
On the bargaining power, it's obviously not the first discussion we had around this. I mean, on the highest level possible, it's all a question of demand and supply. In a hardening market, typically it shifts obviously to the reinsurance side. I see this as a hard market, but it's a differentiated hard market. The way I read it is that at this renewal, I felt that there was a bit less interest in NatC at. The demand went up, and Christian mentioned some of the drivers in the industry. I felt a lot of interest therefore shifted to casualty and actually put a lot of pressure on casualty in general.
Probably also explains why for us, the outcome then on casualty wasn't as desired. We would have been ready to grow, but didn't find the conditions we had. I do believe, Thomas, that if you look at the combined ratio targets of below 95% and below 94%, that indicates a very, very good market, a very, very healthy environment overall. We do, since last year, but definitely this year, have the capability to not only adjust price but also the conditions. We are able to not dictate, but to improve the conditions. That's extremely valuable and not always reflected in the combined ratio, for example. I wouldn't call it 100% seller, buyer market here with seller markets.
I think it's a balanced and differentiated market, but there are very attractive pockets around where we're able to gain market share at very attractive terms.
Thomas, with respect to Ukraine and Russia, I hope I was able to be more precise actually earlier today when we had the press invited. What I tried to clarify is our exposure on the asset side is immaterial. We've got absolutely actually nothing in Ukraine and a small fixed income exposure in Russia that is a double-digit million total. It really is not a particular concern. On the liability side, we do write business in both countries, but on restricted lines. You'll appreciate that we've been cautious about our exposures in these markets for some time. There aren't many global players operating in either market, frankly, in material ways.
While we have seen some opportunities to work with local companies, I don't think we're in any way overweight in our exposures. As I said, it's fairly restricted in the lines we're prepared to write there. We hope things get better before they get worse, but we're not necessarily optimistic here, but I don't think that's a general statement, not with respect to our insurance exposure and liabilities. It's just a very difficult situation.
Thank you, Thomas. Could we have the next question, please?
The next question comes from Iain Pearce, from Credit Suisse. Please go ahead.
Hi, thanks for taking my questions. The first one was just on the guidance for mortality losses in Life and Health. Could you just give a little bit more color on what your assumptions are for excess mortality, especially in the U.S., that's sort of underpinning that guidance? Also if the sensitivities that you've disclosed around excess mortality are still sort of holding, given the higher loss we saw in Q4. Then the second one was on the casualty book in P&C Re. The H2 combined ratio was obviously very high and you sort of flagged some moving parts there. I'm just again wondering if you can give a bit more clarity on the impacts of those moving parts and if there's anything sort of underlying in that that just led to the high combined ratio in H2.
Iain, maybe I'll try the first one on Life and Health losses, and Thierry, I think, will come in on your second question. You know, in the second half of last year, I think we had seen some anecdotal information which suggested that the insured population was starting to perform a little better than the general population. We actually suggested the guidance might be a little better than $200 per 100,000 of excess deaths that we'd previously had out there. At this point of time, with the more information that we got both on Q3 and Q4, I think we have to go back and say, unfortunately, that hypothesis has not held out.
The view of Swiss Re losses of $200 million per 100,000 excess deaths is probably a fair assumption to go forward with. Again, frustrating we had thought that the vaccination rates of the insured population might well be different, but it doesn't seem to have made any difference in the actual mortality, when you look at our own experience. I think that's where we are. As I said, we expect Q1 to be a relatively heavy quarter compared to the rest of the year. We'll see how this plays itself out.
On the casualty part, I'll try to answer your question. I hope I understood it correctly, but please let me know. First of all, you remember a year ago we were very clear on casualty and we shared our concerns. I repeat myself, with regard to social inflation in particular, but also the inflationary outlook already at the time we felt was more concerning than before. We said as a result, we would be very cautious with regard to any business exposed in particular to these two. One of the areas you also mentioned are all large corporate risks with exposures in the U.S. Particularly, of course, the combination of large corporate risks and exposure to social inflation.
Those corrections we have made, and we're actually really pleased with seeing the improvements. When you look at the combined ratio for casualty overall in 2021, you can see a very strong improvement in our combined ratio. Yes, you're right. Underlying, there were movements. We could see how not unexpected, as almost announced, social inflation comes in again. You have heard in the news different verdicts, different jury decisions that have been made. We have said that we see an environment of increased exposure also to very large verdicts driven by general negative sentiments and very active strategic plaintiff bars in the U.S. We have seen those at play, and we indeed have incurred here and there the impact of that.
I think we are really on top of this on the reserve side and definitely on top of this as well on the new business side. We have taken the actions that we can take and we have continued to do so ongoing this year.
Thank you, Iain. Could we have the next question, please?
The next question comes from Vikram Gandhi from SG. Please go ahead.
Hello. I hope you can hear me all right. My internet is quite patchy. Couple of quick ones. First one is on the NatC at, and I know we'll get more details with the annual report, but if you can give us some color on how the growth in the NatC at lines should have impacted the PMLs and is there any change in your retro strategy around that? The second one is on the large corporate risks. I appreciate what you say in terms of the you know, continued reduction around the business. Can you help us with what particular industry sectors or are there any sublines in that risk which would be or should be of particular concern for all of us? Thank you.
John, do you wanna comment on the retro strategy? Vikram, we will be publishing the PMLs with the annual report. Maybe John on the retro.
Just briefly, we continue with our alternative capital partners team to find some very interesting opportunities to place peak risks and reduce some volatility on NatC at as well. We've got both the sidecar and with the placement of some cat bonds along the way, have been able to, you know, modestly increase the retro capacity of the group. I think, you know, part of that is the result of experience in 2021 being relatively positive for those that participated in our sidecars.
I think, you know, the underwriting benefits we had of changing the gross portfolio, what we brought into the business, was shared by those people that have come and helped take some of the risk on the sidecar. We've seen no reduction in the retro that we're utilizing here.
Vikram, very good question on the LCRs. I will not disclose all our magic sauce, I call it, with regard to sublines and everything. I can confirm that we are approaching this in a very detailed way. We do indeed have preferences for certain sublines, and we also have preference for certain sectors although. We have a clear line setting protocol agreed across the company and all the business units. On top of it, another factor we also take into account very strongly are structures. We obviously look at non-proportional and proportional in a very different way. We do, and that is something actually that has quite a big impact.
We also look at countries and legal developments in certain countries that has become increasingly a driver for our appetite and line setting.
Thank you, Vikram. Could we have the next question, please?
We have a follow-up question from Will Hardcastle from UBS. Please go ahead.
Oh, hi. Thanks for taking the question. It's a simple one, hopefully. Just looking at the COVID IBNR numbers, it looks like it's dropped from 43% to 31% full year from half year. Some of this is probably just due to the Life & Health increase in proportion. Is it possible to get the numbers for P&C specific, how that's developed HOH?
Well, we can take that offline. We'll try to provide that to you, yes.
Thank you.
It's gonna be driven mostly by the shift, yes.
Yeah. I think that's right. There have been maybe some payments on BI, but you can see at least by the graph on page 41 that it's still a big chunk in IBNRs.
Thank you, Will. Do we have another question?
The next question comes from Ivan Bokhmat from Barclays. Please go ahead.
Hi. Good afternoon. Thank you very much. I've got a couple questions on Life & Health. The first one is just on slide six. I was wondering if you could perhaps explain in layman's words the annual pandemic mortality risk charge. You know, what does that represent with respect to let's say your GAAP earnings or it's a purely EVM metric. The second one also maybe if we could tie it somehow to GAAP and IFRS results. You do say that your new business margins has improved over 2021, which I think is interesting because at the beginning of the pandemic, I think the general narrative was that the margins shouldn't change since a pandemic is a normal business as usual risk.
I know you've been saying that the earnings power of the franchise should go towards $1 billion. How much of that are those improvements in pricing and terms and conditions on life business after the pandemic? How much more profitable is it now? Thank you.
Ivan. So on the risk number, the mortality risk charge you mentioned on page six. So that's, you know, and we obviously apply to all lines of business a capital risk model, and that defines the capital that we add to that particular line of business. Now, Life and Health, obviously the cat event for Life and Health is a pandemic.
We have a special model, particular model for that one that leads to a particular capital allocated to, for example, mortality. Out of this, we incur capital costs. $180 million is the capital costs that are allocated to mortality overall in our economic system on a yearly basis. That's a yearly charge we apply to that line of business. That's the way it works. On the second one, the new business margin in Life and Health. You are absolutely right that in a perfectly technical world, we would not need, as you can see, with $180 million that we charge anyway, we do not need to increase our prices.
What we have not said is that we have increased our costing, but we have been able to improve our margin given actually an increased demand for this type of risk. We have also seen that there's a bit of a fear around in the market. We have seen the opportunity to increase prices, therefore, in this very uncertain environment on our mortality book overall. The increase has been quite strong, and we see this trend ongoing in 2022, by the way. I expect it also to shift. In the pipeline, we can see a shift from more recurring business to more one-off large transactions, also those driven by the need for capital optimization by our clients, for example.
Generally, also the sales volumes we see are up on a global basis. It's a very good environment for our Life and Health book. Given the demand and our full pipeline, again, we see simply the opportunity and not necessarily the need, but the opportunity to increase the margin.
Thank you. Ivan, do we have one last question?
The last question is a follow-up from Vinit Malhotra from Mediobanca. Please go ahead.
Oh, hi there. Thank you very much. Just one thing I'd check was, you know, we talked about the Nat Cat growth, and like, why do all that growth if all you're going to do is offset it with higher claims inflation assumption? 4% pricing achieved, but 4% gone away to claims inflation. Just, I'm curious. Maybe a quick one-line feedback would be very useful. Thank you.
I'm happy to take this one, Vinit. Why do we do it? Because the price environment is attractive. I mean, by the way, we improve obviously our margins in Nat Cat. It's not flat as we explained. So we have been able to improve the margins. But the price levels that we see in the market where they are are attractive. Now, there's another thing that you should not underestimate. Take Germany floods. Obviously, that was another. As we always told you that every big loss is another data point in our risk model, and Germany was just another of these points.
We have adjusted our Germany flood model as an example and have increased the loss picks quite a bit, and we have been able to compensate more than that through price increases. There are different reasons why we increase our loss picks in that business. But we do see where we are today, an attractive environment overall. We think at those terms it's attractive to grow further.
Thank you, Vinit. Are there any remaining questions?
Not so far, sir.
Thank you for all your questions. I'd like to point out that on March 17, we will be releasing our annual report, which will also include the EVM numbers. We also look forward to welcoming you at our April 7 Investors' Day. With that, thank you again, and we wish you all a nice weekend. Bye-bye. Thank you.
Thank you for your participation, ladies and gentlemen. You may now disconnect.