Good morning or good afternoon. Welcome to Swiss Re's Nine Months 2022 Results Conference call. Please note that today's conference call is being recorded. At this time, I would like to turn the conference over to John Dacey, Group CFO. Please go ahead.
Thank you very much, and good morning or good afternoon to everyone from me as well. I'm here with Thierry Léger, our Group Chief Underwriting Officer, and Thomas Bohun, the Head of our Investor Relations team. Before we go to Q&A, allow me to make a few quick remarks on the release we put out this morning. The third quarter has been challenging for our P&C reinsurance business. The reported combined ratio was impacted by Hurricane Ian in particular, as well as prior year impacts. On the latter, slide four of our investor presentation provides a breakdown of our year-to-date technical result from prior years. We have set up economic inflation IBNRs in our property specialty motor lines to reflect higher actual and expected inflation for both 2022 and 2023.
These reserving actions were not new to Q3, but were less visible in the first half of the year due to offsetting releases in other parts of the reserves. We have generally acted to reflect the latest views on economic inflation whenever they have changed. The main single reason why the group's net year prior technical result turned negative in Q3 is related to a reserving update that we did for a large prior year aviation loss, where new information was received after the quarter end, which we nevertheless decided to include in our Q3 figures. Moving on from the reported P&C combined ratio to the underlying result, we expected the normalized combined ratio to have been a number of points lower than the 96.9 we posted for the quarter.
We had seen higher attritional losses than expected already in the first half of the year, and this continued into Q3. On top of that, we also saw a higher amount of midsize claims, some of which we would not expect to repeat in subsequent quarters. Nevertheless, our nine-month results means that we do not expect to achieve the better than 94% normalized combined ratio for the full year on P&C Re. On the positive side, Life & Health Reinsurance and Corporate Solutions had strong third quarters. Life & Health Reinsurance's net income of $219 million is above our normal run rate of $200 million per quarter, despite some ongoing impacts from COVID-19, albeit at a lower and more manageable level. Life & Health Reinsurance is well on track to achieve its full-year net income target of $300 million.
Corporate Solutions achieved an impressive 92.9% third quarter reported combined ratio, despite absorbing losses from Hurricane Ian, and is well on track to achieve its less than 95% reported combined ratio for the full year. Importantly, the recurring investment yield of the group has started to increase materially. The fixed income and short-term investments book has seen a recurring income increase of more than $100 million in Q3 alone, and this trend will continue to support our earnings power. Our SST ratio was very strong at 274% mid-year. The Q3 number is expected to be modestly higher in spite of the loss in the quarter. This provides a very strong basis for our capital management priorities, which focus on profitable new business growth and an ordinary dividend that we aim to increase or at least maintain.
We also include in slide eight of the investor presentation to remind you of the positive outlook that we have on our 2024 transition to IFRS. We now expect both a higher shareholder equity and higher earnings compared to where we are today under U.S. GAAP. As a result, and despite the challenging third quarter, we have an unambiguously positive outlook for the group. Two of our business segments are already delivering on their targets, while P&C Re is well positioned to benefit from the significant dislocations in the reinsurance market at upcoming renewals. With that, I'll hand back to Thomas to introduce the Q&A session.
Thank you, John, and hello to you, from my side as well. Before we start, if I could just quickly remind you to limit yourself to two questions and then rejoin the queue if you have any follow-ups. With that, operator, if we could take the first question, please.
Our first question comes from the line of Andrew Ritchie with Autonomous. Please go ahead.
Oh, hi there. Two questions for me. First of all, just on the old topic of catastrophe loss budget, clearly you're running ahead of the budget year to date. I mean, even if it's nothing in Q4, you'll end the year somewhat ahead. The industry sort of insured losses are running at about $100 billion or thereabouts right now. That seems to be the kind of new expected normal run rate. Yet, if that is the sort of new normal, you're well ahead. So can you just help me reconcile those two? Is there still sort of a bit too much from sort of non-peak areas in terms of cat losses? Or is this just simply an inflation effect which you think will correct out with pricing?
That's the first question. Second question on capital. I mean, we have four ways now of looking at your capital, U.S. GAAP, SST, IFRS 17, and then rating agency, which is more of a mystery. It's very hard for us to assess really what the capital flexibility is, particularly with a view to growing exposure potentially in 2023. Do we just completely ignore the GAAP performance? I ask it because when I look at what rating agencies are saying, they seem to be vacillating. Recently, this week, they were talking about the impact of lower unrealized gains as having some negative effect on the industry. How do you view it? Are you purely focused on the SST? Is that all that matters? Can we completely ignore the GAAP development? Thanks.
All right, Andrew. Thanks for the questions. Let me try and give a shot on them. I'm guessing Thierry might also wanna come in on the first one in particular. On the cat loss, we have, outside of Hurricane Ian, taken some losses on what we referred to as secondary perils during the course of the year. The response, I think, is, we've reduced our exposure in lower layers and to convection storms, but we haven't eliminated it. I think it's impossible to eliminate it.
I think the world broadly and our clients specifically should expect that we will be looking to continue to move up in the layers on which we take risks, in addition to getting fair prices for the layers which we choose to write, and reduce even further the exposure to secondary perils that seem to continue to be underpriced, at least in the current market. Now, some of this may correct and we'll see how far that correction goes. You referenced also the inflationary impact.
I think one of the realities of our loss we booked on Ian, which we do think is a prudent booking based on, you know, partial information that we had at hand to utilize when we put the $1.3 billion up, is that the inflationary impact on rebuilding on the wind damage of the cost of the Florida losses is material compared to where we might have been 12 months or 24 months ago. These rates will also have to adjust for inflationary impacts on the cost of the damages and also on the asset values of the insured properties. That's why we expect the January 1 renewals, but also further renewals deep into 2023 to be of a material nature in terms of the increase.
With respect to capital, I appreciate your question. I think first and foremost, you're exactly right. The SST basis and the underlying economic capitalization of the group are what's driving our decisions, both for capacity as well as for ultimately the capital measures that we choose vis-a-vis our shareholders. I think the decline of our U.S. GAAP shareholders equity by about $10 billion during the course of the year is simply a mathematical reaction to the rise in interest rates. Those interest rates economically are beneficial to us unambiguously and will provide a material increase in the earnings of the group on a going-forward basis. The rating agencies, I think are, as you say, a little mixed in the importance they're placing on the reported GAAP equity.
I do believe that, you know, they will have their models and run as they see fit. From our point of view, the U.S. GAAP shareholders equity is not at all an indication of the resilience or the risk capacity of the group. We note it, you know, pay attention obviously to the rating agencies and their concerns. At the end of the day, we will make decisions on to write business or not write business based on underlying economics. The last piece on IFRS, just to reiterate, we've included a slide in the deck, without numbers.
These are modeled, but we actually think our modeling is both accurate and the direction of the relative blocks that you see is clearly indicative of the actual expectations for how shareholders equity, the CSM and the risk adjustment might play out on our balance sheet when we go live in five quarters from now. In that context, I'm confident that this better representation of the economic reality of the group will be much more transparent. We can drop the U.S. GAAP view and at least simplify your life a little bit. Maybe Thierry , anything to add on the first part?
Actually, maybe one thing.
Yeah.
Because there was a lot of emphasis that you put on inflation and on secondary perils and climate change. I think we have been quite consistent in the message that actually
Most of the increase in our natural perils exposures are coming from urbanization and increase in wealth. Obviously now the inflation adds to it. Climate change has been a minor driver of that. As we have repeatedly said, climate change is, however, a bigger driver for the secondary peril. For example, TCNA, the recent Hurricane Ian event, TCNA is not driven by climate change. But a hail in France is partially driven by climate change. We have to differentiate all this. The question of the $100 billion is, for us, an obvious one. We absolutely believe that, just generally, the loss load for the industry is increasing.
What is important to us is what is climate change driven in that increase, and make sure we have that correctly modeled. That's what I wanted to add.
Thank you.
Thank you, Andrew. Could we have the next question, please?
The next question comes from the line of Freya Kong with Bank of America. Please go ahead.
Hi. Good afternoon. Two questions, please. First question. At half year, you indicated that you would have expected the P&C Re attritional loss ratio to step down quite a bit in H2 due to business mix changes. I think at the time, you said around 3% improvement, H2 versus H1. We've not really seen this play out, and I guess what's happened between then and now for such a meaningful deterioration, how much of this was inflation driven versus higher frequency that you expect could reverse? Second question is, you've made some IBNR provisions for short tail lines and property specialty and motor, but your U.S. liability reserve strengthening is of a similar magnitude to prior periods. What's your view on higher economic inflation trickling into longer tail liability lines? Has this happened yet? And what are your expectations here? Thanks.
I'll take the first one. Hi, Freya, and John, the second. You're absolutely correct. We were expecting for the third quarter lower attritional loss by several percentage points. This is driven by seasonality in our nat cat budget. We expect more nat cat business premium to roll into Q3, and accordingly, because that business has a lower combined ratio, we also expect a lower combined ratio or attritional loss ratio for the third quarter. We had already observed and have been also clear on the fact that in the previous quarters already we had a higher attritional ratio than we actually wished. We have also. I have been very clear that we are not satisfied by this.
Clearly, we were very clear that we will not rest in underwriting, improve structures, terms, conditions, price, until actually the attritional loss ratio is coming down. Now, the fact that we have missed it by even more in Q4 is, to me, a mixture of that, what we have observed in prior quarters not being resolved yet, plus of course, a higher inflation than we expected. Then we had a higher frequency of losses between $10 million and $20 million that I would see rather as a one-off, statistically absolutely possible to have quarters where we just have more of those losses.
As a result, what we read into the attritional loss higher than what we want is that we continue to be under pressure to improve the terms, as I said, and as I also said, is that we have dramatically reduced our observation period. That before was like 10 years, now it's three to five years. We can now of course see in our calculations these elements of higher attritional coming into our burning costs as well. As a last point, you remember in July we had this +12%, -12% these two numbers out there. The price up 12%, nominal price up 12%, and loss costs down or up 12%.
I do remember having had some discussions with some of you, and you asked me, "Isn't this a bit conservative?" As you can see now, it turns out it wasn't. Maybe the numbers should rather have been +14%, -14%. In hindsight, obviously, we always know better.
Terry, just for the avoidance of doubt, I think to be clear, we saw in Q3 this spike in some one-off losses that we wouldn't necessarily expect to continue in Q4. While we expect our normalized combined ratio in P&C Re to reduce in the quarter, it's highly unlikely to reduce enough to get us back to the 94% for the full year. That's a starting point. I think on the inflation vis-à-vis liability and long tail lines, our observations to date is that any CPI-related inflation is overwhelmed by the social inflation and other factors which is driving up loss costs for these liability portfolios.
What you saw on slide four, the deck we provided, was material increases in these reserves over the last three and a half years to get to a position which says we believe we're well reserved for the impact. That Q3 or nine months of 2022 doesn't necessarily have the kind of very specific CPI inflation, but the overall increases we make are related to what we think are ultimate loss costs. Could there be subsequent impacts? Possibly, but I think what's more important is we get it right. These are both the existing reserves, but more importantly, the costing for new business.
We continue to write liability lines, and we need to be sure that we're charging adequate rate to cover what is a challenging environment, especially in the United States liability book, where we're not the only ones that are, I think, noting that there's no indication that social inflation is reducing anytime soon.
Thank you. Freya, could we have the next question, please?
The next question comes from the line of Will Hardcastle from UBS. Please go ahead.
Oh, hi there. Thank you very much. Coming back to a couple of questions actually already asked, but just extrapolating a bit. I guess trying to work out that starting point for normalized really for the year. Obviously, you're not gonna achieve the 94%. You've been very clear on that. But, you know, that's got some one-offs, as you call it, within that. Should that still be the starting point for how we're thinking for beyond 2022? Or do you think there has been a structural aspect that means that 94% was a bit too optimistic in light of a lot that's changed this year? And second, coming back to Andrew's question on the credit rating agency capital. Is it fair to say this is currently the binding constraint for you at present?
Would you be willing to effectively challenge the rating agencies, grow exposure significantly because your economic models differ so much from the rating agency model? What would be the impact on the business should you challenge them too far, and obviously a downgrade might pursue, and also presumably cedents would challenge this view. I guess I'm trying to understand if that's the binding constraint and how close we are and whether you'd be willing to go against it. Thanks.
All right. Will, let me give it a shot. On the normalized combined ratio, you know, some of the adjustments that we've made on the APLRs for business written in the second half of last year, this year, for 2022, but earned in 2022, you know, reflect an inflationary environment, which was not necessarily transparent when we set these initial goals. I do think, and Thierry mentioned, you know, the January 1 renewals of nominal prices up 10%, loss costs up 12%, sorry, and loss costs up 12%, which reflect the reality that we saw at mid-year. My sense is pricing across every line of business for reinsurance is going to go up. Exposures are going to be structured, terms and conditions are going to be tightened.
As a result, I think it's premature to put out a target for 2023, but I don't think it's a valid expectation to say that normalized combined ratios will go up. It may well be the case that the price impacts are sufficiently strong, that that will give us a higher degree of comfort and capability of achieving something like 94%. That we're just gonna have to wait till we see the dust settle on these renewals. So that's the direction I can go there. With respect to capital, we've got no particular interest to challenge the rating agencies.
We do have a frustration, I can say, that the direction of our regulatory capital moves absolutely in opposition to the direction of our U.S. GAAP shareholders' equity, which is the basis for at least one of the rating agencies' models, when they start assessing available capital. That frustration is not going to be solved anytime soon. As we indicate, we believe that, as we migrate from U.S. GAAP to IFRS, the rating agencies get a bit of a helping hand to be on a more economic framework than their starting point is today. I don't think, even with a stronger, actually a very strong price movement on many of our lines of business that we're necessarily going to be growing our exposure dramatically.
We may be growing some parts of it where the pricing is unambiguously attractive. I think overall, we will be cautious in going too far out with growth at the beginning of the year. We've seen the losses that have come through. We believe in our models, but we don't see the need to take outsized risks in spite of having a SST ratio of 274 at midyear. You can expect us to grow parts of the portfolio. The sort of FX adjusted 9% growth you saw in CorSo, I think you should expect to continue in the commercial lines and P&C Re.
We'll see where the prices our clients are willing to pay and the terms and conditions and layers which they're willing to accept. Based on that, we'll see how much capital we actually deploy. Again, it's not a matter of challenging the rating agencies. It's a matter of trying to work with them to be sure that they understand our view is the economic view, and we believe that we're well managed on that basis.
Thank you, Will. Could we have the next question, please?
The next question comes from the line of Kamran Hossain with JPMorgan. Please go ahead. Mr. Hossain, your line is open. You may ask your question.
Hi, asking two questions. The first one is on the renewals in January. When you think about those, we've seen some messages in the press. Can you maybe give us an idea whether you're planning to kind of grow, kind of increase exposure ahead of inflation? Also perhaps kind of improve the quality of the portfolio in reinsurance. The second question is on Alternative Capital Partners, which has become an increasingly kind of important part of the business in recent years in terms of the way that it can support the reinsurance business. Can you give us an idea of firstly, how well have investors done that have kind of been in ACP?
What do you think the appetite is for them to continue to support you into 2023 and beyond? Thank you.
Hi, Kamran Hossain. I take the first one. With regard to 1/1, I guess everyone recognizes that the reinsurance industry has been through several difficult years. We just have to remind ourselves of the volatility losses John Dacey cited before, but also on the cat side, secondary perils and so on. What we have seen this year was that the demand was outstripping the offer. On the capacity side, we have seen some reduction in capacity, and on the demand side, mainly driven by inflation, we have seen the demand going up. What's going to happen, in our view, on 1/1, is that the demand will go up further, fueled by even higher inflation. We see that the offer is even additionally under pressure.
In my view, I wouldn't be surprised if we went into a gap for example, TCNA of $20 billion-$50 billion for the industry, which would be 10%-20% for the industry. That would be very significant. For us, that's therefore an opportunity, as John pointed out already, to do three things. We look at price, we look at structures, so retentions mainly, and we look at terms under which we insure these. It's gonna be very clear that we'll be more than ever focused on our sweet spots in terms of where we play. Very generally, we think that the retentions will move up. We will certainly push for that.
By moving up the retentions, we will remove ourselves from secondary perils again in an even bigger step than we have done this year. We will tighten the terms, as I said. We see obviously, because of the higher demand, significant improvements on the price side. Your question with regard to risk-adjusted is a difficult one to answer ahead of the renewals because the renewals with our clients are still ahead. We will certainly very carefully choose our loss picks and include a net conservative view as we can on loss trends generally, but also inflation, secondary perils and everything. I'm actually very confident that we will be able to achieve price improvements beyond the adjusted loss pick.
We should next year clearly see risk-adjusted price improvements. Again, discussions are ongoing, but the first signs are positive.
The anecdotal evidence I would add to that is, I think the primary market understands that there may be a dearth of capacity out there and, as opposed to the end of 2017 into the January 1, 2018 renewals where people were willing to wait till the very end on December 31st, and in some cases, found capacity from people diving in. I think that there's a clear expectation that moving earlier to secure capacity, even at much higher rates, is probably in the interest. That's what we've already seen anecdotally happen. I think it's just a very different environment than what you saw at any time in the last decade vis-à-vis the imbalance between supply and demand.
On your second question vis-à-vis the alternative capital partners, this team continues to do well in securing capacity. We're not dependent the way some other market participants might be on retrocessions. What I can say is the alignment of interest between the group and these partners and the transparency we've been able to provide on losses has served us well. I believe, you know, we've got about $3 billion of capacity that's or assets under management in this space in addition to another $1 billion or so on Matterhorn Re bond programs. We're very comfortable that we've been treating our co-investors well.
I think the underweight exposure that we've been able to show on the Florida loss is an example of that, and we will continue to work with potential investors who are willing to stay with us over time. It's been a good story for us.
Thank you. Kamran, could we have the next question, please?
The next question comes from the line of Vikram Gandhi with Societe Generale. Please go ahead.
Oh, hi, it's Vikram from Societe Generale. Couple of questions. Firstly, some thoughts on where the group is with the inflation topic after this inflation IBNR and, you know, where the group is with its annual reserves review, and why the group's reluctance to invest in inflation linkers over the past three-four quarters when there was quite a bit of foresight that inflation could become an issue. That's question one. Secondly, I see the encouraging comments on higher recurring income, but it looks as though most of it is coming from yield pickup at the short end of the curve. Now when I look at slide 14, I still see the liquidity at exactly the same level as at year-end 2021. That's $13.5 billion.
The question really is why isn't the group trying to lock in higher yields on the long end?
Vikram, I'm happy to address both of those. With respect to inflation, you know, we've evaluated both 2022 but also 2023 current expectations. The Swiss Re Institute runs their own. You won't be surprised that they're not too far away from where market consensus would be. We've addressed the positions quarter by quarter as we've indicated when the new information comes out. At least for the moment, you know, those quarterly updates have resulted in higher expected inflation for longer than what might have been the case at year-end 2021. Even there, we've started to put some of the reserves up.
With respect to the inflation linkers, we've never said we don't have any. They don't flow directly through our P&L the way that they might for some of our competitors. The concern I think we've got is the basis risk and frankly the other somewhat odd performance of these bonds in volatile markets. They've not struck us as a great hedge necessarily against the kinds of inflation, whether it's CPI, the specific parts to the construction industry or motor market wages, medical that we have exposure to through our claims position. While directionally they might be helpful, I'm not sure that they always behave in ways which are going to really solve your problem that we see.
Again, it would be wrong to assume we don't have any in the asset portfolio. On your second question on liquidity, yeah. When you're looking at an inverted yield curve, it's a little tough to say it's the moment to go long because rates are going to be falling, and so we should capture in a particular moment the where the 10-year is paying before it drops down. I think you're right. We have been taking advantage of much higher yields on the shorter end.
Our team is evaluating constantly how far out to go based on a view of the downside risk of locking in to rates which might, you know, 12 months from now appear to have been, you know, 100 basis points to 150 basis points lower than what might be available in the future. It's not an easy call, but at least for the moment, I think we're pretty comfortable capturing the yield pickup. If we have a different view, we'll adjust the positioning appropriately. We do have the constraint of largely matching the duration of assets and liabilities and not being able to go either too short or too long across any of these positions in the curve.
Thank you, Vik. Could we have the next question, please?
The next question comes from the line of Iain Pearce with Credit Suisse. Please go ahead.
Hi. Afternoon, everyone. Thanks for taking my questions. The first one was just thinking about risk-adjusted rates. Knowing what we know now, it sounds like sort of rates up 12%, but claims inflation at 14%, so risk-adjusted rates minus 2%. Is that the right way to think about it? Does that mean that knowing what we know now, if we'd known that at the start of the year, normalized combined ratio guidance would be 96% rather than 94%? The second one on the U.S. GAAP equity. I sort of understand that it's, you know, not economic, not what you look at, but surely at some point it becomes an issue. You know, if we're sat at $12 billion now, you've got a dividend cost that brings you closer to $10 billion, interest rates up again, equity markets down again.
You know, is there a point that I know it's not binding, but it looks that it does become an issue, a number that sort of is a threshold level because it's sort of hard to understand why it wouldn't be. Those are my two questions. I'll leave it there.
Take the first one, Iain. On risk-adjusted, and you referred to should the +12%, -12%, should you read that as +12%, -14%? I think what I was trying to do is offer an explanation for Q3, and I don't think you should read too much from Q3 into Q4. John has mentioned a few reasons. For example, renewals that we did in the last year, July, still have an impact. We did not include at the time a lot of inflation. You remember, we were one of the first companies really starting to move on inflation. The fact was, at the time, it was relatively low still, so we didn't include much. Of course, that has moved up quite a bit.
We have found the first two quarters in the year to be impacted by higher inflation than forecasted. We have made that adjustment, the +12%, -12% that we refer to here. We actually think that we have made a big step at the time. The +12%, by the way, is not all just inflation. Some of it was real loss trends. We therefore think that over time, we are actually closing that gap that explains some of the quarters before. Again, I wouldn't read too much into it. There have been one-offs in Q3 that I don't expect to repeat, and we have continuously worked on the inflation adjustment, and therefore I have not given up on Q4.
Nobody's given up on Q4. We would expect, as I mentioned, an improvement, how far that improvement to be seen. I also think that what I said before, the price increases that we anticipate for 2023 will give us a reset on what a normalized combined ratio might be for that calendar year. Your second question, I understand it, but you know, when you look not at Swiss Re compared to the European competitors, but to the American competitors, we're not the most impacted player in the insurance segment vis-à-vis this decrease of shareholders' equity. I think the reality is, it really is just the math.
It says we went from + $3 billion of unrealized gains to - $7 billion of unrealized losses. As long as we're not trading these bonds, and we're not, right back to my point of we largely have a match asset liability duration play, then it really doesn't make any difference for us economically. Again, against some of the primary companies that might have shorter duration assets, yeah, they haven't seen their shareholders' equity under GAAP fall as much. Some of the life companies with longer durations, I think you won't be surprised to find similar or in some cases even larger movements than us. We're just acknowledging, yes, it's a fact.
It doesn't have anything to do with the economic substance of the group. Our liability profile is very, very different with this doubling of interest rates, U.S. interest rates over the last nine months.
Thank you, Iain. Could we have the next question, please?
The next question comes from the line of Derald Goh with RBC. Please go ahead.
Hi there. Good afternoon, everyone. Two questions, please. The first one is just going back to the topic around your inflation updates. Understand you're being proactive here, but what is the risk that we might see for the additions, right, because your cedents will be performing their annual year-end reserve reviews. I mean, what are the additional details that you're asking from them on the back of your exercise this time? The second one, it's on Hurricane Ian. It's around this whole inflation point again. What reassurance you can give? You know, I understand that $1.3 billion estimate, you're saying it's very prudent. Can you say that maybe it would have been $1 billion or $1.1 billion accounting for the inflation updates?
Because $1.3 billion, just the implied loss share of that seems a bit low or maybe there are different reasons like the nature of the loss being more, auto and more water, for example. Thank you.
Thanks very much. Maybe why don't you take the second one, Thierry, and I'll come back on the inflation piece.
Okay. On Ian, I think the additional challenge of Ian obviously was it came very late in Q3, and therefore, obviously we didn't have much time from the occurrence of the loss to today to come up with these estimates. Now, as we all know, Ian has been a very slow-moving storm with wind speeds that have increased very rapidly, actually on the point of reaching land. Equally, when it moved away over land, actually the wind speeds came down quite strongly. Those are elements that obviously we've looked into in the assessment of the claims. We look obviously at wind-related claims. We look at water, flood-related claims.
Sometimes it's the same, sometimes we have to separate the two, as you all know, in the market. I think we have studied this through our models, but also through client indications. As stated by John, we actually feel confident about it. Let me just say a few more points then about why we feel confident. When we reserve for such losses in Florida, of course, we have to take into account the particular element of claims litigation that we have observed historically in that area, in that part of the U.S. Much more important there is actually to understand what we call social inflation as impacting the claims.
There is an inflation part that we had already in our costing, but there's no surprise to that one that we observe, and it's gonna impact the claims. Much more important, forecasting has always been in Florida, the particular litigation where claims actually are litigated to a certain extent. That's what we have included as well, just to respond to your question. What we also do, we check. We said for us it's a market loss of $50 billion-$65 billion, and we check where our market share should be. Also that is an indicator. We know we are underweight in that part of the U.S. and the underweight market share that we have in that loss is a good indicator for that.
That also makes us feel comfortable about where we are. The last bit that I would like to add is that obviously since the last ten days, we have received first client indications, and all of them also make us feel comfortable around our loss pick there. I would not mention it optimistic or pessimistic. I think we've done it as a real best estimate, but we are comfortable with where it stands.
Derald , I think that last point is important. From the moment that the team came together with an estimate, there's been no negative surprise. We didn't break out a specific loading for inflation, nor a specific loading for the unusual legal environment in which some of these homeowners claims in particular get transferred from the homeowners in the assignment of benefits. We've got the direct experience of recent losses that were utilized to build up this position. The one thing I can say is we don't think there's much in the way of commercial loss directly for us, that our Corso reserve as part of the $1.3 billion is a little under $100 million.
Corso's taken a position here in the $1.3 billion, but actually it was the geography of Florida that was hit, makes us believe that the Corso's exposure is also very much contained.
I'm not quite sure I understood your first question on inflation. You suggested that there might be some important year-end positioning that we might have to do.
Yeah. I'm just wondering. My understanding is that most companies, whether it's primary or reinsurers, you would typically conduct your reserve reviews at year-end. I'm just thinking, you know, if there are risks to yourself, you know, having to make further updates to your inflation assumptions as you receive this new information at year-end. Basically, I'm asking, is that a concern at all, A? And B, are you asking for additional information from your cedents this time?
We're very much focused on sort of rolling analysis of evaluating not only experience but also the assumptions that we've got. As we've indicated, these $700 million in inflation is IBNRs. They're not on specific claims, but it's based on some experience and some assumptions of continued requirements for inflated loss costs along the way. We don't expect any particular novelties in the fourth quarter by ourselves or frankly, by our external auditors who have been with us and watching the adjustments that we've made quarter by quarter.
Thank you, Derald. Could we have the next question, please?
The next question comes from the line of Vinit Malhotra with Mediobanca. Please go ahead.
Yes, thank you. Good afternoon. My two questions. The first one probably for Thierry , where, you know, you mentioned that the issues on the attritional, which have also come in on edge, have not been resolved yet. Could you comment a bit more, one level more, and just say, where are you taking some of the actions, and what might these actions be, just so we get some more comfort about these attritional trends? Last question is on inflation itself. It's just trying to explore some possibility that, you know, the 12%, the famous 12% is also a bit fairly robust and conservative.
I just noted that in one of the Scandinavian insurance presentations, I saw that they commented that construction indices, which the market uses, tend to have a different ratio of labor and material, implying that the insurance claims may not be that inflating away as we expect. I mean, do you believe that the inflation assumptions are a bit overly conservative, or do you think they're just right, or any thoughts on that would be appreciated. Thank you.
I'll start with the second one. Whether I think they are over. I mean, if I thought they would be over or under, we would obviously adjust them. Now, you're absolutely right that we actually don't, and John mentioned it, we don't just apply CPI inflation to our costing. We do differentiate per line of business. Property is very strongly CPI driven and construction driven. Also for construction, for example, we differentiate between countries. U.S. Have a different load than China, as an example. Motor is more dependent on used car prices and repair costs. Casualty is much more driven by wages and medical. All of these have different assumptions behind for different countries. It's a very differentiated approach that we have.
I'm not sure whether I should disagree or agree with what you say, but that's the approach we take. On the attritional part, you refer to not resolved, and not happy, not satisfied, I think is the word that I used already in the past. what we do in what we have done this year already and in July, we have continued to do that. we are looking mainly at secondary perils, and continue to adapt, structures, costing and so on. obviously, we have to keep an eye on inflation, which is again, something I've mentioned, today. again, just looking ahead at the next year, we see the environment as an opportunity to move on both, very clearly.
I said by increasing, in a very determined way, the deductibles, the retentions, we can actually really remove ourselves in a much bigger step from secondary perils. That I see as a step change for next year. We will continue to be best estimate on inflation as we were in the past. I think much more important than that is my expectation that the price increases that we will achieve next year should be well ahead of these adjustments that we do to our costing.
Yeah. Just to reinforce, I mean, I think it's not that the attritional losses haven't been addressed. They've exactly been addressed, and that's one of the reasons why the normalized combined ratio, the loss ratio underlying that, has increased above where we thought it would be because we've made the adjustments that were necessary on the pricing to be sure our reserves are well set as we go forward. I think, you know, if you're asking in hindsight, should we have set our January 1, 2022 rates higher? Yeah. That would've had a direct impact in some of what we see here today.
Again, in Q3 in particular, a little bit of this we believe are one-offs, and we believe that we will be bringing this back down, although we can't estimate by how much in the fourth quarter.
Thank you, Vinit. We have time for two last questions.
The next question comes from the line of Thomas Fossard with HSBC. Please go ahead.
Yes. Good afternoon, everyone. One last question on the inflation IBNR, and really to understand, you know, what are the underlying assumptions you've taken for 2023. I mean, are you already able to say or to quote a number on, you know, what kind of economic inflation you've taken in the IBNR you reported this morning, just for us to have a kind of guide to understand where you're setting your expectations for next year. The second point will be on the group SST of 274, which was significantly ahead of market expectations.
I think that this morning you said 255 was the market expectations and significantly up from the start of the year. Could you give a broad sense of the walk from the start of the year to where you are and maybe highlight a couple of the main item? Thank you.
Sure, Thomas. Let me give you an indication of both. With respect to 2023, you know, our starting point would be the SRI forecast for inflation rates, leaving China out of the mix. The numbers between the U.S., Eurozone, and U.K. are in a range of between sort of 3.5% and 7%. I think these are, as I said, very much lined up with consensus numbers as we see them to date. Maybe a little more optimistic in the U.S. and a little more pessimistic in the Eurozone.
Net net, that's the basis on which we started, and as Thierry said, then it's a fairly complicated walk to think by line which are the relevant inflationary impacts that we have to worry about for ultimate cost of the claims. On the group SST of 274, I think there's probably two major implications. One is clearly the macroeconomic environment and the jump in interest rates or the same jump in interest rates, which has been a negative for our reported shareholders' equity under U.S. GAAP, has been improving materially the group SST ratio. The other piece, as of the first of July and continuing here through the end of the third quarter, is that the risk positioning of our investment portfolio continues to be deeply protected.
We've got specific hedges on both credit and equities which continue into the fourth quarter, and the resulting reduction in asset risk has been benefiting this rate. I think, again, we remain comfortable staying well above the top end of our range, not only because of the, you know, macroeconomic and geopolitical uncertainties in the world, but frankly, the recognition that some of this benefit has just come to us with interest rates. Over time, this will normalize a little bit, the same way that over time, it will normalize in our shareholders' equity as these unrealized losses will disappear on maturing bonds.
Thank you, Thomas. With that, we'd like to thank you all for all the questions you have asked. If you have any follow-ups, please reach out to any member of the IR team. Thanks again. We wish you a nice weekend, and speak to you soon. Thank you.
Thanks, everyone.