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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Well, thank you very much, and good morning, ladies and gentlemen. I'd like to welcome you to our conference call presenting our results for the first half of this year. As usual, I will start with an overview before our CFO, Roland Vogel, goes over the financials in detail. I'll then comment on the outlook for the year. And for the Q&A, I'm additionally joined by my Board colleagues, Klaus Miller and Sven Althoff. Despite the burgeon of the COVID-19 pandemic, Hannover Re can look back at the first 6 months that demonstrated again the risk-bearing capacity of our business model. And in light of the fact that we have absorbed, in total, a pretax impact of more than EUR 660 million from COVID-19 in our P&C and life and health segment, the group net income of EUR 402 million is quite satisfactory. The solvency ratio of around 225% at the end of the second quarter remained comfortably above our threshold of 200%, which is even more positive. Additionally, Hannover Re was able to grow gross premium by 12.2%, adjusted for currency effects, confirming the good position of the company in an improving market environment. Going into the details of the COVID 19 impact. In P&C reinsurance, we have booked around EUR 380 million related to COVID-19 claims in the second quarter, bringing the full impact to EUR 600 million, including the EUR 220 million from the first quarter. This increase is the result of additional market information and further scenario analysis, also including some bottom-up market information this time. The major part of the EUR 600 million takes the form of IBNR reserves, and affected business lines are largely the same as in the first quarter, namely business interruption, credit and surety and event cancellations. Apart from this, we expect some other lines to be impacted to some extent and have reserved for this accordingly. Due to COVID-19 related losses, the large loss budget of EUR 414 million for the first half of 2020 has been exceeded by EUR 323 million. This also explains the 102.3% combined ratio, which is above our target of 97%. The COVID-19 impact of the results of our life and health reinsurance group was EUR 63 million. Against this backdrop, the EBIT of EUR 214 million is strong, pointing to a good underlying profitability, particularly in our financial solutions business, which is unaffected by the pandemic. Also excluding the COVID-19 impact, the U.S. mortality experience was in line with expectations. At 2.7%, the return on investment is still satisfactory, even though initial effects of the volatility on the market had a moderate impact in the second quarter. The next slide confirms that new business production is fully intact despite the changes in our working environment due to COVID-19. Our profitable premium growth is the main driver for the very positive operating cash flow of EUR 1.7 billion in the first half of 2020 and has also fueled growth in assets under management, shown on the right side of this slide. Looking at the details of our assets. The positive change in valuation reserves was partly mitigated by a negative effect from our currency translation. Altogether, assets under own management stood at EUR 48.8 billion at the end of the second quarter. Looking at our capital position. Shareholders' equity increased slightly. This is quite a positive against the backdrop of our EUR 663 million dividend payment in the second quarter and given the fact that the group absorbed a negative COVID-19 impact of approximately the same amount in the first half year. Admittedly, the positive impact from the decrease in interest rates was helpful, more than compensating for negative effects from increased credit spreads and currency translation and leading to an overall increase in the OCI. The composition of the total capital on the left side of this slide is unchanged. The EUR 500 million hybrid we issued in early July is not included in these numbers and will be reported in the third quarter. However, the picture on this slide might still look quite similar at the end of the third quarter because we have another EUR 500 million hybrid with the first call date in September. In any case, the new hybrid issuance can be seen as additional capital because we had already issued a EUR 750 million bond in 2019. The reason for the issuance of additional hybrid capital is twofold. Firstly, the market environment is favorable. And secondly, we want to be in the best possible position to take advantage of improving market conditions in the reinsurance market. Finally, it is also important to mention that we still have a high degree of flexibility around hybrid capacity, also including the increased leverage. On that note, I'd like to hand over to Roland, our CFO, who will, as always, explain the figures in more detail.
Okay. Good morning, and thank you, Jean-Jacques. Moving directly to the segmental reporting. I will start with the development of our property and casualty business group. On a highly diversified basis, gross premium grew by 16%, adjusted for currency effect, and here, the Americas and the APAC region contributed particularly well to this growth. And overall, the development was more driven by property than casualty business. The large loss situation for Hannover Re was similar to the first quarter and can be split into 2 parts. On the one hand, the normal large loss experience was rather benign. On the other hand, we had the impact from COVID-19. Compared to the first quarter, our more detailed scenario analysis takes into account the additional information we've received over the last 3 months, for example, regarding the exposure for business interruption in all the different countries and sectors, including their respective uncertainties. But our various scenarios still produce a broad spectrum of potential impacts on earnings. We are in a situation where we have not yet received a large number of claims notifications from our clients yet. And hence, around 80% of the estimated EUR 600 million total impact consists of IBNR reserves based on our internal scenario analysis. Jean-Jacques already mentioned the affected lines of business. By region, the exposure is really across our book. We expect to see the biggest impact in the EMEA region, particularly from business interruption. Overall, even though the euro -- the EUR 600 million provides headroom for actual claims to be reported, we do not feel that we have sufficient data or are able to make assumptions reliably enough, especially around the duration of the pandemic that would enable us to come up with an estimate we could call final. As a result of the reserving for COVID-19 related claims expectations, the large loss budget for the first quarter was exceeded by EUR 323 million, which accounts for roughly 4.7 combined ratio points. Adjusting the 102.3 reported combined ratio for this budget overrun, the figure would have been close to our 97% target. Just as a note, the stand-alone Q2 budget of EUR 226 million was exceeded by EUR 227 million and, therefore, increased the combined ratio by 6.4 percentage points. The runoff of our reserve overall was positive in the first half year of 2020, and the development in the second quarter was more in line with our expectation in contrast to the slightly negative runoff results in the first quarter. Altogether, the confidence level should not have changed materially since year-end, but we should also not assume that we were able to strengthen it. Net investment income decreased by EUR 40 million with lower contributions from private equity and inflation-linked bonds within the ordinary as well as higher impairments only partly offset by an increase -- slight increase in realized gains. Other income expenses were positive by EUR 18 million, mainly driven by positive currency effects. Altogether, the EBIT margin decreased by 2%, mainly due -- or sorry, 4.2%, mainly due to the weaker underwriting results. Finally, the tax ratio is below the normal level because the COVID-19 IBNR reserves, to a large extent, affected the result of our higher tax entities, and hence, the share of taxable income in high tax countries is significantly lower than usual. Total net large losses, including COVID-19-related claims, accounted for EUR 737 million in the first half year, exceeding the budget of EUR 414 million by EUR 323 million. As you can see in the chart, the difference between the gross and the net is lower than usual because we have treated the main part of our estimates for COVID-19 as gross for net, and our ILS business has not really been affected by large losses. Overall, the EUR 737 million net loss already represents 80% of our EUR 925 million large loss budget for the full year, and we still have the peak hurricane season ahead of us. In the end, this means that there's an increased likelihood that 2020 will be the fourth consecutive year with large losses above expectations, which is not only true for Hannover Re, but for the industry as a whole and should trigger positive pricing movements going forward. On the next slide here, you see the large loss list includes 6 events in the area of network catastrophes, the largest being the tornadoes in the U.S. with EUR 31 million and 1 property loss. Altogether, this adds up to EUR 137 million, which would have been very benign, excluding the COVID-19-related losses. The next slide shows the profitability of our P&C portfolio by line of business. Looking at the numbers for the first half year, the impact from additional reserving for COVID-19 led to an increase in the combined [ ratio ] in all regional markets, with Europe being impacted most clearly. Not surprisingly, the most visible effect is on our credit and surety business, where we expect to see an increased loss activity due to the impact of the economic downturn. Agricultural business was affected by the bushfires in Australia and, on the positive side, the technical profitability of our aviation and marine business was very favorable. Overall, the combined ratio stands at a rather high 102.3%. So let's move to the life and health. Growth here was mainly driven by a large financing treaty in Australia, which we wrote in the Q4 of 2019. However, this was partly mitigated by the expected reduction in premium volume due to the effect of recaptures in our U.S. mortality portfolio as a result of our management actions than the previous year. Altogether, growth premium increased by 3.6%, adjusted for currency effects. The impact from COVID-19 is more moderate compared to our [ CE ] business group. Additional death related to COVID-19 had an impact of a bit more than EUR 60 million in the first half year, more than 50% of the booked numbers are IBNRs here as well. By region, a little more than half of the impact is coming from our U.S. portfolio. Apart from COVID-19, the result of our life and health business group was quite favorable. The legacy U.S. mortality portfolio performed in line with expectations, and the earnings contributions from our financial solutions business, and particularly, continued to be excellent. Adjusted for the good EUR 60 million COVID impact, the EBIT would have been close to last year's level, which included a positive one-off of almost EUR 100 million, as you may remember. The net investment income decreased mainly due to the positive one-off effect recorded in 2019. In the first half of 2020, the favorable ordinary income was supported by an overall positive contribution from the change in fair value instruments through P&L, even though the impact from our ModCo derivatives was slightly negative by EUR 10 million. Other income and expenses are primarily driven by a further increase in the contribution from financial solutions business, for which a large portion is recognized according to the deposit accounting method. Currency effects in this quarter were slightly negative. At 11.5%, the tax ratio is low or is below the normal level, also here mainly due to good results from jurisdictions with a low tax rate. On the next slide, we have included this one to provide some more insight into new business production on the life side as well. This is not necessarily evident by looking at the full premium numbers according to IFRS due to the often long-term nature of the business. As you can see, both the new business and the pipeline business are rather diversified by region and reporting category. But what is also visible is that developed markets, in particular, in the area of financial solutions currently offer very attractive opportunities. Since we have only focused on the most important deals in this overview, this does not mean that we do not see any opportunities in the gray areas on the map. All together with the value of new business achieved in the first half year, we have built a good foundation to achieve our full year target of at least EUR 220 million of VNB. But please bear in mind that the value of new business is often a bit lumpy and driven by large deals. Against the backdrop of the significant market volatility in the first half year of 2020, the development of our investment was satisfactory. It is pleasing to see that with a return of 2.7%, the result is actually still in line with our initial full year target, even though some negative impacts were visible in the second quarter. Two factors led to the decrease in ordinary income: firstly, the contribution from our inflation-linked bond portfolio purchased to hedge inflation risk. That was lower due to the decreased inflation expectations. And secondly, the returns from private equity were also weaker than usual in the challenging market environment. Realized gains are coming mainly from our fixed income portfolio. Apart from the normal portfolio turnover, we sold around EUR 500 million in lower quality credits. Before the crisis actually started in Q1, and at the time, almost all sales within our fixed income portfolios were associated with realized gains. Impairments and depreciations were a little bit higher than last year mainly due to EUR 45 million impairment from alternative investments. We have not really quantified the COVID-19 impact on our investments because it's even more difficult to argue what is really caused by the pandemic than it is in P&C or life and health. One could assume that those EUR 45 million without COVID-19 would not have occurred. I already explained the main effects within the change in the fair value of financial instruments. Here, the negative effect from our ModCo derivative was more than offset by other hedging instruments. Unrealized gains increased remarkably to almost EUR 3 billion, driven by significantly lower interest rates and more moderately negative impact from increased credit spread due to the recovery of corporate bond -- the corporate bond market in the second quarter. On the next slide, you see -- you can see that we have actually not changed too much in our asset allocation, nor do we have any intention to do so. What you can see is that we have used the price corrections on the stock market in March to carefully reenter into listed equity, buying a little bit less than EUR 250 million. As I mentioned to you in May, we have been following a passive derisking approach with new money being invested in high-quality assets only, and currently, we continue with that investment approach. The contribution to ordinary investment income is diversified as usual, this time with a little bit of lower share from private equity, as mentioned. I think this concludes my remarks, and I hand back to you, Jean-Jacques.
Thank you very much, Roland. Moving to Slide 18. As you know, we withdrew our profit guidance in April due to the uncertainties surrounding the future development of the COVID-19 pandemic, and with the peak hurricane season just beginning, we're not yet in a position to precisely quantify the effects of the current pandemic on our business and our investments over the course of the year. Looking at the target metrics with our initial targets, you can see that almost all profitability targets are affected by the pandemic, with only the return on investment still above the set target. On the positive side, our business growth is largely unaffected and our capitalization according to Solvency II is comfortably above the 200% target. On the next slide, the June-July 3-year renewals were successful for Hannover Re. We're clearly in an improving P&C market environment, and we use this to grow our business at increased rates and improved terms. One of the drivers is the U.S. market where pricing improved for both primary and reinsurance business. On top of this, we were also able to increase our shares on a number of profitable accounts generally. In Australia and in our agricultural business, we similarly grew our portfolio at improved pricing. And in credit and surety, we decided not to expand our book at this stage but still benefited from higher rates. Overall, the reported premium growth of 11.6%. The risk-adjusted price change was 5.1% for the total renewal business and even higher at almost 10% for nonproportional business. On the next slide, we have updated our current assumptions for the impact of the COVID-19 pandemic. There is still an elevated level of uncertainty surrounding the loss experience and capital market environment. Still, we would expect that the significant amount of IBNR as part of the EUR 600 million on the P&C side should bring us a lot closer to our final estimates for the COVID-19 impact. We see some likelihood for knock-on effects on D&O, E&O and other casualty lines and have taken this, to some extent, into account for our half year results. In life and health, we observed that the excess mortality in the most exposed market in the U.S. and the U.K. is considerably lower in our portfolio than in the general population, which can be explained by socioeconomic factors and a different age structure. The negative impact for our book was, as commented, EUR 63 million in the first half of 2020. And in comparison, P&C, I would say that we have not tried to get ahead of potential developments with significant IBNR reserves in the same way for our life and health business. Therefore, some further negative effects in the second half of the year are still possible, depending on the development of the pandemic. On the other hand, we might see some positive effects in our U.K. longevity portfolio. On the investment side, the lower income from alternative investments and inflation-linked bonds is already visible and might also impact the results in the second half year. Apart from that, impairments are the main risks to our asset portfolio. Otherwise, we feel comfortable with our high-quality investment portfolio. To complete the picture, market movements are having an impact on our capitalization, but not to an extent that would bring our solvency ratio below 200% in the year in 2020. Therefore, we have no intention to change our general dividend policy for the financial year 2020. On Slide 21, based on increasing demand for reinsurance and the favorable renewals year-to-date, we see our book growing in an improving market environment. This is true for most areas of our diversified P&C reinsurance portfolio and should also be supported by an already observed flight to quality with highly rated reinsurers with a strong balance sheet like Hannover Re, seeing higher demand than the average market players these days. Looking beyond the financial year 2020, I would also expect the generally positive trend for P&C reinsurance market conditions to continue. The market environment is not changing as dynamically on the life and health side as in P&C. However, we expect additional demand for our financial solutions business to support our clients in mitigating the impact of the crisis. Apart from this, we see particularly promising growth potential in the Asian market. The growth of our mortality business is impacted by the effect of recaptures in our U.S. mortality portfolio. Overall, I would say, I see the Hannover Re Group well positioned to absorb the impact of the COVID-19 crisis and to take advantage of opportunities in a hardening reinsurance market. We're constantly monitoring developments and updating our scenario populations, and we shall provide profit guidance again as soon as the underlying probabilities are sufficiently reliable. This concludes my remarks, and we will be happy to answer your questions. Thank you very much.
[Operator Instructions] And the first question we received is from Vikram Gandhi, Societe Generale.
It's Vik from SocGen. I've got 3 questions. Firstly, can you split the EUR 600 million COVID impact on P&C across the 4 buckets, credit and surety, business interruption, contingency losses and others? The second is I see almost no retro offset on the COVID loss estimate for P&C Re, and I'm aware you kind of had a comment in your opening remarks that you haven't really assumed anything. But I just wondered why should that be the case, particularly from BI losses and whether the retro is expected to come into play if the gross losses rise materially from here on. And thirdly, can you just help us understand what is the outlook that is being currently penciled in the solvency ratio of 225% in terms of the COVID losses versus what is already there in IFRS?
Thank you very much. I think I'll ask Sven to address the first and the second question, and Roland will cover the capital position.
Yes. Very happy to give you an idea about how this is -- the EUR 600 million is split by line of business. We have approximately 40% coming from the business interruption side, 25% from the credit side and 20% from the event cancellation and contingency business, which brings us to 85%, and the remaining 15% are split across other classes of business, like travel business, engineering business and a few other lines. This is the result of our top-down view of the reserve position of the EUR 600 million. So given the very low number of actually incurred losses that Roland has mentioned in his remarks, with only 20% of the overall number, the remaining 80% are driven by IBNR. So the exact split by cluster of business is maybe a little less precise compared to natural catastrophe losses at the same moment in time. But it's a good view on how the losses should split up in the end. When it comes to the benign retro recoveries, all retro vehicles are in play. But the numbers I have just given to you are indicating that our exit of loss structures are not at a level impacted yet where we would actually be able to make recoveries. And when it comes to our K transaction, we have only booked those losses against our K transactions that have actually been advised as incurred losses from our ceding companies. We have not booked any of our IBNRs against our K transaction. That will follow in the next few quarters, given that we will move from a top-down more to bottom-up reserving approach on COVID.
And maybe with regard to the solvency ratio, if I understood your question correctly, it was how much is already kind of considered also on a longer-term basis. The answer here is that we have considered everything which has been accounted according to IFRS as well under Solvency II. Sometimes the valuations differ a little bit. Potential longer-term changes, so for instance, higher mortality or lower longevity, this has not been considered yet and will only be done as soon as we know what the longer-term impact might be.
And the next question is from Kamran Hossain, RBC.
A couple of questions on life and health re. You mentioned that you probably haven't baked in as much IBNR on the life side as you have on the P&C side. In terms of the EUR 63 million number that you've set aside, can you maybe give us a little bit of help on what that, like, kind of baked in? Is that kind of death as of now? Or is that kind of more excess mortality in certain specific regions going forward? And then how to think about the potential drag on results going forward. Should it be multiples less than EUR 63 million later in the year? Or kind of just any ideas how to think about that drag? And then the second part of the question is on longevity benefits. You've outlined that you could see some benefits there. And I imagine it would likely be the case. In the past, you've been fairly reluctant to recognize some of these tables have moved, but you wanted to actually see real kind of, I guess, people passing away before you recognize it. Are you starting to bake that in? Or is that just something that's another thing in your arsenal to, I guess, add in for buffers and kind of get earnings up in future years?
Yes. Klaus will address the 2 questions on…
Yes. Let's start with the IBNR. Because a pandemic is developing so fast, we thought we should change our processes here a little bit. Usually, we closed the second quarter 6 weeks before the end of June, so in mid-May for claims accounting. At least in the U.S., which is the most impacted market here, we have changed that and started booking claims until 30th of June until the last -- very last day. So the IBNR number is relatively small in the U.S. It's a little bit higher in the rest of the world. As Roland said, we have a little bit more than 50% of the EUR 63 million from the U.S., and the -- there is a certain delay in these numbers. We get in the U.S., and let's just talk about the U.S. here, we get in the U.S. 85% of our business reported on the claims side on a daily or weekly basis. That means the clients send claims basically immediately to us. There is still a delay of about 3 weeks from a person dying until the reinsurer gets the notification of the death. And there is an additional on top 4 weeks delay on average before we get the cause of the death. That means our numbers in the account are more up-to-date than the reason, or the death that we got and the reason for the death. So it's quite possible that we have even more COVID claims we have already accounted for but have not known that they are COVID. We have certainly an expectation that the claims we have seen in the first half of the year will be slightly higher in the second half of the year. This all depends where the largest country currently impacted by COVID, the U.S., starts managing the pandemic or not. When you look at the largest countries impacted right now, it's the U.S. and we have a significant portfolio there. Then the next ones are Brazil and India and was that -- Russia I guess, and we have next to no business there. So all depends on how the U.S. manages the pandemic or starts managing it. On the longevity side, we have, unfortunately, to follow certain accounting rules that's that if you have a loss in a treaty, you have to reserve immediately for whatever can happen in the future. If you have treaties performing better than expected, we cannot take that into account. So even if we change our models slightly, and we expect a better longevity results in the future, we will account for it as it comes in and not earlier. So we will not change that, and we can't.
Can I just clarify, so you said H2 is likely to be more in terms of claims than in H1. So if I was going to say EUR 63 million, it's probably going to be a bigger number for that in H2?
Yes, it will be a bigger number.
The next question is from Andrew Ritchie, Autonomous.
Sorry, I wanted to go back, first of all, some made a comment that you haven't assumed any K session recoveries. I mean I'm assuming quite a lot of the BI losses will ultimately be claimed by your cedents against cat XL treaties, which I thought cat XL would be covered by the K vehicle. So do we have a situation where your net COVID P&C loss could actually reduce over the year as the losses convert from IBNR to reported claims and a lot of those would go through classes of business covered by K? I think that's the implication, but maybe just clarify that. The only other questions I had, why was the life result so strong underlying ex COVID? I mean do we extrapolate that? Or are there some one-offs in terms of non-COVID biometric experience or the deposit treaty businesses? And the other question was in nonlife. Excluding COVID, the underlying, I think, was 98-something combined in Q2. And I'm always hesitant to draw any conclusion on one quarter. Is there any driver of that? Or is this very conservative current year reserving ex COVID?
Thank you. Sven will cover the retro parts and the underlying business of the nonlife side and Klaus will follow up on life and health.
Yes. On the retro part, Andrew, the small difference between gross and net on COVID, the EUR 8.4 million we are showing on all large loss list is actually the result from sessions against K. As I said, we have only booked those losses against K, which have actually been advised by ceding companies. We have not done the same for our general IBNR positions here. And I would not like to guide you to say this gives the potential that the net number should be lower than the EUR 600 million. But you can look at the EUR 600 million with that feature being additional conservatism built into the number. That…
I mean I guess, maybe the question is on the BI losses, as they become notified claims, is that going to be mostly through proportional contracts, which aren't covered or mostly through CapEx, which would be covered by K?
Andrew, there will be a mix. It will be some pro rata some pro risk, but of course, also some cat protections to the extent that the policy language under the cat protections are providing coverage for pandemic exposure, which is not always the case. So we can assume that there will be additional bookings against K. But when I said that 40% of the overall EUR 600 million figure is business interruption-related, which, of course, brings you to a number of EUR 240 million, this would not all be cedable to a K, given that this is coming from a mixed basket of pro rata risk and some cat. And could you repeat the question on the underlying?
Well, just -- it looked like the underlying combined x COVID was relatively high in Q2. I think it's at 98-something. And I think it was running around 97% underlying in Q1. So was there something else occurring or conservative booking or high attritional losses or something else in underlying business?
Well, as my colleagues have mentioned, we are EUR 323 million over and above our large loss budget for the first half of the year. If you deduct that from the combined ratio, you are at 97.6%. Yes, that is higher than the target combined ratio of 97%. But let me put it this way. If we had only had the EUR 130 million of noncore with major losses, and we would still have booked the full loss budget for the first half of the year, I'm pretty confident that we would have shown a combined ratio below 97%. But given COVID, given that the hurricane season is ahead of us, we decided to just let those 97.6% cost out of our machine and not really adjust on it.
On the life business, the underlying profitability was pretty strong in the first half year. There are 2 reasons for that. One is we have increased our financial solutions business, and of course, this should continue for the next couple of years. So this is not a quarter effect. This will be there for the next couple of years. And of course, I also expect that we get more chances, as Jean-Jacques pointed out, towards the end of the year to support our clients who have problems with COVID-19 and the balance sheet. The other thing is, please be reminded that we have retention of EUR 20 million per life, and 2 more claims could make a EUR 40 million difference and a swing of plus/minus EUR 50 million in the quarter would be absolutely normal. It was a good quarter. We didn't have any really large claims. But still, if you go through all the numbers and add them up, you will find a plus [ EUR 10 million ], minus [ EUR 10 million ] every now and then. So it was a good quarter. Natural volatility to the positive side, plus more financial solutions business, which is here to stay.
The next question is from Paris Hadjiantonis, Exane BNP Paribas.
A few questions from my side as well. Firstly, I think going back to the normalized combined ratio. Just wanted to check if there's any benefit from lower frequency or if you have actually seen any lower frequency from other lines of business that benefit to an extent from coverage, I'm thinking motor business, et cetera. If you have seen that, have you booked it? So is the XX [ 97.5 ] for the half year probably a bit higher? Or is the usual conservatism already in the numbers? Then the second question is on the reinvestment yield. Can you give us an idea of where it stands right now, given the pronounced moves in interest rates? And lastly, I guess this is more of a strategic question. Hannover historically has been a company that it doesn't really let the crisis go to waste. So given what is happening right now in the market, do you think that there are any opportunities for you to expand strategically in certain regions or through M&A? So if you could give us some ideas on that front, that would be quite interesting.
Thank you, Paris. So the first question on P&C, Sven will address. Reinvestment yield, Roland. And I'll take your third question.
Yes. On the normalized combined ratio side, we are seeing improved frequency in classes like motor, but we have not changed our ultimate loss ratio assumptions going into the year 2020. We may do so later in the year. But given that we are only seeing that improvement for a few months by now, we didn't feel that it's prudent to already change the ultimate loss ratio assumptions. So in a few classes, which clearly have lower losses due to the much lower economic activity, there is a certain level of conservatism built into those Euler assumptions due to the fact that we have not reduced them. But I wouldn't overestimate that effect at this stage, given that we are only talking about number of months rather than quarters where we are seeing that improvement of frequency.
Yes, Paris, I'm actually not really in a position to give you an exact reinvestment yield as we usually do so because we have implemented this derisking strategy to some extent. So in that regard, it would be a bit difficult to say if we reinvest exactly as we are invested today, reinvestment yield would be X, Y that. We definitely do invest at remarkably lower rates than we currently earn. So there will be a drag on the ROI if that continues. Again, I think we will present the more concrete numbers at the occasion of our Investors Day. In that regard, the 2.7% might not be achievable for the full year, but that also really depends a little bit on the investment -- the reinvestment policy and approach, which is a bit uncertain right now. Sorry for that.
And on your third question, I think the immediate opportunity is related to the market environment. We have loss activities for the last few years, maybe NatCat. We have the COVID exposure and expected losses and uncertainties in the market related to that, and then this is going to push the reinsurance market towards price adjustment, and I think this is a big opportunity for us. We've seen a momentum confirmed during the July renewals. So the 1st of January renewals on the P&C side, I expect it to be going into the right direction from our end. I think we already see the flight to quality in the market. Sven alluded to that, and we received numerous requests from clients from the broker community for increased shares as there's a focus on the better capitalized companies, so an additional window for us to grow and that we will take advantage of that flight to quality. I think the third aspect, which Klaus mentioned, is financial solutions, but also generally, balance sheet protection also in P&C, where we are increasing the dialogue with our clients, and we'll probably see a number of transactional opportunities in the coming 12 to 18 months also partly related to the COVID situation. M&A, we always look at M&A. But of course, we benchmark, on the one hand side, the valuations, the knowledge an acquisition will bring to us and the cost of complexity versus organic scenarios, which give us additionally attractively priced business. At this stage, with the current rate of growth in our business, the benchmark is very high for an M&A play. But we keep looking, and we never exclude it. But I think the organic opportunities are very material for us, and particularly for '21.
The next question is from Vinit Malhotra, Mediobanca.
Yes. So 2 questions for me, please. One is just when I look at the Slide 10 and see the credit, surety, 130% combined ratio, which probably implies for the full year 115% or something like that, it's quite higher than -- even in the crisis, the global financial crisis 10 years ago, 12 years ago. Is there any assumptions in your loss estimate of governmental help on this credit surety line? So that's my first question. Second question is when we talk -- we talked about the knock-on effects, thanks for splitting the credit, the COVID losses by line. But I noticed that the last element, the other -- you didn't really mention the D&O, the casualties, those kind of lines. Is it that is still not there yet? Or is it within that line and that's what we should take away?
Sven?
Yes. Let me start with the second question. Classes like D&O would be in the 15% bucket, which I mentioned. Yes, you're right. I only mentioned engineering and travel, but D&O and a few other classes would be in that bucket. But at this stage, it's only QI. I mean there's no loss estimates from the client side, and we will have to wait a little bit for potential losses to materialize on that side or not. That is an area of particular uncertainty. When it comes to the credit combined ratio, yes, you're right. With the 130%, we are significantly over and above the additional combined ratio we had to book during the financial crisis. But of course, the 130% are only booked against 0.5 year of earned premium rather than the full year's worth of premium. And secondly, the economic situation is much more severely impacted than during the financial crisis in '08 and '09. And what that will mean from insolvency point of view, which is the main trigger on the credit insurance, as you know, we -- I mean, it's still very much crystal ball gazing. I mean you know that a lot of governments have eased the rules for companies when they have to report insolvency situation due to COVID. So the companies have extended reporting lines. Some of them are coming to an end now. So we might see a first spike of insolvencies during the third quarter. And it's, of course, very, very difficult to preempt what may happen in the future when it comes to companies declaring insolvency and what will then subsequently happen with debtors either calling their debt or restructuring their debt, which, of course, is always a loss mitigating sector for the banks and for the credit insurers, restructuring of debt. So therefore, we have been a little bit cautious and put a little extra on our financial crisis experience in 2008 and '09. But that is not a great deal of science around that. It's a lot about our own expectations.
The next question is from Thomas Fossard, HSBC.
One question left on the life side. I think that in the past, you provided a sensitivity to your EBIT number, which was 5% excess mortality was implying a negative EUR 130 million on your EBIT for life. Just wanted to know if you could put the EUR 63 million in the context of this guidance or the sensitivity and if this was clearly valid one going forward. The second question was on the 15% net premium earned growth in P&C. I mean looking at the guidance, the initial guidance for 2020 that you put out early in the year, I think that you were very cautious still at that stage on the growth of -- the achievable growth on PC. So I was wondering if you could mention any big and large quota [ share ], which may have inflated the number maybe dissenting a little bit the 15% growth. And the last question is just to understand, on the Solvency II basis, so the 225%, I understand that actually, you have not provided any 12 months forward looking view in this number. So it's more maybe Q1, which has been updated for the mark-to-market movement in capital generation, COVID-19 losses but not the economic one, which would be closer to a kind of ultimate loss estimates.
Klaus, on the life side.
Yes. I'll [ take ] that. I have to admit that, to a large extent, this is your guesswork. And as I said earlier, it all depends on how the U.S. will have multi-year pandemic in the future. The 5% was the calculation we did a couple of weeks ago. We have seen that the mortality spiked in the U.S. I guess, in the second quarter, population mortality was 20% higher. But we have seen that only a small fraction of that really found its way into the insured population and even less into the reinsured population. We have been quite lucky in the sense that 2 years ago, we, for totally different reasons, increased our rates on the permanent business. And you know that COVID is especially a problem for the older population, and we had a problem with old-age mortality, and this was one of the reasons why we increased rates where we could it, so the effect on that was that the business, to a large extent, was recaptured. Now I can't tell you what claims we don't see now because we don't have the business any longer. So the 5% we used here was an artificial calculation that we assumed, let's say, the 20% mortality increase in the population will lead to a 5% increase in our portfolio. We might be lucky it might be less. We still feel comfortable with this scenario. But I would not even call it an estimate. It's a scenario calculation. I'm sorry that I can't be more precise here, but there are too many uncertainties.
Sven, on P&C growth?
Yes, on the P&C growth side, we have a rather diversified picture. So yes, there are very few big transactions in there, like a new motor quota share, which we have written in Canada and also 1 or 2 bigger transactions, which we have written in China. But the growth is coming from many lines of business, many territories. So there's no single reason driving this development. It's a combination of the better rate, which is not only giving us more premium on the existing business, but it's also making business, which we have not written in the past writable again, which we have carefully started to do. And it's the flight to quality that Jean-Jacques has mentioned. There is a very, very high demand for our security right now. And we could have grown even more if we had not restricted ourselves in a few area like credit or U.S. wind exposure where we don't feel that the time is good for us to grow our portfolio on that side. This will come back towards the end of the year for 2 reasons. First and foremost, there's partly any business renewing from now until the end of the year. So there will be very few areas from which additional growth could come from. And then, of course, in Q3 and Q4, we will see a little bit of a dampening effect from COVID in our premium because in some classes of business, as you know, insurers have decided to return certain parts of their premium to policyholders in reaction to the frequency topics we discussed earlier in the call. And as there's always a little bit of a time lag between the ceding companies doing so and us seeing it in our accounts, you will see a little bit of that in Q3 and Q4. So for the entire year, I would still expect a double-digit figure of growth on the P&C side. But closer to 10% compared to the 16% now.
And Thomas, to come back to your Solvency II question, I think I did explain that everything which has been considered here according to IFRS, has always been -- has also been considered in our solvency calculation. So that means the EUR 600 million are in and if they hold by the end of the year, it's one of the scenarios -- it's one of our best estimate scenarios. If they hold, that is fully considered. Klaus mentioned that the likelihood that potentially the IBNR in life might not have the same likelihood to hold. Moreover, we have already included in our solvency numbers the capital requirements from the remarkable growth. Otherwise, the ratio would have looked even a little bit more positive. It has also been considering the impact from the very, very low interest rates, which is a trigger for higher capital demand. So in that regard, if that all holds, then I would say the solvency ratio does consider. If you then imply that there is a longer-term impact in life where we have potentially our contracts run 20 years or 30 years or even longer, then, of course, that would need an assumption how long it will be impacted by COVID losses. The same is true for positive impacts on the longevity side. Those have not been adjusted yet. And again, if 2021 does see additional losses, again, that would only be 1 year of a long row of Solvency II future cash flow implications. I hope that addresses your question.
I'm just seeking clarity on that just because some of your peers are taking the 12-month view on Solvency II because it was 1 year forward solvency calculation, but you make it clear.
[Operator Instructions] And we do have another question from Vikram Gandhi, Societe Generale.
I've got a conceptual question on life and health re, specifically with respect to the higher [ semi-short ] policies. I think the comment made was that the net retention of life is $20 million to $25 million, which is consistent with what you've said in the past. My understanding is that these policies are generally meant for the ultra-high net worth individuals at older-age groups who go for this tax wrapper, if you like, for inheritance tax planning or estate tax planning. However, for a policy of, say, $20 million, the premiums should be around $15 million, $16 million hypothetically. And so the net amount at risk, if that's the correct technical term to be used, should be pretty low. So then why should a couple of claims on these large [ semi-short ] policies be really a material swing factor for the EBIT, is my question.
Yes. I take that. Nobody else volunteered to answer that. When you have a YRT treaty, you have a risk premium base. And there is -- although you're absolutely right, over the lifetime of the policy, you would expect that somebody pays the amount he finally gets, but the way how it works on the accounting side, from a reinsurance perspective is that we have the YRT premium, the risk premium. And if somebody dies, then this is a full claim for us because there is no reserve. You have to distinguish between level premium, where you get the same premium over whatever the lifetime of the policy, and then you're absolutely right, but usually this is reinsured on a risk premium basis. And then the balance is the diversification in our portfolio, where people don't die and just pay the premium and 1 or 2 might die. But these 1 or 2, if we expect 3 of these claims in a year, and we have 5, then it's 2 more than expected, and that is basically the full amount minus the risk premium of that particular year. This is how the accounting is done. Of course, it should balance out, but it doesn't have to -- over the long run, it would balance out, but we don't get level premium every time. And honestly, in these days, we don't like level premium that much because then you have to invest. And you have to tell the client, "Okay, if you give me the level premium, I take into account 3% or 4% of interest return," and nobody makes that these days. So the client is interested to keep the cash and only pay the risk premium stuff.
Okay. So the level premium presumably must be on the coinsurance treaties?
Right. That's correct.
The next question is again from Vinit Malhotra, Mediobanca.
Very quick one. I'm sorry, Klaus, the -- for life side in the U.S., the -- are you able to provide some indication of how much are the older ages in proportion to the population or something? I'm sorry, you might have commented in another Investor Day, but I can't seem to recollect that, if you have provided that.
We have about, I think, 1.2% of our portfolio is aged 80 or older by amount. And if you just count the lives, then it's only 0.8%. So this is relative to our competitors, I guess, a slightly smaller amount of old-aged people. Basically due to the fact that in the very early days, let's say, before 2008, we were not really a big writer and then we bought the Brock portfolio. And later on, we started writing more business, what you will probably know under the name of the organic business. And the organic business is pretty young and it's already a large chunk of our portfolio, but we have only written that from 2010 onwards. And from the Brock portfolio, as mentioned earlier by me, quite a substantial part of the YRT treaties of permanent life, whole of life have been recaptured. So this is why our share is a little bit smaller here.
And there is another question from Andrew Ritchie, Autonomous.
Two short ones, I think, one, potentially very short. On the business interruption assumptions, are you able to say -- there's quite a lot of life court cases. There's one particular significant court case ongoing. Are you able to say -- have you made a sort of risk-adjusted assumption on the outcome of those court cases? Or I mean, would -- should they go against the industry? Would that necessitate additional reserves? Can you give us any sort of more specific color on that? And the second question, just on ordinary investment income. It wasn't clear, is there a sort of temporary effect on lower dividends from -- or lower returns to private equity and real estate? Or I mean, would you consider some catch -- there might be some catch-up on that. Or is this -- should we just adjust ourselves to a permanently lower level of return from those alternative assets?
Sven?
On the business interruption side, we have assumed that there is no retroactive change of coverage in the United States. So that would not be baked into the EUR 240 million I was mentioning. And for Europe and a few other court cases elsewhere outside Europe, we have taken a balanced view. So if all these cases should go against insurers, then the EUR 240 million number would not be sufficient. If insurers should win all cases everywhere, then the EUR 240 million would be a proven number.
And Andrew, with regard to the expectations of the income from alternative assets, I don't see any reason why this should not recover or even catch up. And I'm sure that the private equity funds might also see opportunities driven by the crisis. Of course, it's uncertain as to when that will happen. But to now assume that even after a recovery of the economy, investors will digest or accept lower yields for such exposures just wouldn't make sense to me.
And we have another question from Thomas Fossard, HSBC.
Yes. A very last one. Regarding the situation in Lebanon, I know it's very early days, but I guess at the level of understanding we have of this kind of market is pretty low. So could you shed some light on where and how you would expect losses to hit the market, not -- maybe not part of a re specific, but more a high level comment, if you have any?
Well, first and foremost, we're very sorry to see this tragedy happening yesterday. And it's very, very early days. We don't have an overview when it comes to loss of life or loss of property at this stage. Of course, the impact for the infrastructure will be massive from an insured point of view. It's too early to say what is the penetration of insurance in that particular area. Given that it's a harbor industrial-related area, we have to assume that there is a good level of penetration here -- so from that point of view. I guess, you will see this on our major loss list in the third quarter, but I would have no feel at this stage to what extent this will be a major loss. That it will be a major loss for us, I see as pretty certain. But whether it's a low double-digit or high double-digit or even 3-digit number, it would be impossible for me to comment right now.
And there are no further questions at this point. So I hand back to the speakers for closing remarks.
Well, thank you very much for your participation and your questions. I think we covered the ground very well. We wanted to give you the latest updates on our best estimates on the exposure of COVID-19. We tried to be very cautious looking at client information, market information, our own portfolio bottom-up view. Still difficult to predict. We said there are still remaining uncertainties, but at this stage, our best estimate is that this will be an earnings event for Hannover Re in 2020. The underlying business is very strong, as we discussed, and we're very confident about the quality of the portfolio. And the outlook is positive. We have price momentum, particularly in P&C. We have growth opportunities and a strong pipeline in structured reinsurance. And I think the FICO quality phenomenon continues to give us additional upside. So that's, I think, the key messages for today. But thank you very much for your attention and participation, and have a good day.