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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, everyone. Welcome to this conference call, where we'll be presenting our first half results. And as usual, I'll kick things off before our CFO, Clemens Jungsthofel, will go over the financials. And I'll then comment on the outlook for the year at the end. And for the Q&A, we're together with our Board colleagues, Klaus Miller and Sven Althoff. On the first slide, with a context of challenging macroeconomic and geopolitical environment, I'm pleased to present a successful first half year results. The war in Ukraine has confronted the world with economic energy supply and financial challenges, much worse. However, it has caused a great deal of suffering for many people, especially in Ukraine. There's no question that the war will likely have an impact on the insurance and the reinsurance industry. But given the uncertainties and limited information available, it is not easy to estimate likely exposures. But before I comment on this, let me give you an overview of Hannover Re's business development in the first half of this year. Against the backdrop of an improving reinsurance market price environment, combined with solid demand for high-quality reinsurance, we increased our group gross premium by 13%, adjusted for exchange rate effects. Growth was particularly pronounced in non-life reinsurance, and furthermore, the return on equity of 12.4% is above our target and in line with our historical track record. We have absorbed a number of large loss events in the first half of 2022. The net income of EUR 649 million contains the EUR 194 million of COVID claims in our Life & Health book and a number of nat cat and man-made events amounting to EUR 543 million. On top of this, we have built a precautionary provision of EUR 316 million for possible losses from the war in Ukraine, which encompasses political violence, war on land, credit, surety and political risk as well as marine and aviation business in that order. We have built our reserving on scenario analysis as the loss information from clients remains very limited. On the one hand, we do not view this reserving as an ultimate number because the war is still ongoing. But on the other hand, we increased the precautionary reserving of the first quarter by EUR 180 million in the second quarter in order to recognize this event to the best possible extent in our reserves.
In life and health reinsurance, the pandemic continued to impact our results. COVID-19 pretax losses were at EUR 194 million in the first half, with the majority of claims emanating from the U.S. market. On a positive note, we were pleased to see that claims payments are declining as expected and this expenditure was partially offset by further relief from our extreme mortality cover. Overall, in addition to some positive one-off effects, the underlying profitability of our life and health book was particularly strong, including longevity and financial solutions. The investment performance was again very satisfying. The investment return of 3% is well above our target for the full year, partly due to high returns from our portfolio of inflation-linked bonds and, of course, an improving reinvestment yield. The group's capitalization remains excellent as reflected in our solvency ratio of 235% at the end of the first half of this year, being well above our limits and threshold numbers. The development of credit spreads and foreign exchange rates led, however, to a slight decrease compared with the end of the year, driven by the extraordinary development in the capital markets. On the other hand, the rise in interest rates was slightly positive to the ratio as expected. Overall, I'd say that these half year results reflect the strength and the resilience of Hannover Re's business model and are pleasing in the context of the current volatile environment. On the next slide, as usual, you see the operating cash flow is an important metric for us, and it continues to be strong. As you can see on the right side of the slide, it has fueled the growth in assets under management in recent years. In 2022, the attractive reinsurance growth and favorable investment results led to an operating cash flow of EUR 2.1 billion. Together with the support of a stronger U.S., this offsets the significantly negative valuation effect that increasing bond yields had on our investments. Against this backdrop, I'd say, it is a positive surprise to see our assets under management at EUR 56 billion, on a par with year-end 2021.
On the next slide, the rising interest rates had a significant effect on the asset valuation and hence on unrealized gains and losses booked in the OCI. This decreased shareholders' equity materially compared to the end of the last year. Looking at this development from an economic perspective as Solvency II does, the capitalization group remains relatively stable. And given our asset liability matching, this is the more relevant view in our opinion. Apart from this, higher interest rates are, of course, not only having a negative valuation effect. They also offer the opportunity to reinvest our money at higher rates, which is a big positive for our ordinary investment returns. On that note, I hand over to Clemens for more insights on the financial performance.
Yes. Thank you, Jean-Jacques, and good morning, everyone. Turning to Property & Casualty Reinsurance. As Jean-Jacques mentioned, the strong growth in P&C continued in the second quarter. The currency adjusted growth of 18.2% is very diversified across traditional and nontraditional lines of business. Still, we expect growth, particularly in structured reinsurance to decline, in the coming quarters, in line with development, as you know, in recent years. As you know, the major loss burdens in the first half of 2022 was EUR 850 million. On nat cat, we were roughly at the expected level, and it was, as Jean-Jacques mentioned, rather the additional precautionary IBNR we set up for the Russian war in Ukraine.
We have increased our first quarter reserving by EUR 180 million to EUR 316 million. And again, 95% of this amount is really IBNR. So what we did is we have strengthened reserves for specific segments in Property and Marine, where losses may have likely occurred.
In property reinsurance, this is based on exposure to political violence and war on land. And we have no new information on aviation. However, we have allocated some IBNR to this line as well just to reserve for possible legal expenses as well as repair and maintenance costs. Furthermore, we have now also reflected the possibility of losses and credits in credit and surety and political risk reinsurance in our reserving.
In the second quarter, the losses relating to the Brazilian drought have developed because it is only now that we can actually observe the effect of the drought that started last year. This resulted in a negative runoff for prior year losses of EUR 130 million, of which EUR 105 million were reported in the second quarter. Apart from this, we have also seen some loss developments for other major nat-cat losses in 2021, which had an effect on the combined ratio as well.
At the same time, we released EUR 88 million of our COVID claims because following an in-depth review, it became rather difficult to argue that those IBNRs are still necessary. Looking at the COVID-19 reserves, we still have a significant amount at IBNR 37% to be precise. If we adjust the reported combined ratio of 99% for the higher-than-expected large losses, including Russia and Ukraine as well as some positive and negative prior year development, the underlying result is around our target of 96%.
Net investment income increased on the back of very strong ordinary results. It includes the inflation-linked bonds. In P&C, as you know, we buy to protect P&C reserves. Currency effects in other income and expenses increased year-on-year remained negative in the income statement, but were offset in OCI and you know that's the -- rather an accounting mismatch, as I mentioned in previous calls. The resulting EBIT was EUR 586 million. Finally, the increase in the tax rate can largely be explained by a lower share of profits from subsidiaries in countries with lower tax rate.
On the next slide, as I already mentioned, major losses on the NatCat as well as on the manmade side were at EUR 543 million, so roughly within the budget of EUR 608 million. In the first half year, the Ukraine IBNR amounted to 3.2% of net earned premium.
On the next slide, the largest item on the list of major losses, as mentioned, is the war in Ukraine. As Jean-Jacques already mentioned, only very few claims were presented from clients so far. Therefore, we base the initial reserving on scenario analysis. So the book number is on a gross for net basis without considering any potential retrocession at the moment. Apart from this, the Australian flood and the European storms accounted for half of the remaining large losses. The impact from man-made losses of EUR 27 million in total was moderate.
The next slide shows the technical profitability of our P&C portfolio by reporting line. The picture is a mixed one. The combined ratio for EMEA reflect the various storms and the hail in Europe and some of the Ukraine IBNR. The APAC combined ratio can be explained by the Australian flood, the South African flood, the Japanese earth quake and the flooding in Malaysia from last year which came in as prior year development. By contrast, the Americas were mostly spared from large losses and shows strong underwriting profitability.
Within the worldwide market, aviation and marine includes one large loss and the other part of our reserving for the Ukraine war. In agriculture, the drought in Brazil is here the main driver of the higher combined ratio. And credit and surety as well as our facultative reinsurance business were in line with the targeted combined ratio. On credit and surety, the reserve release we mentioned earlier on COVID has contributed to the combined ratio, but at the same time, we built an IBNR in credit and surety as part of our reserving for Ukraine, as mentioned before.
On the next slide, moving on to life and health now. Gross premium overall was stable at 0.3% adjusted for currency effects. However, this does not mean that we did not see growth opportunities in the first 2 quarters. Our mortality and longevity business recorded a pleasing premium development. Furthermore, the business growth in Financial Solutions was very good but it's generally, as you know, not fully captured in the top line because a significant portion of the business is booked according to the deposit accounting method.
Reason for the slow growth in premium volume is the ongoing decrease in larger parts of the mortality business and the discontinuation of one sizable individual treaty in morbidity business in Asia. The technical result in life and health includes COVID losses of EUR 194 million, which is clearly an improvement compared to the last 2 quarters and to the previous years. The biggest impact came from losses in the U.S., amounting to EUR 109 million. And as explained in previous calls, the expected payout of our pandemic retro cover needs to be reflected in the market value in our investment income. And even though the official calculations are not yet concluded, based on our own analysis, we feel more comfortable that the excess mortality for the 2-year period of 2020 and 2021 is actually higher than assumed at year-end 2021.
To be precise, we now assume that the index, which is relevant, stands at roughly 116% versus the previous 114% in Q1 and hence, an amount of EUR 88 million is included in the life and health investment income in the first half of 2022.
Still, I would not call this calculation final, and I would add that we have been probably rather on the conservative side in our assumption.
Longevity, the result in our longevity book is, again, very strong, not driven by one-offs, but rather by smaller positive developments from updated mortality data, which was favorable compared to our rather conservative initial assumptions. The Financial Solutions business continued to deliver a strong and growing contribution to the life and health results. And furthermore, the underlying mortality was favorable in several geographies. Last but not least, we've seen some support from currency gains in life and health.
The investment income from assets under own management improved, mainly driven by the explained valuation effect from the pandemic bond. Additionally, the ordinary income increased by around 20%. We also recorded positive valuation effect from an equity participation of EUR 20 million in the first quarter. The fair value of financial instruments includes a negative impact of close to EUR 92 million from a U.K. embedded derivatives in the first half of 2022, but that's also, again, mainly an accounting effect and not an economic one as I believe we mentioned in our first quarter call already.
Other income and expenses are mainly driven by a further increase in the contribution from our financial solutions business, where a large portion, EUR 219 million, is recognized according to the deposit accounting method. Altogether, the EBIT of EUR 334 million is built on good underlying profitability. Additionally, the results include some positive one-offs. For example, the recapture fee for a contract termination amounted to EUR 40 million, and we already mentioned EUR 20 million from an equity participation.
On the next slide, looking at the non-IFRS metrics for business growth. The development is more meaningful than the accounting view on premiums. We have seen particularly good business opportunities in financial solutions, mainly in the U.S. market. If you consider the indicator for the value of new business at the bottom of this slide, you can see that we enjoyed a good development so far, and we are on track to reach the EUR 250 million value of new business target.
Even more important, we have a healthy pipeline in all 4 reporting categories. Just as with the business written in the first half of 2022, the mature markets currently look a bit more promising.
On the next slide, turning to investments. Jean-Jacques mentioned it already, the development of our investments was very pleasing. The ordinary investment income is particularly strong. A number of factors play a role here. Even more so than in the second half of 2021, our portfolio of inflation-linked bonds within P&C performed very well in light of current CPI figures and contributed roughly EUR 200 million to the ordinary investment income in the first half. Additionally, the unchanged high amount of asset volumes and higher reinvestment yields are more and more visible in our returns from fixed income securities. And on top of this, the returns from real estate has been rather strong in 2022 so far and also private equity contributed as expected on a high level.
As we sold the remaining part of our listed equities at the beginning of this quarter, some gains were realized, but I'd say the overall amount of realized gains naturally decreased in the current yield environment. Impairments and depreciations are at an expected level, to a large extent, comprising regular depreciation on real estate, but we've also impaired some of the Russian and Ukrainian bonds.
As mentioned in my comments on life and health, the change in where fair value through P&L includes 2 rather large individual effects, the mentioned U.K. embedded derivatives as a negative and the mortality retro as a positive. Apart from that, the sum of derivative valuations was a positive and the overall return on investments was 3.0%, significantly above our full year expectations of at least 2.3%.
Yes. And then at the bottom of the slide, you can see the remarkable impact of rising interest rates and spreads on asset valuations. Given that we have not actively harvested a lot of unrealized gains in the past, the starting point was, of course, high. So it was not a surprise to see this number decreasing at some point in time. So I would rather view this as an accounting effect and not an economic one. As you know, we follow strict asset liability duration matching. So this development is not really varying the economic view. I guess it's a better reflection with only -- not only looking at the asset side, but also integrating the effects on the liability side. But after years of reinvestment years below the running yield of the portfolio, we are now seeing a positive impact for the reinvestment yield.
On the next slide, the asset allocation, as you can see, more or less unchanged. The minor shifts are mostly driven by the relative changes in asset valuation. In general, we focused our reinvestment in the first half, in line with our strategy, a bit more on the govi and higher quality side. The contribution to ordinary investment income is diversified as usual. The most significant development compared to the previous year is this 33% contribution from government bonds, reflecting the strong contribution from our inflation-linked bond portfolio, on the one hand, and rising interest rates on the other hand.
Following a particularly good year for private equity in 2021, the performance in the first half year was strong at lower levels, but I would call it natural volatility in this asset class.
To conclude my remarks, the first 6 months of 2022 presented some challenges for the reinsurance industry overall. For Hannover Re, it was another opportunity to confirm our resilience and our ability to deliver attractive returns whilst maintaining our prudent approach even in difficult times. And as things stand today, the overall performance to date gives us confidence that we will achieve the group net income within our target range.
On that note, I'll hand back to you, Jean-Jacques, for the comments on the outlook.
Thank you, Clemens. Before coming to the outlook, I'd like to take a brief look at our target matrix. And I'll highlight 3 points here. The most important achievement is the first half -- in the first half is the net income, in line with our expectations. And this confirms, as mentioned, our full year guidance despite significant negative impacts within the results. The second point is our Solvency II ratio. We continue to be financially healthy, high-quality and sought after reinsurer, which creates strong demand from our clients and helps us grow our business on the back of an improving rate environment, particularly in the P&C business.
And lastly, our ROE is well in line with our past track record, even if it's helped by the OCI movements, but it's ahead of our strategic targets. And these 3 points are core to the company, strong profitability and reliability even in difficult times and the ability to take advantage of growth opportunities across market cycles.
The next page summarizes the outcome of our P&C midyear renewals. We have seen favorable demand overall in a continuation of the positive price momentum, limit management and inflation were the most notable topics during the renewal. We have not changed our view on NatCat-related business in the Americas, meaning that we have not increased our risk appetite for U.S. wind and earthquake exposed business.
Primary pricing trends are also showing sustained improvement, which is very good for us as well. The same is true of property reinsurance. The second geography worth mentioning is Australia. Severe large losses in the past months and years have had an effect on the market, with some capacity having been withdrawn and price is now increasing materially.
Just want to point to 3 aspects on this slide. First, a major part of the growth stems from new business, in particular, in Australia. A major part of this is, however, for solvency relief purpose and has less focus on NatCat business. Secondly, we experienced growth of the underlying business of our existing clients, as you can see in the change in volume. And thirdly, we were able to increase the risk-adjusted price by about 4% across proportional and excessive loss business. The risk-adjusted view includes higher inflation assumptions compared to last year.
This brings us to the guidance for 2022. Given the higher-than-expected growth during the P&C renewals in the past months and the continued strong demand for the structured reinsurance business, we have increased our volume guidance from at least 5% to more than 7.5%. This is across P&C and life and health. Despite this change, one thing remains the same, we continue to focus more on the underlying profitability of the business than on premium growth. The group net income of EUR 649 million year-to-date is, of course, below the average run rate, but this was already expected due to a front loading of anticipated COVID losses in life and health and prudent reserving for the Ukraine war. As life and health produced a very strong result, this provides some offset for the lower underwriting result in P&C year-to-date.
While we booked a combined ratio above target in the first half of the year, the expectation of reaching our combined ratio target of 96% in the isolated second half of the year remains unchanged.
In P&C reinsurance, inflation will clearly be one of the key topics, both in renewal negotiations ahead of 2023, but also in discussions with our investors. In our pricing, we adjust the inflation expectation regularly and have done so last year and this year, in particular. We use the empirical data as well as forecasts on future expectations. We also make additional adjustments. We call this superimposed inflation for areas where social inflation or legal costs or medical inflation have a material impact.
The recent renewals show that we are in a position to ask for higher rates, and we were able to integrate, as mentioned, this higher inflation expectations in our pricing. About 1/4 of our treaty business is already protected against inflation through indexation, as you know. And in part of our portfolio, we have further protection through sliding scales in the commissions. In addition, we participate in proportional business through the rate increases of the primary insurers and this will be a key topic as we renew the business in the coming year. So overall, this gives us the high confidence of being well protected going forward against inflation.
To have further protection against inflation, we have seen -- we have been investing in inflation hedging products since 2009, Clemens mentioned it. We currently hold the portfolio of around EUR 5 billion in inflation linkers, which consists of 44% euro and 48% U.S. dollar bonds and only a small portion of Australian dollar bonds. This position had a positive contribution in the investment results, as mentioned. And year-to-date, they contributed around EUR 200 million as much as in the entire previous year. In addition, there is a natural hedge against inflation by investing in real assets, in particular, of course, real estate or infrastructure.
Last but not least, we can rely on our well-known prudent reserving approach as we reserve higher loss ratio picks, particularly in longer lines. As you know, our independent external actuary estimated our redundancies at about EUR 1.7 billion lately. In the fourth quarter, we used part of the inflation linker results for the redundancy increase and further improved our position. This was purely a precautionary measure. As to date, we have not observed any significant inflation effects in the runoff of our reserves.
Against the background of the good development of our investment results, we're also adjusting our guidance to at least a 2.5% return on investment. Of course, we remain in volatile capital markets, but the inflation hedging instruments and the rising interest rates have a positive effect, which we take into account in this figure. All in all, we're confirming our net profit guidance of EUR 1.4 billion to EUR 1.5 billion for 2022. As always, under the provisor that the large losses will remain within our large loss budget, and we do not see any adverse capital market impact in the second part of the year.
We are confident to achieve the guidance, given the expected decrease in COVID losses and strong underlying performance in life and health, the favorable investment results and the continued price momentum in P&C. Furthermore, our strong reserving position provides an additional comfort level in that context.
Dividend capacity continues to be our top priority. EUR 4.5 ordinary dividend per share announced in March 2022 is our floor for the ordinary dividend. The decision on a potential special dividend will, as always, be made early in the next year based on the actual full year results, our capitalization levels and our future growth plans for 2023.
Before closing, I'd like to mention that our Supervisory Board has appointed Sharon Ooi as an additional member of our Group Executive Board, effective January 2023. We have issued a separate announcement this morning to this effect. As you know, we're strengthening our focus on Asia Pacific as a key long-term growth region, and Sharon will oversee the further expansion of our property casualty reinsurance business in that important region, starting, as mentioned, in January. So we're really delighted to welcome her to our Executive Board as a new member as she will play a crucial role in shaping our company's further expansion in Asia Pacific. With this, let me conclude the remarks on our figures year-to-date. And as always, we're happy to answer your questions.
[Operator Instructions] The first question is from Andrew Ritchie of Autonomous.
I had a couple of questions. First of all, you mentioned the -- that there is sliding scale commissions in some of your proportional business, which protects to some degree against inflation. Maybe just focusing particularly, I guess, on motor, to what degree are you comfortable those sliding scales are enough of an offset to some of the pressures we're seeing in that class? And maybe just your thoughts as to the risk of a bleed through from some of the severity pressures being seen at the primary level into particularly that class, but maybe broaden it out proportionately. In other words, will the sliding scales really offer enough protection? Second question. Could you just give us an outlook, Clemens on the ROI, return on investment? I appreciate you've raised the target for this year, but that's sort of backward-looking reflecting the gains on the inflation linkers. When I look forward, I'm having difficulty weighing up 3 factors. One is a higher reinvestment rate for bonds because interest rate has gone up versus secondly, likely lower gains on the inflation linkers. And thirdly, I'm assuming lower gains on the private equity and real estate. So how would you give us some comfort on the ROI? And I'm not thinking for the rest of this year, I'm thinking more looking into '23.
Thank you, Andrew. So Sven on the sliding scale and Clemens on the return on investment. Sven?
It's Sven. On the motor side, you're, of course, highlighting an area which had a very good experience during COVID times due to the lesser driving. And now that the road traffic is back to normal in combination with higher repair costs, we certainly see pressure on particularly the motor physical damage side of the loss ratios. There are only a few jurisdictions where we write a motor quota share business for risk transfer purposes, like, for example, in Germany. Many other jurisdictions like, for example, in the U.K. we are not writing any traditional motor business and only write small amounts in our advanced solutions structured unit, which is naturally better protected against adverse loss ratio development compared to the traditional business.
So at this stage, we would say that on the bulk of the motor business, we have the sliding scale commissions should be able to absorb most of the hit. And in addition, with the high original loss ratio picks, we have in our reserving in any case, we are not expecting how you called it a major bleed through from our motor proportional business due to inflation.
Clemens?
Yes. Andrew, on the investment side, yes, it's a mixed picture. I mean, you rightly mentioned, as for 2022, the ROI is pretty much affected by the inflation-linked bonds. So if you take those effects out, then we are rather at our target level, probably a bit higher, our target level due to good contributions from private equity and real estate, still, et cetera. So we are a bit higher.
Looking forward, it's not an easy exercise, to be honest. I mean, yes, we do have higher reinvestment yields at the moment. Our book values, depending on which currency you look at, at the moment on U.S. dollar, rather, so fixed income locked in yields rather around [ 2.7 ] on euro around [ 1.5 ]. And then of course, with reinvestment yields even being higher at the moment. So there is an expectation that our ordinary income from fixed income will increase, of course, compared to now. Then on the realized gains, I would say, it's probably a bit lower number than we've seen in the past, although we have not taken advantage of unrealized gains to a large extent. On average, we always had roughly EUR 150 million from income securities as well. So I would expect that number to decrease or probably stay stable in our overall portfolio. Then we have the inflation-linked bonds. You rightly mentioned that we cannot see this number that we've seen in 2022 as a recurring number. I would see large effects also in Q3, slightly lower in Q4. And then the mechanics of the inflation-linked bonds is really, as you know, it's -- those are government bonds with embedded inflation swaps. So we have a fixed lag, where we have an expectation, let's say, for euro 1.5% of inflation expectation as a fixed lag, and then we have a floating lag, which is depending on the actuarial -- on the actual expectation.
So that's one element of the inflation-linked bonds of the ordinary income. But there's also an amortization effect due to market valuation. So it's very difficult to predict those, but I would expect them to the contribution to expect those to decrease, of course, in the future. I can't give you an exact number, as you will appreciate, but those contributions will have a lower effect next year.
So then as you mentioned, Andrew, I think on private equity, I wouldn't see the regular contributions of the distributions to decrease. I would expect them to stay those on an elevated level. However, as you know, the unrealized gains are now part of the OCI, whereas in the future, those might flow through the P&L. So there might be a rather one-off effect probably in 2022 -- in 2023, 2024, with a drag on valuations, which we don't know because valuations are very high at the moment on private equity. So there might be a bit of an effect on 2023.
And then, of course, with other 9 [ ECL ], there might be also a one-off effect on that, so expect credit losses. If you put that all together, I wouldn't be too optimistic about -- and I don't want to speculate about ROI targets for 2023 at the moment, but I wouldn't be too optimistic that it's very much higher than our target 2022. But we will see and form a picture later in the year. So I would expect a slight uptick to our target, but not massive.
The next question is from Kamran Hossain of JPMorgan.
Two questions for me. The first one is, I guess, the claims that you booked relation to the war in the second quarter. Can you maybe just give us a view on whether this is your ultimate kind of view of the losses or the claims from the conflict? Because it seems like you're taking a slightly different approach from some of your peers that seems far more precautionary than some of them?
The second question is on, I guess, COVID and kind of credit reserves within that. How much of the COVID credit reserves do you have left? And I think you mentioned IBNR of 37% left for COVID. What are the triggers left for further releases because it does feel like we're a pretty long way down the line on this?
Thank you, Kamran. Sven?
Yes, starting with the Ukrainian war, I mean the news flow coming from our ceding companies and from Ukraine itself, was very limited during the second quarter. So as Jean-Jacques explained, our IBNR reserving is completely based on scenarios rather than re-effect. And we took the view in the second quarter that when it, for example, comes to the physical damage-related exposures that given the fact that the war is still going on, that the amount of damage will have increased compared to the view we have taken after the first quarter.
A lot nonetheless still will depend on the other classes of business like trade credit, political risk, on how the world will look like after the war. So from that point of view, we would not say that the reserve position we have now taken is forming an ultimate view of the Ukrainian exposure or the exposure from this war. And we will be in that uncomfortable position until such time that the war is over, and we have more clarity on what really happened on the physical damage side and what is happening to the assets from a, for example, quantification point of view after the war.
So from that point of view, we only have a small fraction of the overall reserve coming from ceding company reserves at 95% is IBNR coming out of scenarios rather than re-effect.
On the COVID side, after the release on the credit and surety side, we still have another EUR 90 million of credit and surety reserves as part of our forward reserving. And we have not taken a view, obviously, whether this is an amount which we will keep also for the year-end closing or whether there will be further releases. This is an exercise we will only do in Q4 most likely, and I wouldn't be able to give you any guidance in that respect right now.
The next question is from William Hardcastle of UBS.
Two questions on reserves and PYD. And look, I fully recognize you're coming from a very strong starting point. Trying to understand the comment you made there on inflation in bonds benefits and the reserves in PYD, you sort of linked those 2. Presumably, you're buying these bonds because you'd expect the liabilities to go up. At the moment, we're seeing the benefit on the P&L investments coming through. But am I right, no adverse movement on the P&L from the liability uplift? Or are you offsetting? I'm not sure I fully understood what you said. And then on the second part, there's lots of moving parts on this PYD. There's the drought uplift. Does the other cats you mentioned that have been inflated from prior years and then somewhat offset by the COVID release. Was all of this filtered through P&L? Or do you think there's some buffers being absorbed?
You want to take it?
Yes, let me start with the second question. Clemens will take the first question. Yes, you're right. I mean there was a lot of activity also on the prior year side, was all absorbed through P&L to answer that question. And the reason why we had more than usual prior year development is a combination of factors. Like if you -- if we start with the drought in Brazil, that situation started late in 2021. But when we closed our books for 2021, it was by no means clear how long and how severe that drought would be. That view only developed during the course of the first and second quarter. So therefore, the drought was much more severe and much longer than originally expected, which is explaining the significant development on that side.
If you look at some of the property-related losses like the flooding in Malaysia, this was just very late client reporting. So we didn't have a chance to put it into our book closing 2021, and the news only came in this year. And thirdly, if you look at some of the U.S. losses like Idah and the winter freeze. I mean you do see a certain impact from the inflationary environment. I mean you basically have 4 factors to observe here. One is a slower loss adjustment process in the original adjustment of the loss given COVID times. Second, you have the higher repair costs due to higher raw material and energy prices, i.e., what we would summarize under inflation. You also have longer repair times due to still a certain degree of supply chain disruption. And then fourthly, when it comes to the U.S. losses, in particular, you, of course, also have currency effects given the stronger evaluation from the U.S. dollar. So this hopefully gives you a few points that are explaining the prior year loss development. But coming back to the question, again, we've taken it really through the P&L.
On the inflation bonds and/or reserving with I think the observation is completely right. I mean, you mentioned that the inflation-linked bonds or the effects of inflation in bonds under IFRS, let's put it that way, are not synchronized with the view that you could have on reserving. That's for sure because the inflation-linked bonds, as mentioned earlier, they have a regular income effect from the embedded inflation derivative, inflation swaps as well as the market valuation. So there is a front-loaded effect, I would call it, probably from the inflation-linked bonds in the P&L that we see at the moment. EUR 200 million last year, EUR 200 million for the first 6 months this year.
And on the reserving side, at the same time, on our long tail lines, we don't see any effect yet in our paid claims. So there's no immediate effect from inflation observable in our long tail lines, whereas some of the prior year developments from large losses, I would probably allocate, Sven also alluded to probably 2 inflation effects, of course, there. So it's a bit of a mixed picture.
What we did in 2021 actually is we used a substantial portion of the contribution from the inflation-linked bonds to increase, really just a broad brush approach, our reserving level to reflect on that. And we will, of course, do a similar exercise in Q4 when we think about our year-end reserving how much of the contribution from the inflation-linked bonds we might use to increased prudency level in IFRS really just as a precaution. Again, not as we are seeing anything, and I wouldn't expect at this moment any impact from inflation on our reserves under IFRS. However, we might think about it at year-end to really use some of that to increase prudency levels.
The next question is from Freya Kong of Bank of America.
Two questions, please. So your June, July renewals of risk-adjusted rate increases of 4%. What does this bring us to on a year-to-date basis, if you were to reflect updated inflation expectations throughout the year? And how should we think about this translating into margin improvement over the next 12 months?
And then secondly, sorry, just to come back on the reserves. Given all the moving parts and you're saying that this was absorbed within the P&L, net-net, was your runoff still positive for H1? And sorry, just a third question, if I can. So you've made retro recoveries against your the Ukraine provisions. Are there any potential recoveries we can see later down the line? And what's a reasonable assumption to make around this?
Yes, starting with your first question. As you know, we are reporting about the risk-adjusted rate changes on a quarterly basis. So I wouldn't have a year-to-date figure for you, unfortunately.
How this will translate into the combined ratio target for 2023 is something we will discuss in the autumn. And like Clemens said, like on the ROI question, the prior ROI question, that we will connect to you later in the year how that translates into combined ratio target.
For Clemens is answering your reserving question, I can answer the retro part of your second question. You're correct that we have not booked any retro recoveries against the EUR 316 million reserves. So that's the gross for net position. And whether or not during the further course of how that reserve may or may not develop, this situation can change and then it depends on which lines of business are impacted by further reserve deterioration in case there should be any. So I would not speculate about potential retro recoveries at this stage. But you know that we have carried a proportionate vehicle, which is also covering our marine and aviation of loss business, and we also have limited protections in place on our war exposures.
On the runoff result, as Jean-Jacques mentioned, there are a couple of positive negative effects in -- overall, it's still a positive number, a substantial positive number, slightly lower, though than -- if I recall it correctly than last year, but it's still a positive number for the first 6 months.
The next question is from Vinit Malhotra of Mediobanca.
Just apologies for slightly pick you on, on Ukraine, but in the scenarios you have built, it's notable that you have taken an aviation loss scenario, but only for legal and repair costs. In your view, I mean, what's the reason you have avoided actual loss of planes or is it because of -- I'm just curious to hear what you think of that kind of scenario or possibility as much as I appreciate that it's not over yet but just curious to hear.
Second thing is that in the [ EUR 1.13 billion ], could you just confirm if there is any actual recoveries presumed there? Expect not because it's not peak, but just wanted to check that. And lastly, on other income, which is not a very strategic topic. But I mean when I see EUR 119 million hit in Q2 standalone. Could you just remind us that sort of the dollar-exposed business like yourself, why is this spending in dollar such a negative hit? Or maybe other currency is at play but just curious to hear that.
Yes, I'll start with your first 2 questions, Vinit. On the Brazilian drought, we don't have any retro protection in place. We are currently not buying any this retrocession protection on agricultural exposures. When it comes to your aviation question in relation to Ukraine, Vinit, the situation has not changed from Q1. I mean, there are questions around what does sanctions mean for the coverage provided by the market? What do cancellations under war provisions mean for that coverage? So like we said, after the first quarter, there are legal complexities at various levels surrounding the aviation situation in Russia and Ukraine. And consistent with the view of our ceding companies, we have not taken any special provisions other than those mentioned by Jean-Jacques on the aviation side also after the second quarter.
Could you perhaps repeat your last question? We are not sure we understood your question.
So the P&C slide, and I'm just going to point out this one. The P&C slide, that is #7, has other income expenses of EUR 119 million. Now I'm just curious that the dollar strengthened in the quarter and you have these kind of other income and expense hit. Could you just explain why a strengthening dollar should have such a big negative impact on this?
Okay. Yes. Vinit, I'm happy to take this question. It's Clemens. It's really an accounting effect under IFRS. So the way it works, you are perfectly right, we have a stronger U.S. dollar. So what happens is you -- at 30 of June, you have to do a valuation to euros of our both U.S. dollar liabilities and your U.S. dollar investments. And as we claim to be pretty fairly well hedged against currency effects, you would expect that effect to be negligible. But the way it works is all the liabilities are valued through the P&L. So the effect from higher liabilities is going all the way through the P&L, directly through the P&L, whereas on the asset side, IFRS distinguish between so-called monetary and nonmonetary investments.
Monetary investments, for example, being our fixed income portfolio, those are going through the P&L as well, you have a compensating effect. But for example, nonmonetary items like our private equity portfolio or equities in general are not valuated through the P&L. That's really just an accounting item. So they are going straight to OCI. So what we see is, and we have that already in the first quarter is you see an overlap of this P&L effect from the liabilities that produces an amount of -- in excess of EUR 100 million on the P&C side, whereas the positive effect from the private equity portfolio, in particular, that we hold in U.S. dollar goes straight to equity through the OCI on currency gains.
And you can see that when you have a glance into the equity, you can see that our equity increased substantially due to currency effects. So we have the drag on the P&L, on the ROE but not on the economics. I hope that helps, Vinit.
The next question is from Ashik Musaddi of Morgan Stanley.
Yes. Just a couple of questions I have is, first of all, I mean, if I look at your full year guidance, which as you reiterated EUR 1.4 billion to EUR 1.5 billion, but you mentioned that, that is assuming a normal cat or normal large loss. Now given that Russia- and Ukraine-related losses have been moved into large losses, would you say that there is a risk on that EUR 1.4 billion, EUR 1.5 billion? Or would you say that, that is excluding the, say, the Russia, Ukraine as a large loss? So any thought on that would be very helpful to know. I'm just trying to assess how should we think about large loss ex-Russia and Ukraine, with Russia and Ukraine?
So that's one. Secondly, I mean, any split you can give on Russia, Ukraine as to where these loss is taken? I mean, clearly, if I look at the combined ratio of aviation and marine, I mean, that has gone up. So probably large part of this is taken in aviation and marine, but any split in case you can give, that would be helpful. And just related to that is, I mean, should we be expecting more on Russia, Ukraine in third quarter, I mean, assuming there is not much of news flow as we saw in second quarter? Or would you say that, for the time being, it's more or less done? Only when there's additional news flow, then something else will be taken?
Thank you for the question. I'll take the first, and Sven will go into the Ukraine question. The full year guidance confirmation is based on having exhausted the large loss budget for the year, the EUR 1.4 billion. And in addition, we take account of the IBNRs, which we have booked as of today. So that would be the basis for the calculation and our assessment that the guidance will be met. So Ukraine on top of a large loss budget.
And so both will be part of that, say, the large loss basically here, right?
Exactly EUR 1.4 billion plus the EUR 316 million.
And as you know, we have a budget roughly, I think, for the first 6 months of EUR 600 million. So we would expect that there is a budget of EUR 800 million that we will absorb for the second half. As we don't distribute -- just to be clear, as we don't distribute the budget evenly, the bulk goes into the third quarter.
Yes, as regards to the split, what I can share with you that roughly 2/3 of our reserves is distributed across marine, political violence, war on land. Marine is taking part of the political violence and war on land loss as well due to the fact that we, at times, are rightly combined layers. The rest of the political violence and war on land loss you would find in EMEA and in the North American portfolio. But overall, this is 2/3 of our reserving, then we have slightly more than a quarter reserved on trade credit, political risk losses. So only the remainder significantly below 10%, then goes to aviation and others. So as I said, the bulk is really on physical damage-related marine, political violence and war on land-related exposures. As regards to the outlook, as we said, we wouldn't say that the current reserve is an ultimate view. But as we sit here today, of course, I have no indication that there is an additional reserve coming in the third quarter. So that will depend on further news flow, but there may be deterioration in case of further news flow later in the year.
The next question is from Thomas Fossard of HSBC.
Two remaining question on my side. The first one will be, could you be a bit more precise on what kind of new money yield you're getting at the present time or -- and maybe be a bit more precise on how we should expect this to be earned through? And what is the basis point effect you would expect on a full year basis on your running yield, especially in P&C? And the second question will be, actually, you've got very strong growth in P&C. I think that on a full year basis, net earned, you will be probably up EUR 2.7 billion, at least. If you're writing this business, let's say, at a 95% combined ratio average given rated increases. That means that actually you have already increased your earnings power pretax by EUR 135 million, EUR 140 million. What would be against this way of looking at things? It seems to be that actually your earnings power significantly strengthened given the growth you have achieved so far into the year.
Thank you, Thomas. So on new money yields, reinvestment yields.
Thomas, this is Clemens. Apologies. Was it a question around investments and reinvestment yields at the moment?
Yes, exactly, exactly.
Yes, what you're getting in terms of incremental basis points benefits on your running yield?
Yes. So I don't have an exact number how the fixed income blocked in or running book yield have developed in 2022. But of course, I would expect that we probably stood at 2.3%, 2.4% running yield. And now depending really on which currency you look at, for example, in U.S. dollar, the running year should be around 2.65%, 2.7% at the moment in euro, around 1.5% running yield, at the moment pound sterling, 1.9%, I would guess, and then Canadian dollar also slightly above 2%. And reinvestment yields on U.S. dollar observed at the moment that we see is around 3.1%. On euro, a bit lower because we've positioned ourselves a bit shorter during the year. And as mentioned earlier, also a bit more on the conservative side when it comes to government to accumulate some dry powder probably for reentries on credit later in the year, but -- so I wouldn't see this as a representative number on British pounds. We are probably looking at 2.1%. So all going to the right direction, but very difficult, really depending on the cash flows in which currency we are looking at how that will develop into 2023, as Andrew talked earlier in terms of the ordinary income, but the number will go up, of course, substantially on the ordinary fixed income side.
Your next question is from Jochen Schmitt of Metzler.
I have one question on your corporate bond portfolio. Could you provide some breakdown by industry? That's my question.
I don't have the numbers to hand. Let me come back to you probably in a second. So let's see if I can pull the numbers up. Yes, I think we're looking at -- so on the corporate exposure, let me see if I can pull up the numbers and come back to you. Probably, we take that off-line. I don't have the exact number. In general, on corporate, it's roughly 29% of our portfolio. I'll see if I can pull the numbers up in the call and come back to you in a second.
The next question is from Derald Goh of RBC.
Two questions, please. The first one, there is 2 parts to it. So the first part is, could you maybe share your view on profile of nat cat losses at an industry level in the first half? So a couple of your peers have indicated an above-average experience. Is that a view that you share as well? And are there any abnormalities that you'd like to point out?
The second part is on your own experience, it looks like you were running below budget for the first half. Were there any benefits from things like enforcing higher retention in deductibles and also indexation clauses? The second question is just a short one. What are you seeing on ceding commissions across the main lines of business?
Yes, on the NatCat experience in the first half of the year, we had a lot of frequency, again, coming more from losses like flood events, hail events, fire events rather than hurricane, typhoon or earth quake. So if you just look at the accumulated number and compare them with historic averages, the first half of the year was more costly for the insurance industry from a natural catastrophe point of view. When you look at our own portfolio and just the natural catastrophe part of our major loss budget, we were running at 104%. So we were slightly above budget in the first quarter. We were below budget in the second quarter, but overall, more or less at budget. So from that point of view, I would say it's a natural catastrophe year in line with our expectations so far.
On the ceding commission question, I can say that property right now is stable or improving from a reinsurance point of view depending on the experience of the individual contract. On the longer-tail classes, the picture is a little more mixed. What we saw at 1/1 was pressured to increase ceding commissions on some of the casualty business, where the ceding companies argued that given the rate increases they have achieved over 2, 3, 4 years by now has increased the profitability of the business to an extent that higher ceding commissions would be appropriate.
But mind you, those were increased -- decreased rather substantially in the prior years. So they were not kept stable over all that period and clients just tried to regain some of the lost ground. We saw that as a feature in the 1st of January renewals. That has tied away for the midyear renewals as the inflation issue became more prevalent in all the discussions. So a more stable situation at the midyear renewals when it comes to the longer -tail classes as well. Did I catch the second question you had? Or could you kindly repeat them?
No. That's really helpful. And I guess just it's actually the second part of the first question. I mean, were there any benefits from things like higher retention and deductibles from your treaty and also indexation classes in the first half cat experience?
Yes. Sorry. Yes, I mean, of course, there were positive effects both at the insurance and reinsurance level where not only prices, but also terms and conditions have improved. And on the insurance side, that often translates into higher deductibles and lower limits or sublimits for certain exposures. And on the reinsurance side, of course, there was the tendency of having increased retention levels. So that's helped from a reinsurance perspective to keep some of the losses in ceding companies net retentions. But I wouldn't say it was a major effect. We saw that effect, but it was not a major effect in the first half of the year.
Coming back probably, talking to your question around our corporate bond portfolio, I don't have exact numbers to hand at the moment. But I'll probably start with -- give a bit of color around currencies it is probably a good starting point. So roughly 50% will be U.S. dollars and roughly 30% will be euros. In terms of rating, if I recall the numbers rightly, roughly 50% will be A and better and roughly 40%, 42% BBB. In terms of industry, it's not easy because it's really highly diversified our portfolio. So quite evenly spread. I would say, roughly 10% consumer cyclical, noncyclical each. So 20% roughly consumer, probably another 10% is the Technomedia, telecom roughly 5% to 10% will be services, energy probably 5%, basic industry 5%. Insurance, if I call recall the number right around 3% and then banks probably around 25%.
But before we move to the next questioner as well, I realize that we missed one of the questions from Thomas. Sorry about that. I just want to come back to your to your point on growth and P&C growth and earnings power. Obviously, we are hoping for 96% combined ratio in the second part of the year. Whether we're able to overshoot this remains to be seen, but at this stage, we're -- given the front-loading and the impact on the combined ratio in the first part of the year, we concluded that we should stick to the 96% combined ratio target, we'll see in Q4 where we stand. But at this stage, we felt we should not assume that we could overshoot the current target. Therefore, which is not something we used as a steering mechanism, of course, but we would not want to change that.
The next question is from Iain Pearce of Crédit Suisse.
Just 2 quick ones. The first one was on the 96% combined ratio guidance. Obviously, that implies a pretty strong H2 combined ratio. So I'm just wondering if you could talk me through sort of what the confidence level is around that and what's driving the really strong H2? Is it just the seasonality impacts that earns rip higher rates? And then on the call, I think you mentioned that you were expecting growth in structured reinsurance decline. Just wondering if you could elaborate on some of the reasons for that.
Yes. The second question on advanced solutions or the structured reinsurance business. This is an accounting effect where some of the bookings we are doing are front-loaded when -- at the time of writing the business. So we don't want to imply that we see less growth opportunity in advanced solutions. What we try to say is that the way we are booking the advanced solutions business is stronger in the first half of the year than it is in the second part of the year. It's not that we have less business. It's just the way of how we book it from a seasonality point of view over the quarters. The second -- the first question, just to be very clear, again, what Jean-Jacques said, we have a combined ratio target of 96% for the second half of the year. We have not said that we are still having a combined ratio target of 96% for the full year. We obviously have the 99% for the first half of the year. We assume that we will require the full major loss budget which is allocated to the second half of the year. So we are not taking any haircuts on that. And given that we have not lowered any of our original estimated loss ratio assumptions, the 96%, Jean-Jacques was mentioning earlier in the call, was second half only with the first half being at 99%.
As there are no further questions, I hand back to the speakers.
Well, thank you very much for joining this call, and I hope we were able to address all the topics and questions. Key messages were really the continuing strong growth, which is fueled by the market momentum in P&C, the prudency in our reserving, the front-loading of our Ukraine provision, which are precautionary measure, the solid ROE and ROI, and the excellent underlying results in life and health helped to some extent by the reduction in COVID claims. So overall message is that we remain confident on our guidance for 2022 in a context, which is much more volatile, but we believe that the operating model is very resilient, and the underlying performance is strong. Therefore, the confirmation of the guidance for 2022. With that, I'd like to close the call, and wish you a good rest of the week. Thank you very much.