Hannover Rueck SE
XETRA:HNR1
Hannover Rueck SE
Hannover Rueck SE, nestled at the heart of the global reinsurance industry, quietly operates behind the scenes, masterfully dispersing risk for insurance companies around the world. Born in 1966 in Hannover, Germany, this company has steadily built a reputation as one of the leading reinsurance groups globally. Its core business revolves around providing reinsurance solutions that cover both life and health as well as property and casualty sectors. By pooling risks from these insurance policies, Hannover Rueck ensures that its clients—primary insurers—can offer a stable promise to policyholders despite natural disasters, economic shifts, or pandemic outbreaks. This strategic role is essentially akin to providing a financial safety net, allowing their partners to take on new business without the looming threat of catastrophic financial losses.
The financial alchemy that underpins Hannover Rueck’s success is rooted in its meticulous risk assessment and capital management. With an adept ability to quantify and price risk accurately, the reinsurer can charge premiums that reflect exposure while maintaining a balanced risk portfolio. Profit generation stems from the collection of these premiums, coupled with strategic investments of the capital reserves. Hannover Rueck’s prowess in investment further bolsters its financial fortitude, allowing it to amplify returns on equity. By skillfully navigating the intricate web of global risks and leveraging its comprehensive actuarial data and market insights, the company not only sustains its resilience but continually enhances its value proposition to partners and shareholders alike.
Earnings Calls
Hannover Re's earnings call highlighted solid growth in the first nine months of 2024, with net income surpassing EUR 1.8 billion and guidance now increased to EUR 2.3 billion for the year. The P&C reinsurance revenue saw a robust 10% growth, while the combined ratio improved to 87.9%. For 2025, management expects net income around EUR 2.4 billion, reflecting a 14% increase. Reinsurance revenue is projected to exceed 7% growth, with a combined ratio below 88%. Additionally, return on investment is anticipated at least 3.2%, supporting strong returns on equity exceeding 14%.
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Good morning, everyone, and welcome to our earnings call for the results for the first 9 months of 2024.
As usual, our CEO, Jean-Jacques Henchoz; and CFO, Clemens Jungsthofel give you a brief overview on the business development in 2024 so far. And thereafter, Jean-Jacques will provide an outlook for the financial year '25. And for the Q&A today, we will be joined by Klaus Miller and Sven Althoff.
And with that, I hand over to you, Jean-Jacques.
Thank you very much, Karl, and good morning, everyone. Before we discuss our 9 months results, let me say a few words about the personal announcement we made on Friday.
I will hand over the CEO position to Clemens at the end of March. And I mentioned in our meeting release that the decision not to renew my contract was taken with a mix of emotions, and it was indeed not an easy decision for me. I've been extremely happy with my role as CEO of Hannover Re, and I've come to love this company, which is perhaps why it took many people by surprise.
The main reason for my decision is purely private, and as I reflected about my personal goals for the coming years. I felt that I should allocate more time for my family and personal interests. Possibly turning 16 September, right after Monte-Carlo added to my wish to be a bit more self-determined. Although the prospect of not going to Monte-Carlo was not part of the decision.
I intend to build a portfolio of activities in the future, which will ideally include nonexecutive and advisory roles, but also an opportunity to give back in the form of nonprofit activities. In that sense, I have a great sense of gratitude for the opportunity to lead this fantastic company and I've been blessed with a very strong team.
And the good news is that Clemens is, in my view, an ideal successor. The two of us have worked in tandem for the last few years. And I'm convinced that Hannover Re will continue its upward trajectory under his leadership. No pressure, Clemens.
With Christian Hermelingmeier, we're also very fortunate to have a talented new CFO joining in April. He has convinced everyone within the Talanx Group with his deep expertise and leadership qualities in his current role. So the Executive Board is in great shape and will start the year with a lot of strength and a good outlook.
So this is not a fair well event today as I still have a number of tasks to complete and also some further opportunities to exchange with you all in the new year. I also intend to remain closely linked with Hannover Re after months. So this is certainly an outlook with my presence a bit more in the background going forward.
With that Clemens, maybe you want to add a few words before we dive into the figures.
Well, thank you, Jean-Jacques. I certainly do share the mix of emotions. You mentioned, Jean-Jacques, I'm very grateful for the time we have worked together and will work together in the coming months in a transition. I'm also extremely grateful for the trust placed in me.
It is important for me to emphasize here that it is an orderly handover. Hannover Re is in an excellent position, as you will see from the numbers which we are about to present to you. And as I step gradually into Jean-Jacques shoes, which are big Jean-Jacques, I will make sure that Hannover Re stays on its strong and successful path and that we conduct our business, the Hannover Re way in a somewhat different way and I very much look forward to continue to working with all of you in the future.
Thank you very much, Clemens. So let's go back to our figures year-to-date. Looking at the slide deck, I'm very satisfied with the company's performance in the first 9 months of the year. As you can see, the operating performance is running very well in line with our expectations.
On top of that, we recorded a net positive one-off tax effect of EUR 120 million in the third quarter. Altogether, this brings the 9 months group net income to over EUR 1.8 billion. And our initial full year target of EUR 2.1 billion is comfortably within reach. Hence, we have updated our guidance for the group net income 2024 to around EUR 2.3 billion.
In P&C, we have successfully expanded our portfolio in a further attractive market environment, resulting in ForEx adjusted growth in reinsurance revenue of about 10%. The new business CSM and loss component for business written in the first 9 months of 2024 amounted to EUR 2.4 billion, also growing double digits compared to the previous year. The combined ratio of 87.9% is well in line with our target of below 89%, reflecting the very good underlying profitability of our P&C portfolio.
On a 9-month basis, the impact from large losses was around EUR 100 million below expectations. And as usual, we've nevertheless booked the entire large loss budget for the 9 months.
In life and health reinsurance revenue was rather stable year-on-year, but has grown compared to Q2, apart from regular portfolio management, this development also includes a few nonrecurring effects and an accelerated runoff of U.S. mortality business following the last recaptures connected to our in-force management actions in 2018.
Therefore, this top line development in life and health does not concern me and certainly not when I look at the successful new business generation of almost EUR 0.5 billion in the first 9 months of this year. Also here, I would like to point out that this number is well in line or even ahead of our plan and the reduction versus the prior year is mainly driven by the extension of an individual large treaty in the prior year. The profitability of our life and health business is very satisfactory.
Experience variance was overall positive within all reporting categories and mitigated the impact from reserve strengthening for pockets of our morbidity book, mainly in China. The reinsurance service results of EUR 668 million is slightly above our pro rata share of our full year target of more than EUR 850 million.
The investment performance was also very satisfying. The return on investment of 3.1% is clearly above target and reflects the strong ordinary income. As expected, within our guidance, we recorded a moderate impact of EUR 44 million from impairments on real estate and also the valuation of 1 equity participation had a negative effect on the result. The impact from realized losses, change in ECL and valuation of assets at fair value through P&L was, however, rather limited.
Altogether, the return on equity of 22.9% highlights the company's strong earnings power and the solvency ratio of 260% reflects our company's strong capitalization. The 15% decrease in the solvency ratio versus end of Q2 is largely driven by 2 factors. Firstly, foreseeable dividends for the year 2024 are included, which was not the case in the half year number. And secondly, we have considered the planned growth for the coming year as usual in the third quarter.
The first effect accounts for roughly 2/3 of the decrease the latter for the remaining. Third with regards to the foreseeable dividends, the number included in the solvency ratio as of today reflects the ordinary dividend of the prior year as the actual dividend decisions for the year '24 will be taken in early 2025.
Shareholders' equity increased by 10%. The increase is driven by the group net income for the period. The impact from interest rate and currency movements was overall limited. The CSM increased by 9.2%, mainly reflecting the new business value generated by both business groups. We are, therefore, very pleased with this development as it clearly exceeds our strategic growth target of more than 2% for the CSM.
The risk adjustment increased by 7.8%, mainly due to new business in P&C and assumption changes in life Health. The total of EUR 12.4 billion combining risk adjustment in CSM is up by 8.7% and is strengthening our earnings outlook for the years to come.
On that note, let me hand over to Clemens for a more of a deep dive on the financials.
Thank you, Jean-Jacques.
Yes, starting with the development in P&C reinsurance. Top line growth remained strong in the third quarter and is now at 10.4% adjusted for currency. The increase in net revenue was even slightly more pronounced due to the reduced volume of our retrocession program.
The overall growth, well diversified by region and line of business, reflecting broad-based business opportunities in P&C reinsurance markets. In APAC, the favorable underlying growth was mitigated by our portfolio pruning in 2023, which still sort of earns through in the financial year 2024. In the third quarter, we have recorded a high frequency of losses from natural catastrophes, including a series of weather-related events in Canada, floods in Europe and the Hurricanes Beryl and Helene.
Most of these events are at least partially covered by our retrocession program and also with regards to the floods in Europe and in particular, Hurricane Helene, we expect to get some relief from retrocession. But as those events happen around the time of closing the books, our estimates are based on a top-down analysis. Hence, we decided to book the numbers gross for net at the end of the third quarter.
The actual gross loss might come in higher when we will book the numbers on treaty level with a corresponding retro relief. However, the net numbers do reflect our current estimate.
The total impact from large losses was EUR 1.3 billion in the first 9 months in contrast to the first half year. This number now also includes an estimate for Baltimore bridge loss of around EUR 100 million net. As we have learned that the final proximate cause report will only be available in 2025, we have decided to book it at a level comparable to the Costa Concordia incident in 2012. There are still various missing details, and we have also not taken any position on discussed limitation of liability, all of which is needed to fully evaluate the size of the loss.
The runoff result was an overall positive EUR 284 million. It includes positive prior year development in most lines of business, but also a negative development. For example, for individual large losses like the Italy hail events last year, which deteriorated by around EUR 113 million.
In addition, the strong underlying profitability provided room to add some prudency for older underwriting. Last not least, the combined ratio includes a discount effect of around 7 percentage points. This is still higher than the interest accretion in the reinsurance finance result but our prudent initial reserving should offset the difference.
Altogether, the combined ratio of 87.9% is well in line with our target and reflects the very healthy underlying profitability and our continued prudent reserving approach for both new business and older underwriting yields.
The strong investment result primarily stems from the increased ordinary income from fixed income securities. The increase is mainly driven by higher interest rates, supported by a strong operating cash flow. The amortization of our inflation-linked bonds added EUR 117 million in line with our expectation. We have observed some revaluation for real estate, resulting in impairments of EUR 44 million. Altogether, the EBIT in P&C increased by 57% to EUR 1.7 billion.
The main contributors to the P&C result to the service result is the CSM release, as you can see on the next page, reflecting the 2023 and 2024 renewals in a very attractive market environment, the rather high CSM release in the third quarter is, on the one hand, driven by the exposure-based release pattern.
On the other hand, it includes some catch-up effects due to a prudent release in previous quarters. Importantly, this does not have any impact on the overall level of profits because the higher CSM release is offset by a quite prudent reserving approach for the current year, hence a negative experience variance on the current year.
Apart from this, the negative experience variance also includes the offset of the tailwind from higher discounting versus [ EC ] and the fact that we booked the full large loss budget. I already commented on the runoff result. The loss component from new business is quite low, confirming the attractive rate environment in P&C. The CSM growth is mainly determined by our successful renewals and is expected to moderate towards the end of the year as we have no larger renewal date in Q4.
Let's move on to life and health reinsurance revenue. Jean-Jacques already commented on decreased slightly as expected. The main driver is the runoff of our U.S. mortality book, which accelerated following the recaptures connected to our in-force management action in 2018. And Furthermore, the appetite for new mortality business with long durations, like whole of life business was limited in the last years as we do not think that rates are adequate.
Areas like Financial Solutions, where we have grown in the last years have structurally less impact on the overall reported growth numbers as per IFRS 17 because of structured deals, only the fee income is recognized in the top line numbers. The reinsurance service result is fully in line with our expectations with favorable contributions from mortality, longevity and financial solutions.
Just as a reminder, the prior year result in mortality did include a positive one-off from a retro recapture. In morbidity, the result has mainly been impacted by further strengthening of the reserves for critical illness business in China.
Furthermore, a client in solvency in the third quarter resulted in a negative one-off impact of about EUR 30 million connected to a financing treaty with this client. The investment result mainly reflects the good ordinary income, the change in fair value of financial instruments had a positive impact of EUR 41 million, offset by a negative EUR 43 million impact from the valuation of an equity participation in the third quarter.
Both effects should be seen as nonrecurring. In the case of the equity valuation, we even expect a certain recovery in the valuation going forward. Altogether, our life and health business group reported an EBIT of EUR 716 million.
Looking at the drivers for the reinsurance services result in life and health both the CSM release and the risk adjustment release are within the expected range. The experience variances of EUR 171 million is driven by a favorable claims experience across different lines of business and also in-force management actions for our critical illness business in China.
This partly mitigates the negative impact from the loss component of EUR 302 million, the new business loss component was a minor EUR 18 million. The main driver for the loss component was the reserve strengthening in morbidity and the client insolvency affecting a financing treaty.
Altogether, the reinsurance service result is slightly better than the pro rata expectation for the full year. The new business CSM and extensions on existing contracts together amounted to EUR 560 million based on, I'd say, diversified contribution from Financial Solutions, mortality and mobility.
Changes in estimates had a positive impact of EUR 339 million, the main driver for the positive change in estimated was our U.K. longevity business. Adding positive currency effects and the interest accretion, the total CSM increased by 6.6% after recognizing the regular CSM release.
Altogether, I'd really like to point out that from an economic view, assumption changes were positive for Hannover Re because changes in estimates within the CSM resulted in a higher positive number compared to the changes in estimates resulting in a loss component affecting the P&L for the current period. This highlights both the benefit of having a diversified portfolio and also our general prudent approach in setting initial assumptions.
The development of our investments overall was very satisfactory. The ordinary investment income is strong. Several factors played a role here. The asset volume increased based on the strong operating cash flow. In addition, the reinvestment yields are still nicely above our average portfolio yield with a continued positive impact on our returns from fixed income secured.
The contribution from inflation-linked bonds was in line with expectations at EUR 117 million. And finally, the contributions from alternative investments increased as well. The impact from ECL and any valuation at fair value through P&L had a minor impact.
For our real estate, investments, decreasing valuations led to moderate impairments of EUR 44 million, in line with our communicated expectations for the full year. All in all, the ROI of 3.1% is above our 2.8% target.
To conclude my remarks, the results for the first 9 months of 2024 reflects a very healthy underlying profitability. Top and bottom line are growing nicely and further supported by the positive tax effect, the full year result is expected to come in higher than initially expected.
And on that note, I'll hand back to you, Jean-Jacques, for the comments on the outlook.
Well, thank you very much, Clemens. As explained, the business development in the first 9 months supported our expectations for the full year. However, the probability of exceeding our initial group net income target increased due to an additional positive tax effect. Accordingly, we have raised our guidance for the group net income to EUR 2.3 billion. The overall growth targets and the underlying expectation for the business groups and our investment return remain unchanged.
Based on the business development and large loss situation in the fourth quarter, up to date, we are confident to achieve our updated net income guidance of around EUR 2.3 billion. On top our strong balance sheet provides a very solid position to further take advantage of the favorable market environment in 2025.
This brings me to the outlook for the financial year 2025. The group net income is expected to be around EUR 2.4 billion. This is an increase of more than 14% compared to our initial target of more than EUR 2.1 billion in 2024. And we expect, of course, the rate -- the tax rate to normalize in 2025.
We expect the market environment in P&C reinsurance to remain very favorable, and we are very well positioned to act on growth opportunities. As a result, growth in reinsurance revenue should come in above 7%. The combined ratio is expected to be below 88%, also reflecting an environment in the target compared to the current year.
The suit discount effect on the combined ratio will likely be slightly lower in 2025 at around 6% to 7%. But as Clemens explained at our recent investors event in London, the impact from potentially lower interest rates will be gradual and manageable.
In life and health reinsurance, we aim for a CSM growth of about 2%. The target for the reinsurance service result is more than EUR 875 million. This number is based on an unchanged expected CSM release between 11% and 13%, and expected release of risk adjustment between 6% and 8%.
The return on investment is expected to be at least 3.2%, reflecting the observed increase in ordinary income and a normalization and income from private equity and real estate. With an eye on our strategic ambition, this means we are expecting to continue to deliver return on equity clearly above cost of capital and above our ambition of 14%.
This concludes my remarks. And we would be very happy to answer your questions.
[Operator Instructions] Our first question comes from Kamran Hossain from JPMorgan.
Two questions and just a quick comment as well.
I think, the first question I was interested in is just on capital deployment. I guess you've signaled in the Solvency II ratio for next year that you would deploy some capital into growth. Just interested in like P&C, where you kind of think this growth comes from? Is it taking shares? Is this new business? Is this different regions, handouts top-down topics there.
The second question is just on kind of thinking about the combined ratio. Clearly, you know an improvement next year. is helpful. Just interested in where that's running at present. I guess you were sort of 80% -- just under 88%, you've taken some -- you've added to reserves, et cetera. Where do you think that's kind of running right now?
And then just to finish up, I think just -- I'm sure there'll be lots of opportunities to say this, but Jean-Jacques, I guess, from the team at JP, I just want to say we're certainly miss our interactions. You came into the job running inheriting like a really well-run business. And I think it's safe to say it's being left in that way, too. So kind of just want to say kind of thanks from our side.
Maybe passing on an excellent business to Clemens and the team, and we're looking forward to saying goodbye. But yes, I guess -- so that was my comment and kind of the 2 questions before, but thanks very much from our side.
Thank you very much, Kamran, for the kind words.
Kamran, it's Sven. Let me start with the capital deployment question. So where do we expect revenue growth in P&C to come from. We are expecting broadly unchanged rating conditions across our entire portfolio. So therefore, like in previous years, we expect basically all regions or product lines will participate in growth opportunities.
One area, which we can highlight is on the property catastrophe side. As mentioned during our Investors Day, we see good opportunities on the incoming business, but we will also buy somewhat less on the retrocessional side, particularly our K transaction. So those would be the main comments from me on the capital deployment side.
Kamran, it's Clemens. On the combined ratio. We are reporting for the first 9 months now, the 87.9%. As you will have seen, that this does include the regular development of the current underwriting year. We're still being a bit cautious in the third quarter. It also includes a couple of runoff impact as mentioned, for example, for the Italian floodings from last year, et cetera. So that, of course, had an impact on the combined ratio for the first 9 months.
As for the next year, I mean, we have reflected the overall positive outlook and the level of profitability in our combined ratio assumption when we go into 2025. So you should see that reduction in light of our positive outlook on the profitability. It does include, however, of course, the level of prudency that we usually include in our initial recognition.
We haven't changed that prudent reserving approach. So this quite some level of resiliency baked into, of course, into the combined ratio. It also includes the [ EC ] buffer because we still expect some tailwind from discounting versus [ EC ]. So you might consider one percentage point around one percentage point in the combined ratio being any buffer on top of the conservative reserving. So that overall leads to the combined ratio as guided.
The next question comes from Iain Pearce from BNP Paribas.
The first one was just sort of a bit more detail around the combined ratio guidance. It doesn't sound like there's an implication that you're expecting risk-adjusted pricing to be positive. So I'm just trying to understand the sort of walk from the 87.9% at 9 months to the 88% guidance next year, factoring in that 1 point headwind from discounting. If pricing is not getting better, if the prudent level is the same. Just trying to understand what you think is driving that sort of 1 point improvement when we account for the discounting?
And then second question was just on the life and health guidance, again, just trying to understand if we think about the EUR 875 million guidance if we normalize for, say, the insolvency that we saw this year, again, it doesn't imply much growth. So just trying to understand why you are a bit more confident guiding to a slightly higher number there?
And also, if I could just echo some of Kamran's comments and congratulate you, Jean-Jacques, on your time at Hannover Re and I hope you enjoy the next stage of your career, it sounds very exciting as well.
Thank you. Yes. Let me start with the pricing question, as I said, I mean, we are expecting broadly an unchanged picture. I mean you know that the industry had a couple of good quarters from a net return earnings point of view. So in those areas where we had a benign loss environment, we do expect some pressure on the pricing. We don't expect prices to fall significantly, but we have to be realistic here.
On the other hand, as you are seeing from our major loss list the list is very full. So there will be various parts of the portfolio where we will be able to charge further risk-adjusted rate increases. So the combination of the 2, we would at this stage say that we should have pricing in 2025 across the entire portfolio which is at the 2024 level with some movements here and there, but broadly similar.
Just to add briefly to that, if you compare it to the reported combined ratio for the first 9 months, the 87.9%, I would say that it's still at a cautious at a prudent level at this stage. -- which you would have seen in the experience variance for the current underwriting year in the current financial year, which we have kept for the first 9 months at a rather prudent level, and we will revisit that at year-end.
Just a few comments on the EUR 875 million. You say it's conservative on the life side, adding the one-off insolvency here, you would have expected a little bit more. First of all, that kind of are we are always a little bit cautious.
Second, there is one thing where we had a significant profit in the past, and that is financial solutions in China and they are currently changing their regulatory regime. Clients were a little bit cautious in placing new business this year. And this will probably continue until first or second quarter next year before we know the new rules. And so there was a, let's say, a break or a pause in the business in China for about 9 to 12 months. And if this picks up again, then we might be able to beat this guidance.
But currently, we are cautious because you never know what the regulator does, and we can only develop new products and treaties when we know the rules exactly, and that will take well into next year.
The next question comes from James Shuck from Citi.
My first question is on the growth outlook. So I think in your comments at the beginning, you mentioned there was around 5 points of SCR increase, which is expected from the growth on the books coming through the solvency at 9 months. I think most of that was coming from the low retro. I'm just struggling to square that a bit with the P&C Re gross revenue guidance that you're giving for above 7% because if most of the SCR increase is coming from the low retro that I might have expected a little bit more.
Second question is on just your expectations around the margin build. I think you've indicated that you'll continue to offset the difference between the discount rate benefit and the [indiscernible] I'm just wondering kind of where you are in terms of the actual reserve buffer itself? Are you planning on adding to that over the plan period or in Q4 and then for next year, either in absolute terms or as a percentage of the reserves themselves.
And then finally, again, Jean-Jacques thanks very much for your time. It seems brief but very fast. I'm just keen to hear as you reflect back on the legacy that you're leaving just keen to hear your thoughts on what you contributed over that time.
So James, on Solvency II, and I'm not sure if I fully got the question, but I'm -- we've seen the decrease in Solvency II. I think you can roughly allocate 10 percentage points of that to the dividend for the foreseeable dividend, which is a regulatory requirement, which we will disclose also next year from Q1 onwards.
As foreseeable dividend that is roughly -- should be roughly EUR 750 million includes the minority share of the E+S, so that's 10 percentage points. And the rest is really a mix of business growth but also some economic impact from credit spreads, interest rates, FX, et cetera. So it's a mix. It's 5, 6 percentage points. That's that adds to that.
I don't have a number off top of my head, really how much of the business growth is included in that. But you're perfectly right. I mean, the 7 percentage points that we are guiding on top line on a net basis will actually be a bit higher due to the fact that we plan to decrease the level of -- particularly on the [ cape quota shares ], as disclosed earlier. On the margin, on the [ EC ] buffer, we really see this as a temporary sort of buffer. So it is not included in the resiliency reserve that we usually disclose based on the external assessment from Willis Towers Watson. So it's really a temporary exercise. It's going to be -- it is a triple digit -- low triple-digit number probably per year as we were going through IFRS 17. We will release that over time.
As for the regular reserve buffer, I'd say our plan is usually to grow the buffer with the book. So really with the network. So we are happy with the level of resiliency that we have in our reserve at the moment. And just to remind everyone, again, on top of that EUR 2.1 billion resiliency reserve that we reported at year-end 2023. On top of that goes the risk adjustment of about EUR 1 billion. So we are overall looking at a resiliency level of 7%. We do feel comfortable with that level.
And my expectation would be to just keep that level as we grow in relative terms. I mean, we will always look at our reserving position at year-end. If results allow for it, we might consider increasing that buffer, but is not planned at this stage. And again, as always, James, we will be very transparent about it and report any increase in due course.
And James, it's a bit early to start looking back and still in the middle of it. But I'll come back to you probably during the call, in Q1. But in short, as a quick response, I would say that I had 2 goals, the first when I joined was really to leverage the differentiation of Hannover Re and the incredible key success factors, we can present to the market particularly this notion of partnering with our clients. The lean operating model, a very clear focus on reinsurance, so a lot of it was leveraging the strength of the business model.
And the other part of my job was very much to prepare for future growth. And we've been focusing on preparing the company to be able to grow further to be future ready. We talk a lot about portfolio management in our Executive Board. We want the end-to-end operating platform to be competitive and effective. We worked a lot on leadership and leadership development and succession planning.
And last but not least, adjusting the culture, which is very unique at Hannover Re to that growth outlook, meaning becoming more international in scope and in spirit and also more modern in terms of how we manage risk and operate across the world.
So quick response, James, I'll have a bit more time in Q1 to consider a bit the last 6 years, but I hope it gives you an immediate response.
The next question comes from Michael Huttner from Berenberg.
Fantastic. Two questions. So the first one is on the 7% growth. I wonder if you can split it out a little bit. Because I'm still a little bit vague on what you said about cyber at the -- at your kind of deep dive session a few weeks ago. Ages me is what you said is I can't remember whether you're back in growth or you're pausing I'm a bit confused and some memory cyber is a significant component potentially.
So the pockets of growth and the second is also on growth. So you've got this target this year and next year of life CSM growth of 2%. You've achieved 6.6% and I can't see in any other numbers, I don't know the company well, but I can't see any of the numbers and things to cause concern going forward. I'm just wondering whether you could comment on whether 2% is just because you like being very conservative? Or is there something we're missing? Or is 6% the right number, which is 9 months.
Let me start with P&C. So as I said, we do expect a very diversified growth pattern. So in our planning, most of our region, most of our product lines would show growth at around the 7% number. When it comes to your specific cyber question, we have, indeed, reduced the volume of cyber business in the current underwriting year. This was mainly driven by the fact that we saw increased pressure on ceding commissions under some quota shares at a time when the primary market started to give rate reductions.
So that didn't work for us in some instances, and we took the opportunity to consolidate our cyber portfolio a little bit after many years of continuous growth on that side. From a risk metrics point of view, we have plenty of room to grow on the cyber book of business. So therefore, given that the original cyber market keeps seeing additional demand and keeps growing.
We, of course, want to be a partner of our ceding companies to accompany that growth. So in that sense, we are not expecting a reduction of our cyber portfolio also in the next year, maybe some growth but we have not baked any particularly growth ambitions into our overall guidance of 7%. So in that sense, cyber should behave very much like many of our specialty lines.
Michael, on the CSM question, the 2% versus what we've seen in the financial year 2024. So the 2% is basically to be seen in line with our financial ambition over the strategic cycle, where we expect the CSM to grow by at least 2% per annum. The 6% this year does include some positive actual over expected from the regular revisiting revaluation of the portfolio.
I think the 6% is a very good proof point of our prudent reserving that we see positive contributions on the CSM from revaluation. So it does show that we are prudent in reserving in the first place but we do not regularly project those out.
We do expect positive [ AOE ] also in the future. However, we don't necessarily include that in the plan. So you should see the 2% CSM growth really as a commitment as a confidence that we want to grow our life and health book, particularly going forward. And we also do expect the CSM growth on a net basis in P&C for the next year given to Sven's comments both on the top line growth and given the rate environment.
Just on the -- if I may ask on the CSM, you mentioned the prudent serving. In the Slide 10. So you've got this lovely waterfall chart. And where is the reserve, what I would call reserve release, which of these bits of the waterfall is it in? Is it in the change in estimates?
Yes. Yes. When you see the CSM walk, so the change in estimates is the EUR 339 million, and that is basically the revaluations of our business, and that is fueled by sort of all lines of business, mortality, financial solutions, et cetera. And there you see that yes, yes, there you see exactly that positive amount, which is, again, a reflection on the rather prudent initial recognition initial reserving.
The next question comes from Vinit Malhotra from Mediobanca.
I hope you can hear me. First of all, congratulations, Jean-Jacques, on your next endeavors. And of course, congratulations to Clemens. So just on my question, so there are 3 questions, please do quickly numbers and one just maybe theoretical on the outlook. So just on the outlook, in the press release, there is a comment that the combined ratio outlook is based on the improved market environment. And then obviously, we note that you're talking about a flat pricing.
And then when we look at the cut or the large loss budget, that's about maybe 1.5, 2 points negative drag, let's say, next year, but still the combined ratio is you're keeping it flat or flattish on the 9-month level.
So just curious a little bit about how you see this at or largely of loading being absorbed in the combined ratio guidance. And I know it's coming from retro, but also how is it reflected in that table. So it does indicate that the pricing of the business would be getting a little better in your view there? So the first thing.
Second thing is the third quarter stand-alone, I know you don't look at it purely on that, but the reserving the runoff seems to be a bit negative here, EUR 18 million -- I'm sorry if I missed it. Is it from any particular direction that you can guide us on?
And lastly, the real estate, the [ 44 billion ] reval, I know we've been talking about private equity real estate and we always said it's not been happening. But is there any commentary on why now? Is it just because funds gave you the updated valuations? Or is there any drivers there that you can wanted to?
Thank you, Vinit. Let me start with the first 2 questions. On the comments regarding the market environment. Yes, of course, you're right. We are expecting a broadly flat risk-adjusted rate environment. But of course, this is now the third year at a favorable level of rate environment.
So when the business this earning through. We, of course, still have an impact from the strong years '23, '24 with the prior years becoming less important than our forward-looking profitability estimation. So therefore, it's really the 3-year block, which led us to make the comment as we are expecting a similar rating environment on a forward-looking basis. The increase in the large loss budget, you are right.
Of course, this is partly driven by the underlying growth of the business now and forward-looking, but also, of course, the fact that we are going to place somewhat less retrocessional coverage on the property side. And given that the business is inherently profitable, I mean the way we are modeling our K session, of course, would -- in any normal year, be a session of profits to our retrocessional partners and therefore, with us placing somewhat less than we can expect this to somewhat contribute to the slightly better combined ratio outlook compared to this year.
Then on your second question, when it comes to the runoff, as Clemens has mentioned when he made his comment on the slide, we had a number of negative runoff situations this year. So we can say that in most classes of business, the overall number of the runoff is still a positive. But in addition to the hail in Italy, we also had deterioration of old aviation products claim. We had development on some natural catastrophe losses, which happened very, very late in December last year in Australia. So there was a number of developments in the runoff results.
And it's also fair to say that given that many of our segments are producing very favorable combined ratios today that we have not necessarily steered for better runoff results in those class of business which are already well below our target combined ratio.
Vinit, on the or on the impairments real estate, I mean we've did expect the impairments to come through. We fully baked it into our guidance 2024 and our expectations, but only in the fourth quarter. Because that's when the actual valuations are coming through because those are related to direct real estate investments. So you can see these impairments that we've taken in Q3 really as a rather precautionary stance on it because simply as the results, to be honest, allowed for it, so overall fully in line with our expectations.
And as for the overall investment result, it's absolutely in line with our expectations, and you should see the ROI for the full year coming in, not below the ROI that you've seen now, which is a reflection that we fully baked it into the 2024 numbers.
The next question comes from [ Sean Dion ] from Bank of America.
I just had a couple of questions on life and health. I noticed that the reinsurance services out as coming a little bit softer than we had expected. I was just wondering if you could help me understand the biggest contributor to that? And if you expect the trend to continue towards year-end?
And then the second question is just on the assumption changes you mentioned on the L&H book that you've taken? And can you talk us through what you're sort of seeing to drive those changes in your view? I think you mentioned something around the U.K. Yes, that was it.
Just on the first question, sorry, could you repeat that? I didn't get the first part.
Yes. It was just on the reinsurance service result. It just came in a bit softer than sensor we were -- just wondering what the biggest contributor to that was and if you expect that to continue into the year-end?
The reinsurance services out is impacted by the one-off write-off of the financing due to the insolvency that we mentioned. So it's EUR 30 million impacted there. So that's really seen as a one-off, and that has impacted probably the reinsurance service results.
Yes. But as I said earlier, we have EUR 25 million on a single life exposure. So one person dying or not doing could make a difference of EUR 25 million easily. So explaining that on a quarterly basis is always a little bit tricky.
And the second question was on help me again. Assumption changes -- the assumption changes in the U.K. We have whole life portfolio, and we decided to change the last assumptions on that. So when you have a whole of life and you have coinsurance, you get more premium than you need in the first years. And -- that means lapses are usually positive. And we have lowered our lapse assumptions for these whole of life policies. It's always a little bit tricky to estimate something which is 40 years into the future. But as usual, we are very conservative here.
And obviously, we have no experience from the underlying portfolio because we don't have it for 40 years now. And -- but we have market data and decided to be conservative here.
Okay. And then sorry, I just had one more question on the China critical illness book. I know you loaded this quarter. Are you expecting more strengthening in Q4?
What we do here is, as with all our other portfolios, we do an annual review and we have realized already 6, 7, 8 years ago that we expect something in China to work out less stable than originally expected. The cash flow for the time being, up until today is still positive.
But our assumptions for what is far into the future have worsened a little bit. And this is due to some changes in the market with much more screening than we initially anticipated. So there is a government, let's say, order that you should do more screening. And in China, these things are usually done when the government wants it. So that has increased the incidence rates, and we have reacted by being a little bit more cautious. But my expectations for the future is that the underlying profitability of our life and health book in general will easily compensate for that.
So although there might be more strengthening, I would not expect that you will see much of it in our numbers, if not explained explicitly.
[Operator Instructions] The next question comes from Faizan Lakhani from HSBC.
Well, reiterating what everyone else said. So Jacques, thank you very much for our interactions and best of luck in the future. And I also wanted to congratulate Clemens as well.
My first question is coming back to a topic that's been addressed a number of times, and that's the 2025 outlook on the P&C combined ratio. Just putting all the bits together, you're around that mark right now at the 9-month stage, you have a bit of a drag from discounting. But at the same time, you have the benefit from less retro, which should be a positive. Just how do I sort of split those elements out? And just I guess, broad picture, how dependent are you on 1/1 prices being flat next year to maintain your outlook for the combined ratio?
Second question was on the large loss budget. Could you split out what's driving that? How much of that is down to gross growth versus the reduction in retro? And just wanted to sort of get a qualitative feel in terms of what happens to the volatility in a normalized year for NatCats.
Let me start with the second question. I don't have the exact split for you when it comes to the increase to EUR 2.1 billion. How much of that is less retro, how much is underlying growth? But of course, the underlying growth should be at least around the number for the revenue growth, as I explained earlier in this call, we expect that to be a very diversified and therefore, reflect more or less the current composition of our portfolio. And therefore, this exposure increase is going to be at least in that area. And then on K, even though I don't have the exact number, it should be a mid-double-digit contribution to the increase in the major loss budget, but I don't have the exact figure for you.
And when it comes to your 2025 question, how dependent are we on the pricing environment. Of course, our base assumptions play a crucial part in setting the guidance for the next year. So from that point of view, if we should see a pricing environment that is completely different to what I just said we would, of course, revisit the guidance for 2025, and we would be able to talk about that when we do the renewals call in February.
But for now, we are optimistic that our base assumption is going to be correct and minor deteriorations from that base assumptions would not immediately lead to a change in our guidance. Again, quite a bit of the business we are going to earn in and 2025 is going to come from the years '23 and '24. So '25, of course, is a important component in the profitability assumption, but not the only one.
And sorry, just coming back to the first one. How should we assume volatility in the NatCat losses to change given the reduction in retro? Will it be relatively modest? Or were there certain perils that could be more volatile?
Well, you have to expect a little more volatility, not significantly. I mean, as I said, we do expect the combination of more business on the inward side plus less on the outwards, which, of course, is creating a little more volatility.
On the other hand, we expect the reduction in retro buying to come from the K transaction, which by its very nature is a proportional retrocession. So therefore, proportional session is only changing the underlying volatility profile of the business to some extent. And here, the biggest way of how this change is materializing is by us selecting the parts of the portfolio that are covered in K, so particularly in the peak peril cut.
This change will not be felt outside our exposure bases in North America, Europe, Japan and Australia because all the other areas and Chile, I should add, because all other parts are not covered by K. So it's not a global increase of volatility profile but some increase in volatility profile in peak perils given the attractive pricing environment. So it's, of course, our assumption that the upside in an average year should give us a benefit compared to the volatility downside.
The next question comes from Henry Heathfield from Morningstar.
Congratulations to you on your future. Moving, just a quick question coming off the back of that question there. Your large loss budget has increased by looking at forward to our large loss budget has increased by 50% to EUR 2.1 billion over 2022. And now with all the kind of news I'm seeing around climate change and natural catastrophes, are you generally growing this line faster than the rest of the P&C you book? And then should we expect the start of the softer cycle starting next year?
Well, we have grown the property business in line with the rest of the portfolio development. So from that point of view, we are not growing it faster than the average portfolio. When you look at our portfolio development, we have grown particularly strong in some of the earthquake perils the last number of years. So for example, we had above-average growth in places like Canada and Chile. So from that point of view, when it comes to climate change-related and wind-related growth. This is very much in line with the general growth of the business, which, of course, has to be expected.
Jean-Jacques said earlier in the call that it's important for us to have the partnership approach in our business. And to the extent that our existing partners are having underlying growth, we, of course, want to be in a position to accompany that growth and therefore, we have some increase in our exposure base but not above average growth in climate change related parts. And I hope that answers your question -- question in that respect.
Are you maybe any particular lines?
Mostly coming from the property line really. I mean you, of course, have some property cat exposure also in other lines of business like agriculture or for example, Marine business but the bulk of the portfolio development on the property cat side, clearly came out of the property business itself.
Maybe on your second question on the market terms, we discussed it a few weeks ago in London, always difficult, of course, to predict. But I would say some of the criteria we look at include the demand. The demand remains very strong. We expect also additional demand in 2025 from insurance companies around the world. I think the other driver is that the market has been extremely disciplined in the past couple of years, and we don't see this changing anytime soon. We also note that there are very few to know new entrants in our space in the coming year.
And last but not least, of course, the large loss burden has been considerable in the industry in the past few years, which also has a bearing on the future outlook. So our best estimate and it's just a gut feeling rather than a scientific view. Our best estimate is that we'll -- we're going to see stable terms in 2025 in the P&C market.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Jean-Jacques for any closing remarks.
Well, thank you very much. I won't go in depth because I think we covered the ground very well. Thank you so much for the great questions. And have a nice day. Thank you.