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Hello, everyone. Warm welcome to our call on the occasion of our first quarter 2022 earnings. I have the pleasure to be here with our CFO, Christoph Jurecka. He will, as always, give you a few statements upfront and then we will open the floor for Q&A, for which I would like to ask you, as always, to limit yourself to 2 questions each. And now I'm handing over to Christoph.
Thank you, Christian, and good morning, everybody. A pleasure to present our numbers today, and I'll start with a few introductory remarks. Munich Re's income of just above EUR 600 million in Q1 was clearly affected by the backdrop of a very challenging geopolitical and macroeconomic environment, not least due to the war in Ukraine and the related sanctions in Russia. In this context, we wrote down our fixed income investments in both countries, and we booked claims incurred in Q1 while the ultimate financial impact on our underwriting result is still highly uncertain at this point in time. Despite these challenges, our overall profitability remains sound, with a group return on equity of 9.8% in Q1. With an overall investment return of 1.6%, write-downs on Russian and Ukrainian bonds of almost EUR 700 million gross and EUR 370 million net on currently very low market values of even below 20% for sovereign bonds, left their mark on the investment result, both in reinsurance as well as ERGO. Additionally, in response to sharp increase in bond yields, we had losses on interest rate derivatives used for hedging and duration management. Equity, credit and commodity derivatives largely offset this effect. Disposal gains for ZZR financing as well as gains on equities contributed positively to the result. The reinvestment yield increased noticeably to 2.1%, almost matching the running yield, which remained quite stable at 2.3%. Turning to reinsurance. As expected, the Life and Health technical result, including fee income of EUR 20 million. It was clearly below the pro rata annual ambition owing to the prevailing pandemic. In line with our assumption that the largest share of mortality claims would be accounted for in the first half of the year, COVID-19 losses amounted to EUR 150 million in Q1. For the full year, our loss estimate still stands at around EUR 300 million. Apart from COVID-19, experience was favorable despite a few individual large mortality claims in North America. The fee income was very strong once again and continued its leasing growth path. We, therefore, consider the Q1 result to be a promising start to the year, and we are sticking with our annual guidance of a technical result of around EUR 400 million, including fee income. In P&C reinsurance, we posted a good combined ratio of 91.3%, including major losses of only 9.2 percentage points despite the series of major natural catastrophes. This figure includes runoff gains from prior year major losses of around EUR 100 million, which is not unusual, given our prudent reserving policy and is based on updated claims reports we received from our clients during Q1. As regards losses in connection with the war in Ukraine, we can only reserve for claims that we have already incurred and for reinstatement premiums, we expect to pay an external reinsurance cover that we hold. In Q1, we had expenditures of slightly above EUR 100 million. This includes losses that we consider to be cat and also have been incurred with sufficiently high probability to meet the applicable accounting standards. We are closely monitoring the evolving situation and potential additional losses that might emerge. In any case, also because our remaining major loss budget for the rest of the year amounts to around EUR 3.3 billion, we expect the ultimate claims burden to remain manageable for the group. The underlying performance remains healthy with a normalized combined ratio of 94.8%, including reserve releases on basic losses of 4 percentage points. This is in line with our full year guidance, considering that the number is expected to improve further in future quarters as we continue to earn through the rate increases achieved in recent renewals. This brings me to the April renewals, which still featured the slowed, favorable trends observed in previous renewals, but in which these trends were certainly countered by increased loss cost inflation expectations. Overall, the risk and inflation adjusted price level of our portfolio remained stable despite a materially increased inflation. At the same time, we were able to expand premium volume by almost 8% by exploiting opportunities at excellent profitability, especially in Japan and India as well as with other clients around the world. Global clients saw volume reduction partially due to inadequate terms. In primary insurance, in spite of bond write-downs and high large losses, ERGO continued its pleasing financial development, posting a net result of EUR 96 million. In all segments, the underlying performance was healthy overall. German Life and Health business delivered a net result of EUR 44 million, which was driven by a comparatively low investment result, especially in Life related to Russian-Ukrainian fixed income investments, a decreasing ZZR requirement and negative effects from interest rate derivatives. In addition, the technical result was lower due to normalization of the operating performance after a very good prior year quarter in Health and Travel. Moreover, the segment recorded a higher currency result, which, however, further burdened the operating result due to the policyholder participation, which we book in the operating. In P&C Germany, we achieved strong premium growth above market estimates and a very good underlying performance. The combined ratio of 97.4% in Q1 was higher than anticipated due to man-made and nat cat major losses that were significantly above expectations. In addition, we had the usual seasonal fluctuations in claims and net earned premiums in the first quarter. Considering these effects, the underlying combined ratio supports the full year guidance, albeit with an increased level of uncertainty depending on the further major loss development. The ongoing favorable development of the international business with a combined ratio of 92.6% reflects the successful strengthening of our presence in core markets. In Q1, we achieved good portfolio growth despite divestment in prior years. The quarter was particularly strong in Greece and in Poland. In addition, we improved our operating performance in legal protection. Taking seasonal effects in health into account, the underlying combined ratio is well in line with the full year guidance. Now some remarks on capital management. The group's economic position remains very strong. Solvency II ratio increased to 231% in Q1, driven by good operating earnings and a sharp rise in risk-free interest rates, which were partly offset by write-downs on the Russian-Ukrainian bonds. Please note that the Q1 solvency II ratio includes the deduction of EUR 1 billion in share buybacks. The 2 subordinate bonds, which will be redeemed at the end of May will be considered within the solvency II ratio in Q2. I would like to conclude with the outlook for 2022. With regard to our last communication at the end of February, all figures remain unchanged with the exception of our GWP outlook. Due to currency effects, especially a stronger U.S. dollar, higher-than-expected business expansion in Risk Solutions and further growth in the April renewals, we expect a GWP of EUR 45 billion in reinsurance and of EUR 64 billion for the group. The Q1 results keep us on track towards achieving a net income guidance of EUR 3.3 billion even though considerable uncertainty remains with respect to the financial impact of the Russia-Ukraine conflict. This additional uncertainty now comes on top of the usual drivers for short-term volatility, namely major losses and capital market movements. But again, we're having EUR 3.3 billion of large loss budget still available for the remainder of the year. This concludes my opening remarks. I look forward to answering your questions. But first, hand it back to Christian.
Yes. Thank you, Christoph. Nothing to add from my side, so we can kick off the Q&A. As mentioned, please limit yourself to a maximum of 2 questions per person. And please go ahead.
[Operator Instructions] The first question is from the line of Kamran Hossain from JPMorgan.
And the first question is on, I guess, on the guidance and sticking to EUR 3.3 billion. I guess as you outlined in the statement and I guess in the remarks just now, there was some uncertainty in relation to that number. Capital markets, who knows, but I guess more on the kind of large loss side from kind of Russia, Ukraine. When we think about -- I guess, when we think about your confidence in that EUR 3.3 billion number, are there any obvious offsets elsewhere that you have kind of in place that could help to kind of offset claims from Russia, Ukraine that would help you get to that number, particularly thinking about kind of COVID or large loss reserves? Is there anything kind of in that bucket that might help? And the second question is on the April renewals. I think price very -- risk adjusted is very, very, very slightly down. Can you maybe talk about how cautious you're being on your assumptions? I assume you're probably not going to give a nominal versus kind of risk-adjusted price, but we're very interested to kind of hear about what the spread between those 2 numbers is. And whether kind of, historically, you're at kind of very high levels, given that what seems like a very kind of uncertain risk backdrop?
Yes, Kamran. First of all, all the guidance. Indeed, the uncertainties are high, but I mean, they are always high for us, aren't they? And the reason that I highlighted the EUR 3.3 billion large loss budget so much in my introductory remarks was that this is a significant number. Also if you look at the growth and also having in mind that 12% was last year's large loss budget, we increased it to 13%. So that's a significant number. And I mean the volatility of claims we're having is any way large. So that the Ukraine-Russian piece alone is not at all a concern because it's an order of magnitude where claims could anyway be higher or lower every single year. So therefore, in a sense, it remains to be seen how the overall large loss situation will evolve. And you know that our calculation doesn't work like for a particular claim, we are putting aside that much of money and the remainder is just unused. But this diversification across various sources of losses and that you benefit in some years from not having as many losses like in others in certain lines, but in other lines, you have done more losses and it all finally works in the calculation overall. I think that, that's part of the reason why we are still so optimistic to achieve our guidance. And on top of that, yes, of course, I mean, you mentioned COVID, but more generally, I mean, our balance sheet is prudent. We have a lot of prudency in our claims reserves when we had our Q4 call in February. I think I highlighted that we even increased the prudency without the necessity to do so, but deliberately decided to do so when we started into the current year. And now, of course, we enjoy that as an additional prudency, call it, buffer in our reserves, which, of course, will eventually support us at some point in time. And there are others. So that's probably not a single reserve on our balance sheet where we are not, to some extent, prudent tax provisions. So you name them, whatever. So that all together makes still very optimistic at that point in time that we can achieve the EUR 3.3 billion net income target this year. But obviously, I mean, 3 quarters to go. So let's wait and see. On the renewals, yes, I mean, we always try to be cautious in our assumptions. But I think it's fair to say that this time, we particularly focused on the inflation topic because it's so much on top of everybody's mind. And so we really try to as much as we can fully include that not only now in the calculation of the number we are giving you, but more importantly, particularly, of course, also when we do the underwriting. And therefore, also there, we focused a lot on the inflation assumption. And frankly, we had discussions with our clients, which were not always consensual. So maybe it's more kind of episode, I can tell you, but we did not continue some of the treaties we have just due to the fact that our assumptions were more conservative than what our clients would have assumed from an inflation perspective only. So this gives me some comfort that we took a conservative stance this time. And then again, like for the outlook for the year as well for the future development, who knows, finally. So it will remain to be seen if this is cautious enough. But to start with, it feels much better to be in a position where we fully took care of that in our numbers instead of the other way around. And now let's wait for the future development.
The next question is from the line of Andrew Ritchie from Autonomous.
Just a general question. I was just trying to think about the impact of the move in interest rates for Munich. I guess what I'm sort of trying to balance and maybe, Christoph, if you could give us a sense on this is it may mean less unrealized gains to help to boost IFRS investment income. But on the other hand, it's positive economically and specifically for the Life business, there may be lower earnings in ERGO because there's less need to fund ZZR. So how do you think about the move in interest rates weighing the sort of IFRS noise versus the economic positive? And at what point would you think the reinvestment rate -- higher reinvestment rate would start to flow through to earnings? But sorry if it's a bit vague, I just wanted a high-level perspective on as CFO, how you're thinking about what these higher interest rates mean for the group. I guess the only other question I had is coming up to the midyear renewals, which obviously have a higher nat cat component to them. What is the current thing -- there's still a debate in the industry about the adequacy of nat cat pricing, especially given ongoing inflation and frequency. What's the appetite for Munich coming up to midyear renewals in terms of growth of nat cat?
Yes, Andrew, thanks. Well, interest rate, I think you implicitly nearly answered the question already, at least the way you stated it. So economically, it's only positive, so we will benefit hugely from the higher interest rates. But then there are all kind of accounting mismatches around which make the lives of CFO so enjoyable. It starts with, of course, IFRS, but then even more complex local gap and even taxes in certain situations react differently to the impact of rising interest rates. Therefore, in reality, it's very complex to steer through a phase where we currently are in, but that's all short-term noise in a sense. And as soon as you've digested that, the remainder is only positive because the higher returns, the higher interest income will flow through our accounts then and then we'll benefit from higher earnings over time. Now the over time, the question really is how quick will this happen? And as much as we enjoyed the average yield of our book coming down slowly only, obviously, it's also similar to the other way around. It will also take quite a long time until we see the full impact in our running yield. And then again, in the short term, IFRS, everything you just said is right. So in the past, when we did portfolio transactions, we benefited automatically by gains, which we realized because there was not a single security, you could touch as an asset manager without realizing gains. Now it starts to be rather than the opposite side. So there's not many securities left, which are in unrealized gains positions. Most of them are unrealized loss positions on the fixed income side. You start automatically realizing losses, which obviously is burdening the IFRS result. Also the ZZR topic you mentioned is correct. So relatively quickly, there will be no need anymore for additional ZZR fundings in the German market generally, but also for us. So at least that is a driver for the realization of gains will fall away. It's obviously not the only driver there was in the past, but it was a very significant one, and this one will no longer be there. So many moving parts indeed. And then the only thing I can say is that it's -- I mean, the whole industry and then also we hear, we have a lot of experience in modeling through these various accounting standards and to balance them one or the other way. And that's what we are also going to try going forward. But yes, more generally, I'm very happy with the interest rate increase because in long term, it will be significant upside. And everything in between will be noise anyway, but you know that. Cat renewals midyear. I mean, yes, I mean nothing really new here. The general statement still is as long as a business is exceeding our profitability threshold, which is fully reflecting the cost of risk, cost of capital and these kind of things. And as long as the business is above that, we're happy to write it, but then fully incorporating our most current assumption on inflation. And obviously, also all model changes where we include whatever we learned from recent cat seasons and the most recent scientific research, which in itself will also drive prices up, of course, somewhat everything else being unchanged. But if then the profitability level can still be met. So if you were able to increase prices in line with our model and inflation updates, then we continue to be very positive on that line of business because long term, it continues to be one of the most profitable ones we have.
Sorry, can I just ask on the investment return, but why did you not -- why are you sticking with the target ROI for the year in the circumstances? I mean, you kind of almost would be forgiven for particularly cutting that particular target given the noise you've talked about. What -- I mean, is it because you still have some unrealized gains left to fall back on? Or is this Q1 noise that you think was online or...
Well, indeed, there are some unrealized gains left, but I wouldn't say that's the main reason. I mean it's early in the year still. A lot of movement is still possible. And then there are also asset classes, which have been benefiting quite a lot in a recent environment. So we're benefiting from commodities, for example, also inflation-linked bonds performed obviously very well. So there's always an offset, but uncertainties -- also in that area, I mentioned that the uncertainties of the capital markets are quite high as well. So it remains to be seen. But on the interest rate side, it's clearly not helping at all. So there, you're right.
The next question is from the line of Fossard from HSBC.
Yes. I had a question regarding your slightly above EUR 100 million provision for the war in Ukraine. Just wanted to check with you if you would have a bit of better granularity around how we should think about this number in the context of the Munich Re Group and exposure? Have you potentially spotted any lines where you have overweight on the weight exposure? And maybe if you could help us to better understand how we come to this EUR 100 million number and what could be a kind of range of expectations for kind of ultimate loss expectation? I know it's still very early days, but anything around the EUR 100 million could be interesting. The second question will be related to COVID-19 mortality. So actually EUR 150 million of additional claims, over EUR 300 million full year. Maybe you could say a word on how you're viewing things, where the EUR 150 million were coming from, if you noticed any true-up from previous quarters. Here also a bit more granularity EUR 150 million, just to put in perspective, the EUR 300 million unchanged guidance for the year. Thank you.
Yes. Well, thank you, Thomas. Yes, let's start with the first one. Let me maybe start with a quick reminder how we generally approach the way we did to reserving for the Russian-Ukraine complex in Q1. I mean, obviously, we can only reserve for claims that already incurred and for reinstatement premiums, which we expect to pay. This EUR 100 million in Q1 is for specialty lines and encompasses losses that we consider to be covered and also have been incurred with a sufficiently high probability and both topics are relevant here. Because that's what the applicable accounting standards tell us. These claims have not necessarily been notified to us or in other words, a significant part of the provision is IBNR, yes. We're obviously, closely monitoring situation and any potential additional losses which might emerge. But at this point in time, it's highly speculative because. And when you talk about IBNR, I mean, we could have a long debate what line really is affected because it's all speculative. Therefore, I'm also not in a position to give any breakdowns on lines of business. My view just doesn't make sense at this point in time. More generally on the reserving topic, a theme, we heard a lot already today is the question, why didn't you reserve more? Obviously, a question you could ask. Well, again, we can only reserve for claims where we think the probability is reasonably high enough. And of course, there's leeway. So there's judgment in that question. You're all aware of that. But using that judgment just to increase the prudence in our reserve position, which is anyway already very prudent. And where I highlighted in our last call already that we significantly increased the prudence at Q4. Where's the point to some extent? So why should we have done that if there's no real evidence? And of course, we could have been more prudent, you always can. But we didn't see the point why we should do that in that particular point in time, and especially also in front of the background that we increased the prudency position overall wholly at Q4. And there's certain limitations even for Munich Re, how prudent you reasonably can be and should be, I think, in that business.
Christoph, if I may. I mean the fact that you are already expecting to book some -- or to have some reinstatement premium to pay. I guess that this is implying that, ultimately, you are expecting already these numbers to be much higher than the EUR 100 million, because I guess that with just EUR 100 million in claims, probably you won't have to pay reinstatement premiums. So I'm not sure to understand how I can reconcile both side of the equation, but maybe I'm wrong.
No, you're not wrong. What I can confirm is that for some of the primary business in that area, we are writing or we have written that there we have reinsurance protection in place, which we expect to offset or which offload the claims from us into that reinsurance, so I can fully confirm that.
Mr. Fossard, have you finished your question?
So second question -- second was on COVID, I think?
Yes.
So the COVID mortality development, I think what I can confirm is that the development is fully in line with what we expected. The EUR 150 million out of the EUR 300 million, the budget is more or less what we would have expected for the first quarter. Anyway, the major part of that was from the U.S. And also in recent weeks, we saw also, as you know, that the COVID development in the United States being much more favorable. So claims numbers coming down significantly also in the United States in the course of the last month or so, which is also in line with what we expected. There's no true-up. We are booking all these numbers always to the significant share of IBNR. And at this point in time, there's no reason at all to believe that this IBNR is not sufficient and that any negative true-up would be necessary.
The next question is from the line of Iain Pearce from Credit Suisse.
The first one was just on the write-downs of the fixed income assets in Russia and Ukraine. If you could just give us some sort of guidance around what the potential downside risk of further downgrades or write-off period and sort of if you were to write those down to zero, what impact that might have? Sounds like it will be less than what we've taken in Q1, but if you could just sort of give us some guidance around that, that would be very useful. And then the second one was just if you could just talk to us a little bit about how you're thinking about your leverage position? Obviously, you're redeeming some subordinated debt later this month from already a very low starting point in terms of leverage. So just how you're thinking about that, why you want to redeem those subordinated debts later this month, that would be very useful.
Yes. Well, thank you. Fixed income write-downs, I think I mentioned it earlier. We wrote down the sovereign bonds to a level around 20% or close to below 20%. The corporate is slightly higher. Altogether, you're still in order of magnitude of the 20s somewhere. And this is our interpretation of what the market value of these bonds currently is. As you know, liquidity in these markets is very limited. So it is not always easy to come up with market values. That's our interpretation of the current market value. And therefore, development is possible in the future in both ways. It could go up, it could also go down. But there's a rule of thumb, the write-down was 80% of the exposure. So -- and in worst case, a write down to zero would mean and then 20% of the original exposure would still have to be written down. Leverage. I mean there's a short-term and the long-term answer. The short-term answer is that these bonds are facing the first call date now. And obviously, it's favorable to call them because the interest rate environment still is lower than what it was 10 years back when we issued these bonds, so therefore, the call is a very natural reaction. And I think everybody in the capital market expected it to happen anyway. So not unusual at all. Strategically, I think we said many times that we could imagine a leverage position, which is higher than where we currently are. It now automatically increased a little bit because the equity went down. But still, strategically, we always said we could imagine it to go up. But this is a long-term statement. And so nothing in the short term can be deducted from that. And we are not -- always not only, of course, not looking at our own balance sheet, but also, of course, market environment and other things when it comes to that question. But long-term strategy, completely unchanged.
The next question is from the line of Ashik Musaddi from Morgan Stanley.
Just a couple of questions I have is, first of all, on this point about strategically your -- about leverage, I mean, clearly, there is a bit of dislocation in the market. I mean a lot of the stocks have come down quite a lot. And your balance sheet is still very, very strong. I mean you have a solvency ratio of 230%. Your leverage is probably one of the best in the sector. So is there any view you have in terms of capitalizing your balance sheet to do M&A, given that there is a bit of dislocation in the market? Or would you say that's definitely not in the table because there's just a lot of uncertainty in the market, so probably it's better to stay away? So that's the first question. I mean I'm just going back to your previous commentary in the past, I mean, you have been I think looking at specialty line businesses in past. So just thinking about is there anything we should think again? And secondly, like, COVID losses have been way better than your normal budget would be, which is a bit different to what we are hearing from the other competitors or the players in the market. I mean more or less everywhere we hear that, okay, the first quarter hadn't been that benign compared to what an expectation would have been. So what really went right in this quarter? Any color on that would be very helpful.
Yes. Well, thank you. First, M&A, nothing changed, really. So I think we always said the right target with the right price. We would always look into that and then take our conclusions and would be open at least for something. But more realistically, we never saw anything attractive enough, at least not in any big target over the last decade, probably. So therefore, I think it continues to be pretty remote that something could happen anytime soon, but we would be generally open. COVID losses, frankly, it's harder...
In cat losses. Cat losses. I meant cat losses, not COVID losses. Sorry.
Sorry. I understood COVID.
Sorry for that, sorry.
Yes, cat losses, I'm not sure whether the difference is really. I mean if you look at our -- the size of our Australian flood, I think it looks reasonable, given also what we -- I mean, the event that happened there. If you then look at our exposure on the European windstorm, maybe that's a little bit smaller than you would have expected, I don't know. Generally, I think that our underwriting practices, I mean also in the large loss area, they have their merits of course. So I'm not sure, I mean, it's a single quarter and I don't know exactly what's going on with our peers. But yes, I mean, we focus on underwriting, issuing the right risks on our balance sheet at the right price. And then eventually, maybe with the right portion of luck, you end up having a good result, I don't know. It's hard to comment further on that. And then, of course, in these numbers, there was this release of large loss provisions, not unusual at all for us. So there are -- I mean, it's happening quite often, to be honest, that in some quarters, we released some of the large loss provisions. Because they are similarly like in any other provision or like the basic loss provisions as well, we booked the initial loss picks in a very conservative way and then regularly enjoy some positive runoff eventually at some point in time. And again, you have some flexibility when to book it, but sometimes you get client reports in, which, to some extent, trigger or at least move you towards releasing something in a particular quarter and then you release it. So I think that, that's what happened here in the first quarter overall.
The next question is from the line of Vinit Malhotra from Mediobanca.
Yes. So for me, the first question would come back to sort of inflation and COVID as the topics, please. On inflation, I mean, I hear your commentary today. And then when I see some of the peers or generally, I mean, there's been some negative prior year development from nat cat in many other reinsurers because of inflation. So how much -- I mean, obviously, you said Munich Re has had a history of releasing nat cat or large loss PYDs. But this time, the difference is inflation is quite a surprise and a short sort of. Could you just comment if -- how has inflation played a role in this release? I know it's a small EUR 100 million, but the direction is still important. How has inflation played a role in that EUR 100 million release of nat cat barriers? Second question is on COVID. I remember in the fourth quarter, there was extensive discussion about how the reserve setting was quite prudent, quite conservative. I'm just curious, do you -- now that one more quarter lag has gone -- one more quarter has gone by, would you say that the prudence was necessary? Is it -- can it still be released or is there some trends that indicate that it goes rather too prudent, for instance, so I'm not looking for a true-up rather than true-down, if you like, if anything, from fourth quarter?
Yes. First, inflation in the context of large loss provisioning, I think I'd like to start with the statement that it's very much case by case. So how this works is that our claims colleagues, they look in each individual of these large losses very much in detail based on prudent assumptions. And reserve for them with an initial loss pick, which is conservative. And one of the assumptions they take, but by far not the only one is, of course, also inflation, particularly in the cat area, a phenomenon which is called post-loss amplification, that after an event, we anyway assume that certain parts you need to replace are particularly expensive due to the lack of supply in the particular affected area. So inflation post-loss amplification is always part of what's going on when we will do reserving for cat losses. But obviously, there are much, much more drivers. And as you can imagine, initially, a hurricane, a typhoon, whatever event is happening, you do not have a lot of information. Also the claims report from our clients, they come in much, much later. So the initial pick is based on statistic evidence, a scientific evidence, based on research papers, based on first insights of our teams on the ground in a bottom-up way. But it's based to a limited extent on actual claims reporting only because you do not have any reports at the time when you have to set up the reserves for the first time. And therefore, the level of uncertainty is enormously high. And again, we try to be on the very prudent side, so it's not unusual that you have a positive one-off at all. But the initial pick, you have a lot of leeway you could do it either way. And inflation is probably not the most relevant part of that uncertainty. COVID, I mean, one quarter is really not a long time for developments here. EUR 300 million expectation for the year, EUR 150 million after the first quarter. I think we'll finally know much more in fall this year because our assumption currently is, of course, that we do not see any significant wave anymore. But that's also what we said when we initially said our expectation was EUR 300 million. The basis for that is -- and we call it an evidence-based approach that we budget based on the evidence we currently have. There is no evidence at this point in time for an additional wave in the second half of the year. But obviously, that doesn't mean it's impossible. And if it would happen, our claims number would increase. So therefore, at this point in time, I think a discussion about if there is prudency or not, it's a little bit premature because in any case, we would have to await the second half of the year and observe the claims development happening then in our major markets.
Sure, Christoph. I mean the fourth quarter prudency, not first quarter, so just to be clear.
Yes, but we keep it on our balance, the prudency. So it's still there to an extent.
The next question is from the line of Will Hardcastle from UBS.
Just following up on the ZZR interaction with the rapidly increasing interest rates. Yes, can you try and help us to quantify the likely year-on-year incremental cash requirement and how that compares to recent years? Or at least in terms of scale, I guess, we could feasibly be concerned given there's not many fixed income assets to realize gain from, as you said. If we look at Slide 32, just a better understanding perhaps of what's included within the EUR 4 billion non-fixed interest securities, just wondering how liquid these are. Second one, on Russia, I'll give it a go because it's not been noted yet. Just trying to confirm if there's anything in here for the aircraft leasing? More importantly on that, even if you don't want to say for that, but do you have reinsurance or retro protection to limit the exposure here? And are we talking about this on the primary side or the reinsurance?
Yes. ZZR, first, maybe if it's of general interest, a quick reminder on how the mechanics of the ZZR works in general. So it's a provision which we have to set up to close the gap between the interest rate in the market and the guaranteed interest rate, which has traditionally been sold in the German Life Insurance. And the bigger the gap is, the more you have to fund to set it up. But it has been funded heavily for the whole industry already over the last decade or so. And so therefore, the remaining number to be funded is very low. And on top of that now with the interest rates going up, I think at least some players in the industry are if -- especially if interest rates would continue to rise, relatively quickly now in a situation that they would be in a position to release ZZR. So no longer fund it, but release it, given the fact that then the market rates are maybe even higher already than the relevant rate used for the ZZR calculation. So it might turn depending on future interest rate development in Europe, the sort of euro rates. Therefore, from a liquidity perspective, I think that was your question, no concern at all because funding requirements go down significantly anyway. But at the same time, the unrealized gains we still have, they are liquid enough that we don't need to be concerned here. Despite the fact of the reserves we still have, of course, a significant portion is also quite illiquid because we have illiquid investments. You know that participation in some private equities, these kind of things tend to be less liquid. But the part of the reserves, which is still liquid, especially for ZZR is clearly, clearly sufficient. That's our current view. On Russia-Ukraine retro reinsurance, I think, I mean, retro is a different story, but reinsurance cover, we hold, supporting the primary reinsurance business. We have in that area. Retro side, we do not assume that we get any offset from that.
The next question is from the line of James Shuck from Citi.
My 2 questions. Firstly, on the inflation topic, just keen to get some insight into the 2021 and 2022 loss picks. So when you set those, what were the kind of assumptions around any transitory or not view on commodities and material pricing? Obviously, things have continued to rise. I'm just wondering to what extent that was priced in, in 2021 and in the current year 2022? And then also kind of to what extent have you captured any forward-looking view on wage inflation within those loss picks. The second question, just around the P&C Re growth, which was very strong on the GWP side. Can you just shed a bit more light into where that came from, perhaps giving some figures around structured products, risk solutions and the core reinsurance business? And also keen to get any view into what impact this will have on the SCR and how it's diversifying away in the capital requirements?
Yes, James, thank you. In inflation picks, I mean, obviously, there's always a development. So 2021, for example, we started into the year in an environment where the inflation was measured in today's terms, significantly lower than where we are today. So what we did at the end of 2021, we changed some of the picks already in the first year, increased it slightly and in the course of our reserve strengthening and on top of that, put above for us. So that was the additional prudency I was commenting on before, that was part of part of that. So in other words, we are regularly checking picks. One, we do the initial loss reserving. So the initial loss pick, what we always take in consideration is the most recent inflation assumption as given by our economists, but then, of course, adapted for the particular line of business because it's not all related to CPI, but there are various inflationary drivers behind it. So we translate that. The actual is translated into an inflation assumption for a particular line of business. And obviously, also, there is a certain timing in that. So we do not expect inflation to remain on a very high level forever. But also our economists given -- put in an assumption like it will be a certain percentage number this year and then another one next year and then 30 and so on and so forth. So it's a trajectory, more than anything else. And this is reflected in also reserving. Obviously, the actuals look also the duration of the particular portfolio and then also deduct the inflation to be applied to that portfolio given the expected duration. And then again, we regularly assessed it, reassessed it already during the first year. And then during the first year, we find out that the loss picks potentially have been a little bit light. We increased them immediately again. And so it remains to be seen if this is going to happen in 2022 again. That's too early to tell. In 2021, as I said, we did that in some lines of business, right? It deemed to be necessary. But then again, if you look at the overall reserve prudence and our overall reserve position, it continues to be very, very stable, very strong and -- so these elements, I would call them, technical details in an overall setup, which continues to be very strong.
And just on the wage inflation point within that?
Sorry, I didn't get that.
Sorry. Just on the wage inflation assumptions as well, I understand the commodities and materials, but are you anticipating an increase in wage inflation in your loss picks?
Yes, we do. But then again, it depends on market by market, line by line. So there's not a single number I could give you, but we are also looking at wage inflation. That is something I can confirm. The GWP growth, I think the answer is finally pretty simple across the board, more or less everywhere. And again, we are not focusing on particular lines of business or certain geographies. It is really as long as the contract is above the minimum profitability threshold, we're happy to write that business. And over the course of the last year, that happened to be the case more or less nearly everywhere.
And the impact on the SCR?
Well, the SCR, I mean, diversification is still in place. So I wouldn't expect any different development than like what we saw in Q4 where you were able, I think, to see an SCR development, the SCR growing proportionally with premium growth. So that the reinsurance or the technical SCR, the insurance risk SCR growing proportionally with premiums. That's what we saw. Also the diversification is fully intact, and we do not have an overproportional risk intensity in that business.
The next question is from the line of [ Holan Senna ] from ODDO BHF.
Two questions on ERGO from my side, please. P&C Germany showed a very nice organic volume growth of around 9%. Is this price driven? Or are there also market share gains included? Maybe you could also touch on motor pricing in Germany. What's the current trend there? And then you had a nice improvement in legal protection in ERGO International. What's behind this?
Yes. P&C Germany, the growth is indeed nice, clearly above market expectation in our view. We do not have market numbers for Q1 yet. So we cannot judge really finally, but we think it's clearly above market. So to answer your question, yes, we think we gained market share in that quarter again. But some of it is also price-driven. So it's not all the extension of the business. Some of it is also price-driven. All in all, we think the market is -- our book is well intact and the market is not in unreasonable shape when it comes to profitability. That's also one of the reasons why we grow strongly into that market. This is also true for the motor business. Legal protection international, we have a number of entities run by ERGO, which offer legal protection insurance in various European markets, mostly European markets. And we report them together because we run them as a global line. And the combined ratio has been under some pressure recently. But in Q1, the result improved, and that's why we highlighted in our release that the legal protection result came in better.
We have a follow-up question from the line of Fossard from HSBC.
Yes. Sorry, Christoph. Just coming back to the question James on better understanding the 25% growth in P&C Re. I think that's in your introductory comments, you specifically mentioned risk solution, strong growth, maybe you could say a word on this. And also given the big debate on property cat exposure, could you refresh our mind year-to-date how much you grow your property cat book and how much of this growth was price-driven versus volume-driven?
Yes, sure. Yes. I mean risk solutions was a significant driver, but also the core reinsurance business. And don't forget the FX, which also supported the growth significantly because the U.S. dollar strengthened so much. On the particular question on 1/4, I think what I can report on 1/4 is that the cat exposure overall was stable.
And if I may, Christoph, so stable at 1/4s and so year-to-date, I mean, how much would that be and versus pricing, which, I guess, is likely to be slightly above the 0.7% you reported at 1/1 and the minus 0.1% you reported at 1/4s?
I mean for the midyear renewals, it's too early to speak about expectations anyway. What we will do is we, of course, incorporate all the inflation assumptions, but also the model changes into our pricing now with the 1/6, 1/7 renewals coming up. And then again, if profitability thresholds are met, then we are happy to write the business, also cat business because it's, again, long term, one of the most profitable lines of business. So we are not generally fighting for cat business. But it has to meet certain requirements that, that's very important. Otherwise, we don't continue it. And in 1/4, as I mentioned, it was stable. It was stable because we did write more cat in certain areas and less cats in other areas. So we are not innocently writing cat wherever it now comes along. But where it meets the criteria, we have to apply and we do apply, where we're very happy to grow the business because we're convinced we're making money there.
The next follow-up is from the line of Vinit Malhotra.
Yes. So very quickly, if I remind myself of the COVID loss booking pattern, a similar situation unknown loss, so I'm comparing it to Ukraine really at the moment. I mean it seems that -- I mean, you're following the same rule of, we won't book until we know more. But many others in the market don't do that. And I'm just curious if there's been a discussion in the company or in the Board level that should this -- what's the basis for this different accounting approach to this situation? And is it possible to review it? Is it being reviewed? Is it set in stone as a meaningful way? So just any thoughts would be helpful.
I -- it's not easy to comment on peers. So I better don't do that, but maybe the comparison between COVID and the situation now. I think the legal uncertainties are significantly higher this time than they were with COVID. And I admit also with COVID for some lines, the legal uncertainties were quite high. But I think they are significantly higher this time. On top of that, I mean, I think in the COVID crisis, after Q1, the level of claims we had to expect were much clearer than this time. So the development pattern is completely different. And then thirdly, if you look back at how we did handle the COVID situation, we also did not come up with an ultimate after Q1, given the uncertainties back then where, again, the situation was probably even a little bit simpler than this time. And also back then, we didn't do so. And I think any number I would have given you 2 years back for COVID in Q1, I think it would have been wrong. So also in hindsight, I think it was the right approach to wait a little bit to have clarity and then release the number which is reliable enough that it can also stand for more than just a couple of months, right? And that's where we currently stand. And in any case, whatever we incurred, as I said, we build up the provision based on wherever we think with the probability high enough that claims have been incurred, the other provision is fully booked. And everything else, we'll see later on. And I'm sure there will be more claims. This situation develops, the war is ongoing, the sanctions are still there. But who is able to look into the future and book a number based on that? I have difficulties how to do that properly.
There are no more questions at this time. I hand back to Christian Becker-Hussong for closing comments.
Yes. Thank you. Not much to add from my side, aside from saying thanks for joining. Pleasure talking to you as always. Hope to see you all soon. And if you have further questions, please don't hesitate to get in touch with us. Thanks again. Bye-bye.