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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, everyone. Good morning. A very warm welcome to our Q1 '23 earnings call. I have the pleasure to be here with our CFO, Christoph Jurecka. I'll hand over to him as usual, for his opening remarks. And afterwards, we will really have plenty of time for Q&A, given that's probably more important than usually having just introduced IFRS 17. So my pleasure to hand it over to Christoph.
Thank you, Christian. Indeed, it's a big pleasure for me to, for the first time, present quarterly results according to a new accounting standard IFRS 17 and 9. And additionally, we will also present full year 2022 and Q1 2022 numbers according to these new metrics. As Christian said, we can imagine that there will be more questions than usual. So there is enough time today to answer all the questions. And there will be plenty of opportunity to asking them, so I can only encourage you to whatever you have on your mind, please ask and I'll do my best in answering the questions. But I'm convinced that you will join me in appreciating the higher amount of transparency, IFRS 9 and 17 will offer compared to the old regime, also admittedly, the transition confronts us with a lot of new information.
Now as always, I will not go through the slides, but I will start with opening remarks to allow more time for Q&A. I will first focus on full year and Q1 2022, before I then will focus on Q1 2023. So let's start with 2022 and have a look on Slide 29 of our deck, where we compare the full year 2022 net result under IFRS 17 to IFRS 4. The IFRS 17 result is, as you can see, substantially higher than [ under ] IFRS 4 standing at EUR 5.3 billion, where the IFRS number was EUR 3.4 billion.
Well, first, to the new methodology, a positive deviation was certainly to be expected as IFRS 17 results tend to be slightly higher compared to IFRS 4 for us. And aside from the various methodological differences across all segments, which we've discussed already, I would like to particularly mention the earlier profit recognition in Life and Health reinsurance. Second, the 2022 IFRS 17 result is also impacted by temporary effects due to the unprecedented increase in interest rates during 2022. This is reflected in P&C reinsurance earnings where the difference to IFRS 4 is the biggest of all segments. In 2022, we benefited from discounting of new reserves with high interest rates, which was only partially offset by the unwind of [ old ] reserves discounted at the very low interest rates locked in a transition.
So if you want the timing of the transition was just ideal in a way that until then, the very low interest rate has been locked in, and then with the transition, suddenly the interest rates jumped up and thereby, highly increasing the P&C net income. So the obvious question then is, why do we guide for EUR 4 billion net income in 2023 when the last year was already at EUR 5.3 billion? So that's probably the most obvious questions anyway. And the answer to these questions is given on Slide 30. And I think most importantly, I can confirm and underline again that we expect the strong underlying performance of all business segments to continue in 2023, translating into a further operating improvement as, for example, shown in the very pleasing renewal results in January and also in April.
Also, the investment result is expected to increase compared to 2022, which was negatively affected by the volatile capital markets. Aside from these operating developments, more one-off like adjustments have to be considered as well. First of all, we do not expect a recurrence of EUR 0.7 billion of currency gains. Second, the above-mentioned benefit from interest rates in P&C reinsurance. Basically, the impact from the high discounting and the low unwind. This effect is expected to be about EUR 1 billion lower in 2023 compared to a positive net effect of approximately EUR 1.5 billion last year, so that's the absolute amount.
Based on the current interest rates, we now expect a tailwind of about EUR 500 million in 2023. So the effect is not gone. It's only significantly smaller. Please note that this figure is highly dependent on interest rates, which was still somewhat lower than we did the planning in -- for 2023, back in 2022. And furthermore, as communicated with our outlook, we have made some conservative assumptions in our planning to cover the uncertainty of the first-time application of IFRS 17, which we again made explicit also on the slide. Now before I turn to 2023, please allow for a final remark on last year's number affecting the Q1 earnings in 2022.
Q1 2022 was exceptionally strong, supported by benign major losses and a positive currency result. And in Q1 2023, now it was exactly the other way around. Our result was burdened by above-average major claims and by currency losses. However, we had a successful start to the year as we benefited from a strong operating performance once again and a good investment result. Hence, we posted a very pleasing net income of almost EUR 1.3 billion, significantly above our pro rata guidance. And we exceeded the pro rata targets not only in that headline number, but across all business fields and segments in a [indiscernible] variety of KPIs and targets.
And in particular also true for the return on equity, which amounted to 17.3%, which is already above our target or our guidance in our ambition 2025 for the year 2025. I think that's another proof point, how strong the performance was in the first quarter. Now let's look at Q1 in more detail and let me begin with the investment result. The investment result came in at 3.0%. And we posted with that a return which was significantly above our full year guidance. At 3.8%, ROI was particularly strong in reinsurance, driven by just a few disposal gains, but we continue to benefit from the higher interest rates. So the reinvestment yield increased remarkably to 4.4%. Despite the generally expected higher volatility on IFRS 9, ROI came in at exactly the value of the running yield.
In other words, all other positions, including mark-to-market effects on equity and derivatives or also disposal losses on fixed income, almost completely offset each other in this quarter. For the remainder of the year, we will continue to deliberately accept disposed losses in fixed income as the reallocations will lead to a subsequently higher running yield due to higher reinvestment rates. Turning to the business fields and starting with reinsurance now. The Life & Health total technical result of EUR 320 million was above the [indiscernible] annual ambition. The release of CSM and risk adjustment was in line with expectations. Experience variances were slightly negative, driven by expenses and U.S. mortality.
The total technical result would have been significantly higher without negative currency effects of minus EUR 66 million in FinMoRe business reflected in the result from insurance related financial instruments. I'd like to underline that we consider this an accounting mismatch as the related hedging activities are recognized in the currency result. On an underlying basis, our FinMoRe business continues to grow and perform successfully. The CSM stands at EUR 10.6 billion. And this is a small decline compared to year-end, driven by a shift from CSM to risk adjustment as a result of the annual parameter update in the models. As both, CSM and risk adjustment, represent future profits, we do not expect any margin deterioration by this shift.
It's important to note that the CSM from new contracts, reflecting a new business generation, which was particularly pleasing in North America. So the CSM for new contracts exceeds the release through P&L. Now P&C reinsurance. As you saw, we posted a combined ratio of 86.5%. Major losses amounts to 16.4 percentage points and exceed the average expectation of 14%. And I'd like to add, they also include negative runoff from prior years. The single biggest event was the earthquake in Turkey with EUR 0.6 billion of claims. As this loss then is discounted with a high Turkish interest rates, it contributed to a relatively high discount effect, which was around 8 percentage points in the quarter.
And that's at the higher end of the 5 to 9 percentage point guidance we provided at our analyst conference in February. But the underlying performance remains healthy as we earn through the margin improvements of the recent renewals, a normalized comment ratio of 85.1%, which is better than our guidance allowed us to use the better-than-expected discount to cater for claims, uncertainty by prudent loss bookings. So we've deliberately decided to use the benefit, which is 3%, 8% discount, minus 5%, 5% to 9% -- minus 5% in the guidance. So the 3% difference we decided to use that for prudent loss bookings. Obviously, we did not perform a reserve review.
So therefore, at this point in time, it's just prudent bookings. The reserve review will be conducted as always in the fourth quarter. In terms of growth, we continue to strongly expand our business. Insurance revenues increased by more than 13%. Speaking about revenues, this brings me to the April renewals, where we increased premiums by 11%, ceasing opportunities at, again, an excellent profitability. In particular, we expanded the nat-cat business with material rate increases. Overall, the risk and inflation-adjusted price level further improved with an increase of 4.7%, including portfolio mix effects related to a higher share of Property XL business.
In addition, we achieved material improvements in terms and conditions like higher attachment points and stricter [ wordings. ] In primary insurance, ERGO delivered a pleasing net result of EUR 219 million, which is also ahead of the pro rata guidance. The German P&C business came in strongly while the international business suffered from large losses and also Life & Health Germany posted net earnings somewhat below the expectation. Let's start with the latter. German Life & Health business delivered a net result of EUR 41 million in Q1. The total technical result even exceeded the prior year level. However, net income was burdened by nondirect attributable expenses in the Life new book. The CSM increased due to positive operating changes.
Please note that in this segment, new business generally will not be able to compensate for the release of CSM. In Life, as you know, the back book is in runoff. And in Health, our new business strategy focuses on short-term PAA business without CSM. In P&C Germany, we achieved a strong technical performance with a combined ratio of 81.2% in Q1. We benefited from very low major losses and positive seasonality of acquisition costs, which will catch up in Q4. For PAA business, IFRS 17 allows to fully expense the acquisition costs at the time of the sale of the policy, which for our average Germany business is often in Q4. And thereby, we get a quite significant quarter volatility of the combined ratio.
So Q4 heavily burdened. The other quarters are having much less acquisition costs. The investment result contributed to the very high net result of P&C Germany of EUR 166 million. The ERGO International business, the total technical result increased overall compared to Q1 2022. And the Life & Health business was in line with expectations, reflecting CSM and risk adjustment releases dominated by the Belgium Life & Health businesses. The P&C result fell short of expectations with a combined ratio of 95.4%. Poland had to digest major losses from single events, where an intragroup benefit from reinsurance of around 2 percentage points is not reflected in the IFRS numbers and not in the combined ratio due to consolidation.
Legal Protection business and also seasonality effect in Spain also contributed to the weaker combined ratio. And let me explain the seasonality effects in Spain. That's a health business there. So in -- regularly and you could solve and see that over the last years already, the winter months, where the claims are much higher in the winter months. So the majority of the result is being earned in summer. Also, the business in Greece was, by the way, performing well. Our figures now also include business operations in Thailand. For the first time in the P&L show our Thai business in Thailand, where we now hold 75%. The segment net result came in lower than expected for ERGO International at EUR 12 million, burdened by [indiscernible] expenses, relatively high taxes and a negative impact from net financial result, also reflecting investments in insurance joint ventures.
Some remarks on capital management. The group's economic position remains very strong with a Solvency II ratio of 254% in Q1. And please note, this includes the full deduction of EUR 1 billion in share buybacks, which will then be conducted now in the course of the year until the next AGM, but we deduct the full amount already this quarter. I would like to conclude my opening remarks with the outlook for 2023, which remains unchanged. We are still anticipating a net result of around EUR 4 billion. And as already mentioned in our prerelease, surpassing this target has become more likely due to the strong Q1 result. But as we still have 3 quarters to go, we decided not to change any other outlook KPI either. So it's just early in the year.
With this, I'm at the end of my opening remarks, there's a lot of additional information and improved transparency visible in our slide deck, which I recommend having a particularly close look at this time, given the changes in accounting. I look forward to answering your questions, but first, hand it back to Christian.
Thank you, Christoph. Not much to add from my side. My usual housekeeping remark, we are happy to go right into Q&A. [Operator Instructions] And with that, I hand it over to [indiscernible].
[Operator Instructions] Our first question is from Freya Kong from Bank of America.
Two questions, please. The 86% combined ratio guidance was assuming a discount benefit of 5%. But if this is actually 8%, this means your rate adjusted guidance should be around 83%. Are we right in assuming that this entire 3 points you have invested into higher loss picks? And given your unchanged guidance, it sounds like you will do this for the rest of the year. And secondly, how should we think about the increased conservatism in your loss picks? Is this due to lower confidence in the 2% margin improvement that you expect to deliver? Or is this a one-off reserve building exercise in '23, meaning we should see a bigger improvement in margins in '24?
Yes, thanks for the questions. So indeed, in our guidance, if you would have done -- if you did the math, 5% discount was the number included in there. Now we had 8% this quarter, so a 3% difference and the 3% have been used 100% for being more conservative in the basic losses. We have higher loss picks there. And the question is why did we do that? No particular reason. Just wanted to be conservative. It's the first quarter. Only if we would not have done that, the combined ratio would have come in at around 82%, significantly below the guidance. And we just didn't see any good reasons why we should start into the year with that. It's still a long time to go in the year, and therefore, being a little bit of conservative is probably close to our DNA, particularly in the quarter where the results are very good anyway already.
And given the uncertainties in the environment being a little bit on the cautious side anyway, is something which couldn't -- I would never blame me for, let's put it that way. Looking forward, we don't know what we do. So we could either improve the result or we could continue to book in a conservative way. Why should we take any decision today? That's just not necessary. We will carefully observe the performance over the next few quarters. We'll look into our reserves, how conservative we are already, if any additional buffer would make sense at all or not. You know that we traditionally are very, very much on the prudent side. So the question is also how much we can do on that side, how conservative can you be. But it will also depend on performance and on the actual development in the next few quarters. So nothing I could predict today, all options open.
The next question comes from Kamran Hossain from JPMorgan.
Two questions for me. The first one is on the renewals. The -- I'm just trying to square the 4.7% risk-adjusted rate increase, April versus the kind of just over 2% at 1/1. Just based on the kind of, I guess, the commentary what we've heard, it sounded like actually, January was more positive than April. So just wanted to understand kind of what's the difference between those 2 numbers. Am I missing or is it just kind of you'd already trued up assumptions last year or something at April?
The second question is coming back to combined ratio guidance. Obviously, you flagged the impact of Turkey in the quarter as pushing discount rate up a little bit. But I assume even though it's a material loss, it wouldn't have been that huge in the quarter. So should 8% continue as the discount rate kind of going forward for the rest of the year? Or should it look a little bit different? Should it move maybe not back to 5%, but slightly closer to that level?
Thanks, Kamran. Renewals, I think I have to work on my enthusiasm being the CFO because if there -- I mean, if there was anything to be read into my comments that we were less excited about 1-4 than about 1-1 that would be completely wrong. I think we are equally happy with both results. And if you look into the numbers, they have really much follow the business mix. We have a higher portion of cat business in 1-4 traditionally. And so it had to be expected that the numbers look higher, and the amount pretty much follows the cat portion or the business mix development. So therefore, we continue to be very happy with our renewal outcome and by the way, also continue to be very optimistic for the upcoming renewals, given just the market environment, how it presents itself to us.
So again, very happy with the outcome and very good renewal result. The combined ratio guidance or -- I mean the combined ratio, indeed, 5% was in the guidance. Now it was 8%. The full year, though, was also at around 8%. And as you can see, the numbers fluctuate quite a bit. I mean, we gave a range of 5% to 9% in our outlook presentation to somewhat indicates how big the range potentially could be. It depends on a number of factors. It depends obviously on the interest rate environment, that's obviously the major driver. But as you could see with Turkey, interestingly, it also depends on where your losses set because in Turkey, obviously, interest rates are much higher. So you discount with Turkish rates. And interestingly, in the first quarter, this Turkish rate effect did compensate the overall lower yield environment, which we had compared to Q4 last year.
Because if you would have looked only at the yield environment, you probably would have expected even a little bit lower discount effect, which then didn't realize. And the main driver for that being that significant part of our losses sits in Turkey this quarter. So there's many drivers. FX could be another driver. And obviously, it has to be closely monitored. We all lack experience, we all didn't see so many quarters yet in IFRS 17. So I think it will be interesting to jointly observe how the development is going to be going forward. But again, there is some deviations always possible only due to the fact that the losses will arise here. And they are in different geographies, different currencies and different interest rate environment.
The next question comes from Andrew Ritchie from Autonomous.
Thanks for the additional disclosure on IFRS 17 full year '22. First question on the investment return. As I recall, your guidance for full year '23 incorporated some expectation of realized losses on fixed income, partly to accelerate the reinvestment. I can't see evidence of that in Q1. And that might be because there's offsets from other things that have positively moved. But can you just update us on your thoughts on, is that still a plan? Is there still some expectation of some realized losses of the year because as things stand today or maybe the environment means you've accelerated your -- sort of your planning on investment return?
The second question, just on Life Re. I mean just the mechanical release of the CSN risk adjustment, that alone would get me to your sort of technical result guidance. And then on top of that, I'd add in the fee business, which in itself was depressed in Q1, as you said, from FX. So why stick with the EUR 1 billion technical result guidance? It just looks mechanically really challenging, unless you're assuming a high degree of caution on some negative items are not considering.
Thanks, Andrew. I'll start with the first one. So yes, we always said we wanted to, first of all, not restrict trading activities of our investment colleagues too much, and therefore, would allow them to realize losses once they occur in the fixed income space. And in the first quarter, fixed income realized losses amounted to EUR 189 million. So there was an effect. And going forward, we explicitly -- I think I mentioned it already, so we explicitly want to make it very transparent that we will continue to do that and maybe even intensify that. So that's clearly something we would like to continue to look into. And it will only strengthen how quick we benefit from the high yield environment. So in a sense, in our view, it would make a lot of sense, particularly in an environment where the overall results are very good and at least in line with the guidance or above the guidance. So that's still on the agenda and completely unchanged. Life Re, I mean, there are various angles, how you could look at our guidance. I mean you could look into these -- the numbers of this quarter, you can add back the FX and if you then take it to times 4, you are significantly above EUR 1 billion. You would also look at the prior year numbers. And also there, as you said, this year's end release plus risk adjustment release already would be significantly above the EUR 1 billion. And then there were some negative variances, which then brought it down back a little bit. But also there, you would immediately end up significantly higher numbers than the EUR 1 billion. So I think the only justification I have is that we are extremely conservative and cautious. And they have quite a bit of leeway for negative variances, which might occur, but we have no indication at this point in time at all that they will occur. So it's really only conservativism and caution. But sometimes in Life Re, with big treaties, things can also develop quickly.
So it's -- sometimes you have a big treaty, and you're in court, and you get a ruling, and it costs you a triple-digit number. It can happen. So it's not unseen, but it can happen. So I think I'm just saying that to show that we are not ridiculously conservative, but we are very conservative. And indeed, there's a significant upside. Why didn't we change it in the guidance already? I mean I think the same like with many other KPIs in the guidance as well. In Q1, we would not do so. It's just one quarter into the year. A lot can still happen. Some of the KPI looks as if they were very easy to achieve. Others less so, others maybe even challenging. But in Q1, we would never change it.
The next question comes from Tryfonas Spyrou from Berenberg.
I have 2 questions, please. The first one is on April renewals, obviously, this came in quite strongly, 4.7% rate increase. I guess you previously said that this number is close to what should we expect as an improvement in the combined ratio from Munich Re. If we were to wait that given April to 18% of the total P&C renewals that would suggest another 38 bps or so margin expansion on total sort of 2.3% you reported in January, which over the accounts for a bigger proportion of the book. But is that a fair reflection? Do you know sort of expect some higher margin expansion than before given the strong accrual years? So that was my first question.
Second, in term P&C Germany, you mentioned the discounting impact of 5%. I was wondering if you can help us with a similar bridge as it is for P&C combined ratio. For instance, this is in line with what was factored in the guidance of 89%. And I guess, could you perhaps talk a little bit how big the lower large loss impact was if you were to get a better feel for the underlying combined ratio?
Yes. Thank you for the questions. First of all, renewals -- and thank you for the question, it gives me the opportunity to outline our methodology, I think, again. So the numbers, as we show them here, they are all fully risk adjusted, which means that any inflationary effects, any model changes, any reflection of climate change of adapted risk models in whatever line, it's all fully deducted already from that number. So it shows only a margin improvement on the volume which has been renewed at a particular date. So you can basically take the price or the margin improvement, price change as we disclose it, times the volume at renewal. And this will be a real margin improvement, and we fully -- can be fully added to our technical result in P&C Re. So that's how the mechanics work.
And if you look historically into these price chain numbers as we communicated them and historically how then after these price changes later on, the combined ratio moved in reality, you will find quite a good correlation between those numbers. Obviously, there's always uncertainty with that. But I think the past gives quite a lot of evidence that we generally are quite good in these estimates. So that would be my remark on the renewals. So overall, we're very happy with that. Margin improvement, very high. And again, for 1-7, we do not have any indication why this should change at all. So we think the environment will continue to be very positive, particularly, of course, in the nat-cat business, Property XL, which was also to a significant extent, the driver this time.
Combined ratio, ERGO Germany. Yes, discount 4% here. So first question is, why is the discount in primary business smaller than in reinsurance? There is a number of reasons for that. The most importantly, the business is more short tail and also the amount of reserves you have to hold given the heavier risks are in reinsurance. So the amount of reserves is relatively spoken a little bit smaller, which brings you then to a discount effect, and currencies are different and so on. So the business mix is just different. So therefore, you have rather 4% discount instead of the 8% we saw in reinsurance.
How does now the 81% relate to the guidance of 89% in P&C Germany? One of the most significant difference, I think, is the seasonality I was mentioning before in acquisition costs, where a lot of the acquisition costs are expensed in the fourth quarter, where a lot of the book is renewed, and you fully expense the cost, once you write the new policy in the PAA methodology in IFRS 17. That's an option you can choose. You don't have to do it that way, but ERGO chose to do it that way. So you fully expensed acquisition costs at the point of sale. So that's one core driver.
Another core driver of the difference is that we had very good large -- very low large losses this quarter, which was another significant driver. And then generally, the performance has been very good this quarter, also when it comes to basic losses and the overall profitability. And then there also has been a certain reduction of the loss component. If you add it all up, it was a very good quarter. But don't take the 81% for granted for the full year as there is the seasonality effect on the acquisition costs, where in Q4, we would expect the combined ratio to be significantly higher, of course.
The next question comes from Will Hardcastle from UBS.
First of all, can you -- I'm sorry, just going over old ground. But can you help me to understand just how we come to that 5% to 9% discount guidance from a bottom-up approach? And what duration we should be thinking about, for example, and the build of risk-free plus what I guess? And would I be right in thinking the Turkey uplift is maybe worth 1 to 1.5 points or so versus your previous guide? And secondly, just thinking in P&C Re, looking at the investment gains on Slide 51 from disposals. What was the EUR 190 million or so related to? And just on that slide, is that 3.1% regular income, a fair run rate, or was it inflated somewhat?
Let me start with the second one. So the run rate is a fair reflection of the regular income. It mostly includes interest on fixed income instruments but always a few dividends as well. But it's really a running yield, which can fluctuate a little bit due to the dividend seasons and stuff like that but not a lot. On the realization, I mentioned already, we realized some losses in the fixed income space due to normal portfolio trading activities, nothing spectacular. On the other hand, there were some realized gains in reinsurance P&C, as mentioned before. And they were in the alternative investment space, so infrastructure and real estate.
The first question, the range, 5% to 9%, obviously, is related to different interest rate levels. So it's roughly, I think, a 3% to 5% interest rate range, which is then reflected in the 5% to 9%. Duration depends also always on business mix and -- but there's rule of thumb takes something between 2% and 3%, maybe 2.5%. And then as we saw in this Q1, and it will very much depend on where the losses sit to some extent and currency and interest rate environment and various geographies.
And again, the difference between, for example, ERGO, primary insurance and reinsurance is significant. By the way, there's also a methodological difference between GMM approach and PAA approach in IFRS 17, and I stop here. But if you're interested in that, you can ask me. So there's a number of drivers in these discount rates. And I think we'll all get used to it, how much they move in reality. In any case, I would expect them to be much more stable compared to what we experienced last year were due to this unprecedented interest rate change in the environment. As of a sudden, you end up having discounts between 4% and 8%, where in the past, it has all been 0. So clearly, it should be much more stable around the numbers as we see them today.
The next question comes from James Shuck from Citi.
Slide 30, just keen to understand the PCV combined ratio that you're showing here. So you've got the full year '22, 83.2%, and then that normalizes in the comment to 86.6%. So keen to understand what the moving pieces are in that normalization, please, in particular, the PYD on an IFRS 17 basis, but also within that 86.6%. So are there additional things that you can call out for us? So I'm thinking of just rate effect and the release of the loss components. So that's my first question.
Second question, or a general one really around your nat-cat appetite at this point. So if I look at the P&L from full year from the annual report for 2022. It's a U.S. windstorm, I think it's gone up to about sort of EUR 10 billion or EUR 12 billion, I can't quite remember now. But over the years, that's a big number in relation to your book value and has probably doubled over the last few years or so. And that number, I think, is updated for kind of 1/1 renewals, but I don't think it's updated for your expectations going into April or the June-July renewals.
So my question is really around how much appetite do you have in nat cat? I mean in relation to book value, it's getting quite a big number. If I was to look at it only in relation to your P&C Re, book value, that would make you very heavily skewed towards that cat in the overall book. So keen to understand the progression of that P&L and just thoughts around exposure in general, please.
James, thank you for the 2 questions. First, the normalization of the combined ratio, I think the methodology is as we outlined it on the slide. So we normalized for the loss component change, which is generally should be neutral over the year. If not, prices are changing or interest rate levels have an impact also on the loss component. So the loss component change is part of that calculation. And as in the past, also the reserve releases, which are now 5% in the expectation compared to 4% in the past, but that's completely unchanged. And the increase is driven to the different volumes we have in insurance revenue versus premiums in the past. That's also unchanged. And then we have the normalization for the large losses, be it on the nat-cat side or on the man-made side together, 14%; 10% of which are nat-cat, 4% are man-made.
And if you normalize for all those effects, we end up with 86.6%. What is not normalized for in these numbers is the discount. And we had a long debate internally when we set up the whole methodology, if we should also normalize the discount or not. Finally decided against it, because our expectation was that generally the discount should be more stable than the other drivers maybe. And the more you normalize -- I mean I wanted to avoid to finally ending up an IFRS 4 comment ratio again by taking back all the IFRS 17 changes. I mean we have at some point also just us to accept that there is a new standard now. So therefore, no normalization, but we will always mention the combined ratio. So if you want to add that piece of change in addition to the normalization as we do it, you can also do it on your own.
What else in the prior year? The normalization. What I can say is that the discount is the same order of magnitude today. So at least if you compare the prior year 86.6%, what we have this year, which came in a little bit above 85% in the first quarter. Then there is no difference due to different discount. But so that's completely comparable, which shows that we earn through the higher renewals we had recently, and that the operational improvement is clearly visible also in our numbers.
Nat-cat appetite. Second question. Indeed, we are obviously enjoying a hard market and expanding our business into that hard market. So volumes go up. There's always -- and that's a methodological information I start with, but I'll come back to the strategy in a second. There's always an overlay from FX you should be aware of. A lot of our cat exposure is written outside of euro. So if currency goes up or down, exposures follow the currency development. And if you look at the U.S. dollar development, last year and then again into the first quarter of this year, you will see or you can deduct from that, that there was a significant portion of FX also in the cat development, which you have been referring to. So there was additional growth to FX.
And now as FX came back again, the U.S. dollar weakened. It is now significantly dampened also by FX movement. So this FX overlay always has to be kept in mind. But other than that, indeed, strategically, we are going as far as we can, when it comes to cat exposure. And for some perils, we are getting close to our risk budget, so to the upper limit of our risk budgets.
But a hard market is exactly the point in time where you should do that because now is the time to make money with that business. In a softening market, we would, of course, deliberately decrease it again. And then obviously, be lower than when it comes to exposure but also in relative terms when it comes to our risk budgets. As a reminder, these risk budgets are parallel by parallel for us. And obviously, they depend on the capital we have, and obviously, retro plays a role, and retro is different from one parallel to the other. So it's also differently reflected in the various budgets.
So it's a very detailed and sophisticated framework. And we are not simply just expanding the risk limits or the risk budgets, but we are managing to optimize our portfolio within the boundaries of these budgets. I think that's what I can tell you on the nat-cat appetite. For 1-7, we do not see any restrictions for the strategy.
The next question comes from Derald Goh from RBC.
My first question -- actually, 2 sub questions within that. It's on your basic PYD. Firstly, can I quickly check what was the risk adjustment release within that? And then the question is the -- within that, what -- this basic PYD again, what were the pluses and minuses by lines of business? And maybe could you also talk about any changes in loss cost trends that you're seeing on your current year? I'm thinking about mortality and casualty in particular. The second question is just on your midyear renewals. Are you seeing any early movers at this stage, either from the primary or reinsurance side?
I start with the first one. And the second, I have to ask you, could you repeat it, please? I didn't really understand it. Maybe can you just ask again the second one? Then I'll answer both.
Yes, yes. Just in terms of your current year loss cost trends. Are you seeing any changes over Q1 or maybe on a year-to-date basis, I'm thinking about motor and casualty in particular?
Yes, sure. Okay. Very clear. PYD, as we show it in our numbers does not include the risk adjustment at all. So that's just the reserve development. And to remind you, we are using the PAA approach, so that the risk adjustment is probably a little bit of less relevance for us in P&C than what it would be for us in our Life & Health business or also like, it would then be for competitors using other approaches in IFRS 17.
For us in P&C, we try to make it as simple as possible and the PAA is much simpler and what we show is PID is just reserve related. So more or less the same figure, which we would have shown you last year with the difference that we are talking about discounted reserves now. But other than that, it's really the reserve movement we're showing under PYD. We had a positive basic loss reserve for this in the first quarter as always, it's completely common.
That's what we would expect anyway because, as you know, our strategy is to set reserves initially at the higher end, what the possible best estimate would be to then enjoy eventually -- if we have this positive one-off, which we have had in the past to then enjoy the positive one-off of the basic losses.
So that basic loss piece. I mentioned earlier also that on the large losses, we had some negative PYD, but that large loss piece is to maybe give a little bit color around that nothing really spectacular. It happens -- in 1 quarter, it's a little bit negative. In the other quarter, it's positive. It's just day-to-day business, I would mention that. So nothing really specific and also nothing too material.
Loss trends, your second question. I mean, first of all, I have to make a big disclaimer that in many markets, we are not the best one to be asked that question. As we always lag are behind the primary insurers getting that information because often our claims information is based on what primary insurers deliver to us. Of course, there's the exception of markets where we are acting as a primary insurer as well and as you know, we do that at ERGO in many European markets. We have some U.S. primary business as well.
So we do have some first-hand information, but then in other markets, we really rely heavily on the primary insurers and sometimes get the information rather late. What we see, though, is that obviously, for motor lines of business, inflation is a topic in some markets has had to be expected anyway. And that's also not really new. That's something we, I think, said in Q4 already. In fact then, if you remember, we also strengthened our reserves to prepare for scenarios like that. And then now Q1, do we see any particular new information? No, not really because a single quarter is probably anyway not enough information to see something significantly different.
What we see is more or less in line what we expected and maybe to add that already, then nobody else has to ask also the IBNR we set up back in Q4 for inflation, that's still there, and we didn't make any use of it in the first quarter.
The next question comes from Vinit Malhotra from Mediobanca.
Some of my questions have been addressed. Can I just ask on the discounting as such. So it's a bit of a broader question, not 1, 2 specific. But given all these positive news and you're little having to hold back on producing such a good, combined ratio and partly helped by discounting. I mean, do you sense or do you see any risk? And this is maybe a broader question.
Vinit, can you speak a bit louder, please?
Okay. Sorry, maybe my phone. Can you hear me now better, please?
That's better.
So my first question is on the discounting, which is so powerful and having such an effect that you're literally having to hold back on your combined ratio. What's the risk that such a positive interest rate-driven effect could have on underwriting behavior maybe with a new firm within the market? Because if I'm an underwriter, and I'm listening to this call, I'm thinking okay, so already things are so good, partly because of the timing of IFRS 17 and the reported combined ratio is so strong. Is there a risk that there could be some laxity coming in? Are you managing it? Are you watching out for it? So that's a bit of a theoretical question. Apologies, it's not very specific. And second thing is just on the discount rate again. I'm quite interested to hear this Turkish situation where you have used a discount rate of the Turkish risk free.
We're obviously reporting this loss in euros. And I would have thought that maybe you would have considered using the -- I hope our rates or some of the European measure because you're counting this loss in euros. Has there been a discussion about whether the Turkish discount rate was to be used? And secondly, can you also provide the Turkish discounted loss number, the Turkish earthquake maybe because that's what we should compare to peers because otherwise, it looks quite high at EUR 600 million?
Yes, let's start with Turkey. The EUR 600 million is a nominal amount to start with that. And I think the general rule is just we use the discount rate in the currency in which we owe the claim. So it's not like that we sit together and have a debate which one to use. So is it just the currency in which we will have to pay the claim is defining the discount.
Now your more general question, I mean, margins are good. And now with IFRS 17, they look even better as the presentation changed. And I think we discussed it a number of times. Already, now we have combined ratios in the 80s, before they were in the 90s. The difference only being that insurance revenue now is defined differently than in the past. So there is a big amount of different representation in the now even better looking numbers.
But then, of course, due to the discount, the economic reality is also better transparent and better visible than in the past. And yes, so there is an element that we look even stronger. And also my commentary initially was that we had a very strong quarter and we are doing well operationally.
So there is this element of -- as a reinsurer, we are doing well currently. Now what does it do to the underwriters to the markets? I mean, first of all, you have to make sure internally that you are not getting complacent. That's something I can assure you we do regularly. So push for price increases where we can get them and where we think they are necessary.
Don't forget, I mean, the loss numbers have been significant over the recent years. So we don't get -- don't -- we should not celebrate too early even last year with the industry loss was still very high. So it's too early to say, look, I mean, they are making so much money, it's hard for them. And that's also the communication internally, obviously, that it's far not enough, we have to earn back what we paid out as losses over the last year. So that's the first element. Internally, we shouldn't be complacent.
The other element is how do our clients react if they see combined ratios in the mid-80s from us. And obviously, it would be at least potentially a starting point for them to tell us look your prices are too high, you make too much money with us. But then again, I mean, that's not how the conversation usually goes.
First of all, the way we do pricing is obviously not based on IFRS, it's. Of course, not uncorrelated what we're doing in IFRS, but we have a pricing view and the management view, which is different and which is unchanged to the past. So there's no disruption in that. And I think that's important.
Secondly, of course, we train our underwriters, we explained them that this very low number and now in IFRS 17 has something to do with the way how we present the numbers. And I'm pretty sure they're all very well capable of explaining their clients why the numbers now look lower as they did look last year, but why this is not a change in profitability but just a change in presentation from an economic standpoint.
And then thirdly, we are the hard market anyway. And this is, of course, extremely helpful in the current context. So the price elasticity is, of course, different in a hard market compared to a soft market. And the reason for primary insurance to buy protection are not immediately 100% price related. Obviously, they -- of course, they are always happy to pay less but the demand is driven by the wish to get the protection. And this is a very healthy driver for us to increase volume and to continue to enjoy the very positive market environment. That's why I think your question is still relevant. We have to be careful here. But I think we are and we will be able to manage it going forward.
Next question is from Ashik Musaddi from Morgan Stanley.
Just a couple of questions I have. So first of all, I mean, clearly, combined ratio underlying basis is better in this quarter. But would you attribute it to the earn through of this year rates? Or would you say that a big part of this improvement is still coming from past year rates rather than this year rates just because it's just first quarter?
So I guess that's one thing I'm just trying to understand because the rates are likely to go up even further in the coming quarters and probably in 2024 as well. So I just want to understand where this 86% or your 83% is heading towards in the near future? So that's the first thing.
And just related to that is, I mean, we have noticed that there is some big capital raise announced by one of the Bermuda insurers yesterday. I mean how do you read that capital raise? Do you think that will put pressure on the pricing? Or do you think it's actually -- because it's a traditional player, there is not much of risk around that. So that's the first element about thinking about margins.
And second element is -- where was I at? Is it possible to get some color on this IFRS 17 to Solvency II to work? I mean, I guess you had given a slide in appendix about how IFRS 17 earnings, it is Slide #55. Earnings is moving into Solvency II. I mean it'd be great if I can get some color on what is this OCI change and CSM change, et cetera, would be good to get some color on that, that would be great.
Sure. Yes. Thanks for those questions. First of all, indeed, the renewals are not all earned immediately, and we still benefit from the good renewals last year, which are still being earned to some extent this year. And this year's renewal will then also not only affect this year's numbers, but also next year's numbers.
So that's obvious. Are we concerned by the capital raises? No, not at this time. I mean, eventually, at some point, the market will soften again anyway. I think it's by far too early to speak about that now. If there is capital flowing in here and there, yes, okay. But then the question is also the margin expectation. And as long as this continues to be in a healthy levels, we are not concerned at all.
And then more generally, what we currently see is a flight to quality anyway. So us being the market leader, we get a lot of additional demand and business opportunities just because in times of higher uncertainty, many clients just want to go with the safest possible reinsurer.
So I'm therefore, not concerned at all. And if you would ask me that I would say the hard market will for sure continue this year until year-end and then probably also go into next year. But clearly, it's too early to tell and it will depend on capital inflows and so on and so forth.
IFRS 17 walk to Solvency II. That's a great question. I love it because it gives me an opportunity to start a little bit earlier already with answering the question. So how did we implement IFRS 17? I think that's very important. We implemented in a way that we chose assumptions wherever we could to be 100% identical with Solvency II.
So to get the maximum possible consistency. So we have the exactly same interest rate curves. For example, we have the exactly same reserving assumptions, reserves. We have the exactly same mortality biometric assumptions, you name them, it's all identical wherever it can be. So therefore, you would expect a huge -- a large amount of consistency wherever possible, but then obviously, there are areas where it's not possible.
So if you are talking about setting up a loss component, for example, in IFRS 17, that's something which is not existent in Solvency II. And obviously, there are other areas as well or the methodology for risk adjustment is different to the methodology for the risk margin in Solvency II.
So there are remaining differences in the methodology. And by the way, if you ask me by far too many because if you now -- I come back to your questions, if you then look at the reconciliation from one to the other, you will find them that the differences are pretty small. And so if they are so small, immediately, the question comes up, is it really justify to have 2 sets of numbers, which is always a source for confusion internally as well as externally.
And by the way, it's a lot of work of deriving both sets of numbers. And finally, as you can see on that mentioned Slide 55, numbers are quite similar with the exception of a few methodological differences. And now I'd like to comment a little bit more what the differences are.
For Solvency II, everything -- the economic change, there's not a change of the economic equity is 100% economic earnings. So there's no differentiation if a change is OCI or if a change is in the P&L or if it's just a change in the CSM or in the present value of future profits. So it's all economic earnings, all just shown in 1 single number, whereas in IFRS 17, it's spread across these 3 categories. You have the CSM change, you have a change in the OCI and you have the change in the P&L.
And so therefore, you have to add the 3. And then you have to add the difference between risk adjustment and risk margin. If you add them all up, you can see that on the slide for full year 2022, you get a pretty, pretty good alignment between economic earnings of EUR 2.8 billion in the IFRS 17 number. So it is very consistent with the unexplained or other effects of 0.5% only.
The same on the balance sheet. We're also, if you take the own funds according to Solvency II, and then you take out the CSM after tax, you are very close to the IFRS 17 equity. So they're the same holds true that basically the 2 sets of numbers are extremely well aligned. Again, this is particularly true for us as all the assumptions have been made identical wherever possible. So don't expect it to be the same for all of our peers.
And secondly, this is a full year slide. There might be differences in seasonality between the 2. So the differences might be bigger in quarters 1 or 3 compared to what we see for full year. But frankly, the seasonality effects and the differences in seasonality are something which we are also still investigating. I hope that answers the question, but I could continue for longer, if you wanted.
The next question is from Henry Heathfield from Morningstar.
Just 3 kind of broad ones, if I can. I'm sorry if they're not specific enough. On the investment result, the yield is obviously looking really, really strong. And I was wondering if you could comment a little bit around kind of the asset mix that's driving that, whether it's changed an awful lot, whether there's been any alteration within the credit or the investment portfolio or whether it's kind of really remaining last year?
And then secondly, you spoke a little bit about Thailand in ERGO primary. I was wondering if you might give a little bit of a flavor around what the expectations for future international growth are in ERGO, whether Asia is really kind of a really key theme for you or emerging in Southeast Asia?
And then the last one, just on the discount rates being used to discount the P&C reliabilities. And that's being the discount rate within the currency that the losses occur. I was wondering if you might help a little bit on the liquidity premium buildup because surely the EIOPA curves, you can get the illiquidity premium from the open curve, am I wrong there?
Sure. Thank you. Well, asset mix changed? No, nothing spectacular, really, really constant investment strategy. reinvestments are being done into fixed income instruments, which on average, continue to be as safe or as conservative or as high rated from a credit rating perspective as in the past.
From 1 quarter to the other, it can fluctuate a little bit, particularly if the investment volumes are low and you do a little bit more of corporate bonds, for example, then reinvestment yields can fluctuate up or down a little bit in a single quarter. But the stock of our overall investment is not changing a lot really and particularly not in this quarter. It has been very stable.
Asian strategy for ERGO. ERGO has been active in Asia for quite some time now, probably up to 20 years. And most of the Asian business is structured in joint ventures due to the regulatory environment in the markets. I would say the significant joint ventures in India where ERGO has, in the meantime, in P&C, a top 5 market position, and this is I think I get it right now. If we get it right now, 1 of the top 2 private P&C insurers there, together with the joint venture partner, HDFC. Another Asian activity of ERGO is related to China, where ERGO is having 2 joint ventures. One is the life business. The other is the P&C business. In Life, ERGO is holding 50%. In P&C, it's just below 25%. So 2 joint ventures in China.
And then Thailand, in the past was also a joint venture where ERGO did hold less than 50%, so did not have control. According to IFRS language, so we weren't able to fully consolidate it. But ERGO was now able to acquire additional stakes and we have now 75% and also one other local player has been acquired now by the Thailand entity.
And so now we hold 75% of this ERGO type 3 entity and have control now. And therefore, for the first time now, they also in our full P&L. As long as we do not fully consolidate them, their results are shown as part of the net financial result of ERGO International. That's where the results show up. But as soon as we fully consolidate them, you have a complete technical result, you have a combined ratio. So then you can see them as the European entities as well.
And that's the reason why for Thailand, there's also a combined ratio on the ERGO International slide in the deck. And by the way, it's for exactly the same reason I was mentioning for ERGO Germany, so the seasonality of acquisition costs, it's a little bit high this quarter for Thailand with 113%. This has to do with the significant growth this entity is currently seeing. And therefore, a lot of acquisition costs had to be booked in Q1. So therefore, with 113% in Thailand, it's elevated by this acquisition cost effect.
I think that's what I can tell you on the Asian market. ERGO is a small entity in Singapore, which is owned by 100%. I think that's the one I didn't mention so far. So that's what I can tell you on the Asian ERGO business.
Discount, again, we use exactly the same discount rates as we use for Solvency II, which means for entities where we use the volatility adjustment, we then also apply the volatility adjustment for IFRS 17 purposes. For the majority of our entities, we don't do that. And therefore, for the majority of the entities, there is no illiquidity premium. And if there is a positive VA and if we apply for Solvency II as well, then we use it also for IFRS 17.
But as you know, the VA in recent quarters has always been very small. So it's a very small amount of illiquidity premium. If at all, we are having in our numbers. And again, it's not a decision we take. We just take the EIOPA decision and the volatility adjustment from EIOPA.
Next question comes from Jochen Schmitt from Metzler.
I have one question on the investment result on Slide 7, the fair value change on equities of EUR 250 million. Could you explain why there was not any higher effect from listed equities accounted at fair value through P&L in Q1 given the market movements, was this due to hedging? Or were there any offsetting effects within this number, for example, from the revaluation of private equity? That's my question.
Yes, I think I can be very quick here. We hedge our equity exposures. And as soon as markets go up, then you lose on your hedges. So that's the effect.
We have a follow-up question from Ms. Kong.
Could you help us give some guide on how you expect the EC to develop given it's still currently depressed by the unwind of low locked-in rates at transition? Does this mismatch only exist because of the transition? And should it normalize going forward i.e., your higher discount benefits in your technical results should be more or less offset by higher EC? When can we expect this to stabilize?
And secondly, if I can, can you help us understand the concept of the change in loss component which benefited your combined ratio in Q1 and also in 2022? Why is your expectation 0 for the year?
Sure. Thank you. I'll start with the first one. I think it's a very relevant question. So therefore, I try to be as quick as possible, but I also try to be precise here. And your question was how does -- will the EC develop going forward? And let me expand the question a little bit because what I showed you in the -- or what you see in the deck when I was talking about also, if you look at the prior year number, 2022 full year result, 5.3%, which reduced this then and we get to the EUR 4 billion guidance.
What I showed you there is a minus EUR 1 billion effect due to change in discounting versus EC in the P&C reinsurance segment. So there you see a significant effect, reducing the benefit we have from discount versus unwind from the past. And this effect, as I mentioned in my introduction, reduced from EUR 1.5 billion to around EUR 500 million this year.
So last year, it was EUR 1.5 billion benefit in P&C reinsurance from these interest differences. This year, only EUR 500 million. And next year, it's going to be even less than that. I cannot be more precise than that because these numbers are highly interest rate dependent.
So to just give you a rule of thumb, a 100 basis point interest rate movement would mean a EUR 500 million pretax movement as well. And also, these numbers will heavily depend on how the interest rates move. But our current expectation, EUR 1.5 billion last year, EUR 500 million this year. Now this number is the difference between discount benefit and [ IFI ].
So the [ IFI ] in itself, I can answer you that question as well. But don't look at the EC stand-alone because it's always in our view, has to be seen in the context also of the discount benefit. So in 2023, we had an EC of EUR 1.5 billion -- sorry, EUR 0.5 billion, and we expected -- yes. And so I have to -- let me look up the number. I'll take that later. I think -- so in 2022, sorry, EUR 1.5 billion -- yes, there we are. EUR 500 million EC in 2022, which will go up to EUR 1.5 billion in 2023. That's the direction in that indeed.
We have another follow-up from Mr. Ritchie.
Sorry, you just need to clarify the answer to your last question that we need to think about the trajectory of investment income versus [ IFI ] as well. And I'm assuming sort of the to what degree the investment income running yield will accrete to the same rate of the [ IFI ] expense? Maybe clarify that. But sorry, my other questions were -- sorry, I should know the answer to this. The cat loss number you gave, the nominal number is about 16 points of insurance net revenue. So your 16-point large loss loads or the 14 points is on a nominal basis. I thought it was discounted, but it actually appears to be nominal. So the discount from the cat appears where we're confused on that.
My only other question was, how do we interpret ERGO Life and Health Germany? I mean the technical result looks really strong. And some elements of it look quite sustainable, particularly the large CSM release, but any of these non-attributable expenses or some other noise. So what do we do with that provisions?
Thanks, Andrew. So first of all, yes, indeed, also the interest or the running yield has to be the investment yield has to be also seen in the context of the [ IFI ]. That's true. I was referring to the technical result before where the difference of the 2 is relevant.
But you're right, of course, we will also benefit going forward from the higher yields, as you could see in this quarter already. There is -- though this one-off kind of effect, which is particularly strong currently as we locked in a transition to very low rates and then the interest rates jumped up so much. And that's why we always looking into the technical result and how these one-offs there reduce over time by EUR 1 billion from 2022 to '23. So those are large numbers in the technical result. That's why we have been highlighting them so much.
But you're completely right, the discount plays a role there as well.
And by the way, also the change in loss component, I think that's a question of, why I didn't answer, I can quickly do that as well. The loss component reduces also as it also interest rate dependent, it's discounted. And then, of course, it depends on pricing levels.
So if prices go up, you have lost less lost business group of -- less loss-making group of contracts, a lower number of loss-making group of contracts. So therefore, with increasing prices in the market, the loss component should go down as well. At stable price level, it should be stable as well as with stable interest rate levels and then the loss component can move up and down depending on interest on price.
And to your question then on the large losses. The numbers are discounted numbers. So the 14% as well as the 16% number is fully discounted. And then the question on ERGO Life. First of all, if you look at the total technical result as we do the accounting now and that relates to all our segments, not only ERGO Life.
We allocate into the technical result expenses exactly in line with the definitions of IFRS 17, which means only directly attributable expenses. So directly attributable to an insurance or reinsurance contract, only those expenses are part of the technical result. Everything else is outside of the technical result in our other results.
And so therefore, in general, there is quite a significant negative contribution from the other result in all our segments. And that's, of course, then also the case for ERGO Life and Health Germany, but also for the other segments. That's normal, and that's not spectacular, nothing outstanding, so I would not have a comment on that.
But there is an additional comment for ERGO Life and Health Germany, I made. And this additional comment was that we have additional nondirectly attributable expenses in the life new book business. So higher-than-expected expenses, which was an additional track on the result in this quarter of that segment on top of what you would have expected anyway.
And so therefore, that's -- to answer your question, it's probably 2 components. First of all, if you look at the relatively high total technical results, ERGO Life and Health, there always has to be deducted a certain amount of nondirectly attributable expenses in the other result, that's completely normal. And there's probably a higher number than in the past.
So the difference between technical result and net income is probably higher than in the past because this cost definition in IFRS 17 is rather narrow. And -- but that's normal. And then on top, there is as always also in the past, there's current developments in the actual quarters with higher expenses than expected or lower expenses than expected. And this is then the actual performance commentary you saw on the slide, where this quarter, the life new book business had higher expenses than expected.
We have another follow-up from Mr. Hardcastle.
Can I just clarify something on that 8 points of discount and the nat cat load. Is it effectively 8.7% because you've already taken some component within the nat cat number. So Turkey shouldn't actually be affecting that headline. Just trying to understand that if that makes sense in terms of that walk through.
The actual question, sorry. You mentioned there's also an adverse development on that prior year cap, I think if I understood your comments. Could you just quantify or state which cat that relates to? And then just thanks for publishing the P&C reserve is always helpful. Can you just guide me where I should see the inflation caution in the motor reserves? Because all the back years seem to be developing pretty favorably across both motor prop and non-prop. I can see that the non-prop '22 loss booking was materially higher year-on-year. Is that where the caution has been taken? Or is that just experience?
So the last one is a little bit too specific that I could spontaneously answer that. So I think we have to take it off-line, sorry for that. On cat, I'm not sure if 100% got the question. I mean, I can only reconfirm the numbers are all discounted, but the discount is pretty stable versus year-end. So that's not a big source of a fluctuation, particularly not in a large loss area where we normalize for.
I hope that answers the question. Otherwise, please follow up. PYD, we only would quantify a number like that if there's something really extraordinary what happened there, which is not the case this quarter. So generally, it's up and down every single quarter. So therefore, we refrain from giving any details there.
Next follow-up from Mr. Shuck.
Just a very simple one for me actually. I was hoping that IFRS 17 would lead to a certain amount of consistency and improved transparency between companies and particularly reinsurers. You seem to have taken a different -- elected to take a different approach on the PC Re side in choosing the premium allocation approach. Can you just guide us through why that was the case? Obviously, we lose a particularly useful insight, which is the CSM new business margin comparing that year-on-year between reinsurers. So any insight why you've chosen to differ versus some of your peers would be helpful, please.
Yes, sure. So I mean, to start with, I mean, I also did follow the disclosures over the last days, I have to say. I mean it's really interesting and, by the way, also fun to observe what everybody is doing now with these new disclosures. And it's interesting and probably much more for a follow-up conversation in a few quarters from now then to comment extensively today because I think it's all early days still.
But I do think comparability has improved. As soon as the dust settles a little bit, there will be much more similarities in the disclosure or are already today in the disclosure than what we had in the past. So if I look, for example, into some of the charts, how [indiscernible] movements have been explained by our peers and then look into our disclosure, I think it's pretty similar in many cases.
So therefore, I'm quite optimistic. And then to more specifically answer your question, also the PAA versus GMM approach in P&C, I mean, bottom line is very similar. There's not a big difference in there. There are some timing differences sometimes. I think discounting is different, that's something which somebody should maybe be aware of.
But more generally, I think it's pretty similar. The presentation is different. And there, I think it's a matter of taste. Finally, if you prefer having a CSM for a short-term business, which I personally also sometimes have a little bit difficulties how to really interpret in the context that you also have a loss component then, you have a loss component. You have CSM for short-term business. It's also not so simple.
The PAA has other advantages. It's closer to what we did in the past. So it's maybe easier to digest initially, but then also there, the loss component and the discounting. So also some differences. It's probably more a question of taste, what you prefer to.
The reason why we did choose the PAA is a very simple one, though. So not these highly sophisticated and theoretical discussions, but a very simple one. And the reason was that it was much cheaper for us to implement the PAAs were simpler, and we did have to have that less systems than otherwise. So that was the reason.
The next one is from Mr. Spyrou as a follow-up.
Just it relates to Solvency.
Sorry, we can hardly hear you. Can you please speak a bit louder?
Can you hear me now?
Yes. Let's give it a try a bit louder, please.
Yes. So it's on solvency. And I appreciate that you deduct the buyback, which is around 6 points. But I was wondering if you could give a bit more color on the moving parts where I estimate you had around maybe 6 to 7 points of capital generation that would have offset that 6 points from the buyback. So any color on why sort of Solvency looks slightly lower than the full year level, that would be great.
Yes, sure. So I mean the major driver is reduction of the buyback. I think everybody -- everything else, not very spectacular. We had positive operating earnings as economic earnings in there, which then will were more or less completely offset by some tax effects and some other effects.
Seasonality, I think I mentioned that in a different context is different in the economic earnings on the Solvency II space compared to IFRS 17. So a lower portion of the result is realized in Q1, at least in the way how we do the Solvency II calculations. So therefore, probably that might be one of the reasons why the number is not higher. The STI is pretty stable. So all in all, nothing spectacular really.
The next one comes from Mr. Goh from RBC.
A couple of quick follow-ups on Life and Health technical results, please, and both related to Slide 19. So I appreciate there's a lot of conservatism in the EUR 1 billion guidance, but I'm just trying to get an underlying picture on 2 things. The first one is on U.S. mortality. Can you say what was the total impact was from negative experience in Q1? And is there any more color you can share on this, whether it was just underlying excess debt? And is there a risk of this dragging into future quarters from things like late reporting?
Second one is on that fee income from FinMoRe? So adjusting for the currency effect, it looks like it was about EUR 120 million, which is about double what it was Q1 last year. Now is that a fair reflection of the growth potential here? Or are there any one-offs or seasonality effect to consider?
A second question, I don't -- no, I don't see any seasonality. I think the business is growing in a very attractive and constant way for quite some time now, many years. So that -- I think that's just the ongoing development. And indeed, if you would adjust it for FX, the number would be significantly higher. So I think that, that's just a very good performance.
On the mortality in the U.S. I mean, first of all, I think if you look at the disclosure, we are talking now about effects, which would not have even been visible in the old IFRS 4 world. So this is, again, the advertisement for how good IFRS 17 is because we are talking now about a tiny little bit of performance up and down, which otherwise in IFRS 4 with locked in margins and locked in reserves would not have been visible at all. So that's a big advantage already.
What's happening here is that we're talking about really slight deviations. It's not a lot. We, of course, see a big improvement in the COVID space. We still have COVID IBNR, which we did not release yet. So we are still on the course just right there. And therefore, if you would include that COVID piece, then the mortality deviation would immediately look different, obviously, because then also the starting point of the expectation would have to be explained in a different way.
And I think that it already for now. Obviously, U.S. mortality, we need to continue to observe that closely. I mean that's something you can also take out of the press that mortality generally in the U.S. population is still elevated. Now there's always a difference between insured portfolio and the general population.
So it is not one-to-one at all in the way how one moves and then how the other react. But still, it's something we have to and we do observe, and we do so for many years already as we have a big mortality book like many other insurers as well.
Mr. Musaddi, please go ahead with your follow-up question.
Just a couple of follow-ups. So if I look at Slide #22, this is just for clarification. I mean, last year, first quarter, the basic loss ratio was very low, 52%. This year is high. I guess this is just the [ IFI ] gap, which you mentioned that last year, there was a positive impact of EUR 1.5 billion now it will be only EUR 0.5 billion. So just to clarify, this is the same thing and I'm not missing anything.
And then second thing on ERGO German Life. If I look at the CSM release, I mean, it's a big number like around EUR 1 billion, which is 10% of CSM. So how do we think about the duration of this? Because my gut feeling would have been like, okay, German Life should be relative high duration. So I mean 10% release sounds pretty high. So is this a recurring number? And if that is the case, then should we keep expecting that this number keeps going down at a very fast pace as well.
I mean I'll try answer the first question. I'm not sure if I got the second one. The first one, on the basic losses, is basically -- I mean the answer is you can't really compare prior year and this year because the threshold between basic losses and large losses has been increased. As you know, in the past, the large loss would start at EUR 10 million and now it starts at EUR 30 million.
So the basic losses are defined differently this year compared to prior year, and we did not restate for that effect. So I think that should explain a lot and particularly highlight it's not comparable to look at basic losses prior year to basic losses this year.
The CSM release, I'll try to give the answer, and you can follow up on that. I mean the release -- I mean, what we generally guide is, we'll say, around 2% per quarter or 8% per year. The same for life and health reinsurance as well as for ERGO. The point is a little bit that this on the ERGO side depends on the excess, so the excess yield or the excess investment income, which has been generated because first, the whole calculation is done in a risk-free way and then excess return adds to the release.
Therefore, also all the numbers like the new business contribution, all based on risk-free interest rates are relatively small. And then only in the release, the bigger release based on real world in investment yield is being shown in the P&L. And to give you order of magnitude, it can be a factor of 2. So the risk-free release could be by a factor of 2 smaller compared to the full release talking about ERGO Life and Health Germany now.
Now there's no such effect for reinsurance life and health because there's no savings business. So be careful that's not the case of insurance but there is this effect for VFA business. So most importantly, ERGO Life and Health Germany and then also for some of the businesses in ERGO International.
I'm sorry, we have one follow-up because we had a couple of people who didn't get the numbers with respect to Slide #30, where we explain the walk from last year's earnings to this year's outlook, specifically with respect to the EUR 1 billion figure for P&C Reinsurance and Christoph will repeat the numbers again.
Yes, indeed. So we have EUR 1 billion impact, as shown on the slide. And I'll show you now year-by-year what the benefit -- the interest benefit in P&C Reinsurance was. I start with 2022. We had a benefit of EUR 1.5 billion after tax, and the components are discount effect EUR 2 billion, [ IFI ] EUR 500 million to be deducted from that and EUR 500 million loss component of release.
2023 expectation is EUR 0.5 billion effect still, discount EUR 2.2 billion, [ IFI ] EUR 1.5 billion. And the difference between the EUR 1.5 billion and EUR 0.5 billion is the EUR 1 billion you see on the slide. 2024, we expect the numbers to go down further, but I also repeat my disclaimer I made before. These numbers are all highly interest rate dependent. The shift in interest rates of EUR 100 million could mean EUR 500 million difference in these effects.
There are no further questions at this time, and I hand back to Christian Becker, for closing comments.
Yes. Thanks to you all for joining us and for the lots of questions. Happy to follow up on the phone afterwards. Thanks again for joining and hope to see you all soon. And have a nice remaining day. Bye-bye.