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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to Munich Re's Q2 Earnings Call. Today's speakers as announced Joachim Wenning, our CEO. [Audio Gap] presentation. Afterwards, there will be ample opportunity for [Audio Gap] -- Joachim.
Ladies and gentlemen, good morning also [Audio Gap] after the first half of the year, we see strong performance across all lines of business. In P&C reinsurance, we continue to navigate in a favorable environment with highly attractive rates. We have taken advantage of the further hardened market. Client ratio is way better than our full year ambition for 2023. Our life and health reinsurance post an excellent total technical result, well ahead of the pro rata full year guidance, and ERGO continues to be a very reliable earnings contributor.
In terms of return on equity, we are already at the upper end of our targeted range of 14% to 16% for the group, but also for each of the [Audio Gap]. Our ambition 2025, trajectory is based on sound underlying development. But additionally, it benefits from a longer-than-anticipated favorable pricing cycle. And I'd like to say, even if the cycle should reverse at some point, and of course, it will, but I don't think so soon, we will continue to deliver because by expanding the earnings contribution of less cyclic businesses like Life & Health Re, Global Specialty and ERGO, we facilitate increasing resilience of our overall earnings going forward. Diligently managing earnings, we aim for a rather steadily increasing earnings path.
I'd like to now summarize my key takeaways for each segment, and I start with core P&C reinsurance, where the July renewals have seen a continuation of the upward pricing trend. We posted a fully risk-adjusted rate increase of 5%, which is significantly above the ones seen in past July renewals, but also in the 2 renewals on 1/1 and 1/4 this year. Main driver remains NatCat business, which we further expanded across all regions. But we also further improved terms and conditions and it quite some work on wordings and exclusions, et cetera. As a weaker wordings tend to cost some money from time-to-time and strong wordings make the business more robust.
This to us is an equally important achievement of our underwriting rigor. We are simply not willing to support what doesn't make technical sense. And we have seen some evidence of this in quarter 2. So we continue to be very disciplined in the casualty lines, which are very long tail, and we also reduced a little bit our property proportional business, I come to this. And as a result of this business shift, business mix shift from proportional to non-proportional we have reduced premiums by almost 2%.
Taking then a closer look at lines of business, it is striking that Nat cat provides increasingly attractive margins. I'd like to repeat now is the time to grow this segment, and we are prepared to do so and seize opportunities. For the other lines of business, the picture is slightly more differentiated, consistent with our approach in recent years and against the backdrop of social inflation and the like. We have further reduced our exposure to proportional casualty business. And in property, we have given priority to non-proportional strikes.
This has caused them [Audio Gap] all the remaining lines of business are doing really good. In our eyes, the favorable market environment will not only sustain into 2024, but I'd like to make a bold statement. It will probably sustain into 2025 as well. Now, we don't have the crystal ball, and I know nobody can really know and predict this. And nobody knows what the actual large loss is going to be, how they impact the cycle, how the capital markets might or might not impact available capacities.
However, besides those effects that always will be there, there is simply too much ongoing uncertainty rather than the market and too much to still catch up to worry about rates broadly decreasing. So I'll give you examples, take the personal lines business. Everybody would agree that there is something more to do. Just take motor business in many of the international markets. It's obvious.
But then there is climate change and related losses, whether the big large ones or the more local ones, it's obvious that losses practically have doubled in recent years. And this trend will not become cheaper, if at all, will become more expensive. Insurance gaps are still high even in established markets to the extent that they will close this is further demand, the cyber market. There is not too many risk carriers offering their capacity. Inflation is somehow lower, yes, but it's still very much there.
So I also don't see any easing at this front. And social inflation driven by U.S. litigation industry drives rates up and up or coverage is down. I could add more points, but those define our position that we don't see the positive trends changing any soon. Then within P&C, you know that we are working on extending our specialty business, that's why we have bundled this under the leader of Mike Kerner.
We seek for synergies in the areas of underwriting, claims, sales and operation. This has been worked on. We expect this segment to grow by 25% to around €10 billion premium income by 2025. And the combined ratios should end up in the low 90s. In Life & Health Reinsurance, earnings are developing much better than anticipated.
Total technical result is expected to exceed €1 billion by 2025. And -- on the one hand, this is supported by IFRS 17 because the business profitability is crystallizing much better and earlier than under IFRS 4. But at the same time, and more importantly, the underlying performance of our business has improved materially. I come to ERGO, which has delivered an exceptionally strong net result of €470 million in the first half, way more than 50% of the full year guidance. I'd like to say that going forward into 2025 and thereafter, there is even more earnings potential than the €700 million annually.
We are confident that ERGO management will get there step by step as evidenced in the last 6 years. In addition to the favorable insurance market environment, we are experiencing some tailwind also from higher interest rates in the capital markets. We are currently reinvesting new money at almost 4.5%, so much better market conditions than just a year ago. And in essence, we use three major levers, some technical, shorter-term positions like higher investments in high-yielding assets and/or taking some currency positions like very recently increasing our U.S. dollar position, which we had reduced towards the end of last year.
But then, another reason is, of course, that we are constantly expanding our investments in the alternative sector, thus liquidity premiums. And the third lever is that we are also open to mandating the asset management for high parties that [Audio Gap] out performance. Let me summarize, Munich Re is in very good shape to further increase earnings, demonstrated in the last renewals, we have absolutely no constraints to deploy capital in the hard market and profitably expand our book. But we don't do this blindly. We do it consciously, nothing for growth's sake, as evidenced in the July renewal.
We are leveraging our superior underwriting qualities to safeguard profitability and diversification. And at the same time, our shareholders participate via growing dividends and by share buybacks. The result can be seen in the leading total shareholder return against our peers now for the second time in a row, number 1. This brings me to the end of my presentation, concluding the 2023 outlook, which, as you can see, is unchanged compared to our last announcement in May. Some of the KPIs I might look a little bit conservative from today's perspective as we have already achieved 60% of our net earnings target this [Audio Gap] so I would agree to this view and no doubt the likelihood of achieving or even surpassing our financial targets in 2023 has further increased yet cautious and mindful of the hurricane season still ahead, there is still to us no sufficient reason to adjust guidance now.
With that, I'd like to hand over to Christoph for his guidance.
Thank you, Joachim. And yes, a warm welcome also from my [indiscernible]. Always, I will not go through the presentation, but just pick off the Q&A with my personal remarks. And I'd like to provide you with some more color on Q2 results to begin with. This time, the story of the second quarter is really quite straightforward.
Our technical performance in all fields of insurance business continues to be very strong, while the investment result was dampened by losses on fixed income. We posted a very solid net income of almost €1.2 billion, which, by the way, is very close to the analyst consensus. On a personal note, I think it's impressive how well you guys have managed to estimate our earnings. You obviously did a lot of homework on IFRS 17, like we did, which makes me very optimistic that you join me in appreciating the higher amount of transparency and predictability, IFRS 9 and 17 offer compared to the old [indiscernible]. We will continue to provide you with detailed explanation necessary to thoroughly project and analyze our earnings.
Now, coming back to the Q2 numbers. Munich Re exceeded almost all KPIs and Porta financial targets with the exception of the ROI of 1.1% in Q2, which was clearly below our guidance. And here, the Q2, we thought was negatively influenced by 2 management decisions, aiming at a steadily increasing future earnings trajectory and as much as possible dampened volatility both in reinsurance and at ERGO. First, management decision affects investment is reflected in the comparably low ROI. In Reinsurance, we decided to reallocate funds in our fixed income portfolio realizing losses of around €300 million, thereby increasing future investment income.
Similarly, negative fair value changes from interest rate derivatives in ERGO Life and Health Germany will also lead to a higher investment result going forward. Without these 2 effects, the investment results would have been more than twice as high, would have fully met the guidance. The second management decision affects P&C reinsurance and ERGO P&C. In these two segments, we used the opportunity of higher-than-expected discount benefits to book more prudent estimates reserves. We'll come back to that.
Despite all the mentioned measures, after the first half of the year, Munich Re is well ahead of its pro rata €4 billion 2023 net earnings target, reflecting an excellent underlying profit. Now turning to the segment and business fields, one by one, and let's start with reinsurance. Life & Health total technical result of €325 million in Q2 was again above the pro rata annual ambition. The release of CSM and risk adjustment was in line with expectations -- pure re variances on aggregates were largely neutral with negative U.S. mortality compensated for by positive variances from the remainder of the portfolio. Food and booking of certain short-term group and health business had some negative impact booked in the onerous contract line. Total technical result would have been significantly higher without negative currency effects reflected in the result from insurance related financial instruments. Consider this an accounting mismatch, related hedging activities are recognized in the currency result. On an underlying basis, our FIN RE business continues to grow and to perform very successfully.
PSM Life & Health Re stands at €10.5 billion. This is a small decline compared to the year-end, brought in by a shift from CSM to the risk adjustment as a result of an annual parameter update, as already seen in Q1. So that's not new. The CSM and the risk adjustment represents future profits, not expect any margin deterioration from a shift from risk adjustment to CSM or the other way. BSM from new contracts is reflecting a new business generation, which was particularly pleasing in North America in the release to P&L.
In P&C reinsurance, we continue to strongly expand our business. Sales revenues increased across the board by 9% in the first half of 2023. Q2, we posted a very good combined ratio of 80.5%. Major claims amounted to only 9.3 percentage points, clearly below the average expectation of 14%. €200 million, the flood in Italy was the single biggest loss for Munich Re.
Against the backdrop of a quite active Nat cat quarter for the industry, specifically in the U.S., this large loss result bears testimony of our prudent underwriting. Underlying performance remains sound as we earn through the margin improvement of the recent renewals. Normalized comment ratio of 86.2% is fully in line with our guidance. Already in Q1, we again, used the high 8 percentage points discount benefit to cater for claims uncertainty by prudent basic loss bookings. The increase of the normalized combined ratio versus Q1 is a reflection of the even more prudent loss picks in Q2 compared to Q1.
In primary insurance, ERGO delivered an exceptionally strong Q2 net result of €250 million, which leads to a very high half year net profit of €470 million. Starting with German Life & Health. The net result amounted to €72 million in Q2. In addition to a strong contribution from the life back book, the result of PAA business exceeded the level achieved in Q1 driven by a very pleasing development of short-term [Audio Gap] . In P&C Germany, we achieved a very good technical performance with a pleasing combined ratio of 84.7% [Audio Gap].
This number includes a high discount effect of 3 percentage points, which we, as we did in reinsurance used for a prudent reflection of downside risks in the basic loss ratio. Isolated second quarter with 88.1%., combined ratio was pleasing, supporting a good net result of [Audio Gap] again, benefited from the seasonality of acquisition costs and again, lower-than-expected major losses, contributing to an H1 major loss level significantly below expectations. Let me quickly explain the acquisition cost topic. For the PAA business, the IFRS 17 standard allows to fully recognize the acquisition costs as expenses when they are paid out. This leads to seasonality, especially for the motor business, where the majority of sales and renewals happened in Q4.
Therefore, the acquisition costs will increase significantly in the fourth quarter, leading to a much higher combined ratio in that last quarter. And as a consequence, and assuming a normal large loss level, we, of course, expect P&C Germany earnings to be substantially lower in the second half of the year than in the first half. International business of ERGO saw a strong operating performance in benign large loss development in P&C. Now to the first quarter, the Q2 combined ratio improved to 88.1%, with particularly good combined ratio in Greece and in Poland. The total technical result was also supported by the CSM release on an expected level and a €30 million one-off release of claims reserves in Life & Health.
Segment net result came in at a very strong level of €116 million. Few remarks only on capitalization, which remains very strong according to all metrics. The group's economic position is particularly strong with a Solvency II ratio of 273% at the end of Q2 due to good operating earnings and lower capital requirements from active risk and capital management in P&C reinsurance, including a recent issuance of a cat bond. Joachim mentioned the outlook already. I can only reiterate what I said at another occasion already.
We do not want to make any hurricanes by raising our outlook too early. So let's wait and see how Q3 develops. And in any case, we'll continue to diligently assess and the beneficial to implement measures to support a reasonable earnings trajectory going forward. That's it. Then also from my side.
Joachim and I, we are looking forward to all your questions. But first, I'll hand it back to Reston.
Thank you, gentlemen. We can now move on and turn to the Q&A session. My usual housekeeping remark, please submit the number of your questions to a maximum of two per person. [Operator Instructions]. One moment for the first question, please.
First question is from the line of Ivan Bokhmat with Barclays.
My first question would be on the P&C combined ratio. I was wondering if you could try to help us understand how much have you added in terms of this IBNR in first quarter? Is it the 3% difference between 8 and 5. Is there a little bit more? And maybe if you could elaborate of when you were adding to the reserve prudence is year, are there any particular buckets that you are more concerned of -- and then the second question, I think it's related to the disposals that you've taken so far this year.
Could you help us estimate compared to how much you have -- cost it through the P&L. What's the uplift to the regular income should we be expecting, let's say, this year and next? And is there a budget for your disposals? Or are you just going to be opportunistic if the -- let's say, if the caps are low, you're going to keep doing it?
Yes. Ivan, I think both questions are for me. Let's start with the comment ratio, P&C. I mean my commentary was that we used the opportunity of the difference in discount of 8% versus what the expectation was. Expectation was 5% or 8% minus 5%, 3%.
That was the background in front of which we decided to strengthen the reserves, but I also said is that in the second quarter, we even booked more conservatively than in the first quarter, which I think gives room to fantasy that maybe the 3% is the lower boundary of what we have been doing in the first and in the second quarter. I would be a little bit reluctant to give you more detail than that because at some point, it's no precise signs anymore, but then it's very judgmental where the additional prudent ends and where you really would need the reserves then. But I think I can easily confirm it's minimum the difference between the discount of 8 and 5. There are no specific buckets. It's clearly only IBNR.
And also your question, if there were any areas of concern, I think for that strengthening, no, they aren't because there really isn't -- wasn't any indication leading us towards the need to do a strengthening. And it was really opportunistic in a sense that we were able to afford it. And again, the target is steadily hopefully not at all volatile earnings trajectory increasing forever into the future. That's the target. Disposals on fixed income, there is a budget that doesn't make a lot of sense to release any budget here because there's an opportunistic over the budget.
So therefore, it's both. We started into the year with the budget. But in the meantime, the budget has been increased opportunistically already, and we will continue to manage that in a very agile way, depending on the result development, obviously, and also depending on our view on how the earnings trajectory will develop also into the future. We are currently going into our planning exercise where we do another 3-year plan ahead and try to understand well what the effects are going to be. There are quite a few sources of volatility, as you know, in the business, but also generally, IFRS 17 and [indiscernible] is more volatile than what we had in the old regime.
So there's quite a bit of areas where you might want to have some buffers in the future. And therefore, wherever we can afford building them up, and we will do so. The impact on the -- well, impact on the running yield, yes. Thanks for the reminder. It's a little defense a little bit how you -- and in which book you do it.
But I mean, as a rule of thumb, if you assume, I don't know, duration of 4 years or 3 years and divide the impact by that number and you get a rule of thumb what the impact would be.
Next question is from the line of Cameron Hossain with JPMorgan.
Two questions from me. The first one is just on the [indiscernible], and I think it's very reassuring to hear you say that you'll probably like you to exceed it. Just because we're -- I guess we've seen and IFRS 17, we don't always really know what the different quarters will do in terms of seasonality or other effects. The other thing to flag in the second half of the year that we should really bear in mind when we're going and updating and kind of working on our IFRS 17 numbers. So any kind of things that we might expect, whether that's kind of [indiscernible] et cetera in Q4?
The second question is, given the kind of strong earnings base, it's a much larger base than it's been for many, many years or kind of overall time. Now, dividend has obviously been strong and consistent. The share buyback has been for many years. At what stage do you think you would look at that share buyback and think actually we can put that sustainably up to a higher number than GBP 1 billion
Okay. Seasonality. There is a few items where we have some seasonality either in our business or in IFRS 17. To start with large losses, I mean, you know that we generally talk about our expectation to be 14% on average across the year. So for every single quarter.
But in reality, the second half of the year is more prone to large losses than the first half of the year. So that's already the first source of potential source of seasonality, obviously, depending on the actual outcome. A second source of seasonality is acquisition costs, what I discussed before for ERGO Germany, for example, where in certain quarters, particularly in the fourth quarter, you have higher acquisition costs than on average due to the fact that a lot of the book is being renewed in that quarter. And there's a similar fact also in P&C reinsurance with a loss component built up or release is also subject to seasonality. We're in the fourth quarter as we have the big renewal even in times where margins are extremely attractive as they currently are, we still would expect the loss component to be built up again due to the fact that we have this very low granularity in the way we book it, and we always put the additional prudency on top.
And even including the prudency even in the most profitable book, you would always find a few pockets where you book a loss component. So that's also a seasonality we generally see. Part of the idea of the way see the earnings, this is really to manage those areas. But obviously, they will not go away, so they will always be part of [indiscernible] to interpret our numbers. Second question, buyback dividend.
I think what is very obvious is that we currently are on a different run rate when it comes to earnings than where we have been a few years back. Our buffer when it comes to capital, they are also well filled. Solvency II is very high, but also according to all other capital metrics, we do not see any significant restrictions. The usual process for us is to consider our capital measures in the first quarter after we saw the Q4 result just because the seasonality you were asking for is hitting us very much in the second half of the year. A lot of the large losses happened in the second last half of the year.
So therefore, it always feels better to await how they really turn out to actually happen. And then we will make up our mind in Q1 next year, what actually the payback can be and what dividend and share buyback will be then going forward. But obviously, it's very clear. If our result comes in as expected, buffers all being filled up and solvency being at a very high level also in historic terms. Obviously, we will consider all of that in our decision and currently very clear that there will be [Audio Gap].
Next question is from the line of Tian Spiro with Berenberg.
I've got two questions. The first is on [indiscernible] I was wondering if you can perhaps share some additional color on what specific lines and geographies you reduce exposure at the midyear and whether this is made up of a single large contract or many sort of individual smaller ones? And I guess, on the expansion in Nat cat, would it be fair to say that cat bond you issued was as a result of the higher than previously anticipated growth in this area. So that's the first question. And the second one is, I was wondering if you can maybe share some comments on the performance of the global specialty insurance in Q2 and have year-to-date, you mentioned a low 90s combined ratio is an ambition presby over the cycle.
I was wondering whether you can share where you sort of currently stand and whether there are any particular lines where you're kind of more cautious or more excited about
Thank you. Let me take the first one. I understand the first one, like you are interested to know which are the lines where we reduced our exposure. In the traditional P&C reinsurance side, it was clearly the proportional casualty lines. And we reduced them further after having reduced them already in the years before.
And the second one is that in the developed markets, in Asia, in Europe, but also in the U.S., we have reduced our property proportional exposures, where possible, we transform them into nonproportional structures or shrink our participations or just exited them. Those are the two lines. A third one is on cyber, where we thought that wording wise, we don't get to terms. We prefer not participating. These are the three areas that would come to my mind.
With regard to the global specialty insurance, what are the sweet spots, what are the not so sweet spots, frankly, compared to what we have been doing in the last years, the strategy or the appetite hasn't really changed, though, in that sense, I would say, continuity in a good sense.
Maybe the [indiscernible] question quickly. What I can confirm is that the issuance of the cat bond felt in a time where the cut market generally was an attractive market for investors for more investors showed interest in that, and we were benefiting from that
Next question is, from the line of James Shuck with Citi.
So my two questions. Firstly, in terms of this kind of recycling of the discount rate benefit. So I can hear what you're saying in terms of the margin build. What I'm trying to do is just get an understanding of how that will reverse out in future years. So I think you guided for an IFE unwind in PC of GBP 1.5 billion, if that's still valid.
Presumably, that number is going to go up in 2024, so as we move into '24 or '25, how should we view how you release that margin build? Will it be neutralization of the discount rate benefit net of IFE? Or will it be neutralization of those two offset by the investment income? Will we see it come through the PYD? Or do we see it come through the initial loss picks.
So any help on how to think about that when we actually see your numbers coming through next year would be helpful, please. Second question is around the Atlantic windstorm exposure. So your PML show a very sharp increase for the one in 200 million from $8 billion to $10 billion. My understanding is that is a forward-looking number. So I'm keen to hear, given the July renewals, is that still valid P&L also given that cat bond that you've issued?
And how do you think about that in the context of your NAV because you seem to be stressing that you're a very diversified company. But when we look at that wind storm number in relation to your NAV, it's actually all-time high and a very big number. So I'm worried about the volatility at the overall group level, please?
Sure. Well, thank you for the two questions. The first one, how will the reserve strengthening be reversed? And how will we in the future benefit from that? Well, there's a number of ways how we could use the buffers, obviously.
I mean I think the worst potential use would be that we would really need it somewhere, maybe even short term. So if something unexpected happens during this year, even we could use the funds we have been setting aside now to fund additional losses or higher-than-expected inflation or whatsoever. That would be the first option. Currently, no indication at all that this will happen, but it's -- we cannot exclude it, of course. The second option is that in our year-end review at the end of this year, we'll -- we find out that the overall prudence in our reserves is so high that it's hard to sustain that high level and then we would maybe even also have to release something this year already.
I'm also not expecting that to happen, but it's also not to be excluded. And then the third way is to release it in the future, so next year or even later. And there is 2 ways to look at it. One is we generally have the target, as you know, to release 5% from prior year. And given the growth we have at least 5% in absolute terms are higher numbers every single year.
So it's harder to get to the 5%. So it might help us in the future to get to 5%. That's the more negative interpretation, the more optimistic one would be that we would achieve the 5% even without these additional reserve strengthening. And then they would come on top of that and help us in the future to release more than 5%. As I say, highly speculative at this point in time, we don't know how it's going to happen.
It just feels much more flexible having those additional pockets of IBNR on our balance sheet. And I'd also, like to confirm again that there was no need all to build that up. So [indiscernible] strength was unchanged end of last year already at a very high level. So there was no need to fill up something again after having it used before. It's really now about managing how we develop into the future.
The North Atlantic windstorm exposure, we do not quarterly update our PML numbers, as you know. So it's hard for me to give you a 100% precise answer. But I think we came across the question quite a few times already in the past, very often also in the context of how much potential do we have to grow still. Are we getting closer to our limits. Those kind of questions, I recall, for example.
And there, I can continue to confirm that this is not the case. So there's plenty of room for growth still. And what we also continue to do is in the course of the renewal, we manage our exposure. So a few of the actions Joachim has been elaborating on, for example, changing from proportional to nonproportional all these kind of topics also have an impact. And what we saw now in the second half of the year also in the improvement of the Solvency II numbers is -- I think I called it risk management in P&C Re very generally in my introductory remarks.
But what we were able to achieve is a more balanced portfolio in the second quarter compared to where we were at the beginning of the year and balance, meaning that it's also better diversified again. And as you can see, we immediately benefit also from that the Solvency II ratio, but also affected budget -- affected not got budget, of course, we also benefit from these kind of actions. And as you said already, the cut bond, of course, also has an impact on that. So therefore, a very long answer, sorry for that, I cannot give you any precise numbers, but I just wanted to show a little bit how we think as we're really diligently managing the topic and are convinced that the risk profile is still very well diversified and easily adjusted for us. Maybe a last remark on discount and EFE effects for the next year because that also has something to do with managing earnings going forward.
And as you know, we are currently still benefiting from the difference between discount and the insurance finance expenses -- income and expenses, the EV. And the benefit this year is estimated to be roughly maybe €500 million. It's obviously ups and downs and depending on the curve. And only recently, we analyzed the shape of the curve, how it might impact these numbers. I will not go into all these details, but it's a little bit volatile, but the order of magnitude is still the same.
And next year is going to be less than that. So there is a negative development against, which we have to work. And a few of our earnings management measures also will support us next year to achieve the stable increasing and gradually increasing earnings trajectory, not very volatile and increasing over time. So that's also part of the overall set of measures we're implementing that we have to offset this discount versus EV effects.
Next question is from the line of Will Hardcastle with UBS.
I guess just on -- it's very clear that reserve release is still very strong with buffers increasing. I guess going a bit more granular. Was there any line of business? Is the spread of it perfectly normal, I guess, as continued talk and discussion on social inflation, I'm just trying to understand if there's any adverse trend beyond your expectations year-to-date that you're seeing there? The second one is just on the SCR reduction.
You did mention the use of the cat bond. I guess can you just go into a little bit more detail on the quarter-on-quarter reduction? Anything you can give on -- in terms of those specific actions taken probably on the cat bond or market move benefits there? Any color on that cat bond and size that you can give us?
Thanks for the question, Will. I take the first one on social inflation, and the second one, Christoph will deal with. Do we see any change in the trend of social inflation, which we prefer calling legal abuse to be a little bit more provocative. No. But that's a bad statement because that means that we assume an ongoing trend of increasing liability losses, which are the consequence of the litigation industry that we know, particularly in the U.S. market, the consequence of which is that we would technically expect ongoing increasing rates and/or reducing coverages or reducing limits, Christoph.
I don't think there is a lot of now that I can add that the cat bond obviously, helps us to reduce our exposures in the payrolls, which are covered by the cat bond. Specifically, we talked about it already, the North Atlantic windstorm in parallel. The underwriting action we took, I think we mentioned a lot of it already. So we reduced proportional. We increased the excess of loss business.
We looked a little bit into the distribution geographically also, it's somewhat more diversified now than before. Prices went up, obviously. So a combination of all these things is the obviously, also having an impact on the SCI in the model. And this is how the SCR goes down. But it's not like there's this one single silver bullet, which immediately helps us to have a completely different portfolio.
Of course, not if it's really treaty by treaty, the underwriting actions we have been commenting on already.
Next question is from Vinit Malhotra with Mediobanca.
I hope you can hear me clearly. So just picking up this market outlook commentary. I seem to remember that in the management meetings in June [Technical Difficulty].
Sorry Vinit, we have a significant issue here with your line. We can't
Can you hear me now?
No, it's better
So just the first question is on the market outlook that we heard today, which was a bit more positive than what we heard back in June in terms of you know, it was -- I think you said attractive markets sustaining even to 2025. I'm just curious, has something changed between now and June? Or are you just along the same lines, but just a bit more optimistic. So that's my first question. And the second question was on the Solvency II, but I think you've already addressed it.
So I think I'll stick to one question for now.
Thank you, Vinit. I can say there is no change really compared to June, and I'm not aware of any changes with regard to our June statement. I would say what you hear today is just another reconfirmation of our confidence in pretty attractive markets going forward. What is maybe new is my bold statement that I don't see this trend ending any soon.Thanks Vinit
Next question is from the line of Freya with Bank of America.
Maybe just following up on Vinit's question as well. I guess to what extent do you think that Munich Re and the rest of the industry can continue to push for further risk-adjusted rate increases given that the ROEs that you're showing today are already very strong. Where does further margin expansion come from here from property nonproportional or other lines? And then maybe I just wanted to touch on your thoughts in cyber. I think you had a little more cautious commentary on the call just now, and you've reduced exposures.
Is this pricing or wording driven?
Yes. Thank you, Freya. Let me take both questions. So to what extent can we push rate increases. First of all, in all humbles we alone, we cannot push anything.
Our market share is not important enough globally. But what we can observe and what we can state is that the reinsurance market, though offering broadly, the capacity needed and demanded in the market, the reinsurance industry is very firm in what they are charging for it. So for good money, you get good capacity, for soft prices, you don't. And I just wanted to underline we don't see that these circumstances are changing any soon, but I will not make any prediction into what that could mean in terms of risk-adjusted rates next year or in two years, I just expect it to stay very favor. With regard to cyber, my comment was not so much referring to rates for cyber coverages than for the conditions or the wordings.
And what I mean is the whole industry, I mean, the issue starting with the insureds, but also the brokers, but then the direct writers and the reinsurers, we should all be as crystal clear as possible of what is included in the policy and what is excluded in the policy. And the wording should do this job, and there is still too many wordings out there, which are not crystal clear enough to avoid any long debate when really big events happen and when, let's say, a cyber war attack is happening or when an attack on critical infrastructure is happening. Those are the delicate circumstances that will matter a lot. And then those ones, we just insist that the wordings are as clear as possible, then we are happy to grow our business. And if not, then we have no appetite.
Next question is from the line of Andrew Ritchie of Autonomous.
Just the first question just on Life Re. I think I probably asked the same question in the last two calls. Why shouldn't we -- I mean I can't see what I would normalize down in the Life Re result, particularly given a large portion of the strong result is just the CSM release. And then I guess there's natural growth in the fee component as well, which is better in Q2 versus Q1. So what would I normalize down in the life result as I reconcile with your guidance versus what's actually emerging?
The second question is probably one for Joachim. This cycle, I mean, having covered unit for a long time, I look -- there seems to be a lot more quite strong management renewals of the book. I mean, Munich is known as a very long-term partner for sedans, but it looks like you've done some fairly radical stuff on proportional versus non-proportional in particular. Is this a philosophy shift? Is Munich sort of being a lot more tactical than it has been historically?
Or is it just simply the case that there's just quite a radical difference in the economics this time around between proportional and non-proportional. And related to that, if I could just slip in another related question. Is it possible that economic proportional actually start improving more next year because there's just a catch-up in primary business as pricing there accelerates.
And I'll take the first one, Life, and I think we had this conversation indeed a few times already. I don't see a lot of reasons to normalize it down. We had 2/3 of the yearly target now at half year, and the run rate is very much driven by the CSM release. So I think the probability that we are going to exceed our target of €1 billion is quite high at this point in time. I mean there's still some volatility.
As you could see this quarter, we had a quite significant negative impact from FX movements on the total technical result in Life 3. So things like that can happen. But again, I think that the achieved target there is -- maybe more generally on our outlook, I mean, when we took the decision that ahead of the wind season now, we don't want to change our outlook, that income number. Obviously, the discussion always starts with €4 billion net income. And if you then take a decision like let's keep it with that for now.
And then it's hard to change any sub-targets at this point in time because we cannot only keep the $4 billion constant and then increase life because what are you going to do with P&C then or with ERGO or whatever. So these things are -- they depend on each other. Therefore, maybe you take away with you that the intention was very much to keep the €4 billion stable and that, therefore, it's one or other of the other targets, the probability to overachieve them is even higher now than it was in Q1.
Andrew, this is Joachim. Thanks. Is there a philosophy shift at our end? I don't think so. Is there a rigor shift maybe, the rigor is high.
And I think it should be, but there was also urgency, Andrew. So if you just look into the U.S. market specifically, and we just look into our traditional U.S. P&C reinsurance business in the last 5 to 6 years, they weren't overwhelming. They were underwhelming.
So there was a need to do things differently. One of the reasons is the casualty business, another reason is then the proportional property business. And there is, of course, learnings from this also into in other regions where this urgency had not yet occurred. Is there enough skin of the game of our cedents? Or should we be more prudent here and the learning was that could be similar events, not events, experiences going forward in other regions.
And from that, we're doing and then we said we have a preference for nonproportional property and we introduced it. So I would call it underwriting rigor, no philosophy shift.
Next question is from the line of Ashik Musaddi with Morgan Stanley.
Just a couple of questions. First of all, I mean, is it possible for you to quantify the benefits that you're seeing already from the terms and condition and attachment point change? I mean, is there a way to quantify that benefit already? I mean, we are hearing at least this time that there has been a lot of losses, cat losses in U.S., et cetera, but it is not feeding into the reinsurance and probably part of that benefit is coming from terms and condition and our attachment point. But is there a way you can quantify and you can see a clear benefit.
That would be good to know. And then second question is, how should we think about earnings growth in the future? I agree that I'm probably going into 2024, 2025. But, I guess, it is getting more and more relevant because you continue to remain very optimistic about top line. At the same time, margins, I mean, if I hear you again, you are not really worried about the market outlook in terms of pricing.
Investment income is going higher. You have much more prudency in terms of reserves. So, I mean, it is very easy to just get a number -- a growth number -- net profit growth number much higher than 10%, like much higher than 10%. So could you give some color around that? Like how should we be thinking about that?
Or if we are missing anything -- I guess the only thing negative I can see is clearly the EC drag. But other than that, I mean, anything else you would want to add?
Thank you, Ashik. So is it possible to quantify the -- how should I say, the terms and condition changes in underwriting P&C business, can we quantify those? So higher attachment points or lower limits or sub-limits, -- can we give a quantification? We can't. Even internally, we don't have it.
It's not that we don't disclose it. It's -- we don't have it. So it's qualitative. And if you just take new wording and you say the wording will do a better job than the old wording. When would you really actually see the impact of this?
It is when the loss is happening. And then you will see if the wording does the job, it was supposed to do it doesn't. As long as there is no loss, it's theoretical, you see. And in this sense, please accept it's not quantifiable, but it's important if your experience in this business, you know which structures the line you as a reinsurer with your seasons and the better the alignment is the better the quality of the bookers in the end. Christoph, earnings growth going forward?
Sure. I mean, first of all, I'm very happy that we have now a discussion about how high the earnings growth is going forward. I can remember discussions with unwind of discount and some technicalities from IFRS 17, where there was the notion more than potentially earnings might come down even next year. So it's good to talk about growth because this is absolutely also what we are expecting and what we are seeing. I mean, one of the big advantages of IFRS 17 is anyway that a few of our segments are much better predictable than in the past.
So whatever is life and health, long-term ERGO reinsurance. I think it's pretty well predictable. You can add some, I don't know, new business CSM onto our currency and then run it off with the usual rate of monthly or yearly run off and you get a pretty good view on what the earnings potential is in those segments. Similarly, ERGO more generally, they have been on a steady earnings increasing growth for a number of years, why they shouldn't they continue. The more difficult thing is P&C.
Obviously, we have been growing significantly at higher rates. So I'm sure you can put up a nice model in two parameters, get some ranges of potential outcome. We are internally not at a point yet to really discuss it as our planning process is more or less starting as we speak, and we will use the fall and to have those internal discussions, what we think what is realistic. But of course, I'm very happy to confirm that we are also expecting quite a significant earnings growth going forward. Having said that, I mean this is one statement of caution.
I've always have to make as the CFO. Obviously, the tenor so much more volatile. And as soon as capital markets would be volatile as soon as anything else, FX or the loss development would deviate from expected value, you would also see more of it in our P&L than in the past. But again, we expect earnings to go [indiscernible].
Really appreciate your response.
Next question is from the line of Henry Heathfield with Morningstar.
So just on the reserves of €600 million you set aside for the earthquake in Turkey. I was wondering if you might be able to give me a rough idea of the shape of that in terms of reported versus not reported? And then the second question is on the large contracts in Continental Europe within Life & Health that led to a decline in net insurance revenue. I was wondering if you could talk me through briefly if you haven't already, and I'm sorry if you have what that relates to.
Sure. I start with the second question, the decline in Life and Health, nothing spectacular. I mean what we do very often we restructure contracts when the profitability is not in cording to our expectation. And in Life, you have quite a few options how to structure contracts. Sometimes they come with a lot of premium, sometimes they don't.
So the volume is just affected in this case, by restructuring or sometimes even discontinuation of contracts, where just our profitability targets are not met. Turkey, there's a significant amount of IBNR, of course, still in that number. Other than that, there's nothing I would like to comment on publicly.
Next question is from the line of Darius Satkauskas of KBW.
Just one question, please. So if I go back to your sort of full year presentation, when you talked about general renewals achievements, your rate increase -- risk-adjusted rate increase was 2.3%. And I think you based your combined ratio guidance for 2023 on the assumption that you achieved roughly similar sort of rate in the upcoming renewals. Now clearly, renewals in April and July and June have been much better.
And so, I think back then, you sort of assumed that 1 percentage point roughly will be still one in 2024. So implied combined ratio from 85 million -- is that still the right number to think about? Because obviously, it's double the rate when you initially issued that guidance for 2023.
Sure. Yes. I mean generally, we knew already also back when we did our planning or our initial outlook that the renewals would not all be the same because the not cut portion is different in the three renewals. And as you know, 141.7 is more cut heavy than 11. Therefore, in that regard, you already knew that the outcome would be slightly different.
So -- but where I would agree is that now it's particularly 1.7% was even better than what we expected. Still, it takes some time until you earn it, obviously, and then finally, again, I come back to my initial comments. Of course, we booked also conservatively.
Question is from the line of Thomas Fossard with HSBC.
[Indiscernible] two questions. The first one, Christoph, can you come back on the acceleration of the Solvency II ratio numbers, especially in Q2? Or maybe give us a bit of quantified elements to understand maybe the growth year-to-date, maybe the numerator or the denominator. I mean, anything where we can better understand what has been driven by mark-to-market movement and what is really driven by either good returns or management actions. The second question would be for Joachim.
You're referring to the 2025 target and business plan. Clearly, when you presented the plan, we were in a completely different environment from a technical point of view and interest rate point of view. Maybe you don't need to provide any updates in terms of strategy. But do you feel that actually, at some point, we'll have to update the financial targets embedded in this 2025 business plan.
I'll start with the first one. I mean the beauty of IFRS 17 now is that earnings in IFRS 17 are closer to Solvency II. So as much as we don't generally disclose own funds numbers and STR numbers during the year, at least the approximation could be just to take, I don't know €1.5 billion, €2 billion earnings on funds earnings, so economic earnings in the second quarter. And if you assume then the own funds to have been growing that order of magnitude to get to an improved Solvency II ratio of the 273%. You can easily do the math, you will end up with the requirement that SCR has been shrinking, has been decreasing, and that's actually what happened.
So we have a lower SCR now compared to 1.3 to the end of March and higher own funds. And probably this is also what you call the acceleration. We have a double impact, higher own funds and lower SCR. And then obviously, the impact on the ratio is significant.
Yes. And your question on the 2025 expectations that we had set back at the beginning of ambition 2025 and how our look on them is now. I mean, there is factors that very clearly are more favorable than we had them in mind 3 years back. Very concretely, the P&C price cycle is better and is longer than we expected end of 2022 -- 2020, end of 2020. Interest rates are higher than what we anticipated back then.
That's all in favor. That's all tailwind. And it's quite a bit of tailwind. But then at the negative side, inflation has been much higher than anticipated, it has come at a cost. Then we have seen a deeper, longer pandemic in some, I would say, some pandemic losses in the end, higher.
We had reserved for them but higher than we would have hoped for. Then we have seen the war in Ukraine or Russia, Ukraine, which wasn't anticipated. Of course, we still don't know what the war-related losses are going to be, but they will be there, and we hadn't anticipated them. If you take everything together, net, net, as it stands, with all the uncertainty going forward, I would say today, we are very confident that we will deliver on 2023, '24 and 2025. And internally, I would say -- and maybe there is a chance to even exceed that.
More specific, we cannot be. We are going through the planning period. And I think towards the end of the year, you will know what we concrete will plan then into.
There are no further questions registered at this time. I would like to hand back to Christian Becker for closing comments.
Thank you. Nothing to add from my side. Pleasure as always, further questions, you know where to find us. Thanks again, and hope to see all of you very soon. Have a nice remaining summer. Bye, bye.