Muenchener Rueckversicherungs Gesellschaft in Muenchen AG
XETRA:MUV2
Earnings Call Analysis
Q3-2023 Analysis
Muenchener Rueckversicherungs Gesellschaft in Muenchen AG
The company's management has stated that profitability remains at the core of their operational focus, foregoing growth targets if it means compromising profitability. This approach has been a longstanding principle within the organization, ensuring that any expansion or business growth aligns with profitable terms and attractive pricing.
The Solvency II ratio of the business has remained stable over the quarter, showing minor fluctuations due to operating impacts, market-to-market effects on equity markets, and currency exchange variances. Despite these factors, the company maintains a solvency level well above the targeted optimal range of 175-220%, with a current ratio of over 270%, indicating financial strength and resilience.
In the face of changing interest rates, the company has experienced a portfolio uplift in specific segments like P&C, predicting a continual increase in investment results. Although alternative investments, which represent a significant portion of the portfolio, have seen adjustments due to market conditions, management perceives the impact as minimal. Regarding cybersecurity, while claims and frequency conditions vary, the company's strategic approach remains unaltered, believing in the stability and attractiveness of their cyber portfolio.
Currency fluctuations have significantly influenced P&C revenue growth, with the company reporting a 6.5% increase in revenue without considering foreign exchange impacts. Management has communicated an optimistic outlook for continued growth, supported by strong market renewals and a combined ratio that has dipped below 86%, signaling a positive trend in their margins.
The company's dividend policy continues to be assessed with an emphasis on flexibility. Shareholder returns are expected to correlate with higher earnings, but rather than strictly adhering to a payout ratio, the focus will be on the absolute contribution to shareholders. The discussion of dividends versus buybacks remains open, taking into account the potential for organic growth and sustainable earnings. The decision between increasing dividends or buybacks will be based on the actual performance of the current year and future earnings trajectory.
The influence of increased interest rates is the most apparent driver behind higher Q3 discount benefits, with technical factors such as cash flow patterns, currency differentials, and reserve prudency also playing a role. The complexities involved in the discount impact variables make providing a detailed breakdown challenging, but the upward trend in interest rates remains the primary contributor to the observed effects.
There is an ongoing strategic pursuit of diversification into alternative assets such as infrastructure, renewable energy, forest assets, and real estate. These investments aim to leverage illiquidity premiums while aligning with long-duration liabilities. Currency risk management is treated like any other investment risk, with a current long position in U.S. dollars in line with overall investment appetite. However, this position is subject to change based on market assessments and attractive opportunities in other markets.
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A warm welcome to everyone to our Q3 earnings call. Thanks a lot for joining. Procedure very straightforward. Today, as always, today's speaker is Christoph Jurecka, our CFO. And I'll hand over to him in a second and afterwards, we can go right into Q&A. Christoph, please?
Thank you, Christian. Good morning, everybody, also from my side. Great pleasure to have the opportunity to talk to you about our Q3 earnings, in particular, given how excellent these earnings are. We have almost met our earnings target for the full year already after 9 months, which reflects a consistently strong underlying profitability across all our segments.
After 9 months, the ROE amounts to 16.5%. And this is already slightly above the upper end of our 2025 ambition target range. It was great to see in Q3 that we were able to maintain the momentum of the strong previous quarters. Again, exceeding almost all KPIs and pro rata financial targets. The pleasing net income of almost EUR 1.2 billion is once again very close to the consensus estimate.
I must say I'm still quite impressed how predictable our earnings are under IFRS 9 and 17, also we should not underestimate the volatility. So I cannot promise you stable results forever. But as in previous quarters, we also continued to take management decisions aiming at a steadily increasing future earnings trajectory and also as much as possible dampening earnings volatility.
We again made use of higher-than-expected discounting benefits to book prudent best estimate reserves and once more also realized losses on our fixed income portfolio.
Let me start with the second decision and its impact on the investment result. In Q3, disposal losses amounted to around EUR 200 million for the group affecting reinsurance and ERGO in almost equal parts. By reallocating funds at current reinvestment yield of 4.5%, we will gradually increase the sustainable investment income beyond the current running yield of 3.3%.
In addition, negative fair value changes at ERGO Life and Health Germany, in particular, resulted in a comparably low ROI of 0.9% at ERGO. By contrast, the ROI of 1.4% for the group benefited from the solid 2.2% investment return in reinsurance. As fair value changes are volatile in nature, we did not change our full year 2023 outlook for the return on investment. However, with an ROI of 1.8% after 9 months, the outlook of achieving more than 2.2% appears more of a stretch now.
As it is closely related to the investment result, let me quickly mention the currency result up just above EUR 300 million. The further expansion of our U.S. dollar long position has paid off.
Turning to the business fields and starting with reinsurance. In Life and Health, we already surpassed our initial full year guidance for the total technical result after 9 months. Q3 stand-alone contributed EUR 440 million, which is particularly pleasing and well above the pro rata run rate. The insurance service result is dominated by the release of CSM and risk adjustment, which was in line with expectations.
Experience variances were balanced overall, adverse U.S. mortality was compensated for by positive variances from the remainder of the portfolio. Apart from that, the result includes negative technical one-offs of around EUR 60 million. In Q3, the underlying result from insurance related financial instruments remains on a high level while at the same time, benefiting from a sizable positive currency effects, which fully reversed the negative currency volatility in H1. However, as mentioned in previous quarters, we consider this FX overlay and accounting mismatch as the related hedging activities are recognized in the currency result. And by the way, after 9 months, the overall FX impact on the insurance-related financial instrument result is close to 0.
The CSM stands at EUR 10.7 billion, which is a small decline compared to year-end, driven by a shift from the CSM to the risk adjustment as a result of the annual parameter update, which we did already in Q1. So this is still the same effect. The CSM from new contracts is reflecting a healthy new business generation, which was particularly pleasing in North America, exceeding the release to P&L.
In property-casualty reinsurance, we continue to profitably expand our business. In Q3, we posted a very good combined ratio of 82%, supported by lower-than-expected major losses. Also, no major hurricanes occurred. It was a fairly active nat cat quarter with several medium-sized events accumulating. With around EUR 200 million, the Maui wildfire was the single largest loss to a larger extent, driven by our primary insurance operations.
The underlying performance remains sound as we earn through the margin improvements of the recent renewals. The normalized combined ratio of 85.5% is fully in line with our guidance. Due to the impact from major losses, currencies and the shape of the yield curves, we benefited from a high discount effect of 10 percentage points this quarter.
As mentioned earlier, when referring to our management decisions, we again used this benefit to cater for claims uncertainty by prudent basic loss bookings. More concretely, as in the quarters before, we took the additional discount on top of the 5% we had in our initial outlook and put it fully into our reserves concretely 10 minus 5 and it gives 5% of additional discount effect, which is fully reflected now in additional -- or was fully reflected in conservative or prudent reserve bookings.
After the first 3 quarters, I can now easily confirm that at least the discount effect or the additional discount on top of the 5%, at least that amount has been put as additional prudence into our reserves.
Now turning to primary insurance. ERGO delivered a net result of EUR 173 million in Q3, fully in line with the pro rata run rate. In German Life & Health, the net result amounted to EUR 52 million in Q3, driven by CSM release fully in line with expectations. In addition, we saw a very pleasing contribution from short-term health business, and a seasonally strong development in travel insurance.
In P&C Germany, the underlying performance continued to be strong. We achieved a good combined ratio of 88.2% in Q3 despite elevated nat cat losses like hail storms. While ERGO continues to benefit from the seasonality of acquisition costs in Q3, we have to expect a much higher combined ratio in the last quarter. As the majority of sales and renewals for our P&A business is taking place in Q4, the acquisition costs are expected to increase significantly compared to Q3 in the fourth quarter.
In our fixed income portfolio also at ERGO P&C Germany, we deliberately realized losses in Q3 to support future running yield, which led to a somewhat lower investment result.
Overall, the net result at ERGO P&C Germany amounted to EUR 31 million. The ERGO International business performed well. In P&C, the very pleasing combined ratio of 87.9% was among others driven by good development in Poland, Spain and the Baltics, compensating for elevated nat cat losses, particularly in Greece.
In Life and Health, the CSM release was in line with expectations. Furthermore, we recorded a release of claims reserves in the Belgium Health business. The segment net result amounted to a high level of EUR 90 million this quarter.
Now some remarks on our capitalization, which remains very sound according to all metrics. The group's economic position is particularly strong with a nearly unchanged Solvency II ratio of 271% at the end of Q3. Despite positive operating earnings, the Solvency II ratio decreased slightly compared to the previous quarter, but only slightly due to the market variances, taxes and other effects.
I would like to conclude with the outlook for 2023. While ERGO is expected to deliver on its guidance, including both combined ratio targets, the uplift of the group net result target to EUR 4.5 billion is driven by higher-than-anticipated earnings in reinsurance. Consequently, we have increased the net income target for the reinsurance segment by EUR 500 million.
In P&C reinsurance, we now expect a lower combined ratio of around 85% for the full year. Please bear in mind that after the release in the first 3 quarters, there will be an increase of the loss component in Q4. Additionally, the unwind of discount in the insurance finance income or expenses, so-called IFIE, will continue to trend upward every quarter and will, by the way, also burden results in 2024 significantly.
In Life and Health reinsurance, we reflect the strong development by lifting the full year guidance for the total technical result to EUR 1.4 billion. While the outlook for insurance revenue is unchanged at group level, we increased it for ERGO to EUR 20 billion while reducing it, driven by FX to EUR 38 billion for reinsurance.
With this, I'm at the end of my opening remarks and look forward to answering your questions, but first, of course, hand it back to Christian.
Thank you, Christoph. Not much to add from my side. Just my usual housekeeping remark. When we go to Q&A now, please limit the number of your questions to 2 questions per person. [Operator Instructions]. So with that, let's go ahead.
[Operator Instructions] And the first question comes from Kamran Hossain from JPMorgan.
Two questions from me. The first one is on capital management. And I guess you've kind of -- the earnings for the year has gone up. You've beaten your EUR 4 billion target. Do you think now is the right time to think about increasing the share buyback? Or given the level of earnings and taking into consideration they look relatively sustainable, should we expect a step-up in the share buyback from EUR 1 billion into next year?
The second question is on reserving. Clearly, your reserve movement overall was very positive. So just slightly ahead of your 5% guidance. Could you maybe talk to whether we've seen movements within that? So actually whether you've had better development in short-tail classes, property, specialty, et cetera versus longer-tail classes and how that's developing? And whether there are any issues or concerns or worries that you have on that at all on the long-tail side.
Kamran, thank you for the question. First of all, on capital management and your question, if now is the right time. I think we have, first of all, a little bit defined what now means. Because as you know, our general process is to discuss questions like that also internally only after Q4. So therefore, let's assume for a moment now it's after Q4 and the year continues as we expect it to continue and we very nicely achieved the EUR 4.5 billion target.
In that case, I mean, it's very obvious that we're on a higher earnings level now. And as you know, our entire company and the Board and whoever is responsible here, we always have been shareholder-minded in the past in a sense that whenever possible, we distributed earnings and repatriated capital wherever possible. So it feels like a very natural question you ask. And also internally, it's a very natural discussion to have, to increase payout. And if by dividend, by buyback, I mean, all these are technicalities we are going to discuss then later on. But I can clearly confirm we are highly dedicated to continue to give shareholders a very attractive contribution also in our success and our results as soon as it's achieved.
Second question, reserving development. Also there, first of all, the process disclaimer. And we are always doing our holistic reserve review only in the fourth quarter. So whatever I tell you now is very preliminary. But I think a lot of that was disclosed during the year already, was pointing at very positive developments on the reserve side for us. I mean we consistently were showing a 5% positive impact on our normalized comment ratio from reserve releases throughout the year already. I mentioned in my introduction already that we feed it in the additional benefit from discount above the 5% and at least that amount into our reserves during the year already to increase the reserve strength. And if you remember, end of last year, we set aside an amount of EUR 1.3 billion for inflation impacts. So I think there should not be a single doubt about our reserve strength. We are very much on the safe side.
Talking about the individual businesses. Obviously, when you think about property, you think about maybe inflation on building costs, stuff like that. So the inflation assumptions are key. Currently, I don't have any indication. But again, the review is ongoing. I have no indication that the inflation assumptions from last year that they are not holding, so that the money was set aside. At this point, I'm not aware that it would need to be increased.
On the casualty side, I'm also not aware of any issues. Earlier today, I got a question already, if that's only on the discounted level, also the nominal level of the reserves. But also on the nominal level, I'm not at all concerned for casualty for us given where we currently stand on the developments as I currently see them. So no, all good, I think, on the reserve side, safe as ever and looking forward for the reserve releases to come.
And the next question comes from Andrew Ritchie from Autonomous.
As just following up a little bit on that question. I mean in numbers terms, you've effectively added best part of EUR 1 billion to reserve prudence year-to-date. I'm just wondering how you do that from an auditing perspective, an auditor's perspective? Because you're doing it by way of -- I'll maybe clarify, are you trying to manage the risk of discounting volatility going forward? In other words, if the discount benefit declines? Are you trying to manage claims volatility? What -- I'm just trying to gain -- or is it just -- if it's basically a smoothing mechanism, how are you justifying that from an auditor perspective? Is it there was room to move to the upper end of the range of best estimates? And if that is the case, presumably you're getting close to that? Or maybe just clarify, I'm surprised that the frankness with which you're essentially telling us you've added about EUR 1 billion to prudence this year?
Second question. Is the Life free technical result upgrade the new base from which we go forward? Or was there any sort of noise inflating that? I appreciate -- well, I think actually the FX noise is neutral for the 9 months. So maybe just tell us, is that the new base going forward? Is there any -- either can we grow off that base? Or is there anything inflating it?
Thank you, Andrew. Yes, auditors, it is a good question when it comes to reserve. Well, so first of all, the way we look at it is always that we look at the best estimate as a range of possible best estimate. I mean there are many actuaries in the world. And if you ask two of them, they for sure will come up with different best estimates. So there's always ranges. And you can be more conservative or less conservative. And as long as you're in a certain range, the auditor will have no chance to challenge what you're defining as your best estimate is as long as you're in that range.
And obviously, that range can be stretched a little bit here and there and there the upper boundary is not completely fixed, so there is room to maneuver for us and always has been. And obviously, the more we strengthen the reserves, the closer we'll get to the upper end, but who knows where the upper end really is, to be honest. This is a debate we presume are going to have at the year-end with the auditors as we do every single year. I'm not aware of any single year where we weren't close to what the upper end was at that point in time.
So this is a recurring discussion more or less. But as long as you are within that reasonable range, obviously, the auditor will sign off and you're still booking best estimates. And now a little bit more to the details how do we do then all these, you call it smoothing. I wouldn't call it smoothing, but we just have offsetting effects in various pockets we have in our reserves. You have all these developments. In one portfolio they go up and the others, they go down. So there's a lot of individual items. And if you look at them one by one, of course, there's always very good justification what's going on there.
But more globally, there's also kind of a diversification in that. And what we also do is we look at them also then more from a top-down perspective and ask ourselves if we need an IBNR on top of that. And that's also something we book. So in the first 3 quarters, what we did is we booked what we call a bulk IBNR and to cover that additional prudency. So we didn't allocate it to specific segments. It's really a bulk booking.
Now in the course of the fourth quarter reserve review, we will see if we need some of it in certain actual segments or if it will all remain bulk for more global uncertainties, not reflected technically in one of our specific segments.
Yes, I mean, that's really the way we do it. And yes, I mean, I can also confirm there's a lot of volatility in that. And this is just the reason why it works because uncertainties are the justification to have ranges around best estimates. And maybe that's also one of the differences between us and many, many other insurers who you also might be looking at.
Given our business portfolio, our business mix and the uncertainties being a global reinsurer and having all these major, major big, big risks across all lines in our book, I would immediately say that the uncertainty [ is far from ] significantly higher than for others, which also translates into bigger ranges than what others potentially would have and what we are doing is just using this flexibility. I hope this helps a little bit, but that's really technically what's going on here.
And again, the review is ongoing as we speak. So I do not have any indication what really then we'll be discussing at Q4, but also I do not have any indication of any weakness at this point in time, rather the opposite.
Life Re you mentioned already, Andrew, that the currency is now neutral more or less after 3 quarters. So if you look for a moment at the two components, one is just the, let's say, the IFRS 17 business where we just transfer the CSM over time into earnings and the risk adjustment, and that's very stable by nature anyway. And then you have the IFRS 9 business or the former so-called fee business, and there you have this currency volatility on top of what the underlying performance is, which is just an accounting volatility as we hedge it. No, after 9 months neutral. So therefore, looking at the numbers for now, and dividing them by 3, you probably get an indication of what the quarterly run rate that year currently was.
Now the duration of the businesses is different. The traditional Life Re business, it tends to be a little bit longer than the fee business, but also the fee business is not really very short tail. So therefore, going forward, as a starting point, before talking about experience variances and assumption changes and these kind of things. As a starting point, I think it's a fair assumption to look at the current results level and -- as a starting point for projection into the future.
And the next question comes from Vinit Malhotra from Mediobanca.
Just picking up your comment on the dampening of earnings volatility. Could you give us some examples? Could it be perhaps that some of these reserves prudences that we just discussed or you just mentioned, could those be used in the future to manage or to dampen volatility? Could you just give me some examples? That would be very helpful.
Second question is just on the growth in P&C Re, which -- maybe there are some large [ VTs ] on and off, but 3Q was a bit lower than recent quarters [ ex ] FX basis, about 1% give or take. I'm just curious or maybe even something like 1% to 2%. I'm just curious, is there anything that you'd like to flag here? Because I've noted the comment on Slide 21 that GSI was still very strong. So is it the traditional P&C work a bit slower? Is it because of renewals recently? Just any thoughts would be helpful.
Yes. Okay, Vinit. Yes, maybe on the reserve side or generally managing earnings volatility. I mean, what we did recently in the recent past and also going forward, what we would do in case we would be hit by a larger-than-expected loss. We would, of course, look into levers we have in other bookings and review assumptions. And if you then find assumptions, which are rather on the conservative side, you can discuss if it's really needed to be that conservative and can maybe reassess here and there the level of conservatism you have and then one or the other of the assumptions in your balance sheet.
Obviously, you have to be careful with that. And I mean the way you asked your question is exactly the amounts we're setting aside now are then available for dampening earnings volatility, I mean, we properly document what we are booking here. So I cannot confirm that it's exactly the amounts we are setting aside now. But if your balance sheet overall is very conservative you'll most probably find pockets there where the level of conservatism maybe is no longer justified and you can reduce it a little bit and then dampen the volatility by releasing reserves in one or the other area at the point in time when some bigger event is hitting you. I think that, that is how it works.
But obviously, we are not free from any restrictions. And we have to also keep in mind the way how we did document things in the past and even for us, the best estimate is the best estimate and doesn't suddenly change from one quarter to the other end. And these kind of things, of course, are all the same for everybody. We are, I mean, fully in line and it's obvious, but just to confirm it again, fully in line with all the accounting standards, very obviously, and the auditors are fine with what we are doing. But that's how it works generally.
The second question I understood was more on the growth side. And I think in the commentary, what we differentiated a little bit is the across the board significant growth in GSI versus the excess of loss business, where we maybe were benefiting more from price increases, but then really having more risks on the balance sheet. It's one of the price effect driving the revenue increase here. And then in the proportional business, we discontinued some business but then were able in other businesses to compensate as also primary insurers were increasing the prices. And then obviously, we also benefit from that and then also certain commissions have been reviewed and these kind of things.
So what we wanted to give, I think, in that slide is just a differentiated picture in a big segment where not everything is moving exactly in the same way. But I think the overarching comment would be that it is still very positive. If you look at the organic growth number, it's still very high, and it is just offset by FX. And by the way, also the now somewhat reduced outlook for insurance revenue on the reinsurance side, it's only FX driven. We are still very happy with the organic business growth in that segment.
The next question comes from Ashik Musaddi from Morgan Stanley.
Just a couple of questions I have. I mean, first of all, a very simple question with respect to this earnings base of EUR 4.5 billion. Now there are quite a few moving parts. I mean you have higher discounting, but then higher reserve buffers, better cat but then higher, say, investment gain losses, et cetera. But would you say that this EUR 4.5 billion is a good starting point for next year to think about? So this is like this is -- this would be an underlying number for 2023 as well rather than it has been impacted by -- positively or negatively by some one-offs. So that's one thing I'm trying to understand, is this a good starting point to think about what could be the earnings for 2024? Without going into details of what it would be in 2024, but at least thinking from a starting point perspective. So that's the first one.
And second question is, can we get some color with respect to what are the IBNRs still in the -- on your COVID reserve, on your, say, Hurricane Ian-related stuff and then the inflation reserve? And could you just remind, I think it's EUR 1 billion for the discounting reserves. So any color, any visibility on that those things would be very helpful. All I'm trying to do is to understand how much of extra buffers you have built up and how you're going to use this in the future? Is it just going to be against a big event or some structural changes? Or would you try to use it for earnings support as well in terms of growing earnings?
Yes. Thank you for the question. Yes, maybe let's start with the reserving question again. It's a nice theme already throughout the call, so let's continue with reserving. I mean all those IBNRs you're mentioning, they are sitting where they are more or less and awaiting development of claims in the future. There has not been that much of development, but there's still some development even in the COVID space. So that's why we feel still comfortable with the IBNRs as they are.
To remind you, we released some of the COVID IBNRs end of last year already for the minor piece, a minor part only. So the majority of it is still sitting where it is. Now would we use it for supporting the earnings? Well, I mean, I think what counts most for us is really the underlying organic or earnings capacity we are having. And obviously, your reserves can be whatever strength you want to have them, but releasing them into earnings, you can only do it once. So we will also always be talking about onetime effect if we would release something here or there. And what we are much more interested in is just our ongoing and operating sustainable earnings trajectory, where I tried to highlight also in my introductory remarks that we're really interested in sustaining to develop that earnings trajectory, growing into the future, growing -- sustainably growing earnings into the future. That's what we are interested in. And that's something you cannot achieve by reserve releases. The sustainable piece is just not achievable by releasing reserves.
Now in case a big hit would come from a big, big event we weren't expecting it at a point. As I said before, of course, we would be able then to review assumptions in certain pockets of our reserves overall. And if we find conservatism here and there, it would help us to dampen volatility and to make sure this earnings trajectory continues to be stable and as expected. I mean, obviously, that's what buffers are for. But as a long-term support for earnings is just not the purpose of having these reserves.
Talking about the future, the EUR 4.5 billion and is it the starting point for the expectation for next year. Let's -- why don't we just look into our segments one by one and I give you a little bit how I think about the various developments. Maybe the easiest piece is ERGO potentially. ERGO has been steadily growing their earnings contribution year-by-year for quite a long time already. I do not see any reasons why that should not continue, to be honest. I mean they are just on track.
Second, Life Re, I think we discussed Life Re already. We have the starting point now. And then, of course, you think about effects like FX, you think about effects like experience variances, these kind of things. But the starting point is given also how IFRS 17 works, pretty much a stable CSM release, stable risk adjustment release. And whatever assumption you take for how the fee business continues into the future, how long it does continue? And how much you can also add to that? And there's some interest rate dependency in that as well because a lot of that is financing business. And the higher the interest rates are, then you also potentially get higher interest from your clients at least for new business. So that's something to be considered there.
And then on the P&C Re business and frankly, that's just technically a little bit more complicated, given how IFRS 17 is working. There we have the discount component, we have the IFIE, so insurance finance income or expenses where I mentioned already that this is trending upwards. So the interest unwind is going to increase year-on-year significantly. I mean we have been speaking, I think, about of the support and earnings we have this year. Earlier this year, we mentioned around EUR 500 million after tax support. This will be a significantly lower number next year. That is something to be kept in mind. But then on the other hand, this year's discount effect, we used it to reserve strength -- for reserve strengthening. I mean that's clearly -- also we talked about upper boundaries and all this stuff like that before.
So the question really is how long are you able to do that? And at some point, the lower discount will just be the lower discount and support the earnings. So this would be then an upward driver of results versus the IFIE would be a downward driver. And again, to remind you, our target is sustainably increasing earnings trajectory. So that's always what we have in mind.
And then there are other drivers, of course, also, if you look at the result for the future, we had a relatively high tax rate this quarter. I wouldn't expect that necessarily to be the case again in the fourth quarter and more long-term tax ratios for us. We always said we're between 20% and 25% so that -- but already that 5% range is quite a bit of a lever. The other results, there's also always some ups and downs. So there are quite a few more drivers which you have to keep in mind. But yes, generally, I mean, of course, the EUR 4.5 billion is a starting point. I mean that's what we expect this year now to happen. And if we ourselves look at what we would expect ourselves to deliver next year, of course, we would look at EUR 4.5 billion as the starting point for the discussions. But then, as I said, the discussion would be very differentiated segment by segment, and particularly in P&C, we look at IFIE versus discount and also take some assumptions what we are going to do with the discount next year compared to what we did this year.
The next question comes from Tryfonas Spyrou from Berenberg.
I guess just following up, Christoph, on the results for next year. How should we think about the uplift from investment income to come through and help with the results? It looks like the higher IFIE chart would be managed somewhat by the buffers using the discounting package, presumably, you have a much higher investment income coming through given your realizing losses this year. So should that more than -- should that be a net contributor to the result next year over and above the IFIE? So that was my first question.
I guess the second one is on the -- some early thoughts on renewals for January next year and your appetite for growing volumes further and which areas you're looking to deploy your balance sheet? I guess, any early thoughts on the risk-adjusted price increases you're looking to achieve?
Yes, thank you for the question. Yes, -- and then for the reminder on the investment result, I should have mentioned that before, of course, it's also a significant driver for next year's result. Already this year, our regular income -- our running yield is significantly higher than prior year. And of course, wherever we reinvest money now, it comes again with a higher yield. So the upward trend in the investment result only from that effect is obvious and something we would expect for next year.
Then against that, of course, then the question how much losses are we going to realize? And there's always 2 elements for that even without any management overlay, like what we do this year to dampen results. Even without that natural turnover in our fixed income portfolios very often still comes with the realization of losses as long as we still have unrealized losses. So therefore, the investment planning for next year, in any case, we'll foresee the realization of losses on fixed income books. And on top of that, just to remind you, IFRS 9 is quite volatile in nature as we also did see that here. So there will be for sure, some noise in one or the other way, it could indeed go either way on top of that, which is difficult to reflect in the plan.
So -- but yes, my answer would be in the investment result. The trend will go to higher earnings, given higher running yield. And then the connection to IFIE maybe that's something you asked as well. I mean the IFIE, there's 3 components you have to look at. The IFIE will go up, of course, for the higher unwind. And parallel investment yields will go up due to higher reinvestment, that's for sure the case. And then it's also the question what happens with the discount, how much of the discount is being used to reserve strengthening? And how long are you doing -- are you going to do that or not anymore next year? And all these 3 things are moving parts, which, to some extent, have to be looked at together. But yes, all the 3 are relevant for next year's earnings expectation.
General renewal, we continue to be very confident. I think in many business lines, prices are now on an attractive level. If you talk about the big nat cat layers, we wouldn't expect our margins to go up significantly from the point where they are, but also do we not have any indications that the market would soften at all. So I think it's in a good place. Differently on casualty, I think there is a space and also the need for rates to go up in at least certain segments and certain markets. So a differentiated picture. But overall, I think I can just confirm what we already said in the last few calls, a very attractive environment for us as a reinsurer generally, and we don't think this is going to change anytime soon.
And the next question comes from Freya Kong from Bank of America.
I just wanted to follow up on the growth outlook. Because like you said, the environment remains very attractive and it looks like claims experience is holding up better than what you're expecting, portfolio repositioning has worked quite well and reserves are strong. So does this mean that you would be pushing for growth in these more volume growth in these conditions in 2024?
And just secondly, a more technical question. Just could you give us the moving parts on the Solvency II reduction in the quarter? And what growth assumptions are loaded in that for [ 1.1 ].
And last question, if I can, just on the discounting benefit assumption that you took this year, which was 5 points, it's probably going to end up being closer to 9 points at the end of this year. Was there just a lot of prudence in that? And should we expect a more aligned or less prudent discounting assumption next year when you set your expectations?
Yes. Let's start with the third question. I think when we published our outlook last year, we immediately said that this was an outlook which even for Munich Re was particularly conservative. And one of the areas where we were booking, let's call it, booking, the conservatism was the discount rate. So the 5% was 1 source or [ 1.1 ] area where we already knew we were quite conservative. And then numbers realized to be significantly above that 8%, 9%, 10% even, and let's see where the year-end number will finally be.
The reason for that particularly conservative outlook clearly was the first time introduction of IFRS 17 based also on a lack of experience in planning and forecasting in that new metric. And there we now have 1 year more experience, which still doesn't mean we are up on a maturity level like we were after 20 years of IFRS 4. But of course, we are much more certain of what we are doing compared to a year ago.
So therefore, I cannot tell you what exactly we are going to do in the outlook because it's just too early to do and we are still having the internal discussions. But what I can promise you is that when we are going to -- at this point in time when we are going to release the outlook, I will be very well able to tell you if the level of conservatism is still the same than a year ago and my current assumption would be, it can be less because we understand better now what we are doing. But details, you can only tell you once we talk about the outlook, it's too early to tell today because I don't have any outlook for you. But again, the reason for the overwhelming high level of conservatism clearly was the first time and first time plan based on IFRS 17, right?
The other question on the outlook growth if we were pushing for growth? And then the question is what does pushing for growth mean? Would we compromise on profitability? No, we would never compromise on profitability, we never did. And there's still not a single person [ or region or ] organization having growth targets, and we would not change that. At the same time, if there are growth opportunities, of course, of course, we push for growth then. And of course, we would strive to grow our book if possible at attractive terms and prices and so on. So therefore, it depends a little bit on what you mean by pushing for growth, but we would not compromise on the level of profitability.
Solvency II -- the -- I mean, first of all, maybe a few remarks on the development in that quarter. You know the numbers, 271% now, it was 273%. So rather stable from one quarter to the other now. There are a few effects to be considered. First of all, the operating impact is positive, always is positive. We are a little bit closer now in Solvency II also to what's happening in IFRS, given that IFRS 17 is closer to Solvency II, but the seasonality is still different.
So if you remember Solvency II after renewal, also for P&C business, in Solvency II fully reflect the present value of future earnings of the business you're writing because it's a fully present value-based regime, Solvency II also for P&C.
Now that's not the case for IFRS 17. So therefore, in quarters where you do not have a renewal date, numbers differ stronger than in other quarters because there's no new -- not that amount of new business. You add to your Solvency II numbers in that quarter. So in that sense, already structurally Q3 is a little bit muted in Solvency II compared to IFRS 17 or more muted than the other quarters. That's one effect we have kept in mind when talking about the operating impact on Solvency II. And that's probably an impact no other insurer has to that extent like we have because for us, the renewals are much more pronounced than for others and maybe also the way we model them. That's one aspect.
The other aspect, in the fourth quarter, we saw some mark-to-market effects. I mentioned that in the IFRS 17 context already, but clearly, they also have been affecting our solvency numbers. So it's a little bit of a negative impact on the Solvency II ratio from, for example, equity markets. That's something which was a little bit detrimental, but that's volatility in our view that it can happen every quarter. It could go up easily again very quickly. Also other asset classes, even FX was a slight negative contributor to Solvency II, this quarter could use to go the other way, again next quarter. So that's volatility in a sense.
And then there are a few other effects, taxes and other effects more of technical nature, which also reduced our Solvency II ratio this quarter, maybe by -- a percentage [ for its share ] there or a couple of percentage here or there, a couple of percentage points. Nothing spectacular, all of them very small, but if you look at them holistically, then you end up having a quarter where the Solvency II ratio is more or less stable and not going up like it did all the other quarters before. But it's not of any concern at all.
And given the level where we are, I think the discussion anyway should be is the level of 270 plus. Is it a level where we should be long term? And I think very consistently, the answer in the past was our optimal range is 175 to 220. So as long as we are in that range, we are fine already and above that range is not necessary anyway. I hope that helps a little bit on the Solvency II developments.
The next question comes from Ivan Bokhmat from Barclays.
I've got a first question that would be on the investment side. Actually two small ones, perhaps. One, maybe you can just clarify the scale of the disposal losses year-to-date. I think I'm counting around EUR 700 million. And maybe if you link it to the expected uplift to the regular income over this year and next?
And the second small question here. On the investment portfolios, I mean, about 16% of the total is in alternative investments. Have you been taking any kind of notable mark-to-market adjustments on those portfolios this year given what has been happening in the financial markets? Do you think you might need to take something towards year-end and if there's anything you might want to call out? And sorry, the second question, which is just a separate topic. We're hearing a bit more recently about the increase in cyber frequency, I think, competitive pricing in various market segments. So I was just wondering if you could perhaps give your view on the attractiveness of cyber for your both private -- for your both primary and reinsurance portfolios?
Sure. Let's start with the investment result. So for the uplift, you have first to differentiate the various segments. In the P&C segment, I would look at it like average duration, maximum 5 years, sometimes even 3 years. So there, you'll get an uplift relatively quickly. So if you realize let's say, for the sake of an easy calculation to realize EUR 100 million of losses in the 5-year duration portfolio, on average, you get EUR 20 million more every year.
On the Life and Health ERGO portfolio, it's very much different because there, the investment movements are anyway buffered by the CSM. So there, the immediate earnings impact is already different by the accounting rules of IFRS 17. But on top of that, of course, also the duration of our fixed income book is significantly longer there, so that in case you realize some losses in those books, it take a longer time until -- or the proportion you get back every single year is smaller, obviously, given the higher duration. So a little bit of a differentiated answer. But if you look at our disclosures you can probably figure it out.
Alternative investments. It's a significant share for us. We are reviewing valuations regularly. So far, not really anything very significant. But here and there, of course, we have been adjusting values. And so the example which comes to my mind are certain real estate revaluations, for example, where we reduced values a little bit in the course of the year already. But nothing spectacular, nothing really significant so far at least.
On the cyber side, I think our strategic channel picture is completely unchanged, and claims and frequencies, they go up and down, and I wouldn't be worried at all by that. And I think on -- other than that, I think our cyber story is very much unchanged. So nothing to add really.
And the next question comes from Will Hardcastle from UBS.
Two questions. Q3 P&C revenue growth looks like it's been heavily impacted by FX. Can you give us a view of what it would be year-on-year in Q3 at constant currency?
And then second one is undoubtedly the commentary on the income guide is really strong. I do feel like you're becoming increasingly challenging to model because there are so many buffer areas. But if I may -- if we strip out the discount benefits, et cetera, how big do you think the year-on-year economic improvement is on the underlying combined ratio? Sort of trying to understand what the margin benefit has been of this hard market.
Sure, Bill. The differentiation between organic change and FX change is something we show in our slides. So if you look at the insurance revenue development on our slides, you can see the differentiation. I'm trying to find the right page now, as we speak. Without FX, it's 6.5%. Now can you remind me of the second question, sorry?
Yes. I was trying to understand the benefit of the hard market, thinking about the economic improvement.
Yes, I think the best way to look at it is looking at our renewal publications as we did them after Q1 -- was it Q4, Q1 and Q2 for the, let's say, a big block of the reinsurance business. And then, of course, for the primary business, it's a more differentiated picture. So you have to reflect a little bit the proportion of how much is reinsurance versus what is primary in our book. But yes, I mean, generally, I think the renewals are at least in line with our assumptions as we took them last year, slightly better.
I mean, you saw also the normalized combined ratio running a little bit lower now. I mean there's always some volatility, but now it's already below the 86%. So I think that's an indication already for an attractive and very positive organic business development. And I don't see any reasons why that should not continue going forward. So therefore, generally, I think we are in a very good place there.
The next question comes from Darius Satkauskas from KBW.
Two questions, please. So the first one is your discounting benefit was very high this quarter. Is there anything unusual there in terms of having large losses in high interest rate geographies? Or is 10% what we should be baking in going forward now, assuming interest rates remain unchanged? And my second question is, you mentioned the potential rebasement of payout ratio. How should we think about the potential additional capital [ return ]? Would you consider adjusting the ordinary dividend? Or is it really about buybacks or specials?
Darius, thank you for the questions. The payout ratio, I don't -- didn't say the payout ratio was kept stable necessarily. I was talking about that if you have higher earnings, then obviously would -- the contribution we would need to give or want to give to shareholders will also increase. So the absolute amount. It would not necessarily mean that the payout ratio needs to be -- or will stay the same. We will look at the payout ratio as well, but we were generally much more looking at the absolute amount. And also look at the various ways how to do the dividend versus buyback, but then, of course, also look into growth opportunities, how much would we need to deploy for organic growth and all these kind of considerations.
And then the outcome of these considerations in January, February next year will be a dividend and the buyback. And then we'll see what the payout ratio is. But it's really that way around, not the other way around. We're not looking first at the payout ratio and then define what we do. I think that's just to make everybody aware what we are doing.
Is there upside risk to the ordinary dividend? Or is it more about [ something else at play ]?
As I said, we look at everything. So I can neither confirm nor say it's completely impossible. We will look at all the possible measures how to reasonably give back capital. The way I personally would look at it is the following, that the buyback is always a more flexible tool, which you can more easily increase, decrease. So we have a lot of flexibility there. The dividend has always been something which we never reduced it. So it always was kind of a flow off of our capital repatriations.
And having that in mind, we would always be a little bit more careful when it comes to increasing dividends versus increasing buybacks. But then on the other hand, if you are convinced that your underlying sustainable earnings level is significantly higher than what it was in the past, why not also thinking about dividends, right? But this is exactly the kind of debate we need to have from now on, but more pronounced probably than in January and February, only once we know what really the outcome of the actual current year is? And on top of that also, once we have finalized our planning process and also ourselves understand a little bit better how the earnings trajectory will develop into the future years, and how much organic sustainable earnings growth we think there is going to be. And to put that then into relation to a potential dividend increase versus a buyback increase versus a combination of the two, right? So that's on capital.
The other question at the discount level. I mean, first of all, interest rates are just higher now than they were in the first 2 quarters. I think that's the most obvious driver behind that. But then there is also a lot of always -- also always a lot of technicalities behind. The shape of the interest rate curve differs and then differs by currency. And it matters, as we discussed already in Q1, which currency do you have, which kind of claims. But then also cash flow pattern, they change from one quarter to the other. So you have different assumptions, how long it will take, for example, to fully adjust a claim and then your discount impact might deviate from that. You reserve prudency changes from one quarter to the other. The discount you have on your -- the discount impact you show in your combined ratio also depends on how prudent your reserves are because the more reserves you have, the higher your discount effect is.
So there's many, many moving parts and I couldn't give you a detailed breakdown of what exactly were all the drivers. I think the most significant clearly was the interest rate increase, which we saw. And then there's many others. And then by the way, we are always talking about rounded figures. So we started into the year with 8%. Now we have 10%. It looks like it's necessarily a 2% difference. That's not -- also not necessarily the case, right? So a lot of moving parts. Sorry for that not 100% precise answer, but it's really complex.
And the next question comes from [ Olan Fender ] from ODDO BHF.
Two questions from my side. On Page 6, you show your investments. You mentioned that there was an expansion into alternative investments in the quarter. What asset classes are those? And what is driving it in the context of actually a high interest rate environment to go into a more, I guess, illiquid asset classes here? Second question regarding U.S. dollar long position or active FX management. How is this embedded in your risk management? What could be, for example, the maximum loss you would accept and how do you manage this?
Sure. I start with the risk management piece. Currency for us is an asset class like any other asset class. So our investment function, they get a risk budget. And it's their job then to decide if they invest the risk budget, indeed the equity into the credit, into the interest, into the FX markets or whatever other markets they find. It's really their responsibility. Currently, we have a U.S. dollar long position, as stated in the documents. But this is really a snapshot and something which is fully in line with our investment risk appetite overall, and it might change quickly. If the view on FX or in U.S. dollar would change or if other markets would be assessed as being more attractive than the FX market. So that's maybe the brief remark on the U.S. dollar.
Alternatives. I mean it's not a new strategy at all for us. So going into the alternative space to benefit from illiquidity premiums but also to diversify the portfolio and also to find investments which are long in duration to cover our -- in parts, very long duration to the liability side, it also makes a lot of sense for us. So that's completely unchanged.
Obviously, we started that in a very different interest regime. But even with higher interest rates now, it continues to be an attractive place. Maybe no longer every single investment as in the past. For some of them, the hurdle rate is a little bit harder to achieve than before given the risk free interest rates are so much higher, but there are still attractive targets around. And we're looking into all of them very regularly. Asset classes, we would look into our -- what are they, infrastructure -- equity infrastructure debt, for example, renewal energies, forests as an asset class I like very much. And also some private equity in their real estate.
So a variety, all about variety of various asset classes, which are all under the label alternative assets. And the increase now in the quarter was not that spectacular that I would be able to point at a single investment, which I would like to highlight today. It's just the normal course of action.
And there are no further questions at this time, and I hand back to Christian Becker-Hussong for closing comments.
Thank you very much. Not much to add from my side. Thanks again for joining. And please don't hesitate to get in touch with the IR team for any further questions you might have. Have a nice remaining day, and hope to see you all soon. Thank you.