Muenchener Rueckversicherungs Gesellschaft in Muenchen AG

XETRA:MUV2

Q1-2025 Earnings Call

[Operator]

Ladies and gentlemen, welcome to the quarterly statement as of March 31, 2025, of Munich Re. I'm Moritz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Christian Becker-Hussong. Please go ahead, sir.

[Christian Becker-Hussong, executive]

Yes. Thank you, Moritz, and welcome to everyone joining us this morning for our Q1 earnings call with our CFO, Christoph Jurecka. Same procedure as every quarter. Christoph will start with a short statement. Then we will go right into Q&A as always.

Christoph, please go ahead.

[Christoph Jurecka, executive]

Thank you, Christian. Good morning, everybody, also from my side. A big pleasure to be able to talk a bit about our Q1. And as Christian said, just a few introductory remarks, and then we can go into the questions right away.

Q1 was a quarter with quite some volatility in the sector's core insurance business and also capital market returns. While our underlying technical profitability continues to be very strong overall, high large losses, fair value changes in the investment result and significant currency movement affected our net earnings. By contrast, ERGO and Life Re posted earnings in line or above expectation.

Altogether, we present a resilient result of EUR 1.1 billion which is testament to the broad diversification of earnings drivers in our business and, once again, demonstrates the effectiveness of our strategy to continuously expand the earnings contribution of less volatile businesses.

Let's look at the Q1 earnings drivers in more detail, starting with the investment result. The running yield was pleasingly high at 3.5%, while the ROI of 2.2% was burdened predominantly by negative fair value changes of fixed income instruments. This was more pronounced at ERGO, achieving an ROI of 1.7% compared with 2.9% in the reinsurance segment. In addition, mainly the devaluation of U.S. dollar resulted in currency losses of around EUR 500 million, evenly split between reinsurance and ERGO. As volatile capital markets always provide opportunities, we could noticeably increase the reinvestment yield to 4.6%, providing further support for an uptrend in the running yield.

Now turning to the business fields. First of all, I would like to reiterate that our segmentation has changed this year, with GSI being carved out of P&C reinsurance and the 2 German ERGO segments being combined. As always, I will start with reinsurance.

The life and health total technical result of EUR 608 million came in significantly above the pro rata annual ambition. We do not consider this to be the new run rate given that we benefited from positive experience driven by the U.S. portfolio, which is not expected to repeat, at least not to the same extent every quarter.

Beyond the release of CSM and risk adjustment in line with expectations, the FinMoRe business made a strong contribution once again. Please note that from this year onwards, we changed the methodology regarding currency effects in the result from insurance-related financial instruments, which will now be reflected in the currency result.

Benefiting from strong new business, including 2 large transactions, the stock of CSM further increased despite significant currency headwind, providing a sound basis for a continued high total technical result going forward.

The 2 nonlife segments were affected by losses from the LA wildfires of EUR 1.1 billion altogether, which is a slight decline from the initially announced EUR 1.2 billion due to positive effects of a weaker U.S. dollar and retrocession. Around EUR 0.8 billion of the LA wildfire claims are attributable to P&C reinsurance.

In total, the segment result was affected by major losses of 21.3%. With 17%, our final major loss expectation for the year is at the upper bound of the provisionally indicated range, also reflecting some rate reductions.

The combined ratio of 83.9% includes a higher-than-previously guided discount benefit of around 10%, resulting from the high volume of major losses. For the remainder of 2025, we expect a discount rate which is somewhat higher than the anticipated 7% to 8% after having refined its allocation between P&C and GSI. Please bear in mind that there is opposing impact due to a correspondingly higher IFIE going forward.

Business mix effects and an increase in the loss component had an increasing effect on the basic loss ratio, while the normalized common ratio of 78.8% remained strong and in line with our full year guidance. Releases on basic losses met the expected 6 percentage points.

This brings me to the April renewals, where we maintained high profitability and the sound quality of our book. We continue to manage our portfolio diligently to safeguard an optimal risk reward. We expanded premiums by more than 6%, in particular, driven by selective growth in casualty proportional business in Europe, Asia and Latin America.

On the other hand, we gave up some nonproportional property business, specifically in Japan. Coming off a particularly high level, the risk and inflation-adjusted prices in our total portfolio declined by 2.5%. Excluding business mix effects related to a higher share of proportional business, the decline was more muted at 1.7%.

On a year-to-date basis, which means January and April renewals combined, the price decline of our portfolio was less than 1%. From our point of view, the overall market environment remains attractive, allowing us to earn good margins on the risk we take. At the same time, we were able to largely defend achieved improvements in terms and conditions.

I conclude the reinsurance part with our new segment, Global Specialty Insurance. Before moving on to the Q1 figures, please allow me a brief look at the full year 2024 numbers, which we disclosed for the first time.

The explanation of the total technical result of EUR 534 million is pretty straightforward as the combined ratio of 93.6% was elevated due to several major losses, reserve prudency and reserve strengthening for U.S. casualty. For 2025, we expect a higher technical result driven by an improved combined ratio of around 90% and ongoing revenue growth.

Compared to P&C reinsurance, the net financial result is comparatively low, almost 0 in 2024. This is not unusual given the limited risk taking against the replication of insurance liabilities.

Finally, the negative other operating result of minus EUR 290 million is comparatively higher than in reinsurance as a primary insurer like GSI has a structurally higher cost base. Furthermore, the result contains services for insurance-related activities and continued investments in the development of a joint operational platform, which are expected to pay off in terms of higher business growth and economies of scale going forward.

All in all, GSI achieved a net result of EUR 182 million in 2024, which we expect to increase significantly in the years to come.

Now let's have a look at the Q1 figures. The LA wildfire losses of around EUR 0.2 billion, together with claims from severe convective storms in the U.S. left their mark on the combined ratio which came in at 95.5%. Please note that around 40% of the large losses of GSI in Q1 are ultimately borne by P&C reinsurance. Our IFRS numbers do not include this relief as internal reinsurance is fully eliminated due to consolidation. On an underlying basis, we are in line with the 90% full year guidance. The business continues to grow nicely, particularly at American Modern in the United States.

In primary insurance, ERGO delivered a pleasing net result of EUR 241 million, slightly ahead of the pro rata expectation. ERGO Germany posted a pleasing segment result of EUR 140 million. The technical performance in Life and Health increased due to improvements in life, short-term health and travel business. The stock of CSM increased, driven mainly by higher interest rates, model updates and premium increases in long-term health while the CSM release was in line with expectations.

In P&C, the combined ratio of 88.8% met our full year guidance. Please note that from this year onwards, we changed the methodology regarding acquisition costs, which are now evenly spread across the year. As mentioned earlier, the investment result came in lower.

The international business of ERGO achieved a good net result of EUR 100 million, mainly driven by a strong operating performance of P&C business in Poland and Greece, Spain health as well as by an increased contribution from our Asian joint ventures. The technical performance in Q1 was in line with expectations in Life and Health as well as in the P&C business. And the combined ratio improved slightly to 89%, driven by the major P&C entities and short-term health business.

Just a few remarks on capital management. The group's economic position remains very strong. The Solvency II ratio was largely stable at 285% in Q1 as a strong operating performance offset the deduction of EUR 2 billion for the new share buyback.

I would like to conclude with the outlook for 2025, which remains unchanged. We continue to anticipate a net result of about EUR 6 billion as we consider our Q1 net earnings within the range of normal fluctuation in a single quarter. As usual, we anyway do not change any KPI so early in the year as volatility can derive from various sources and can have an impact in different directions in the remainder of the year.

While in this quarter we had to deal with high major losses and a negative currency result, we expect an earnings benefit after closing the acquisition of Next Insurance, presumably in Q3, just to name one other earnings driver in the course of the year. And as always, our full year guidance takes all of these factors into account. Our shareholders can fully rely on us to actively manage the inherent volatility of our business.

With this, I'm at the end of my opening remarks, and I'm looking forward to answering your questions, but first, I hand it back to Christian.

[Christian Becker-Hussong, executive]

Thank you, Christoph. Not much to add from my side. My usual remark, we can now go right into Q&A. [Operator Instructions] Please go ahead.

[Operator]

[Operator Instructions] And the first question comes from Andrew Baker from Goldman Sachs.

[Andrew Baker, analyst]

First one, just interested in your outlook for the midyear renewals versus what you've seen in 1/1 and 1/4. And it looked like, in April, you're willing to give up a bit more margin for volume. So just curious how you're thinking about volume versus margin against this backdrop for the midyear.

And then secondly, we just heard from one of your peers that they'd be willing to use reserving buffers not just to manage sort of large loss volatility but also to support earnings if we do see a softening cycle. Can you just remind me your philosophy here? I think you've said in the past, you'd be less inclined to use buffers to support earnings in this softening cycle. But can you just remind me where we're at on that?

[Christoph Jurecka, executive]

Yes, Andrew. First, midyear renewal, it's early days, obviously. I think what we have to keep in mind is that the 1/4 renewal is a very specific one, given that it's limited in size and very specific also when it comes to geography. So in particular, Japan, as you know, is a major part of that business renewal. And so it's a bit hard to draw any conclusions from 1/4 to 1/6, 1/7, even more given the fact that the LA wildfire is far away from Japan and it's significantly closer to the U.S. business up for renewal in 1/6 and 1/7.

If -- as mentioned in my introductory remarks, if you look at 1/1 and 1/4 together, the price decline is less than 1% for us so far, which means that we are still in a very attractive territory and margins are attractive. And this has to be kept in mind also when we look about volume because obviously, we -- I mean there's a client relationship, and we want to serve and will serve our clients also going forward.

And just to highlight a bit of how the process works, it's not like that ahead of the renewal we sit together and discuss a question like you asked is that how much compromise are we willing to make top-down. But it really depends on the discussions with the clients, how clients react, also the overall client relationship, how long-standing is it, how profitable is it overall. And all these discussions always go beyond single treaties and single renewals, obviously.

So therefore, I think I can only summarize that we continue to be optimistic for 1/6, 1/7 that the market will continue to be attractive for us and will allow us to also generate attractive margins out of our business going forward based on the very attractive starting point where we're at and also based on what we saw, particularly on 1/1, a bit less so in 1/4 as 1/4, as mentioned, was very specific.

Second question for what would we use our buffers, resiliency reserves, you called it. We usually talk about our reserve prudence. Well, basically, for volatility, obviously, it would be available, and we would be able to use it.

A soft market long term, I'm always a bit cautious, and let me explain you why. The reason is that a soft market can last quite a long time. And the question is how much -- for how long can you really support insufficient margins with your balance sheet? And then the risk is, of course, that you do not act decisively enough in pricing. And therefore, we continue to be reluctant to cross-subsidize businesses out of the balance sheet, which does not mean, in exceptional cases, we would compromise potentially.

But really, the idea of the prudency is to deal with volatility, which is unhelpful. We think volatility is unhelpful in the context of the stock overall. And this is for what we do have the buffers. But really, running the business profitably enough is not something where any reserve prudency can help you long term. That's just not the case. And therefore, again, primarily, my answer would be we use it for volatility and concentrate on running our business as profitable as possible.

[Operator]

And the next question comes from Michael Huttner from Berenberg.

[Michael Huttner, analyst]

Two. So Life Re, the insurance service result, EUR 608 million. Your guidance, EUR 1.7 billion, would imply just over EUR 400 million a quarter. And here, you've got an experience variance of around EUR 150 million. Can you explain what the -- where the experience variance is coming from and whether it's structural? I'd love you to say structural and that U.S. mortality has turned the corner. And I'd love you to say, if you remember the dinner, that it's all coming from these or partly from these obesity drugs. But obviously, facts are better.

And then you said the solvency stayed largely flat, and this is despite the EUR 2 billion deducted for the buyback. So how do I -- I've completely forgotten, or I've never asked. The -- you have EUR 2.1 billion net profit in -- sorry, EUR 1.1 billion net profit. Did you -- if I deduct the dividend accrual, I'm not sure that's what you do, but -- and then add the -- and deduct the buyback, then I'm down quite a lot, which implies that something else was very, very positive in the quarter. I just wondered if you could help me out.

[Christoph Jurecka, executive]

Yes. Thank you, Michael. So first, on Life Re, I think this happens in a quarter when everything is stable and on top of that, that you have positive experience variances. I think I commented already U.S. And if I look a bit deeper, then it's mortality, but it's also disability, LTC. So it's a bit all over the place, a very positive development, also driven by a lower amount of large losses this quarter. So there is a bit of a natural volatility also in Life Re, not as big as in other lines, but a bit there is. And this quarter, we benefited from that.

But nothing really to comment on. And as mentioned before, please don't think this is going to happen now every single quarter again. This is not the new run rate in any case.

Solvency II, I mean, we deducted the EUR 2 billion. Please be aware, there is no accrual for dividend in our methodology. So this is important to note. Still, obviously, it's good news that we basically were able to earn the full share buyback in a single quarter. That's how you can interpret the numbers in Solvency II terms.

Now earnings in Solvency II terms are still a bit different to the earnings we have in IFRS despite the methodology being much closer now than what it used to be. One difference you have to be aware of is that while in IFRS, we build up the CSM with new business in life, you're right, it immediately increases the own funds and goes into the economic earnings in Solvency II.

So some of the significant amount of new business in life health we have been writing will only be showing up in IFRS earnings over time, while in Solvency II, it immediately increased the own funds, and that was a significant amount. By the way, still dampened by currency. But if you would look at it normalized for currency, would have been massive this quarter. So that's one effect.

And then also, what is also different is the currency dynamic and the interest rate dynamic in Solvency II compared to IFRS. While in IFRS, there's still the difficulty, what goes to OCI, what goes to P&L, that's different in Solvency II. And in quarters with significant movements of interest rates, you end up having some volatility in IFRS, where in Solvency II, where we, as you know, match our duration quite nicely between assets and liabilities in Solvency II, this kind of additional volatility from accounting choices doesn't happen really so much. But we are really very well hedged, as you know. And therefore, these sensitivities are probably a bit lower in Solvency II compared to what saw in IFRS.

And if you then add up all those drivers and the number of smaller pieces, I cannot comment on all of them now in the call, you come up with a very positive earnings development in Solvency II in that quarter, which very nicely supports our Solvency II ratio.

[Operator]

And the next question comes from Kamran Hossain from JPMorgan.

[Kamran Hossain, analyst]

I've got 2 questions. The first one is on GSI. Just -- I mean, I guess, looking back at the disclosure we got yesterday plus today's quarter, you haven't hit the 90% combined ratio target in full for the last 5 quarters. Just interested in what the plan is to get this back to target.

And just to clarify on this as well, I think, Christoph, you said the number would have looked better today, but the -- you don't include the internal reinsurance effects. So I just wanted to clarify whether the 90% includes that target or not or whether it should trend a little bit above 90% and actually you get a benefit in P&C Re.

The second question is on -- I guess, on the life business. We've seen very strong new business generation. I think the market, we've seen some deals that include U.S. long-term care. Could you maybe elaborate on your appetite for kind of whether you want to take a long-term care business and whether the business you put on in this quarter and previous quarters have included long-term care?

[Christoph Jurecka, executive]

Yes. Kamran, thank you for the question. I start with the GSI piece. So the 90% target is fully based on IFRS, which means internal reinsurance is fully not reflected in that 90% target. But of course, if you compare that number with potentially other specialty insurers, I think it's a relevant piece of information if there is any reinsurance protection included in that number or not. And here, the answer is no because we consolidated. And this is also the reason why I mentioned it in the call.

And this consolidation effect obviously becomes bigger if you have significant amount of large losses. And so therefore, this quarter, I mentioned that our approximation is 40%. But this number, obviously, is depending on the amount of large losses you have because this reinsurance, as a nonproportional reinsurance, does not come in at the same level, but it depends really on the amount of losses you have.

Now you're right, the 90% target has not been hit now in Q1. And also last year, the combined ratio has been above that number. Let's start with prior year. In the prior year, there were some effects also from reserve movements where, particularly in Q4, we took some action to get a clean starting point for the segment to really work on its own, which means we strengthened reserves a bit. And strengthening meant we basically moved the on-top reserve we are holding, a part of it, moved it to GSI in order to have a fair distribution of that on-top reserve between reinsurance and GSI because in the past, as it was all one segment, we didn't care so much where we booked it in reality.

But now for different segments, to get a fair starting point, you have to think about how much of that on-top reserve are you holding in P&C versus how much in GSI. So that's something which increased the combined ratio in GSI last year. I think I commented also on reserve strengthening for U.S. casualty that came on top of that. And then we had also quite a lot of large losses for GSI last year, which we still regard as volatility.

The underlying profitability was much better last year. And now coming to Q1, also in Q1, the underlying profitability is in line with the 90% expectation while we have, again, a big volatility. And frankly, it's not ideal to start with the new segment in the quarter where you have the LA wildfire and some severe convective storms, which immediately hit that segment above expectations. So I would have clearly preferred not to have these events, but that's not our choice, obviously.

But yes, underlying profitability, I think, is still in line -- is in line with the 90%. And the large loss volatility, it's the same like in reinsurance. It's smaller than in reinsurance, but the fact in itself is the same that you're a bit dependent also on what kind of events are happening in which quarter. And so we'll have to see at year-end and really what the large loss number is going to be.

Other than that, obviously, the entire segment is focused on profitability, and there is a number of actions being implemented on the price side or underwriting side. So I will not go into any further details here. But clearly, the profitability is the main target the colleagues are looking into right now. And at the same time, still a growth of 7% is quite significant.

Coming to your LTC question, the LTC, generally, our appetite is muted. So I would rather go as far to say if a mortality business is offered to us, it's generally a yes. If LTC is offered to us, it's generally a no. And then here and there, sometimes there -- as to all general rules, sometimes, there are exceptions, but really, really, really not a lot. The large transactions this quarter did not include any LTC, to be very clear.

[Operator]

And the next question comes from Ivan Bokhmat from Barclays.

[Ivan Bokhmat, analyst]

My first question would be on the outlook and the guidance. I mean one element that we have there is the insurance revenue growth, EUR 42 billion for reinsurance, EUR 64 billion for the group. So I'm just wondering, given the building up of the FX headwind, is that the target that you'll be -- would have full confidence in reiterating? Should we expect some acceleration of this run rate later in the year? And maybe on that topic of FX headwind, you could just comment on how do you think about that?

The second question is, in fact, on the FX. You've historically been taking a substantial long dollar position, both structurally and strategically as part of the investment book. So I'm just wondering whether that has changed right now. I mean how do you think about the potential FX impact in Q2 and later in the year? And what's your appetite over there?

[Christoph Jurecka, executive]

Yes, Ivan, thank you very much. I'll start with the growth. I mean, I think it's obvious that this growth target is -- has become a bit more challenging after Q1 compared to when we started initially based on the FX movement. So that's a correct observation you had.

It's a bit too early to really revise it because in 3 quarters, a lot can happen and we can either organically compensate it or also the FX could move again. But yes, it's a bit more challenging now to achieve that compared to when we initially came out with that target.

More generally, on FX, indeed, a long U.S. dollar position was always part of our asset allocation overall, also to compensate for movements in other risky asset classes, and very often the intrinsic hedge between U.S. dollar and risky assets worked quite well. And this U.S. dollar and also U.S. treasury used to serve as a safe haven, not only for us but for many, many investors in a way.

And now given the political development, I think it's an ongoing public debate to what extent this safe haven is still in place or not. And who knows how it is going to continue? So -- and we also don't have a crystal ball, so we do not know it any better, but we are really very actively following that discussion and carefully observing what's going on in the market. And we'll revise our appetite also for that long position, in line with also our appetite for risky asset classes all over the board and will regularly review what's going on.

It's too early to draw final conclusions. And I think the only fact I can add is that already in the course of Q1, we reduced our U.S. dollar long position quite significantly. But it's still there, but it's significantly smaller than what it used to be.

[Ivan Bokhmat, analyst]

Can I just follow up on that, please? On the FX impact, maybe you could talk about the sensitivity of your earnings, let's say, to a 10% devaluation of the dollar.

[Christoph Jurecka, executive]

Yes. So as you know, there's always a one-off effect in the currency result. And then I think I interpret your question right that you're also interested in the concurring effect. So the one-off, we digested more or less already. So you can see what is, in order of magnitude, the recurring effect. So let's assume a 10% decline in U.S. dollar. And then my rough estimate would be that our net income would affect it by roughly half of it. So if you assume 10% lower U.S. dollar steadily, constantly, for a longer period of time, I would expect a minus 5% effect on our net income.

[Operator]

And the next question comes from Shanti Kang from Bank of America Merrill Lynch.

[Shanti Kang, analyst]

See, last week, we heard from a company that mentioned that they were able to secure an aggregate cover, which was expected to buy in a 1-in-4 and a 1-in-5 type scenario, which is lower than we typically expect. But I was just curious to hear more about your participation in the aggregate market today.

And then the second question was, obviously, on solvency, it's level. Clearly, capital generation is very strong. I was just curious, given the comments earlier this year on M&A, I think you mentioned you'd look in Global Specialty. And I was just wondering what size or scope of M&A you'd be looking at within that segment, for example, or if it would be outside of Global Specialty as well.

[Christoph Jurecka, executive]

Yes. Shanti, thank you. First question, aggregate covers. I think the usual disclaimer is correct here as well. We don't talk about individual clients or nonclients or future clients or clients of the past or individual primary insurers.

What I can only tell you is that we are still extremely cautious and we always have been extremely cautious when it comes to aggregate covers. We don't see a huge trend in the market back to aggregate covers anyway at this point in time.

And then my final remark would be even if generally, we are very cautious in aggregate covers, not each and every aggregate cover is equally toxic. But of course, also there, the details matter and sometimes matter a lot. So not everything is equally bad. But we continue to be very cautious in that respect and -- but still, of course, we look at each single one in a very differentiated and detailed way if offered to us.

Solvency II, indeed, I mean the capital is -- continues to be strong. We always have been quite outspoken at least in the last couple of years that M&A would be an option for us. We are still busy in closing the next transaction, and the closing is expected to happen probably in the third quarter. And that's what we currently would assume, maybe early July. So we are kind of busy.

But then at the same time, we would continue to be interested and observing the market. And if, again, an attractive target would be available, which would help us to improve our business overall, would add capabilities, which we currently would not have to what we, as a group, can offer clients, we would be very much interested and even more if then the price would also be attractive. So yes, generally, we are -- continue to be interested in M&A. And if the right opportunities comes, we are here.

[Operator]

And the next question comes from Will Hardcastle from UBS.

[William Hardcastle, analyst]

I'm just looking to frame really how the renewals are coming in, in a historical context. We're hearing broadly stable a lot. But I guess if 2023 were generally considered to be the best renewals in 20 years, would '25 still be in the top 5 in, I guess, 22 years? Or are you thinking closer to average? There's quite a wide range of views out there. So I think this would be a helpful reference point.

And just trying to understand, in P&C Re, the 21 percentage points major losses, if these include any reduction from prior year helping to reduce that? And can you -- if so, can you help quantify from which events?

[Christoph Jurecka, executive]

Will, I'll start with the second one because I'm much more confident that I understood it correctly, but the first one, I'm not so sure.

So we usually do not disclose PYD specifically every single quarter, but it's part of the way we book things. So there's always some up and down due to PYD in our large loss numbers. I think what I can mention, though, this quarter is that nothing significant, if that's of any help for you.

The first question, if I understood it correctly, and otherwise, please jump in, what's the question is the current pricing level where it stands in historic comparison. And there, my answer would be it continues to be very attractive. I mean, again, the combination of 1/1 and 1/4 would be less than 1 percentage point decline of a historic very high level, which means it's still indeed a very attractive level. And this is all risk adjusted. So in these price change numbers, as we interpret them and as we communicate them, the change in exposure, but also the change in the risk, for example, due to climate change, model updates and all these kind of things, it's all included in there already. So you have to also keep that in mind.

[William Hardcastle, analyst]

That's helpful. So I guess to put into context, what you'd classify that is just early signs of softening from an extremely hard market but a long way from a soft market. Is that a fair comment?

[Christoph Jurecka, executive]

I think that's a fair summary, yes.

[Operator]

Then the next question comes from Chris Hartwell from Autonomous.

[Christopher Hartwell, analyst]

Actually, was going to have a sort of question, actually one -- I'll leave that one. It was largely covered before. GSI, obviously, the profitability of that, you discussed earlier. But in terms of the top line growth, I think you mentioned in your opening remarks, American Modern has been one of the areas of excitement. I was wondering if you can maybe give a little bit more detail on what the growth opportunity is, maybe a little bit in terms of specific product lines or geographic opportunities.

And second question, we've been sort of thinking about Donald Trump and Section 899 and Section 891, which we appreciate are very much tail risks in effect, potentially putting fairly punitive taxes on remittances to, I guess, unfriendly countries from a tax perspective. I'm just sort of wondering within the sort of context of reinsurance, what sort of areas of sort of -- or what can you do to sort of mitigate that potential risk? So sort of thinking about sort of maybe writing throughout the jurisdictions or some other sort of funky transactions, something like that. But I wondered if you had any thoughts around that.

[Christoph Jurecka, executive]

Yes, Chris, thank you. American Modern is a specialty business with a very retail-ish kind of special insurance. So therefore, it is not like that there are large transactions having any impact on growth numbers, but it's a bit all over the place and also, to a large extent or to at least some extent, also price driven. It's volume and price. It's admitted business. So as you know, you have to file for tariffs, and then you have the new tariffs, and this all supports the growth then. But nothing really specific to be mentioned on top of that.

Section 899. Now this is my favorite topic in a way because what -- I mean, what potentially would happen here is that as a reaction to the global minimum taxation of the OECD, which has been implemented in EU already, the U.S. might respond in way of some retaliation or additional taxes retaliatory measures against that global minimum taxation, which, first of all, I think, proves that the idea of a global minimum taxation is no longer working because the basic requirement of the precondition for it to work is a broad worldwide consensus to comply with the rules, which have been agreed by the OECD.

And this obviously is no longer the case. By the way, not only -- not in the U.S. but also other markets are having difficulties with the concept in the meantime. And this makes it then extremely hard because then I mean global minimum tax is called global because it was meant to be global. That is no longer the case. I think it's unhelpful generally.

And I think the European Union would be well advised to no longer have it or at least adapt it in a way that these extraterritorially aspects are taken out because the U.S. is a reaction on the fact that you might impose additional taxes on U.S. companies. And obviously, then they would do the same on European companies. And as long as there are no agreement on the rules, I think this can only be unhelpful, very similar to the tariff discussion, which is maybe more on everybody's mind.

Now as all these rules are not in place yet, it's extremely hard to think about how to mitigate that, except the European Union to get rid of the entire rules of the global minimum taxation.

What I can say, at least is maybe to give you some answer, at least and give you maybe also some confidence is that we, of course, are very flexible in many aspects in the way how we write business. So we are currently writing business in the U.S., out of the U.S., but also having U.S. business written -- being written out of other jurisdictions, for example, Germany, but also other places. So we are quite flexible in that regard, and we could react if there are any possibilities that reactions would mitigate the impact. So that's one part of the answer.

And the other part of the answer is that, obviously, we don't know how big the amount would be. But my current expectation would be that it would not be that big for us anyway. But again, early days. Who knows what is going to happen? And a lot of room for policymakers to change something on both sides of the Atlantic.

[Operator]

And the next question comes from Darius Satkauskas from KBW.

[Darius Satkauskas, analyst]

Two questions, please. Do you still see U.S. property cat as a growth opportunity in the near term, given the sort of trends and the fact that inflation was -- has been eroding nominal attachment points, et cetera, even if you managed to sort of defend it since the move up in 2023? And then would it be possible to give us some color of where you think through-the-cycle normalized combined ratio for GSI is?

[Christoph Jurecka, executive]

Yes. U.S. property growth, absolutely. I mean if the business meets our requirements when it comes to terms and conditions but also price, of course, we are prepared to grow that business. It's a healthy business generally. And as discussed earlier today, the margins are still in a very attractive place, generally spoken. Now it will depend on the renewals and also how the LA wildfire will impact those renewals in 1/6 and 1/7. But yes, generally, we are absolutely prepared to grow in that area as well.

Can you remind me of your second question, Darius? I'm not sure if I understood it.

[Darius Satkauskas, analyst]

Yes. Just trying to get some color on the -- what you think the through-the-cycle normalized GSI combined ratio is?

[Christoph Jurecka, executive]

Well, that's a harder one because there is not one cycle in specialty insurance, but there is many cycles affecting the various lines of business or various businesses quite differently. So therefore, it's really difficult to give you an answer.

I think the 90% we currently see is an attractive target, and it's the right target in the right point of time, I would say, given the current situation where the markets and where the cycles currently are. But a lot of these cyclic movements are also offsetting each other. So thinking about the situation where all the specialty businesses are being on top of the cycle at the same point in time, that's probably anyway unrealistic.

So again, I can't give you an answer. I think the 90% is the right target for now. And everything else would be highly speculative at this point in time anyway.

[Operator]

Then the next question comes from Vinit Malhotra from Mediobanca.

[Vinit Malhotra, analyst]

If I can just ask on the -- there is this push on the casualty side outside the U.S., and we also know that one of your other peers has a stated target on a growth area. And today, you're also growing in that market. Could you just comment a bit about how attractive is it, what's the competition, what's the risk?

And second question, again, on P&C Re, on the loss component where there was, I think, at least to me a surprise, a negative effect. Can you just comment a bit because I think one of your other peers noted that market was profitable now, pretty positive? So just curious as to what drove that increase. And if I can ask the GSI 90% is gross [ number ], no [ internal ] in that? Am I correct?

[Christoph Jurecka, executive]

Yes. Vinit, the third one, yes, very straightforward. There is no internal reinsurance included in the 90%. The 90% is the plain vanilla IFRS number.

Loss component. Indeed, it's a bit surprising that loss component in that quarter did increase. That is very much interest rate driven, but also a sign of a prudent reserving approach again. So we reflected some new business, maybe even more cautiously this time.

And your question on casualty proportional outside of the U.S., a lot of that business is motor business, obviously, and the dynamic is pretty clear. It depends a lot on primary prices.

And on the question, where does the cycle in motor business then, given inflationary tendencies, which might be -- or sometimes are a bit hard to digest in that business. So the attractiveness is very much depending on the direct business. And then, of course, the commission you negotiate with the client. And again, a lot of that is motor business. So in a way, if you compare it with U.S. casualty business, a low-risk business, I would say.

[Operator]

And the next question comes from Iain Pearce from Exane BNP Paribas.

[Iain Pearce, analyst]

The first one was just on the Global Specialty growth outlook. So the sort of EUR 10 billion you talked about at the full year presentation, it looks a bit stretched based on the underlying growth, particularly if you factor in the likelihood of FX headwinds going forward. So do you still see the EUR 10 billion as a reasonable number? And also, if you could touch on what you're seeing in terms of pricing within the Global Specialty segment, that would be very helpful. And I think there was a question from Chris about American Modern growth opportunities, which might have been covered when we were talking about the tax item.

And the second question was on the currency result. So clearly, we have negative FX items in P&C Re, which was sort of expected. There's quite a big negative FX item or currency results in ERGO Germany, which I struggle to understand given the jurisdiction. So if you could touch on what's driving that, that would be very helpful as well.

[Christoph Jurecka, executive]

Sure. Well, thank you. First of all, GSI, the EUR 10 billion target is still the target, but I think what I said before in a more general context is correct here as well. Given the FX movement, it has become more challenging to get there. And also in the operational steering of our GSI business, what matters most to us is profitability. The combined ratio target is much more important than the growth target, and then the second most important target is growth. But then again, the currency anyway makes it a bit harder to achieve it. We'll see how far we get, but yes, it's a bit more challenging now than what it seemed to be a few months back.

On the pricing side, obviously, we -- I mean we are talking about a very diverse segment with various cycles and various business lines from some lines very close to retail, up to the very high-risk lines in the Lloyd's business. So it's a bit hard to speak generally about the pricing there. I think our strategy is obviously in all businesses to prioritize margin over growth and still achieve a fair and reasonable amount of growth given that we want to overproportionately grow this business and compared to P&C reinsurance. But that very much depends on business opportunities as well and on the competitive situation in the various lines and geographies where we are doing that business. But really, the margin is what matters most to us.

Currency without ERGO Germany, this is done as a yield enhancement strategy. So as for ERGO Germany, for some of the businesses for ALM purposes, a high running yield matters quite a lot. And to achieve that, investing into U.S. dollar instruments sometimes makes a lot of sense as the running yield is higher in the U.S. And then the currency is sometimes hedged, sometimes not, sometimes hedged within a certain collar that they still have some FX exposure, but that depends a bit on the book.

But look at it as FX being just one additional asset class also for ERGO, a riskier asset class admittedly. And in the course of ALM optimization processes, the exposure is then being set up and optimized. As you saw anyway, you're talking about long-term Life and Health business here predominantly.

So there anyway, the future of IFRS 17 is that the CSM is dampening those effects. So that business is in a much better situation to also cope with volatility more long term. And if in a single quarter, the currency goes down a bit, if in a few quarters from now, it will go up again, it will really not hit the bottom line but will be digested by the CSM in both directions, which is given the long-term nature of the business anyway, a very good outcome of the IFRS 17 introduction that in those long-term businesses, the investment strategies, ALM strategies can be much more long-term oriented now than what they used to be.

But sometimes, you have some IFRS volatility, at least in the investment result from that. And then we're happy to bear it given that the entire strategy still makes sense long term and from an economic perspective.

[Operator]

And the next question comes from Faizan Lakhani from HSBC.

[Faizan Lakhani, analyst]

The first was on the discounting benefit that's meant to be structurally higher for the rest of this year. You mentioned there'd be an offset on the IFIE. Would it be right to say, given the timing difference, that you get an elevated benefit this year relative to next year?

Second question is on GSI. I know you don't provide a budget for the nat cat losses, but given the fact that you said that the experience is in line and that you're opening at 95.5% Q1, can we assume once we adjust for LA wildfire that you have sort of 4- to 5-point budget for nat cat? Is that the right way to think about it?

And finally, you mentioned expense ratio is structurally higher as well. You talked about potential operating leverage. Could you provide some sort of walk or framework on how to think about the expense ratio development for GSI going forward?

[Christoph Jurecka, executive]

Yes. Let's start with the discount. So the discount of the 10% is heavily influenced by the large amount of major losses this quarter. So that's a significant driver. And if you normalize for the large losses, that element of discount is also being normalized. So some of it is already been taken out by the normalization. And there's still a remaining effect on the basic losses. But this is partly also compensated by IFIE going forward, but then also compensated by business mix effects and other smaller changes. And therefore, I wouldn't see any support, neither for the future nor now, but it is really in line with expectation when it comes to the overall profitability.

On the GSI expense side, if you look at the full year 2024 numbers and the way we commented there, I think what I highlighted is that we are still in an investment phase. So we're building a joint platform. There are some investments also, for example, for a joint finance platform, but also joint operational platform. And these investments will still take a few years and -- but then will pay off due to additional growth we try to achieve, of course, but also due to synergies or economies of scale. But we -- that will be a few years until we really get there. So therefore, short term, I would not expect any significant relief on the expense side. More long term, I would expect that to happen.

[Operator]

And the next question comes from James Shuck from Citi.

[James Shuck, analyst]

Just on the IFIE versus discount rate benefit topic again. So the -- if I understood you correctly, just in your answer to that last question, you said that the combination of those 2 are in line with expectations. I think kind of what we're trying to get to is, is that positive or negative expectation for the full year?

And I'm interested, I mean, you've said in the past that you will offset any positive and add it to an unspecified reserve and then that will be released in the future as interest rates start to come down. How will we see that release come through? Will it manifest through the attritional loss ratio? Or will you separately identify it for us in the normalization of your combined ratio in PC Re? That's my first question.

Secondly, on Next. So I just had a couple of questions kind of actually on this business because I struggle to see how you can get to a mid-triple-digit granted U.S. GAAP net income in the midterm. There's revenues of EUR 548 million currently in the pack that you disclosed. And even if I grow that at 20% per annum for the next kind of 2, 3 years, to get to mid-triple digit, you're talking about a significant margin on that kind of revenue. And that business made a loss of EUR 94 million in '24. So perhaps you can just help me understand the glide path to mid-triple digit for Next, please?

[Christoph Jurecka, executive]

Yes, thank you, James, for the question. I think -- let me try to answer the first one a bit more high level without going into all the technicalities, which I tried in my previous answer.

So I think my high-level answer would be that there are many moving parts in the normalized combined ratio right now. And if I look at all of them together, the normalized combined ratio sits pretty much where we would have expected to be anyway. So the combined ratio target is 79%. The normalized combined ratio is slightly below that. So it's pretty much there.

And did we book any additional prudency or something in Q1? No, we didn't. So it more or less was moving parts, which then all led to the fact that we are still around this 79%, which is reassuring that the core profitability is unchanged, but no additional prudency was booked in that case.

And the IFIE is part of that equation, of course, and so I would not expect any big relief, but also not a burden going forward. But currently, we are really in good shape when it comes to achieving our targets. I think that was the main message about the normalized combined ratio in light of various moving parts, be it discount, be it IFIE, be it business mix or be it also the loss component.

Your second question on Next. So what are the drivers? Two things I would like to add. One is capital management. So currently, Next is writing some of the business not on their own balance but using other balance sheets, and we can internalize a lot of that and, by that, maintain the margin in the group and deploy the excess capital we have in order to support the growth. This will all be much more efficient, so there will be capital synergies. And by the way, on top of that, also, to a smaller extent, but also operational synergies with our U.S. operations in the group.

And the second piece is significant growth over a few years. And we would expect the growth to continue to happen over many years, by the way, in a market where the market share of Next is still very small. And it's an underserved market, given that the incumbents do either concentrate on retail business or on the large corporate business.

And Next is in the sweet spot in between, where you still have a multibillion market in the U.S., but this market is not being so specifically addressed by the existing players. So that the assumption is that significant growth and profitable growth will be possible going forward.

So those are the assumptions behind our business case basically. And then over the years, we'll get to these mid-triple-digit numbers as outlined in the presentation we published on Next a few weeks ago.

[Operator]

Ladies and gentlemen, this was the last question. I would now like to turn the conference back over to Christian Becker-Hussong for remarks.

[Christian Becker-Hussong, executive]

Yes. Thank you. Nothing to add from my side. Thanks for joining us this morning. Further questions, please don't hesitate to call us. Looking forward to seeing you all soon. Thanks again, and have a nice remaining day. Bye-bye.

[Operator]

Ladies and gentlemen, the conference is now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.