MURGF - Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (MURGY) Q1 2023 Earnings Call Transcript

2023-05-18 01:01:06 ET

Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (MURGY)

Q1 2023 Earnings Conference Call

May 17, 2023 5:00 A.M. ET

Company Participants

Christian Becker-Hussong - Head of Investor and Rating Agency Relations

Christoph Jurecka - Chief Financial Officer

Conference Call Participants

Freya Kong - Bank of America

Kamran Hossain - J.P. Morgan

Andrew Ritchie - Autonomous

Tryfonas Spyrou - Berenberg

Will Hardcastle - UBS

James Shuck - Citi

Derald Goh - RBC

Vinit Malhotra - Mediobanca

Ashik Musaddi - Morgan Stanley

Henry Heathfield - Morningstar

Jochen Schmitt - Metzler

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the quarterly statement as at 31st March 2023 of Munich Re. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] It is my pleasure and I would now like to turn the conference over to Christian Becker-Hussong. Please go ahead, sir.

Christian Becker-Hussong

Thank you, [Francie] [ph]. Hello, everyone. Good morning. Very warm welcome to our Q1 2023 earnings call. I have the pleasure to be here with our CFO, Christoph Jurecka. I'll hand over to him as usual for his opening remarks. And afterwards, we will really have plenty of time for Q&A, given that's probably more important than usually having just introduced IFRS 17.

So, my pleasure to hand it over to Christoph.

Christoph Jurecka

Thank you, Christian. Indeed, it's a big pleasure for me to for the first time present quarterly results according to new accounting standards IFRS 17 and 9. And additionally, we will also present full-year 2022 and Q1 2022 numbers according to this new metrics. As Christian said, we can imagine that there will be more questions than usual. So, there's enough time today to answer all the questions and there will be plenty of opportunity to asking them.

So, I can only encourage you to whatever you have on your mind. Please ask and I'll do my best in answering the questions. But I'm convinced that you will join me in appreciating the high amount of transparency IFRS 9 and 17 will offer compared to the old regime, also admittedly the transition confronts us with a lot of new information.

Now, as always I will not go through the slides, but I will start with opening remarks to allow more time for Q&A. I will first focus on full-year and Q1 2022, before I then will focus on Q1 2023. So, let's start with 2022 and have a look on Slide 29 of our deck, where we compare the full-year 2022 net result under IFRS 17 to IFRS 4. The IFRS 17 result is, as you can see substantially higher than under IFRS 4 standing at €5.3 billion, where the IFRS 4 number was 3.4.

Well, first to the new methodology, a positive deviation was certainly to be expected as IFRS 17 result tend to be slightly higher, compared to IFRS 4 for us. And aside from the various methodological differences across all segments, which we discussed already, I would like to particularly mention the earlier profit recognition in life and health reinsurance.

Second, the 2022 IFRS 17 result is also impacted by temporary effects, due to the unprecedented increase in interest rates during 2022. This is reflected in P&C reinsurance earnings, where the difference to IFRS 4 is the biggest of all segments. In 2022, we benefited from discounting of new reserves with high interest rates, which was and only partially offset by the unwind of old reserves discounted at the very low interest rates locked in a transition.

So, if you want, the timing of the transition was just ideal in a way that until then the very low interest rate been locked in. And then with the transition, suddenly the interest rates jumped up and thereby, highly increasing the P&C net income. So, the obvious question then is why do we guide for 4 billion net income in 2023, when the last year was already at 5.3 billion, so that's probably the most obvious questions anyway. And the answer to these questions is given on Slide 30.

And I think most importantly, I can confirm and underline again that we expect the strong underlying performance of all business segments to continue in 2023, translating into a further operating improvement as, for example, shown in the very pleasing renewal results in January and also in April. Also, the investment result is expected to increase, compared to 2022, which was negatively affected by the volatile capital markets.

Aside from these operating developments, more one-off like adjustments have to be considered as well. First of all, we do not expect a recurrence of 0.7 billion of currency gains. Second, the abovementioned benefit from interest rates in P&C reinsurance. Basically, the impact for the high discounting and the low unwind. This effect is expected to be about €1 billion lower in 2023, compared to a positive net effect of approximately €1.5 billion last year, so that's the absolute amount.

Based on the current interest rates, we now expect a tailwind of about €500 million in 2023. So, the effect is not gone. It's only significantly smaller. Please note that this figure is highly dependent on interest rates, which were still somewhat lower when we did the planning in 2024, 2023, back in 2022. And furthermore, as communicated with our outlook, we have made some conservative assumptions in our planning to cover the uncertainty of the first time application of IFRS 17, which again made explicit also on the slide.

Now, before I turn to 2023, please allow for a final remark on last year's number affecting Q1 earnings in 2022. Q1 2022 was exceptionally strong, supported by benign major losses and a positive currency result. And in Q1 2023 now, it was exactly the other way around. Our result was burdened by above average major claims and by currency losses. However, we had a successful start to the year as we benefited from a strong operating performance once again and a good investment result.

Hence, we posted a very pleasing net income of almost €1.3 billion significantly above our pro rata guidance. And we exceeded the pro rata targets not only in that headline number, but across all business fields and segments in a variety of KPIs and targets. And it's particular also true for the return on equity, which amounted to 17.3%, which is already above our target or our guidance in our ambition 2025 for the year 2025. I think that's another proof point how strong the performance was in the first quarter.

Now, let's look at Q1 in more detail and let me begin with the investment result. The investment result came in at 3.0%. And we posted with that a return, which was significantly above our full-year guidance. At 3.8%, I was particularly strong in reinsurance, driven by just a few disposal gains, but we continue to benefit from the higher interest rates. So, the reinvestment yield increased remarkably to 4.4%.

Despite the generally expected higher volatility under IFRS 9, the ROI came in at exactly the value of the running yield. In other words, all other positions, including mark to market effects on equity and derivatives, or also disposal losses on fixed income, almost completely offset each other in this quarter. For the remainder of the year, we will continue to deliberately accept disposed losses in fixed income as the reallocations will lead to a subsequently higher running yield, due to higher reinvestment rates.

Turning to the business fields, and starting with reinsurance now. The life and health total technical result of €320 million was above the pro-rata annual ambition. The release of CSM and risk adjustment was in-line with expectations. The experience variances were slightly negative, driven by expenses and U.S. mortality. The total technical result would have been significantly higher without negative currency effects of minus €66 million in FinMoRe business, reflected in the result from insurance-related financial instruments.

I'd like to underline that we consider this an accounting mismatch as the related hedging activities are recognized in the currency result. On an underlying basis, our FinMoRe business continues to grow and perform successfully. The CSM stands at €10.6 billion and this is a small decline, compared to year-end driven by a shift from CSM to risk adjustment as a result of the annual parameter update in the models. As both CSM and risk adjustment represent future profits, we do not expect any margin deterioration by this shift.

It's important to note that the CSM from new contracts, reflecting a new business generation, which was particularly pleasing in North America. So, the CSM from new contracts exceeds the release for P&L. Now P&C reinsurance as you saw, we posted a combined ratio of 86.5%, major losses amount to 16.4 percentage points and exceed the average expectation of 14%, and I'd like to add, they also include negative run-off from prior years.

The single biggest event was the earthquake in Turkey with €0.6 billion of claim. As this loss then is discounted with the high Turkish interest rates, it contributed to a relatively high discount effect, which was around 8 percentage points in the quarter, and that's at the higher end of the 5 percentage points to 9 percentage points guidance, we provided at our Analyst Conference in February. But the underlying performance remains healthy as we earn through the margin improvements of the wins, recent renewals, and normalized combined ratio of 85.1%, which is better than our guidance allowed us to use the better than expected discount to cater for claims uncertainty by prudent loss bookings.

So, we've deliberately decided to use the benefit, which is 3% – 8% discount minus 5% in the guidance. So, the 3% difference, we decided to use that for prudent loss bookings. Obviously, we did not perform reserve review. So therefore, at this point in time, it's just prudent bookings. The reserve review will be conducted as always in the fourth quarter.

In terms of growth, we continue to strongly expand our business. Insurance revenues increased by more than 13%. Speaking about revenues, this brings me to the April renewals, where we increased premiums by 11% seizing opportunities yet again, an excellent profitability. In particular, we expanded the NatCat business with material rate increases.

Overall, the risk and inflation adjusted price level further improved with an increase of 4.7%, including portfolio mix effects related to a higher share of property XL business. In addition, we achieved material improvements in terms and conditions like higher attachment points and stricter wordings.

In primary insurance ERGO delivered a pleasing net result of €219 billion, which is also ahead of the pro-rata guidance. The German P&C business came in strongly while the International business suffered from large losses and also Life and Health Germany posted net earnings somewhat below the expectation.

Let's start with the latter. German Life and Health business delivered a net result of €41 million in Q1. The total technical result even exceeded the prior year level. However, net income was burdened by non-directly attributable expenses, the life new book. The CSM increased due to positive operating changes.

Please note that in this segment, new business generally will not be able to compensate for the release of CSM. In Life, as you know the back book is run-off. And in Health, our new business strategy focuses on short-term PAA business without CSM. In P&C Germany, we achieved a strong technical performance with a combined ratio of 81.2% in Q1. We benefited from very low major losses and positive seasonality of acquisition costs, which will catch up in Q4.

For PAA business IFRS 17 allows to fully expense the acquisition costs at the time of the sale of the policy, which for our Germany business is often in Q4 and thereby we get a quite significant quarter volatility of the combined ratio. So, Q4 is heavily burdened, the other quarters are having much less acquisition costs.

The investment result contributed to the very high net result of P&C Germany of €166 million. The ERGO International business, the total technical result increased overall, compared to Q1 2022, and the Life and Health business was in-line with expectation reflecting CSM and risk adjustments with this dominated by the Belgium Life and Health businesses.

The P&C results fell short of expectations with a combined ratio of 95.4%. Poland, had to digest major losses from the single events, where an intra-group benefit from reinsurance of around 2 percentage points is not reflected in the IFRS numbers and not in the combined ratio due to consolidation.

Legal protection business and also seasonality effect in Spain also contributed to the weaker combined ratio. And let me explain the seasonality effects in Spain. That's a health business there. So, in regularly, and you could solve, you see that over the last years already the winter months, there the claims are much higher in the winter months. So, majority of the result is being earned in summer. Also, the business in Greece was, by the way, performing well.

Our figures now also include business operations in Thailand. For the first time in the P&L, show our [Thai business] [ph] in Thailand, where we now hold 75%. The segment net result came in lower than expected for ERGO International at €12 million burdened onto equity-related expenses relatively high taxes and a negative impact from net financial result, also reflecting investments in insurance joint ventures.

Some remarks on capital management. The group's economic position remains very strong with a Solvency II ratio of 254% in Q1. And please notice this includes the full deduction of €1 billion in share buybacks, which will then be conducted now in the course of the year until the next AGM, but we deduct the full amount already this quarter.

I would like to conclude now my opening remarks with the outlook for 2023, which remains unchanged. We are still anticipating a net result of around €4 billion, and as already mentioned in our pre-release surpassing this target has become more likely, due to the strong Q1 result. But as we still have three quarters to go, we decided not to change any other auto KPI either. So, it's just too early in the year.

With this, I'm at the end of my opening remarks. There is a lot of additional information and improved transparency visible in our slide deck, which I recommend having a particularly close look at this time, given the changes in accounting. I look forward to answering your questions, but first hand it back to Christian.

Christian Becker-Hussong

Thank you, Christoph. Not much to add from my side. My usual housekeeping remark. We are happy to go right into Q&A, and as always, I would like to ask you to limit the number of your questions to two per person. And if you have further questions please go back to the queue. And with that, I'll hand it over to [Francie] [ph].

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] Our first question is from Freya Kong from Bank of America. Please go ahead.

Freya Kong

Hi, good morning. Thanks for the presentation. Two questions, please. The 86% combined ratio guidance was assuming a discount benefit of 5%, but if this is actually 8%, this means your rate adjusted guidance should be around 83%. Are we right in assuming that this entire 3 points you have invested into higher loss picks and given your unchanged guidance, it sounds like you will do this for the rest of the year?

And secondly, how should we think about the increased conservatism in your loss picks? Is this due to lower confidence in the 2% margin improvement that you expect to deliver, or is this a one-off reserve building exercise in 2023, meaning we should see a bigger improvement in margins in 2024? Thanks.

Christoph Jurecka

Yeah. Good morning, Freya. Thanks for the questions. So, indeed in our guidance, if you would have done – if you did the math 5% discount was the number included and there now we had 8% this quarter, so a 3% difference, and the 3% have been used 100% for being more conservative in the basic losses, have higher loss picks there. And the question is, why did we do that? No particular reason. Just want to be conservative, it's the first quarter only.

If we would not have done that the combined ratio would have come in at around 82% significantly below the guidance. And we just didn't see any good reasons why we should start into the year with that it's still a long time to go in the year. And therefore being a little bit of conservative is probably close to our DNA, particularly in the quarter, where the results are very good anyway already, and given the uncertainties in the environment, being a little bit on the cautious side anyway is something which, I would never blame me for. Let's put it that way.

Looking forward, we don't know what we do. So, we could either improve the result or we could continue to book in a conservative way. Why should we take any decision today that's just not necessary. We will carefully observe the performance over the next few quarters. We'll look into our reserves how conservative we are already, if any additional buffer would make sense at all or not, you know that we traditionally are very, very much on the prudent side.

So, the question is also how much we can do on that side, how conservative can you be, but it will also depend on performance and on the actual development in the next few quarters. So, nothing I could predict today. All options open.

Operator

The next question comes from Kamran Hossain from J.P. Morgan. Please go ahead.

Kamran Hossain

Hi. Good morning, everyone. Two questions from me. The first one is on the renewals. I'm just trying to square the 4.7% risk-adjusted rate increase April versus the, kind of just over 2% at 1.1. Just based on the, kind of, I guess the commentary, what we've heard, it sounded like actually, January was more positive than April. So, just wanted to understand, kind of what's the difference between those two numbers. What am I missing? Is it just kind of you had already trued-up assumptions last share or something at April?

The second question is coming back to combined ratio guidance. Obviously, you flagged the impact of Turkey in the quarter as pushing discount rates up a little bit, but I assume even though it's a material loss, it wouldn't have been that huge in the quarter. So should 8% continue as the discount rate, kind of going forward for the rest of the year, or should that look a little bit different? Should it move maybe not back to 5, but slightly closer to that level? Thank you.

Christoph Jurecka

Thanks, Kamran. Renewals, I think I have to work on my enthusiasm being the CFO, because if – I mean if there was anything to be read into my comments that we were less excited about [1:4 then about 1:1] [ph], that would be completely wrong. I think we are equally happy with both results. And if you look into the numbers they pretty much follow the business mix. We have a higher portion of cat business in [1:4] [ph] traditionally. And so it had to be expected that the numbers look higher and the amount pretty much follows the cat proportion or the business mix development.

So, therefore we continue to be very happy with our renewal outcome and by the way I also continue to be very optimistic for the upcoming renewals given just the market environment, how it presents itself to us. So again, very happy with the outcome and very good renewal result. The combined ratio – guidance – the combined ratio indeed 5% was in the guidance. Now, it was 8%. The full-year though was also at around 8%. And as you can see the numbers fluctuate quite a bit.

I mean, we gave a range of 5 to 9 in our outlook presentation to somehow, what indicate how big the range potentially could be. It depends on a number of factors. It depends, obviously on the interest rate environment, that's obviously the major driver, but as you could see with Turkey interestingly it also depends on where you're losses at. Because in Turkey, obviously, interest rates are much higher, also discount with Turkish rates, and interestingly in the first quarter this Turkish rate effect did compensate the overall lower yield environment, which we had compared to Q4 last year, because if you would have looked only at a yield environment, you probably would have expected even a little bit lower discount effect, which then didn't realize, and the main driver for that being that a significant part of our losses, it's in Turkey this quarter.

So, there's many drivers. FX could be another driver and obviously, it has to be closely monitored. We all lack experience. We all didn't see so many quarters yet in IFRS 17. So, I think it will be interesting to jointly observe how the development is going to be going forward, but again there is some deviations always possible that's only due to the fact that the losses will always here and there and in different geographies, different currencies, and different interest rate environments.

Operator

The next question comes from Andrew Ritchie from Autonomous. Please go ahead.

Andrew Ritchie

Hi, there. Thanks, and thanks for the additional disclosure on IFRS 17 full-year 2022. The first question on the investment return. As I recall, your guidance for full-year 2023 incorporated some expectation of realized losses on fixed income partly to accelerate the reinvestment. I can't see evidence of that in Q1, that might be because there's offsets from other things that have positively moved, but kind of just update us on your thoughts on, is that still a plan? Is there still some expectation of some realized losses as the year goes on, as things stand today, or maybe the environment means you've accelerated, you're sort of you're planning on investment return?

The second question just on Life Re. I mean just a mechanical release of the CSM and risk adjustment that alone would get me to your, sort of technical result guidance. And then on top of that, I would add in the fee business, which in itself was depressed in Q1 as you said from FX. So, why stick with the billion technical result guidance, it just looks mechanically really challenging unless you're assuming there's a high degree of caution on some negative item are not considering.

Christoph Jurecka

Thanks, Andrew. I start with the first one. So yes, we always said we wanted to first of all, not restrict trading activities of our investment colleagues too much and therefore would allow them to realize losses once they occur in the fixed income space. And in the first quarter, fixed income realized losses amounted to €189 million. So there was an effect. And going forward we explicitly, I think, I mentioned it already, so we explicitly want to make it very transparent, that we will continue to do that and maybe even intensify that.

So, that's clearly something we would like to continue to look into, and it will only strengthen how quickly benefit from the high-yield environment. So, in a sense, in our view, it would make a lot of sense, particularly in an environment where the overall results are very good and at least in-line with the guidance or above the guidance. So, that's still on the agenda, and completely unchanged.

Life Re, I mean there are various angles, how you could look at our guidance. I mean you could look into these numbers of this quarter, you can add back the FX and if you then take [it times four] [ph], you're significantly above €1 billion. You could also look at the prior year numbers and also there, as you said, it is [annual lease] [ph] plus risk adjustment release already would be significantly above the 1 billion, and then there were some negative variances, which then brought it down back a little bit. But also there, you would immediately end up with significantly higher numbers than 1 billion.

So, I think the only justification I have is that we are extremely conservative and cautious. And they have quite a bit of leeway for negative variances, which might occur, but we have no indication at this point in time at all that they will occur. So, it's really only conservativism and caution. But sometimes in life with big [3Ds] [ph], things can also develop quickly. So, sometimes you have a big 3D and you're in court and you get a willing and it costs you a triple-digit number, it can happen.

So, it's not unseen but it can happen. So, I think I'm just saying that to show that we are not meticulously conservative, but we are very conservative and indeed, there is a significant upside. Why didn't we change it in the guidance already? I mean, I think the same like with many other KPIs in the guidance as well, in Q1 we would not do. So, it's just one quarter into the year, a lot can still happen. Some of the KPI looks as if they were very easy to achieve, others less so. Others maybe even challenging, but in Q1 we would never change it really.

Operator

The next question comes from Tryfonas Spyrou from Berenberg. Please go ahead.

Tryfonas Spyrou

Hi, good morning. I have two questions, please. The first one is on April renewals. Obviously, this came in quite strongly at 4.7% rate increase. I guess you previously said that this number is close to what should we expect this as an improvement to the combined ratio for Munich Re. And if we were to weigh that given April was 1.8% of the total sort of P&C renewals that will suggest another 38 bps of margin expansion on top of that, sort of 2.3% reported in January, which obviously accounts for a bigger proportion of the [book] [ph]. But is that a fair reflection? Do you now sort of expect it somewhat higher margin expansion than before given the strong April renewals? So that was my first question.

And second on P&C Germany, you mentioned the discount impact of 5%, I was wondering if you could help us with a [similar piece] [ph] strategies for P&C Re combined ratio, for instance, is this in-line with what was factored in the guidance of 89%? And I guess could you perhaps possibly [say a] [ph] little bit how big the lower large loss impact was to [indiscernible] to get a better feel for the underlying combined ratio? Thank you.

Christoph Jurecka

Yeah, thank you for the questions. First-of-all, renewals and thank you for the question. It gives me the opportunity to outline our methodology, I think again. So, the numbers as we show them here, they're all fully risk-adjusted, which means that any inflationary effects, any model changes, any reflection of climate change of adapted risk models in whatever line, it's all fully deducted already from that number.

So, it shows only a margin improvement on the volume, which has been renewed at a particular date. So, you can basically take that the price of the margin improvement, price change as we disclose it, times the volume at renewal, and this will be a real margin improvement and we fully – can be fully-added to our technical result in P&C Re. So, that's how the mechanics works.

And if you look historically into these price chain numbers as we communicated them and historically how then after these price changes later on the combined ratio moved in reality, you will find quite a good correlation between those numbers. Obviously, there is always uncertainty with that, but I think the past gives quite a lot of evidence that we generally are quite good in these estimates. So that would be my remark on the renewals.

So overall, we're very happy with that margin improvement, very high. And again for [17] [ph], we do not have any indication why this should change at all. So, we think the environment will continue to be very positive, particularly, of course, in the nat cat business property XL, which was also to a significant extent a driver at this time.

Combined ratio, ERGO Germany, yes discount 4% here. So, the first question is, why is the discount in primary business smaller than in reinsurance? There's a number of reasons for that. The most importantly, the business is more short tail, and also the amount of reserves you have to hold, given the heavier risks are in reinsurance, so the amount of reserve is relatively spoken a little bit smaller, which brings you then to discount effect and currencies are different and so on.

So, the business mix is just different, so therefore you have rather 4% discount instead of the 8% we saw in reinsurance. How does now the 81 relate to the guidance of 89 in P&C, Germany? Well, the most significant difference, I think is the seasonality, I was mentioning before and acquisition costs, where a lot of the acquisition costs are expensed in the fourth quarter, where a lot of the book is renewed and you fully expense the costs once you write the new policy in the PAA methodology in IFRS 17, that's an option you can choose.

You don't have to do it that way, but ERGO chose to do it that way. So, you fully expense acquisition costs at the point of sale. So that's one [indiscernible] driver of the difference is that we had very good large – very low large losses this quarter, which was another significant driver. And then generally the performance has been very good this quarter also when it comes to basic losses and then the overall profitability and then there also has been a certain reduction of the loss component.

If you add it all up, it was a very good – very good quarter. But don't take the 81% for granted for the full-year, as there is the seasonality effect on the acquisition costs, where in Q4, we would expect the combined ratio to be significantly higher, of course.

Operator

The next question comes from Will Hardcastle from UBS. Please go ahead.

Will Hardcastle

Hi there, thanks for taking the call and all the disclosure. First of all, can you – I'm sorry, just going over old ground, but can you help me to understand, just how we come to that 5% to 9% discount guidance from a bottom-up approach? And what duration we should be thinking about for example and the build of risk-free plus, plus what I guess? And would I be right in thinking that Turkey uplift is maybe worth 1 to 1.5 points or so versus your previous guide?

And secondly, just thinking in P&C Re, looking at the investment gains on Slide 51, from disposals. What was 190 million or so related to? And just on that slide is that 3.1% regular income a fair run rate or was it inflated somewhat? Thank you.

Christoph Jurecka

Let me start with the second one. So, the run rate is a fair reflection of the regular income. It mostly includes interest on fixed-income instruments, but always a few dividends as well, but it's really a running yield, which can fluctuate a little bit due to the dividend seasons and stuff like that, but not a lot. On the realization, I mentioned already, we realized some losses in the fixed income space due to normal portfolio trading activities, nothing spectacular. On the other hand, there were some realized gains in reinsurance P&C as mentioned before, and they were in the alternative investment space, so infrastructure and real estate.

The first question, the range 5% to 9%, obviously is related to different interest rate levels. So roughly, I think 3% to 5% interest rate range, which is then reflected in the 5% to 9%. Duration depends also on – always on business mix, and but as rule of thumb take something between 2% and 3%, maybe 2.5%. And then as we saw in this Q1, it will very much depend on weather losses to some extent and currency and interest rate environment in various geographies, and again the difference between, for example, ERGO primary insurance and reinsurance is significant.

By the way, there is also a methodological difference between GMM approach and PAA approach in IFRS 17, and I stop here. But if you're interested in that, you can ask me. So, there are a number of drivers in these discount – in these discount rates. And I think we'll all get used to it, how much they move in reality. In any case, I would expect them to be much more stable, compared to what experienced last year were due to these unprecedented interest rate change in the environment.

As of a sudden, you end up having discounts between 4% and 8%, where in the past it has all been zero. So, clearly, it should be much more stable around the numbers as we see them today.

Operator

The next question comes from James Shuck from Citi. Please go ahead.

James Shuck

Yeah, good morning. Thanks for taking my questions. Slide 13, just keen to understand the P&C Re combined ratio that you're showing here, because the full-year 2022, 83.2%, and then that normalizes in the comment 86.6%. So, keen to understand what the moving pieces are in that normalization, please? In particular, the PYD on an IFRS 17 basis, but also within that 86.6%, so there are additional things that you can call out for us. So, I'm thinking of the discount rate effects and the release of the loss components. So, that's my first question.

Second question, general one really around your nat cat appetite at this point. So, if I look at the PML from full-year – from the Annual Report for 2022 to U.S. windstorm, I think it's gone up to about 10 billion or 12 billion, I can't quite remember now, but over the years that's a big number in relation to your book value and this doubled over the last few years or so. That number I think is updated for kind of [1:1] [ph] renewals, but I don't think it's updated for your expectations going into April or June-July renewals.

So, my question is really around, how much appetite do you have in nat cat? So, I mean, in relation to book value is getting quite a big number, if I was to look at it only in relation to your P&C Re book value, that would make you very heavily skewed towards nat cat in the overall book. So, keen to understand the progression of that PML and just thoughts around exposure in general, please? Thank you.

Christoph Jurecka

James, thank you for the two questions. First the normalization of the combined ratio, I think the methodology is, as we outlined it on the slide. So, if we normalize for the loss component change, which is generally should be neutral over the year, if not prices are changing or interest rate levels have an impact also on the loss components or the loss component change is part of that calculation, then as in the past also the reserve releases, which are now 5% in the expectation, compared to 4% in the past, but that's completely unchanged.

And the increase is driven through the different volumes, we have in insurance revenue versus premiums in the past, that's also unchanged. And then we have the normalization for the large losses, be it on the nat cat side or on the manmade side, together 14%, 10% of which are nat cat, 4% are man-made. And if you normalize for all those effects, we end up with 86.6%. What is not normalized for in these numbers is the discount. And we had a long debate internally, when we set up the whole methodology, if we should also normalize for discount or not.

Finally decided against it because our expectation was that generally the discount should be more stable than the other drivers may be and the more you normalize – I mean – I wanted to avoid to finally ending up in IFRS 4 combined ratio again by taking back all the IFRS 17 changes. I mean we have to, at some point also just to accept that there is a new standard nozzle.

Therefore no normalization, but we will also always mention the combined ratio. So, if you want to add that piece of change in addition to the normalization as we do it, you can also do it on your own. What else in the prior year, the normalization, what I can say is that the discount is the same order of magnitude than today.

So, at least if you compare by 86.6%, what we have this year, which came in a little bit above 85% in the first quarter, then there is no difference due to different discount, but that's completely comparable, which shows that we earn through the higher renewals, we had recently and that the operational improvement is clearly visible also in our numbers.

Nat cat appetite, second question, indeed, we're obviously enjoying a hard market and expanding our business into that hard market. So, volumes go up. There is always and that methodological information I start with, but I'll come back to the strategy in a second. There's always an overlay from FX, you should be aware of. A lot of our cat exposure is written outside of Europe.

So, if the currency goes up or down, exposures follow the currency development. And if you look at the U.S. dollar development last year and then again into the first quarter of this year, you will see or you can deduct from that there was a significant portion of FX also in the cat development, which you have been referring to.

So there was additional growth to FX and now as FX came back again, the U.S. dollar weakened. It's now significantly dampened also by FX movements. So that this FX overlay always has to be kept in mind. But other than that, indeed strategically we are going as far as we can, when it comes to cat exposure and for some parallels, we are getting close to our risk budget, so to the upper limit of our risk budgets. But a [hard market] [ph] is exactly the point in time where you should do that because now it's the time to make money with that business.

In a softening market, we would of course deliberately decrease it again. And then obviously be lower than when it comes to exposure, but also in relative terms, when it comes to our risk budgets. As a reminder, these risk budgets are parallel by parallel for us. And obviously they depend on the capital we have and obviously retro plays a role and retro is different from one parallel to the others, also differently reflected into various budgets.

So, it's a very, very detailed and sophisticated framework, and we are not simply just expanding the risk limits or the risk budgets, but we are managing to optimize our portfolio within the boundaries of these budgets. I think that's what I can tell you on the nat cat appetite. For [1:7] [ph], we do not see any restrictions for the strategy.

Operator

Your next question comes from Derald Goh from RBC. Your question please.

Derald Goh

Good morning. Good morning, Christoph. My first question, is actually two sub-questions within that. It's on your basic PYD. Firstly, can I quickly check, what was the risk adjustment release within that? And then the question is within that what is the basic PYD again? What were the pluses and minuses by lines of business? And maybe could you also talk about any changes in loss cost trends that you're seeing on the current year and thinking about motor and casualty in particular?

The second question is, just the mid-year renewals, are you seeing any early movers at this stage, either from the primary or reinsurance side? Thank you.

Christoph Jurecka

I start with the first one, for the second, I have to ask you to repeat it, please. I didn't really understand it, maybe can you just ask again. The second one and then I'll answer both.

Derald Goh

Yeah, just in terms of your current year loss cost trends, are you seeing any changes over Q1 or maybe on a year-to-date basis. I'm thinking about motor and casualty in particular.

Christoph Jurecka

Yeah, sure. Okay, thanks. As PYD as we show it in our numbers does not include the risk adjustment at all. So that's just the reserve development. And to remind you we are using the PAA approach so the risk adjustment is probably a little bit of less relevance for us in P&C than what it would be for us in our Life and Health business, also like it would then be for competitors using other approaches in IFRS 17.

For us in P&C, we try to make it as simple as possible and the PAA is much simpler and what we show is PYD is just reserve related. So, more or less the same figure, which we would have shown you last year with the difference that we're talking about discounted reserves now. But other than that, it's really the reserve movement we're showing on a PYD.

We had a positive basic loss reserve release in the first quarter, as always completely common that's what we would expect anyway. Because as you know, our strategy is to set reserves initially at the higher-end, what a possible best estimate would be to then enjoy eventually, if you have this positive one-off, which we have had in the past to then enjoy the positive one-off of the basic losses.

So that this basic loss piece, I mentioned earlier, also that on the large losses, we had some negative PYD, but that large loss piece is to maybe give a little bit of color around that, nothing really spectacular. It happens in one quarter, it's a little bit negative in the other quarter, it's positive, it's just day-to-day business, I would mention that now. So, nothing really specific and also nothing too material.

Loss trends, your second question, I mean first-of-all, I have to make a big disclaimer that in many markets, we are not the best one to be asked that question, as we always lag behind the primary insurers getting that information, because often our claims information is based on what primary insurance delivered to us. Of course, there is the exception of markets where we are acting as a primary insurer as well, as you know, we do that as ERGO in many European markets, we have some U.S. primary business as well.

So that we do have some first-hand information, but then in other markets we really rely heavily on the primary insurers and sometimes get information rather late. What we see though is that obviously for motor lines of business inflation is a topic in some markets and has had to be expected anyway. And that's also not really new, that's something we – I think said in Q4 already impact then.

If you remember, we also strengthened our reserves to prepare for scenarios like that. And then now Q1, do we see any particular new information? No, not really because a single quarter is probably anyway not – not enough information to see something significantly different. What we see is more or less in-line what we expected. And maybe to add that already then nobody else has to ask, also the IBNR we set up back in Q4 for inflation that's still there and we didn't make any use of it in the first quarter.

Operator

The next question comes from Vinit Malhotra from Mediobanca. Please go ahead.

Vinit Malhotra

Thank you for this. Some of my questions have been addressed. Can I just ask on the discounting as such. So, it's a bit of a broader question, one specific, but given all the positive news and you're literally having to hold back producing such a good combined ratio and partly helped by discounting. I mean do you sense or do you see any risks and this is maybe a broader question...

Christian Becker-Hussong

Vinit, can you can you speak a bit louder please?

Vinit Malhotra

Okay. Sorry. It maybe my phone. Can you hear me now better, please?

Christian Becker-Hussong

It's better. Thank you.

Vinit Malhotra

Thank you very much. Sorry, so my first question is on the discounting, which is so powerful and having such an effect that you're literally having to hold back on your combined ratio. What's the risk that such a positive interest rate-driven effect could have on underwriting behavior, maybe within the firm, within the market, because if I'm an underwriter and I'm listening to this call, I'm thinking, okay, so already things are so good, partly because of the timing of IFRS 17 and the reported combined ratio is so strong. Is there a risk that, there could be some [indiscernible] coming in? Are you managing it? Are you watching out for it? So that's a bit of a theoretical question, apologies. It's not very specific?

And the second thing is, just on the discount rate again, I'm quite interested to hear this Turkish situation, where you have used the discount rate of the Turkish risk Re, we're obviously reporting this loss in euros. And I would have thought that maybe you would have considered using the – I hope our rates or some other European measure because you're counting this loss in euros. Has there been a discussion about whether the Turkish discount rate was to be used?

And secondly, can you also provide the Turkish discounted loss number, the Turkish earthquake, maybe because that's what we should compare to peers, otherwise it looks quite high at 600 million. Thank you.

Christoph Jurecka

Yeah. Let's start with Turkey. The 600 million is a nominal amount to start with that. And I think the general rule is just we use the discount rate in the currency in which we order claims. So, it's not like that we sit together and have a debate, which one to use. So, it is just the currency in which we will have to pay the claim is defining the discount. Now, your more general question, I mean, margins are good. And now with IFRS 17, they look even better as the presentation changed. And I think we discussed it a number of times already.

Now we have common ratios in the 80's before they were in the 90's, the difference only being that insurance revenue now is defined differently than in the past. So, there is a big amount of different representation in the now even better-looking numbers. But then of course due to the discount, the economic reality is also better transparent and better visible than in the past. And yes, so there is an element that we look even stronger, and also my commentary initially was that we had a very strong quarter and we are really doing well operationally.

So, there is this element of – as a reinsurer, we are doing well currently. Now, what does it do to – does it do to the underwriters to the markets, I mean first of all, you have to make sure internally that you are not getting complacent that's something I can assure you. We're doing it regularly. So push for price increases, where we can get them and where we think they are necessary. Don't forget, I mean the loss numbers have been significant over the recent years.

So, we don't get – don't – we should not celebrate too early. Even last year with year-end, the industry losses was still very high. So, it's too early to say, look, I mean they're making so much money. It's hard for them. And that's also the communication internally, obviously that it's by far not enough. We have to earn back what we paid out as for losses over the last years. So that's the first element. Internally we shouldn't be complacent.

The other element is, how do our clients react? If they see combined ratios in the mid 80's from us and obviously, it would be at least potentially a starting point for them to tell us local prices are too high, you make too much money with us. But then again, I mean that's not how the conversation usually goes. First of all, the way we do pricing is obviously not based on IFRS. It's of course not uncorrelated, what we are doing in IFRS, but we have a pricing view and management view, which is different, and which is unchanged to the past. So, there is no disruption in that and I think that's important.

Secondly, of course, between our underwriters, we explained to them that these very low numbers, now in IFRS 17 have something to do with the way we put – how we present the numbers. And I'm pretty sure they're all very well capable of explaining their clients. Why the numbers now look lower as they did look last year, but why this is not a change in profitability, but just a change in presentation from an economic standpoint?

And then thirdly, the hard market anyway, and this is of course extremely helpful in the current context. So, the price elasticity is of course different than the hard market compared to the soft market. And the reason for primary insurance to buy protection are not immediately 100% price-related. Obviously, they – of course, they're always happy to pay less, but the demand is driven by the wish to get the protection.

And this is a very healthy driver for us to increase volume and to continue to enjoy the very positive market environment. That's why I think your question is still relevant. We have to be careful here, but I think we are and we will be able to manage it going forward.

Operator

The next question is from Ashik Musaddi from Morgan Stanley. Your question, please.

Ashik Musaddi

Thank you and good morning, Christoph. Just a couple of questions I have. So, first of all, I mean clearly combined ratio underlying basis is better in this quarter, but would you attribute it to the earn through of this year rates or would you say that big part of this improvement is still coming from past year's rates, rather than this year's rates, just because it's just the first quarter? So I guess that's one thing I'm just trying to understand because the rates are likely to go up even further in the coming quarters and probably in 2024 as well. So, just wanted to understand where this 86% or your 83% is heading towards in the near future?

So that's the first thing. And just related to that is, I mean we have noticed that there is some big capital raise announced by one of the Bermuda Insurers yesterday, I mean how do you read that capital raise? Do you think that will put pressure on the pricing or do you think it's actually because it's a traditional player there is not much risk around that? So, that's the first element about – thinking about margins.

And the second element is, what was that – is it possible to get some color on this IFRS 17 to Solvency II work? I mean, I guess you had, you had given a slide on – in the appendix about how IFRS 17 earnings. So, this is Slide number 55, earnings are moving into Solvency II, I mean it would be great if I can get some color on what is the OCI change and CSM change et cetera, would be get some color on that, that'd be great? Thank you.

Christoph Jurecka

Sure. Yeah, thanks. Thanks for those questions. First of all, indeed the renewals are not all earned immediately and we still benefit from the good renewals last year, which are still being earned to some extent this year, and this year's renewal will then also not only affect this year's numbers, but also next year's numbers. So that's obvious. Are we concerned by the capital raises, no, not at this time.

I mean eventually at some point, the market will soften again anyway, I think it's far too early to speak about it now, if there is capital flowing in here and there, yes, okay. But then the question is also the margin expectation and as long as this continues to be on healthy levels, we are not concerned at all. And then more generally what we currently see is a flight to quality anyway, so us being the market leader, we get a lot of additional demand and then business opportunities just because in times of high uncertainty, many clients just want to go with the safest possible reinsurer.

So, therefore – we're not concerned at all. And if you were to ask me that, I would say the hard market will for sure continue this year until year-end and then probably also go into next year, but clearly it's too early to tell and will depend on capital inflows and so on and so forth.

IFRS 17 walks to Solvency II, that's a great question. I love it because it gives us an opportunity to start a little bit earlier already with answering the question. So, how did we implement IFRS 17, I think that's very important. We implemented in a way that we chose assumptions wherever we could to be 100% identical with Solvency II. So, to get the maximum possible consistency.

So, we have exactly the same interest rate curves. For example, we have exactly the same reserving assumptions reserves, we have the exactly same mortality biometrics assumptions you name them, it's all identical wherever it can be. So, therefore, you would expect a huge, large amount of consistency, wherever possible. But then, obviously, there are areas where it's not possible.

So, if you're talking about setting up a loss component for example in IFRS 17 that's something, which is not existent in Solvency II. And obviously, there are other areas as well or the methodology for risk adjustment is different to the methodology for the risk margin in Solvency II. So that are remaining differences in the methodology and by the way, if you ask me, by far too many, because if you now – I come back to your questions if you then look at the reconciliation from one to the other, you will find them that the differences are pretty small.

And so, as they are so small, immediately the question comes up if it's really justified to have two sets of numbers, which is always a source for confusion internally, as well as externally. And by the way, it's a lot of work of deriving both sets of numbers. And finally, as you can see on that mentioned Slide 55, numbers are quite similar with the exception of a few methodological differences.

And now I'd like to comment a little bit more, what the differences are. For Solvency II everything – every – the economic change – the change of economic equity is 100% economic earnings. So, there's no differentiation, if a change is OCI or if a change is in the P&L, or if it's just a change in the CSM or in the present value of future profits. So, it's all economic earnings. All just shown in one single number. Whereas in IFRS 17, it's spread across these three categories.

You have the CSM change, you have the change in the OCI and you have the change in the P&L. And so, therefore you have to add the three, and then you have to add the difference between risk adjustments and risk margin. If you add them all up, you can see that on the slide for full-year 2022, you get a pretty good alignment between economic earnings of 2.8 billion and the IFRS 17 numbers. So, it's very consistent with unexplained or other effects of 0.5.

The same on the balance sheet, where also, if you take your own funds according to Solvency II and then you take out the CSM after tax, you are very close to the IFRS 17 equity. So, there the same holds true, that basically the two sets of numbers are extremely well aligned. Again this is particularly true for us as all the assumptions have been made identical, wherever possible. So, don't expect it to be the same for all of our peers. And secondly, this is a full-year slide. There might be differences in seasonality between the two.

So, the differences might be bigger in quarters one or three, compared to what we see for the full-year. But frankly, this seasonality effects and the differences in seasonality are something, which we are also still investigating. I hope that answers the question, but I could continue for longer if you wanted.

Operator

The next question is from Henry Heathfield from Morningstar. Please go ahead.

Henry Heathfield

Good morning. Thank you very much for taking my few questions. Just three kind of broad ones if I can. I'm sorry if they're not specific enough. On the investment result, the yield is obviously looking really strong. And I was wondering if you could comment a little bit around kind of the asset mix that's driving that, whether it's changed an awful lot, whether there's been any alteration within the credits or the investment portfolio or whether it's kind of really remaining last year? And then secondly, you spoke a little bit about Thailand in ERGO primary, and I was wondering if you might give a little bit of flavor around what the expectations for future international growth barring ERGO, whether Asia is really kind of really key theme for you, when you are merging Southeast Asia?

And then the last one, just on the discount rate being used to discount the P&C Re liabilities, and that's being the discount rate within the currency losses occur. I was wondering if you might help a little bit on the illiquidity premium buildup, because surely the [IOPA] [ph] curve, you get the liquidity premiums on the [IOPA curve] [ph] now, am I wrong there? Thank you.

Christoph Jurecka

Sure. Thank you. Well, asset mix changed, no, nothing spectacular really constant investment strategy. Reinvestment are being done into fixed income instruments, which on average continue to be as safe or as conservative or as high rated from a credit rating perspective as in the past. From one quarter to the other, it can fluctuate a little bit, particularly if the investment volumes are low and to do a little bit more of corporate bonds for example, then reinvestment yields can fluctuate up or down a little bit in a single quarter. But the stock of our overall investment is not changing a lot. A lot really and in particular not in this quarter, it has been very stable.

Asian strategy for ERGO, ERGO has been active in Asia for quite some time now, probably up to 20 years, and most of the Asian business is structured in joint ventures, due to the regulatory environment in the markets. I would say it's a significant joint venture, it's in India, where ERGO has in the meantime in P&C, a top five market position and this is, I think – I get it right now – if I get it right now, one of the top two private P&C insurers there, together with our joint venture partner, HDFC.

Another Asian activity of ERGO is related to China, where ERGO is having two joint ventures, one is the Life business, and the other is the P&C business. In Life, ERGO is holding 50% and P&C it's just below 25%. So two joint ventures in China. And then Thailand, in the past was also a joint venture, where ERGO did hold less than 50%. So did not have control and in according to IFRS language.

So we weren't able to fully consolidate, but ERGO was now able to acquire additional stakes and we have now 75% and also one other local player has been acquired now, by the Thailand entity. And so, now we hold 75% of this ERGO [Thai 3] [ph] entity and have control now, and therefore for the first time now, they're also in our full P&L. As long as we do not fully consolidate them, their results are shown as part of the net financial result of ERGO International, that's where than their results show up. But as soon as we fully consolidate them, you have a complete technical result with a combined ratio.

So, then you can see them as European entities as well. And that's the reason why for Thailand, there's also a combined ratio on the ERGO International slide in the deck. And by the way it's for exactly the same reason I was mentioning for ERGO Germany is the seasonality of acquisition cost. It's a little bit high this quarter for Thailand with 113%. This has to do with the significant growth this entity is currently seeing and therefore, a lot of acquisition costs have to be booked in Q1.

So, therefore 113% in Thailand is elevated by this acquisition cost effect. I think that's what I can tell you on the Asian market. ERGO is a small entity in Singapore, which is owned by 100%. I think that's the one I didn't mention so far. So, that's what I can tell you on the Asian ERGO business. Discount again use exactly the same discount rates as we use for Solvency II, which means for entities where we use the volatility adjustment, we then also apply the volatility adjustment for IFRS 17 purposes.

For the majority of our entities, we don't do that and therefore, for the majority of the entities there is no illiquidity premium, and if there is a positive and if we applied for Solvency II as well then we use it also for IFRS 17. But as you know, the VA in recent quarters has always been very small. So, it's a very small amount of illiquidity premium if at all we are having in our numbers. And again, it's not a decision we take, we just take the IOPA decision and the volatility adjustment from IOPA.

Operator

Next question comes from Jochen Schmitt from Metzler. Please go ahead.

Jochen Schmitt

Thank you. Good morning. I have one question on the investment result on Slide 7. The fair-value change on equities of 250 million. Could you explain why there were not any higher effects from listed equities accounted at fair value through P&L in Q1, given the market movements? Was this due to hedging or rather any offsetting effects within this number, for example from the revaluation of private equity? That's my question. Thank you.

Christoph Jurecka

Yeah, I think I can be very quick here. We hedge our equity exposures and as soon as markets go up, then you lose on your hedges. So that's the effect.

Operator

We have a follow-up question from Ms. Kong this call. Please go ahead.

Freya Kong

Hi, thank you. Could you help us give us some guide on how you expect the IFIE to develop given it's still currently depressed by the unwind of low locked-in rates at transition? Does this mismatch only exist because of the transition and should it normalize going forward, i.e., your higher discount benefits in your technical result should be more or less offset by high IFIE? When can we expect this to stabilize? And secondly, if I can, can you help us understand the concept of the change in loss component, which benefited your combined ratio in Q1 and also in 2022, why is your expectation zero for the year? Thanks.

Christoph Jurecka

Sure. Thank you. I start with the first one, I think it's a very relevant question. So therefore I tried to be as quick as possible, but I also tried to be precise here. And your question was, how does – will the IFIE develop going forward? And let me expand the question a little bit, because what I showed you in the – what you'll see in the deck and what I was talking about also, if you look at the prior year number 2022, full-year result 5.3 billion, which reduced [indiscernible] and we get to the 4 billion guidance.

What I showed you there is a minus 1 billion effect due to a change in discounting versus IFIE in the P&C Reinsurance segment. So, there you see an insignificant effect reducing the benefit we have from discounts versus unwind from the past. And this effect as I mentioned in my introduction, reduced from 1.5 billion to around 500 million this year.

So, last year it was 1.5 billion benefit in P&C reinsurance from these interest differences. This year only 500 and next year is going to be even less than that. I cannot be more precise than that because these numbers are highly interest rate dependent. So, to just give you a rule of thumb, 100 basis point interest rate movement would mean a 500 million pretax movement as well. So, these numbers will heavily depend on how the interest rates move, but our current expectation 1.5 billion last year, 500 million this year.

Now, this number is the difference between the discount benefit and the IFIE. So, the IFIE in itself, I can answer you that question as well, but don't look at the IFIE standalone because it's always in our view has to be seen in the context also of the discount benefit. So, in 2023, we had an IFIE of 1.5 billion – sorry 0.5 billion and we expect it – yeah, and – so I have to – let me look up the number. I'll take that later. I think – in 2022, sorry 1.5 billion. Yeah, there we are 500 million IFIE in 2022, which will go up to 1.5 billion in 2023, that's the direction indeed, yeah.

Operator

We have another follow-up from Mr. Ritchie. Mr. Ritchie, please go ahead.

Andrew Ritchie

Hi. Sorry, just to clarify on the answer to your last question. We need to think about the trajectory of investment income versus IFIE as well. And I'm assuming, sort of to what degree the investment income running yield will accrete to the same rate of the IFIE expense maybe clarify that?

Sorry, my other questions were – I'm sorry, I should know the answer to this. The cat loss number you gave, the nominal number is about 16 points of insurance net revenue. So, your 16 point large loss loads or the 14 points is on a nominal basis. I thought it was discounted, but it actually appears to be nominal. So the discount let's say from the cat is where, I'm confused on that? My only other question was, how do we interpret ERGO Life and Health Germany? I mean the technical result looks really strong and some elements of it are quite sustainable, particularly the large CSN release, but then as these non-attributable expenses or some other noise? So, what do we do with the provisions? Thanks.

Christoph Jurecka

Thanks, Andrew. So, first of all, yes, indeed, also, the interest, although the running yield has to be – the investment yield has to be also seen in the context of the IFIE, that's true. I was referring to the technical result before where the difference of the two is relevant. But you're right, of course, we will also benefit going forward from the higher yields as you could see in this quarter already.

There is though this one-off kind of effect, which is particularly strong currently as we locked in a transition to very low rates and interest rates jumped up so much. And that's why we're always looking into the technical result and how these one-offs there reduce over time by 1 billion from 2022 to 2023, so those are large numbers in the technical result. That's why we have been highlighting them so much. But you're completely right the discount plays a role there as well.

And by the way, also a change in loss component, I think that's a question of why I didn't answer, I can quickly to that as well. The loss component reduces also as it's also interest rate dependent it's discounted. And then of course, it depends on the pricing level. So, if prices go up, you have loss – less loss business group of – less loss-making group of contracts and lower number of loss-making group of contracts. So, therefore with increasing prices in the market, the loss component should go down as well. At a stable price level, it should be stable, as well as with stable interest rate levels, and then the loss component can move up and down depending on interest and on price. And to your question then on the large losses, the numbers are discounted numbers, so the 14%, as well as the 16% number, is fully discounted.

And then the question on ERGO Life, first of all if you look at the total technical result, as we do the accounting now and that relates to all our segments, not only ERGO Life, we allocate into the technical result expenses, exactly in-line with the definitions of IFRS 17, which means only directly attributable expenses, so directly attributable to an insurance or reinsurance contract only those expenses are part of the technical result. Everything else is outside of the technical result in our other results. And so, therefore, in general, there is quite a significant negative contribution from the other result in all our segments.

And that's of course then also the case for ERGO Life and Health Germany, but also for the other segments. That's normal and that's not spectacular nothing outstanding. So, I would not have commented on that. But there is an additional comment for ERGO Life and Health Germany I made. And this additional comment was that we have additional non – directly attributed to expenses in the Life new book business. So, higher than expected expenses, which was an additional track on the result in this quarter of that segment, on top of what you would have expected anyway.

And so, therefore, to answer your questions probably two components. First of all, if you look at the relatively high total technical result at ERGO Life Health, there always has to be deducted a certain amount of non-directly attributable expenses, in the other result that's completely normal and that's probably a higher number than in the past.

So the difference between technical result and net income is probably higher than in the past because this cost definition IFRS 17 is rather level. But that's normal and then on top there is – always also in the past, there is current development in the actual quarters, higher expenses than expected or lower expenses than expected, and this is in the actual performance commentary you saw on the slide, where this quarter, the life new book business had higher expenses than expected.

Operator

We have another follow-up from Mr. Hardcastle. Please go ahead.

Will Hardcastle

Hey, thanks for the follow-up. Can I just clarify something on that 8-point of discount and the nat cat load? Is it effectively 8.7, because you've already taken some component within the nat cat number? So Turkey shouldn't actually be affecting that headline. Just trying to understand that, if that makes sense in terms of that walk-through. The actual question, I'm sorry, you mentioned there's is also an adverse development on that prior year cap. I think if I understood your comments.

Could you just quantify or state, which cap that relates to? And then just thanks for publishing the P&C results always helpful. Can you just guide me, where I should see the inflation caution in the motor reserves? Because all the back here seems to be developing pretty favorably across both motor prop and non-prop? I can see that the non-prop 2022 loss booking was materially higher year-on-year. Is that where the caution has been taken or is that just experience? Thanks.

Christoph Jurecka

So, the last one is a little bit too specific that I could spontaneously answer that. So, I think we have to take that offline. Sorry for that. On cat, I'm not sure if I 100% got the question, I mean, I can only reconfirm, the numbers are all discounted, but the discount is pretty stable versus year-end, so that's not a big source of fluctuation, particularly, not in the large loss area, where we normalize for. I hope that answers the question otherwise, please follow up.

PYD, we only would quantify a number like that, if there is something really extraordinary would happened there, which is not the case this quarter. So, generally, it is up and down every single quarter. So, therefore we refrain from giving any details there.

Operator

Next follow-up from Mr. Shuck. Please go ahead.

James Shuck

Thanks. Just a very simple one from me actually. I was hoping that IFRS 17 would lead to a certain amount of consistency and re-transparency between companies and particularly reinsurers. It seems to have taken a different – elected to take a different approach on the P&C Re side in choosing the premium allocation approach. Can you just guide us through why that was the case? Obviously, we lose a particularly useful insight, which is the CSM new business margin comparing that year-on-year between reinsurers. So any insight why you've chosen to defer versus some of your peers would be helpful please?

Christoph Jurecka

Yes, sure. So, I mean, to start with, I mean, I also did follow the disclosures over the last days, I have to say. I mean it's really interesting and by the way also fun to observe what everybody is doing now with these new disclosures and it's interesting and then probably much more for a follow-up conversation in a few quarters from now then to comment extensively today, because I think it's early days still. But I do think comparability has improved.

As soon as it does settles a little bit, there will be much more similarities in the disclosure or are already today in the disclosure than what we had in the past. So, if I look for example – into some of the charts, how CSM movements have been explained by our peers and then look into our disclosure, I think it's pretty similar in many cases. So, therefore I'm quite optimistic. And then to more specifically answer your question, also the PAA versus GMM approach in P&C, I mean bottom line is very similar. There is not a big difference in there.

There are some timing differences sometimes, I think discounting is different, that's something which somebody should maybe be aware of, but more generally, I think it's pretty similar. The presentation is different and there I think it's a matter of taste.

Finally, if you prefer having a CSM for a short-term business, which I personally always – also sometimes have a little bit difficulty to how to really interpret the context that you also have loss component and you have a loss component for CSM for short-term business, it's also not so simple. The PAA is another advantage, it's closer to what we did in the past. So, it's may be easier to digest initially, but then also there the loss component and the discounting show also some differences.

It's probably more a question of taste, what you prefer of the two. The reason why we did choose the P&As is a very simple one though. So, not these highly sophisticated and theoretical discussions, but very simple ones. And the reason was, it was much cheaper for us to implement the PAAs for simpler and we did have to have less systems than otherwise. So, that was the reason.

Operator

The next one is from Mr. Spyrou as a follow-up. Please go ahead.

Tryfonas Spyrou

Hi, thanks for the follow-up. Just it relates to Solvency II...

Christian Becker-Hussong

Sorry, we can hardly hear you. Can you please speak a bit louder?

Tryfonas Spyrou

Hi, can you hear me now?

Christian Becker-Hussong

Yeah. Let's give it a try a bit louder, please.

Tryfonas Spyrou

Yes, so it's on Solvency. I appreciate that you deduct the buyback, which is around 6 points. But I was wondering if you could give a bit more color on the moving parts, sort of where I estimate you had around maybe 6 or 7 points of the capital generation that would have offset that 6 points from the buyback. So, any color on why you sort of Solvency looks slightly lower than the full-year level, that will be great? Thank you.

Christoph Jurecka

Yeah, sure. So yeah, I mean the major drivers is the deduction of the buyback. I think everything else not very spectacular. We had positive operating earnings as well. Economic earnings in there, which then will have more or less completely offset by some tax effects and some other effects. Seasonality, I think I mentioned that in a different context is different in the economic earnings, and the Solvency II space, compared to IFRS 17. A lower portion of the result is realized in Q1, at least in the way how we do the Solvency II calculations. So, therefore probably that might be one of the reasons why the number is not higher. The STI is pretty stable. So, all-in-all, nothing spectacular really.

Operator

The next one comes from Mr. Goh from RBC. Please go ahead.

Derald Goh

Yeah, thanks for the opportunity. A couple of quick follow-ups on Life and Health Re technical results, please. And they both relate to Slide 19. So, I appreciate there is a lot of conservatism in the 1 billion guidance, but I'm just trying to get an underlying picture on two things. The first one is on U.S. mortality, can you say what the total impact was from negative experiences in Q1?

And is there any more color you can share on this, whether it was just underlying access and is there a risk of this dragging into future quarters from things like late reporting? The second one is on the fee income from [indiscernible]. So, adjusting for the currency effect, it looks like it was about 120 million, which is about double what it was Q1 last year. Now, is that a fair reflection of the growth potential here or are there any one-off seasonality effects to consider? Thank you.

Christoph Jurecka

The second question, I don't know – I don't see any seasonality. I think the business is growing in a very attractive and constant way for quite some time now for many years. So, that – I think that's just the ongoing development and indeed if you would adjust it for FX number would be significantly higher. So yeah, I think that's just a very good performance. On the mortality in the U.S., I mean first of all, I think if you look at the disclosure, we are talking now about effects, which would not have even been visible in the old IFRS 4 role.

So, this is again the advertisement for how good IFRS 17 is because we are talking now about tiny little bits of performance up and down, which otherwise in IFRS 4, with locked-in margins, and locked-in results would not have been visible at all. So, that's a big advantage already. What's happening here is that we're talking about really slight deviations, it's not a lot. We of course see a big improvement in the COVID space.

We still have COVID IBNR, which we did not release yet. So, we are still on the cautious side there. And therefore if we would include that COVID piece, then the mortality deviation what immediately look different. Obviously because then also the starting point of the expectation would have to be explained in a different way. And I think that's – it already for now obviously U.S. mortality we need to continue to observe that closely.

I mean that's something you can also take out the press, but that mortality generally in the U.S. population is still elevated. Now, there's always a difference between the insured portfolio and the general population. So, it is not one-to-one at all. And in the way how one moves and then how the other react, but still it's something we have to, and we do observe and we do so for many years already as we have a big mortality book like many other reinsurers as well.

Operator

Mr. Musaddi. Please go ahead with your follow-up question.

Ashik Musaddi

Yeah, thank you. Just a couple of follow-ups. If I look at Slide number 22. Just, this is just for clarification. I mean last year, first quarter, the basic loss ratio was very low 52%, this year is high. I guess, this is just the IFIE gap, which you mentioned that last year there was a positive impact of 1.5 billion, now it will be only 0.5 billion. So just to clarify, this is the same thing and I'm not missing anything?

And then second thing on ERGO German Life, if I look at the CSM release, I mean it's a big number like around 1 billion, which is 10% of CSM. So, how do we think about the duration of this? Because my gut feeling would have been like, okay, German Life should be relatively high duration. So, I mean 10% release sounds pretty high. So, is this a recurring number? And if that is the case, then should we keep expecting that this number keeps going down at a very fast pace as well?

Christoph Jurecka

I mean – I'll try – I'll answer the first question, I'm not sure if I got the second one. The first one on the basic losses is, it's basically – I mean the answer is, you can't really compare the prior year and this year because the threshold between basic losses and large losses has been increased as you know. In the past, the large loss would start at 10 million and now it starts at 30 million. So, the basic losses are defined differently this year compared to prior year and we did not restate for that effect.

So, I think that should explain a lot and particularly highlight. It's not comparable to look at basic losses prior year to basic losses this year. The CSM release, I'll try to – I try to give the answer, you can follow up on that. I mean the release – I mean what general guide is, we say around 2% quarter or 8% per year, this is same for Life and Health reinsurance, as well as for ERGO.

The point is a little bit that is, on the ERGO side depends on the excess, so excess yield or the excess investment income, which is being generated because first the whole calculation is done in a risk-free way, and then excess return adds to the release. Therefore, also all the numbers like the new business contribution, all based on risk-free interest rates are relatively small, and then only in the release, the bigger release based on real-world investment yield is being shown in the P&L. And to give you order of magnitude, it can be a factor of two.

So, the risk-free release could be by a factor of two smaller compared to the full release, talking about ERGO Life and Health Germany now. Now, there's no such effect for reinsurance Life and Health, because there is no savings business. So, be careful. That's not the case for reinsurance. But there is this effect for VSA business. So, most importantly ERGO Life Health Germany and then also for some of the businesses in ERGO International.

Ashik Musaddi

Yeah, that's clear. Thank you.

Christian Becker-Hussong

I'm sorry. We have one follow-up because we had a couple of people who didn't get the numbers with respect to Slide number 30, where we explained the walk from last year's earnings to this year's outlook, specifically with respect to the 1 billion figure for P&C reinsurance and Christoph will repeat the numbers again.

Christoph Jurecka

Yes, indeed. So, we have a 1 billion impact as shown on this slide. And I'll show you now, year-by-year what the benefit – the interest benefit in P&C Reinsurance was. I start with 2022, we had a benefit of €1.5 billion after tax, and the components are discount effect 2 billion, IFIE 500 million to be deducted from that, and 500 million loss component release. 2023 expectation is 0.5 billion effect still, discount 2.2 billion, IFIE 1.5 billion. So – and the difference between the 1.5 billion and 0.5 is the 1 billion, you'll see on the slide.

2024, we expect the numbers to go down further. But I also repeat my disclaimer I made before. These numbers are all highly interest rate dependent. The shift in interest rates of 100 million could mean 500 million difference in this effect.

Operator

There are no further questions at this time. And I hand back to Christian Becker-Hussong for closing comments.

Christian Becker-Hussong

Yeah. Thanks to you all for joining us and for the lots of questions. Happy to follow up on the phone afterwards. Thanks again for joining and hope to see you all soon and have a nice remaining day. Bye-bye.

Operator

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

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Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (MURGY) Q1 2023 Earnings Call Transcript