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Edited Transcript of HNR1.DE earnings conference call or presentation 6-Nov-19 9:30am GMT

Q3 2019 Hannover Rueck SE Earnings Call

30625 Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Hannover Rueck SE earnings conference call or presentation Wednesday, November 6, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jean-Jacques Henchoz

Hannover Rück SE - CEO & Chairman of the Executive Board

* Klaus Wilhelm Miller

Hannover Rück SE - Member of the Executive Board

* Roland Helmut Vogel

Hannover Rück SE - CFO & Member of the Executive Board

* Sven Althoff

Hannover Rück SE - Member of the Executive Board

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Conference Call Participants

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* Andreas Schäfer

Bankhaus Lampe KG, Research Division - Analyst

* Emanuele Musio

Morgan Stanley, Research Division - Equity Analyst

* Farooq Hanif

Crédit Suisse AG, Research Division - Head of Insurance Research in Europe

* James Austin Shuck

Citigroup Inc, Research Division - Director

* Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst

* Kamran Hossain

RBC Capital Markets, Research Division - Analyst

* Michael Hermann Haid

Commerzbank AG, Research Division - Team Head of Financials

* Paris Hadjiantonis

Exane BNP Paribas, Research Division - Research Analyst

* Roland Pfänder

ODDO BHF Corporate & Markets, Research Division - Equity Analyst

* Sami Taipalus

Goldman Sachs Group Inc., Research Division - Research Analyst

* Thomas Fossard

HSBC, Research Division - Co-Head of European Insurance and Analyst

* Vikram Gandhi

Societe Generale Cross Asset Research - Equity Analyst

* Vinit Malhotra

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. I welcome you to today's Hannover Re international conference call on the Q3 2019 results. For your information, this conference is being recorded.

At this time, I would like to hand the call over to your host today, Mr. Jean-Jacques Henchoz, Chief Executive Officer. Please, go ahead, sir.

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [2]

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Good morning, ladies and gentlemen. Let me also welcome you to our conference call presenting our results for the first 9 months of this year. As usual, I'll start with a short summary before our CFO, Roland Vogel, will go over the financials in detail. For the Q&A, I'm additionally joined by my Board colleagues, Klaus Miller and Sven Althoff.

In the first 9 months of 2019, group net income increased by 38% to EUR 1 billion. This is particularly pleasing because it outperforms the top line growth and the increase of the shareholders' equity and, hence, contributes to the ROE.

On the basis of the favorable underlying business development, this strong result is also supported by some nonrecurring effects resulting from valuation gains from 2 participations. One of them, Viridium, was reported already in Q2 and contributed to our net income with EUR 100 million. The second gain results from the sale of a Nordic managing agent, which we founded in 2010 together with partners. We sold our stake in Q3, producing a gain of EUR 49 million.

Gross premium increased by 13.3%, adjusted for currency effects, reflecting a healthy demand for reinsurance and for Hannover RE as a business partner. Very strong investment income and the significantly improved earning contribution from our life and Health business group led group net income to rise to EUR 1 billion. The positive development in life and health reflected, among other things, the actions taken in the previous year to improve profitability in the U.S. mortality business.

Despite the strong increase in shareholders' equity, the return on equity of 13.7% remained clearly above our minimum target. Book value per share advanced to a new record level of EUR 88.97

The solvency ratio continues to be well above our 200% threshold, standing at 245% at the end of the second quarter. This number should have decreased in the third quarter in line with the outlook presented at our Investors' Day 2 weeks ago.

Premiums in our P&C reinsurance business continued to grow strongly. The key impetus for growth derived from North America, Asia and Germany as well as from structured reinsurance. Despite the fact that with Hurricane Dorian, Typhoon Faxai and the Thomas Cook bankruptcy, we recorded sizable large losses in the third quarter. The overall large loss experience was still below the expected levels on a 9-month basis. Due to our conservative reserving policy, in particular with regard to our large loss budget, this is largely not reflected in the underwriting results. On the other hand, our results do include around EUR 100 million in loss creep from Typhoon Jebi. Against this backdrop, the underlying combined ratio is still more favorable than the reported 98.6%.

In life and health reinsurance, we saw good opportunities for new business in Asia, resulting in gross premium growth of 5.8%, adjusted for currency effects. The underwriting results improved compared to the previous year where we had reported higher recapture charges for our U.S. mortality business in the third quarter.

Apart from some negative developments in Australia and the U.K. in the first half of the year, the underwriting profitability was actually favorable. Our financial solutions business again contributed strongly to the result, and altogether, EBIT for our life and health business unit increased significantly to EUR 478 million.

The performance of our investments was highly satisfactory. Assets under management grew to more than EUR 47 billion, helped by the positive cash flow and valuation changes. The return on investment from assets under management were 3.5% on an annual basis and, therefore, well above our target of 2.8%.

On that note, I'd like to hand over to Roland, who will explain these figures in more detail.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [3]

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Thank you, Jean-Jacques, and good morning to everybody. As usual, I will walk you through the financials in a bit more detail and try to keep my comments brief.

We recorded strong premium growth in the first 9 months of 2019. Adjusted for currency effects, gross premium written increased by 13.3%. The strong contribution from our P&C business continued to be the major driver, but also the business production of our life and health business group contributed as expected.

The difference between gross and net premium can be explained by the change in unwritten premium in a growing environment. This effect, however, has already decreased compared to the first and second quarter because we earned more of the premium over the course of the year.

Other income expect -- other income and expenses improved due to a further increase in the contribution from deposited accounted financial solutions contracts, but also from an additional one-off as we had sold our holding in a Swedish agency which we had consolidated before. As such, the mid-double-digit profit is to be reflected here rather than as part of our investment results.

Currency effects had a minor positive impact in the first 9 months, and at 20% tax rate is below the expected level. This is driven by tax-privileged investment gains.

So altogether, group net income decreased (sic) [increased] by an impressive 38% to more than EUR 1 billion, and with that, to an all-time high in the first quarter -- in the third quarter.

On the next slide, the operating cash flow was very strong in the first 9 months, already exceeding the number of the full year 2018. The main driver here is the growth of our P&C business. And on top of this, increasing valuation reserves and currency effects supported the growth in assets by around EUR 1.8 billion and EUR 1.3 billion, respectively.

Overall, assets under own management are at another record-high level of nearly EUR 48 billion. By the way, as we have issued our new hybrid bond of EUR 750 million on October 1, this will only be reflected as from Q4 onwards.

Looking at the capital position. We see nearly the same effect. The strong earnings comfortably exceed the dividend payment in Q2. And on top of this, the increase in OCI boosts shareholders' equity to another record high of EUR 10.7 billion mainly driven by the valuation change due to decreased interest rates and lower credit spreads.

The composition of the total capital on the left-hand side is unchanged. As just mentioned also here, the new bond is not yet included in the numbers and will, at least temporarily, increase the hybrid capital by EUR 750 million at year-end. However, there is a EUR 500 million bond with a first call date in mid-2020. And in this regard, we have -- or we had the opportunity to potentially refinance this early with a very attractive coupon of 1.125%, comparing quite favorably to 5.75% for the old one.

On Page -- or Slide #8. P&C gross premium increased by a remarkable 17.5% on a currency-adjusted basis. This is driven by both our structured reinsurance and by diversified growth in the traditional book across regions and lines of business across the world.

After the very benign first half quarter, major loss activity increased significantly in the third quarter. However, with 5.9% of net premium income, major losses were still around EUR 120 million below budget.

On a 9-months basis, as in previous years, we stuck to our reserving practice and reflected the large loss expectation as part of our IBNR reserves.

The runoff result for the first 9 months was overall positive, as expected, but still includes the negative development of Typhoon Jebi for which we had increased our loss estimates by around EUR 100 million compared to the year-end 2018 number.

We will see in a minute that 2 of our Q3 large losses have their impact nearly gross for net. And especially for the EUR 112 million credit loss, it is quite challenging to roll forward to large loss budget. Overall, we should have reserved more conservatively than last year. And today, we assume that the confidence level at least should not have deteriorated.

Taking into consideration the positive results in life and health and from the investment side, the loss development over the fourth quarter will determine what confidence level we are able to achieve by year-end.

Altogether, we have to acknowledge that we missed our 97% combined ratio target in Q3. Still, the result in P&C is satisfactory or even very satisfactory.

Net investment income increased slightly driven by the favorable increase in ordinary investment income. Other income and expenses include the already mentioned EUR 49 million gain from the disposal of our participation. Apart from this, there are no other material one-offs included in this line.

The tax ratio is slightly lower than normal. This is due to the just-mentioned disposal gains and some realized gains from real estate in the third quarter, and both of these effects enjoy a privileged tax treatment.

On a 9-month basis, major losses were still below the expected level, entirely driven by the very benign first half year. This means that we started the fourth quarter with around -- with a budget of around EUR 330 million, including the roughly EUR 120 million of unused budget carried forward. I say started because with Typhoon Jebi, we already observed another significant cat event in October. It is still too early to come up with a loss number for our account. However, based on the estimates from ARR, for instance, the insured market loss might reach a similar level as Typhoon Jebi, which was a EUR 230 million net loss for Hannover RE. This means that the unused budget from the first half year is most likely not -- no longer available anymore as of today, but the overall budget available after 3 months should be more than sufficient to cover this loss.

Looking at the large loss list in detail here. You can see that the 3 events were the main driver for the exceptional high loss burden in Q3. Hurricane Dorian, Typhoon Faxai and the Thomas Cook insolvency, particularly the EUR 186 million net loss from Hurricane Dorian might be surprisingly high. And you might also wonder why the difference between gross and net is so small. Firstly, we already had a higher market share in the Caribbean as, for instance, compared to Florida, plus we took opportunities of improved market conditions after Hurricane Maria in 2017, especially also writing proportional business. And secondly, the Caribbean hurricane is not one of our defined peak net cat exposures and, therefore, not covered by our take whole share. The same is true for credit and surety business where we are one of the market leaders, and hence, we also take the Thomas Cook event gross for net.

By the way, JV developed slightly favorably in Q3, so the runoff is still around the already-mentioned EUR 100 million year-to-date, but at least the direction of development has turned.

So those 3 large loss events are also visible in the technical profitability by line of business, leading to combined ratios above target in North America in credit and surety and in the cat XL line. Cat XL additionally includes negative runoff of Jebi, as already mentioned.

The combined ratio for U.K., Ireland and the London market also exceeds the target, affected by rather weak technical profitability of the Lloyd's business that we support.

On the other hand, aviation and marine are significantly below target, benefiting from a favorable loss experience as well as some positive reserve runoffs. And also, Germany and Latin America contributed well to the technical results.

In life and health, on the next slide, gross written premium increased by 5.8% on an adjusted -- FX-adjusted basis. New business production was particularly favorable in Asia, and here, again, with a focus on China.

The results for our U.S. mortality business improved significantly because we had booked EUR 218 million of recapture charges in Q3 2018. Moreover, the underlying mortality in the first 9 months was better than expected and that -- particularly in the third quarter.

As already reported with our half year results, we had some negative effects from disability business in Australia, and we had added some reserves for our U.K. business. In both cases, we have not seen a material further negative development in the third quarter.

Already, the ordinary investment income increased compared to the previous years, but also the fair value changes through P&L were beneficial in the first 9 months of 2018 as part of the realized gains we accounted for the one-off of EUR 100 million, and that altogether boosted the net investment income to EUR 414 million.

Other income expense -- other income and expenses are mainly driven by an even increased contribution from financial solutions business, particularly in the U.S., for which a large portion is recognized according to the deposit accounting method.

Altogether, based on the EBIT of EUR 478 million, we are very well on track to maybe even outperform the guidance of EUR 400 million, excluding the EUR 100 million one-off. Here, again, worth to mention at 15%, the tax ratio is below the normal level driven, again, by tax-privileged valuation gains.

We and especially I, we are very satisfied with the development of our investments in the first 9 months. The return on investment of 3.5% is remarkably above our initial expectation for the full year with increased ordinary investment income to the already good figures in the previous years. If we adjust the 3.5% for the Viridium effect, that would still be 3.2% or more than 3.2%.

Realized gains were largely driven by the disposal of another real estate object in the third quarter that contributed another EUR 50 million after EUR 20 million in the first quarter. The change in fair value of financial instruments was positive on top. The ModCo derivatives contributed EUR 6 million.

Unrealized gains increased significantly to a record high again mainly driven by our fixed income portfolio due to the decreasing yields in the major currencies as well as lower credit spreads. So that unrealized valuation status of EUR 2.8 billion has gained a lot of liquidity here.

On the next slide, you can see that we did not change our asset allocation during the year, at least not on an asset class level. As just recently explained at our Investors' Day, we are improving our geographical diversification of our fixed income portfolio mainly by increasing the investments also in emerging markets where yields are still a bit more attractive.

The overall diversified contribution to ordinary income is again supported by the good results from real estate and private equity, but not to any extraordinary extent.

I think this concludes my remarks, and I leave the target matrix and the outlook to you, Jean-Jacques.

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [4]

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Thank you very much, Roland. On slide 17, the target matrix reflects the overall good performance of our business in the 9 months of this year. Roland explained the reasons for the small miss on 2 of the profitability targets in P&C, but I have to consider, like him, the overall profitability of our P&C portfolio as healthy.

On Slide 19, this brings us to the updated outlook for the year 2019. Reflecting the favorable business development in the first 9 months, we have raised our targets for premium growth and investment returns. For the group net income, we're now targeting to achieve more than EUR 1.25 billion. The message regarding the dividends remains unchanged. If our capitalization remains at a comfortable level, as planned, we will again pay a special dividend for the year 2019. Overall, the previous year's total dividend of EUR 5.25 per share should serve as a minimum benchmark for this year's dividend.

Looking at the expectation for our P&C business, you can see many arrows pointing upwards, confirming the favorable demand for reinsurance. The overall financial year profitability is also satisfactory, enabling us to earn our cost of capital. The somewhat weaker profitability in cat XL, which is obviously affected by large losses as well as U.K., Ireland and the London market, will be offset by positive developments in other areas.

In life and health reinsurance, the expected growth is somewhat more modest compared to P&C, and we see good opportunities for further growth in morbidity business mainly in Asia, while demand for financial solutions also remains strong.

With regards to the financial solutions business, the arrow is not reflecting this development because a significant part of the business is booked according to the deposit accounting method and, hence, not visible in the premium.

Looking at the profitability. All individual lines are expected to earn the cost of capital or more. Profitability is particularly strong in financial solutions where our U.S. business is the main driver. Longevity is also enjoying a healthy performance. And altogether, the result is expected to increase steadily driven by the improved results from our U.S. mortality business due to the in-force management actions and the associated one-off IFRS charges taken in 2018.

Finally, we come to the group outlook for the year 2020. Based on a continued competitive but improving market environment in property and casualty reinsurance and our good market position in life and health reinsurance, we expect to grow our premium by around 5%, adjusted for currency effects.

At the occasion of our Investors' Day, Roland gave an update on our investment portfolio and the impact from the continued very low yields, and hence, it should not come as a surprise that our ROI target is 10 basis points below the initial target for 2019 at around 2.7%.

Altogether, we anticipate group net income of roughly EUR 1.2 billion. Compared to the guidance for 2019, this is an underlying increase of around EUR 100 million. We're also raising our net major loss budget for the 2020 financial year to EUR 975 million. The increase in the budget is motivated primarily by the continued expansion of our underlying business. The risk appetite of the underwriting side has not changed materially.

Finally, our approach to capital management is unchanged and I'd expect us to be in a position to again pay a special dividend in order to pave the way for attractive ROE in the future.

As you can see from the guidance and from our messages today and at our recent Investors' Day, we are optimistic about the outlook for the industry and for Hannover RE in particular. We do see an increasing demand for reinsurance with, at the same time, an improving pricing trend worldwide. We're well positioned to benefit from this market momentum and, therefore, expect to deliver attractive returns in the future.

On that note, ladies and gentlemen, we come to the end of our presentation and look forward to your questions.

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Questions and Answers

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Operator [1]

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[Instructions operator] First question is from Kamran Hossain, RBC.

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Kamran Hossain, RBC Capital Markets, Research Division - Analyst [2]

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First one is just on the major loss budget. Thanks for the color that you've given around increasing that to EUR 975 million from EUR 875 million. Could you maybe explain in a little bit more detail where kind of you expect your additional exposures to come from? I guess, you're aiming for top line growth of 5%, major loss budget going up 11%, and it already feels like you're relatively cautious in assessing that number. So any color on kind of where you see the additional major loss and cat exposure coming from?

And the second question is on Life Re. I think the underlying, even if you back out some of the real estate gains, feels like it's running above your kind of EUR 450-ish million target. Could you give us an idea of what you think the underlying is for the quarter? And then maybe what you think -- or how we should think about this going forward into future years?

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [3]

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This is Sven Althoff. I will take the major loss budget question. As Roland has explained when he talked about the growth in 2019, we do expect a similar picture in 2020, i.e., diversified growth from a territorial point of view. So we expect the increase in the major loss budget being driven more or less proportionally in line with that premium growth in all the peak peril scenarios, given that our growth is also covering many of the peak peril scenarios. So the Asia, North America and Australia will all feature in the growth pattern. So there's not a particular area where the increase in major loss budget will come from but more organic proportional growth.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [4]

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If I may add to that, this is Roland, you have to bear in mind that we set our large loss budget early in the year based on the plan. We had more-than-expected growth in 2019. So in that respect, the increase, which we now have in 2020, also includes a little bit of the outperformance of 2019 and does not reflect an increased risk appetite, as we mentioned before, but is to reflect the overall growth we see.

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Klaus Wilhelm Miller, Hannover Rück SE - Member of the Executive Board [5]

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Maybe on the -- Klaus Miller speaking. On the life side, of course, this year is quite pleasing, especially with the additional real estate or participation profit. The run rate we would expect should be, under normal circumstances, well above the EUR 400 million. So this means for 2019, well above the EUR 500 million, more probably towards EUR 450 million in the long run. The only issue is that we had very positive variation in 2019 on the mortality claims side and we are still not certain whether this is a trend or will be seen in the future as well. This is why we are still guiding a little bit carefully here.

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Operator [6]

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The next question is from James Shuck, Citi.

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James Austin Shuck, Citigroup Inc, Research Division - Director [7]

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First question is around the growth rate in P&C Re. So the GWP growth at 9 months was 18% constant currency. I think the renewal July year-to-date was plus 15%. At the renewal time, you didn't mention structured products as a source of that growth, but for the GWP growth today, you mentioned structured products along with Asia and along with North America. Could you just help identify what the contribution is from structured products, both on the renewals and on the GWP at the 9 months, please?

Second question was around U.S. casualty reserving. It's difficult to get insight into what your size of U.S. reserves are on casualty, in particular the split between proportional and excess of loss. If you're able to give any insight into the mix of your reserves, particularly from U.S. casualty in those 2 areas and just comment around some of the trends you've seen year-to-date in 2019. I'm particularly interested in some of the well-telegraphed kind of social inflation trends that we've seen and how they're filtering through into the U.S. excess of loss book, please.

And finally, just a quick one. I didn't see a combined ratio target or guidance for 2020. I think you do normally give one for the year ahead. Are you expecting that to be flat on the 97% or maybe a bit better?

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [8]

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So maybe I can take the first one, James, because it will be in line with the previous guidance, the 97% -- better than 97% combined ratio.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [9]

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I just think with regard to casualty -- U.S. casualty, we don't have the numbers or the detailed numbers of excess of loss to proportional and where it comes from. I think, in general, I think when we have received the question before about our exposures here, especially when it comes to the opioid crisis or other components, I think we had a look in our -- at our reserves in U.S. casualty. At casualty, especially, we are well reserved. This is where we have the most part of our redundancies. We also looked at these trends and have not seen any reason to assume that this comfortable position we are in today is changing.

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [10]

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And on the Advanced Solutions business. We -- this business practice is contributing between EUR 300 million and EUR 350 million of growth for this year. The reason why we have not reported this during our call on the 1/1 renewals is twofold. First, we never talk about Advanced Solutions renewals as a focus area and that's all. And secondly, many Advanced Solutions' contracts are only concluded after 1st of January, so later in the year, because they are not so 1/1 sensitive. It's quite all right given the structure of those contracts to continue negotiating a month or so into the new year and then have the effective date at 1/1 or at a later stage. So that's why it didn't feature that prominently when we talked about 1/1 renewals.

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James Austin Shuck, Citigroup Inc, Research Division - Director [11]

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I was looking at the July year-to-date renewals, actually, which was plus 15%. So I'm wondering how much of that comes from structured and tailored transactions?

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [12]

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I think we mentioned at the half year results that we had it approximately 50-50. The growth in -- after the 9 months was a little bit more prominent -- or the contribution was a little bit more prominent from the traditional reinsurance side and a little bit less from Advanced Solutions because that was very strong in the first half year.

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Operator [13]

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The next question is from Vinit Malhotra, Mediobanca.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [14]

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Just one numbers question and one probably outlook question. On the numbers, the AUM is interesting, nearly EUR 3 billion growth from EUR 45 billion to EUR 48 billion in this 3-month window, so in Q3 stand-alone. If -- I mean the operating cash flow is around EUR 940 million on the slide. The fixed income growth is around -- I mean the unrealized gains are around EUR 0.5 billion. Is there a significant markup to -- in private equity or somewhere else which explains almost EUR 1.5 billion delta between these 2 items and the AUM growth, please? And sorry if you would like to take it off line, but I just thought I'd asked this question.

Second thing was more on the guidance on volume. The 5% -- I mean last, I think, two years, the guidance has been beaten on volume. And also, I -- just to clarify, I mean, the 5% you mentioned is a composite of pretty strong growth in P&C and modest in life. Is there anything other than that? Is it that you think structured is slowing down? Or is there something else? Or is that really it?

And sorry, last, if I may. The 2019 guidance and comments around fourth quarter have no mentions, obviously, around California wildfire, which is still very early, I presume. But would that change some of this guidance for 2019? Just a comment would help.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [15]

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So if I start with the AUM, Vinit, I think if you -- for instance, at the presentation, there is some guidance in the components. But I think you have already referred to the EUR 1.8 million development of unrealized gains, and that is really the fixed income portfolio. I think these are really -- as I -- this is why I also mentioned the increased liquidity. By the beginning of the year, the remaining valuation reserves were really in the more illiquid asset classes like private equity and real estate. And what came on top of that was driven by the regular fixed income book and here, of course, by the decreasing interest rates and the decreasing credit spreads, as mentioned. So there was no extraordinary development from the more illiquid asset classes.

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [16]

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Maybe on the guidance question. The guidance is, of course, driven by the fact that we see some momentum in the P&C market. But at the same time, we expect the market to be very competitive. And therefore, we felt we should not be too aggressive on top line growth. Quality is the name of the game, and that's led to that to the 5%. Slightly more on the P&C side than life and health. But there is no link with California wildfire in particular, you mentioned. This is not related to the plan. On California wildfires, Sven can say a bit more. But, of course, too early to say, but we would not expect a repeat of what happened in the previous years. This is expected to be much lower in comparison in terms of exposure for Hannover Re.

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [17]

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Yes. I can probably confirm that. Of course, we are very closely observing the various fires, we are talking more than half a dozen of fires right now. When we look at the structures that have been destroyed so far, they are at a relatively low level compared to the wildfire events in 2017 and 2018. So none of those fires, at this stage, give us particularly concern that they will develop into a major loss for us. But it's early days. I mean given the very, very dry weather conditions and soil conditions in California right now, it can change overnight with a change in wind speeds and wind direction. So it's too early to give a final assessment on the ongoing fires.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [18]

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And can I assume that even if -- I mean at the moment, your EUR 1.25 billion -- greater than EUR 1.25 billion for 2019 assumes California fires are as they are and you have some loss for that in there?

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [19]

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We don't have any losses related to California wild fires at this stage. The number does not include any specific item for that potential loss.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [20]

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And Vinit, if I may add. I was trying to give some indications. We started into the fourth quarter with the remaining budget of EUR 330 million. If we assume that some of that is digested by Hagibis, that will at least leave us with some buffers. The -- so there is room for a wildfire in the size of the last years. If, of course, large losses accumulate in Q4, and it's only the beginning of November today, then I think we would stick to our usual guidance that if we exceed the large loss budget remarkably, that could have an impact on the year-end result. But today, we see that there is still room for more losses in the large loss budget.

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Operator [21]

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The next question is from Farooq Hanif, Crédit Suisse.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [22]

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I just want to return to U.S. casualty. What's your kind of explanation for this sort of double message that we're getting. So the U.S. primary carriers really seem to be extremely worried about medical malpractice and a whole variety of latent claims, but a lot of the reinsurers and actually yourselves seems to be very relaxed. Is that because you feel like you've been taking very conservative loss picks already and you've anticipated it? Do you think there's an element of delay in reporting? I mean what more can you say on that?

Second question is on the large loss budget and the increase of it. You seem to be talking about proportional increase with volume growth that you've had year-to-date. But I would've thought that with the pricing that we're seeing, you'd be more than compensated for that. So I just wonder to what extent you are just being kind of conservative there.

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [23]

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Okay. I will take the U.S. casualty question. I wouldn't say that we are relaxed would be the right expression. I would say we feel that we are prudently reserved given our ultimate loss ratio picks. Of course, there's a number of complex U.S. casualty situations, which we are currently observing. So Roland mentioned the opioids, but there are also concussion claims. There is the lifting of a time barring on old sexual molestation loss situation. So we are observing that all very closely. For some of those situations, we have also decided to book additional reserves over and above our initial loss ratio picks. So from that perspective, there is a lot of development. But at this stage, we are comfortable with our overall and aggregated loss reserving on U.S. casualty.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [24]

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And to come back on the large loss budget one more time. Yes, we are expecting better prices. Still, I think we also have been commenting on that more than once that, overall, we see that various areas are still not in an area where we would increase our writings drastically in that regard. If there are really opportunities arising, we will be able to take them on, but we are not expecting our risk appetite on the cat XL increasing so remarkably that this would justify an even higher increase of the -- of the large loss budget here.

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Operator [25]

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The next question is from Sami Taipalus of Goldman Sachs.

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Sami Taipalus, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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You mentioned underlying profit increase of about EUR 100 million from the EUR 1.1 billion sort of initial guidance to the EUR 1.2 billion guidance. But if I look at the sort of the top line development in P&C, which is nearly 20% year-on-year, and the strong development in the life and health reinsurance profit over the year, it seems like that's quite low. Well I'm struggling to reconcile the moving parts a little bit. Is there something else there that I should bear in mind when you're thinking about rolling this guidance forward to 2020?

Then my second question just comes back to your view on the market a little bit. If I look at cat XL and the London market business, and you're basically stating a reasonably negative view in your communication there, is that just related to the loss experience you're currently seeing? Or is that a comment on what you see the rate that should be in the market at the moment?

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [27]

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We have -- well, I think to come back to the latter question, this is really a reflection of the current result. This is not a reflection of the market. So these arrows on the slide and -- is a reflection of the current result and not of our market.

With regards to the guidance, I can also add that, of course, the assumption on the investment side is nearly entirely based on ordinary investment income. So the -- and this is why we go down to 2.7% up to now.

We have had a little bit of a positive impact every year. But again, in our plan, extraordinary gains are not included to a material extent, so that really is based on ordinary investment income. And the the decrease from 3.5% to 2.7% in ROI, that would not be easily compensated by additional volumes. So there is, at least in our plan, the investment income goes down.

And you have mentioned the positive components of our plan. And in this regard, you might consider that as being conservative. But again, it is late 2019, and we'd rather outperform the guidance than underperform.

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Sami Taipalus, Goldman Sachs Group Inc., Research Division - Research Analyst [28]

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Sorry, just to interject there. The initial EUR 1.1 billion guidance for 2019 include an investment return of 3.5% or assume an investment return of 3.5%?

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [29]

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It -- you're right, but it was higher and it did include more extraordinary investment gains than 2000 and -- the 2020 plan.

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Operator [30]

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The next question is from Andreas Schäfer, Bankhaus Lampe.

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Andreas Schäfer, Bankhaus Lampe KG, Research Division - Analyst [31]

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Just one question regarding your guidance for 2019 with an combined ratio of still 97% after having reached 98.6% after Q3. So that implies, let's say, a combined ratio of 92% to 93% for Q4. Do you expect any, let's say, reserve releases above the normal level to reach the sort of combined ratio, even if you have, let's say, larger claims like the typhoon and Californian wildfires? It seems to be still very, let's say, optimistic in my view.

p id="52419186" name="Roland Vogel" type="E" />

Yes, thank you for the question. And well, we try to explain that and we've mentioned that the Q3 reserving exercise that there was really no reason to be very aggressive. Overall, we mentioned that reserving was more conservative than it was last year. And in that regard, there could be -- there is a little buffer for Q4 included. Today and even more so -- and as we mentioned before, if we really get higher than expected, we would also use the flexibility we have, but this is not anticipated as of yet.

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [32]

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And for the large loss budget is included in the numbers year-to-date, which partly explains why the numbers will normalize to some extent by the end of the year.

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Operator [33]

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The next question is from Thomas Fossard, HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [34]

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Just 2 questions on my side related to the life and health reinsurance. The first one would be related to the U.S. financial solutions. So year-to-date, we've got a 46% increase, so to EUR 211 million. Could you help us to better understand how the growth in the U.S. financial solution EBIT contribution is going to trend into 2020? It's been a significant growth and gradual quarterly improvement, but how should we expect this 46% to go into 2020?

And the second question will be related as well to the life and health, just a clarification. So is your EUR 1.2 billion net income for 2020 based on a EUR 450 million EBIT profit for the life business?

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [35]

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The financial solutions.

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Klaus Wilhelm Miller, Hannover Rück SE - Member of the Executive Board [36]

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Yes. Klaus Miller. Let's start with the financial solution. We have to admit that the 40% margin here is not a good measure because we have to summarize all the business we have from financing to financial solutions to Solvency deals under this reporting category.

In absolute terms, we expect the profitability to continue and even grow in 2020. Whether this is a 40% margin or not depends on how many treaties have to be booked according to FAS 113. That means deposit accounting. So please don't try to interpret increases of these EBIT margins here. But the profitability will continue, and we expect that there will be a significant drop also in the midterm for the next couple of years.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [37]

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With regards for the 2020 plan, Thomas, you are right that the plan includes a little bit more than the EUR 400 million, but not much more. Does that answer your question?

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [38]

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Yes.

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Operator [39]

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The next question is from Vikram Gandhi, Societe Generale.

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Vikram Gandhi, Societe Generale Cross Asset Research - Equity Analyst [40]

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I apologize at the onset in case I'm asking something that you've already mentioned in your opening remarks because I joined the call late. So my first question is based on the movement in the reported combined ratios for the first half '19 and 9 months '19, it appears there was very little help from the runoff result. Is that a fair conclusion? Can you offer some insights on what's happening with the runoff result this year I mean at least till 9 months?

And since even net of the loss creep on Typhoon Jebi, are you seeing runoff results seem to be slowing down year-on-year. That's question one.

Secondly, what are your assumptions on the industry-wide losses from Dorian and Typhoon Faxai?

And thirdly, on the 2020 guidance, you've got a 5% premium growth overall and you said a bit more on the P&C side, 97% or less combined. You've got confidence on your U.S. financial solutions. U.S. mortality book should behave better. And yet you say the EBIT assumption or your -- and what you've penciled in for FY '20 is a bit more than EUR 400 million but not significantly more than EUR 400 million. That's a bit of a surprise.

And then overall, EUR 1.1 billion to EUR 1.2 billion net income increase also seems to be a bit conservative. So any thoughts there would be really helpful.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [41]

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So Vikram, if I start with the runoff. I did mention in my presentation that we had a regular runoff result, which does include Jebi, so it was a little bit lower than the regular. But other than that, we did not have any extraordinary effects.

I would also not subscribe to your proposal that the runoff results goes down year-by-year. If I look at the numbers we have been publishing and I always mentioned that you have to take them with the salt of -- a grain of salt because there could be one-offs into them. So in that regard, we do not see that the runoff result is slowing down. And as long as the redundancies are on a comparable level, that should not be the case.

I think that was my question. If I -- the loss assumptions, Sven, you will?

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [42]

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Yes, happy to take those. On both Dorian and Faxai, we have done a bottom-up estimate rather than taking a market loss as a starting point to better reflect the individual exposure of our individual clients. But if you want to translate that into a market loss, it's on both somewhere between $5 billion and $7 billion. On Faxai, obviously, completely typhoon Japan driven on Dorian. The bulk of the EUR 5 million to EUR 7 billion is from the Bahamas with a very limited contribution from the U.S. part of that loss.

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [43]

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So on the guidance, just back to our previous remarks. Clearly, you have one-offs this year, which make the growth in net results for next year, I would say, realistic. It's not that easy to beat. And we took account of the fact that there is growth momentum. There is some potential for price adjustment in P&C, but we're also well aware of the very competitive market conditions. If price is to improve materially, there will be also more capital entering the system. And for that reason, we didn't want to be too aggressive on -- particularly on our top line guidance.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [44]

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If I may add to that, that you should be aware that with our initial reservings, additional premium in P&C does not immediately lead to higher profitability in the first year because we very often book initial loss ratios higher than 100. So it takes a little bit while -- until that growth really comes down to the bottom line. And on top of that, if you call us conservative, we don't take that as an offense.

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Vikram Gandhi, Societe Generale Cross Asset Research - Equity Analyst [45]

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Okay. That's great, Roland. If I could just come back to the first point and maybe we can take this discussion off-line if you want, the first half '19 combined ratio reported one is 96.7% and the 9 month is 98.6%, so nearly 2 percentage point increase just because of the addition of one quarter. And you still haven't exceeded your budget, i.e., there's no impact from excess large losses over your budget. So I'm just struggling to understand what can drive 2 percentage point increase in the combined ratio from first half to 9 month if the reserve leases haven't -- or the runoff result hasn't been a lot lesser than what it used to be?

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [46]

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Vikram, I also mentioned...

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Vikram Gandhi, Societe Generale Cross Asset Research - Equity Analyst [47]

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But the attritional has weakened a bit. Maybe that's the information I don't know.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [48]

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I think there was also the underlying loss ratio was a little bit higher than compared to last year. I also mentioned in my opening remarks that especially the credit loss -- for the credit loss, it is challenging, especially in the fourth quarter or by the end of the third quarter when you have started your year-end proceedings to roll forward the large loss budget in one loss, which only affect a single line, implying that we did not fully release the large loss budget against that one credit loss. But again, it's challenging to really see that in the alternate loss ratio picks across the whole portfolio.

And moreover, we also indicated that we have been a bit more conservative than last year.

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Operator [49]

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Next question is from Roland Pfänder, ODDO BHF.

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Roland Pfänder, ODDO BHF Corporate & Markets, Research Division - Equity Analyst [50]

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Two questions, if I may, on life reinsurance. Firstly, on longevity, if I compare your profitability outlook compared to last year, it looks like you are a little bit more optimistic now shooting for earning above cost of capital. Is there any specific reason to this? Maybe you could explain on this point a little bit more in detail.

Secondly, mortality, could you give us a normalized EBIT margin for the newly -- new business you're writing currently, also in the context of recent very favorable underwriting results here in this business line?

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Klaus Wilhelm Miller, Hannover Rück SE - Member of the Executive Board [51]

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Yes. Let's start with the longevity. You might have seen that mortality got a little bit worse, especially in the U.K. in the last couple of years. Some of the direct writers have even changed their assumption. We didn't do that, but of course, we expect higher profits from that on the longevity business on the longevity side.

Still most of our longevity business is from the U.K. We are writing a lot around the world, but still most of that comes from the U.K. So we are a little bit more optimistic on that side that you will see the profit coming through slowly but constantly in the next couple of years.

Then mortality EBIT varies a lot around the globe. We have different EBIT expectation for different markets. If you look at the U.S., we have pricing for something which is more like 10% EBIT margin. If we finally make 8%, we will be happy. We don't write much U.K. business because EBIT margins would be insufficient from our point of view. And in other markets, it varies really by markets around the world. But everything is priced according to the same return on equity as we have on the P&C side, as we have with all our business.

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Roland Pfänder, ODDO BHF Corporate & Markets, Research Division - Equity Analyst [52]

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But did it improve lately, mortality margins on the new business? It looks like at least.

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Klaus Wilhelm Miller, Hannover Rück SE - Member of the Executive Board [53]

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Definitely, you'd see the results from the management actions in the U.S. But we don't see mortality rates improving in general worldwide. The competition is strong as ever.

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Operator [54]

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Next question is from Michael Haid, Commerzbank.

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Michael Hermann Haid, Commerzbank AG, Research Division - Team Head of Financials [55]

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Two questions. First on the K-Cession. The K-Cession does not apparently apply to the Bahamas. Still, the Bahamas is North Atlantic hurricane risk. Is there any reason why you treat the U.S. differently than the Bahamas? Or is it just a constructual mistake that you intend to change that in the future? First question.

Second question, pricing in Asia, property net cat. It appears to me that given these high losses from last year already, that the pricing in the April renewals was by far not sufficient. Do you share this view? And should we expect an acceleration of price increases in Asia for the 2020 renewals?

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [56]

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Yes, thank you very much for those questions. Starting with the K question. Why is Bahamas not included in K? As Roland already explained when he talked about Dorian, the bulk of our exposure in the Bahamas and the Caribbean Islands in general is coming from proportional business and K only takes nonproportional business. So the impact by including it into the K-Cession at the time was a commercial decision. Whether that would improve our expected return from the K transaction or not, and at the time we came to the conclusion that it wouldn't, so it was a conscious decision. It was not an oversight.

When it comes to the Japanese renewals and what do we expect on the next renewals following the runoff from Jebi and the 2 new typhoon events, you're certainly correct that had we known the full impact of Jebi, i.e., including the development of the loss, which the entire market, not only Hannover Re, has observed in 2019, then in all likelihood, the price increases at this year's 1st of April renewal would have been more significant compared to what we could actually achieve.

Now with that runoff, plus the 2 new losses, of course, we continue -- or we do expect significant rate increases again. Whether they will be accelerated is a different question because it's unfortunately not as simple as saying you have to pay so much more for the Jebi deterioration and then you have to pay more because we had Faxai and Hagibis. 1 plus 1 does not necessarily make 2 in that respect when it comes to rate increases. And of course, the client also always has the option to discontinue buying low layer structures if they feel that the risk transfer they can achieve after additional rate increases is insufficient.

So yes, we can expect significant rate increases, but we also have to be mindful that the percentage increase on the absolute premium that we will be able to generate will be impacted by those risk transfer consideration by the Japanese client.

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Operator [57]

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The next question is from Emanuele Musio, Morgan Stanley.

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Emanuele Musio, Morgan Stanley, Research Division - Equity Analyst [58]

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The one question. Given the strong pricing improvement in retro and giving pricing improvements in reinsurance are lagging, I'm wondering whether this might have an impact on your retrocession appetite and/or whether this might have an impact on your cat budget looking ahead.

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [59]

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Well, it's our intention to place similar retrospectus compared to what we placed the last couple of years. Of course, we have the financial flexibility that in case the retro market should charge increases, which is not in line with our view on the exposure of those particular contracts which we are buying to place less retrocession. And we also have the flexibility to increase over and above what we currently have in our plan for natural catastrophe business when it comes inwards into us because we have certainly not exhausted our potential risk appetite for natural catastrophe business.

I think we have taken a prudent view on what we can expect on further rate increases, and our plan is driven on that prudent view. If we should have been too pessimistic, we would be able to take full advantage of that development and write more business.

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [60]

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Maybe one element to consider is of course the exposed markets have usually renewals on the 1st of April and 1st of July for North America, and that gives us ample time to prepare for the renewals and have an appropriate strategy to link the price of the retro market with the pricing we will apply for the renewals. So we remain confident from that perspective as well.

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Operator [61]

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And we have another question from Thomas Fossard, HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [62]

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Yes, sorry. Just a catch up question on the surety loss on Thomas Cook. If we understand, that's not part of the K-Cession, but still an individual loss on the credit and surety portfolio of above EUR 100 million is still a significant loss. And I'm too surprised that, in fact, there is no specific [retro] protection in place to cap this single loss exposure. So maybe, could you share a bit more how you're protecting your book in this business line?

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [63]

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Yes, very happy to do that. Of course, a loss of more than EUR 100 million is a very significant loss. You're absolutely right in that. But it's fully in line with our risk appetite for our specialty classes where we are expecting that from time to time, we will experience 3-digit losses.

We have looked into retrocessional solutions for credit and bond business in the past. There are some products available. But it's -- we always came to the same conclusion. The limits that are available are not really moving the meter for us.

And secondly, they come at a very loaded pricing because it's such a tight market. So therefore, on the credit and bond side, unlike marine and aviation, where we buy substantially, we always came to the conclusion that it would be much more beneficial for us to write less gross exposure rather than the net position by what we felt is, yes, too expensively priced small retro solutions.

But to be very clear, I mean, a loss coming from that business practice of EUR 110 million is what we can fully expect from time to time.

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Operator [64]

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And the next question is from Jonny Urwin, UBS.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [65]

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Just a quick one, please, just to clarify. So what drove this additional reserving conservatism during the quarter? Was there any specific lines, i.e., have you increased loss picks on casualty like some of the U.S. primaries are doing? Or is it just replenishing the buffer after some erosion in recent years?

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [66]

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It's -- I would say it's a mixture of things. You have to bear in mind that when we closed the books for Q3, we saw Hagibis already come in. So in that respect, and then if you then with the uncertainty around another big Japanese typhoon plus a very positive contribution from life and health and from the investment side, it did not really make sense to be overly aggressive on the P&C reserving.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [67]

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Okay. Because I guess the bearish read of that is that buffers have come down in the last 3 years, like potentially, i.e, are you not happy to see them fall further? Or is it just a bit more opportunistic? It sounds like it's a bit more optimistic in that you've had a good result in life so you're going to take some of the benefits of P&C reserves.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [68]

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Again, not knowing how -- what Hagibis and the rest of the fourth quarter will bring to us, of course with the very positive contribution from the other side there, would -- this could have been an opportunity to fill the buffers again and increase those, and we wanted to be prepared to do that. And on the other hand, again, with now the fourth quarter being open and seeing Hagibis come in, we just wanted to make sure that we do not see the Jebi development again.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [69]

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Okay. And you haven't increased loss picks on casualty?

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [70]

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Not that I'm aware of. We had -- again, I mentioned that before, we had a close look, also driven a little bit by more than one of the question from your community. Our reserving actuaries looked at it one more time. We see the casualty reserves also rolling forward a little bit from the older years so there was no reason to take action based on the information we have today.

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Operator [71]

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And we have a follow-up question from James Shuck, Citi.

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James Austin Shuck, Citigroup Inc, Research Division - Director [72]

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Just very quickly, sorry for the follow-up. The 98.6% combined ratio at 9 months, now that is a normal run rate for large losses. You've intimated that the PYD for the 9 months was broadly in line with previous years, subject to the Jebi addition of about EUR 100 million. So if I normalize for that kind of Jebi situation, then maybe you're running about 98%. Really, just a simple question is why is that at 98% rather than below 97%? Because I think your answers around the casualty loss picks has not been that the loss picks have been getting higher. So if you just help me understand why that's not running below 97% on a kind of look-through basis, that would be helpful.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [73]

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I think I can only reiterate I think what I said at the last one. It was to let the credit loss kind of run-off against the budget was not easy to determine in the middle of a late third quarter. We took a little bit of a more conservative position, especially on the cat losses. So although the losses are in between the budget, it always depends on how much of the old budget you use to cover the new losses. Moreover, we did not really increase loss picks based on concrete casualty situations. But overall, again, we took a little bit of more conservative approach.

And as I also mentioned before, the underlying noncat or nonlarge loss experience was also a little bit worse than in the previous years.

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Operator [74]

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And the next question is from Vikram Gandhi, Societe Generale.

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Vikram Gandhi, Societe Generale Cross Asset Research - Equity Analyst [75]

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Just a really small one. Can you remind us if there is any retro protection on your casualty portfolio?

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [76]

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No, there isn't.

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Operator [77]

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And the next question is from Vinit Malhotra, Mediobanca.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [78]

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Just to quickly check the nat cat -- sorry, the large loss budget increase. Is there -- can I assume that the proportion between man-made and nat cat is similar? Or is there a change in that? So I remember it used to be EUR 660 million nat cats and the remaining was man-made. Can you confirm that as well, please?

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [79]

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Yes. The current split on the EUR 875 million is EUR 700 million nat cat and EUR 175 million from the man-made side. For the additional EUR 100 million, the split is...

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [80]

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I think it's nearly similar.

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [81]

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Nearly similar.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [82]

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It might have moved a little bit to the man-made because experience over the last year was that we were sufficient on the cat side and a little bit deficient more than once on the man-made side. But I don't have the split with me. But it should not be too far away from each other, but moving slightly to the man-made side.

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Operator [83]

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And the next question is from Paris Hadjiantonis, Exane BNP Paribas.

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Paris Hadjiantonis, Exane BNP Paribas, Research Division - Research Analyst [84]

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The first question would be on life and health. In Q2, you were highlighting that there was an effect from a number of cases that were in arbitration, and we didn't really share on update on whether or not there's been any kind of recapture in Q3. I assume from your results that there has not been one, but if you give us an update on what's going on with the cash and arbitration would be helpful.

And the other one is just on return on investment for next year. The 2.7% that you're giving, obviously, as you say, is mainly based on ordinary investment income, but the reality is that you have more than EUR 1 billion of unrealized gains, which are not related to fixed income. So I'm wondering whether or not there is any plan for some benefit from realizations coming up?

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [85]

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Could I just ask again about your question about recapture in the U.S. What exactly was the question again?

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Paris Hadjiantonis, Exane BNP Paribas, Research Division - Research Analyst [86]

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So in Q2, you were highlighting that you are in arbitration with a number of clients for a number of contracts.

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [87]

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Yes.

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Paris Hadjiantonis, Exane BNP Paribas, Research Division - Research Analyst [88]

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So an update on what have been the development since would be good.

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [89]

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Yes. The arbitrations have basically started everywhere with the selection of the umpire. It will probably take at least the full year 2020 to come to a conclusion. Until then, we have to book the results each quarter as they come in according to the old treaty terms. That means we will see losses in the next year from these treaties, which they will then be reversed. If at some point in time, we expect that we win the arbitration, the business is either recaptured or the rate increase is accepted. In both cases, we would either get back the losses or we get the additional premium increases. But this will be well into 2020, if not even '21.

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Roland Helmut Vogel, Hannover Rück SE - CFO & Member of the Executive Board [90]

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Yes, it's good to come back to the yield assumptions for 2020. As I mentioned before, it is more or less entirely based on ordinary investment income. You mentioned that there is -- there are more variation reserves, so we have no -- we are working right now on potentially the sale of 1 or 2 more real estate objects, and that could lead or would, if it really happens, it would lead to some additional extraordinary gains, but we haven't factored them in yet.

Moreover, every -- if you digest any extraordinary gain or any valuation reserves. This is a drag on the ordinary yield in the future, even if we look at private equity or other areas. So we would rather very concentrate in kind of harvesting ordinary yields also in the future rather than plan for contributions from sale of investments. So in this regard, there -- is there a potential? Yes. Are there plans? No. At least not to a remarkable extent.

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Sven Althoff, Hannover Rück SE - Member of the Executive Board [91]

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Maybe one additional comment on the recaptures. We still expect some recaptures in the fourth quarter 2019. This is what we originally expected in the third quarter, this drags on a little bit. It would be about $30-plus million from one of the companies which might go to arbitration. They will definitely go to arbitration if it does not happen in Q4.

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Operator [92]

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There are no further questions at this time. So I hand back to the speakers.

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Jean-Jacques Henchoz, Hannover Rück SE - CEO & Chairman of the Executive Board [93]

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Well, thank you very much for the Q&A session, for listening in. I think we've covered the ground very well. The P&C profitability has been a topic. We remain of the view that we have a very healthy portfolio. And indeed, there is a conservative reserving implied in the numbers.

Life and health is marked by a very strong in-force management actions. And over time, I think it will allow the profitability to emerge and to increase. And the outlook is positive, but obviously, we're well aware of the competitive market conditions, and that explains the guidance for 2020.

But I think we've covered all the key points for today. Thank you very much for your attention and see you next time.

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Operator [94]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.