Swiss Re AG (OTCPK:SSREF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET
Company Participants
Christian Mumenthaler – Chief Executive Officer
John Dacey – Chief Financial Officer
Thomas Bohun – Head Investor Relations
Thierry Leger – Chief Underwriting Officer
Conference Call Participants
Andrew Ritchie – Autonomous Research
Kamran Hossain – JPMorgan
Freya Kong – Bank of America
Iain Pearce – Credit Suisse
Vikram Gandhi – Societe Generale
Will Hardcastle – UBS
Vinit Malhotra – Mediobanca
Ashik Musaddi – Morgan Stanley
Thomas Fossard – HSBC
Derald Goh – RBC Capital Markets
Darius Satkauskas – KBW
Dominic O’Mahony – BNP Paribas
Operator
[Starts Abruptly]
2024, there is much more matching between the asset and liability side. And we won’t see this drop, which we have seen now in U.S. GAAP. And finally, on the targets, I said it this morning in the media call. And I think you can obviously judge by yourself with everything I said, I think the segmental targets are absolutely within reach, 10% ROE is very much a question of financial markets in my mind, also obviously, since we still have a billion of budget there, and it depends on how things develop its financial markets has been, a real, real strong deviation this year, have impacted us significantly.
And so if you see any recovery there, of course, the 10% are still possible. So it’s just important to appreciate the distribution of potential outcomes, and that the 10% is still within this distribution, of course. So with that, I’ll hand over to Thomas to introduce the Q&A session.
Thomas Bohun
Thank you, Christian, and hello to all of you from my side as well. [Operator Instructions] With that operator, if we could have the first question, please.
Question-and-Answer Session
Operator
The first question comes from Andrew Ritchie from Autonomous. Please go ahead.
Andrew Ritchie
Hi, there. It’s not often on first on the queue anyway. Can I just follow-up on the proportional business, particularly motor, Christian, you mentioned you pulled back on it. But obviously there’s a lot in the book. I’m just trying to understand the protections that there might be as a reinsurer particularly on motor proportional business. Yes, I’m thinking things like sliding scales, et cetera. That mean, you are to some degree insulated from the issues that we’re seeing at the primary level, so maybe a bit of color on that will be useful. Second question on capital in SST, there was quite a lot of increase in drawn down debt in the first half of the year. I can see in the accounts that there’s been also some reduction of senior debt, but does the SST number include that additional debt? Or have you netted off debt that you’re expecting? I think you’ve got some maturities in September, maybe early next year.
And maybe just talk to us, through your sort of debt strategy and what you did in the first half? Thanks.
John Dacey
I will take the first one. Hi, Andrew. So, on proportion business motor in particular. So you’re absolutely right, that there are protections in place. So we have around, if you look at proportional and non-proportional, on the proportional, the protection, we have in place a sliding scale, so around 80% of our business has a sliding scale, so that protect from inflation, for example, quite a bit. And on the non-proportional side, more than 90% of our business has index clauses typically such an index is CPI related, so it’s not a perfect match. But it works quite well in current environment.
So that also provides us with protection, but it’s clear that we see or, as Christian said before, earlier in the year, but already, during last year, we saw different tendencies, not necessarily just inflation, we also saw social inflation kicking in at the degree that would actually go beyond the sliding scales as an example or social inflation is also not reflected in the CPI index in non-proportional, so these are all areas to watch for us.
And clearly, our conclusion in the end was to reduce from the multiple that we had. So that’s a decision we took despite some of these protections being in place, of course, we reduce more on those books that actually don’t have these protections and where those protections are not all motor quota shares, obviously have such protections.
Christian Mumenthaler
Maybe here to add, of course, there’s these are not infinite, these sliding scales are just a few points and they protect you from the worst from the beginning. But yes inflation gets worse, it can hit you.
Thierry Leger
Yes, typically, they absolutely eradication of five, maybe seven points, right. And that’s why I said if you’re faced with heavy inflation and maybe social inflation on top of it, then a 5% to 10% sliding scale just doesn’t protect you anymore enough, right and which actually led us to reduce that exposure. But that doesn’t mean forever. The market as Christian said might turn more attractive again and we will have a lot of powder dry at that time.
John Dacey
And Andrew, it’s John. With respect to the debt financing, you’re right, we called on the pre-funded facilities early in the quarter, the $1.9 billion was brought on balance sheet, largely as a preemptively funding what are going to be three maturing issues in the next 12 months, there’s a subordinated note at the end of the Q3, there’s a senior note maturing at the end of the year. And another senior note maturing in May, I think of 2023. The amounts of those are similar, a little bit smaller, I think the $1.9 billion in total.
But our expectation is that we would not do any additional funding, replacing any of these three maturing issues, but rather, when we saw the market volatility in March and April, drawing on the pre-funded seemed to make sense, both economically and just securing the funds on the balance sheet ahead of these maturities. I think overall, the leverage of this was really cosmetically looks relatively high just because the shareholders equity has dropped $7.5 billion impact from the increase in interest rates as of June 30th.
Again, this is an accounting reality, not an economic reality. And I think we’re entirely comfortable with the overall positions of both debt and economic equity in the balance sheet, the SST ratio, as Christian mentioned is above the top end of the range. And we’re very comfortable at the moment with that, it’s been inflated by this big shift in interest rates. When we come out, I think in the end of October with our Q3, we will give you detail on the final SST number as of the first of July.
Thomas Bohun
Thank you, Andrew. Could we have the next question, please?
Operator
The next question comes from Kamran Hossain from JPMorgan, please go ahead.
Kamran Hossain
Hi, afternoon. Three questions. The first one is guess on strategy in reinsurance, as you’re increasing the level of CAT business, you’re putting on what seems sensible given what’s going on in the market seems like it’s actually truly getting out there. Could you maybe talk about how much headroom you actually have to increase CAT risk, both on kind of a race agency basis, and then also on an internal risk appetite? The second question is on core. So I mean, the numbers, I think Christian you said it’s been a very result, and it has been for some time, the exit, kind of combined ratio, underlying combined ratio, ex, I guess the deal you did suggests it’s kind of closer to 91.
Potentially a little bit of bad luck in the first half as well. Is there any reason this quarter shouldn’t have a kind of sub-90 combined ratio in the near-term? Thanks.
John Dacey
Hi, Kamran. I will take the first one. On CAT and you referred specifically to the headroom, so but let me start first with confirming that we do indeed see CAT as an attractive area to go further, we think the market is as now as Christian said arrive to right market positioning and we see further hardening for example, in the July renewals and we feel that continuity hardening will happen in the next 18 months or so. So, we are very optimistic with regard to the market out there.
In terms of headroom, so our headroom goals from very large to maybe less. So it depends a bit on the perils as you know, we split our CAT book into many different areas. So on some of them we have a lot of appetite. So we are strongly pushing for those and they now in this hard market come actually at very attractive rates. One of them was for example Germany last year where we could really ride the wave very nicely with deploying more capacity into the market. There are other areas where the capacity is generally more scarce.
But also there, we have some headroom still to play around. And if we feel that the headroom is reducing, what we do is which is prone to good business, but maybe it’s not as stellar as some of the new presence we can get. So some of the actually good business might have to go and make home for even better business. And that is also why certainly, you can hear Christian being very positive on CAT because what is good is going to get even, even better. So we can go both EVM capital allocation, and we can over proportionally grow our economic profit into space.
Christian Mumenthaler
And I think if I can, together with that the continued strength of our alternative capital partners gives us the opportunity to manage some of the peak risks by directly accessing retro markets for those risks, the prices that are being demanded are elevated compared to where they might have been a year-ago, we understand that and to date, we’ve been able to price the underlying risk that we bring on to our books in a way that there maintains a margin between what we cede out in with various vehicles, to what we’ve actually been compensated for taking the risk onto our books.
John Dacey
I’ll take the CorSo question, which of course I fully understand and the clear logic in what you’re seeing and suggesting, I just say that I think really about the long-term of this business, and we’re still paranoid about the past, and where things might go with this market if you project several years out. So it is the top importance for me is that CorSo must be rock solid in every single balance sheet item. And that will be the priority, they do this, we don’t want to push results now. And then later get into trouble. I think it’s super important that we have a sustainable long-term path for CorSo. And we do that through some portfolio shifts and getting into more diversified lines overall.
So that even if there was a shock, like the loss of cycle, which is basically what I’ve always tried to go through in simulations that we can sustain. So I’m not making any particular predictions for the future. But just understand what’s the mentality we’ve come from, and that we want to make sure that it’s on a very safe, sustainable path.
Thomas Bohun
Thank you, Kamran. Could we have the next question, please?
Operator
The next question comes from Freya Kong from Bank of America. Please go ahead.
Freya Kong
Hi, good afternoon. Two questions, please. So your P&C Re currency loss ratio seems to be moving backwards, despite your changing business mix over the last year. Is this being driven by motor proportional or something else? And even adjusting for the war losses and the earn through timing H1 versus H2, do you think you are still running a bit behind the 94% normalized combined ratio target for this year? And secondly, there was some reserve strengthening in Q2 for both P&C Re and CorSo. Could you just give us some color on what’s driving this?
John Dacey
Hi, Freya, I will take the first one. On P&C Re, the loss ratio question that you were asking, indeed, your observation obviously is factual, right. And that with regard to where the last races develop, so maybe let me go just back a little bit, we’ve made it very clear, right that we see an environment of high volatility in which actually good returns first, right. So that explains our very strong focus on combined ratios. And that, of course, includes the loss ratio.
And we have also said that we would shift the portfolio to where it’s more attractive, and in this environment, we have explained it now, several times we move from proportional rather to non-proportional business. So all of that obviously then impacts our loss ratio. So what I would think in this environment, we definitely need to watch that. So as a Chief Underwriting Officer, I really watched your attritional loss ratio very closely, because I do believe that we need more headroom in such a volatile environment.
And I think with the continued shift of business with the improved costing that we are seeing again, in July, it makes me feel very optimistic about continuing to drive this attritional loss ratio down further, there is more into play here and much more details with regard to the question of CorSo of the 94. I think we have explained it several times already that we see ourselves still on a good path with regard to P&C Re, we have shown the normalized results at the normalized combined ratios, and we have explained to you the seasonality effect as an example, but also Christian mentioned the Ukraine impact and so on. So all reasons that if you did is actually you can see that you are still on a very good path to get below the 94.
Thierry Leger
Sorry with microphone. With respect to the prior-year development, I think overall in the first half of, there was positive momentum continuing, although at a much smaller rate than in 2021, for Corporate Solutions. And the net position was about plus 50. There was some reinforcement of reserves and casualty, there might have been a couple of specific claims were coming from the older years where they saw a need to make some modest top-ups. But I think more importantly, just some precautionary assumption changes for the CorSo book in casualty to be sure that we’ve got as Christian indicated sufficient reserves for the uncertainty, that’s part of the casualty liability book of business there.
I don’t think this has anything to worry about in the context of any trends, but rather just looking forward and being sure that we’re well covered. On P&C Re, a similar orientation, I think again, some pluses and minuses net-net for the half year, I think we were had a negative $10 million, which is frankly trivial with respect to the overall reserve position of P&C Re, I think we’re very confident in the reserves, we’ve continued to evaluate all different dimensions of pressures on these reserves, whether it’s social inflation, that we’ve been talking about now for literally years, whether it’s the current spike in inflation affecting short-term lines on motor and property in particular, and comfortable that we’ve made the adjustments we need to make to be well positioned.
Thomas Bohun
Thank you, Freya. Could we have the next question, please?
Operator
The next question comes from Iain Pearce from Credit Suisse. Please go ahead.
Iain Pearce
Hi, thanks for taking my questions. The first one was just on the Intergroup dividends. Just looking at the reporting, it looks like the segmental changes in equity is no longer being shown. And [indiscernible] equity looks quite low, even taking into account the sort of market movements that we’ve seen. So I’m just wondering if you could talk to us about what’s happened in terms of dividends from subsidiaries, up to group level in H1. And the second one is just a point of clarification. Around P&C Re, particularly with the business mix changes that we’ve seen in the sort of one half percentage point combined ratio that I think you’ve mentioned, improvement that you mentioned there. Is that included in the 94 guidance, or is that in addition, that with these changes, was that part of the budget at the start of the year is something that actually should be leading us to sort of improved estimates for next year. Thanks.
Christian Mumenthaler
John, would you like to take the first question?
John Dacey
Yes, I mean the — with respect to internal dividends, we did make a dividend payment out of SRZ and SRL in advance of the payment of the external dividend, I think our capital and liquidity in the flagship care, so SRL remains robust, and we don’t see any particular issues with respect to flexibility on dividends as we go forward. So I’m not sure that there’s a particular issue here. On the disclosure, we can I don’t know that we’ve specifically done less, it’s part of the restructuring that we described last year with what we call Project Genesis, bringing a series of legal entities in Switzerland together may just not have that intercompany flows that you might have seen in previous years. And I think that’s the only thing that’s going on here. On the second question?
Christian Mumenthaler
On the second question, so you’re absolutely right. So the business mix is included in our 94 targets already. Improvements that we have achieved obviously this year will already profit to a certain extent this year that would actually help to compensate for some of the headwinds, unexpected headwinds we have seen due to the war. But lots of these changes including obviously the very strong July renewals will also or even more, so profit 2023 and further years.
Thomas Bohun
Thank you, Iain. Could we have the next question please?
Operator
The next question comes from Vikram Gandhi from Societe Generale, please go ahead.
Vikram Gandhi
Hi, it’s Vikram, SocGen. Just a quick one from me. Can you share what the latest IBNR position is on COVID results for P&C Re and CorSo. I think the last disclosure we got was at the current stage where the IBNR position was around 52%, 53%. That’s really all from my side.
Christian Mumenthaler
It’s still surprisingly large, given the fact that we’re two years after the incurred event is down a bit. But we’re continuing to be the largest single IBNR position continues to be the property BI and we continue to be in serious discussions with a number of primary companies looking for resolution for an appropriate determination of final claims.
I like to tell you, it’s going to be done this year, but I don’t think it will be some of them might and we’ll give you as we get through December 31 more detailed updates of what’s left out there.
Thomas Bohun
Thank you, Vikram. Could we have the next question, please?
Operator
The next question comes from Will Hardcastle from UBS. Please go ahead.
Will Hardcastle
Hi, afternoon everyone. Yesterday, we heard quite a bit about reserve risk and the read across from whether it be reviver statutes, or inflation potential. It sounds like your state penalized the higher inflation risk, and you wouldn’t assume any more risk than normal assumptions heading into the Q3 reserve review. Is that a fair statement from what you’ve said so far? And I guess it I’d probably say seems quite optimistic given the spike in inflation, or is that is it because you just view it as a short-term spike in nature? And the second one, just thinking about leverage, you mentioned that the headline IFRS isn’t the correct way because of the unrealized gains, et cetera.
I guess we could always strip that out. But even then we’d still be close to 40%. And of course, the peers would be lower in that regard. I guess other reinsurers are happy giving that target? Would you be willing to give an appropriate range for leverage? Or how should we be thinking about it? Thanks.
Christian Mumenthaler
Sure, Will. On the first one, with respect to the reserve risks. I know the reviver statutes and potential risks on abuse claims is topical, we’ve been looking at this quarter by quarter for probably the last five years at least, maybe longer. We continue to update our view of our own exposures talk with our clients, we’ve got sort of general IBNR reserves set up for our U.S. liabilities, which for better or worse is probably where most of this, the dollar loss is likely to come from, but also in some cases, some specific case reserves.
And we’re comfortable, very comfortable with what we have there. The reserve adjustments that we made in 2019, 2018, 2020 through the P&C Re and CorSo, I think reflected our view that the social inflation was a issue and our continued view that it’s not going away, it’s not getting better. It may even be getting worse. And so the updates that we made and you saw last year that we continue to make contributions to P&C liability reserves were reflective of this.
On the shorter tail lines, we evaluate what the exposures are for us, you just heard, Thierry talk about some isolation or insulation that we have on some of the motor inflation. But we’re still see especially with large losses, the risks are there, certainly in property as well. And we in the first case, we’ve adjusted aggressively our costing models and the pricing related to these lines. But we’ve also looked at the reserves, and we’re comfortable that we’ve made whatever adjustments are required on a quarter-by-quarter basis to get us to a good place there.
So I think we don’t have a particular view that inflation is going to be short lived. On the contrary, this was reinstitute, I think has taken a relatively pessimistic view, coming into 2022, and through 2022 and while we don’t necessarily agree 100%, with everything that our economists there have to say that that’s the basis from which we evaluate what we think might be required for the insurance covers we write.
With respect to the leverage, we actually I have been reducing over the last 10 years a series of positions for the various components of leverage the way that we calculate it, we’ve said that we’re looking at the upper end of 35, different kind of linear using, but we can fit it very easily together. And we’ve stayed in there, the important thing is we’ve systematically have been reducing our senior debt and in some cases replacing it with subordinated debt along the way. But I think the point of this momentary increase that you see here at June 30 is what I mentioned, Andrew, right, pre-filing those three, and the next 12 months, new issuance is result. And we’ll go into 2022, I think in fine shape, comparison with our competitors, I’ll leave to you.
Thomas Bohun
Thank you, Will. Could we have the next question, please?
Operator
The next question comes from Vinit Malhotra from Mediobanca, please go ahead.
Vinit Malhotra
Yes, good afternoon. Thank you, John. Thank you, Christian. The first one is on the renewals. And I’m just curious about one or two things there. One is the strong reduction proportion property, which I presume is X category, you’ll note that this is more exposed to inflation. Now, I understand that the motor topic you just discussed earlier in the call was in the casualty side. But is that similar thing here? Why should proportional property expect have more inflation if you could just clarify or give some ideas there? And just link to that, is it a fair thing to compare these two slides which is as of 1Q and then in the 2Q slide, the one where we show the renewals walk and we see new business longer lower only about $100 million in the July renewal.
And obviously that could be consistent with [indiscernible] that just wanted to hear your thoughts on this cut back in July renewals, that is the first topic. Second topic is the mid-sized manmade losses, which both 1Q and 2Q and now on the Slide 23 both 1Q and 2Q were higher year-on-year on the accident, the additional loss ratios if you’d like to call them back, is there something that we should be thinking about here because this was a topic in the call today — in the morning today and the second half point, literally a half one word clarification.
You mentioned CorSo being very cautious, reasonably cautious. Is the casualty CorSo 120C combined ratio 2Q, just an example of cautious approach or is it an example, is it something being driven by some external law set of claims or even the revival statute you just mentioned? Thank you.
Christian Mumenthaler
Vinit, I will take this and you might have to repeat one question. I wasn’t sure whether I understood it, but I will go with those that I believe I understood. So the first is on proportional property, right? Why do we reduce it, and so when you look at inflation, you can see that CPI and for example, construction prices and elements like this, they have a direct impact on property. And when these spiked way they did, I mean construction started last year, which is, by the way, also why we already started last year to become very cautious on property.
Because the construction prices are not up only since the war, they were up already because of supply chain problems before that. So construction prices are high up, now CPI is high up as well. Both have a direct impact on property, and then these spikes happen relatively fast. And then of course, it’s clear that it’s going to take the primary industry at least 12 months to actually get ahead of the curve, everyone is now behind the curve, increasing prices, you have to file, it takes a while for 12, 18 months delay. And so when you look at it from a reinsurance perspective, and you have different ways to deploy your capital, so that’s not necessarily where we therefore decided to deploy our capital.
You also had a question around renewals and $100 million, maybe Vinit, you want to just and I come to your other questions in a second, but maybe you want to be elaborate a little bit on that question of the $100 million because I didn’t get it.
Vinit Malhotra
Yes, yes, sorry. So if I see the slides, which show the renewal walk. So for example, what was in the first quarter Slide 5 and today is Slide 6, you see the column new business, YTD. Hence it’s really small number of only $0.1 billion. And just, I mean, you can cancel a lot, which I can see, which could be a proportion property. But if you only wrote $0.1 billion of new business, is that just a reflection, that non-proportional tend to be lower volume, but higher impact on the number?
John Dacey
We can take it offline.
Christian Mumenthaler
Maybe you will have to, but I’m really happy to answer what I think I now understood. So yes, indeed, you are absolutely right when you. So non-proportional business for the same amount of capital allocated comes with five times less premium. So that’s what you see, right? So you can really allocate more and more capital. But when at the same time you shift from prop to non-prop, you reduce your premium that goes with it. So again, you have $100 million capital with proportional that might create, that might create $500 million of proportion premium, if you write the same $100 million capital with non-proportional that creates maybe $100 million premium. So when you shift the business mix, then that’s exactly how in the end, it comes across.
Do you have a question around the mid-sized manmade losses, and indeed, we have observed a number of mid-sized losses. So mid-sized are below our $20 million threshold for large losses, so we applied it to net cat and manmade, so there are some differences to some of our competitors that actually apply different thresholds for us, it’s always $20 million. So midsize is below the $20 million, but still above the $5 million to $10 million. And so we had indeed an unusual increase of number of such losses, mainly related to prior years.
Here I wouldn’t read too much into it, to be honest, I mean this is the usual change in frequency that one has to expect. So yes, there have been more than we would typically expect, but I really don’t see this now as a new trend or anything worrying to come our way and you also make reference to the CorSo relatively high, combined ratio and whether we should read anything in there. So certainly not seeing varying, some of it can be explained, by the way, but it is mid sized manmade losses, clearly and also you shouldn’t read into it an overly cautious approach to casualty care. We are, as John said, in CorSo generally trying to be very, very technical in our approach to the risks that we see in particular inflation. But again, I would not read too much into this quarter casualty, CorSo line of business. It’s just too narrow and too volatile.
Thomas Bohun
Thank you, Vinit. Could we have the next question, please?
Operator
The next question comes from Ashik Musaddi from Morgan Stanley, please go ahead.
Ashik Musaddi
Thank you. And good afternoon, everyone. Just couple of questions I have. I mean John, I guess you mentioned earlier that some of the benefits of the business mix change will feed into next year as well. And given that the CAT business have grown really, very strongly and in 24%, versus Group at 3%. I mean, is it fair to say that the combined ratio improvement this year was like next year versus this year on a normalized basis could easily be like a percentage point or something? Or would you say no, that’s a bit on the higher side. So that’s the first question. I would say the second one would be life earnings are pretty strong, excluding COVID, as well.
Any color you’d want to give on, what was driving that life earnings? Is it technical? Is it investment income driven? So that would be very helpful. Thank you.
Christian Mumenthaler
Ashik, thanks. On your first question, it’s a little premature for us to be out with a 2023 guidance on the combined ratio. I think what’s important is that we were pleased with the acceleration of pricing in the mid-year, as Thierry expressed that he thinks and frankly, the group thinks that the hardening market for reinsurance broadly CAT specifically will continue. And we’ll be able to give you a much more definitive color on what an appropriate combined ratio for P&C Re will be when we’ve got the January 1 renewals under our belt.
It’s just too big of a piece of the puzzle to have us speculate before that that’s actually done. But the message that you’ve heard, I think from everybody here is that we think the pricing is supportive, we think the loss costs are increasing, and we think the price will need to continue to improve for any future uncertainties or deterioration and loss costs caused by inflation or other factors play into the risks here.
On life earnings, you’re right, in the year where we said the impact of the crossovers of the pre-2004 portfolios was going to put real pressure on us, at year-to-date the underlying earnings have been strong. And what I can say is, in any one quarter or one half, we normally have a number of geographies performing well and then one or more geographies, where the life business is either struggling or needs a bit of a reshaping with respect to some components.
What we saw, especially in the second quarter was actually the business firing pretty much on all cylinders, across all geographies and delivering just a very, very strong result. I can’t project that this will be carried forward into future quarters. But what I can say is we didn’t stretch anything to try to show a nice number. The fact that we got to a positive two rather than something else, is literally the result of an important bottom up exercise of where the profits landed. And the underlying strength of the business is what gives us a firm belief that we can in fact, achieve the $300 million for the year in spite of what will be some additional COVID losses, which we would expect in the second half.
Thomas Bohun
Thank you, Ashik. Could we have the next question, please?
Operator
The next question from Thomas Fossard from HSBC. Please go ahead.
Thomas Fossard
Yes, good afternoon, everyone. A question on the life side, I think that I can remember that the Investor Day at the end of last year, you were pretty bullish on the prospect for growth opportunities in the life business, year-to-date premiums are up 2% to 3%. So I was wondering is that the results of more attractive opportunities in the P&C side, which makes you allocate more capital to be serious with life or should we expect the momentum in terms of top line on the life side to pick up in the upcoming quarters?
The second question will be maybe also clarification on COVID-19. Could you talk specifically, what your thinking is currently on credit and surety IBNR, is it is related to COVID-19, is it something that you are ready to rethink Q3, Q4 and the last thing could be in the context of a very volatile financial market environment, could you update us on what your latest thinking regarding asset mix, asset allocation, AG, anything that you would like us to live with after this call regarding how you’re positioning the investment portfolio for Q3? Thank you.
Christian Mumenthaler
Hi, Tom, I take the first on life and health growth. So you’re absolutely right, we still see an environment generally of actually attractive opportunities, we see that generally the desire from people in is to get protection, that is still kind of coming off from the COVID crisis. And we see that across the board, we see that the growth is generally happening at improved margins, we said that we see ourselves in a payback mode now, after COVID. So we continue to push really hard for price increases.
And we get not everything we want, but you get some of it. So we are quite pleased about these two, so that those two are working really well, I guess we have a little headwinds on the very large transaction. So we still haven’t seen that one. Generally, we see one or two per year of a large ones that hasn’t happened yet, that can come obviously, any time but it’s much, much more lumpy than anything else. So that explains some of what you said. And also, you might remember that we have in critical illness also been very careful in the last two years. So we can see now some of that coming through reduced growth in CI, but again, nothing varying actually wherever we want to growing, we are growing and we are growing at nice margins currently. So actually quite good news in life and health.
John Dacey
So Thomas on your second question on sort of COVID credit & surety IBNRs, look we’re looking at various components of COVID reserves. And I think we’ll give everybody an update, probably at year-end with where we stand. If we find that there is redundancies, we’ll act. But we don’t necessarily disclose every time we do something here with respect to the overall position. Like I said, we believe our current reserves remain more than adequate for the exposures that we have on the P&C side for COVID remaining. And I think you squeezed a third question on asset and just quickly, I can say that our investment team remains fairly cautious.
We’ve put in place a series of hedges with respect to listed equities, which protect us from much in the way of downside risks there, we still have exposure to our private equity portfolio, which we’ve disclosed is about $3.5 billion and the overall mix of assets. There is some credit exposure but we continue to trade up into relatively high quality more than 90% of the credit book is investor grade and is closely monitored. Christian, I think this morning identified about $50 million of impairments largely related to Russia, and maybe some China development real estate exposure, but we’re very comfortable with the portfolio we have as a fairly defensive position on
it.
Thomas Bohun
Thank you, Tom. Could we have the next question, please?
Operator
The next question comes from Derald Goh from RBC. Please go ahead.
Derald Goh
Hi, good afternoon to everyone, hope you can hear me okay. Just two questions, please. The first one is just going back to topic on inflation. So I’m just trying to get a sense of how your stress testing your [indiscernible] inflation assumptions within reserving. So maybe things like, what is the inflation stress that you’re assuming under SST capital, as well as anything anecdotal, you can share perhaps what is the SST ratio sensitivity to say a 1% increase in inflation assumption?
The second one, just going back to the CorSo reserve strengthening, could you confirm that this was covered under the ADC to P&C Re and also, how much of reserves have been ceded to P&C Re through ADC since inception to date? Thank you.
Christian Mumenthaler
Let me get a try. I think with respect to inflation, I don’t know if people remember but we actually made adjustment in the SST model to inflation more than a year-ago, which we had to explain, it created a reduction of the capital ratio that was not necessarily anticipated, but it seems appropriate at the time, which would I think at year-end 2020 if I’m not mistaken. And we continue to evaluate under SST, what an appropriate inflation risk factor is, as we go forward, we have not shared sensitivities on this. And I’m not sure that we will, but I’ll at least consider if the people think that this would be a useful point of information for you. The CorSo position sorry.
John Dacey
I think the PYD you were referring to, that would be in the combined ratios, of CorSo. So that would have been retained within CorSo, specifically, those combined ratios that we show by line of business that is a net view.
Christian Mumenthaler
And more broadly the specific sort of detailing of the cash flows of the ADC between the two we’ve not disclosed and are unlikely to disclose.
Thomas Bohun
Thank you, Derald. Could we have the next question, please.
Operator
The next question comes from Darius Satkauskas from KBW. Please go ahead.
Darius Satkauskas
Good afternoon. So two questions, the first one you highlighted that year-to-date rate increase was roughly 6%. And this was fully offset by loss cost trend. So when we think about next year’s combined ratio, am I right to think that there should be — there should not be any benefit beyond business mix changes from the pricing you’re able to achieve in the recent renewals? That’s the question number one. Second question, during the July renewals, did you see any signs of pushback on rate increases, because your investment yields have gone up and you expect pressure on the underwriting returns going forward as the industry should be making much more autonomy investments? Thank you.
Christian Mumenthaler
Yes, Darius, I can take these. So yes, at this point in time, you should look at it the way we presented, so that the changes that we’ve received will come from a portfolio mix because we think that the price increases that we have seen has been used actually to set them against different loss trends, inflation and so on that we have seen. So indeed that should be your thinking. On your second point. No, actually it’s very, very important right that we do not get pushback on that point, I have been very clear also at the Investor Day that we need technical results, margins. And as a result, that’s also how I provide the messages internally to all underwriters in the company.
And I’m very clear that the combined ratio is what has to be top on people’s mind. And we will very happily take the higher interest rates as a windfall.
Thomas Bohun
Thank you, Darius. We have time for a last question. Could we take the last question, please?
Operator
The last question comes from Dominic O’Mahony from BNP Paribas. Please go ahead.
Dominic O’Mahony
Hi, folks, thank you for taking the questions. Just just two small clarifications. One is just on life. And I think our target in life going very well in the second quarter, you’re sticking with a $300 million, is that because there’s something about H2 which you just need some manage through and so that the sort of the beating expectations in Q2 doesn’t necessarily translate into an upgrade in that $300 million or I have essentially been conservative with that, with that $300 million. And then secondly, just on pricing versus claims, over the next 18 months, you’re very confident on the pricing environments. And all said you were you were really happy with the summer renewals.
And the latest renewals essentially offset claims inflation, which is great. But are you expecting over the next 18 months pricing ahead of claims inflation as some of the capacity from your competitors comes out of the market? Or is this really about confidence that you’ll match things inflation, and that that will lead to sort of strong growth? Thank you.
Christian Mumenthaler
I’ll take the first question, Dominic. With respect to the net income and effectively saying that we’ll make $300 million in the second half of the year as I mentioned, we do expect some COVID claims still in the second half. And again, Q2 was light at a reported 40. But that’s a net number, the actual incurrence for the quarter was slightly above 100. And then there were some offsets from reservations that we’ve put up in previous periods that we can balance off against that.
So we shouldn’t extrapolate the 40 necessarily into the next two quarters. On the other hand, we think it will be contained, as we’ve said before, and in addition to that, this is a tough year with respect to the crossovers. I mentioned in Q2 especially, but in the first half, we had all regions performing very, very well. I think it’s unlikely that that will be the case for the full-year. If it is it will be a nice to have. But I think the $300 million remains a reasonable and certainly achievable target for us.
John Dacey
On the second question, Dominic, I don’t know at some point I guess that the pricing will go ahead of the claim strength but for this, the claims trend somewhat has to turn right, so inflation has to turn, other elements have to turn for actually the price trying to get out of the claims trend. So it’s going to happen at some point, I can honestly not predict when that will be but it’s going to happen and that’s going to then represent an exposure. So that’s going to be the next tailwind right. So the tailwind that we see now is on the interest rates side. And the next day when we beat it, we are indeed ahead of the trends.
Thomas Bohun
Thank you, Dominic. With that we’ve come to the end of the session. We’d like to thank you for all your questions. If you do have follow-up questions, please contact us at Investor Relations. So thanks again and we wish you a nice weekend. Bye-bye everyone.
Operator
Thank you. [Ends Abruptly]
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