Swiss Re AG

John Dacey - Group CFO Philippe Brahin - Investor Relations Edi Schmid - Group Chief Underwriting Officer

Edward Morris - JP Morgan Vikram Gandhi - Societe Generale Thomas Seidl - Bernstein Sami Taipalus - Goldman Sachs Andrew Ritchie - Autonomous William Hawkins - KBW Kamran Hossain - RBC Frank Kopfinger - Deutsche Bank Jonny Urwin - UBS Vinit Malhotra - Mediobanca

Thank you very much and good afternoon or morning to all on the call. I'd just like to quickly introduce the 9-month results with a couple of thoughts of my own and then return quickly over to questions.

The first, to state the obvious, at 9 months, we do have a very positive result, $1.1 billion for our net income. I think the magnitude of losses that we've had from the nat cat sector, materially different than last year.

But the third quarter reminded us that in fact, this loss will recur and recur across various jurisdictions. The second point, the resilience of our P&C Re business.

In spite of those large man-made and nat cat losses, $634 million of profit for the first 9 months, annualized ROE above 8%. I think a resilient business, which we expect to continue to be able to grow as we've done modestly in the first 9 months of 2018.

Third, the very strong performance I would argue of Life & Health Reinsurance, again $640 million of profits within 9 months and annualized ROE above 12%, importantly also a real growth in this business coming from a combination of an expansion in high-growth markets, broadly China specifically, and a continued success in bringing home important transactions in the more developed markets. Fourth, on the investment side, a stable running yield of 2.9%.

We started to see interest rates move up in the U.S., unfortunately not much motion in Continental Europe. Nonetheless, we've been able to protect that running yield.

Overall, the return on investments of 2.8%, if you adjust for the U.S. GAAP changing guidance would have been a 3.0% for the 9 months.

And last, I'm sure most of you have noticed we've published a Group SST estimate for July 1 of this year, a positive movement from the beginning of the year from 269% at January 1 to 285% at July 1. This reflects what we believe to be a continuing increase in the value generation of the Group.

We'll have more details on the full year number when we publish it based on the full year EVM results. And with that, I'd turn it over to our host today, Philippe Brahin to manage the questions.

Ladies and gentlemen, good day to all of you also from my side. So as you know, we have adjusted the format for our reporting and our comments during the call would be focused on our 9-month results in line with the scope of our press release.

[Operator Instructions] In the room here today, we also have Edi Schmid, our Group Chief Underwriting Officer to answer your questions. So with that, operator, could we please have the first question?

Thanks, for taking my questions, two please. The first is on Life & Health.

I wonder if you could just talk a little bit more about the performance that actually seems to be suggesting the capital generation and EVM and Solvency Swiss SST seems to be very strong. So I just wonder if you can talk a little more about that, and maybe anything that we can't see just from the U.S.

GAAP net income figure. And the second question is on your comments about future actions on capital management.

Seems to be a sort of slight change in tone from the way you've talked about things previously. I appreciate you still referring back to the Group priorities, but can you just talk a bit about what you mean there and is there any sort of timing that you may have in mind or something?

John, you want to start?

Sure. I think I'll probably take both of those.

On Life & Health, I think we've been trying to emphasize 2 things. One, based on some important restructuring we did in Life & Health Re in 2013, 2014, we put ourselves on a path to long-term profitability.

You see that in the U.S. GAAP results, which have met the target we put out of 10% to 12% ROE.

But more importantly or as importantly from our point of view is the continued progress of our EVM results on the Life & Health side. We haven't released those for 9 months, but have reached back all the way to year-end 2017.

I think you'll see a continued positive movement in the EVM earnings of Life & Health that actually exceed U.S. GAAP and demonstrate what we're putting on the books today, provides the opportunity for future earnings, which will come through the U.S.

GAAP's accounts as these portfolios continue to mature. So, and since the EVM is the basis for the calculations on the SST, that's where you see the positive impact coming through as well.

These are the capital management. I'd say the tone is not materially different.

We've said for quite some time, our goal in the first case is to protect the dividend to be sure that we are able to fund new business opportunities, deploy the capital organically in the first case, inorganically, should the opportunities arise. We've demonstrated the examples of this with the bolt-on acquisitions we've done in Corporate Solutions.

And at the end of the day, if we find ourselves with more capital that we can successfully deploy on a value-creating basis, we will return it to shareholders. We started the buyback program in 2018 and without the caveats that we've had in previous years, we're well along in that share buyback program.

With respect to any capital management issues regarding 2019, I think it's safe to say we'll wait for our full year results and engage in the appropriate discussions with our own Board of Directors, and let people know subsequently.

Firstly, can I just check how far is cost was aggregate cover from attaching, and if you've already had some breakup of this. Can you share how far is it from the point of exhaustion?

Secondly, given some of the recent growth court rulings in the U.S., can you shed some light on your comfort level around the Group's asbestos results?

Edi, do you want to take the questions.

So the first one, Vikram, is on CorSo's aggregate cover we put in place as we mentioned in previous calls to protect the portfolio a bit better, not just from similar type of events although it also puts us in place that protects that against the series of midsized hurricanes. And so far, we have the Hurricane Florence, which is closed as a total of $120 million and about half of that is in CorSo.

So CorSo is still well protected by the aggregate so it's not yet close to that aggregate cover here. I mean that's how it describes the situation.

And the second is around A&E reserves. And actually our P&C Re reserves in the third quarter are tiny bit negative, and that's was the reason we strengthened A&E to some extent in this quarter.

Overall, we think we are now fine in line with all the different benchmarks we used to set A&E reserves. So yes, that's how I'd describe A&E.

First, ReAssure Life Capital suffers from the weak UK Capital Market. I wonder if you could give us an update on how this would influence and where you are actually in your preparations to IPO ReAssure.

Is it getting more difficult now, and how are you doing there? And secondly, go back to this capital thing.

I mean, with this SST ratio you published today, you have $11 billion of excess capital, according to our own metrics. So you would need an act to write another $11 billion of premium to consume this capital, which probably is not likely in the next couple of years.

So what keeps you actually from making a more significant set, let's say, bring down by $5 billion, $6 billion?

John, that's for you.

It's John. I'll take both of these.

With respect to the IPO, what I can see is the preparation continues to pace. I really have no new insights for you compared to where we were in August.

We specifically said we would expect to be able to go to an IPO sometime in 2019 without being very specific about precise timing. Obviously, we will pay attention to market conditions but that's not new.

It's exactly what we've told you back in August. So again, nothing changed there.

With respect to capital, I take your point that 285% is quite some distance away from 220%, and arguably, is moving at least on one dimension further away during the course of 2018, at least as of July 1. The year is not over, and let's see where we actually land the year.

But the opportunity is for us to rethink where the capital is required. We'll continue to be a point of discussion for the executive committee and ultimately, the Board of the Group.

I will suggest that one of the reasons why this number remains relatively high relates to our defensive posturing of an asset risk. We remain in a range that's defined by our strategic asset allocation.

So there has been no fundamental change in the ranges that we've put on since the beginning of the year. But we remain cautious in accepting additional asset risk.

You could imagine situations where some combination of opportunities for writing new reinsurance and then primary insurance business plus a, some increases in asset risk in the future would provide opportunities, deploy a substantial amount of this capital.

Yeah hi. Afternoon everyone and thanks for taking my question.

My first one is actually coming back to the capital generation in the first half, which was very strong. Is it possible to give just a little bit more of a break down on what was behind that capital generation?

I mean, you already alluded as it goes a little bit to the Life & Health Reinsurance new business, but if it's possible to just potentially split out for me market movements or management license, on anything like that, that would be really helpful. Then the second thing comes back to your, I suppose comments about bidding capacity, you linked the, like I suppose, capital returns to the SST ratio somewhat in the statement, is that how we should think about it or should we -- do we also need to cross check it against the capital we have available at the holding company level.

Because I guess, the 2 are not necessarily directly linked. Thank you.

So Sami, to your latter point, yes. There are multiple dimensions, which we evaluate the dividend capacity.

The Group SST is clearly one of them, the available capital that we do have at the holding company. Second, an overall liquidity position, I'd say the moment we remain in fairly robust shape on most dimensions.

And so that's the starting point and frankly, a good place to be in these times where we've started to see some increase in volatility both in financial markets and some real losses coming through in the third quarter on the insurance side. We're not providing much more detail about the development of the SST at 6 months, I'd remind you that 285% is an estimate.

We think it's probably a pretty good estimate, but it's not been audited. It doesn't go through the same rigor that we have for the full year results, and therefore I think, my comments before about relatively modest levels of asset risk in the big picture and a clear capital generation of our first half business is including the Life & Health is about as much details we're prepared to provide at this point.

Thanks Sami for your questions. Can we have the next question please?

Hi there. I think, my question is for Edi.

First of all, could you give us an update on the reunderwriting at CorSo, we'll both -- I guess both partly the reunderwriting you were planning to do the portfolio clean-ups and so also progress on achieved average increasing rates you've managed in CorSo to date. And secondly, can I just follow up on the reserve comment you made to P&C Re, I think there was some adverse outside of the asbestos review.

Is that the same problem areas as in the first half, which I think was particularly U.S. also related liability?

It is something new in this part of the sort lumpy review process, just add a bit more color on state reassurance will be helpful. Thanks.

Yes. Thank you, Andrew, for these 2 questions.

So the first one is on reunderwriting, both P&C and CorSo. I think what we highlighted over the last few quarters that we took quite a different view particularly on U.S.

motor that's a bit older, but also on U.S. liability.

And then particularly when it comes to large corporate risks and it seems just significant large verdicts and settlement. So in our portfolio prioritization, clearly, U.S.

liability is very much prioritized for what we call risk reduction, margin improvement and not for growth. So on the hands, on casualty business, the property cat business with rate stabilization, even some rate increases, we have started to grow that business a little bit further and actually are on a good track to achieve these portfolio actions and that over time, it will also help the underlying combined ratio.

So there is no change in this prioritization. We'll continue on this path into 2019.

And on the second one regarding the P&C Re reserves, so for the 9 months overall, reserves development for P&C Re is positive. It's just the third quarter.

It's a little bit negative and one comment I made, which strengthens asbestos is uneventful a bit and the other contributor is actually some man-made losses from previous acts in the years that had to be strengthened this time on the P&C Re side. But we don't see any, let's say underlying wording trends and we continue to be very confident as the overall results assessed independently at the Group actual control level in the 60% to 80% range.

So A&E strengths a bit in Q3 and a couple of man-made losses from previous acts in the U.S. were strengths, so that explains the tiny negative, but overall, still in the positive territory for P&C Re.

First of all, in Christian Mumenthaler's closing remarks in your press release, you've referred to an inflection point in the P&C reinsurance pricing cycle. Could you elaborate on the extent to which that's a confident forward-looking statement, because we know the rates increased in the first half of this year.

But my understanding was the momentum was very much coming back, if not actually back in a declining mode into January. So could you just discuss a little bit more, you mean by an inflection point for pricing?

And then secondly, clearly, we don't have all the detail for the 9 months or third quarter, so it's a bit tricky. But you told us very clearly that P&C Re has had some pretty big knockouts.

You talked about negative reserve development. Mine from that is a bit underlying attritional experience that has been extremely good since you last reported.

Is that kind of fair and if so, why has the underlying expedience excluding capital and reserve development being so good? Thanks.

Thanks William. I think, Edi, this is all for you.

William, on the first one regarding inflection point. Maybe, if you go back after the record losses in 2017, there clearly was an expectation that there will be a significant inflection point, particularly for P&C Re, we have achieved in our business in P&C Re, on cat business and other parts, some improvement, maybe not as strong as expected.

And it's fair to say that momentum was not too strong throughout the year. When we talk about the inflection point, I think it's more important not just to look at reinsurance, but to look at P&C business globally and there, over the course of the year, if you look at all the indices produced, you clearly see positive rate trend now in the commercial businesses.

It was still a bit slower in the first 6, 9 months. Just more recently, we see a little bit more momentum there in markets like Australia, markets like Germany, where clearly that's more paying than before, we actually see positive momentum and that paints this picture of an inflection point.

And then we'd also refer to a signal study we released a couple of months ago where we analyzed by the institutes, the 5, 6 biggest P&C markets overall. And there, you can clearly see that if you want to achieve a sustainable return on equity above cost of capital, these P&C markets overall, so really the original business like, it's quite a bit of underwriting margin.

So this picture together with the losses we see this year, development fee in many markets, we feel has this an inflection year. And then on your second one is the combined ratio for P&C Re at 99.5%, I think it's important to look at it on a normalized basis.

We have this significant loss burden from nat cats from man-made. But it's important to differentiate the first 6 months were actually very benign.

We had hardly anything on the reinsurance side. And Q3, as it's anecdotally is above average, but you can take everything together, both nat cat and man-made.

This loss burden is broadly in line with what you would expect for the year. And that's also why we still feel the target or the estimate we gave for the full year of 99% combined ratio, we are set to achieve this over the full year.

Maybe what's important to reflect that actually that the third quarter is quite a heavy one in terms of nat cat exposure. So also we earned a lot of the margin in that year.

That's making it a hint on why the combined ratio could be a bit lower in your analysis, and also what I referred to before, we continued to have a rather cautious stance on U.S. cash flow business while we tried to go a bit more on property.

Cat again, which will also help the combined ratio a bit, to trend a bit more to the lower end. As, and then, obviously, we have achieved underlying improvements in the P&C Re book.

The quality is improving but that takes time to earn through, but we start to see some impact of this. So bottom line is, overall for this year, we still think the 99% combined ratio P&C Re is a good estimate.

3 questions. The first one is just on, I guess, the different.

I guess, first one is for Edi. It's on a difference in renewals and the dynamics between, I guess, 1:1 and 1:4 and kind of how you think this might impact the 99% combined ratio-starting point that you just talked about.

So first question. And the second question, just coming back to ratio, ahead of any potential IPO next year, can you just remind us is there any additional, kind of, pockets or caps or anything, any kind of capital optimization that you might be able to do and kind of dividend not to creep ahead of that?

Edi, you start it and then John, I guess.

For the question, let's say the different renewal timing. So you refer 1:1 and then 1:4, maybe you also meant to include 1:7 here.

So we had 1:1 where we only had moderate price increases, was mainly the European book. Then we have Japan, 1:4 with, I think, the picture was largely flat and then we had probably some improvements and also, without reasons, flattish into 1:7 here.

So actually it was not a very different pattern across this Re renewal cycles. But what again is important to understand is how this business earned.

So it's the lack in terms of new cycles, and that is how the business is earned on a get basis. So this year, still we earn about 50% of the business written in 2017 here, where there was rather some quality reduction.

And now the business growth this year, 50% of this improved business will only be earned into 2019, as always descattered. Now it will turn on 1:1, that remains to be seen, we still expect a flattish type of environment, there's still capital out there in quite abundance that's fair to say.

All that I explain before, there was also losses. There is pain in the system.

So for P&C Re, a flattish outlook, I think, is the least we expect.

So Edi, my second question is actually related to the first half as you related to kind of your different, difference in upcoming dynamics, for 1:1 versus 1:4, I just feel like 1:4 and 1:7 is a little bit far away.

Yes, so the only part I would make in this aspect are, there are significant losses out of Japan with Typhoon Jebi, where we said it's about $6 billion market events and our share is about $500 million and there are also smaller losses so that will clearly drive the dynamics of the 1:4 renewal, which is mainly a Japanese one and 1:1 is mainly Europe, when it was not significant loss activity, so that is this flat picture, it's probably a fair view.

Thank you, Edi. John, on the ratio?

On ReAssure, again, I've not a lot to say. These will be the actual IPO processes other than we continue to move ahead as planned.

The one that I would say is the Life Capital is a division demonstrated a continued strong gross cash generation up to a $1 billion for the first 9 months here and among other things, this provides opportunities for some flexibility as we think about why capitalization levels and potential dividends before or after IPOs, but the IPO itself is, there is no real news on.

I have also two questions. My first question is on your tax effects, obviously, if, whenever you have higher loss burden, there's some sort of offset to our tax effect.

Can you shed some light on how big they have been in Q3 in P&C and CorSo and then secondly, can you also provide some first few on Hurricane Michael, and your potential loss there?

All right. So it'll be John on tax and Edi on Michael.

So on tax, you're right. The geography, which absorbs the losses has a different tax impact.

I would simply suggest we are in a little different world with the U.S. corporate tax down to 21%.

The variations are smaller than they used to be. We have put in place the Swiss Re Asia Ltd regional coding company in Singapore, which has a even lower tax rate.

So some of the tax loss carryforwards from losses that would be booked through Singapore, might be even more modest than the 21% that we'd see in either Switzerland or the United States. But net-net, our goal is to make money here and the after-tax effect, how important to us is less important that we get back to our feet in terms of the underwriting.

On Michael, maybe I'll just jump in for Edi. We really can't say anything yet about what those losses might be.

They will be part of the fourth quarter and we've got no clear line of sight of either our position or frankly our own Swiss Re estimate, you've seen. The market estimates here are between $6 billion and $10 billion.

That does not feel reasonable. Edi, you might have additional view.

I also have quoted some of these loss estimates from $6 billion to $10 million. That's not unreasonable, but I would also point out that Swiss Re is a little bit underrated in Florida, we have commented in the past.

So as John said, it's too early to come up with any specifically at this point. But also as we said, we still think the 99% combined ratio is the reasonable exponent for the full year so I think that describes the picture.

Thank you Frank for your questions. Can we have the next question please?

Hi there. Thanks for taking my questions.

Two quick ones. So firstly, how is the profitability of the casualty book developing in recent underwriting is for us and for your expectations, please?

And secondly, what's your appetite growth in both P&C Re and CorSo. Going into 2019 should the pricing environment be flat and should we expect any mix changes in P&C?

Thank you.

Edi, you're going to take the two questions?

So the first is on casualty. Quality of the portfolio as I commented on earlier, particularly in the U.S.

markets on the motor side, but also on the liability side, portfolio is where we push forward for risk reduction for margin improvements we have achieved, some of that this year. We still think that market has to improve further.

I think the pain is increasing in U.S. liability.

But as always, I will not make too many forward-looking comments on how it turns out. Your second question is more about the outlook in terms of growth.

I would also there, reiterate what we said earlier, was let's say a flattish price environment. The quality of our book in a good shape we'll capture opportunities be it on the transactional side was in some of the core business, cat business we clearly have appetite, we like that business.

So it's a stable pricing with further slight increases. We'll also grow in some of these segments.

So overall, there is potential for growth, but it goes without saying that we will still do that with underwriting discipline.

Alright. Thank you Jonny for your questions.

Can we have the next question please?

Yes, good afternoon. First question, please.

Just maybe a bit of extra comment, please, on Corporate Solutions where the 1H growth was 18.5% and the 9-month, it is 9%. Is this just normal volatility, is it just -- is it that with management change in CorSo, you're making a step change or you're planning some step changes?

Just to hear some thoughts on CorSo growth, please in the first half in 9 months. And second question is, just a bit more in last night's reporting, AIG has flagged that they expect a lot of the fourth quarter losses to come to the reinsurance market because their management points are being hit.

I mean, generally, do you think there's been bit more aggregate sort of covers being sold to clients from your perspective or market perspective? And are these some things that are going to be important as we think of the next year, but also our fourth quarter?

Thank you very much.

Edi, you take both questions?

On the course of growth, 18% versus 9%, so 9% is for the first 9 months. So that's in line with the strategy to grow that book and most of that comes from the primary release initiative where it starts to bear some fruit and we'd again also point to the joint venture, but that's going in Brazil, but that's to the growth.

The reason why this more in the first 6 versus now is a one-off effect, but I don't want to go into the detail there. And the second one, regarding this AIG comments, we'll not comment on any company individually.

But your comment was more regarding aggregate covers in the markets and aggregate cover is nothing new and have been around for a long time since it has weakened some of those and we'd also continue to do so. It can be a very good mean to take out volatility from an insurance company, but obviously, it will be underwritten with still necessary rigor.

All we have to be careful at this point in time that as a reinsurer, you should not take, let's say, the bad part of the business away from the CD company, so it is -- just has to make sense. But aggregate as such is a valuable reinsurance toll.

We use to support our insurance company clients. It's still necessary underwriting discipline that's the product where actually we made decent returns over many years.

Actually, they are the last questions of the today. So we've come to the end of our Q&A session.

Thank you very much to John and Edi. Thank you also for -- all of you for joining us today.

Don't hesitate to reach out any member of the Investor Relations team for follow-up questions. Thank you again for your participation today.

Operator, back to you.