Swiss Re AG

Thank you very much, good morning and good afternoon, everybody and welcome to our 2018 annual results Q&A call. I'm here with John Dacey, our Group CFO; and Edourd Schmid, our Group Chief Underwriting Officer; and Philippe Brahin, our Head of Investor Relations.

Before we go to Q&A, there are several remarks I'd like to make to put today's reported information into context. There are two main factors, which over proportionally impacted Swiss Re in 2018.

First, we experienced elevated large losses in our P&C segments and absorbed US$3 billion in large claims. This is in the context of 2018 being the fourth costliest year for the insurance industry.

The second factor was the underperformance of global equity markets and impact that had with the new U.S. GAAP accounting guidance on Swiss Re's results.

The adverse pretax impact was almost US$600 million. We were not subject to the same volatility in 2017, as accounting change was introduced last year.

Bear in mind that our European peers are not subject to the same rules, making our results appear artificially more volatile. Looking at the performance of each of the business segments, we had a challenging 2018, but remain optimistic about the outlook.

P&C Re's underlying performance was slightly below expectation, but we maintain good cost discipline. Life & Health Reinsurance has continued to deliver solid results and strong growth, including from partial transactions.

Asia remains a key driver of growth in this business segment. Corporate Solutions performance in 2018 was clearly disappointing, in spite of the measures taken to address underperforming business.

We will continue with our corrective measures and expect to benefit from improving commercial insurance rate in 2019. We will also conduct a business review under the incoming CEO, and will update you together with our half year results.

Life Capital delivered exceptional gross cash generation in 2018, and met its 2016 to 2018 targets. On the close book side, preparations for potential ReAssure IPO continue, while the open book business continued to grow dramatically.

Turning now to the January renewals, on which we reported today, we are very pleased with the outcome achieved. We remained disciplined on lines of business with ongoing price pressures and found attractive opportunities to deploy capital.

We achieved a volume growth of 19% and a price quality improvement of 1%. We expect further price improvements during the remainder of the year.

Finally, we're proposing an attractive set of capital management actions. Given the long-term economic earnings and sustainable capital generation of the Group, the Board will propose through the 2019 AGM, a rebasing of the regular dividends to CHF5.60 per share, representing a 12% increase.

In addition, we propose to seek AGM authorization for a new share buyback program to be executed in two tranches prior to the 2020 AGM. The first tranche will be very similar to last year; the second one is conditional on the development of the Group's excess capital position in 2019.

For instance, if we experience a significant increase as a result of the successful reduction of Swiss Re's holding in ReAssure below 50%. With that, I'll hand over to Philippe to introduce the Q&A session.

Thank you, Christian, and good day also to all of you from my side. So as usual before we start the Q&A, I would like to remind you to please restrict yourselves to two questions each and register again if you have follow-up questions.

So with that, operator, can we please take the first question.

I guess I just wanted to understand a bit more about the thinking behind the rebasing of the dividend. I think, it was in April at the Investor Day, John, you gave us a slide suggesting that the net solvency capital generation per annum, economic capital generation per annum was about $7 per share or about $2.4 billion.

You're now proposing sort of a recurring repatriation of about $2.7 billion of the unconditional buyback plus the dividend. Is that the kind of level of ongoing capital generation you now think the Group is generating?

Is that how we should think about it? Second question, reading the annual report, comments from the Chairman in particular, are very bearish about the broader macro backdrop, and I guess this is part of the reason why you are reducing the credit exposure through the sell down of ReAssure.

But just to clarify, will you look to reinvest some of that credit risk that you freed up to replace the lost earnings from ReAssure? Or is it a general you just want to run a lower level of overall credit risk?

Andrew, hi, it's John. I'll try and take both of those questions.

On the first case, we think about the share buyback and the ordinary dividend separately. I think, we're comfortable with the rebasing of the ordinary dividend as a level which is sustainable and where we can think about either maintaining or potentially enhancing that in future years, not necessarily 12% a year.

I think it's also important to say that this is in the context of our shares having systematically reduced through the share buyback program over the previous years. And so the actual amount that we're increasing this by is not a big amount.

As you identify, we go from $1.6 billion to $1.7 billion with this dividend payout. The share buyback will be judged I think more systematically on a yearly basis as to where the overall position of the Group's excess capital is.

We've demonstrate there's a certain resiliency in the balance sheet over the last two years. I'd say the challenge of the fourth quarter in 2018 was a little different than what we'd seen as financial markets turmoil and the blowing out of credit spreads in particular would have had a negative effect on our Swiss solvency calculations as well as on the underlying ordinary equity of the Group.

So I think as we go through this, you should think about the ordinary dividend is something both we and the Board have confidence in being able to maintain, if not expand in future years. The share buyback will be a lever we will use when we believe that we've got excess capital that can be returned to shareholders, and we don't see the opportunities for redeploying it otherwise.

And that's the way I think you should be thinking that these two. With respect to the Chairman's commentary on credit markets, I think, again, we came into 2018 with a fairly conservative investment portfolio, we'd already moved ourselves higher up the credit curve in the corporate credit portfolio that we had.

We've mentioned I think in the documents, the relatively de minimis impairments on the fixed income side that we've had to endure in 2018 but also previous years, and we continue to be conservatively positioned. I wouldn't necessarily expect but if we're successful in executing an IPO of ReAssure that we will immediately build up a big credit position, we'll take a view of where the market is at that point of time and where interesting opportunities are.

It does create more flexibility, should conditions be of interest to our investment office to be able to build in or take on more credit risk supporting the other businesses. But there is nothing automatic about the redeployment.

Thanks Andrew for your questions. Can we take the next question, please?

Yes, good afternoon, everybody. I have two questions.

My first question is on the capital position of CorSo. In 2017 you had to recapitalize the unit after the significant losses, now you had another $400 million loss, how shall we think about the capital position this time?

And then secondly, on the price increase during the renewals, the 1%, there is a footnote saying that this is adjusted for portfolio mix effects, can you comment on or elaborate on this? What do you mean with this portfolio mix effect?

And what an unadjusted number would be?

Thank you, Frank. Maybe John first, and then Edi.

Sure. So with the CorSo capital position, you're right we did make an increase in CorSo's equity at the end of 2017.

We've also looked at the opportunities we see for this business on a going-forward basis and want to be sure that we've got adequate capital. We'll disclose the SST for the subsidiary businesses in our April disclosures.

But what I can say is, we're comfortable the business currently has enough capital to write profitable business going-forward basis. We did increase, from a Group level, a subordinated debt in Corporate Solutions at year-end 2018, but there's been no equity injection and we'll evaluate the capital situation partly in context of evaluating the reinsurance program for CorSo on a going-forward basis.

Thanks, John. Edi on the price improvement.

Yes, thanks for the question on the 1% price increase. As you noted we changed the way we measure price quality improvement.

We moved away from the internal LTPA measure we disclosed in the past to what we think is something more comparable to what peers do and also what we think is a more objective way to measure price quality improvements, it's actually a very simple measure of underwriting margins, so it's the premium we get for the risk net of the commissions we have to pay discounted for the time value of money and then divide it via the expected claims discounted, we think that the purest view of a underwriting margin. And then to really do an apples-to-apples comparison, we adjusted for the portfolio composition, so we really get a fair measurement of the business that gets to us on a like-for-like basis, and that leads then to this 1%.

Apparently, the factor of portfolio composition, the way our portfolio developed from 2018 into 2019, with a bit more premium volume growth on the casualty side, it would have a slightly negative impact. The price adjustment was fairly positive, but it will be a bit little bit lower than 1%.

I think that's the way to think about it. We also, I think, provided an explanation of how this LTPA compares to the new measure it tracks quite closely.

We really think the benefit is, it's less distorted from our internal capital cost and the internal expense allocation, so we have this objective measured. So [indiscernible] portfolio improvements, it's about 1%, including portfolio mix change it would be somewhat lower but still positive.

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

Hi, good afternoon, everyone. I've actually got 2.5 questions hopefully Philippe forgives me for that.

Firstly, on CorSo, obviously, the results are underwhelming, can you shed some light on why the improved Reinsurance program has not really worked? And I remember from the nine months 2018 conference call, you said the business was well predicted with the covers you had in place.

And then what is it that you intend to change going forward? So that's question number one.

Secondly, sorry to come back on the dividend increase, but the 12% increase in dividend, I guess, the message you want us to take is that the earnings power of the Group is really strong, but with the dip in the future cash upstream from the reassured stake dilution and more so with the IPO planned and CorSo still on shaky ground, what gives you the comfort for a 12% increase in dividend? I guess the other half question is on ReAssure, just philosophically, why would you prefer an IPO to an outright stake sale and bring in a third-party along with you and MS&AD?

It is simply because decision-making would get too complicated with three parties instead of two? That's all from my side.

Yes, Vikram, these are three questions. It also with Reinsurance Edi, and dividend for John.

Maybe on the Reinsurance side, of course, I can say something since I was more deeply into CorSo now for 1.5 month. So you remember, philosophically, 2012, we traded CorSo, we said philosophically, we aren't going to protect it much with Reinsurance, only very really remote Reinsurance, so the gross performance is always visible in that segment because it will be left pocket, right pocket with Reinsurance.

Last year after the big events, we increased Reinsurance somewhat on the cap side to avoid repeat of the last year, but the losses in CorSo really case reserved, which have adversely developed. About 80% of the adverse development is single case reserves where there have been some reserves, there was an event, something was reserved in the current of 2018, we had to increase the loss reserved for that particular case.

So the only thing that could have protected it would have been a ground-up adverse development cover or something like that, which was not in the plans or foreseen last year. Going forward, I think this is an open question, all right; this is something that I want to discuss with Andreas Berger.

My strong instinct is that to ensure more comparability with peers, we're going to have a more normal-type reinsurance program for CorSo, but that's something that we're going to update you on in mid of this year.

What I would add also 2018 was affected quite a significant number of current in the large man-made losses. We had a substantial fire loss in Germany, we had this satellite loss later in the year.

And the change in the CorSo program was older than net cat side as Christian said, but the man-made protection, the retention per risk is still at a significantly higher level than to peers, and that's clearly something we will review over the course of this year. This should be a bit lower.

And together with the adverse developments that together explains the result.

So with respect to the question on dividend increase, again, while 12% is a significant rebasing, in an absolute terms, we're moving from $1.6 billion to $1.7 billion, and so our confidence in being able to sustain this dividend and potentially increase it on a more modest level in years going forward is basically related to the underlying economic earnings, which we've been able to share most recently, and in particular, the franchise of our Life & Health Reinsurance has been delivering a strong increase in economic earnings for the previous four years ever since the restructuring in 2014, and we don't see any reason to suspect that will back itself down in any material way. You do mention that the cash generation and large dividends we're getting from ReAssure will moderate if we don't own 75% of it or even if we do own 75% versus 100% of it, that's probably true, but we're confident that the combination of normal years for our P&C businesses and improving Corporate Solutions and our Life & Health Re business will provide ample opportunity to maintain this level of dividends.

Again, to reiterate what I mentioned to Andrew, the discussion for the share buybacks will be revisited on a routine basis depending on the overall level of excess capital. Last with the ReAssure IPO, we continue to - with the preparations for that.

The nature of the question, I think, needs a little clarification, what we said is, we're running a process to be ready to do an IPO and will execute it in 2019 when we think market conditions are supportive. It doesn't exclude any other possibility, but the focus of our efforts are doing this in to the degree that we are 100% in control of going or not going with it.

There's no gun to our head, we don't need to execute the IPO for capital reasons, but as we've said before, we think we're not the best consolidator of this business into our balance sheet. If there are other opportunities, which provide adequate value to ourselves and interesting future for the business, we're not adverse to discussing them.

All right. Thanks Vikram for your questions.

Can we have the next question, please?

Yes, hi, everyone from my side as well. The first question would be on the level of large losses over 2018, which has clearly been very high.

I was wondering if there was anything that surprised you and could lead to any model adjustments. And also given that you freed and more business on the cost side in January renewals, if you could actually guide as to what you expect in terms of budget for 2019?

That would be helpful. The next question is with regards to the new business and the return in Casualty.

I was wondering, if you could give us an idea with regards to ceding commissions, especially in the U.S. What the year-on-year change there has been?

And also given that there's a lot of growth, but that growth seems to be targeted and not necessarily in areas where we see adverse development on the reserve side, such as motor, if you could comment on maybe motor and liability lines and pricing? Thank you.

Okay, so Edi.

Yes, thanks for the questions. The first one on the large loss burden 2018 and learnings from it.

So obviously, Nat Cat has been a key risk pool for us for a long time, and we have developed sophisticated models and these go through a very regular back testing and updating models. So already after 2017, it was [indiscernible] losses, we did deep dives and we did some adjustments here and there, and we have started to do the same thing again out of the learnings from 2018.

Overall, I'm happy to say we're still quite comfortable with the modeling of our Nat Cat. If we assess actual claims versus our modeling over a number of years where we take out random volatility, we think we project the losses quite adequately.

There's always some things to learn. Now in 2018, there is some surprise element in these wild-fire losses.

So for the second year, we have significant losses out of California, it's also not a new risk because this exposure has been clear to us for a while, but that we have - twice in a row, where significant wild-fire losses was a bit of a surprise. So already into this renewal, we costed a bit more for this wild-fire exposure in our portfolio and took a bit more cautious stance.

But overall, the way we model the Nat Cat business globally, we feel very confident that we get this adequately right and that's also why we're confident to deploy again more capital to the Nat Cat space. We could improve prices quite a bit last year, we see positive momentum also in this year, and that's why we are comfortable to deploy quite a bit more capital into that space.

Premium-wise, as we explained, it's about 22% more premium at 1/1 versus expiring, and if rates develop as we expect in the April, June, July renewals, we plan also to deploy more then. Obviously, what it means for the 2019 Nat Cat budget, it will be higher than last year.

Last year it was $1.15 billion, we have now grown the exposure by a bit more than 20%, then you would add a bit more, let's say, costed-loss burden for some of the model adjustments for wild-fire is not much, but we will disclose the Nat Cat budget in the Q1 results and it will be higher, but I cannot give you a number now. But in the end, we're very confident with our assessment of these risks and that's why we will deploy more capital into that space.

Great, and then Edi, there was the second question around casualty, new business, what we have seen, from Paris?

Also motor.

Yes, motor in particular.

So back to the 1/1 renewal. Obviously, we had not only grown in the Nat Cat space, we have also grown on the Casualty side quite significantly, actually, just measured premium volume terms, the casualty growth is even a bit more than the property cat growth.

Now it's very important to see where this growth is coming from. Actually, Casualty is a very broad, let's say, risk pool and have to look into it a bit more in detail.

What we have been quite concerned about since two years, and we have made this clear on the CorSo side, but also on the reinsurance side in the U.S., that was commercial motor, which was not performing well, where we do not write in CorSo, and also took a very cautious stand in Reinsurance. But then there's the general liability side, in particular, coverage for large corporations, Fortune 500, Fortune 1000 type of accounts led by excess liability and lead umbrella type of policies.

And there, in CorSo, we started to improve significantly also on Reinsurance and this will continue. The new business we now put on the books in 1/1, it was mainly acquired via large-tailor transactions, we had a significant one in Europe, but also we had significant ones in the U.S.

And most of this businesses actually what we would call really small commercial business and it is also very small limits. And it's kind of what we call first-dollar coverage and not excess.

So what this means that the claims developed fairly quickly, so we have more predictability and it's not this long-duration business that has more uncertainty. And of the business we took onboard, we have a confirmed good track record and it comes in a transactional form where it has structural elements, so upside and downside are more balanced.

So that business we put on the book, I'm very comfortable with, it will perform according to expectations, and we clearly have no intention to grow in areas where we see the concerns around the liability, lead umbrella, access or large corporate risks. There we'll continue to improve CorSo and will take a cautious stance in the reinsurance space.

And then similar on the motor, you also asked about motor where commercial and motor is also still difficult. Personal lines in U.S.

looks a bit better, so we will look into that space. If it comes as a good price transaction, we'll definitely consider it, but commercial motor continues to be also an area we are quite skeptical.

All right. Thank you, Paris for your questions.

Can we have the next question please?

Yes. Hi, good afternoon, everyone.

Just coming back to CorSo on my first question. You mentioned that you're going to update on this segment with the H1 results.

Just wondering how much freedom is the new CEO going to have to change the strategy. Is it just the case of maybe buying a little bit more Reinsurance?

Or is there going to be a broader review of the strategy in the business? And then the second question is on M&A actually.

I think, John, there was some headlines on Bloomberg earlier today about you saying that pricing on deals is still a bit high. Could you comment a little bit on what you're seeing in terms of stuff being offered to you?

Is there a lot of stuff being offered to you? And also on your internal capacity for deals?

Thank you.

So maybe Christian on CorSo and then...

Yes, with pleasure, right. I think obviously, the situation with rain and the disappointing results ask for decided action.

But to me there's two components to that, one is sort of remedial actions you can take pushing for price increases, cutting some portfolios much more than we have done before. But to me there's also a strategic dimension, where to play, when to play, how to play, so I want Andreas to have significant freedom, I think the only thing I wouldn't want is to sell CorSo.

That will be in any case a bad idea in the bottom of the cycle, but everything else is basically on the table. And I think we have an unique opportunity to have somebody with 20 years of experience to come in with an outside-in view, I expect him to look all the portfolios, all the process, all the setup, all the philosophy, the people, everything, to be able to give us a benchmark of how does he see things, where are we in advance, where not, where can we compete against others, where not.

And so I'd give him a lot of freedom, I think that's what we expect.

With respect to M&A, and say we are, obviously, a major participant in the insurance and reinsurance market. We evaluate what possibilities there maybe for improving our strategic position.

We said exclusively that we don't necessarily see much real opportunities for strategic transformations in our Reinsurance business, Life & Health or P&C. And obviously, we've not been in that market doing any transactions in terms of consolidation plays in recent years, never say never, but that's the - I think, the current view.

We have said that we'd be happy to reinforce the position of Corporate Solutions if we saw the opportunity and saw it at a price levels which we thought made sense to us. We've done some small bolt-on acquisitions in previous years.

Last year, we completed and benefited in some ways from the transaction with Prodedesco in Brazil. That's after investing in Columbia and taking over RSA's China business.

But net-net, again, we've I think been fairly disciplined in the way we've deployed capital on inorganic plays and we'll continue to be so.

Thanks. Any further questions.

Can we have the next question please?

Hi, there. Thanks for taking my questions.

Just a couple on the reserve. So in P&C Re, could you just tell us how that favorable reserve development on 0.9 point sort of split across Property, Causality and Specialty.

That's the first one. And then secondly, could you please update us on the latest claims inflation trends that you're seeing in U.S.

Casualty, and also how has profitability developed on the liability book on the recent underwriting years?

So Edi, I guess, these are two questions for you.

Yes, thanks for the questions. So the first one is on the reserve development, P&C Re.

So overall it's 0.9% positive. And that I would split out into the three main pockets; property, which was positive, special lines was also positive, and then Casualty overall was negative.

So giving a bit more color around this negative in Casualty, it comes from a few places, one actually is related to the specials and environmental in the U.S., where we strengthened quite a bit. And it's mainly related to actually very old years, where we agreed a settlement was once seasoned for a late reported claims, so that's a significant contribution.

And then we had also some strengthening in our motor portfolio in Europe, also rather old years from the UK. And then to some extent, we strengthened a few pockets in U.S.

liability in line with the trends we have seen to larger verdicts going through our robust reserving process for older segments. For some we updated reserves and strengthened to some extent, so that overall, again, we are comfortable with the total reserve level, which as in now stand in addition reviewed independently by our group actuarial control function confirming that the overall reserve base is still within a good range between 60% and 80% of what is considered reasonable, best estimate.

And this in fact applies to the total reserve base, and what is also important, it also applies to the more recent underwriting years. So that's about PYD.

And the second one was regarding inflation in the U.S. Actually, it has been quite benign as you know.

This is something we monitor very closely as it affects our longer-tail business of course to a significant extent. So at all times, CPI, but then also, healthcare cost inflation and wage inflation are monitored and are reflected in the latest projections to cost to assess the business we put in our books.

So inflation is still benign, we have seen a bit of an uptick on health care. I mean, to share my frank view, I'm not concerned about the inflation really the next couple of years, and would rather say recession risk is a bit higher over the next couple of years.

But clearly, inflation is a bit risk factor, so we monitor it very closely, we put it into our costing, and also it's one of the significant risk factors in the group risk models, so the businesses that are exposed to inflation get additional capital charge, so it produces the adequate return there. That's what I would say about inflation, particularly in the U.S.

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

Yes, good afternoon. Two questions on my side.

The first one would be related to CorSo and the pricing environment. I think that last year you were shooting for plus 5% price increase across the book.

I think that at the end you came with something which was more around 3%. Looking at, I would say, your combined ratio and also combined ratio of your peer group, which are all significantly above or under 10% in 2018.

I mean what would be your reasonable pricing or better pricing environment for 2019? Is it still, I would say, a very surprising noticing, I would say, more momentum coming up with everybody trying to improve underwriting profitability and even targets to bring the combined ratio down below 100%.

That would the first question. The second question would be relating to the P&C Re combined ratio target of 98% in 2019.

Actually, it's down 100 basis points from guidance for 2018, which seems to be in line with the pricing issue, managed to get on the 1/1 renewal. So on the 98% for 2019, and what's your pricing expectations for the upcoming renewals?

And how should we see this guidance, if by any chance you were reporting better pricing momentum later in the year? Thank you.

So Edi.

Yes, thanks for all these questions on the pricing environment. Actually, both in the commercial space and in the P&C Reinsurance space.

So on CorSo, you correctly reflected, last year after the significant loss in 2017, we targeted a price improvement across the CorSo portfolio 5% and disappointingly, we only managed to get to 2% to 3%. I mean it's very clear in line with what we said earlier, the commercial business in the market overall, but also specifically CorSo needs to be improved much more significantly than 3% or 5%.

The trends we've seen in the segments, I alluded to a bit earlier, it clearly need to see much more price improvements than the numbers we have just mentioned. We will still find our action plans to improve the portfolio more, but it will be significant.

It will be targeting significant price improvements across-the-board, but then also, much more targeted. It was clearly that segment, as we mentioned a bit earlier, around large corporate general liability coverage, where we don't think it's realistic to get to a sustainable rate level anytime soon.

So there we will actually take away capacity quite dramatically. So clearly, the commercial markets overall, but in particular, U.S.

liability, they need significant improvements. And in our improvement action plans for this year, we will target significantly more than the numbers we have just been mentioning.

I cannot go into specific numbers at this point. But it's clear.

The industry overall and CorSo specifically will need to drive much more than these 3% or 5% that we've been talking last year.

Okay. And then maybe on the second question, maybe on the P&C Re combined ratio 98%, obviously, pricing developing further this year?

Yes. So our estimate for P&C Re combined ratio 98% for 2019, so that's a point lower than last year.

And that's actually - there are several contributing factors to this 98% estimate. We say it's about 50% of the improvement is coming from better quality of the business, and the other half is coming from what we would call a scale effect.

So the scale effect is pretty simple. We write about 20% more business, that's stable expenses.

That explains why the combined ratio will get a bit lower. And the rest is price improvements.

And that is important to keep in mind the earnings patterns for the business, so we wrote the business in 2018 at what we disclosed 2% higher. So some of that is now earning through into 2019.

As I mentioned earlier, the business we wrote at 1/1 is a bit better measured objectively. If we consider the business mix, this does not help much in terms of combined ratio improvement.

But the estimates for the whole year, obviously, also projects the forthcoming renewals in April, June, July. This will earn only partially this year, and into next year but still it has a bit of an impact.

And there in our plan, clearly, because this is the more loss affected business in places like Japan or U.S. We have factored in some good quality improvements and that's also reflected in this 98% estimate.

So that's the contributing factor that leads us to this 98% which we feel very comfortable with at this point in time.

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

Hi. Thank you for taking my questions.

The first is coming back to reinsurer. And it sounds like you're also keeping your options on the table in case other alternatives come up.

Can you just clarify, if you were to go down the route of a trade sale rather than an IPO, would your preference be to retain a significant minority stake? Presumably any buyer would want to at least control, but if you could just talk about whether you prefer to retain a stake or could you, in fact, completely exit your holding there?

And the second question if you could just help us a little bit with the trajectory of things in CorSo. You're talking about intensifying some of the pruning of underperforming business there.

And on the other hand, you are also talking about the opportunity in Primary Lead. Overall, are we expecting premium to grow in CorSo in the next year?

And a little bit of help on where we are on an underlying combined ratio basis would be helpful. So if you could just give a feel for what you think might be a good outcome for Corso this year?

Thank you.

So I'll start with the reinsurer discussion and probably frustrate you a little bit. The reality is that it's not particularly useful to think through hypothetical situations of potential trade sales.

I would say, I stand by what we said when we announced the IPO plans, we don't think this is a bad business, actually it's a very interesting business. The cash generation is interesting and has been useful to us.

I think, we need, in the first case, to de-consolidate it and take it off of our balance sheet, consolidated balance sheet. Once we do that there is probably a certain level of openness for whatever stake below 49% we might hold onto.

The important move by MSNAD to come in for another 10% makes it a little simpler for us to get down to below 50% where we would stop either on the IPO or in some other transaction to be seen in the future.

I think on the CorSo, I'll take the question on the CorSo trajectory. Because as I said, this January and February, I looked at it very closely, obviously in view of these results.

And I've worked with the team. So to me there is two stages.

One is short-term fixing of the business. The other is more the strategic angle, which I really want Adreas Berger to look at, but for the fixing I didn't want to wait for him.

So there's clear instructions to the team. We work through a plan of, how much do we expect in price improvements, where?

And how much and where do we have to cut to get to where we need to be? And using basically the experiences of the combined ratios we had last year.

So there will be some significant cuts of business and of portfolios. And my expectation would definitely be that we're going to shrink somewhat.

Now who knows if anything changes completely and prices go up higher, or if we find new business, that's fine. But clearly, the instructions to the team is not to make sure we maintain the top line or grow the top line, the instruction is, it's absolutely fine if we shrink.

And I think, if we execute as we do, there's just a relatively high likelihood that we're going to shrink. This is really a year we just need to do whatever needs to be done.

And not to watch cost ratios and things like that.

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

Hi. Thank you very much.

First of all Edi, I just want to challenge the answer you gave earlier about your Nat Cat budget and being happy with it. I'm sorry, this is ancient history and slightly technical, but if you remember, just before [indiscernible] left, he significantly reduced your cap budgets and you disclosure to the market.

It was prior to 2016 about $1.5 billion. And when you cut it in 2016, the explanation was that you were doing that because you had a period of light Nat Cats and positive reserved development.

And so you were making an adjustment to remove double counting. And as it seems to me, now that Nat Cats have at least normalized and reserve developments has gone back to a more normal level.

It's odd to me that you haven't returned the cap budget to where it was prior to 2016. So I just wanted, like, if this more of a statement, but I'm not sure why you think you're happy with $1.15 billion as a starting point?

And then secondly, just a follow-on from that previous question, is there any chance you could try and just help us with normalizing the Corporate Solutions combined ratio? I appreciate that everything is in flux, but given that it's been such a large number for two years, just trying to get a feel for what would be bad luck, and what would be just bad business?

It would kind of be helpful. So I'm assuming that all of your reserve developments ideally should be zero.

I'm assuming that your Nat Cat budget if you were normal commercial lines, writes up would be about 3% versus the 6% you had. What I'm really uncertain about is the level of large man made losses.

Should that figure actually be zero, because it should be captured in attritional or would you always have some budget for it? Thank you.

So, on your first question regarding the Nat Cat budget, so what I wanted to make clear and then repeat that we are very comfortable in the way we assess the Nat Cat business. So the models we update on a regular basis that makes us believe that we have a good way to assess the claims we have to expect in the longer-term from the Nat Cat business and that's why we're comfortable to also deploy capital into that space.

I think it happened before my time. We made some changes.

You're correct in the way we calculate the budget. What I can say the way we do it now, I feel this is the best way to really assess what is the expected impact of the Nat Cat business volatility to our financial year.

And what we changed in the approach versus earlier is, for example, that this is not just the expected losses we consider, but there's also other factors that play a role like it considers the reinstatement premium we will be able to get. If there are claims on the non-proportional side, or there is profit commission arrangements in many transactions that would also moderate the impact.

So we just changed to a basis that we feel much better reflect the true impact of the expected Nat Cat low burden to the current financial year. I understand it was a bit difficult because there was a change.

But actually, the methodology has nothing to do with the fact whether there are large Nat Cat losses or not. It's just we came up with the way, we best quantified the impact of the expected Nat Cat losses and the $1.15 billion, for last year, we felt that's really the best quantification.

And we will come up with the same and again, which we will disclose in Q1, which as I already indicated, will be significantly higher, but not because of a change in methodology, but because we write more business and because we update some of the models to most objectively reflect the true underlying risk in this portfolio.

And maybe, Edi, on the second question, regarding the possibility to normalize the combined ratio for Corporate Solutions, which I think we talked about a little bit in the past when we discontinued the guidance on the combined ratio.

Yes, maybe I'll jump in here. While I appreciate your desire I can imagine that.

The fourth quarter and full-year 2018 for CorSo result has been frustration to anybody who's been trying to model it. But I don't think this is the time for us to introduce or reintroduce guidance on what that combined ratio should be.

So we'll see later in the year, when the portfolio actions are bearing fruit if we can give you a little bit of help there. But today I think it would be premature and potentially misleading if we would put anything down for you.

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

Hi, everyone. And just coming back to CorSo, could you remind us on - you think about percentage point benefit or kind of investment cost that you think added to the CorSo combined ratio.

If I remember, it was four points. Could you maybe update on that given you have improved a couple of points in the last year?

And then the second question relating to that, I guess the premiums at CorSo are pretty large, I mean $4.7 billion. Just this business really need more scale to hit reasonable operating cost?

So any thoughts on that would be great. Thank you.

Edi, may be on the impact of this investments, primary drive the opportunities, in fact with - on the combined path.

On the CorSo 1, yes, I mean, if we try to normalize the CorSo performance to make it more compelled to peer, there is this two factors we showed in the past. I mean, what is the cost base because we invest significantly to build this Primary Lead capability.

That's adding between 4% and 5% to the cost ratio. Then the other factor is, as you know the reserves that were left back in the reinsurance business when we put CorSo on a standalone basis.

That has delivered significant favorable prior year developments. And again also for last year, this would be, I think, 3.4% combined ratio points improvement, if it were reflected.

That's what we described as total financial contribution. In addition, there will be some investment return on that, but I will not go into that level of detail, yes.

But clearly, these two effects together would bring CorSo combined ratio down quite a bit. But it would still be a very bad year.

There is no doubt about that.

And there was a second question...

Yes, on the scale, yes. Yes, I mean it's obvious, right.

I think the Corporate Solutions business, once you go over to a Primary Lead type activity, you need a lot of costs, a big infrastructure all across the world, which is what we have invested in, right, on the technological side, but also legal entities, et cetera, et cetera. Once you have that, you can scale up with much, much less cost increases.

So clearly, getting to scale is important pre-requisite to get more competitive over time. That's, I would say, the strategic consideration, obviously.

It doesn't override the fact that we need to get the portfolio right, which is what we're going to focus on this year.

And maybe if I can just - chime in here. Actually, as we continue to build out the Primary Lead capabilities, the average cost on the expense or on the combined ratio is probably a little lower in 2018, 2019, close to 3% than 4% to 5%.

But it's still material and we're still finalizing this work. We believe the technology that we'll have as a result of these investments will be important for CorSo's future success.

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

So, one on the Life area and one on the investment income, please. Just on the Life EBIT.

So using the disclosure, Slide 38, and adjusting for realized gains, if I try to get a clean EBIT, in both 2016, 2017 that was at around $1.2 billion. But in 2018, we get $1.050 billion range.

Is there something that is going on outside this whole debate around mortality, model changes, et cetera, in Life? And just a slight head-on push into that is also that Page 19 today has the Life economic transactions going up about 50% plus in terms of economic profit.

So should this feel that whatever has led to this kind of a decline in Life in 2018 should kind of recover in the future? So that's really a two part question on Life.

And then just on the investment income, I have noticed your comment about running yield being about flat. But when I look at the Slide 39, I see - the very first number is $830 million in P&C REIT fixed income, which compared to $700 million last year, and also in the other lines a $257 million number.

I'm just trying to understand these are - this makes a very big difference to, say, P&C Re investment income. It's not flat.

It's quite a lot more. Is there any one-off here, you would like to flag, John?

Thank you very much.

So EBIT, on the EBIT, Life developments…

On the Life side, I mean you referred a bit to mortality and the experience there and how this affects earnings. So what we observed in 2018 is there was some adverse development on mortality in the U.S.

The main reasons for that, we see is some seasonal effects, like flue earlier in the year, but also we had some individual large claims over in our portfolio, we had some very expensive individual lives, and we had a few more of those unfortunately that were paying out last year. But it's important to say, we still feel comfortable with the long-term assumptions on mortality trend in the U.S.

More recently, there has been some pockets in the population that show the slowdown in mortality improvements or even the reverse, but it's only for certain pockets like younger ages where we have this opioid impacts. But if you look at the insured pool, we have no reason to believe that the long-term assumption of mortality improvements should change.

So we're comfortable with the basis there. So that's what I would say about the impact of mortality on the EBIT.

Maybe add to them. We may be a bit victim of our own success that when we fixed Life, and as we said 10% to 12% ROEs.

The target we had a bit more in the first year. So I think the expectations have risen up and I try every time to repeat it, 10% to 12%.

Also because we couldn't fix everything in the U.S., there is still some books there that have a very low ROE and so we compensate that by some business that is very attractive overall in the world. So we certainly don't manage by quarters, so we look at the full-year.

We are confident we can keep the 10% to 12% range. We add good new business so there's no negative some recent transactions I'm aware of.

And so I think, it's really more that the last year was just above our range.

On the investment income.

I think that's absolutely true. The other thing I would say is the impact of the U.S.

GAAP accounting change cut across our businesses and in Life & Health Re. There, I think was a total impact of about $70 million after-tax.

The vast majority of that showed up in the fourth quarter for that business. On the fixed income in P&C, I don't know that I've got a specific explanation for why the $831 million is a material increase.

We did move some positions out of cash and into positive yielding investments. I don't know if that would have been enough to explain the difference you were referring to, but we're going to have one of the members of the IR team see if we can follow up on you.

Happy to follow, Vinit, on this one.

Okay. Thanks for your questions.

Can we have the next question please?

Hi, good afternoon. My first question would be on the conditional buyback.

So it mentions that ReAssure is one of the conditions. Could you perhaps talk about what other conditions may satisfy paying out this $1 billion in case ReAssure deals is not completed this year?

And secondly I have got two small follow-ups, actually. Firstly on Life & Health, maybe you could speak a little bit about any impact that you anticipate from the fiscal reform in Australian superannuation system.

And one more follow-up on the subordinated debt at CorSo that you mentioned, can you just check that this is the $300 million that we see an increase in long-term debt for the unit? Thank you.

This is another three questions, but the last two we'll manage quickly. So may be John on the buyback.

So let me actually - on the last one immediately. Yes, that $300 million is exactly what I referred to earlier in the call.

With respect to the conditionality of the second tranche of the buyback, I think, it's important for everyone to be clear on the words you can imagine, we spent a lot of time agreeing on this. So the conditionality is not on the ReAssure IPO.

The conditionality is on the development of the group's excess capital, which we would assume, if we were successful in the ReAssure IPO would be materially affected. But there could be other things, which would affect that excess capital during the course of the year, positively or negatively.

And the board has reserved the right to judge the position during the course of the year. The first tranche, the first $1 billion, should launch assuming that's approved at the AGM very soon after.

And like we did in 2018, we would expect to move forward with that with all due speed. The second tranche where the board - management, it's proposed to the board and the board agreed to launch it, could operate simultaneously and overlappingly so long as we stay within the restrictions of any daily purchase.

But I think it's important to say it's not automatic vis-à-vis the ReAssure IPO and there's no other specific condition, but we'll evaluate the excess capital position of the group during the course of the year.

May be, Edi on the Australia developments on the Life side…

Yes. I was - I'm not sure, what you referred to.

I mean what has been going on in Australia is this investigation by the Royal Commission into some inappropriate sales approaches by the Life industry. Obviously, that's something we monitor very closely.

So it could impact the volumes that are being sold and other aspects. So clearly, we look at this with a very careful eye and take appropriate actions.

Also I think the Australian market has become a bit more competitive. We had these issues, you remember, quite a few years ago, particularly with the group disability business and we fixed that and brought the business to very good profitability levels.

More recently, as competition has increased then now in addition we have this outcome of the Royal Commission. So it's clearly a market where to need to have our eyes wide open.

Thanks, Ivan, for your questions. Can we take the next question please?

Good afternoon, everybody. Two questions from me please.

I just wanted to return to the point around the kind of contingent language on this special dividend as I see it. So the $1 billion, I think John, listening to you, it seems to be that as long as the capital position goes up following the ReAssure disposal, then the $1 billion special buyback will go ahead.

I'm just struggling a little bit to understand that because 269% is your SST ratio, but that's obviously above the 220%, well above, and you're getting a lot of ROE dilution from the buildup of surplus capital. So I'd expect it to be managed down closer towards the 220% at least over time.

So I'm just struggling to understand a little bit that contingency elements. And particularly as you do the ratio, IPO or trade sell or whatever it is, that should lead to further funds.

So that actually should increase the outlook for further buybacks rather than just allow this particular one to be done. That's my first question.

And secondly, on the SST ratio, I think one of the slide shows that the P&C Re economic capital deployed had gone up by 20% in the year. Your solvency, I think, your SST ratio though is kind of broadly as I would have expected it, it's a little bit light versus kind of market movements and things like that that were broadly in the same sort of camp.

So it's a forward-looking ratio there. So it's taking into account the economic capital.

So I'm just struggling to understand some of the moving parts, and why the SST ratio isn't lower as a result of that deployed economic capital? Thank you.

James, thanks for the question, and maybe we haven't been entirely clear. So let me see if I can sort things out a little bit.

The 269%, you referred to, was the SST ratio as of January 1, 2018. We announced during the course of the year that the six-month view, the July 1 estimate, which we had for SST it actually risen from 269% to 285%, but we have not provided yet the year-end figure for SST.

We've said in the documentation that it's comfortably above 220%. And I can maybe provide some further guidance, which says that we expect it when it's finally the calculations are finalized, which should occur in the next 3 weeks that we should be above 250% million.

But the precise number is not being shared with the public. So you're right, we retain a robust balance sheet and I think, the resiliency of that balance sheet in the context of 2017 and 2018 is reassuring.

I would also say that the market volatility that we saw in financial markets in the fourth quarter did have this negative effect and materially brought us back down from the 285% midyear number. So as we go-forward, we believe that maintaining a strong capitalization in the context of our very clearly stated capital policy is in our interest.

We look forward to taking opportunities for being able to expand organically our business and - but we also don't see the need to build up excessive capital. And so the contingency is, in the context of a successful IPO of ReAssure that is one of the places where we'll go back to the board and evaluate is this the time to launch the second tranche?

I think it's fair to say that we are not interested in accumulating additional capital beyond a certain level, what that level is depends a little bit on both the perceived volatility of the asset side of our balance sheet and opportunities on the liability side. So I'm very comfortable saying we're guarantying you the first $1 billion it's coming through the door.

We are going to have the authorization or ask for the authorization from the AGM for the second $1 billion, and we'll manage it through the course of the year.

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

Hi. Thanks for the opportunity.

Just looking at Slide 40, cash and short-term investments represent nearly 8.3% of your investment portfolio. So any thoughts on if and when you're going to deploy that cash would be welcome.

Thank you.

I think, the goal of our team has been to use this position over time, short-term investments, and the context of a very flat yield curve probably are less painful than they might otherwise appear. And if we can, in fact, continue to move that cash number down, we will.

It's I think we've got the right level of incentives for our investment team to look for every opportunity to do that. Having said that, we do have a business which involves some cash flows, and we need the certain level of liquidity to be able to provide our clients with the recoveries that they are expecting from us.

Thanks, Vikram, for your questions.

So indeed we have come to the end of our Q&A session. If you have any follow-up questions, please don't hesitate to reach out to any member of the IR team.

I also wanted to just mention that we would host a conference call on the March 14, when we will publish our Annual Report together with our economic results and group SST figures. And then also, please note that we will organize a series of Q&A sessions with our management on the May 23 in London.

So we hope you can make note of this two dates. Thank you again for joining today.

Operator, back to you.