Swiss Re AG

I’m here with John Dacey, our Group CFO; Edi Schmid, our Group Chief Underwriting Officer; and Philippe Brahin, our Head of Investor Relations. Allow me to make some comments on the results we published today before we take your questions.

There are several drivers of the Swiss Re Group 2019 annual results. First, we saw elevated nat cat claims with multiple large and medium-sized events.

For instance, typhoons Hagibis and Faxai in Japan, Hurricane Dorian in the Bahamas and several events in Australia. Since we have a strong presence in all of these regions, explaining why the impact was large.

However, we continue to see these as attractive markets, and they remain profitable for Swiss Re over the cycle. Second, we took decisive actions throughout the year to address the performance of Corporate Solutions.

We increased claims reserves in the first half and implemented further strengthening in the second half as we experienced a pronounced increase in U.S. casualty claims.

We adjusted the initial loss picks for 2019, conducted significant portfolio pruning, reduced expenses and added reinsurance protection. 2019 was a pivotal year for that business unit under a new management team.

These actions restore a stable foundation for this business. We’re optimistic about Corporate Solutions' return to underwriting profitability by 2021.

Third, the U.S. casualty trends on which we commented on at Investors Day have deteriorated.

We proactively responded by adding to prior year reserves and increasing initial loss picks in P&C. As such, we maintain our overall reserve adequacy and have reduced the risk of further reserve strengthening in the face of future uncertainty.

Fourth, moving on to the life business. Life & Health Re continues to deliver strong and stable results with an ROE on the top end of our target range.

Fifth, in Life Capital, we executed on one of our key strategic objectives by agreeing to sell ReAssure to Phoenix at an attractive valuation. This transaction is expected to improve the group’s return on capital profile going forward.

Sixth and finally, we are very happy to report an excellent result for Asset Management, including the realization of value with the divestment of our stake in SulAmérica. Looking forward to 2020, we are very pleased with the outcome of the 1/1 renewals.

We have reduced our exposure to cat linear business at the last round of renewals. The premiums written in this line were down 2%.

Meanwhile, we pursue our growth strategy in nat cat, supported by price improvements. Our overall nominal price increases of 5% compensate for the impact of lower interest rates and higher loss assumptions.

We expect to see an improved combined ratio for 2020 of 97%, supported by further price improvements in upcoming renewals. For Corporate Solutions, price increases of 14% were achieved in January 2020.

Together with the ongoing portfolio pruning and cost savings, this supports expected improvements in the combined ratio of around 105% for 2020, while the combined ratio target for 2021 remains at 98%. To conclude my remarks, let me highlight the set of attractive capital management actions which we’ll propose to the upcoming AGM: A 5% increase in the regular dividends to CHF 5.90 per share and an up to CHF 1 billion share buyback program.

With that, I’ll hand over to Philippe to guide us through the Q&A.

Thank you, Christian, and good day to all of you also from my side. [Operator Instructions] So with that, operator, could we please take the first question?

Thanks for taking my question. The first one is just on the ReAssure deal.

Can you maybe talk about your thinking around proceeds from the deal? I guess closing in the middle of this year, you will get some cash, you’ll have a stake.

Could you maybe talk about kind of plans for that? Or does the, I guess, the strengthening in casualty plus kind of high cat kind of consume some of that?

And would you look to replace it with similarly sustainable, solid cash flows? And the second question is just on the reserving charge.

At what point did you kind of think we need to address this some more? Because the impression that I took away from the Investor Day in – towards the end of November was certainly that maybe things were fairly under control.

So I just wanted to get a little bit more color around that.

Thanks, Kamran. So maybe, John, for the first one, and Edi for the second?

Sure. This is John Dacey.

On the ReAssure, you’re right, we get a mix of cash, we expect GBP 1.2 billion, plus shares in Phoenix coming through when the transaction closes. That transaction is obviously subject to regulatory approvals, but the good news is that Phoenix has been able to raise some funding for the deal as well as get the shareholder vote last week.

When this comes in, in middle of the summer, we’ll evaluate where we go with the funds, but I think it’d be premature to suggest what they will be used for. We continue to look for opportunities to continue to write profitable business in our Reinsurance book in particular.

And in addition to that, I think it’s important to note that the impact on the SST ratio of this deal will not be included in the January 1 calculation we would publish next month with the annual report but will only flow through when we close it. So the capital benefit will show up on closing, not before.

Thanks. For the second question regarding the reserve strengthening.

And as you point out, this is mainly around U.S. casualty and in particularly with liability.

And we spent a lot of time already back at the Investors Day. What really happened towards the end of last year, that we saw a significantly more pronounced severity and frequency of large claims out of U.S.

liability. And also, what you have to picture, that in Q4 is the time when the reserving actuaries actually go through the what we call A-priori loss ratios or the initial loss picks that are an important input into setting the IBNR.

So they went, set that again with the underwriters and concluded, with all the loss trends we see and still the heightened environment around tort and social inflation, it was prudent to also go back and increase the initial loss picks for the very clean underwriting years like 2018 and 2019. And also out of that will be concluded out of this feedback loop that it’s also prudent to strengthen the loss ratios we use for that business going forward.

That’s also why you actually see that the price improvement of 5% nominal was then compensated by a 1.5% increase in loss pick and the rest through rate increases. So it really was a combination of much more pronounced loss frequency and severity out of U.S.

liability and the still elevated social environment, plus then the time of going through these initial loss pick reviews where we felt prudent to bring the initial loss ratios to – at an adequate level.

First things first. The 97% combined ratio you talk about for P&C Re normalized ratio, can you just clarify the assumptions within that?

First of all, what is the assumed cat budget for 2020 given the growth in cats exposure? And secondly, I’m assuming there’s no expected change.

You’ve uplifted the current year peak for casualty exposures in 2019. I’m assuming you’re just assuming they hold there within the 97% as in pricing won’t overcome them.

You’re going to have to hold the current year loss picks at that – the elevated level for casualty. Second question, perhaps this casualty question, and I just want to clarify.

Have the issue now widened out beyond LCR, large corporate risks? I mean large corporate risk was the kind of where you encouraged us to focus as being the kind of main issue in November.

Is that now not the case? Is it a much broader issue?

Yes. Thanks, Andrew, for these two questions.

And first is around the 97% combined ratio estimate for this year, which is down from 98% we estimated last year. Actually, as you know, last year, we were close to this 98% on a normalized basis.

So the further improvement comes from three factors. One is price improvement.

But obviously, the nominal price improvements, again, need to be compensated by the increases in loss pick. So last year, we had price increases of something like 1%.

But with the loss pick we now used for 2019 going back, some of that is lost. So there’s not that much earnings, so – into this year.

In the 1/1 renewals, we have seen this 5% nominal increase. Again, some of that is compensated by the higher loss picks.

But then we also have 3.5%, which is nominal but which we need to compensate for the lower interest rates. And this will also go down ultimately to the combined ratio.

But again, this will only earn about 50% in this year. And also, we have not assumed that this 3.5% affects all the business we write this year.

And so if you factor this in, we get to about 0.6% improvement just through price improvement. And then the other factor, which you also pointed out last year, there’s a scale impact.

So we wrote significantly more business in 2019 at flat expenses, and quite a bit of that earns into 2020 and again with more growth. So that explains another improvement in the combined ratio estimate.

And then there’s also a bit of uplift in the combined ratio outlook from the mix in the business. Last year and again this year, we start to shape the portfolio quite a bit more into the short-tail part, which also adds.

And these 3 factors together explain the 97%, the 1% improvement versus last year. On – the second question is where do we see this elevated social inflation impact in U.S.

casualty. I would still say this is much more pronounced in the larger corporate space.

You can also narrow it down to certain products in the liability base. It’s mainly affecting Lead Umbrella, Excess & Surplus.

So it’s really the products that pick up the severity of the losses. And this is large verdicts and the tort environment that go into these product lines.

So that’s really the space where we see these impacts are most pronounced. And really, the SME segments also, if you look at our different Reinsurance clients, it’s mainly affecting those carriers that write these large risks, that write the umbrella, that write the excess liability.

The more regional clients writing the smaller risks, the SME clients, there we actually see the performance quite in line with the expectations. So it’s not purely only the largest companies, but it’s really those that are regarded as deep pockets.

And it’s also these products like the pickup in severities of the excess and the umbrella. And just to give another example, we call it liability, that – this umbrella.

And excess, we also picked up the commercial motor play. So we can also have very large verdicts if there’s a trucking accident, and then the excess claim goes again into the umbrella.

So it’s picked up under the liability line of business even though the underlying business is commercial motor. So still, we think this is a big issue in the market.

I think we are now a bit at an important juncture. You see a lot of improvements in the original markets.

Carriers reuse their lines. They deploy an umbrella and excess.

They significantly increase prices. But on the other hand, you still have the elevated social environment, tort environment.

So these 2 factors need to be monitored very carefully in 2020.

Maybe, Edi, one word on the budget 2020...

For cat?

For nat cat.

The cat’s actually down. So the updated number, we usually only provide after Q1.

So last year, the budget, as you call it, is – was 1.6 billion. We won’t pronounce the impact, which is then adjusted for reinstatements and profit, commissions and so forth.

So we clearly think it’s going to be, again, a bit higher because we wrote more nat cat business. There was, again, some model adjustments.

We reflect the trends we see in the business like in Japan, where we expect significant rate improvements. We adjusted the models.

So the budget will be a bit higher, but it’s too early to give a final number.

It’s Vik from SocGen. I’ve got two questions.

Firstly, I just want to go back to the massive reserves review exercise for CorSo, where the conclusion was that the Reinsurance reserves were adequate. And then the comments at Investors Day in November, where I thought the message was okay, you’re aware of those issues.

And since we have a reasonably large exposure to U.S. casualty, you’re flagging it, but we are on top of it.

Now I – your comments regarding the previous questions. But based on what we see today, wouldn’t it be an oversimplification to say that the loss cost trends have significantly accelerated just towards the end of November/December and the actions that the group has taken are simply a reflection of that?

So that’s question one. And secondly, perhaps somewhat related to the first is the level of reserving and the whole debate about U.S.

GAAP versus IFRS. And consequently, the best estimate versus was the best estimate plus a margin.

My question really is since the best estimate is a range and not a point, what really stops the group from being conservative by reserving at the top end of that range? Because by design, the long-dated lines can really spring a nasty surprise.

So that’s all from my side.

Thanks. So back to you, Edi.

Yes. So on the first one, which – along the same lines as the previous question, so at the Investors Day, we clearly pointed out that reserves are adequate at an overall basis, but we also highlighted that if you look more specifically into this U.S.

liability space with underlying products, as I explained in the earlier questions around umbrella/excess liability, that was a significant, let’s say, focus area, of course, over the last few years there. And also, a lot of the reserve strengthening happened.

But also, these were the lines, then obviously, we, of course, have decided that we would put highest on the pruning list and get out of these lines. Some of these exposures also are in the Reinsurance business.

There, obviously, it’s part of a much broader portfolio with other lines in the U.S. and in the global casualty portfolio.

But already at Investors Day, we pointed out in the U.S. liability space there is uncertainty.

And as I explained in the last question, there was clearly a much more pronounced reporting of large losses out of the segments I just pointed out. Plus and going back to the initial loss picks for the clean underwriting in 2018 and 2019, and with the results, it is prudent to then increase those to reflect these latest strengths and also project that some of these elevated social inflation will prevail for a bit longer in the reserving but also in the writing of the new business to really be on top of these issues.

We are now back at a level in the reserve range is similar to before, which gives us confidence that we are at the right place. But clearly, this U.S.

environment, as I described before, remains quite uncertain, so we need to keep watching this space very, very carefully. And maybe on the second one, John, you want to comment on IFRS versus U.S.

GAAP estimate?

Yes, Vikram. The – my view, and reinforced by our external auditors, is that they expect our reserving to reflect where we think ultimate losses are going to be.

Undoubtedly, there’s probably a little bit of flexibility around that. This – with a book as big as ours, we can’t pretend that there’s absolute precision in this.

I think your question came – was aiming more at why don’t we hold more reserves than less. And the conversations I’ve had with our auditors as well as the policies of the group over quite some time have been an attempt to get to where we think is the right number, not a right number plus a buffer.

And so hanging on to those buffers is not something which we do today, we’re likely to do tomorrow. We’ve – do our calculation, and that takes us into the percentage ranges that you’ve seen us talk about in the past.

And as Edi said, we remain comfortable that we’re in pretty good shape here, especially after the actions taken in the fourth quarter. And I understand your frustration given where we were on Investors Day.

We’ve got some of it, too. But I can reiterate at this point that there was new information that came into us on actual claims in CorSo, on notifications and related claims through our Reinsurance book that showed up at the end of the year before we finalized our numbers at the end of January, and we were compelled to use the latest information we had to make those adjustments.

It’s frustrating, but that’s what we saw. I don’t think there’s any particular reason for it other than the process Edi mentioned on the calculations for the APLRs.

You should expect that every year-end, we’ll continue to do that. But in terms of what the notifications were, I don’t think people have been holding back or we’ve been ignoring anything along the way.

Two questions, please. The first, just coming – again, back to this topic of U.S.

casualty. I mean you’re talking about doing this on a proactive basis and you mentioned that there’s a reduced risk of further additions being necessary in the future.

On the other hand, it seems that it’s a reactive approach to something that you’ve seen in November and December. So I’m just trying to understand, are you now feeling more confident about the level of reserves for the U.S.

liability book than you were in November? I think You talked about being at the 50% confidence level for the U.S.

liability book then. Are we in a better position now than we were then?

The second question is really just around Corporate Solutions. I mean this is the third year now where we’ve had a very significant negative ROE.

The ROE for this year is actually flattened dramatically by the fact that a lot of the losses were passed up to the P&C Re business. I mean it seems that this business has now effectively depleted all of the equity that was in it in 2017, and we’re aiming to get back to an ROE of 10% to 15% in two years' time.

The risk/reward around that just feels very, very bad. So I just – can you – does it pull you to, again, think about the long-term plan for Corporate Solutions?

So maybe, Edi, and then Christian?

Yes. So on the first one, again, around U.S.

casualty and the reserve strengthening in Q4. Proactive, I really say that this is in line with what we described as this best estimate approach.

So at any point in time, we just want to make sure we reflect all the new evidence we have and also factoring the trends we see in the business. And in Q4, we saw this elevated claims, and we went back also to adjust the very clean underwriting years, where still a lot is not based on reported for pure IBNR.

And proactive means already at that early point in time, increase the A-priori loss ratio into loss pick to make sure that the new evidence and the trends we see are fully reflected. As I pointed out and John reiterated, we are now back in the same range around the best estimates, so we feel comfortable.

But it’s fair to say this U.S. liability tort environment is still uncertain.

How this is going to continue is really hard to predict. In our assumption for reserve setting and also for the costing into 2020, we assumed this increased severity is going to prevail for a little longer.

We see first signs of, let’s say, some of the charges will override some of these really high verdict statures. There’s coming some transparency requirements around litigation funding.

So hopefully, it’s going to peak soon, but we think it’s going to get a bit worse, which we factored in. But on the other hand, as I explained earlier, we also need to understand what’s happening in the underlying insurance market: So the significant cuts of limits provided for liability risk plus the significant rate improvements.

So factoring all of this together, which we try to estimate as best as possible. But still, there remains some uncertainty.

But we are now back at a reserve level where we feel confident that it is under control.

Yes. I’ll take the second question, obviously, here.

So obviously, we see the same figure that you see, and they’re very frustrating. So no, very fair challenge, and we all ask ourselves the same question now.

We are where we are. And for any option in the future anyway, we need to clean up, do all the cleanup work, bring it back to profitability.

The fact that we’ll be able to do that, I think, is very plausible. If you look historically, this business has been very profitable.

It’s a very, very cyclical business. As we know, it has been very profitable in the past, but it also had some horrible phases in the past.

Just think about the reserves alone that were part of Reinsurance. When, of course, it was separated in 2012, they produced more than 1 billion of profits during that period of time.

So there’s – that’s definitely some very good years. But clearly now, it has hit a very hard place.

So our view is anyway, we need to fix it. And then the question is can we transform it into something that is interesting, will be different, as Andreas had shown in the Investor Day at half year.

The idea is not to become a huge player. And, I mean, the old trajectory definitely will not come back.

The question is can it become something smaller, more specialized. As we say, it would be commoditized.

The business is one of the key elements. So in which sub-lines do we have any competitive advantage?

There are some where we have some, where we have demonstrated good tools and a good sense of where the price are, and some others not. So don’t think we just fix it and then go back to the old one.

I think that we’ll focus on fixing it and then see what else can we do with it and can it be transformed into something that makes long-term sense in the Swiss Re Group.

It’s just one really and is a follow-up on the casualty. But I think we need you guys to be a bit more explicit around the U.S.

liability piece and where you are versus best estimates. So obviously, at the Investor Day, you were at the 50th percentile on that U.S.

liability piece, but the broader book was in the 60th to 80th. So please, can you update us on that U.S.

liability piece in particular? I mean I would think, given this is a large reserve charge, that, that would have improved.

But please, could you confirm that? And then secondly, I appreciate what you’re saying about reserving, and it’s consistent with our philosophy reserve of best estimate, no buffers.

But, I mean, has this experience in P&C Re and CorSo led you to think about questioning that? I mean should you hold buffers?

Your peers do. I’d just be interested to get your color there.

I guess, again, I’ll take the first one around the U.S. casualty and more specifically around U.S.

liability. So with the reserve strengthening, what we said before, we are back in – at the same level in the reserve range as we were before.

So that was casualty overall, a very comfortable U.S. liability.

We strengthened. But still, I would say, as mentioned before, there is uncertainty around U.S.

liability. We’re comfortable that this is now a best estimate, reflecting all the trends, all the losses we have seen, plus factoring in there’s also to expect to be continued aggressive tort environment.

So around U.S. liability, there is still more uncertainty then in the overall reserve base.

So that’s how I will put it. And on the buffers, I think...

Yes.

John, maybe take that one.

Jonny, look, I mean, yes, would I like to have cookie charge that I could access at will? The answer is yes.

Would that make calls like this one a little easier? I would assume so.

But the fact of the matter is that that’s not going to happen at Swiss Re in the foreseeable future. And so I think where our focus is and where our focus should be is actually on the upfront underwriting.

And what you’ve heard Edi talk about is aggressively adapting the pricing, the costing frameworks to this new reality and being sure that we’re faster, not slower in getting those prices in place, as we think we have as we go into 2020, so that any new business we bring onto the books is, in fact, going to be profitable and we don’t have to worry about reserve deficiencies on a going-forward basis. So that’s where the focus of the group is.

And I’m confident that there’s enough urgency and focus on this in addition to, frankly, some new people and some important roles in CorSo in particular to be able to deliver.

So my first question is just on the rating agency perspective of financial strength. Can you just maybe provide an update on your level of comfort on rating agency capital and rating agent debt leverage?

Then my second question is just on claims and – but not U.S. casualty this time.

Could you just provide a view of how you see the Australia wildfires? I guess we had some in last year but also how it’s going on now and also potential impacts from the coronavirus.

Thank you.

Maybe, John, on the rating agency leverage?

Yes. Sure.

So on the rating agencies, we’ve – we’re very comfortable where we stand with S&P, Moody’s and, I think you’re probably aware, A.M. Best.

And We use Fitch or have used Fitch with respect to the ReAssure business. There’s no reason to think that there’s any adjustments or changes here.

We’ve not disclosed in recent years the S&P Capital, but it remains above the current rating, and I can say it still remains above the current rating. I think they, like others, will be happier with – when we’re – our actual results meet our financial targets.

I expect them to be interested in seeing how our plans are for delivering that. But again, with a 97% combined ratio in P&C Re, with our Life & Health franchise continuing to deliver and with our investment risk contained but delivering strong results in 2019, sitting on 5 billion of unrealized gains at year-end, I think we’re in just fine shape.

With respect to Austrian wildfires, maybe let me take a first shot. The fires that we saw started in December, continued into January.

A number of the reinsurance coverage in place actually had us bring back most of the damage that was done into the 2019 calendar year. And so I think we’ve indicated we’ve taken a charge in 2019 on the wildfires in December or January of about USD 100 million.

And we think that’s for the fires and the majority of – the vast majority of the ultimate cost. Subsequent to those wildfires, there have been both hailstorms and floods in Australia, which will be Q1 events in 2020, that we’re evaluating as we speak.

I think on coronavirus, at the moment, I suggest that this does not appear to be a significant insurance industry loss nor a significant loss for Swiss Re with the infections that we’ve seen in the desks that are related to this. There clearly is some very important economic disruption as a result of this.

There will be industries and companies which are going to be severely affected. Most of the covers that might be relevant that would include some sort of business interruption typically are on property policies that require physical damage.

And so I don’t exclude the possibility that some people might have reached out for specific covers related to non-physical damage. At least in our portfolio, I think we can say we don’t see much.

Edi, you might want to add.

Yes. That’s a – good with high-level description.

So again, a significant impact on global supply chains. So some – this interruption, travel implications.

But the vast majority of policies out there, they require physical damage. There are some that include non-physical damage, BI, but usually there then, this communicable disease are excluded.

And there’s a niche market, I would describe it, where you get some coverage for communicable diseases under a non-damage BI cover. It’s really a niche.

Maybe on the Life & Health side, obviously, at this point, the bulk of the impact is within China. And there, the different products will respond differently.

Most of the impact, we see on the medical side. We only have a small book on the medical side.

Most of our business is what we call critical illness. So it’s cover for defined diseases.

And here really, the coronavirus would not be a covered disease, but there may be some very severe symptoms coming on where there is some coverage available. But it’s also important to put the event into context.

Still a lot of uncertainty. Hopefully, it’s going to get under control soon.

But the number of deaths so far, while it’s a very sad event, if you compare it to an annual seasonal flu, causes about 300,000 to 600,000 deaths on a global basis. So there are close to 2,000 we have seen so far.

It’s not a huge event from a relative perspective. But I really hope to think that’s under control.

And yes, let’s see. But at this point, we don’t see it as a huge impact to the insurance industry.

I’ve got two questions, please. The first one is on pricing across CorSo and perhaps across the primary space in casualty.

I’m just wondering whether you can make a statement on whether you see the price improvements that you received as covering the loss cost inflation or not and the social inflation. And then the second one would be on the SST.

Just wondering if you could talk about the – give a little more color about the movement in SST since the previous reading of 241% you gave. And maybe a little bit of an update on the benefit from the ReAssure transaction.

I mean we obviously have seen the strong performance of Phoenix share price, but also rates have moved. Perhaps you could update us on that number.

Thank you.

Yes. So maybe I go first regarding the pricing question in, let’s say, the larger commercial business, which is the CorSo space.

So I think if you go back a little bit after the hurricane losses in 2017 and 2018, we were all hoping for more significant price increases in the commercial space, which has been actually very soft for a long time, and it’s only really through 2019 where we saw prices to start picking up much more significantly. In the property space, where there have been cat losses, it’s probably most pronounced.

But then throughout 2019, there was much more dynamics going into particularly the U.S. liability space relating to what we discussed earlier around the reserve strengthening and what we’re doing there.

So there is, I would say, a lot of pain in the system around U.S. liability.

It’s mainly in this umbrella/excess/commercial motor space I pointed out before. And there, you see significant actions by most of the larger carriers.

So they are deploying much lower limits than before, and they’re charging significantly more premium. Now you asked an important question whether these changes, this lowering of limits and the increasing prices are good enough to cover the increased level of losses.

At this point, we think in 2020, for these most exposed segments like umbrella and excess, we are not yet convinced that this is enough. When you look further down in other segments, in property, other lines, actually those like CorSo also has been growing at much stronger rate adequacy.

There, I think we’re getting in a better space. But clearly, this momentum in the commercial space around different lines has to continue for quite some time.

But in these really most exposed areas in U.S. liability, there we’re not comfortable yet that what is happening in the underlying market is good enough.

It will take more and it will take also some improvements in the tort environment. That’s why we remain cautious in 1/1.

Also, in our Reinsurance book. The premium on casualty is 2% down.

If we look more closely into the U.S. liability space, where we now track the underlying limits that we reinsure in all the treaties, we have reduced exposure to that most exposed base by some 12%.

So clearly, we want to position us more cautious in that most exposed space at this point in time.

And you might have to add that – I mean, this may be obvious, but in CorSo, we basically don’t write that business anymore, right, the one most exposed to social inflation. So when you say you’re – we’re not happy with the rates, it’s meaningless for our portfolio.

It’s just an observation on what we see in the market.

So the CorSo pruning actions are, to a large extent, around exactly those most exposed segments, umbrella, excess liability and Excess & Surplus. But obviously, we have some of that in our reinsurance treaties, and that’s where we also not exit but reduce exposure significantly.

But for the absolute delta for CorSo, now we’ve shut down the teams so that we’re not writing new business, we’re managing the portfolio as it expires. The second question with respect to the SST.

Again, we’ll provide you in March with the January estimate for SST – or not estimate but the actual number that we’ve calculated. I mean I can give you some directional help, I think.

As you said it, as of July 1, the number was 241%. There’s probably three factors which would have a negative impact on that.

One was the capital deployment in the business that we continue to go through in the P&C Re business in particular. The second was the reduction of interest rates in the second half of 2019.

And the third, we will include as of January 1 the capital actions that we described yesterday – or actually this morning, sorry, the Board approved yesterday for the increased dividend and the authorization for the share buyback. Instead going positively, the tightening in the credit spreads in investment markets and a debt issuance that we did in the second half of the year that’s SST relevant will help that number.

So the combination, I think, would leave us – or should leave you to believe that the answer is somewhere between the 241% which we identified and what we said this morning, which is we remain above our target level of 220%. Importantly, that number of January 1 does not include the estimate that we will have for the ReAssure transaction.

We’ve not attempted to update that from the number we’ve previously provided, which is 12 percentage points to the SST ratio. Eventually, we’ll see where the Phoenix share price ultimately is and the impact that might have to earnings during the course of the first six months of the year.

A couple of questions from me. Firstly, on CorSo combined ratio.

And so you sort of outlined the steps that you see to get you to 105% next year, but you’ve maintained the 98% guidance for 2021. So I’m just wondering what you see as driving the improvement in 2021 with that 7 percentage point improvement in the combined ratio.

And then also on CorSo PYD, not on casualty this time. You’ve also flagged some negative development in the property line in CorSo and specialties.

So I’m just wondering if you could give a bit more detail on what’s caused that negative development. Thanks.

On the CorSo combined ratio, so we are still very confident that we achieve the target we’ve set for 2021, which is the 98%. For this year, we also did an estimate of 105%, which reflects all these changes we have been talking about.

So there are various components, again building on the decisive management actions started last year so that the pruning of the portfolio will help the significant rate increases we are achieving. I think we showed across 2019 we achieved 12% rate increase in the costs that CorSo booked.

Just in January, rates were up some 14%. So we clearly will maintain the significant rate improvement momentum.

As we discussed earlier on, we have reviewed also these initial loss picks. So we increased that also in CorSo to really make sure we have a very solid footing for the business we write going forward.

So that explains why, for example, the normalization ended up with a slightly higher combined ratio than we showed before. But with all the actions now in place and the rate improvements, we are confident we can achieve throughout 2020 and into 2021.

We will definitely get to the 98%, and we have this 105% estimate out there for 2020. And on the – second one is the PYD for CorSo.

So in the second half, it was also around this increase in initial loss picks. But you point not only to casualty.

There were some also in property. But that was really part of the detailed reserve review we did in the first half year.

There where also some of the cases on the property side, some net cat claims, some large man-made claims. We increased reserves on these specific cases.

So there is not like a trend in the IBNR. It was really that some of the individual cases had to be strengthened in terms of individual reserves.

That explains the property and the specialty part. There was also one larger credit loss where we increased the case reserve.

Two questions. Firstly, on Japan going into the renewals.

Obviously, you are a very large player. You have had to pay quite a lot of claims in Japan over the past couple of years.

I was wondering if you can give us a bit of an update of how your conversations with clients are going into the API renewals. And what kind of changes have you made to your risk of view?

So – to your view of risk for not cutting Japan? So also, we also have quite a lot of detail out there from the press saying about mid-double-digit increases in price.

So if you can give us some detail on Japan, that would be interesting. Secondly, I’m sorry to be going back to U.S.

casualty and liability. In your Investor Day, you were flagging about $8 billion of related reserves being impacted.

Obviously, that didn’t include CorSo reserves. Given the actions you’ve taken today, can you give us some more detail of where that takes your ultimate loss ratios, particularly for the years which are impacted?

And if you can give us a bit more detail about which years exactly are impacted? Previously, you were saying 2014 onwards.

I think right now, we are talking about some of the more recent years. Thank you.

So let me take the first one around the 1st of April Japan renewals. Clearly, we have very high expectations for price increases given the experience over the last two years: Jebi the year before and last year Hagibis and Faxai, significant losses.

And as you also correctly pointed out, we had a significant market share in Japan. Over the cycle with Japanese clients, we have made good profits.

So clearly, we want to stay in that market, but we will push a lot to get now to price levels that are really commensurate with the risk, yes. So we’re talking about substantial amounts.

I don’t want to go too much into percentages, but it is going to be very, very substantial. To also compensate for clearly a more elevated risk review we now have in our models, as we always do based on the learnings from large nat cat events, we review all the loss evidence and also take the latest scientific evidence and put then the real risk, the risk model on the latest scientific basis.

And there was a significant uplift in our view of risk. We actually went out with these messages very early in conferences in the market to really make it clear that the market overall is underestimating the Japanese typhoon and flooding risk.

So that’s what we now use as a costing basis. And on top of that, we really will go for substantial price increases in the Japanese market.

Also then further into the midyear, we still would expect loss-affected programs and programs with significant U.S. hurricane exposure to achieve also significant rate increases.

So further price momentum, which then backs up our ambition to actually write more in the nat cat space. But of course, we need to achieve the appropriate rate increases first.

And on the second one, U.S. casualty, I was not quite clear where you’re pointing towards.

I mean, yes, we have about $8 billion of reserves in Reinsurance that are U.S. liability.

But again, as U.S. liability in the broader basis, this is not, let’s say, only – this is broader and – than the more exposed segments I pointed out before.

So this the excess liability, the umbrella that is written by the large cedents, the larger carriers. That’s a much more narrow reserve base.

I think we quantified it back at Investors Day as a much smaller number. That’s really the more exposed for us.

The $8 billion, that also includes liability reserves with regional clients where there is a lot of SME business. I would not call that exposed.

And then obviously, there’s the CorSo parts where now we have the ADC in place. So the reserves on the CorSo side are now actually part of the Reinsurance pool.

But I cannot give you a reserve number on top of my mind how big that would be.

Yes. Paris, on the 19th of March, in a few weeks, we will publish our annual report.

With the annual report are the loss triangles, and we will have the breakdown, the detail. We’ll have a call, and the Chief Actuarial Officer will be with us to go through these numbers and your question regarding the utilized loss ratio, where are we and so forth.

So it will [indiscernible] in the next few weeks.

So just one question from me on the U.S. casualty topic, apologies.

But just to clarify, you mentioned that tort environment remains uncertain, and you mentioned that the medium-sized SME clients are, I think, coming in line with expectations. I was just wondering, is there any provisions you have taken for this assumption to be tested later in the year?

So for example, what if the tort environment trickles down to the medium sized? Is there a risk that you see as likely?

Or you see that we’ll tackle when we get to it? So that’s my first question.

And second question is just back linked to CorSo. So the 105%, would you say that – when this presentation was made in summer last year, would you say that this trajectory is in line with what you expected for the 105%?

Or would you say that the U.S. casualty trends, et cetera, have led to some kind of a change here and you were expecting a bit better for 2020?

Thank you.

For the first one, once more around U.S. casualty or more specifically U.S.

liability, and maybe I’ll also make the comment that clearly, this is an industry issue. Also, if you look at the filings of all the carriers in the U.S., there was clearly significant reserve strengthening around U.S.

liability for the last few years. While it was not so much in the headline, is that it was, to most extent, compensated by favorable reserve development mainly in workers' comp.

So those carriers will also have significant workers' comp book that could compensate these two. So it kind of a net it out.

Your question, again, around the protection, how this quite aggressive tort environment, social inflation is going to play out, of course there is uncertainty. As I pointed out before, there are some silver linings, and you see some of these very large verdict statures being overruled by [indiscernible] chief.

So it could peak. And as I said before, it’s more pronounced at the larger corporates.

These are regarded by the jurors, the plaintiff bars as the deep pockets to go after. But also, we have seen cases where a trucking accident, still the plaintiff bars go after the trucking company.

It may not be a Fortune 500 company, it also affects other corporates. But it, as I said, goes mainly into this umbrella and excess covers that really pick up the severity of the losses.

Where we have not seen it is really in the SME portfolios of the regional clients, but that’s clearly a space we need to watch very carefully. And that’s why I explained before there’s a significant momentum in terms of rate increases and limit cuts, but this tort environment is still an area of concern.

And how these factors play against each other means we need to track these very carefully. And at this point, we are not comfortable in that space, so that’s why we keep reducing exposure, yes?

But the picture can change 6 months from now, 12 months from now. We need to reassess.

But just maybe if I can add, Edi. I think the reserving actions we’ve taken are not limited only to large corporate-related risks.

Its line of businesses where we’re on either a proportional or an excess of loss treaty. In Reinsurance, we’ve taken a look at the underlying risks and made these pretty significant actions not only on reserving but also pricing going forward.

And so I think that’s where we are.

So again, maybe just add to what – maybe that’s basic, but I think, obviously, U.S. GAAP is a best estimate philosophy through and through, which means that the reserving setting process is a completely independent process overseen by the Chief Actuary, and Edi and John and I have nothing to say in that process.

So we’re receiver of the information and – so the actuaries try, based on all information they have, to get to the right answer. There’s – so there’s a plus and minus with that.

But it means that they can be on both sides, right? We cannot just start to book things because we’re afraid of something.

There needs to be evidence. Otherwise, you can’t book anything.

But vice versa, there’s no way, no temptation, nothing that top management can say, let’s wait it out or let’s see if things improve, et cetera, et cetera. So what you get is basically, when people look at evidence, that’s what they’re seeing, and they try to change the assumption accordingly and come to the right results.

And that’s a – it creates more volatility, obviously. I understand the frustration.

I’m part – I’m frustrated myself sometimes. But to a certain extent, it’s a very honest way of looking at things, and it means you’re typically at the forefront of things.

But it does – all it means, there’s always risk, but you don’t have buffers to avoid risk.

And I’ll give Edi a break and try to do the second question myself, and maybe you’ll correct me if I get it wrong. But your question is at the midyear, are we seeing the trends we expected.

I’d say we’ll probably see a slight deviation but on two dimensions. So the first deviation is, yes, we probably have a more negative view of expected losses in the casualty book, especially but not only other places.

But that, fortunately, has been balanced by a better-than-anticipated increase in the pricing that CorSo has been able to achieve. So both these have to work their way through the portfolio.

But net-net, one of the reasons we’re confident about the 98% is not because we need 14% price increases for the rest of this year, but rather because we’ve seen in 2019 an important price increase that we’ll earn through in 2020, and we see in the beginning of 2020 a continued momentum here. And everyone we talk to sees or expects that this is going to continue.

That will be a wind at the back in getting us down to the 98%.

Thank you very much, good afternoon. Two questions.

First, also, I have to come back to Paris' question on Japan exposure to nat cat. When I add up Jebi, Trami, Faxai and Hagibis losses, I come to USD 2.4 billion.

Your premiums over the past two years from Japan were, I don’t know, $1.5 billion plus and maybe $1.3 billion, $1.4 billion net earned premiums. So this seems rather low.

Now you can say 2018 and 2019 were extraordinary or you can say 2018 and 2019 were the new normal. So even if you achieve, say, 10% or 20% price increases, this appears not sufficient.

This would give you net earned premiums of $800 million from Japan. So what are your thoughts on this?

And the 97% normalized combined ratio for 2020, are price expectations for April and July renewals already included there? And second question on – again on CorSo, the 105% combined ratio.

Is – you achieved significant price increases you mentioned just before. Is 98% for 2021 then the end of the story?

Or should you aim for even lower combined ratio for CorSo after 2021?

So on your first one regarding Japan. So 10% or 20% is clearly not enough, yes, the numbers you mentioned, yes?

So I don’t want to give precise numbers, but we’re clearly going for more significant price increases. The loss levels have been significant, as you did your calculation correctly if you add up Jebi, Faxai and Hagibis.

And as I explained before, we used this evidence to update the nat cat model for Japan. We still reiterate you cannot look at the nat cat business in one market over a few years only, yes?

This needs to be looked over 10, 20 years. And there, we clearly have made very decent margins in the Japanese market, yes?

There’s also, obviously, always these questions around is this a new normal if you factor in climate change. And also, this week, we studied very carefully what we actually can see in Japan, that at this point, we are rather in a phase of elevated natural frequency of typhoons.

If you look at it over many decades, there are also phases where you see a bit elevated frequency or lower frequency in the last two years. And also in the future, we think we are in that phase of an elevated frequency.

We cannot link it directly to climate change, but we clearly see a higher frequency. And then all the learnings from the losses, we factored into the model.

So clearly, we need to go for substantial price increases for this business to become sustainable. But it’s important to look at it over not just a few years, it really needs to be seen in a much longer time period.

And your second question was around the 97%, to what extent further price increases are already factored in. So some are reflected.

So what we achieved in 1/1, the 5% nominal with all the collections, as we explained, of course as projections stand for the forthcoming renewals, we have not yet factored in the compensation for the lower interest rates, yes? Some of that, we have factored in, but not all of it.

But clearly, we’ll push in Japan but also in the midyears and, as explained earlier, on the casualty accounts to get further compensated for the lower interest rates. So there’s further upside.

And some of that we already baked in. Let’s see where we get to.

And maybe I’ll jump in. Again, back to the Corporate Solutions.

I think it’s a similar answer, which is we’ve been pleasantly surprised by the pricing increase, of course, it’s been able to achieve also through January. We’ve been disappointed by the loss cost adjustments we’ve had to make.

Let’s see where 2020 takes us. We expect to be able to achieve the normalized 105%.

If we have reason at that point in time, based on actual price increases and actual loss experiences, to make an adjustment to what the 2021 target looks like, we’ll do so. But for now, I can just reiterate our strong confidence that we, on the current trajectory, will get down to 20 – to 98%.

Maybe if I can up in, right? I mean clearly, the one increase from last year we had, of which only part has been in last year, have been eaten up by this change in assumption in APLRs we have put through.

But if you think about January 14% increase, that’s on the lines we have kept. So this is not the main lines touched by social inflation.

So I think it’s extremely unlikely that this will be eaten up by claims inflation in one way or the other because that’s the remaining book of CorSo. So I think that makes us quite sure of the momentum in the market, the talk.

There’s absolutely nobody talking about this is enough yet now, right? So there’s continuous momentum.

People think this is a multiyear movement. So I think all of that makes us quite confident about the 98%.

And it’s a great question. I think we’ll look where we go from there after that.

But historically, clearly, there have been phases where it was much lower than 97%, right.

Thanks for taking my question. I have one question on Corporate Solutions.

Could you please remind me the criteria that had been in the pruning in Corporate Solutions? And also, you adjust your appetite to a different type of risk?

For example, smaller or more diversified risks? Or is it purely based on like online appetite?

And then lastly, if you can remind me where you are with the pruning process.

So on the CorSo pruning actions, I mean, on the top, we have talked about it a lot already. It’s the U.S.

liability space, yes? So in umbrella, in excess and in E&S.

These are lines CorSo is really exiting. And there’s also other segments where there’s significant pruning.

It’s in the marine cargo space, and it’s also in the general aviation space and in agriculture. So these are lines where we are either exiting or significantly pruning.

And then it’s the lines, as we explained earlier, where CorSo has demonstrated they have, I think, the necessary insight, the data to really differentiate and underwrite this business in a good manner. So around property, engineering, these other lines, there we really push for the price increase.

Pruning, we have achieved about 25% of the plans in 2019. And until the end of 2021, we should have achieved about 90% of the pruning.

Obviously, it goes with the respective policy renewals. So that’s the speed we can go.

And then the rest will happen in 2021. But we are well on track to achieve this pruning, which then also will go in line with some expense reductions on the other side, yes?

So we are very well on plan with this pruning action. It is really in these lines of business where we concluded CorSo has no edge.

It’s just additional capacity to market. So there, we execute these actions.

The first one is on the dividend increase, the 5% in dividend per share. I appreciate that’s on a lower share count, so the impact on total dividend out is not that material.

But given the pending sale of ReAssure, which has been a very healthy cash generator, and you’ve had underperformance from, let’s say, P&C Re and CorSo, not producing the desired results, how should we think about the dividend trajectory going forward? And the second is on the risk-adjusted price quality.

One element of the interest rate, which is 3.5 percentage points, to me that seems to be too high given the way the interest rates have moved. I mean, of course, interest rates have come down, but 3.5 percentage point impact, that kind of offsets the price increase.

That just seems too high. Now maybe there’s something simple that I’m missing.

But if you can just help clarify, that will be helpful.

Yes. So on the dividend, you’re right, Vikram, it’s a 5% increase.

We bought back approximately 3% of the shares with a CHF 1 billion buyback. And so while it will be appreciated by those that still hold the shares, the overall cost is not going up quite by 5%.

The one observation is the strengthening of the Swiss franc means that our payment of the dividends in Swiss franc is a little more in those terms than it would be on – had the U.S. dollar-Swiss franc exchange rate remained absolutely stable.

The Board discussed the dividend increase yesterday literally and is very comfortable with the underlying earnings and our ability to continue to fund not only this year but future years in a stable way. You’re right, the ReAssure book was throwing off cash.

We will be getting cash end of the year when the ReAssure transaction closes. But as importantly, the continuing ownership of the Phoenix shares will provide us access to the Phoenix dividend, which in recent history has been around 6% paid out on that investment.

So we’ll continue to book that as long as we own those shares. In the meantime, we expect our Reinsurance business, Life & Health as well as P&C to do well, and we expect the Corporate Solutions to return to a healthy profitability in 2021.

So I think in any midterm plan, we’re very comfortable with the dividend position.

On your second question regarding the impact of the interest rates. So first, it’s important that when we underwrite cost of business, we always look at it on an economic basis, which means we discount the future expected claims with the interest rates we see at this point in time.

And 3.5% across the portfolio may seem a bit high, but I would point out that the average duration of claims settlement in our typical P&C portfolio composition is about six to seven years. So the average claim is discounted over six to seven years.

And then also, a small, let’s say, reduction in the interest rate curve over six, seven years, then you get quickly to this 3.5% impact versus the upfront premium you charge then for these risks. So it’s mainly, obviously, in the longer tail lines, in the casualty lines.

But even on property, it has a small impact. They have two years of claims duration.

So if you do that calculation, correct claims duration, it turns out to be the 3.5% impact of the interest rate drops we have seen towards the end of last year.

I’ve got a small follow-up, please. One on CorSo.

Could you please update us on what’s the capitalization of the business, whether you anticipate a need to strengthen capital anymore? And secondly, it’s on Life & Health.

I mean your Slide 46 in the presentation, it shows some reduction in EBIT for Life & Health division. Although if you take away all the one-offs, there’s actually a 5% to 10% improvement.

I was just wondering if you could give some thoughts around the sustainability of the Life & Health business and maybe some early indications for 2020. Like for example, in the U.S., the flu season looks a bit worse, and we’re hearing about problems in Australia from your peers.

Thank you.

Yes. So maybe I’ll do the second one first.

There’s no indications that we could provide at this point in time with respect to Life & Health on 2021. I think we’re – we’ve got a broad portfolio across a lot of different regions, and there shouldn’t be – or I – at least I’ve not heard of anything dramatic in any jurisdiction to date that we need to alert people.

I think the one big one-off in the 2019 accounts, which on Page 46 actually is referred to in the last bullet point, we found ourselves in a curious situation where Life & Health Re had witnessed a series of treaties with Old Mutual a number of years back. Old Mutual renames itself Quilter, and ReAssure, we announced, I think, in August of 2019, sold its back book, including the policies related to these reinsurance treaties to ReAssure.

That transaction actually closed with ReAssure on December 31 of this year. And what it made was these reinsurance treaties automatically became an intergroup transaction.

So it forced us in an unusual moment to have to unlock a set of assumptions on the liability side, marking to market those liabilities with existing interest rates at year-end. The adjustment was approximately a 300 million technical cost to Reinsurance.

We took the view that as businesses being marked to market on both sides, we should go ahead and adjust the asset side as well. And so a similar amount of gains came through at the end of the year to affect that match.

That’s one of the reasons why the Health – Life & Health investment result looks as robust as it does. But that’s, let’s say, a technical correction to a problem that was – came through as a result of the Quilter transaction for ReAssure.

Obviously, if things go as planned, we will not own ReAssure anymore in – after the summer. But for these six months, it’s a in-house transaction now.

Your first question was with respect to CorSo capital. We did recapitalize Corporate Solutions at midyear.

That’s also when we put the adverse development cover in place with the Reinsurance team. The combination of those, I think, leads us to believe that CorSo remains adequately capitalized to do the business it needs to do.

Now the pruning of the portfolio at the 65%, which we expect to come through in 2020, means that the demand for additional capital, at least on a full year basis, is limited. And so I don’t think we’ve got any expectation that there’s any immediate needs for recapitalization.

Australia Life & Health, I think there was a question, right? I mean just as you know, we are traditionally more long in the group life and not in the individual life.

Group life, was it, I think, in 2013, we had a loss there. But we could recuperate that over the last few years because the market hardened a lot.

Now it’s softening again, and we’re – we have significantly reduced our position. The current issues are now in the retail market, right, with really life’s visibility, and we’re not a big player there.

So it’s not a huge thing for us.

Okay, Ivan. Thanks for your follow-up question.

We’ve come to the end of our Q&A session. So if you have any follow-up questions, please don’t hesitate and reach out to the members of the IR team.

Thank you again for joining today.