Zurich Insurance Group AG

Richard Burden - Head, Investor Relations Mario Greco - Group CEO George Quinn - Group CFO

Farooq Hanif - Credit Suisse Dhruv Gahlaut - HSBC Andrew Ritchie - Autonomous Nadine Van Der Meulen - Morgan Stanley Paul De'Ath - RBC Thomas Seidl - Bernstein Vinit Malhotra - Mediobanca Michael Huttner - JPMorgan Andy Hughes - Macquarie Group Nick Holmes - Societe Generale Ralph Hebgen - KBW

Thank you. Good morning, good afternoon and welcome to the Zurich Insurance Group's full-year 2016 results Q&A call.

On the call this afternoon we have our CEO, Mario Greco and Group CFO George Quinn. As usual, we would remind you to keep your questions to two and if we have time we'll come back to you for additional follow-ups.

But before we start with the Q&A, I'd like to hand it over to our CEO Mario Greco, who will make a few introductory remarks.

Thank you Richard, good afternoon everybody. So let me quickly assess what has been done in 2016 and what these numbers have and what they don't.

So I think 2016 was a year of profound changes at Zurich. We changed the organizational structure, but more importantly the management team has been changed in composition and roles.

We went down into the [indiscernible] organization in the second half of the year. We also merged the commercial and the global corporate organization in Europe, in the U.S.

and in the rest of the world. In the meantime, we launched important portfolio restructuring actions.

We re-underwrote a number of books. Through the year we kept improving our results quarter-by quarter, so what you find in the year-end numbers, I think, is a good achievement of the first year of a journey which is going to take us for the next three years.

Also, what you find is a very consistent contribution by life, by retail business where farmers has been especially strong and also by the commercial and corporate business which has been improving over the previous results. I'm also pleased to report on the $300 million reduction in nominal amounts of the cost basis which is something that we indicated to you that would be the target for 2016 and it was achieved and gave us good traction and confidence for continuing in 2017 and in the next years.

So the way I would look at this result is, we're getting traction, we're getting confidence on what we can do. The movements are all indicating the right direction.

The re-underwriting skills are clearly there and the result's also clearly there. More will come in 2017 and in the next years and the targets are exactly as reachable as we thought they would be.

Before I hand it back for questions, let me also anticipate something that likely you will ask which is on the M&A scenario and the market situation. There have been a lot of rumors and a lot of chats on M&A.

Our position is, again, unchanged with respect to November. We have a strategy which is not based on extraordinary transactions.

It is not based on M&A, however, we have been doing, in 2016, some transactions which all share a common theme. They are focused transactions on given markets or given customer segments and they strengthen our strengths.

So they keep building on where we're already strong and keep creating further opportunities for us to maintain, acquire, develop our leadership position in market or in customer segments. That is to say that we will continue looking at the market in the same way that we have been doing, but we don't participate to the last rumors in the market and we don't see anything that makes us changing our views.

With that, I will open the line now to questions and George, myself and Richard will be happy to handle your questions.

Firstly on global corporate. It remains disappointing in Q4 and for the year, although obviously it's improving.

Can you talk about the things that you think will disappear through re-underwriting in 2017? So for example, perhaps financial risks or things that have been a problem in Q4 and what impact do you think continued impacts will have on top-line in global corporate?

And my second question, moving to the Z-ECM, clearly very strong. I presume this does not include the impact of investment portfolio de-risking, so if you could comment on that.

But also, how do think about your surplus capital position and what your priorities are for using that budget? That's it really, thank you.

Can I start, Farooq? And then I'll pass it to George for further comments and especially on the capital side.

I mean, on global corporate, what matters to me is that business is improving and results are improving. One thing you should be mindful of is that through the year we changed many responsibilities in global corporate which also meant that we reassessed customers' positions, customer interest and we took different decisions on a number of them.

That was important to be made and so this gives me optimism for now, for the continuation of the journey in the next years. I will pass it now to George for the next part.

So, first of all, on global corporate, Farooq. I mean, you're absolutely right.

The performance that we've achieved in Q4 is not the one we've targeted and it's clearly the area of most significant opportunity for us, looking forward to 2017. I mean, after Jim Shea's arrival, he's done a review of the portfolio.

We've discussed that with him as part of the planning process and he does have further plans to adjust the portfolio, but that will also mean - it's a combination of - in some areas we'll reduce capital allocation because returns are low. In other areas we may increase capital allocation along the line that we outlined at the investor day.

So I mean, we do have a detailed plan that's country-specific, that is line-of-business targeted, to further improve global corporate and to bring it to the level of return that we require. I mean, I think it is a tough market though.

Difficult conditions, it's probably the most competitive market out there. But for us, we have a required level of return for that business and we'll keep making the changes required until we get there.

From a top-line perspective, we're not as - we don't expect to see as dramatic a change as we saw during this year and in fact some of the things we've done this year should start to feed through into earnings as we move through 2017. So I mean, in contrast to the, around, double-digit impact we've had on premiums this year, I mean, something in the low single-digit range is what we anticipate from global corporate in 2017.

And just following up on expense ratio which has had some focus today, I mean, are you worried that some of your bottom-line, sort of absolute expense reductions are kind of - could get swallowed up in the ratio that you show or is that really not a concern?

So the - I think this came up when we discussed the same topic a year ago and I guess it was a concern there that, I mean, some of what we do at the top line might be offset by what we do at the expense side. We said then and it's still true today, that we'll tackle the nominal expense first and if we need further adjustments to achieve the target rates that we have, we'll do that afterwards.

But the key focus for the time being, achieve the expense goals that we have and achieve the required technical hurdle rates of the various businesses that we've got. On Z-ECM, there'll be some impact of the de-risking that's taken place already through the last quarter of last year.

The main impact in Q4 is interest rates and in particular the steepening of the curve reverses some of what we saw in Q1. From a budget perspective, I guess we don't think of it in terms of a budget per se around the 100%, 120%.

It's really about capital allocation. We go through a regular review of where our capital is deployed and whether there are alternatives that would give us more attractive returns to investors.

That's what led to some of the things we did last year around the countries we've exited and of course we've redeployed that capital in other markets where we believe we can achieve an overall improvement. We'll go through the same process this year.

That's true for countries, it's true for regions and it's certainly true for the Group, but from a budget perspective - I mean, we're always - we're adequately capitalized. We're in a position today where if we had opportunities to expand and the market offered attractive rates of return we could do it, although as we discussed before it's now obvious that we have significant growth ahead of us in the short term.

I have two questions. Firstly, could you talk about the legacy portfolio, what you have in the UK as well as Europe, in terms of the size of liability and what is the capital attached to it?

Given the RSA transaction which you have done yesterday, would that be something - as in, you would look for your liabilities as well? Secondly, slide 11, you've given a blended rate in terms of change, still around 2%.

How would you say claim inflation stacks up with this on a blend basis?

So let me start with the first question on legacy. So, within our European - the European side of our legacy portfolio, the largest piece by far is a UK employers liability exposure.

We've got about, approximately, $2 billion of reserves in that portfolio. From a capital perspective, it's a relatively small part of the overall reserve position of the Group.

So I mean, if the Group has, say, $50 billion, $55 billion of reserves, we're looking at something slightly less than 5% of the total.

Right.

From a capital perspective, I mean, it tends to diversify away in the economic system, so the economic impact of disposing of it is not particularly significant. As a larger impact for S&P, so we're talking about a few hundreds of millions of dollars of S&P capital - I mean, everything that we have in legacy is not something that we intend to nurse and look after for the rest of its natural life.

We're looking to try and find exits, attractive economics. So I mean, that's something - and we have been exploring, we continue to explore, the capital side of it.

I mean, it's not unimportant, but to be honest, just to remove the risk factor would be a more important motivation for us. Beyond that, within Europe, I mean, what we typically have is small amounts of relatively long-tail lines in some of the continental European countries, but they're very small in comparison to the UK EL block.

Your second question was about loss costs inflation compared to the -

The 2%. Yes.

Yes, so we estimate Q4 around 1%.

Right.

So we're still seeing positive margin improvement.

Just reading the commentary and results, I'm still a bit confused on the accident year ex-cat loss ratio in Q4. Is that still containing an above normal level of large losses?

I'm talking ex-cat, so I think the implication is, it's still slightly inflated versus what you'd describe as normal. And in relation to that, when you talk about the outlook for the combined ratio, what's the assumption now on a normalized level of cat?

Because there's been a few changes in reinsurance and exposure. It used to be around 3.5%.

Is that still the case? The second question is just on expenses.

I'm still confused what the bottom-line impact of the cost savings was in 2016. I appreciate you achieved $300 million run rate, but what was the bottom-line impact, because there's some confusing commentary.

Clearly - I know the IFRS expense base reduced by more, but some of that is accounting effects. So to just clarify, the bottom-line impact in 2016 and the expected bottom-line impact in 2017.

Thanks.

So, on the first question, on the large loss component. Compared to what we planned for, we're still slightly above, so that's part of what drives the outcomes for Q4 and we've been really cautious both in the commentary and in other comments that we've made, to not make comments that this is volatility.

I mean, we've taken the view that it is what it is. We have an expected return and that's what we expect people to achieve, but I mean, it is certainly high.

To be fair, George, is that one of the reasons why the combined in Q4 didn't hit what you talked about at the end of Q3?

It's one of the reasons, but you can see, if you look at the numbers - I mean, overall for the Group, the loss ratio's actually in a pretty decent place, notwithstanding what we discussed earlier on global corporate. The expense rate is the challenge in Q4.

Okay, so it's still slight above what you planned for the -

In that quarter.

Okay and on the cat?

On the cat. So cat, I mean, given the covers that we now have in place, both for last year - in fact, we've increased the amount of cat cover we have in place for 2017.

We expect - again, long term expectation - around 3% compared to the prior 3.5%.

Okay.

On the bottom-line impact of expenses, Richard and I were talking about it earlier, I think at times we try and do too much to explain what's taking place and I think that had the unintended consequence of confusing people. I mean, the simple way to think of this is that we have a $300 million bottom-line impact after you allow for currency.

If you look at the financial statement you see a larger number, but we don't give ourselves credit for the currency impact [indiscernible] $300 million.

So it's an incremental $417 million, then?

I mean, but the currencies will move around over time.

Sure. Constant FX, I mean.

So, yes. Correct.

The first question is on your comments around claims inflation that you just made, that they're around 1% for the Group. Could you give more details on the regions, with regards to the claims inflation and the rate increases that you're putting through?

And then the second question is on the cash remittance. The guidance of over $9.5 billion for 2017 to 2019.

If I sort of simply compared that to the $2.8 billion in 2016, that means on an annual basis, it's about 12% higher each year in the next three years. Can you explain where that uplift is coming from?

Is that all from the operational earnings improvement or are there other sources as well, for example reduction in surplus capital in certain units? And then, I suppose lastly, quickly, on the ultimate loss ratio for 2016, it looks a little bit low relative to previous years.

Would this have, by any means, an impact, potentially, on future reserve releases? Could you comment on that?

That's it, thank you very much.

So on the claims inflation topic, I mean, it's hard to do it just to claims inflation without talking about pricing region by region. I mean, overall you've seen the figures for rate, you've heard my comment on loss cost.

If you break it down, at the positive end of the spectrum, in general Europe is in pretty good shape. Italy is the only area where we would see more pressure on the margin side of things, but UK, Germany, Switzerland, Spain, all looking in very good shape and above the average for the Group.

North America, more challenged, so in mid-market commercial, also the corporate end of America. I mean, things are probably closer to flat than improving in that particular market.

Much more competitive dynamic and much harder to get rates significantly ahead of loss cost. And global corporate generally follows that same trend.

So, stronger in Europe, slightly weaker in North America and outside of the two key regions LatAm is in decent shape, maybe slightly below, overall, Asia-Pac, because of the changes that we've made [Technical difficulty] portfolio. So for example, we've been reducing our exposure in Australia which is one of the weaker markets, but maybe slightly above the average overall Asia-Pac.

On the cash remittance topic, I'm just - just to repeat something that I said at the investor day, just to make sure that the frame of reference is correct. We've had a target for the last three years of $9 billion.

You've see what we've announced today, so we've significantly exceeded that. We've set $9.5 billion as a target for the next three years and that includes absorption of the restructuring costs that we've talked about before.

So gross of restructuring, the cash target would be particularly higher than the one we've published today for the last three years. The vast majority of that comes from operational improvement.

As you'd expect, we always have some plans around capital movements or extraordinary dividends, but we've taken - I mean, most of that over the course of the last two years around - particularly around farmers. So we've taken quite a bit of the capital out of farmers RE because it wasn't required to support the business there.

I mean, we don't have an equivalent impact planned for the next three years and we do have an expectation that some of the things we've talked about before around some of the excess capital in North America on the commercial side coming back to us. But the uplift is, to the vast majority, driven by the improvements in operational performance and the higher dividends that that permits.

On the ultimate loss ratio for 2016 compared to previous years, I mean, it depends what you look at in terms of previous years. Obviously if you compare it to 2015, it's significantly lower, but I guess we would all expect that given what we know happened.

2015, you've then got a mix of years going back. I think, if I look at where we end the year from an ultimate loss ratio perspective, I look at the triangles, I look at the Paids.

I mean, we're in a good place compared to what I've seen from the Group starting prior years. And as far as reserving goes, we feel comfortable with where we're reserved overall.

We've talked already about the PYD and our intention to keep it in a reasonably narrow band and try and maintain some consistency. And if I look at what we've done over the course of the year, my view - and I appreciate it's subjective - is that even with the PYD delivered in the range that we've talked about, our view would be that we've actually strengthened the overall reserve position.

So today we'd be, if anything, slightly more confident than we were a year ago.

A couple of questions please. Firstly, just a point of clarification, really, on the dividend.

You make the comment that you pay this or you're going to pay the dividend partly in reduction of capital contribution reserve and part from retained earnings. It would just be interesting to know what's kind of driving that and is that markedly different to what you've done in the past.

So that's question one. And secondly, just looking at the Q4, you've sort of alluded to the fact that obviously part of the reason why you missed on the guidance in terms of combined ratio was due to combined losses and partly due to expense ratio.

But I guess, what was the surprise on the expense ratio side? Was it that you couldn't cut the cost that you thought you were going to or was it due to top line being lower than you thought?

What was the surprise to you there? Thanks.

So on the first one, on the dividend, you've probably seen in prior years we've talked about dividend, but technically it's been a distribution from reserves. And because of Swiss law, we're able to make those distributions, certainly to retail shareholders, in a form that's free of withholding.

There's a given amount that we have, defined by prior capital issuance, that would permit us to do that and as we pay the dividend this year or the CHF17 per share, as we get partway through that number we exhaust our ability to make distributions from those reserves. So we technically make the CHF17 payment in two pieces.

One is a distribution, one is a more traditional ordinary dividend and with that we will have exhausted our capacity to distribute capital in that more technical way and in the future it should be ordinary dividends. On the expense ratio side of things, I think if you look at the number for the quarter - we anticipate that we will see a step up in Q4.

We have a seasonal pattern to expenses that we've had over several years, so we would expect to see around a 1% move up. We still have, beyond that, another 1.5% points there to explain.

If you dive into it more deeply, there's a combination of effects that drive it, but premiums are probably the thing that drive it most and of course maybe the thing that we haven't anticipated as well as we might have done is the way that GWP would feed into the earned premium. If you look at the GWP numbers for Q4, the moves are not as significant.

If you allow for RCIS and the impact of disposals that we would have seen earlier in the year and given that we have an expectation that next year premium growth will be fairly flat, that will be a temporary impact. But what it does do is, of course, it rebases the expense ratio that we start from.

But as we go through the course of 2017, you'll see the expense ratio start to move down again as we start to get the benefit of the expense and efficiency program that we're still pushing through the organization come through with a relatively stable top line.

My first question is on your guidance for the year, 12% ROE. I think the underlying ROE last year was 11%, so you would just probably need to achieve some 9%, 10% improvement in operating profit.

From the guidance you put out today for P&C, I only get to $300 million. So I wonder, what are the missing parts to get to the at least $200 million operating profit improvement?

And the other question is on page 11, on your rate change. About 40% of your U.S.

portfolio is long-tail liability and with the steepening of the curve, should we not expect basically rates to come down as you and others start to price in the better interest rate environment?

Thanks Thomas. So I guess on the first one, I mean, obviously we need to sit down together and go through your more detailed model, but I guess what I'd point to, maybe above everything else, is if you look at what we intend to do on the expense side, that's a very big step towards that gap that you've referred to on the ROE.

And beyond expenses, I mean, we do expect to see some improvement on the technical side. I appreciate, it becomes more difficult to get as we go on, but given the portfolio action that we have taken and in fact some of the portfolio steps that we'll take next year, we anticipate further improvement.

Those two things in combination will be what drives the improvement to more than 12%.

Can I follow up please? So on the expense side, I will assume that this is already part of your 1.5% lower combined ratio guidance and on the life side you basically guide for flat operating profit, so I guess the expense part is already captured in that.

So again, we have an expectation that through the course of next year, we'll achieve about $400 million pre-tax cost reduction. But it's not only in one area.

On the rate change in the - I mean, the risk that that causes the market to react and essentially offer reductions. If you look at things from a longer term perspective I agree with you, that - I mean ordinarily, when some of the pricing factors or the cost-production factors change, the market eventually competes them away.

I think, though, typically there is a lag around interest rates. I mean, hard to say precisely how long it would be.

But I think if we did see rates move up, I'm not convinced that you would lose that benefit immediately. But I agree that over time it would be very, very hard to retain it.

So year-to-date, you don't see that type of activity from competition?

I'm not aware of it at this stage.

I just wanted to understand, George, this divergence between NAC and GC in terms of the loss ratio or the underlying loss ratios. Is it that NAC is doing more effective gearing because of the investments in the data-mining tools or is there something that explains that?

And this quarter's again prominent as it was in previous quarters, but just trying to understand a bit more. And the second question is, just sorry to come back on an expense issue, but there's also a comment on commissions going up because of business mix.

Just elaborate a bit. Is it just because you have to pay more commissions so that people can justify volume cuts or what's the story there?

Thank you.

So on NAC versus global corporate. They are obviously quite different markets and they have, even from an end 2015 perspective, completely different starting points.

I mean NAC has some exposure at the top end of its business to things that are similar to the things that global corporate has at the bottom end, but the nature of what they do is quite different. So a focus on things like workers comp, on the construction side they have to write markets, they've got F&I.

Obviously, they have crop in a big way, after the acquisition. Global corporate, I mean, the entire company's for the companies you'd expect.

I think if we look at what NAC's done, we're very happy with the execution from the team at NAC. I mean, they do invest a lot on data analytics, using new technology to try and create products to help us risk-select or price more effectively and they've done a number of things in 2016, that in fact Christoph spoke about at the investor day.

Global corporate, I think the issues - I mean, it's partly where we're starting from and partly the market. So it's a very, very competitive market.

It's obviously the one that's most impacted by, for example, cat-prone risks and we all know what's happened from a pricing perspective there. But again within that, if we look at the portfolio - again, Mario talked about this at the investor day.

I mean, we could look to try and shift all of our mix in a way that we think would deliver a more attractive return. We have been a bit too concentrated in areas where, I think, we've seen more margin erosion over the last few years.

So a more balanced portfolio around global corporate would certainly help us. I know that that's high on Jim Shea's list of priorities.

The challenge is the extent to which the market will allow us or support that shift over time.

And George, just quickly. In Q3 there's obviously the European lines which [Technical difficulty] up in global corporate.

Was it a similar effect in 4Q or was it only losses that led to this worsening [indiscernible].

I mean, while I appreciate the question, I will say there is this temptation to want to analyze things to death and I think the problem with it is you can find excuses for almost everything if you do that. In the end, our conclusion is that it's just not what we want it to be.

This is clearly where we see the biggest opportunity for improvement.

Sure.

On the expense ratio commissions, next topic, so, the one thing we have seen - I mean, it' s neutral to actually slightly positive for the combined ratio, so it may explain a shift in the expense ratio driven through the commission side. I mean, again we've got a bit more consumer [indiscernible] business in the book.

We know we have more coming on-stream in Latin America over the course of the next 12 months and of course the acquisition that we would like to complete that we currently have underway will also be something that drives, potentially, the mix or rather the mix within the combined ratio in a different way. So I think on this topic, what - we'll try and do more, as we come up to Q1 and help people understand how it might develop as we go forward, because it will be a key topic for us.

But it's that mass-consumer element of the portfolio that tends to drive up the commission component.

I have two questions, one which is a pure speculative question. You have this German life business, where $400 million will be used in the ZZR the next five years.

Have you thought of selling it and what numbers are you looking at? The reason that I ask is, there was a - [indiscernible] wrote that in December there would be demand for Munich's portfolio and he put a price on it of $1 billion, so clearly there's a market for this kind of stuff which is a put market.

The buyers are not expecting to be paid to take the business. And then the second question.

Jim Shea, he's the new guy at global corporate, right? What is his package?

How is his incentive structured? Because on the one hand I don't get it, because why would I want to start in a business that is effectively being wound down and merged into countries and will do the [indiscernible] reporting?

So I get zero visibility, very difficult target, I also don't get paid much, but on the other hand he might get the benefit that all these claims which I imagine your very large claims decided yeah, you're abandoning them. They're going to claim, let's get their money back early.

You might say no, it's not like that. I'm thinking hmm, maybe it is a bit like that, but these claims will naturally dry up over the next couple of months or maybe six months and then the business might actually look even better than you were hoping.

How is his incentive structured relative to these two potential trends? Because they're guesses, I don't really know.

Thank you.

Excellent, so two traditional Michael Huttner questions.

Thank you.

You appreciate, I'm going to ask Mario to answer the second one in a moment.

Of course.

The first one, you'll appreciate, I'm not going to answer that one. I think the thing I would point you to though is, again, one of the comments that Mario made back in November when we had the investor day.

We took a decision many, many years ago about what our priority would be when it came to the products where we thought we could serve clients best and that's reflected in the product mix today. It's certainly been one of the things that's helped our German business, from being a much bigger challenge than it would be otherwise.

So we don't have a burning problem in the German life business. We have some capital that's not earning quite what we'd like it to do, but I think our team there, with the challenges that they have, is actually doing a very good job.

Mario, do you want to comment on Jim and his incentive?

Sure, what can I say to you, Michael? The transformation that Jim is bringing is to start with, it's a different approach.

Jim has been an underwriter for a number of years, so he is bringing strict underwriting culture to the organization. So we're focusing everyone to work client by client, account by account, portfolio by portfolio.

The other thing that still needs to be appreciated is, you know, skills are not infinite and they definitely are not infinite for us. Between corporate and commercial, we were replicating skills.

That cannot work or cannot work infinitely. So by bundling together under Jim all these people, we have a unification and a better use of the skills.

Also, I think it's much more clear now the way in which Jim is operating compared with before, because people belong to the countries and Jim is responsible for setting the targets, for giving them underwriting priorities guidelines and he runs directly some global businesses which clarifies a lot of accountability issues that we had before. But, it is a huge change for us and it's something that has got us busy for a number of months last year.

Absolutely, thank you very much. Oh, just a question.

How much capital is in German life?

So if you go back to a presentation that you'll probably remember very well, from three years ago, within that we've given - we have an underperforming capital mix, Germany makes up - it's not quite half, but it's not far away from the $10 billion that we'd identified then.

The first one, sorry to over-analyze is, but global corporate? I was just a bit confused, because when we went through the tiering exercise, I notice that you're not updating on the tiering in the slides today.

So are you basically saying that the tiering exercise didn't really work in the way you anticipated? Because I remember when we talked about Q4 last year, we talked about how under new underwriting strategy, the loss would have been lower and clearly you've got large claims now.

Are these large claims from tier four or are they large claims from a different tier that was previously categorized? And the second question is on NAC and it's a very simple one.

What would the combined ratio being ex the crop business in Q4? Because I guess that earns over Q3 and Q4 and then when we get to Q1 obviously it will revert back to closer to where it normally is.

Thanks.

So on the global corporate topic, I'm going to refer to an answer that I gave a few moments ago. You could certainly pick out things that I could claim, that if it wasn't for this it would be better.

But in the end, it is what it is. We have an expectation of a higher return from this business.

We've taken steps through the course of last year. We continue to tier.

We haven't shown the tiering. I mean, not because it shows a different picture.

It shows exactly the same picture, but in the end it's the outcomes that matter rather than the inputs here. I think we're still confident that the steps that we've undertaken through the course of 2016 will have an impact, but that said we're not yet at a level that we'd like to see and that will be part of what we address again through the course of 2017.

As I mentioned earlier, Jim has been through the portfolio. He's identified from his perspective the changes that he would like to make, as in maybe taking capital away from some areas and moving it to others.

I don't expect the same significant top-line change that we saw in 2016, but we clearly have more work to do on global corporate.

Can I ask what happened on the 1st of January [indiscernible]? Obviously, it's a very big thing for global corporate.

Global corporate, with the exception of a couple of the European markets, is a continuous business throughout the year. So it's not like Re insurance where it has a big Jan 1.

It has a pretty continuous profile.

Can I also make a comment? So I think, you know, in reality what we appreciate and like is the fact that the trend is visible at global corporate.

You can't really linearize this trend by quarters. It doesn't really work that way.

I am sorry to say so, but the improvements for us are there. The improvements will continue to come.

You have lots of [Technical difficulty] impact into one quarter or the other. The trend is there and the trend will continue to generate improvement over time.

I have a sense that you are kind of reading a little bit too much in one quarter only.

I was looking more at the half-year actually. I was just thinking about 3Q and 4Q this year versus 3Q and 4Q last year.

It's basically higher than it was last year, in terms of the loss ratio.

If you look at the year, today and you split it into two halves, I mean, I agree. I think we've had a better performance on the attrition on the first half.

I think we actually had some luck on the large loss side. Second half has been weaker.

But there's not much I can add to what I said earlier. We're aware, we're focused on it and Jim and the team have a plan in place where they expect to drive significant improvement through the course of 2017.

On the crop topic, I think there's actually a slide in the deck Andy. So if you have a deck handy, on slide 36 you see there the impact on NAC of RCIS.

I wanted to revisit the expense control question and the real question is why is the $300 million not visible in the expense ratio? Can you tell us what are the factors that offset it, basically and can you explain, how should we really think about the $1.5 billion?

I mean, it isn't, I guess, giving us great confidence that we can't see the $300 million in the actual ratio. Then, second question is just quickly on U.S.

commercial. Wondered if you could give us a flavor of where you think rates will end up this year for yourselves.

I mean, the market is soft but you've done rather well in 2016. Do you think you can continue that performance?

Thank you.

Thank you, Nick. So on the first one, apologies for this, but I'm going to try to take us back to what we had said earlier in the year.

We had indicated that we anticipated that the expense ratio would be fairly flat. Having said that, we had a goal to reduce absolute expense levels.

If you look at the full year, we've done both of those things during the course of the year and the reason that we thought the expense ratio would be flat, is because we anticipated that to improve profitability which we have done, that would require us to give up some volume. So where we've - I mean, I don't see an expense control issue.

I mean, if I look inside the group we have a much tighter expense regime than we have had for some time. There's a focus on further efficiencies that we need to drive out over the next two to three years to achieve the goals that we had, but the offset - put it in inverted commas - is what happens on top line.

That's what drives this difference. But we have received the goal we set out in expenses and I'd refer you to the answer that I gave to Andrew Ritchie earlier in the call.

One the U.S. commercial market, I think the team have done very well.

I mean, as we look forward and we look at planning, we would expect in the U.S. market - I mean, I've cut along the lines of the answer even from earlier that rate and loss cost in the U.S.

market 2017 will be fairly in balance. So it's a - of all the markets, that's one of the most competitive ones out there currently.

Just coming back on the expense ratio, what sort of expense ratio and P&C should we expect for 2017?

I'm really tempted to give you the plan in great detail. I mean, we have a goal for our return on capital, so BOPAT ROE goal is the primary one that we have.

I think we all appreciate that we cannot get there without proving the overall combined ratio. Our expectation is that we'll see us move from what's around 99%, down by about 1.5 points and we'll see contributions from both expense and from loss improvement.

Ralph Hebgen from KBW. There are three things, if I may.

The first one goes back to global corporate, I'm afraid. Just one point.

In the fourth quarter I noticed that there was a reserve increase again in global corporate and I thought that was a little bit disappointing because it came after three quarters where we had a net release run rate in the region of 4 percentage points. So it would be interesting just to hear some commentary on what generated the need to have a reserve increase.

In the fourth quarter, was a little bit of true-up at the year-end involved and where are we going to go from here? That's question number one.

Question number two is relating to cash, specifically in the life segment. I noted there that you reported $0.4 billion, so that's like $100 million or so below the run rate which we've seen in recent years and I think looking at the numbers, that might have been generated by Spain which had a higher acquisition strain.

So perhaps, on that one also some commentary. What generated that lower run rate in the life segment and are you happy to confirm your guidance going forward that cash generation in the life segment is going to increase from this year onwards?

And the final one is just the factual check on the excess of lost attachment points in the large loss re-insurance treaty. What are your plans going forward in 2017?

Are you going to lower the attachment point there? And that's it, that's question number three.

So, on global corporate, you're absolutely right. There is a reserving increase within the book in Q4.

I mean, we talked about this before, we're trying to manage the overall portfolio and at all times we have pockets of strength and there will be some pockets of vulnerability. We addressed one of those pockets of vulnerability, global corporate, in Q4.

I mean, the overall Group outcome was actually toward the top end of our guidance on PYD. We've reiterated - it's in the written material and I'll reiterate it now, that for 2017 we anticipate that you'll see PYD continue in that positive, 1% to 2% range.

On the cash, I think - I mean, you're absolutely spot on. So you've picked out exactly the thing that drives it.

We made a deliberate decision, together with one of our partners during the course of the year, essentially to put a bit more cash and a bit more capital behind a particular product. We thought that from a longer term perspective that's in the interest of shareholders.

It doesn't change our expectations of what life can generate, but we had an option or something in front of us that we thought was beneficial for the organization overall and we therefore made a decision. On the excess of loss attachment point, I'm going to be slightly more coy than I normally am.

I think I was ultra-transparent a year ago on everything around that contract. We just have renewed it at a slightly lower re-attachment point.

So we have tried, together with our re-insurance partners. Given the performance that we've seen, even on a large loss basis in 2016, we've had discussions to try and work with our re-insurers to reflect that and how that contract is structured.

So that means the propensity to attach is slightly higher, assuming the same level of large losses.

Just two very quick ones. Tax rate, you guide to 29% for 2017.

I think that's similar to what you said at the investor day, but when does that tax rate start to drift down, because I think the non-life business pays a lower tax rate? I would have thought we'd start to see some benefit of that in 2017, but maybe just clarify the trajectory there.

Second question, you point in the commentary to benefits you're getting from in-force management in the life business, at least in IFRS earnings. I guess what slightly concerns me is, when I look at the EV disclosure, there are actually quite large negative variances to do with poor in-force experience on things like persistency and I'm not sure what else.

So I'm just worried that's a lead indicator that we've kind of exhausted the in-force benefits in IFRS terms, because the EV commentary is reflecting that there are some in-force issues. Maybe just clarify the disconnect there.

Thanks.

So on the first one on tax rate, the biggest challenge on the tax rate is actually the ongoing restructuring. A lot of that cost ends up at home which is not a very efficient place to carry it but we don't really have much choice around that.

I mean, what it really means is that I anticipate the tax rate will be elevated both this year and next. It will start to trend down, but I'm still expecting for this year that you'll see something in that 28%, 29% range and something similar, maybe slightly lower, in the following year and then we'll start to come back to the longer term tax rate that you're more familiar with.

What's the tax rate on a bulk basis, then?

Well, I don't have that on me. It's slightly different from NIAS, because of course there are elements in NIAS that are taxed at different rates, but I don't have it in my head with me right now.

But it will be lower, because obviously restructuring is a NIAS item, not a BOP item.

So, yes for restructuring, but it's not always the same answer for realized gains. They can vary depending on which jurisdiction and what the tax will be, so [indiscernible] the realized gain component.

And the long term tax rate, you think should be what?

So I think before you were seeing somewhere from within the 25%, so I think somewhere within that 25% to 27% range is where we should be targeting, given the mix of businesses that we've got. Look, there is one wild card in all of this.

So quite a large part of our profit is generated with the U.S. and if we saw tax reform there, that would potentially have a very positive impact on rate for us.

On the in-force management versus the EV topic, so timing is obviously different. So I guess that's what's behind your question, that the EV tends to anticipate the entire life of cash flows and extrapolates experience along those - all those years to expiry.

I don't believe, though, that we've completely exhausted what can be done on in-force management and we know - I know from the plans that we have that some of the things that we intend to do through the course of this year and next I think improve both profitability and the cash signature from the book. But again, I couldn't draw that out in an EV versus BOP comparison.

But let me take it away and think about it a bit more.

Maybe two quick questions. On page 17 and the profit, a sort of profit disclosure on life, if I may.

I noted a very strong drop in the technical margin by 10% and also quite a significant drop in the unit-linked fee-based margin. Maybe you could comment on what were the drivers and what is the outlook on those to items, please?

Okay, so first of all on the technical margin, adverse claims experience. So two of our regions have had higher claims than were allowed for in pricing, but that can happen and it's driven by some of the incidents, some of the larger cases that we cover.

On the unit-linked side, I don't recall the issues. I need to look at it and the team can come back to you tomorrow.

Sure, but is the technical margin, is the run rate $1 billion, then? Or what is the run rate you would expect here?

I think if you look at the drop that we've had this year and you treat most of that as volatility, you would see the run rate.

Okay, thank you very much, everybody, for dialing in today. We're aware there's a couple of people still with outstanding questions and the team will come back to you during the course of the afternoon, as we unfortunately don't have any further time today.

If you do have any more questions, the whole IR team stands ready to take them. So with that, I wish you a good afternoon.