Zurich Ins Group S/Adr

Good morning, good afternoon, and welcome to Zurich Insurance Group's first quarter 2020 Q&A call. On the call today is our group's CEO, Mario Greco, and our group's CFO, George Quinn. As usual for the Q&A, when we get to it, can we kindly ask you to keep to a maximum of two questions, but before we start with the Q&A, Mario will make a few introductory remarks. Go ahead, Mario.

Thank you, Richard, and good afternoon, everyone, and thanks for joining us today. We're living through an unprecedented health crisis. Over recent weeks, our priority has been to support our customers and local communities while ensuring the safety and the well-being of our colleagues. We moved early to remote working. And our business has been fully operational throughout with our investment in the digitalization of our business over recent years paying off. Our business model and decisions taken over years are designed to ensure that the group remains resilient. Our group is highly diversified, both in terms of geography and business line, with no dependency on any single market or business. Our focus on achieving returns through underwriting rather than investments has ensured that we have maintained a conservatively structured investment portfolio, with relatively lower exposure to some of the more stressed industries and asset classes. In life, we moved away from spread-based savings already over a decade ago, thereby making our life business more resilient to ongoing low investment yields while also reducing our overall direct exposure to investment markets. Our unique farmers' business provides us with a high level of stable fee-based earnings and non-regulated cash remittances. back to the group. Further, the balance sheet is strongly capitalized, even under our own highly conservative CDCM ratio, which is calibrated to be consistent with a AA rating. On a regulatory basis, the Swiss solvency test ratio of 186% is also well above any requirements. This capital strength is complemented by moderate leverage and significant reinsurance protection. The first quarter saw the business continue to deliver a solid top-line performance, with the crisis having only limited impact mainly in live sales in the quarter. Most importantly, we continue to see improved rates across the business, most notably in North America, and we expect this to continue. As an insurer, we're used to handling crises and complex events like those that we are experiencing. We have seen it before with events like Hurricane Katrina and the attacks on the World Trade Center. We have provided you with a number today for the potential claims related to the COVID-19 outbreak and see this well within our tolerances and similar to the claims from the three hurricanes of 2017. As we showed then, we're more than capable of managing such events. We expected the crisis to strengthen demand for digital interaction. and more tailored services. And we are already looking beyond the current crisis to make the changes necessary to the business to adapt to what will be a changed world. The combination of our flexible and resilient business model, our committed employees, and the strength of our balance sheet gives me great confidence that we will emerge strongly from the current period and in a position to take advantage of new opportunities as they present themselves. George and I will now be happy to take your questions.

The first question comes from the line of Peter Elliott from Catfish River.

Please go ahead, sir. Thank you very much, and good morning, good afternoon, all. I appreciate the extra disclosure and obviously the efforts at quantifying the losses, which I appreciate is a very difficult exercise. I'm just going to use my two questions, if I may, to just try and understand a little bit more about the assumptions that you've used behind that. So first of all, on business interruption, on the point that more than 99% of your property policies do not cover COVID-19, Because my reading of that is that you're relying to an extent on the physical damage clause maybe for some of those policies. I was just wondering if you could specify what proportion of the policies specifically exclude disease risk. And then my second question was on workers' compensation. And I guess if you look at the WCIRB midpoint estimate, which they got to $11.2 billion, If your market share equates to a bit over 500 million, obviously you've quoted a much lower number in terms of your exposure, and I appreciate there's lots of moving parts there. But I was just wondering if you could give us a sort of a rough walk from their number to your number in terms of your exposure, which looks like being about 30 million. Thank you very much.

Peter's jaw, so thank you. So let me start with the policy wording topic. So you see the comment in the presentation today, you mentioned it. So 99% of the policies don't provide a cover, the vast majority having a virus of similar exclusions. That means we're not relying on the property damage wording. So even if we believe that the property damage wording excludes it, if you look at our standard contract language, We have, for example, in the US, the ISO standard form has the virus exclusion and both of our two typical standard wordings have the virus exclusion. So we're not relying solely on property damage to give us comfort that we're going to avoid a challenge to coverage on the basis that it's not property damage. On the workers' comp topic, I think the big difference between what you see in either the WCIRB scenario or the NCCI paper that was out I think last week or maybe even this week is the type of product that we are offering. So I think it's not an issue if you walk through the assumptions you get a different answer. A large part of our book is high deductible I think as we've talked about before and that high deductible book means that we don't cover the ground up costs. So within any reasonable scenario, most of the cost of that actually falls back on the client that we are providing the high excess coverage to. And I think that's why you see a difference in what you expect from a market share perspective from us and what you actually see in the calculating number that we have today. So in the deck that we've given, The range that we've given, the 30 to 150, is based on the bottom end to the midpoint of WCIRB using exactly the same assumptions as they've used, only it's modelled on the entire US book. The big difference is that high deductible feature.

Okay, that's great. Thank you very much.

The next question comes from the line of Finit Malota from Mediobanca. Please go ahead.

Yes, good afternoon. Hope everybody's well. Thank you very much. So I had one in workers' comm which has the address, so thank you for that. Next one is on the commentary about the economic impact, George and Mario. You know, let me be very simply. If GDP globally or in your markets fell, say, 4-5% this year, would there be a material risk to the $750 million Thank you very much. That's my key question.

So it's a slightly tricky question to answer, Vinay. So what we've done today is to focus on the direct P&C claim impact. I mean, there may be second order effects that we could see later this year or next year. I mean, there are obviously things like DNO or credit. I mean, we don't believe we have a significant exposure to this, either because of the size of the premium volumes in the overall portfolio, all because of reinsurance protection. But if we see a very significant fall in GDP, you would expect to see a bit more distress in the real economy than maybe we see already. And that can have some impact. But again, from a direct claim effect, we haven't modelled that into it, but we've tried to consider the impact of that in the scenario that we've given this morning. So for now, we're focused on the direct claim. If we do see GDP continue to weaken as a result of what's going on, I think the most likely thing you're going to see on us is probably less a bigger impact on the claim and more likely an impact on volumes because, of course, some of our premium flows are activity dependent. So workers' comp, as we discussed earlier, has a payroll component and to the extent that payrolls fall, we've all seen lower premiums. The model is the direct claim impact that we expect to see.

Thank you. And if I can use my second option, please. The property premiums disclosure on the BI slide, adding up to 8.7 or so billion, would we know what is the NEP? Because the reason is that I understand from speaking to the IR team that there's a lot of fronting captive business there and also that when I go back to Jim Shear's slides of Investor Day, the property exposure of say the commercial unit was only 26% where these numbers today on this slide are much higher. Is it possible to have a sense of the NEP or is it not available maybe? Just wanted to check.

So the NEP specifically for business interruption or property in general, Vinay?

or property in general, please.

I don't have it, but we can certainly get it for you. I mean, that's not difficult to do. So we can get it for you after the call.

Thank you. Thank you very much.

The next question comes from the line of Nick Holmes from Societe Generale. Please go ahead.

Oh, hi there. Thank you very much. Two questions. First is coming back on BI. I wondered, are you worried by legal risk? I mean, if the maverick court rules that insurers should pay out, how big a worry is that for you? And then second, with the ZECM, just going back to the calibration, I mean, why set it at 100%? Why not set it at 200%, you know, like FST or Solvency 2? Because that would sort of look better. Just wondered what your thinking is. I mean, you know, because when it falls below 100%, what sort of message is that meant to send to the market?

George, can I take the first one?

Of course you can.

Thank you. Look, Nick, I mean, we worry about everything because we're insurers and we're used to dealing with any kind of risks. So by definition, the answer to your question is yes. However, if the worry is that somebody will ask us to pay for things that we have never insured, that frankly is a worry that doesn't take long to be forgotten because then it can be valid for everything. And we're living in a world where nothing is anymore a sense or a certainty. Here we're not talking about interpretation. We're talking of things that don't exist. And so as such, then anything can be attributed to us. Any kind of cost or need you have, you can raise it against insurance. And so you don't really worry for that because it's a kind of world where it's pointless to worry about.

So on the capital topic, so I mean, it's a topic we've discussed several times in the past. I think the, and in fact, we've talked last year about the fact that, I mean, after we saw the moves on interest rates in Q3, that we might look at making some changes. I mean, you can see that, I mean, with FINMA support, we've moved to the FINMA curve, which of course is the standard approach in Switzerland. That, from an SST perspective, again gives us something that is I guess closer to the optical numbers that you see from the peer group, but again recognising that that number is still very conservative compared to the Solvency II basis. So why keep ZECN? I mean really two reasons, so one is that I think we all know that capital and I guess it's become more apparent there's a number of capital regimes out there that have significant smoothing built into them and you've seen that in times of stress it's become more hard to rely on those as the basis for a capital management policy because there are clearly fears that might go beyond the number or what the number would represent so for us even though I mean ZECM obviously represents a I mean, a particularly tough test. It's obviously calibrated at 100 to double A, but the way we parameterise it is unchanged. We have swap rates. We don't have ultimate forward rates. I mean, that for us, I think, is consistent with how we think about the risks that we run. And I think if we were to get rid of, say, the ECM and try and live in a world where everything was smoothed and nothing was market neutral, I'm not quite sure we would end up. And I think the... I mean, you saw it positively this year from us. So, I mean, obviously, we paid the dividends back in April. We did, as requested, review the scenarios and the stresses that the company could be subject to. And even after that review at the end of March, we went ahead and paid because those stresses and scenarios didn't, in our opinion... lead to a conclusion other than the one we previously reached. So I think actually having something that is a tough test that maybe more reflects the reality and the kind of environment we're in today is a good tool to have in the toolkit. But when you're thinking about comparison to the others, maybe you need to use the SST number plus a bit to really get a valid comparison. I think we're going to keep this combination because I think both of them play an important role.

Great. I'm very clear. Can I just have a very, very quick follow-up, which is with legal risk, are there any jurisdictions, for example, the US versus the UK, that you would be more worried about, that there could be some maverick decision?

Not really. I mean, in both countries, in effect, in just about every country where we operate, there's an established legal process. I mean, we all know the the quirks and some of the unusual features that some of these systems have. I mean, it's not as if this is a new topic. We know how to navigate it. And as I said in response to Peter's call at the top of the discussion, I mean, we've got good contract wording. We have good defence to the challenge. And I'm sure the Maybe there are others out there who are probably easier targets for this topic. But if someone decides there's something they want to go after, we believe we've got a good foundation and we'll defend ourselves.

That sounds very reassuring. Thank you very much.

The next question comes from the line of Edward Morris from J.P. Morgan. Please go ahead.

Oh, hi, everybody. Thank you for taking my questions. I hope everyone's well. First question is on the topic of reinsurance. I wonder if you can just talk through whether the 750 million assumes any benefit from any of the excessive loss reinsurance that you have, or is that only from quota share? And is there any particular benefit attachment points or things that you would point us towards that give you confidence in that figure or should some of the assumptions change, et cetera. So just some comments on reinsurance would be good. And the second question really relates to underlying performance in some business lines, which I guess may actually see improving claims trends because of COVID. Principally, I'm thinking motor here. I noticed 70 million you talk about as providing support for customers. I wonder if that 70 million has any significance. I'm just sort of thinking about how you're likely to think of individual business lines versus the group. Are you likely to return premium in books of business that are proving to be more profitable than expected, or would you view it as a group and manage on that basis?

Thank you. So thanks, Edward. On the reinsurance, the modelling assumes that Only the quota shares are relevant for now. And that's just a simplification that we've applied to make the whole process more straightforward. I mean, if I look at the various contracts we have in place from a reinsurance perspective, I mean, most of them don't have pandemic exclusions. But again, for the time being, they only... assumption we've made is that the quoted share on the property business in the US attaches. On this underlying performance, or I guess we think of it internally as the impact of frequency, so obviously lower activity has an impact across the group. You're absolutely right, we've highlighted today some of what some of our businesses have committed to return, but some of that benefit that we've seen so far through the early part of the lockdown. I mean, the message we've given people is that this is really a, it must be a market by market topic. There can be a big tap from the group that says we want you to do this because every market is a bit unique in some way. And of course, in some markets, premiums may adjust naturally because of the nature of the way the premiums calculated. individuals or companies may have other rights to suspend cover if they choose to. So again, we've encouraged the businesses to look at this, but we haven't set an expectation for what should be done. On the who's the main target of this topic, again, it's clearly more of a retail employee SME issue than it is an issue of the bigger end of commercial. I mean, to the extent that risks were adjustable in some way typically commercial contracts I mean the upper end will include some element of that so I think the overview would be that by and large that feature to some degree will exist already whereas on the retail side of things that's less common and again it's more important to think about it in that context so that's why you've seen us do what we've done so far

Okay, thanks very much.

The next question comes from the line of Farouk Hanif from Credit Suisse. Please go ahead.

Hi, everybody. Two questions. First one, on pricing, to what extent was this going to happen anyway? And to what extent thus far are we seeing some sort of COVID-related support? And do you think, given the pandemic, the experience in 2Q, that we might see some further acceleration in pricing. And secondly, on your sensitivities, I noticed on ZECM that your credit spread sensitivity has gone up, but interest rates have gone down. Just wondering if there's anything special about convexity relating to credit spread sensitivity that we should take into account. Thank you.

Thanks Farouk. So on the pricing topic, that's a really hard question to answer. The only way I can really try and give you a sense of how we see it is that obviously we had plans for something this year and what we're seeing is significantly exceeding what we anticipated from a planning perspective. But I think our view would be that there's this additional factor which of course squeezing capital and surplus across the industry is pushing pricing and we see it not only in the US in the beginning of Q2 you also see it in Europe as well in fact the move in Europe even though it hasn't reached the levels of the US the move in Europe is more dramatic from where it started so again probably further acceleration for how long it's going to continue I wouldn't like to predict but certainly we've seen a very strong pricing environment entering Q2. On sensitivities I think the main driver of that is going to be a combination of I mean just as the numbers drop the discounting impacts become much smaller so the optical sensitivities just naturally rise and if you look at what we've done from I mean we haven't done a ton of hedging but we've done some things to take some of the some marginal risk off the table, we're putting a bit more on the interest rate side than we have on credit. But the credit sensitivity is almost certainly due to the fact that just at these lower interest rate levels, the impact appears to be larger.

Okay, thanks very much.

The next question comes from the line of Johnny Wu from Goldman Sachs. Please go ahead.

Good afternoon, guys. Thanks very much. Just a couple of questions around the sensitivity again of that 750. I wonder if you can share with us, I understand that you don't have consistency across the group, given that you're allowing the business units to look at what the lots are. Give us an idea for sensitivity to that 750 with regards to BI sublimits before reinsurance or average lockdown timeframes that you've assumed for that 750. So we get a sense of where that number could move to approximately. And the second question just relates to, you know, you've made a statement with regards to expenses. Are you providing sort of new guidance on expenses or are you saying you have flexibility on expenses? Thank you.

Thanks, Johnny. So on the first one, I mean, the temptation to want to give you all of the different components of the model for me is quite high, but I'm not going to do it. And the main reason for that is if I look at the, I mean, one of the key sources of BI that we have in the portfolio currently, that actually has a time limit in it today. So the scenario that we've chosen extends beyond that, but one of the key drivers doesn't require that assumption to arrive at the number that we've achieved. So actually giving you a lockdown timeframe, I mean, it doesn't, we can substantially have help you understand the sensitivities that we would have to the timing topic. More relevant on travel. So again, we've assumed a timeframe that certainly extends well beyond from where we are today. Travel because of the summer. timeframe can have a bigger impact. But that is reflected in the figures you've seen today from us. On expenses, I think we're not signalling that, I guess, we're about to start another large expense reduction plan. I think that what we are trying to signal is that we're trying to be as proactive as we can. And the reality is that in our business, We have some things. The obvious example is travel. Travel is likely to be structurally affected by this for some time to come. I think if we sat and we waited and we do nothing, I don't think there's any hope in the short term that the picture improves. We made the decision that we need to take action on that topic straight away. On the rest of it, on the expense topic more broadly, consistent with the investor presentation that we set out back in November last year we had a number of areas where we were investing for growth and I think if you look at from where we stand today some of that is still valid some of that is not and again we're trying to react quickly to avoid that we build up an expense basis that becomes a structural problem and prevents us from having the ability to respond to an environment that the aftermath of this might reveal some different demands or needs in our customer base but as you've seen from us over the course of the last three years we've managed the expense base tightly that has not changed that will continue through the course of this year but that comment was really a signal about us reacting to what we see and also trying to anticipate some of the change that is undoubtedly coming in the market and the way that we operate both with distribution and with customers directly.

Okay, brilliant.

The next question comes from the line of Michael Hassner from Berenberg. Please go ahead.

I'm here. Thank you very much. And just like I said, I hope that every one of you is good as well. And two quick questions. One is a bit longer than you might think. The first one is on the triple B bond portfolio. I wonder if you can give a little bit more color. It's fantastic to have this. It's not a criticism, but some of your peers have provided a bit more than it's easier to compare. One is on the triple B minus exposure, and the second is on the rating downgrade risk, and the third one is on aviation. I see a figure for transportation, but I'm sure that aviation is just much smaller risk. And then on the 750 million, it's fantastic that you provide the certainty, which is really lovely. And I suppose another way of asking the question my peers have asked is, how much of that certainty we should provide comes from the fact that you do have a little bit of potential buffer on Rota. Thank you. And if I may, how big is that quote?

Thank you. Thanks, Michael. I hope you're well too. I don't have all of the details of the portfolio in front of me. I think if you go back and look at the UN numbers from February, including the BBB component, we haven't seen any significant migration impact at this stage, so if we were republishing the tables today, they would look a lot like the ones that you saw then. So apologies, I don't have it at my fingertips, but what we gave for the year end would be a good indicator of the exposure at the end of the quarter. So on the leisure and airline side of things, within the portfolio, again, it's a really small exposure. I mean, we would see it as immaterial. point one percent of the group's investments so if you look at the different components we've got about a bit more than 40 in equity and the remainder is fixed income so much less than one tenth of one percent on the airline topic. What was the third question?

The third question, yes sorry, the 750 million So it's lovely to have certainty and I admire it, but how much, when you framed that, did you think that if things move a little bit that you can use a bit more buffer for motor? I just wondered to ask if that's right and maybe you have a figure.

So the only thing, I know that you read this and I'm going to remind you that we carefully avoided the use of the word certainty in the press release for the obvious reason that there's quite a lot of uncertainty currently. On the absence of an assumption of the frequency benefit I think for the time being just recognising there are lots of moving parts I mentioned already that there are some things that are not modelled for the reasons I gave earlier and I think it's helpful to have frequency to sit against that group for the time being. Obviously as we go on through the year the level of level of clarity will improve, things will become clearer and we'll update at that stage. But I think for the time being we've thought about frequency as addressing some of the both the known unknowns and the unknown unknowns at this time.

Great. And the question, please.

Oh, sorry. I haven't given the number in the past, so I was proposing to start today.

Okay. Thank you.

Sorry, Michael.

No worries. But it would be in the premium figure you give to Vinny.

It would, but you'd have to go back and get the gross figure and what that was. I mean, it's not a space heater. I mean, you can probably almost certainly find it in some of the yellow books as well. So, I mean, we talked about at the end of last year, I think that we had about, I think the premium session we gave was about $600 million. That gives you a sense of how big that quota share is quite precisely.

Fantastic. Thank you so much. Thank you.

The next question comes from the line of Michael Haidt from Commerce Bank. Please go ahead.

Thank you very much. Good afternoon. Only one question on life insurance. Apparently you have seen the first impact of the current COVID-19 crisis on your new business generation. I would like to get a better feeling on how sensitive the new business generation is to the lockdown measures that have been taken. Given that the lockdowns were basically put in place only mid-March in the first quarter, I find the decline of the new business in life quite significant. So is the extent of the decline... a result of the last two weeks in the first quarter or more? Was the decline more evenly spread over the first quarter? Also, given that the second quarter is now halfway through, can you give us an indication of new business generation and how it was affected in the second quarter so far?

Yeah, thanks Michael. So maybe a couple of things about the comparison year over year. You're absolutely right. The lockdown component comes quite late in the quarter. I mean, it varies market to market. So obviously the Asian markets have been impacted for longer. But we already saw it, for example, in the Latin American business, both in the stuff that we do directly plus the business that we get through the joint venture. That continued into the early part of the quarter. We have seen some improvement. in the trend on new business. It's not back to where it was before but I think we've certainly seen it improve and production has come up again but there's still a gap that needs to be closed to bring us back to what you would have ordinarily seen. I think the other thing to keep in mind is the comparison to last year's number. Last year's number includes a pretty exceptional quarter for the Swiss business so it You may remember that there was some dislocation in the Swiss life market late, middle late 2018. And our team did a great job here in taking advantage of that. So part of the challenge that we've got this quarter is that can pass into the prior. But the lockdown component is at the end of the quarter. It has continued, but we have seen certainly an improvement in some markets, albeit we still have room to improve further to get back to what we've seen before.

Thank you very much.

The next question comes from the line of James Shack from CT. Please go ahead.

Thanks. Good morning. Just one question for me, please, and it's on the dividend. My understanding is that the dividend policy is to grow with underlying earnings and you have a floor level of 17% share. I just need to know whether there's some kind of soft bracket on that number when it comes to making the full year decision. you look at prior year and think, well, it's got to be something very abnormal in order to make an absolute reduction year on year.

Thank you. Thanks, James. So, I mean, it's a topic that actually we've discussed several times over the course of the last three or four years. If you think back to 2017, it was already a topic then. And, of course, we had the impact of the three hurricanes in the US, which... were a significant impact on the earnings for that year and a number that's not too far away from the figure we've given today. If you remember what we did then and what we said to the market at that point was that we were trying to look through the temporary effects for the current year to look at the base and also spending as much time looking at the coming year and what that would bring us in terms of capacity to make sure that the position that we adopted would be sustainable. No change for that process. I don't expect we get to the end of the year and we invent a new one. But, of course, at this point in the year, it's just too early to start to get through the detail of that. But, I mean, you've seen what we've done in the past. In terms of process, I would expect we would do the same thing again.

Okay, that's helpful. Thank you. I actually do have a second question, if I may. I think you just mentioned in your early commentary around the reinsurance process coverage and protection, you said that most of your reinsurance cover doesn't have pandemic exclusions. That's somewhat at odds from what we hear from many of the reinsurance companies that actually report, that do actually explicitly say they do have pandemic exclusions. Can you just shed a little bit of light on your commentary versus my understanding?

It's a bit hard for me to do that because I can only really talk from our point of view here. So, I mean, some of the contracts that we have have very clear pandemic exclusions, some don't. Why there would be a different picture presented to the market at large is not a question I'm capable of answering for you.

But your coverage comes from a wide range of reinsurance providers, and it is most of those policies that don't have pandemic exclusions. Is that fair?

So, yeah, I mean, all the insurance coverage comes from names that you would be very familiar with. I mean, obviously, it will depend on which particular risks or particular reinsurers are on that would decide whether they would have more or less with us. But certainly on the key contracts that we have, or key contracts is the wrong expression. I mean, we have a large number of contracts that do not have pandemic exclusions.

Okay, that's very helpful. Thank you.

The next question comes from the line of Andrew Ricci from Autonomous. Please go ahead.

Oh, hi there. I wonder, George, if you just concentrate on the asset side for a minute and tell us, I mean, Zurich's been quite tactical in the past, and tell us if there were any kind of major shifts or any even subtle shifts in asset allocation over the first quarter in response to market movements. I'm thinking particularly in terms of low-grade credit and the additional hedging, either on credit or equities. So just what was the response on the asset side to the market moves? And second question, your COVID sort of first stab at the claims number, I think excludes third-party losses. I think it's only first-party exposures. Just as a broad outline, just give us a sense of where the third-party liability exposure would arise. Obviously, things like DNO, but is there any other exposure to things like healthcare liability sectors, that kind of stuff? Just some broad outlines as to the third-party liability trends and your sort of expectations there would be useful. Thanks.

Yeah, okay. All right, so on the first one, we've made relatively small changes over the course of So there's a group of us we meet every week. We review where we are. Urban's the chief investment officer is in the lead on the asset side. I think the team have done an excellent job in the way that they structured the portfolio before this thing started. So as you've heard already on the airline side, we don't have a giant exposure. when we had the oil and gas topic a few weeks ago, you heard already that we didn't have a major exposure there either. The portfolio is pretty granular. So I don't think we're overweight in a particular name or geography. So what have we done? So we did put some hedging on equities, which would have been probably, I mean, the exact date escapes me, but sometime probably middle of Q1. So that will have reduced the exposure that you saw reported at the end of the year. The team had planned some tactical changes around credit. And the only request we made to the team was, well, let's do it a wee bit quicker than we had intended. That's not that significant in the size of book that we've got, but it just takes a bit of the credit exposure down. And then the other one is interest rates. So, I mean, just given the model that we have from a capital modelling perspective and going back to the conversation that I think I had earlier with Nick on the ZECM model, there's no USR in there, so there's an interest rate sensitivity that you guys have seen in the disclosed numbers. So, I mean, we did, we have taken some additional steps to, again, reduce the exposure that we have there. I mean, just given that Obviously the markets are a bit volatile. It's hard to do that in scale or size. So, I mean, what we've really done is more at the margins than something that would present a dramatically different picture today. But those have been the key areas of focus. So on the third party side, I mean, DNO is the obvious one. I mean, as you'd expect by now, of course, we have notifications. Not many, but we have a few. I mean, the challenge on DNO, I think, is until the dust settles and it becomes less of a free-for-all because of the market move and the issues start to focus on maybe companies who've got more particular issues, who may be more exposed. It's very hard to make any assessment of what happens on DNO other than we've got a big market move. and prior history has taught us that that is normally accompanied by an increase in activity around DNO. On the other third party topics, I think one of the things we've been looking at carefully would be EPLI, so the employment practices liability side of things. There's obviously a specific liability on particular sectors, you mentioned healthcare, and I guess there the I mean, again, the preoccupation is to try and look for areas where we believe there's a risk that we're overexposed or we have a particularly large or disproportionate share of a particular sector. And we don't see that at this stage. So when it comes back to the scenario modelling, none of these things pop up in the kind of depth or in the kind of size that would cause a significant concern at this stage. Again, the third party topic will play out probably long after this thing has reached some kind of equilibrium. So, I mean, the true impact of that will only become clear with the passage of quite a bit of time. But for us, given what we run in frequency, given the scale that we have in our book, we think that's reflected in the scenarios we've given today.

Okay, thank you. The next question comes from the line of John Hawking from Morgan Stanley. Please go ahead.

Good afternoon, everybody. I've got two questions, please. George, I seem to remember the Investor Day, you talked about sort of credit and surety as a line where you were sort of pushing back against some of the sort of bottom-up planning submissions from some of the PUs. Can you talk a little bit about the credit surety exposure in the book and how you see that developing? And then secondly, just to loop back on the question that Farouk asked, the impossible question about rates, etc. I just wondered what your view was in terms of the weakness of the corporate sector and the ability to push through rate increases given the level of insolvencies and also the precarious trading position of a lot of companies. Thank you.

Yeah, good. So on these two topics. So first of all, on credit and surety, I think we talked already last year about the fact that from a from a strategic perspective, the group had decided that we weren't comfortable with a further expansion in capacity for credit insured just because of what we saw in terms of the developing environment and also what we'd seen through a number of idiosyncratic events that didn't in themselves seem to portray any systematic challenge but you'd seen a few more and of course you saw Thomas Cook last year And Thomas Cook is not the only one. So we've put a cap on things that squeezed the book quite a bit last year. I mean, beyond that, I mean, we haven't yet, as you can imagine, been able to implement a shrinkage in the book, just given timing. Having said that, I mean, today we did disclose the Global Surety Reinsurance Programme. And I guess if you've had a chance to look at that, you'll get a sense of why we've had such significant events, but they haven't caused significant impacts in the P&L. We renewed that contract earlier in the year. As you can imagine, we paid more for it than we have in the past. It's obviously focused on surety, which is the bulk of our credit and surety book. So I say that, I mean, overall, for a combination of what we've done in capping capacity, what we've done on the reinsurance side, I think we feel comfortable that we're well protected. I mean, we can have things go wrong there, but the risk that something accumulates over a large number of names is obviously protected by the structure we've got in place.

George, can I give you a little bit of rest?

Of course you can.

So on the market situation, guys, it's important to understand that a big portion of our commercial books are with mid-size or global corporate accounts. And they are not immune, just to quote George from a while ago, but they're rather insensitive to what's happening, meaning that the business continues, that the revenues continue. And so, you know, they have no issues about following the market rates or about paying the premiums. The thing that we're very pleased to see is that the quality also of our contracts keeps improving. We signaled this already. I think Jim talked about this in the November Investors Day. And this is continuing. So we are building a much better economy. book on commercial, not just by the strength of the rates increase, but also by the conditions that we have in these books. And this is fairly independent from COVID. COVID is more an issue for individuals and SMEs, but has less of an impact on the big accounts.

Thank you very much.

Thank you, Mario.

Welcome, George.

Thanks.

The next question is a follow-up question from Peter Elliott. Please go ahead.

Thank you very much for the opportunity to come back. If I could mention two more. First of all, on capital fungibility, you mentioned the strong and unregulated nature of farmers in the start. I'm just wondering if you could sort of talk more generally about sort of any impacts on your ability to upstream cash, especially sort of regulatory impediments. That was the first question. And then the second one on the SST versus Solvency 2, you know, you mentioned the 90 percentage points of the respective entities. I was just wondering if you could sort of translate that into a group level delta. Thank you very much.

So on the capital fungibility topic, obviously the first point is the most important one. So farmers obviously constitute a large part of the cash flows and it's not subject to any impediment. So we're in a relatively fortunate position compared to the industry in general. I mean, every year that starts, there's a very large part of the cash flow that's pretty much guaranteed. I mean, more broadly on the regulatory side, I mean, you can imagine we're in Regular contact with all of the key tier one entities. We're monitoring their solvency. We're talking to them about what their plans are for dividend flows. It's just, I guess, way too early in the year to reach any conclusions. I mean, certainly if we would project out today, I certainly wouldn't plan for the same level of cash flow that we had anticipated, say, when we completed the planning at the end of last year. But that said, the cash flows that we would anticipate today I mean that's still a pretty healthy flow through the entire group so at this stage I don't anticipate any issues I do expect it to be somewhat impacted by the general environment but obviously the foundation that farmers gives us is a great starting point for the year Can I translate the 90% into a group impact? Unfortunately, the answer is no. I'm not that smart. I think the way you need to think about this is there's tons of complexity because obviously you guys understand that in general we're comparing standards model outcomes and how that would translate into individual model outcomes for some of the larger peers that we have in Europe is not really that clear to me and also important to remember that when you move out of Europe the US gets a completely different treatment under Solvency 2 versus SST because of course in SST we model it according to FINMA's requirements and we don't have this equivalence assumption which of course can create benefits around things like corporate bond spreads so I think all I can tell you is that it's not 90 but the number's not immaterial either it would be a substantial uplift to the 186 that we've published today.

Great. Thank you very much. The next question comes from the line of Thomas Cossat from HSBC. Please go ahead.

Yes, good afternoon. Two last questions for me. The first one would be on the business trends. If you could share some any revenue trends in April or May, just to have a feel of if you're already noticing some reduction in the business flow. Not sure if it's making sense with what you just mentioned, but just to get a feel of how business is going down at the present time. Second question would be on the measures you've taken in light of the COVID crisis. I mean, in terms of taking decision to shift the book towards all different business lines, additional protections. On the asset side, I think that you've said that nothing has really changed in Q1, but Overall, any decisions you've taken for the remainder of the year in light of the crisis and in light of COVID development? Thank you.

Yeah, thanks, Thomas. So on the first one, I think the short summary would be that from a rate perspective, the early Q2 indications are They're really good and it's very strong across the two key markets, North America and Europe. And I think I mentioned earlier that if you look at Europe, it's not at the level of the US, but it had a much larger leap in April compared to what we've seen previously. So rate is good. I think the challenge is going to be growth. So we've had a really good start to the year, the teams both in Europe and in the US. have done a great job. But I think if we just look at current trends, so I think as you hear from the entire market and as you look at some of the broader industry analysis, you can see that new business has fallen significantly from what we've seen in prior periods. That's partially offset by the fact that retention is up significantly. So it's not a net fall, but it's that combination is what's leading us to tell people that I mean for the year in total you probably need to expect a premium picture that's flat to maybe even slightly down for the full year. On business shift I mean other than things I've mentioned here on the call already around travel I mean largely no I think the I mean Mario's already mentioned the fact that the the things we've done around the portfolio the quality of the portfolio the approach to underwriting I mean all of those things that we've we've already done I think have put us in very good state for the environment we're now in and at this point at least we don't see that there's a need to make further significant shifts and in fact I think being a bit consistent as we go through this is actually more important thank you

The last question from today comes from the line of Michael Hackner from Bloomberg. Please go ahead.

Thank you so much. Can you hear me? Yes, go ahead, Michael. Yes, sorry, sorry. Yeah, so two questions. One is, what is the current crisis? How is that affecting the ANZ Life integration and the hoped opportunity of cash there? And the second is, you mentioned on your slides that potential vast capital allocation to extract capital from non-core businesses. And I thought, ooh, this is nice, and I just wondered what that might be. Thank you.

Yeah, thanks, Michael. So I think it would be fair to say that if you look across the entire group, the team that has the most stress currently would be our Australian life team because they have the integration to manage, they've got the challenge of the current events to manage, And you've got the aftermath of the Royal Commission which took place down in Australia. I think they're doing a great job. This will be a bit of a difficult year given that combination. I'm not going to give predictions for where the year will end today. There's a number of things that I think I talked about last year. For example, on some of the steps we will make to adjust the portfolio to make it more profitable, the team have that in train. And the key reasons and the key drivers behind the acquisition of ANZ Life remain true today. So one path. that's the brand that we use is a great addition to the portfolio but it'll be a slightly difficult year for that life business as it is already for many of our life companies. On the non-core businesses I guess in common with a number of our friendly competitors I mean the reality is environments like this make you think again about the composition of the portfolio and maybe your patience or enthusiasm for some things is a bit diminished. So I think we're just signalling that the things that we've done already to regularly recycle capital away from risks that we think are poorly rewarded to those that we think have a greater and more positive strategic impact on the company, that process is going to continue. And in fact, as you can imagine, I guess this current backdrop, it will get a bit more energy.

Fantastic. Thank you very much. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Burden. Please go ahead.

Thank you very much, everybody, for dialing in today. Obviously, the IR team is available should you have further questions. So please feel free to reach out to us either via email or directly on the numbers on the website. Stay safe and have a good afternoon.