Zurich Ins Group S/Adr

Ladies and gentlemen, welcome to the Zurich Insurance Group Annual Results 2020 conference call. I'm Aria, the chorus call operator. I would like to remind that all participants will be in listen-only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Richard Burden, Head of Investor Relations and Rating Agency Management. Please go ahead, sir.

Good morning. Good afternoon, everybody. Welcome to Zurich Insurance Group's full year 2020 results Q&A call. On the call today is our Group CEO, Mario Greco, and our Group CFO, George Quinn. Before I hand over to Mario and George for some introductory remarks, just a reminder for the Q&A, We kindly ask you to keep to a maximum of two questions, and if we have time, we'll circle back around again. So with that, I'd like to pass it over to Mario.

Thank you, Richard, and good afternoon, ladies and gentlemen, and thank you very much for joining us today. I'd like to give you a few remarks before handing over to George. 2020 has been an unprecedented year with unforeseeable events ranging from global pandemic and recession to civil unrest in the United States and a high level of natural catastrophes. Throughout these challenges, we have supported our customers and local communities while ensuring the safety and the well-being of our colleagues. The performance over 2020 confirms the strength of the business, the agility of our people and the effectiveness of our digital strategy with our business remaining fully operational throughout. On the back of this, we have increased customer satisfaction and employee engagement. This is already leading to growth in our customer base and will be supportive of further growth in the next months and years. Our results demonstrate a strong underlying performance with the decline in business operating profit for the full year explained entirely by COVID-19 and by the above normal levels of the natural catastrophes. Even with these effects, our combined ratio remain at the level that when we started this journey would have been considered as a challenge to achieve. The underlying performance of our property and casualty business was particularly pleasing. Not only did we experience a strong growth in gross return premiums, but we also saw strong improvement in the underlying combined ratio of 2.6 points. Claims related to COVID-19 net of reinsurance and associated frequency benefits have remained in line with the US dollars, $450 million we reported at half-year, a level which stands favorably against peers of similar size in the industry. This performance reflects the work done in recent years to improve the portfolio as well as the benefit of the recent price increases. Combined with the current price trends, which are expected to continue through this year, I am really confident that our property and casualty business is well positioned to deliver further strong profitable growth. Our life business also showed a strong performance over the year, with the growth of 7%, excluding the effect of COVID, and despite falls in investment yields and in Latin American currencies. The group has focused on life protection business and capital light savings products for over a decade, a decision that serves as well as global investment yields remain at historical lows. Farmers Management Services saw an improved second half performance, and together with the acquisition of the MetLife property and casualty business, I am confident in the future prospects for the former's business. During the year, we paid our 2019 dividend on time and in full. Our confidence in our plans and continued strong balance sheet means that we are proposing a stable dividend in Swiss francs in regards to 2020. As a look at the business today, we have adapted our plans to the changed reality And I'm confident that the strong delivery in 2020 and the work done in recent years to improve the business position as well to deliver on the commitments we made in 2019 for the end of 2022. I will now hand over to George to make some additional remarks. Thank you.

Thanks, Mario. And good afternoon. Good morning to everyone. I'd like to add some additional points on capital and the switch to Swiss solvency test from ZECM. Today we've reported an SST capital level that's obviously not the one you were expecting. The principal drivers are an update of the Q3 estimate that we reported back in November, increased capital consumption related to additional growth that we expect to see in 2021, and some operating variances. It's obviously not good when the most significant item in the analysis of change has nothing to do with the business. I'm sorry for this, and we've made changes to our processes so that this can't happen again. Although we might not be happy with where we've got to this point, we are very comfortable with where we are. The updates of the Q3 SST number doesn't impact the other measures of capital on the old ZECN basis. We're in the upper half. with the target range, and we have a very significant excess from a rating agency perspective. In the past, we've also indicated that for, if you compare our European Union businesses, a solvency two ratio would be around 90 points higher than the SST ratio, and this remains the case today. Although we don't have a solvency two ratio for the group, we remain comfortable that our SST capitalization would translate into solvency 2 ratio at the upper end of those published by Appearance. As mentioned at the time of the third quarter, we've also provided a new capital target based on the Swiss solvency test with our target for the future being to maintain an SST ratio at or in excess of 160%, which is equivalent to the previous 100% level under ZECM. This underlines our commitment to a strong balance sheet and the maintenance of at least AA standards across all capital metrics. And perhaps just away from the capital topic for a second, I just want to reiterate Mario's earlier comments regarding the strength of the performance of the business over 2020 and the confidence that that gives us in the outlook for 2021 across all of our businesses. With that, I think we're now ready for Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on their touch-tone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from John Hawking from Morgan Stanley. Please go ahead.

Hi, good afternoon, everybody. I've got two questions, please. The first one on sort of where you are in terms of rate increases versus claims inflation. One of your US peers that reported very similar rate increases to yourselves in the fourth quarter was talking about 4% claims inflation. I wonder whether you could comment on that and also a comment on EMEA would also be helpful, please. And then the second question, on slide 41, where you've got the SST bridge for 2020, In the market movements piece, this is 16 points for market volatilities. Is that main interest rate volatility? And I wonder whether you could comment whether any of that is reversed already in 2021. Thank you very much.

So, John, it's George. So maybe on the pricing point first. Can you hear me okay? Yeah, I think so, George. Yeah, excellent. Good. So on pricing, so you've seen what we've reported today in terms of price trend in the business. It continues to be very strong through the fourth quarter. If you look at the various geographies, US still stands out. So we are, I mean, we're just at about the same level that we saw Q2, Q3. We're about 17% for the year and we're above that in Q4. So there's no obvious sign at this point that things are slowing down in any significant way. Distribution across the lines of business is similar to what you've heard from me before at the Q3 call. So in the 20s across the two main classes of property and liability and lower on the others with motor just in double digits. Workers' comp has actually come up quite a bit. in Q4, so maybe responding a bit to the yield pressure, but specialty, including credit, is still pretty low. I mean, it's close to 1% currently. From a lost cost inflation perspective, views similar to what we saw earlier in the year. So we've held a view. So if you look at, I mean, all in, we're seeing a bit more than 5%. If you adjust for exposure, it'd be closer to 4%. I think the challenge of going to market is that the pandemic has slowed things down in the system during 2020, and I guess at some point that will start to unwind. I mean, we've taken a very cautious approach around liability. So, for example, when you look at activity, activity is down. There might be a tendency to perceive that as frequency, and we've ignored that in the reserving process. We've assumed that even with the absence, there's no change in underlying trends for the time being. Other markets. So if we look at Europe, I mean, Europe from a headline perspective, it's not as strong as the US. So the overall rate we would see around 5%. It's actually, it's been coming up through the years, stronger than that in the fourth quarter. And the market that stands out is the UK. So UK is in double digits. It's obviously driven by commercial. And again, stronger in the second half of the year. Again, Q4, well above the average for the year. From a lost cost perspective, the trends in Europe are a bit different to those we see in the US. You don't see quite the same issues that exist around social cost inflation. But if you look at pain points in Europe in the portfolio, They tend to be pretty similar to what you see elsewhere, so it tends to be casualty lines, it tends to be professional indemnity, some financial lines like D&O, for example. But I guess kind of sum total of all of this is the significant margin expansion both in the results in the second half of the year, and we expect that to continue into 2021. And in fact, given where we're starting 2021, I mean, most likely that will now spill over into 2022 in terms of end outcome. On the slides and on the volatilities, so, I mean, it'll be volatility across a wide range of the asset classes. I mean, you've seen quite a bit of move on interest rates. That'll be part of the driver. I don't have the precise breakdown in my hands. I can't give that to you immediately. The challenge with it a bit is that because of the look-back period that we have in the volatility model, it will take quite a while for that to work its way out of the system. So I think the elevated volatility, I mean, assuming the markets come down, it will average down. But, I mean, we'll have that type of impact in the reported number, I would expect, for most of 2021, if not into early 2022.

Okay, thank you.

The next question is from Peter Elliott from Kepler Shriver. Please go ahead.

Thank you very much. Sorry, the first one's on solvency, George. But I guess you always said the quarterly ZECM ratio estimates were accurate to within five percentage points. It sounds like this was more of a sort of one-off event. I mean, should we sort of think going forward as the sort of quarterly SST estimates as being sort of pretty accurate or should we expect them to move around? Yeah, I guess that sort of goes for the full year number as well. So I guess you haven't sort of fully filed that yet with the first one. Second one on P&C investment income, looking about it, I guess it fell by 155 in H2 alone. Given that trend and given the big gap to the reinvestment yield, I was quite positively surprised that you were guiding to only a drop of 50 to 100 for the whole year in 2021. Is that just explained by the maturity profile of the assets or is there something else that I'm missing there?

Thank you very much. Thanks, Peter. No need to apologise for the first question. I think All of you would expect the numbers to be pretty accurate. So that's what you can expect from us going forward. I mean, we made changes in Q4, which was to automate quite a bit of the quarterly production. That's, of course, what's triggered the revision that we've reported today. And I expect to produce the level of quality that you're familiar from us across the other capital metrics that we disclose on a regular basis. So you can expect it to be accurate. On the P&C investment income, I think the reason why you see this there's really two things taking place here. So if you look at last year, as you point out, you see a fall that's larger than you'd expect. And that's because you have a combination of yields, but also what we think is probably, well not probably, we can see that dividend receipts are quite a bit lower than they've been in the prior year. And if you look at the numbers, it's about 50 million in the P&C number for 2020. So as we look at the yield change next year, I mean, we've got about 100 basis point gap booked to new business. So that still equates to about 100 million, but we're expecting to see some of the absence of dividends in 2020 start to recover in 2021. So I think it's those two things that offset to some degree which is why you're hearing that 50 to 100 gains.

Yeah, that's great. I guess I was thinking of the dividends more as sort of H1 phenomenon, whereas I was sort of looking at the running yield on H2. But I appreciate there's lots of moving parts. Thanks a lot. Thank you.

The next question is from Andrew Ritchie from Autonomous. Please go ahead.

Oh, hi there. First question is on your outlook for NEP growth in P&C. I guess if I had been writing the press release, I would have been tempted to say mid to high single digit. I'm just trying to unpack kind of your guidance of mid single digit, which I assume is five, because the stock of unearned premium reserve is the highest it's been, I think, for five years. I think imply you're not renewing some of your reinsurance. And then on retail, I guess retail is COVID impacted, but again, retail and SME seem to bounce back in the second half. So could you just unpack? I guess my angle is why only mid-single-digit NEP growth for 2021? And the second question on reserves is, I guess just an update. I think the implication is that you added a little bit to U.S. liability ex-work comp in the first half. Did you do that again in the second half? And on reserves, I noticed Australia or Asia Pacific is the gift it keeps giving. Was there another sort of round of looking at some of the long-tail business there? There appears to be looking at the PYD by division. Thanks.

Thanks, Andrew. So on outlook, I think I'd probably start by saying that we wouldn't necessarily conclude that mid-single digits could only encompass five. So we might be slightly more generous than that. But I agree with you that it's only compared to, I mean, the different factors driving the results, and you've commented on some of them, you would anticipate something a bit higher. And in fact, of course, if foreign exchange stays where it is, that alone will drive it quite a bit higher than the mid-single digits. I mean, I think we've tried to be a bit cautious on the growth outlook. I mean, we want to leave room if necessary to make sure that we can continue to manage the portfolio. We did some of that last year. So, for example, MedMal and some of the credit lines were targets for reduction. I mean, I don't know today that there are significant parts of the portfolio that would look to shrink, but we have tried to, To be a bit cautious, just to reflect the fact that, I mean, we do at times, as we review the portfolio, identify parts where perhaps we're not quite as enthusiastic about growth. But certainly, I mean, if like for like, you'd probably see something a bit higher than mid-single-digit growth, even allowing for something that's not five, if everything continues as is. unreserving I mean no great there aren't major changes in the second half of the year around I think there's a bit of adverse, but it's quite small compared to what we've seen before. Workers' comp in the US and European retail continue to be the biggest drivers of the positive outcome. And yes, you're correct. Australia continues to be the gift that keeps on giving. In this particular case, it's PI and a particular design and construct. So it's a colliding topic in Australia that's driving that experience. But I mean, overall, as you can see from the outcome, I mean, we can easily manage PYD targets. And in fact, looking at reserve strength into the future, I mean, arguably, if you were to take a slightly more short-term view of workers. So we take a fairly long look back on the lag factors for workers' comp. If you were to move to a five-year rather than a 10-year or longer perspective, there would be a very substantial surplus in the current reserve position.

Is it fair to say not all the, I think you said this earlier on, I just want to clarify, not all of the frequency benefits was allowed to drop through. Some of it has been trapped and reserved. Is that fair?

That's fair. So just given the uncertainties that are still out there, we've decided that it's appropriate to hold some of that back for now.

OK. Thanks very much.

The next question is from from Credit Suisse. Please go ahead.

Hi, everybody. First question on expense ratio. So you've very kindly shown what the ratio would have been without the premium refund effect. Can we just take that as a base for 2021? And can you talk a little bit about how, given the commission ratio seems to be flattening out, how some of your expenses could actually work into that ratio the next few years? And then secondly, on cash remittances. So you've obviously had a higher payout ratio because of surplus capital, you say, in the P&C business. Is your aim going forward to try and manage that number to be quite smooth and avoid discontinuity? Or do you think we could see more kind of surplus capital upstream to support that number going forward? Thanks a lot.

Thanks for it. So on the first one, on the expense ratio, I need to be a wee bit careful what I say. As the CFO, I'd love to just tell you that, yep, absolutely, we're going to maintain expenses exactly where they are. There's clearly an element of the expense change that is driven by the circumstances of last year. That's definitely going to continue into the early part of next year. And some of the structural changes that will happen in the way that we operate means that some of that most of that maybe never comes back into the organization but i think to make the assumption that um there's no prospect of any of it flowing back is too aggressive having said that i mean you know that from the investor day that we had november 2019 there's an ambition to bring the expense ratio for the group down to around 12 so There's a number of other initiatives that are currently ongoing. I mean, trying to push efficiency. We're looking to try and again reduce and adjust the resource allocation within the group. So we reduce some of the back end within the corporate center and allow the business to expand slightly while still achieving the overall goals for the group. So I think it'd be in the very short term, assuming that we start to see, for example, travel come back to normal, you'd expect to see some of that come back into the picture, but not as much as we've had in the past. On the commission ratio, I mean, you've seen that flatten off. We've talked in the past about, I mean, we do have a level of appetite for that, and I think we're not that far off of it. I mean, we do continue to evaluate transactions with distributors that that we think would be a good use of our capital um i mean they tend to be the uh because the mass consumer type things that do tend to still come with elevated commissions i mean i don't know that we'll do that in 2021 but i want to leave open the possibility but i mean there is a limit to how far we're prepared to see the commission ratio rise um on the cash remittance topic uh well I mean, in all honesty, I'm a bit greedy. And I think it just makes sense from a group perspective, if we can move capital into the centre, you're just better off doing that because it gives us far more flexibility to deal with any challenge that can occur in any particular part of the group. I think the reality of it is, though, that as we approach regulators, particularly to deal with excess, capital positions versus target. I mean, regulators don't tend to react too well to a sudden shift in the capital base of a subsidiary. So we'll normally try and agree a stepwise process over, say, two years, three years to bring us back down to target. And we've been doing that pretty consistently over the course of the last four or five years. I mean, the The challenge or even maybe the good news behind it is that as we address existing excess capital positions, what we tend to find is that by the time we finish that process, the business has now generated a new excess capital level. And we then go back and agree a plan to take that. I mean, the reason that you see this pretty strong number for last year, which of course is quite a bit ahead of what you'd expect given the performance of the business, is that we've done that with, I mean, one of our largest businesses. So they've talked to their regulator about how they come back down to target. And the plan is that that's not just a single year topic. That will be, let's say, a two, three year exercise. And that's helped balance out and was the shortfall that you'd otherwise have expected because of COVID in 2020.

So just on that, it's possible, but obviously not a guarantee, that you could see the payout ratio being above 85% in some of the future years as you put this into place?

It's possible.

Okay. Thank you very much.

Thanks, Farouk.

The next question is from Michael Haidt from Commerzbank. Please go ahead.

Thank you very much. Good afternoon. Two questions. First on the net realized capital gains you had in the fourth quarter, which were significantly above my expectations. Can you tell us what were the motivations of these high disposals of equities and real estate? I saw that you left the equity ratio within your portfolio unchanged. And second question with respect to expectations for the top-line growth in P&C in 2021. I saw you expect a mid-single-digit, possibly above 5% growth in P&C on net earned premiums. Also, the SST was burdened by some higher growth assumptions, presumably in P&C. I would have expected some pressure, actually, on commercial premiums, not coming from price, of course, but from volume, as often premiums are tied to blind revenues. So can you tell us your view on how this affects the growth, and maybe you can provide a breakdown of how much of the premium growth is price-driven and how much is volume?

Michael, thanks very much. So on the first topic of net realized capital gains, So, you've got a variety of drivers. So, property is probably the most straightforward. Within property, I think we've talked in the past about the fact that we've got one of our largest business units that is probably slightly overexposed to property from a capital structure perspective. Well, the overall allocation that we have to property in the SAA, I think, is perfectly reasonable. the way that we've actually financed that from a capital perspective is inefficient and we've been correcting that over the course of probably the last two years now. I think there's still a bit more to do but Urban and the team have made great strides in this topic and in fact some of what you see at the end of the last year again is us addressing that overweight position in one of our businesses. On the equity side, I mean, it just varies depending on what the managers are deciding to do. I'd say that probably also the realized gains are a bit higher than I expected towards the end of last year. It obviously has a slightly negative impact that it puts a bit of pressure on the ROE. But we tend to leave the team to decide what they think they need to do when they need to do it. On the growth topic on P&C, I think the point is absolutely valid. You've certainly got a bit of a competition between rates, also activity, and I think I'd add a third thing to the mix, and that's just the budgets that some of our clients set. I've talked to quite a few of my Focused at numbers, some of our clients over the course of the last six or seven months. And I know that they're probably struggling to some degree with, I mean, what's happening in the market. I think they see two issues. Price is certainly one issue. I mean, capacity is probably at least as big an issue for some companies. there's a there's an absence in some lines of business and of course that's just driving quite a bit of the rate picture so I think I think there is a I mean whether it's activity driven whether it's just the fact maybe someone retains a bit more risk either because they don't like the price or because they have to because of a lack of capacity. I mean, there is some offset effect in the top line growth. But having said that, when you look at the rate that we're seeing in commercial at the moment, I mean, that's going to overwhelm any volume or other impact. And we've allowed for that in the estimates that we've given today. So in the comments I made to Andrew earlier, As we think about 2021, we've said mid-single digits. Maybe that's a bit north of the midpoint of that range. And certainly, we're also allowing for the fact we may continue to manage the portfolio. So, like for like, I think the opportunity in 2021 is probably a bit stronger than that. And again, foreign exchange, if we continue to be throughout the year where we are today, that will also boost growth in the remainder of the year.

Okay, thank you very much. Thank you.

The next question is from James Shucks from Citi. Please go ahead.

Hi, good morning, good afternoon, everybody. George, my first question is on the reinsurance recoverables. If I look at that number over the last 18 months or so, it's increased by close to 3 billion. I think the reserves have grown over that time, but even in relation to the reserves, that number's gone up. I'm just wondering how much of that actually relates to COVID-type issues, and if you could elaborate on any potential friction points with the reinsurers over that amount, please. And then secondly, on the SST, the calibration is interesting, particularly when you compare it with the ZECM. So the market risk is 68% now. That was 52% under ZECM. The SST interest rate sensitivity has doubled to about 19 points for minus 50 bits. The credit spread sensitivities have come down. Can you just elaborate a little bit on how you're seeing that market risk and how you're going to manage that SFT volatility going forward, please?

Yeah, thank you. So on the reinsurance recoverable topic, I mean, it's tricky to look at the headline number because there's a bunch of stuff in there that's either captive relationships or, I mean, things that simply flow straight through our balance sheet. on the way back to commercial clients in many cases. So it can be a bit misleading to look at the rise and attribute that solely to a rise in gross claims that translate into a higher expected recoverable. Now, having said that, I mean, the point you make about COVID is clear. So if you compare where we are today to where we were say at the half year. Since then, we've had the FCA decision in the UK. As you know, our own wording was upheld. The industry has lost on the resilience wording, so that's triggered additional losses. The Quarantine Act topic in Australia has also triggered some additional losses. In general, both of those have been absorbed by by reinsurance currently. So it has increased the recovery. And in fact, through a combination of COVID and the other cat losses through the year, like Laura, Sally, the civil unrest topics, we're relatively deep into the aggregate at this point. So there is a more substantial recovery to be expected there. Now, in terms of risk from that, I mean, obviously we're in regular contact with our reinsurance partners. We updated them prior to renewal of the aggregate. I mean, not just about the the drivers but our views of potential ranges and for the cover that they're backing and of course well no one has said yep absolutely we'll just wave it all through i mean we're not anticipating um significant issues here i think the we've tried to structure i mean what we expect in a relatively conservative manner um they're not trying to be aggressive about how we attach this to the reinsurance protection And I think that puts us in a good place in terms of risk around the expected recovery. So I don't think there's an indicator in that higher number that means there's a higher risk. On the second point, on ZDCM versus SST and volatility, I mean, apart from the thing I talked about earlier in terms of revision, it's a tricky year. I mean, we've seen market risk consumption passively increased by pretty huge amounts, mainly driven by the two things that came up at the top of the call. So obviously interest rates, as you mentioned, but also market volatilities. I mean, from a From a risk perspective and how we manage it going forwards, I think everyone's aware that SST is going to bring, it will bring more stability than ZECM has. And in fact, that's partly reflected in what's happened in Q4 in terms of the difference in the movement of the two numbers. I think in terms of risks and how we approach the management of it, I think the philosophy actually should be the same. If you look at it fundamentally, ZDTM typically doesn't have any dampening measure. We do get some benefits under SST that we pick up some of the UFR from the Solvency II entities. although we get no benefit of that on the required capital side. So I think the existing mechanisms that we have in place to manage that interest rate risk will certainly help us. But I think also as we think about capital allocation going forwards and some of the things that we were going to do anyway to reduce some of that sensitivity even under the old model are equally valid under this. So I think as we look at some of the portfolio action and some of the portfolio simplifications that we intend to undertake over the next year or two, you'll notice a close correlation between those portfolios and the contribution to this particular risk.

Okay. Thank you very much, George. Thank you.

The next question is from William Hawkins from KBW. Please go ahead.

Hello. Thank you very much. George, I wondered if I could come back to the answer you gave Farouk about the cash remittance. Could you help me maybe by being a bit more explicit on what the excess capital was within 3.4 billion? Again, you've guided qualitatively to neutralizing the impact of COVID, but obviously it depends on how much of that gross figure sat in America or anywhere else. So if you could be helpful on that, that would be kind. And then, again, just to be clear in your final part of the answer, given that you've got more excess capital to come up this year and possibly the year after, and given at the moment your budgets still look all right, rather than saying it's possible you're going to be higher than $3.4 billion or whatever in 2021, is it not almost inevitable? Or is there some other moving part to the downside that I wouldn't have thought of? And then secondly, please, could you maybe give a bit more color on your thought process behind some of the changing assumptions on the ROE waterfall on slide 7? I mean, for me, the investment income and portfolio quality changes directionally seem quite obvious, but I'm a little bit surprised that you've reasonably visibly cut the business growth impact and also the productivity. Again, I would have thought, given the hard market and, you know, given the opportunities you're taking, I appreciate that growth is capital intensive, but I still would have thought that your growth should actually be accretive to ROE rather than incrementally dilutive and again the productivity rate is lower but also that everything we've heard from Zurich over the past 18 months is about better productivity rather than tighter so why have those two numbers taken a bit of a hit?

Yeah, okay. So on the first one, cash remittance, the U.S. special is about a fifth of what we reported today. Hopefully that helps answer that question. The special is about a fifth, 20%. Can you hear me well?

Yes, I can, George. Sorry. Thank you.

Oh, sorry. I thought I'd lost you for a second. So it's about theft, just to be relatively precise. So the second part of that question, so is the fact that it creates some expectation that some of that will continue? I mean, does that mean that we are anticipating something adverse? No, it just means we're a bit conservative. I mean, that's all that means. I think if you look at the cash remittance numbers that we've generated through the last cycle, we were quite a bit ahead of where we expected to be. And, of course, that was to a significant extent, not entirely, but to a significant extent, driven by us making sure that we work. efficiently managing the placement of capitol around the group and there's no change in that process for us today on the second topic on the on the walk let me just turn to the page I think on the concerns about productivity, it's not that we've lowered the target. It's simply a reflection of where we've now gotten to in the current number. The ambition is still the same, but we've actually delivered a part of it. I think for the reasons that I gave in answer to the earlier question from Farouk around the expense ratio, we've Maybe we've accelerated, maybe we've had some help in the course of 2020, given the change in activity, but the overall goal is certainly unchanged. It's just a reflection of a change in the starting point, is the way that I think of it. In terms of growth, I think what's happened there is if you go back to the the investor day conversation that we had back in 2019, there was certainly more of an expectation of retail growth than the modeling that we'd done. And of course, some of what we had geared up to do was completely targeted to see that as a more significant driver of the plan over the course of the three-year period. Seen from today, we just don't have that perspective. So it's not that we don't like that or... We wouldn't take advantage of that if that was to offer it, but we just think that the market conditions around that topic are not as conducive. Then we'll just see far more driven by rate on the commercial side. So I think that's really why you see some of the change here.

And at the risk of stating the obvious, the retail comment you just made is COVID-related, right?

Sorry, say that again?

At the risk of stating the obvious, the cautionary comment you made about retail is all COVID-related.

Well, I mean, it depends. So I think in my mind, the way I see it is certainly there's a COVID issue that's obviously knocked some parts of the business that will take longer to recover. And I guess the part of our portfolio that's obvious there is the travel topic. So you see it overall in the Covermore number and in particular in the APAC number. But there's a secondary issue, which is that I think the frequency effects have driven a more competitive retail environment. I think that will persist for a while. And it just makes the environment a bit trickier. So for us, it just makes a bit more sense to allocate a bit more of the capital towards commercial because that's where we see the stronger opportunity currently.

That's great, George. Thank you. Thank you.

The next question is from Michael Hartner from Berenberg. Please go ahead.

Thank you very much. In your words, you'd be quite pleased, I expect, with the numbers. You're quite cautious. I have questions because my peers are so good on questions. I couldn't think of anything very clever. One is on farmers and the other one is on businesses for sale. On farmers, I'd be a bit contentious here and I'd say, well, you can't The business model is to lose market share, create capital, and buy businesses. So you bought, was it 2009 or something, in the first century, and now you're buying MetLife. And I just wondered how you would react to something which is a little bit aggressive. Apologies. And linked to that, why isn't farmers in that lovely waterfall chart through 2022? And then in the RE. And then the other broad question, kind of fishing a little bit, is... When you talk about allocating capital, are any businesses for sale? Can you say something about, oh, yes, there are some businesses. You're kind of mentioning retail, not so hot. That's it. Thank you.

Thanks, Michael. I think I'm pleased with almost everything, apart from maybe one number. I think on farmers... I remember the questions that you posed to Jeff at the Investor Day back in 2017 when we were all together in London. I understand why you put it that way, but that's definitely not the way we think of it. From a longer-term perspective, I don't think you need to operate farmers that way. If you see the business and the business model today, we know that you guys are all very familiar with the very positive nature. There's obviously a fairly consistent concern that the growth is hard to come by because of the expense levels that you end up with within the structure. We've talked in the past that, I mean, that's at least partly compensated by the way that people think about the return on capital within that structure. I think it's just too easy. So one of the things we've been doing with Jeff and the team is, I mean, working really hard to work, I mean, how can we support the business more? What does it have to do to make sure it's competitive? And to try and get us away from that thought that, well, this thing is a highly priced premium product and therefore it plays in a completely different market. And I think maybe the customer segmentation is a bit different, but I mean, Jeff and the team know when you look at the pricing, I mean, they're competitive. We just need to try and make sure that we can support the exchange in trying to find ways to make the distribution system more effective. Because, I mean, when Jeff talks to me and Mario about it, we can see that when we look at benchmarks against some of the obvious peers in the US, we've got a gap that needs to be closed. And that's the thing that we want to focus on. And we think that will drive some growth. It will drive higher production. It will drive higher fee returns to us. And we're also hoping that the acquisition of the MetLife business and the addition of a new distribution channel will actually help accelerate uh some of those things so um i understand why you've made the point but uh perspective on it would be completely different uh farmers is in the the roe walk it's hidden in that business growth number so apologies for for not coming out um Did you have a second part to your question?

Yes, the real fishing question. What businesses are you thinking sell, given that you sound a little bit less, a bit more lukewarm on retail, are they any like traditional agency businesses or my favorite, you know, the German Life, whatever?

I think, so you can appreciate there are lots of reasons why I'm not going to list a group of businesses that we may or may not sell. In the future, I think one thing to be careful of, so the comment that I made to Will on retail, I mean, that's not a long-term perspective that all of a sudden we don't like retail and only love commercial. It's simply a capital management topic. I mean, we're looking for the stronger returns and to the extent that we can move capital around in a way that finds that, we will always do what we can to maximise that. So there's nothing wrong with retail. But the challenge is, at the moment, it's just not offering quite the same return. Now, if you look at the portfolio, and I won't get into precisely what and where, but you guys can see how we allocate capital today. You can see the kind of risks that don't fit with the model overall. You're well aware of what solutions the outside world offers. I mean, hopefully we can use the market to help us again further improve the capital allocation over the course of the next couple of years. Thank you very much. I can't say more than that. Thank you.

The next question is from Nick Holmes from Societe Generale. Just go ahead.

Oh, hi there. Thank you very much. Two questions, please. Can you tell us more about what's causing the 90 percentage point difference between SST and Solvency 2? Sort of, you know, which parts of the business, which risk areas? And then secondly, would it just make sense to publish a Solvency 2 estimate for the group? Or is that simply a waste of time, do you think? Thank you.

Thanks, Nick. I'm reflecting on the second part of your question because I'm thinking that I probably have a few too many capital measures rather than a few too few. I mean, I understand why in terms of the immediate comparability with others rather than this fairly soft summary that we give of how you end up with something that optically looks lower but probably in the end up it ends up being substantially higher um so i mean i can't i i'm not going to commit to us doing a solency two um number i mean the course of doing that would be would be pretty substantial i know that one of our one of our friends i did that a couple of years back and i understand why they did it But it's tricky and just given the complexity of our businesses and just given the other demands that are out there, one of them today, like IFRS 17, for example, which is not a small undertaking, it'd be hard to... not only justify, it'd be hard to find the people around to actually do it for us. So, I mean, so what we typically do is we point to, I mean, what we can see clearly in the EU businesses, it comes with lots of caveats because these are typically standard model EU businesses or standard model Solvency II outcomes. And you need to be cautious when you're comparing them to the internal model outcomes of some of our peers for the entire group. I mean, when you look at it, what drives it? I mean, there's a variety of different topics. I mean, ranges from things like VA, the UFR structure, treatment of non-solvency II businesses, the way that capital requirements are set, the way that we shock for interest rates and the capital requirements, some of the runoff capital requirements or additional expenses that are required in the solvency II model. I mean, there's a whole wide range of drivers, but the best guide to it is, I mean, if we look at the EU businesses, we can see precisely what the differences are versus SST. They are on average about 90% currently. It wouldn't be that significant if you were to move the entire group and do a comparison to an internal model. but we're still talking about many chains of points. I understand the reasons I ask, but...

Yes. I mean, that's very, very helpful. But just your point, it's tens of percentage points versus internal model. I mean, if one was to take not standard model of the EU subsidiaries, but if they were to be on an internal model. And therefore, I mean, I think you've said in the past, haven't you, that it's 40 to 50 percentage points around about that versus peers? I mean, I think you said that a few years ago. Is that still a valid comparison?

I think it's a very substantial number. And the reason for any hesitation is just that the basis for that calculation is quite old at this point today. So I want to be cautious, but there's many tests. I mean, the challenge is even if I calculate that number, other than to show you guys what it is, I can't do anything with it. Hmm. It doesn't help me in managing the business. I need to manage to the things that are relevant for us today, and that's a sort of solvency test. It's S&P's capital requirements, and these are the things that need to drive what we do.

Great. Well, fair enough. Thank you very much. Thanks, Nick.

The next question is from Paris Adantonis from Exxon BNP Paribas. Please go ahead.

Yes, hi, good afternoon from me as well. The first one on SST, you've given us a minimum level that you're targeting, but I was wondering if you can give us an idea of what you consider optimal. So where should we expect you to operate, let's say. And the second one is on the catastrophe ratio, which is going up to three and a half for 2021. I was just wondering what is driving that. Is it business and exchanges, higher frequency, or something else?

Great. Thanks very much. So on the SST topic, so we've obviously indicated today that Target is to be operating at or above 160 historically. If you look at the numbers, we've been closer to the 200s mark. So, I mean, I would expect that you'd probably normally see us and operate somewhere between where we are currently and probably somewhere a bit higher, maybe closer to 200. But, of course, that will depend to quite a significant degree on the external environment, what's happening in the financial markets, and also what's happening in terms of opportunity. Because if we can deploy more capital at attractive rates of return, as we can today, I mean, we will use that capital strength to go do that. On the cat topic, what's driving it? I mean, if you look, I mean, maybe a couple of things. So we've taken off some of the quote share that we had on the property book in the US. So that brings in a bit more cat exposure. I mean, we're buying roughly the same protection. The deductible is slightly higher than it was last year, just given the growth in the portfolio overall. And it's really those two things in conjunction that's driving the slightly higher. care loss expectation. Thank you.

The next question is from Vinit Malhotra from Mediobanca. Please go ahead.

Hi there. Good afternoon, George and Mario. Thank you. Just very quickly, first thing is the BI litigation risk which George in the past and today as well you've commented you remain comfortable with for more creditable nature regarding wordings, but we have seen a particular ruling in the US earlier this last month. And if you still remain comfortable, that's just what I'm looking for. So if you can comment on that, please. Second thing is just on the SST target, the 160. I mean, the problem I face is that when I see 160 versus 182, I get to an excess capital, if you like, of close to five and a half billion and a bit more. When I see 110 versus 100, I get to three and a half. So, I'm just trying to figure out, I mean, you've implied today that 100% of VADCM is equivalent to 160 of SST, but then this doesn't seem to be adding up on the X of capital calculation. And also, isn't 160 feeling a little lighter compared to the peer group? So, just any comments, please.

Thanks. Yeah, thanks, Teddy. So, I guess short answer to the first question is I remain comfortable. I mean, I think the, I mean, it's to be expected that it will not be a completely straight line to the outcome, the overall outcome that we expect to the end. But if you look at what's happened in the US so far across the industry, I mean, the vast bulk have gone in favor. of the insurance companies, even at the dismissal stage, so before it reaches full trial. I think, though, you're going to find that in most states, just given the numbers that are at stake, you'll probably end up at state Supreme Court level for most jurisdictions. So even with all of this, all of these decisions at this stage, there's probably a step for everyone at the very end of this process where the key courts in each of the states will weigh in on the topic. So even if you get a variety of outcomes, and you've seen that already in Ohio where the case that we've had that attracted some attention a few weeks ago was handed down. I think these things will get tied up at the end, and we remain confident in the position that we've adopted. On SST and target ratios, I guess you make an assumption in there that is not unreasonable, but I'm not sure I've actually said it. So I think, so the end of the assumption that is that somehow the number that we've printed today is, say, precisely equal to the midpoint of where ZECM is. I mean, ZECM today is actually a bit higher than midpoint, as you've seen in the disclosure based on the estimates that we've got. I mean, there will be some differences between them. But if you allow for the fact that ZECM may be a bit higher than midpoint, and if you want to correlate that to the 182 number that we've published today, then I think that may be actually answers the question that you've asked about whether the excesses are different. They won't be substantially different today. I can't guarantee that because the two models are not linear in relation that they'll maintain that relationship into the future. Does that help? Thank you.

The next question is from Ashik Musadi from JP Morgan. Please go ahead.

Yeah, hi, thank you. Good afternoon. Just a couple of questions I have is, first of all, going back to James' question earlier about some SST ratio and stress test. I mean, if I look at your hurdle of about 160%, so first of all, can you give us some clarity as to what this hurdle means? I mean, below this, do we think about dividend cut or how do we think about this hurdle, right? And if we think about like a combined stress of say falling rates, rising spread and falling equities, which is not a unique stress, which is what typically happened these days. I mean, you can easily breach 160% because that's just 20, 20 percentage point offer you have at the moment. So how do you think about the combined stress scenario rather than on an individual basis? So that would be first question. Secondly, You mentioned that you are trying to think a bit more about commercial lines at the moment versus retail lines. So how are you thinking about the return differential between the two? I mean, clearly price increases are pretty punchy on the commercial lines, but is it really translating into a much better combined ratio so as to make that shift from commercial to retail? Because if I remember correctly, I think a couple of years back, you were pretty much focused on shifting away from commercial into retail. And now we are thinking about the reverse. So how do you think about over the cycle? Thank you.

Yeah, great. I think on the first one, what does 160 mean and What about the risk of a combined stress in the number? I think you end up with an answer for, it's the same actually for both questions. So we try and avoid bright lines. So even under the old way that we approached it, where we had 100 to 120 CDCM, nothing remarkable happened at 99. I mean, the requirement was that There's a formal switch in how we operate internally. So I'm the capital manager when we're within target. The leadership moves to the chief risk officer when we move outside of tolerance. I mean, in practice, nothing actually changes because the two of us, we work closely together on this, whether it's in target or otherwise. And we look at facts and circumstances about what has to be done. So are there changes? temporary in nature? Is there something idiosyncratic? I mean, we would apply all the judgment I think you would expect us to apply so that we avoid that we become a victim of the capital model. That should not be how this works. So, I mean, we are allowed to apply significant judgment. We're required to present a plan, but there's nothing that significant happens as you go from 160 to 159. It really depends on where you think you're headed from there. That will determine what we think the best course of action will be, even under that combined stress. From a commercial lines versus retail perspective. I think if you look at the results, I mean, again, I think I don't want to give the impression that all of a sudden one day we say that retail thing is not attractive anymore and we suddenly pick up and try and move everything to commercial. Given the scale of the organization and given the fact that we need to be a reliable partner, I mean, you can't do that. I mean, what we are looking to try and do is, where we have the ability to deploy more capital and potentially take it away in markets that are underperforming, we would look to do that. The reason for that, it's embedded in some of the results today. So, for example, if you look at, let's do XCAT, just to keep it simple. So, retail for us last year would have been slightly stronger than commercial. So maybe the retail combined is in the 94s, the accident year combined X cap for commercial being the 95s. You look at it again this year, and just given the strength of rate already, that's somewhat flipped around. So if you're looking at retail, we do X cap also to X COVID to keep it clean. Maybe it's improved slightly, so maybe you're in the 93s. If you're looking at commercial, commercial's around 91. And rate, trend versus loss cost in commercial is way stronger than you'll find in retail. There is a capital penalty that you have to have in mind, so the commercial business tends to be a bit more capital intensive, so It does need to produce a bit more. I mean, that kind of differential is meaningful. And given that we would expect it to broaden rather than narrow, the capital allocation choice that we're making makes complete sense to me.

George, can I add a point? Can I add a point? Because I don't think we ever say that we want to grow retail against commercial or vice versa. You know, we want to grow both, but the cycle is not aligned, and there are times at which it's easier, more profitable to grow one with respect to the other. But in general, we don't have a preference, and we try to develop both kinds of customers, the commercial and the retail, as well as we can. But again, we consider the market opportunity as, you know, we're supposed to do. And we push harder depending on what is the potential opportunity that we see in the market.

That's right.

I just have one more question. Sorry.

Hang on a second, Dash. I want to be conscious of the fact that there's a number of other conference calls that are about to start for other companies. Richard, are you happy to continue?

I think we need to wrap up in fairness to some of our peers out there.

So we should probably... Actually, if you don't mind, I'm happy to catch up after the call.

Yeah, that's fine.

If you're interested in the team, we'll address it there. But apologies, I want to be mindful. We don't run over too much. So Richard, can I hand it back to you?

Yes, George, thanks. So thank you very much to everybody for dialing in this afternoon. We are aware of the outstanding questions on the call, so we will come back to you from the IR team post the call. Have a good afternoon, and thank you for your interest.

Ladies and gentlemen, the conference is now over. Thank you for choosing Cargo School and thank you for participating in the conference. You may now disconnect your lines. Goodbye.