Zurich Ins Group S/Adr

Good morning, good afternoon everybody, and welcome to Zurich Insurance Group's first quarter results Q&A call. On the call today is our Group CFO, George Quinn. But before I hand over to George for some introductory remarks, just a reminder for the Q&A, we kindly ask you to keep to a maximum of two questions, as we know that some of our peers also have calls straight after us today. So with that, I'd like to just hand over to George for some introductory remarks.

Richard, thanks very much and good morning and good afternoon everyone. Thank you for joining us on what I know is a very busy day for all of you. As you've seen from this morning's press release, the group's made a very strong start to the year. We've got good growth across all the businesses and it's important to remember that this is against a prior year quarter that was largely unimpacted by the pandemic. The performance demonstrates, we believe, both the strength of the business and the successful positioning of the group to take advantage of growth opportunities as the world emerges from the challenges of the global pandemic. In the first quarter, our P&C business contained to perform well with top line growth of 14%. driven by the strength of commercial insurance. Pricing momentum in commercial insurance remains strong. All regions are seeing higher levels of price increase in the first quarter than you saw a year ago, and we expect the current pricing conditions to continue through this year and to next, supporting further improvement in the underlying accident-year loss ratios. Life and the farmers' businesses have also performed well, with a focus on unit-linked and protection products leading to strong growth in new business value. And while the Farmers Exchange, which are, of course, owned by the policyholders, saw a return to growth even before the inclusion of the acquired MetLife P&C business, which will add to growth from the second quarter. Balance sheet remains very strong with the solvency test ratio, and this allows for the acquisition of the MetLife P&C business, even if it didn't close. in the first quarter, 201%, well above the target levels that we communicated back in February. Before I give you some thoughts about the remainder of the year, I just want to comment that there's been no change to the level of COVID-19 P&C claims net of frequency benefit. So this remains at the $450 million net figure level that we reported back in February. Looking ahead, it seems clear to me that given the strength of the first quarter that we were perhaps a little cautious in our guidance for the P&C net and premium growth. If you remember, Richard and I stretched the definition of mid-single digits, and I think we would now say that it's more likely to be in the upper single-digit range compared to what I'd indicated back in February. On the claims side, you'll have seen in the press release that we've got a higher than usual level of NACAT events in the first quarter primarily the Texas freeze and so assuming that all things are equal only we have the usual NACAT experience for the remainder of the year that would add about one percentage point to the combined ratio overall and for the year and life the first quarter so Some additional mortality, a level that was similar to the second half of 2020 with about $120 million driven primarily by the UK, US and Latin America. Mortality has been improving steadily as the lockdown measures and the successful rollout of vaccination programs has led to significant improvements. And that's particularly true in the UK and the US. To look ahead for a second, I think the strength of the first quarter trends and the continuing improvement in the underlying P&C margins gives me and all of us great confidence as we look out to the remainder of the year. With that, I'll be happy to take your questions.

The first question comes from the line of John Hocking with Morgan Stanley. Please go ahead.

Hi there. I've got two questions, please. Firstly, on inflation, there's a lot of data points flying around about how much inflation we're seeing, particularly in areas for construction, so lumber costs, et cetera. I wonder if you could talk a little bit about what you're seeing there and how you expect it to impact the results. And then secondly, I just wonder if you could give a little bit of color, please, in terms of the rate increases, particularly in the U.S. What's the rate increase, ex-workers' comp, and if you can give us a comment on the lines, that would be very helpful. Thank you.

Yeah, thanks very much, John. So on the inflation topic, maybe just to remind everyone of something I've said in the past. I think if you look at our book, I guess most people perceive the inflation risk around workers' comp. We've talked in the past about the fact that we don't have a market view of the inflation assumption. we tend to have quite a backwards, well, backwards is the wrong way to express it, but we've got a longer time series in the assumption. We go back several years. I think we've also highlighted that we haven't fully taken A versus E, actual versus expected on the workers' comp side. So that gives us some measure of protection, but I think it's a topic that everyone needs to keep in the front of their mind. On the lumber cost topic, I mean, I think the only immediate impact you see of this, other than the fact that it will appear in some of the claims that we've already incorporated in Q1, I mean, the most obvious place where I see it is that I think for the first time it's come up in our assessment of the Texas freeze topic. So as we've been looking at the potential cost of that, we've allowed for some of the price inflation that we've seen around some of the things that will be required to repair some of the damage that we've seen. From a price perspective, it's another strong quarter. I think in commercial, this is the fifth straight quarter of a double-digit rate increase. If you look across the various lines of business, the picture is not very different compared to where we were at Q4. I'd say that property and liability are slightly down compared to where they were. I talked back in February about the fact that they were both reasonably deep into the 20% plus territory. They're both now, from our perspective, around the 20% level. Workers' comp, I mean, slightly weaker. So, I mean, overall, I mean, I think the move that you've seen in certainly US commercial down from the 18 points that we reported back in Q4 down to 14 in Q1, I think if you adjusted out for workers' comp, you'd be somewhere slightly north of 14 points. I think if you look at the book more broadly, there's a couple of things that are relatively important to bear in mind. I mean, the US market has a relatively continuous renewal pattern. Europe's a bit different, so you tend to see a bit more seasonality. Q1 is typically pretty heavy Germany and Switzerland. And those markets have quite different pricing dynamics from the UK. So I think when we see what happens at Q2, I think you'll still see a very strong market. And potentially, I think you'll see Europe come up again in Q2 because the UK has a much more significant impact on April 1. So overall, I mean, trends are really pretty good overall. We expect this to translate into underlying underwriting improvement. And, of course, when we get to Q2, I'll give you a more thorough update on that.

Excellent. Thank you.

The next question comes from the line of Peter Elliott with Kether Shiver. Please go ahead.

Thank you very much. Two questions, please. The first one, just on the guidance, Jordan, you obviously mentioned that now you're thinking you were too cautious on the P&C growth. I'm just wondering if you could sort of highlight any of the other areas in the guidance outlook that you gave at full year 20 where you sort of changed your view over the last three months. That's question one. Question two, just on the NAPCAT impact, Just sort of help to understand the impact. I'm just wondering whether you've allowed for any seasonality in that or whether it's just as simple as saying plus one point for the full year equals, it means you're sort of plus four points over the normal budget for Q1. Just understand that. Thank you very much.

Yeah, great. So on the guidance topic, Peter, I think the I mean, I think if you look at, I mean, what we're seeing internally and you're allowed for the comments, I'll come on to the NatCat topic in a second, but if you're allowed for the press release commentary around NatCats, you're allowed for the COVID topic, I think we still expect to be roughly, I mean, what we had planned for even before that. So I think it was a sign that the the underlying trends are probably stronger than we anticipated, which is, I mean, it's less relevant this year potentially because of the impact of things like the Texas freeze, but it's a strong sign for next year. So I think that underlying improvement is important. On NatCat impact, so we do allow, I mean, when we look at what we anticipate in each of the quarters, there is a seasonality pattern to it, so it's not prorated. And essentially simply what we've done for the time being is look at the excess level for Q1 and add that to our expected levels for the remainder of the year. I mean, that feels like the most transparent way to do it, but you guys can make your own assumptions. about what that means for the remainder of the year. But, I mean, for the time being, we've seen a, I mean, what's typically one of the later quarters deliver, I mean, quite significant net cap loads. And that's why we've made the commentary that we have.

Great. Thank you very much.

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

Oh, hi there. I wonder, just on North America P&C growth, if I back out the effective crop, the underlying growth is a bit behind rate. Is there still remedial actions going on there? Has there been a significant change in retention? Or is this just possibly still COVID overhang effects? I'm thinking particularly on workers' comp. of payroll effects, which presumably are still coming through. That's the first question. Second question, just remind me, would the Q1 Texas freeze loss count towards global aggregate in that CAT? I'm not sure. I can't remember if all events count towards that or whether there's a big franchise deductible on those kind of events. And remind me, does that global CAT aggregate cover run calendar year? Thanks.

Yeah, thanks, Andrew. So on the first one, I think when you break out the North American numbers, obviously the crop price change has had a pretty significant impact. I think the reason why you maybe don't see all of what you see on the North American business isn't so much the impact of COVID. I'm sure there's still some of that in the number. I suspect that a more significant driver is probably the fact that the actual exposure, um that we take at these price levels is less so the um you i mean if you think of the way the corporates tend to approach it um i mean they're certainly they have the same budgetary constraints that we do and it's a pretty common response to this type of pricing environment that people will increase deductibles maybe buy a bit less cover so you've got these two things um partly offsetting each other But I mean, net-net, it still means that you have a much higher quality commercial book in North America. On the Q1 Texas freeze, so the answer is yes, and it's a calendar year cover. And as you can imagine, this thing certainly passes the franchise requirements for the global GATT aggregate.

Okay, great. Thanks.

The next question comes from Will Hardcastle from UBS. Please go ahead.

Hey, afternoon, guys. Just two quick ones to wrap up, given those questions. What industry losses have you seen, therefore, in the Texas windstorm? It sounds like there's a bit of a bottom-up regarding the number comments, but have you used a top-down view as well? And then on the second one, I guess, given the extent of the rate and credit spread benefits in Q1,

have sensitivities to rising rates from here moved significantly versus the ones you provided at the full year so on the first one well I mean as always it's a it's a bit of both so it's a relatively unusual event although I mean having talked to the claims team a few weeks ago Actually, we have some experience from the tornadoes last year. We've got some clients that have been impacted both by the tornado and by the freeze. We've got a bit of insight into how some particular properties are exposed to particular loss. The way the team have done it for the time being, because there's not a lot of... They haven't been fully through the loss adjustment process. At this point, we've taken the notifications The team have looked at some of the experience from last year. They've come up with ranges. The thing is driven by, it's not a really short list, but we're talking, I mean, a couple of tens of actual events tend to drive the overall outcome. So we've focused mostly on those to try and look at bottom-up from the perspective of notification and top-down from our knowledge of that particular event. exposure of property and I think as I mentioned earlier in response to John's question I mean we have had added a few additional things for example to incorporate some of I mean it's not really demand surge inflation it's I think it's more the commodity and the recovery from the COVID driven inflation topic around lumber but commodities in general. On sensitivities, I mean, we haven't updated it. I mean, they will have moved because, of course, they're not entirely linear. I mean, it'd be wonderful if this thing was completely parallel. But, of course, we all know that's not true. But I think for now, I mean, given that the Q1 move is mainly driven by interest rates, I think almost the entire market move, I mean, the nonlinearity is not so important for that particular topic.

Okay, thanks.

The next question comes from the line of Vineet Malhotra with Mediobanca. Please go ahead.

Good afternoon. Just to follow up, George, there was a comment in the press release about mortality, and I'm just wondering whether you were trying to suggest that we should be more cautious about mortality than back in mid-Feb, or I think you did say that there wasn't much of a change, but just wanted to cross-check that, so mortality guidance. And the second question is more about, you know, when we are hearing more and more about semiconductor shortages and those kind of things affecting car manufacturers, and I don't know what else, but, I mean, are you seeing some of those

side or second order claims and business interruption or other areas which could be COVID linked sort of thank you for just curious about that thanks yeah thanks so I think on the first one I think there's two offsetting effects so I think if you if I look at mortality now compared to what we were expecting back in February I would say that UK US has probably slightly better than we were anticipating. I mean, certainly the decay pattern that we can see is faster than we had anticipated. Having said that, though, we're seeing more from Latin America, particularly Mexico and Brazil. Having said that, I mean, looking at the strength of the life business overall, I don't think it changes the overall outcome. So, I mean, I bet that the comment I made at the top of the call around the the underlying trends on the P&C side, I mean, the underlying trends actually on life look pretty good too. But, I mean, the reason for giving the guidance was, I mean, within the life segment, it will be visible. I mean, you'll certainly hear us refer to it, just given the impact of it, but the underlying business is actually doing pretty well and certainly play a bit stronger than we anticipated back in February. On semiconductor shortages and the some of the shutdowns and other issues that we've seen. I mean, I think it's a pretty complex topic from an insurance perspective. And I think the risk actually cuts both ways because, I mean, in theory, I mean, if you're more directly exposed to the semiconductor sector, I mean, any damage in that world is going to be a bit more expensive because of the BI consequences. On the flip side, on the recipient end, because of the short time working or the other restrictions, I mean, arguably, the gross income level might be lower. So I think it's really hard to draw a very clear conclusion, depends a bit on maybe how the book is positioned overall. But I mean, as with everything, there's a few positives and negatives. And those two are the most obvious to me.

The next question comes from the line of James Shuck with Citi. Please go ahead.

Good morning, George and everyone. On the solvency positions to 201%, I appreciate that number is quite volatile and you have a floor number of 160, but you don't have an upper end range anymore. But under the old ZECM basis, if we just apply the same kind of multiple and relationship between SST and ZECM, then 101% would be at the top end of the previous range. So just trying to get a feel for what stage do you see yourself as having surplus capital? I know you're going to tell me that it's volatile and it can come back. Presumably there's some things you can do on the life back book that might take out that volatility and should actually even add to the SST If you were to do things around that. So any updates and thoughts around the surplus capital potential, please. Secondly, on coffee insurance. So I just want to be just remind me how you book the combined ratios up to half year and then the true up you have in the second half of the year. Obviously, very high increase in commodity prices. Does that mean that you're still expecting similar combined ratios on that crop business relative to history? Thank you.

Yeah, okay. So on SST, I suspect if we were looking at ZECM, we would be through the top end of the range. I think we gave a number back in February, and it feels to me we've had a bigger move than that. I think when we think about surplus capital, we just think of capitalization in general. I mean, the priority is really the thing that you highlighted, and that's about where is the money And what's it doing at the moment? So, I mean, we're very active looking at capital allocation. I mean, I want to avoid that. I'm always talking about it rather than actually producing evidence that we've done something about it. But that's going to be a very important priority for us this year. And I certainly hope that as the year goes on, I can actually report on some tangible progress. Now, I mean, what do we do with that on the day that we get it. I don't know yet. I mean, obviously our priority would be to, I mean, put it back into the business and hopefully actually earn a higher return on capital that's more consistent with the rates that owners would expect us to earn on the capital they provide us. It's just too early to say at this stage. So priority for me, it's a combination of making sure we have allocated, capital allocated as rationally as we possibly can within the normal constraints. And I think we'd also like to bring down some of those sensitivities. I mean, I think it's pretty clear that from a model perspective, we've got some features tend to dominate the risk landscape. And I would like it if some of those movements were a bit smaller. and we are thinking about how we would achieve that. On the crop insurance side, it's an interesting one. I think from a purely financial perspective, the stuff tends to all be written in Q1. We then earn it mainly through Q2. Q3 and then into the early part of Q4 when typically the yield and revenue topics are worked out. I mean given where we were last year underlying on the combined ratio, I mean crop would probably end up, I mean there's no change to our expectation in terms of crop profitability. It's not reliant on investment income for obvious reasons. But it would probably tend to be at the upper end of combined ratios or loss ratios in particular for our book. So you may see a small impact from earning through more crop premium. But again, having said that, given the improvement we're seeing on the commercial side, I don't really expect that to be visible. Maybe just a last comment on crop risk. In general, I think the move on prices is generally a positive topic overall. The actual crop cover has a bit of complexity between the price that's struck planting and then the price that's achieved in the market. But obviously, we've actually had a pretty decent planting season so far. And the current market conditions give farmers every incentive to get the stuff into and out of the ground. So too early to make any forecasts, but crop certainly doesn't start the year in a bad place.

Okay, thank you very much, George.

The next question comes from the line of Michael Hotner with Barrowburg. Please go ahead.

Thank you. Can you talk about MetLife, how much this will add this year and next? Just remind us because it seems to happen a bit quicker. And the second is on the runoff. I suppose I'm asking, is this 400 or whatever million you added to COVID going to come out of runoff? But maybe you could just say, whether you've changed the expectations runoff. I think it's between one and a half and two and a half. Are we now in the middle of range expectation? I don't know.

Thank you. Yeah. Thanks, Michael. So the, on MetLife, I guess we've closed about, I mean, probably a couple of months quicker than we expected. So if you go back to what we said before, I mean, there's a, From a Zurich money perspective, we've got about a 2.3, just more than 2.3 billion dollar investment. We've got some restructuring that will be incurred between us and the exchanges through the remainder of this year. It will have a positive impact on income for the management company as we go through this year. It will obviously depress the reported fee level, but you'll see more fees. I think if you look out about 18 months, I mean, you should start to see that relatively clean through of about a 10% return on that 2.3, just over $2.3 billion investment. So you'll see some this year, but you're going to have to wait about 18 months to see the clean run rate. On a runoff, I mean, no change to guidance around that topic. I mean, I think we've tried to be reasonably cautious on what we've guided to over the last several years to maintain some consistency and predictability around the topic. And from what I see and what we've been doing at Q1, and not only at Q1, but actually throughout all the last couple of years, no reason to change that. So still anticipating 1 to 2 somewhere in the middle of the range would be ideal, but certainly 1 to 2% is my expectation.

And there's no, sorry, I'm cheating here. There's no, it feels like COVID claims have been over-reserved. Is that something, looking at reinsurance, isn't it?

I think it's too early to reach. I mean, there's a number of litigation topics running. And while I'm not concerned about the risk around those topics, I'm not really convinced there's a huge amount of conservatism in the numbers that we have. I mean, if you look at what we've booked, I mean, it's predominantly actually Europe, which is kind of unusual given it's a commercial topic. I mean, you know, the outcomes that have taken place in a number of the key markets. So, I mean, it'd be great if we did see some of that reverse, but I mean, our plans don't anticipate that at this stage. And it's certainly, I haven't reflected any of that in any guidance around the expected level of runoff from reserves.

Thank you very much. Thank you.

The next question comes from the line of Ashik Musadi with JP Morgan. Please go ahead.

Thank you. Just good afternoon, everyone. Just a couple of questions. First of all, is with respect to farmers, sorry, with respect to solvency, last quarter, if I remember, you missed the solvency ratio by 6%. This time it is better. by six to ten can you give us some moving parts i mean i guess it is to do with interest rate but again some color on that would be very helpful as to what drove a significant increase or say how much is the macro benefit here and secondly i mean you mentioned in terms of combined ratio or say in terms of losses cat losses one percentage point higher because of the cat losses Would you say that all these price increases that are coming through this year will offset that versus the expectation that you had at the beginning of the year? Or would you say that this one percentage point incremental cat losses is just like a negative on a net basis? Or would you say there are offsetting factors so that we don't need to change our combined ratio forecast, which we would have, let's say, yesterday? Any thoughts on that would be helpful.

Yeah, great Ashik. So on the SST number, I mean, I need to be careful because I think on prior Q1 calls, I've given quite a lot of detail that almost was an earnings release. So I'm going to be careful. I don't go into too much detail, but essentially there are only three moving parts of any relevance this quarter. There's the economic profit that we've generated. I mean, you can obviously assume that that somewhat impacted by the impact of the excess NACAT losses, the Texas freeze topic we've been discussing throughout the call. We've got the dividend accrual and plus or minus, those two things are close to offsetting each other. And in the middle of it all, I've got interest rates. And that's about it. I've got other smaller things, but they're really not as significant as those other two. So this quarter, at least, the movement is actually relatively simple and straightforward to follow. Okay. On the combined ratio, I have a bit of a challenge. Of course, I need to know exactly what everyone forecasts for a combined ratio for us for the year. But if I say generally that... I mean, certainly, if you'd asked me, if we'd had this discussion back in February and I'd looked at my plan for the year, I mean, do I now need to add 1% to the plan for excess NACAT losses in Q1? I do not. So I've clearly got more rates coming through than the plan anticipated. And that will help absorb some part of the netcat impact in Q1. But I mean, we're highlighting it for the sake of transparency.

OK. So it's fair to say that some part of this 1% extra drag would be offset by the rate increases. Yeah, we are not going into the aesthetics of that number, like whether it's a half percent or 1%, but at least some part of that will be offset.

OK. That's an excellent summary.

Okay, thank you. Thanks a lot.

The next question comes from the line of William Hawkins with KBW. Please go ahead.

Hello, thank you very much. George, can you just be clear, what was the Texas freeze loss that you booked in the first quarter? I'm sorry if I'm being foolish, but I know you've got to give them the full year, but a lot depends on what all the other experience was to actually back out what the hit was. So could you be a bit clear about the dollar impact of the Texas freeze? And then on farmers, 4% growth relative to what that business has been achieving in the recent past is quite an interesting acceleration. You've made reference to the new business volumes and the commercial rideshare business, but I wonder if you could just briefly talk a bit more about what's happened there and do we now plug in 4% for the full year or are there any kind of base effects or seasonality issues that we need to be aware of? Or if anything, is it maybe even accelerating? It could be higher by the year end.

Yeah, great. So on the first topic, I'm going to resist the temptation to give you a dollar number. I mean, the main reason for doing that is the net impact of CAT is important. So if you look at the thing overall, North America is high versus planned or expected CAT impact for Q1. Europe is low. The two don't fully offset each other. but that's why we end up with one point. So, I mean, from that, you can work out that Texas freeze is slightly higher and there's a slight positive from a European perspective. Farmers growth, Q1. So, I mean, I think you're right. And of course we're comparing this quarter to same quarter last year, which, if you look at the dynamics, The ride share companies tend to be quicker to react and anticipate. So there's already some impact of GWP or on GWP in the farmers numbers at Q1 last year. I mean, the more kind of pure retail side of it obviously reflects actual experience. So we've seen ride share bounce back in Q1 of this year. So that's a much larger contributor to the 4%. That's important because, of course, the fee benefit of that is lower to the management company than the broader retail positioning. But, I mean, we've seen good growth on both sides. We do expect it to increase as you go through the remainder of the year. If you look at the the different dynamics. I'm going to put MetLife P&C to one side for a second. So that'll be an overlay on top of the whole thing. If you look at it, I mean, we're going to have an absence of prior year negative, which will drive growth that we report through the year. So the refunds that exchanges delivered to customers mainly in Q2 last year and the obvious return of a fee that that triggered for the management company you won't see that selling in Q2 so that will have an obvious impact from a rate perspective which is the main driver at the moment if you look across the book auto pricing in the US is pretty competitive so if we are seeing growth or if the exchanges are seeing growth, you're seeing it more than non-standard, which obviously is not the bulk of the book, it's only a certain proportion. Homeowners is much stronger. But again, if you look at the rest of this year, we expect the 4% to rise, and not because of ride share, but a combination of what's happening and the absence of negatives from the prior year, underlying dynamics around pricing, And then on top of all of that, we'll have MetLife P&C come in as of Q1. Sorry, Q2.

That's really helpful.

Thank you. Thank you, Josh.

The next question comes from the line of Michael Haidt with Commerzbank. Please go ahead.

Thank you very much. Good afternoon. Two questions. Retail first. While you had strong price increases in commercial, which is definitely more important to you than retail, both premium volume and pricing in retail appeared under pressure in the first quarter. If correct, you had nominal price increases in retail of around about 1%, probably below lost cost inflation. What are your thoughts on retail at the moment? In the last call, you already indicated retail is not flourishing. that part of the business you want to particularly grow. Second question, you published the SFCR report. So if I may, I would like to ask a question about Zurich Deutsche Herald and the solvency more general. If I remember correctly, you applied a standard model for the solvency calculation which cuts the negative interest rates at zero. In addition, you applied a 16-year transitional as well as the volatility adjuster. For your solvency calculation, excluding these, your solvency ratio is still comfortable at 170% level. How comfortable do you feel about the capitalization of Zurich Deutsche Herald from a purely economic perspective? And do you have any reinsurance protection in place just to make sure the fact that you apply the standard formula for Deutsche Herald does not affect your Zurich SST ratio, right?

um so thank you michael so this second one's a bit complex so let's we'll do the first one uh relatively quickly so i think your summary on on retail's uh rate with one caveat so i think that i think the market condition um i mean you guys can see it i mean i mean certainly more broadly than i can with all the different companies you all follow um but it's a it's a sector that's generally more under pressure at the moment so i i don't think we see it as negative but it's obviously it's not producing either the margin expansion or the growth that we're seeing on the commercial side. Now, that doesn't mean we're negative on retail. I mean, just a reminder that, I mean, when we said strategy for the current economic cycle, retail was a significant part of it. And while we're prioritizing growth and commercial currently, We are trying to make sure that we make the investments, we build the capabilities, we really have that customer-driven focus around retail so that when we start to see the term in the retail market, we're well positioned for that. But it's absolutely true that it's a more challenging market than commercial currently. On SFCR, I think your summary of the different components is good. The choice of type of model for Solvency II has no impact on SST. And in fact, I think as you've heard us discuss before, from an SST perspective, we apply an internal model across our businesses. From an economic perspective, So how do we feel about the capitalisation of Zurich Deutsche Herald? I think we feel pretty good. The company is, we believe, well capitalised for the risks that it carries. And I think if you look at it on a local basis, maybe you'd be more positive about the positioning of the organisation. The challenge is, and I guess this is at the heart of your question, when we look at it from a An internal economic model perspective or a Solvency II, or sorry, a SST economic model perspective, it looks a bit different. The volatility is higher. The return on capital is lower. And I think that's certainly something we want to look carefully at whether we have alternative ways to try and manage that risk. From a protection perspective, we don't have any significant economic reinsurance in place. And the primary path that we've taken over the last several years is really around ALM. And so more swaption, more long-dated fixed income in the portfolio. But I think even there, we try and be careful that you don't go from one extreme to the other but i mean certainly the the business is all capitalized in its local market but when we overlay the our own view of the world it brings a sensitivity and a level of return that i wouldn't say we're entirely comfortable with excellent thank you very much

the next question comes from the line of honey saruk from credit swiss please go ahead um hi everybody thanks a lot um first question um we're starting to see commercial us players you know seeing the benefit of rate for those that give us give us the numbers in q1 um and that's only you know potentially going to accelerate plus obviously yields are going up so in in that in that context what are your latest thoughts on how long you think this pricing cycle is going to go on for? I realize this is an open-ended question, but just some thoughts would be interesting. And then secondly, on SST, I think like a normalized kind of growth in that number based on if you take out COVID for 2020, it's probably like seven to eight points a year. That's economic profit minus dividend. Given life margin, especially pricing and met life, do you think that goes up materially this year on an underlying basis?

Thanks. Yeah, interesting question. So on the first one, I mean, recognising that it requires maybe even just psychic capabilities that I can't really... claim to possess. I can only tell you what I can actually see at the moment. So we've obviously reported the effects for Q1. I can already see April numbers and April numbers give me significant confidence about the continuation of the relatively high level of rate that we've seen so far. And April's quite an important date for both US and UK. So we've seen a small drop coming into Q1. April looks pretty good for me. We'll see what May and June bring us. I mean, I think if you look out a bit further, And you look at all the things that are out there. I mean, you talked about the interest rate topic. We've talked earlier on the call about inflationary issues that seem to rear their head. I mean, there are evidently significant risks still in the market, as are evidenced by a number of fairly obvious events over the course of the last few months. I mean, there's There's an element of what's happening in the commercial market, which is simply trying to get the level of return back to a level that's commensurate with the risk. Now, when do we reach that point? I'm not convinced it's imminent. So I don't expect the market to completely roll over. I do expect we'll continue to see the market maybe ease in a few areas. But the gap between headline price and lost cost inflation is still very substantial. And I expect us to maintain a substantial gap through all of 2021. 2022, we can discuss later in the year. You sounded as though you wanted to come back.

No, no, I was just laughing at your remark. Yeah.

Okay. On the seven to eight points, I mean, given there's a predictive component for that, and the one thing that, I mean, we're in a quarter that's relatively late on P&L, in particular bottom line information. I think I want to avoid that after three months of the year, I signal an expectation that the economic profit generation has materially shifted. I think it's a topic we should come back to later in the year. But we've clearly had a very good start to 2021.

Thank you very much. Thank you.

Today's last question is a follow-up from Mr. James Shack with Citi. Please go ahead.

Thanks very much for the opportunity. I'm just keen to know what one of your peers mentioned about claims inflation slightly ticking up in Q1. I think they cited model changes and increase in litigation funding costs. So just interested to know whether you saw that in Q1 and also if you're able to comment on any large loss experience that we may have seen just given the various frequency impacts in the quarter. And then secondly, just quickly on the debt leverage, you've obviously issued debt for the MetLife deal, taking you above your kind of historical run rate. What's the intention with that debt? Ultimately, will you pay it down and return to more normal levels? Thank you.

So on the lost cost trends, so we've just completed the Q1 piece of work. I mean, within it, there are moves within the overall lines of businesses, but the overall picture is not vastly different from the one we talked about last year. I think we all need to be careful that the amount of data that we have from last year is definitely impacted by some delay in activity. So, for example, from a liability perspective, I mean, it would be relatively easy to get carried away positively. But for the time being, we've held everything on the basis that it's just delay and the information coming to us. I mean, by and large, the overall view of lost cost inflation hasn't really changed. Large loss is interesting. I think this is one of the better large loss quarters that I can remember. But equally, we're not extrapolating that into the remainder of the year either. On debt coverage, the financing structure is an abundance of caution. You will see us bring it back down to the levels that you're more familiar with for us.

Great. Thank you very much, George.

Thank you.

This concludes today's Q&A session. I would now like to turn the conference back over to Mr. Burden for any closing remarks.

Thank you very much, and thank you, everybody, for dialing in today. Obviously, if you do have further questions, please don't hesitate to call the Investor Relations team. I wish you all the best for the rest of the afternoon. Thank you.