Zurich Ins Group S/Adr

Good morning and good afternoon, everybody. Welcome to Zurich Insurance Group's 2021 four-year results call. On the call this afternoon we have our Group CEO, Mario Greco, and our Group CFO, George Quinn. Before I hand over to Mario for some introductory remarks, just a reminder that we kindly ask you to keep your questions to two per individual in the Q&A session. Mario.

Thank you, John, and welcome, everybody. Thanks for being on the call. As we entered Zurich 150th anniversary year, the group is in excellent shape. 2022 is also the final year of our three-year strategic plan. We're on track to meet or exceed the targets that we established back in 2019. And I look forward to hopefully seeing you all in November when we will set out our ambitions for the next cycle. As I said back in November last year, the investor update, We have had to be extremely adaptable with the shape of the results being very different than we expected in 2019, given the impact of the pandemic. I'm very pleased with what we have achieved in 2021. Results were among the best in Zurich history with the highest POP and the best property and casualty combined ratio since 2007. However, we can continue to improve from here. And we believe that the trends in revenue and earnings growth will continue at least into 2023. Across the retail business, we're benefiting from our work on improving customer engagement, which is evidenced by the strong net new customer numbers we have reported. Robust top line in retail and SME property and casualty and by the excellent life results. Commercial insurance is reaping the rewards from its repositioning in recent years, with the continuing strength of the pricing cycle providing an additional tailwind. We're also growing selectively in areas such as middle markets, where we are continuing our build-out. Farmers is making good progress integrating the MetLife business with a strong top line growth for 2021. And the balance sheet is very strong with the SSD ratio at 212% and the healthy increase in the dividend to 22 Swiss francs. The SSD ratio is before reflecting the benefit we expect to get later in the year when we complete the disposal of our Italian life and pension back book. And now I hand over to George.

Thanks, Mario. I'd just like to highlight a few additional points regarding the strength of our financial performance. P&C's result in 2021 was very strong with 11% top-line growth and a 2% improvement in the underlying combined ratio. As Mario mentioned, the 94.3% combined ratio is the best in 15 years. Growth was robust with both commercial insurance and retail and SME driving growth, and it's not just rate-driven, but also coming from disciplined new business winds. Despite PYD being slightly higher than our guidance range, we believe that reserve strength has further improved. And consistent with our prior comments on anti-cyclical reserving, we've taken a cautious view and not fully recognised the continuing benefit of rate versus lost cost trend. 2022 should be a further year of growth and margin expansion for the P&C segment, and we expect to see a further strong improvement in performance in 2022, with the pace only slightly slower than we saw last year. We're really happy with the life result in 2021, which benefited from the recovery in markets, strong growth momentum in EMEA and Zurich Santander, as well as favourable claims experience. We aim to grow earnings in 2022 at the mid-single-digit percentage from the reported BOP level. Our continued focus on protection and capital-like savings is serving as well as is our strong presence in the bank channel. In farmers, the integration with the acquired MetLife business continues to go very well. The farmers' exchanges GWP was up 20%, including Met, and 7% like-for-like. As for 2022, we expect further growth in the high single digit range. The balance sheet is strong and the changes that we're making to capital allocation will improve this further, both in quantity and quality. As outlined at the investor update in November, our first priority is the elimination of earnings dilution. This is not a small number, as some of you have already started to estimate. The Italian transaction doesn't trigger any significant energy dilution and the changes that will are likely to come later this year. So hopefully this explains some of the timing. On the use of capital more generally, our preference is to reinvest any further surplus for earnings and dividend growth. But if this is not possible, we will not retain surplus funds that we cannot redeploy productively. With that, I'll hand it over to the operator for the Q&A.

Our first question comes from the line of Andrew Ritchie with Autonomous. Please go ahead.

Oh, hi there. Gosh, it's not often I'm number one on the question queue. Okay. George, could you give us just an update on the reduction of the inward cash exposure? I remember at the investor day, I think you talked about a 10%. AAL, average expected loss reduction in the US, just where you are on that in terms of progress. Also, I guess, has there been any thinking, because obviously you've reinstated reinsurance since then, given more constrained reinsurance that was available. Do you think the 10% reduction in inwards AAL is enough, or do you think you need to revisit that? So that's the first question. Second question is a simple one. Why have you realized gains so high in the second half? I saw some mention of equity gains. I don't know if that was tactical or what else was going on. Thanks.

Yeah, thanks, Andrew. So, I mean, just a reminder that when we had the investor update in November, I talked a bit about what we were planning to do. In fact, it started to do already around some of the exposures that the the U.S. business in particular brings us. We're aiming to achieve about a 10% reduction in AAL. That affects a number of different risk types, includes U.S. winds, includes U.S. tornado, includes California quake. If I look at the overall program, we've got about somewhere in the mid-300s in terms of accounts impacted. We're expecting to see about 60% of the benefit by the end of this year, remainder to come next year. And if I look at the progress we're making, we're on track for that. I mean, we're driving it. Again, I gave a fairly high-level summary of what we were trying to do to achieve this. But, for example, on the wind-exposed topics, we've introduced new gradings. We've got new underwriting requirements. to try and direct the capacity more towards the preferred risk. And in fact, for some classifications, we don't offer capacity anymore. So I think you expect to see about 60% of this this year, 40% next, and we're well on track to deliver that. On the related reinsurance topic, sorry.

Yeah, no, sorry, you're about to address that, yeah.

Yeah, you have to trust me to remember this. The second part of the first part of your question on the on the reinsurance topic. I honestly don't see these things as connected. I mean, I think you've seen from some of the US reporters already. It's pretty clear the aggregate market is a bit dislocated. I mean, we've taken the decision to keep a foot in the door to see how it further develops. But, I mean, reality is that, I mean, even though cat aggregate has certainly been helpful for us in the course of the last couple of years, it doesn't make an enormous difference. And if you look at the impact of the change that we've made, so we all retain about another $100 million of exposure, and that's before you allow for the fact that we do actually pay for it, so there's a premium that you would net off. So I don't think the change there is significant enough to have us change direction on how we're trying to manage the topic more broadly. So we'll continue to do the things we talked about in November.

Can I just ask, on the AAL, obviously, so it takes time for that reduced AAL to be in place. Is there any earlier benefit from terms and conditions on property exposed or cat exposed property? I'm talking, I mean... a more immediate benefit on things like deductibles or hours clauses or coverage. That's what I'm trying to grasp at. That will affect the 22 underwriting year.

So if you look at the market generally, and this is true beyond property, I mean, it's not just price. I mean, you are seeing contractual improvements across the boards. So, I mean, these range from some of the things that do help define the extent of... a catastrophe from a property perspective. It includes things like cyber. There's a wide range of things that I think benefit us. I mean, we don't try and put a dollar number to all of these. I mean, even simple things like deductibles. I mean, it's a pretty common feature of a response of corporate to higher price to retain more of the risk. So that takes us more out of the frequency and provides... I mean, a bit less exposure to those lower down events. Now, typically, they're not in that cat, though. So it tends to help us more with, say, the attritional and what we would describe as the large, so the large man-made events. On the cat side, things like errors causes certainly help. But it's a topic across the entire book. And in fact, I think it's a benefit that you'll continue to see in performance, not through just this year and next, But I think long after we've stopped discussing what the rate trajectory is like, we'll still have benefits from T's and C's. Realized gains. So why so high? So we made some tactical shifts in the portfolio towards the end of last year. I mean, we don't try and constrain. We don't try and push necessarily for particular outcomes. But the team... They haven't changed the strategic view of risk, but they did reduce equity exposure towards the end of last year. And that's one of the drivers of the gains. Probably the other principal one is that we have property on a market-to-market basis. And, of course, given current trends, that's generally been positive for the group. Those are the key drivers of what we saw in gains. Okay. Thank you. Thank you.

The next question comes from the line of Louise Miles with Morgan Stanley. Please go ahead.

Hi, thanks for taking my question. My first one, George, you just mentioned it in your intro. You talked about redeploying excess capital. Just so that I can get a better understanding, in the release you talk about net-earned premiums in the P&C business growing at mid to high single digits next year, or this year rather. How does that translate into capital consumption on an SST points basis? It'd be great to understand that a little bit. And then my second question is on slide four. You talk about the EPS CAGR of 7.3% for the business. If you look at the DPS CAGR, that looks like it's about 5%. Do you plan to close the gap between the two of them? Just trying to have a think about dividend trajectory from here. Thanks.

Sorry, on the second part of the question, you were comparing the EPS to DPS. Is that what you were doing?

Sorry, the EPS CAGR versus the DPS CAGR.

Yeah, okay.

7.3% on slide four.

Yeah, so the easy one to answer is the second one, because that's a foreign currency topic. So you've got a... I mean, if you look at the dividend per share and the underlying currency of earnings, it will follow what we've seen underneath. I mean, do we at this point believe we have a gap? I mean, I think I would argue, given we're paying the dividend in Swiss francs, you've actually got a higher growth rate on the dividend than you do on the earnings at the moment. So I'm not sure from our perspective there is a gap to close. On excess capital, I mean, it's a great question. I mean, one of the interesting challenges of certainly the more economic models is that Assuming that we grow the book in a balanced way, and in particular, if we don't overemphasize some of the peak risks, and of course, in the question that Andrew asked, you can see that we've clearly got a restricted appetite for some kinds of risks at the moment that are more capital intensive. I mean, the growth rates that we're guiding to today for 2022 don't consume significant amounts of capital. I mean, it's highly diversifying across the portfolio at large. And if you look at our book and you look at our capital models, I mean, it's the traditional peak risk drivers that dictate consumption. And very few of them are present in the growth plans that we have for P&C for 2022. So I don't expect organic growth ambitions to be a significant consumer of capital.

That's great.

Thank you.

Thank you.

The next question comes from the line of Peter Elliott with Capital Sherbrooke. Please go ahead.

Thank you very much. My first question is very similar to Andrew's actually. Hopefully we won't, but if we did get another year like we did last year, um are you able to to tell us roughly what the natcat um might be so obviously six and a half percent last year just wondering what that would sort of translate to um for 2023 if we got a similar year bearing in mind that the changes that that you just talked about to andrew um second question um obviously very impressive uh reduction expense ratio we saw that already at the half year i mean i think excuse me You said that can be split. Previously, you said that can be split into discipline and also the economies of scale that come with the top-line growth. Are you able to give us any more feel for how those two drivers do split out and whether we can expect a continuation of that if we do get the further growth coming through that you've highlighted today? Thank you very much.

Yeah, thanks, Peter. So if you look at the aggregate cover, we allow for the change. And we'll say for the sake of argument, because obviously I don't want to disclose the premium, but let's assume that the impact is $100 million. If everything was the same, using the capacity and the aggregate as a guide, it would be about three-tenths of a point higher. That would be the change. From an expense efficiency perspective, I mean, I think it's become a hallmark of the group, but it's something that we're very focused on. You're certainly right that we got the benefit not only of the work we've done to become a bit more efficient and a bit leaner across the entire group, but we've also had the benefit of growth. I think as we go into this year and you look at the expense ratio and we break it into the two components, so we have the acquisition cost ratio and we have what we refer to as the OUE or the administrative or overhead component, the Zurich expense part of the expense ratio. On the acquisition side of it, I mean, given the mix of business that we've currently got and the expectations of continuing recovery out of pandemic, I think we'll see some rebound around travel. I think we'll also see some rebound around the mass consumer business, particularly in Latin America. They tend to be relatively high distribution cost businesses, so they probably will nudge up the acquisition cost ratio slightly. I don't expect it to be particularly dramatic, but like for like, it would make it slightly higher. On the expense side, we continue to push on expenses. Will this trajectory change from where we've been in prior years? I don't think so. I think the if i look at all of the dynamics around expense and of course keeping in mind that about 60 of the group's expense burden is salaries i mean there is a certain pressure uh from inflationary uh drivers of expenses i think so far we've been able to manage that by offsetting that with efficiency gain that's still the plan for us in 2022 but what it does mean is that i mean probably a larger part of the expense game will go back to staff because of the prevailing labour market conditions. So I would expect that volume will be a bigger driver of an improvement overall in the expense ratio in 2022 than perhaps it was in the last couple of years.

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

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

Well, afternoon, everyone. First one, just I guess with lots of moving parts, COVID, catastrophe losses, what's the extent of the favourable year-on-year development in 21? And how does this compare to the pace of change in 20? And without pinning you to any sort of targets, I guess from a high level directionally in pace, any colour that you can give on that? And then the second one is a really big, high-level one, but you've had a huge upgrade, it seems, on your life, Bob, today. I guess a little bit more colour here on what's driving it would be useful. Thanks.

Yeah, thanks, Will. So on the first topic, I think if you're prepared to look through the headline numbers and we characterise it in the same way that we have in prior years, I mean, we think that underlying is somewhere around the 92 mark. It would be about two, maybe two to three point improvement over the prior year. If you look at 2020 over 2019 on the same basis, it's probably one, one and a half points of improvement. I think given the cycle, I would expect us to be closer to the improvement we saw in 2020 than 2021, just given the fact that rates moderated as we enter 2022 compared to 2021 I mean it's also worth adding that the rate that we're currently seeing is 2023 relevant as much as it is 2022 so to the extent that we continue this through the first half of the year we will start to firm up precisely what's going to be delivered in 2023 already From a life business perspective, I mean, our life businesses globally have done a fantastic job. If you look at it from a volumes perspective, as a proportion, we write much more of the preferred risks. The growth, I mean, it's not quite back to the level of 2019 on an APE basis, but the mix of what the teams are achieving is far better. So we write much less of any of the business that carry spread risk. And we just have far more of the protection focus, the unit link focus, driven by a wide range of businesses. So in Europe, there's other businesses in UK, Germany, Switzerland, all doing a great job. Joint venture in Spain with Sabadell, very strong joint venture in Latin America with Santander, also excellent. And I think, I mean, one of the ones that, has been a big driver in terms of turnaround is the Australian life business. So as we get to the end of 2021, believe it or not, we're now starting to get very close to the business case that we committed to nearly four or five years ago when we announced the acquisition. And I think the Australian business has more room to develop further. I think they're quite cautious in how they positioned themselves at the end of last year. we're the leading player in retail in the market. I expect to see further strength from them this year. The other thing that stands out in the results today, we've highlighted what we describe as one-offs. I think one-offs are not a very elegant way to describe some of the hard work that some of the local teams do in managing the in-force that results in changes, for example, in particular reserving positions. I mean, it's not always something that can be predicted with high precision, but we do have a good track record of producing a reasonably consistent level of income from what we do around enforced management. I mean, looking at what's ahead of us, I don't really expect that to change in 2022. Finally, we have COVID. It's the one place in the business where you continue to see the impact of the pandemic tends to have more of a North American and South American flavor to it. I mean, we've had slightly over 300 million of excess mortality in the course of 2021. It won't be zero this year, but it's going to be a significant step down from where we were last year. So I think if you look at the book overall, I mean, we're very happy with the progress the team has made, and that's why we've given clean guidance from the headline number without adjustment today.

Great. Thanks.

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

Hello. Thank you very much. George, just picking up on the useful color you just gave about the life business, I'm wondering if I could just press you more on some of the line items that are driving this. In the absence of your source of earnings disclosure, your profit is up about $400 million year-on-year in absolute terms. How much of that has come from what would have been the investment margin, and how has the technical margin, what would have been, changed? And when you're thinking about the $100 million growth that your 5% or mid-single digits implies for this year, which would be the key driver there. Is it investment margin or technical margin or maybe something else? And if I can append to that, I appreciate you've dropped the source of earnings disclosure because of the other pressures like IFRS 17 work. To what extent is there any restatement of your earnings going on behind the scenes so that you're creating a number which is strategically more consistent with what IFRS 17 may look like? I don't know if I'm taking your conspiracy theory too far. Second question, please.

Will, can I? I'm not sure I understand the second part of the question. What does that mean?

Presumably, your earnings could be restated significantly under IFRS 17. And so I'm just wondering if whether your new earnings figure includes any kind of implicit smoothening into the new accounting regime. So is 1.8 a good base for what we're going to be thinking about under IFRS 17?

Very great. Thank you.

And then second question, in your guidance of high single digit growth for farmers premiums this year, how should we be thinking about the actual operating profit of the management services company? I'm not sure. I mean, on the one hand, I can imagine it will be higher than that because you've got all the lovely synergies from P&C. And on the other hand, it could be lower than that because you've still got the integration expenses and things. So do we take volume as also the sign of profit? Or if not, which way is the delta, please? Thank you. Yeah, great.

So on the first one, so you're right. I mean, we've removed some of the elements we would normally give because we have eight closes during the course of this year. I think if you look at the sources of the improvements over the prior year, and just given the change in the mix of business, I mean, a very significant driver of this is going to be technical margin. It's coming from business that typically carrying underrating risk. So, I mean, I picked out Australia earlier because Australia has one of the biggest turnarounds compared to the prior year. I mean, that's a business that's almost entirely a combination of either what the Australians would refer to as lump sum, i.e. TPD, mortality type cover, or DI, both of which are obviously dominated by protection features and therefore technical margins. So there will be some of this, which is partly a recovery of markets, but I expect the largest driver of the outcome is the improvement in mix towards technical, and that technical is driven by underwriting outcomes rather than investment outcomes. On the second part of the question, I guess it's a different way of asking me, what will your life earnings look like under IFRS 17? All I can tell you is that we haven't done anything from a bulk perspective to try and anticipate IFRS 17 at this stage. And in fact, I don't expect that we will do that during the course of the year. The one thing that we did do, and we talked about this already on the Q3 call, is we did make some changes that impacted AFR to allow us to set up the best estimates in a way for transition for IFRS 17 so that some of the businesses that potentially could carry more risk into the new accounting standard would have more significant buffers around them. But that's really the only thing we've done around anticipating IFRS 17 at this stage. For farmers, I mean, I think for the management company, I mean, there are obviously four components. So I'm going to put the life company to one side at second. I'm going to put Farmers Read to one side, assuming that that has no that significant impact. So we're left with, I guess, what was the management company now has the addition of MetLife to it. I think the growth figure that we've given for underlying is a pretty good guide to where you'd expect the fee income to go. I think you need to allow for the fact we still have some restructuring to do, so that will continue to keep pressure on the margin on the farmer's workplace. component which is the old MetLife P&C business but I think if you work off of the the overall guidance that we've given for the exchange and you're prepared to make a reasonable split between the let's call it the old management company and workplace services and apply the two margins with a bit of a step up on workplace I mean that will give you a pretty good guide to where I'd expect the fee income to come out overall. That's very helpful George thank you. Thank you.

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

Fantastic. Thank you so much, and well done on record profits for a record year. Two questions. The cash conversion, so it's really a way to ask what's the cash remittance growth going to be, but if I do the ratio of cash to net profit and 85 percent the five-year average 95 so if I imagine convergence there's a lot of growth to come just wondered if you could maybe show share some of the drivers of what could be and then the second question so Italy done the other deal which I imagine Germany as you say maybe end of this year so we'll have a lot less volatility in your on your asset side, a lot less risk. How much do you release in terms of capital if you imagine that you could live with lower solvency buffers?

Thank you. Thanks, Michael. So on the first one, on cash conversion, so the numbers are correct. We are, through the first two years of the strategic plan that we have ending this year, first two years, we are pretty much at guidance at about 84, 85. And if you look back on a longer term historical average, we have been higher than that. We have said today that obviously the ambition is to meet or exceed all the targets that we've given. I think if you look at cash remittance, I mean, I see no reason why it would slow down as we go into 2022. There's obviously some continuing impact from COVID, although it's not so significant as it was in the prior year. And we continue to have pockets that we would like to go after. So we've talked before about the fact that one of our largest entities continues to run a capital level that's in excess of the level that we target. And even though we've been successful in repatriating that some of that in prior years it continues to exhibit that characteristic and we would intend to go and tackle that again this year now I think that I mean the reality of those processes are that I mean we need to have local boards who are comfortable we need to go to convince regulators that these things make sense so I don't expect a shift from where that business is to a perfect line with target in one year. So I think there could be benefits from this that will flow this year, maybe also next year. So I think from a cash remittance perspective, I'm going to obviously avoid giving you a firm number, but I'm very comfortable that we'll be in excess of the cash remittance target that we established. So on the second thing, so obviously we've announced the transaction in Italy that will have a small positive impact on the SST ratio when it closes has a smaller impact on liquidity but I mean the real reason for us to do that again was the volatility that the predominant investment in that book created issues for us around volatility of capital and I mean, it's a challenge to take too much beyond that because, of course, I'm not going to talk about other transactions that we are or are not considering. I think, I mean, we've made a commitment that we want to go further in addressing the back book challenges that we have in the company. I think people can draw conclusions quite easily about what that might mean. I mean, there's a certain complexity when we move into other jurisdictions, again, that some degree reflects also the comments around the cash topic so we need to work with business business team the our local partners and very importantly the regulators to make sure that all the stakeholders are comfortable with what we intend to do here um i think the the positive thing around some things we do intend to do is that um i mean they're not dependent on a flow back of local capital. We've been able to put in place relatively efficient financing structures already. Really the benefit of doing some of these things is for us to remove some of the superimposed capital requirements or as you highlighted to have a lot less volatility and therefore to be comfortable operating at a level of capital that's lower than the one that we would typically target today. That doesn't mean a reduction in the 160 It just means where we operate in the range above 160. In terms of quantum, I'm going to resist the temptation to make any comment on that yet, but obviously the things that we intend to do are far more significant than the thing that we have done.

Fantastic. That's so helpful. Thanks so much and good luck.

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

Hi. Good morning, good afternoon. In terms of the underlying improvement in the combined ratio at full year, I think about the accident year number, ex-COVID, there was a slowdown from the first half to the second half. I think we kind of three points or so and then to 190 basis points or so. To some extent, I mean, we could expect that, and I think you've probably got high loss picks on some of your liability lines. But when I kind of break it out into expense and loss ratio, it seems like the biggest slowdown is on the expense ratio side. So just some color around whether that's timing differences or how to think about that slowdown. And a kind of link to that is if we split it out the other way and look at it in commercial lines versus retail and SME, SME, I think, was improving by about 80 basis points at first half and then was flat at full year. So it looks like the return on SME deteriorated in the second half of the year. I guess that's kind of one thing about a possible headwind for you as we go into 2022. So just some thoughts about the return on SME outlook would be helpful, please. And then secondly, on the PYD, so you are and have done recently, but the first half of this year, second half, the PYD is kind of at or above the top end of your target range, you are saying that you are building margin, at least in this period. So should we be expecting that number to be coming out at the higher end, as it has done in recent times? And if you are able to just comment on IFRS 17 when it comes to a P&C reserving situation, are you likely to have to reserve closer to best estimate under IFRS 17? Thank you.

Thanks, James. That's a long couple of questions. So on the underlying complaint ratio, I mean, your analytics are spot on. One of the things I would love to cure us of is the fact that we have a significant expense skew into the second half of the year. It seems to be one of those things. We can manage to bring down the total amount we spend, but we don't really seem to be able to fix the skew so much. I think in the scheme of things, I'm more concerned that we become more efficient in total. I'd love to tell you that we could get this thing more even, but there is a skew into the second half that's partly driving the characteristic that you see. On retail SME, again, you're right about the outcome. I'd be more optimistic than you are. I think the... On retail and SMEs, it's been a pretty tough market, especially for retail. I mean, we've seen a rebound in the business, mainly driven by partnerships. So that certainly helped us. But if you look at the price dynamics, they're pretty flat in retail. I mean, I think just given the prevailing market conditions and some of the challenges that are out there, I think in some markets you have started to see an improving trend on price, and I expect that to broaden across all the businesses. So I think as we get deeper into this year, I'd actually expect retail to produce a stronger performance than they have from a rate perspective than they did in 2021. That's also true. for farmers and the benefit that it will get from a fee perspective from what I think the emerging price dynamic is in the US retail market. On PYD, where are we going to be? I would expect us to be at or very close to the top end of the range. As you saw last year, we struggled to keep it within the range. in general, pressure tends to be to release more than to release less. We've tried to be appropriately cautious or prudent in what we've done, but I certainly think that as we go into 2022, the high end of our target PYD range is a better indicator to the likely outcome than the low end. On IFRS 17, it's an interesting issue. You're obviously aware that there's a greater perception of best estimate component to the choices that are made. We have not yet been all through that process with the auditor. I think it would be our intention to make the argument that management's best estimate, which will include elements that there may be limited evidence of and historical data should still be incorporated into the IFRS best estimate outcome. So rather than see a very large reduction in the expected outcome, I think we're going to try and make the argument that the what might be perceived as margins are actually simply reflecting the fact that the data is never perfect. We get constant reminders of issues that can crop up that had not previously appeared in the data. So I'm hoping we won't see that step change down and that we can maintain a similar philosophy as we move into the IFRS 17 world.

That's very helpful. Thank you, George.

The next question comes from the line of Vinit Malhotra with Mediobanker. Please go ahead.

Yes, thank you, George. Some of my questions have been addressed, but two I could think of. One is on the PYD that you just indicated, closer to the high end of the range, 1% to 2%. What about inflation, social inflation, those topics? I mean, would that be something that have been considered in this sort of revised guidance, if I can use that word. So that's the first question. Second question is just on the dividend and cash flow. So of course, I mean, I have to say my expectations were met and consensus as well, but payout ratio 63% cash flow much stronger. I mean, what's the reason for not doing a bit more because you didn't want to ratchet up? I mean, you know, the dividend policy is higher of last year as well. So if you could just comment a bit about that would be helpful. Thank you.

Yeah, thanks, Vinny. So on the PYD topic, have we incorporated a perspective on inflation, social inflation? Yes. In fact, on the introductory comment that I made, I mentioned the fact that we haven't fully recognised the benefit of rate versus lost cost trends. That's a bit of a departure from prior years. If you look at what we've done in terms of building reserve strength in the earlier periods, typically we would have been releasing workers' comp reserves are something similar, maybe auto liability in some of the European markets, and maybe adding to some of the more social inflation exposed lines in the US. I mean, this year, we've actually held back part of, again, what might be perceived to be margin, just to increase the level of prudence and give us more ability to manage that topic if it becomes more significant. So, I think we've tried to be preemptive around it and the PYD guidance considers those risks. On dividend and payout ratio, I mean, it's an interesting challenge. I mean, I think, I mean, go back to the first question from Andrew. We clearly have a relatively unusual level of unrealized gain in the result today. So I would never simply take the headline number and base the outcome on that. I mean, arguably, I think you could argue 75% might imply something slightly higher. I think there's several thoughts in the process that we went through. I mean, we've looked back over the course of the last four or five years, and if you look at earnings on average over that period in total, we're very close to a 75% pair ratio. So in years where um perhaps for um because of major losses we've seen um lower earnings or last year with covert we saw lower earnings um in other years where it's been stronger um it has offset if you allow for the passage of time i think we also said that the investor updates um back in november i mean we clearly want to make sure that shareholders benefit in a way that reflects the improvement in earnings. But that for a topic, as a topic for us, is going to be something for the end of the cycle, not the middle of it.

Thank you very much.

The next question comes from the line of Thomas Fossett with HSBC. Please go ahead.

Yes, good afternoon. Two questions on my side. The first one, George, will be to come back on the reserving strengths currently at DERIC. Will you be able to comment on the level of confidence currently that you have in your reserve compared to where it's been in the past on a historical level? Just to better understand if here also on a historical basis you feel very, very safe and... Well, actually, you're building some additional prudence levels, but maybe not all of it will be required going forward. And the second question will be related to your debt maturity. Actually, you're showing a slide. I think it's on 41, the slide back, where In fact, you've got a pretty significant amount of maturing debt, senior unsubordinated 2022 to 2024. And I was wondering how much this was potentially putting some constraints on you to return a bit more cash to shareholders. Or, I mean, is there anything that you could comment on the desired level of debt ratio you want to keep? Thank you.

Yeah, thanks, Thomas. The, I mean, obviously, as I look at the reserves, I don't have reserves for events that I don't expect to happen. Otherwise, I would be in trouble quite quickly. I think what we try to do is to be consistent, to be conservative around how we approach it. And recognizing this is talk rather than something that I'm scientifically proving. I think in all of the last three or four years. Even with the level of PYD that we've had, from our internal metrics, the percentile in our reserve range has increased. I think the only time that I've seen it go down recently was Ogden, when of course we used part of the reserve strength to deal with Ogden. All other years it's gone up. And currently we would be at one of the highest numbers I can recall here, in fact, probably the highest number. I mean, that doesn't mean to say that we've got a pot that we can draw on when we wish. But what it does mean is that we create more resilience around some of the risks that we all know are out there, whether that's the inflation topic that was discussed earlier. I mean, whether that's just any other risk that can come up in the portfolio overall. And that includes the social inflation or litigation topic in the US. So there's never any guarantee that any number is going to be enough. But the number that we have today is higher than the one we had a year ago, and it's higher still than the one the year before that. And I think it just gives us a measure of protection against some of the risks that are out there. From a financing perspective and the general question, does that produce any constraints for what we might like to do otherwise? I mean, not really. I think the, if you look at the, I mean, we give this simplified capital structure picture. I mean, we are very close to the target levels. And in fact, after we do some which will take place early in this year, it will actually look a bit underleveraged potentially compared to the target. I mean, our aim would be to maintain it around those kind of levels going forward. So I don't expect the financing needs that we have over 2022 and 2023 to create any significant constraints on what we would like to do, either to invest in the business more broadly, or if it comes to it, to increase cash returns to shareholders.

Excellent. Thanks, Todd.

The next question comes from the line of Dominic O'Mahony with BNP Paribas. Please go ahead.

Hi, folks. Thank you for taking our questions. Two for me. Just the first one on the farmer's outlook, the high single digit premium growth. I wonder if you could just give us some kind of on the breakdown of that, the inorganic effect, the organic. And I suppose what I'm really getting at is any sense of how you see that business progressing on a sort of a normalized basis into the next several years in terms of top line. The second question is really just, George, I wonder if you could expand on your opening comments on capital management. In terms of the use of surplus capital to support to support growth one of the things you said earlier was that your organic growth doesn't really seem to create much strain on capital at all and so I'm sort of wondering if you you have surplus capital it's not really going to matter too much if if you wanted to to sort of press on the accelerator organically is that is that the right way to think about it that actually the extent that you had you have surplus beyond that organic isn't going to be the way that you deploy it, or have I misunderstood that? Thank you.

Yeah, thanks.

Thanks, Dominic.

So on the farmers topic, I think the easiest way to think about the split of growth, if you look at the growth, I mean, we've given two numbers for last year. So one was like for like, one is including MET. The MET contribution is about 75% of a full year. So I expect to pick up the other 25%. So that would explain a slightly higher than normal guidance around farmers. And I'd expect both books to be growing kind of in that mid single digit territory. I think the rate dynamic, as I mentioned earlier, seems to be picking up momentum in the US. It's clear that there are issues across the market with frequency and severity. That's going to drive rate filings, I think, pretty much everywhere. And also in some of the key markets for the exchanges, you've seen some people step away and maybe move more to an E&S type structure. And I think, again, of course, that has a big impact on capacity and hopefully some influence on the regulators where rate has to be filed for us to get, or for the exchange to get the required approvals. So, I think this should be a pretty decent year, I think, for both of the businesses. But if you're trying to think of the Met part versus the former management company, the major part of the drive will be that 25% pick up because of the additional three months. On the opening comment I made on capital management, I think your interpretation is pretty much spot on. So it's not zero. But if we grow the firm by 10% and we grow it across, especially across P and C, and we don't grow in the highly exposed risk categories, we're not going to get close to a 10% capital usage type number. And in fact, I think I've said in the past that if you think of the capital generation I mean, we give about 75% of it back. We keep about 25% of it. I mean, that would fund, I mean, pretty high single, I mean, potentially even low double-digit growth rates across the entire fund. So the organic, I just don't see that being the principal way in which we absorb the capital levels that we currently run with. I think from our perspective, I mean, we would like to deploy it if we see things that make sense. I think we've been reasonably successful in doing that over the course of the last five years. I mean, things are not quite as active on the buy side as maybe they have been for sometimes, certainly for the types of risk that we're interested in. But I wouldn't completely exclude the possibility as we go through the year, we'll see things that we think could actually allow us to accelerate achievement of some of the strategic priorities, grow earnings, which, of course, close the dividend, which is the primary goal. That's really helpful. Thank you.

Thank you.

The next question comes from the line of Henry Heathfield from Morningstar. Please go ahead.

Good afternoon, all. Thank you for taking my questions. Can you hear me, George?

Oh, yeah, I can.

Go ahead, Henrik. Yes. Great. Thank you. Just a couple of clarifications, really. So, well, and interesting, some accounting movements as well. On the acquisition of MetLife into farmers, I mean, I know you touched on this in answering one of the questions, but I'm just Can I get a better idea of how this business is now changing? We used to have farmers management service company, which was really just administration services working on the back of farmers exchanges. And now it seems that the acquisition of MetLife, you're actually moving more into kind of an underwriting business for farmers. Is that the way we should kind of, or I should think about it? So we've got this MetLife business, which now sits side by side next to farmers exchanges and the farmers management services office. and administration management services for both those elements. If you see what I mean, maybe you could help me answer that. That's my first question. And then with regard to your insurance contracts, it seems there's been a bit of kind of compression in the valuation, particularly within future life policyholder benefits and then in the policyholder contract deposits. I think on the first one of those, there's the big outflow of about 3.4 billion, which relates to the sale in its lead to gamma life. I was wondering if you could help me understand whether that's predominantly driven by the traditional guaranteed spread business, whether you're really wanting to move away from that, move more into unit-linked business, or there's something else that I need to think about. That would be really helpful, and maybe if there's any coming, you might be able to provide them. any more changes in the future going forward on kind of like divestments within that kind of traditional part of business, if that's the case. And then secondly, within the development of policyholder contract deposits, sorry, that was on the prior question. I'm referring to page 42 of your financial statements. And then on page 43, within the development of policyholder contract deposits, there's a decrease of around 2.6 billion. I understand within both of these movements, FX has a large part to play. but there's a decrease of about 2.6 billion that relates to other comprehensive income. And is that really just movements in investments that relate to the value of the investments that sit in the liabilities? Perhaps you could just help me answer that. So that's my three questions.

Thank you. Thanks, Henrik. So on the last one, can I ask a favour? Can I have the IR guys call you back on that one? because they can probably give you a better answer than I would on the call. On the other two, on the MetLife P&C topic, so apologies if I've left the impression that the Zurich side of the relationship is now engaged in underwriting. It's not. So it continues to be a management company structure. As you pointed out, in the traditional model, we provided service for a fee, and it continues to be that. on the MetLife P&C, following the MetLife P&C acquisition. So Zurich is not underwriting alongside the exchange.

Sorry, who's acquired MetLife? I'm a bit confused about this. Who's acquired MetLife then? I mean, did you acquire the underwriting part of MetLife?

The farmers' exchanges acquired MetLife. But you paid no money for this. Well, so the... No, no. So the way to think of this is that the exchange has bought business and we will benefit from a stream of fee income into the future as a result of that acquisition. The exchange expects to be compensated for giving us access to that stream of business, so of course we pay them for that as part of this deal. So the way to think of this is that they acquire the underwriter and we're essentially paying them for a a perpetual distribution agreement, if that makes sense.

So you bought MetLife and you're providing the exchange with access to the underwriting of MetLife and you don't engage in underwriting on the MetLife acquired business. Is that the way to think about it? Am I kind of near there?

Almost, almost. But the exchange is on the insurance company, MetLife P&C.

Okay, and the exchanges bought MetLife BNC? They did, right, okay. And you have no interest in the exchanges? No, they're completely independent. Other than just the management fee, basically, which is, there was no, Zurich does not hold a monetary interest in the underlying exchanges.

Correct.

Okay, I think I'll get out of it, but thank you very much. That's really useful.

I mean, if it helps, we can spend more time with you offline and go through it in more detail. On your analytics around the dynamics, I mean, they're probably spot on. So you have a preference for protection, for unit links, for the non-guaranteed types of life product, and therefore, I mean, you... I mean, you potentially do see some compression of asset balances over time because of that. I mean, you will also see quite a lot of volatility because of market movements. But given the group's preference, risk preferences in life, acquiring assets that back guaranteed life products is just not a priority for us. Traditional life products are not a priority.

Can I ask this? Are the discount rates on these liabilities, are they fixed at the point of policy writing and they don't change over time? Is that correct?

So we get into quite a detailed conversation about ALM, but basically you're correct. I mean, these are really viewed, if you view them from a portfolio perspective, it's a fixed term liability. So you should match them at the point of sale.

Thank you very much for your answer.

You're very welcome.

The last question is a follow-up from Mr. Hartner with Berenberg. Please go ahead.

Thank you so much. It's a very cheeky question, and I'm sorry. But if you are, well, it's got to be on the line, but if you don't take for a moment, you step into, you borrow his shoes, and you think either for the next three-year plan or the three-year plan where you're clearly on target to beat everything, which particular metric do you think is the one where you've got most upside compared to the original plan?

There's obviously a part of me that really wants to answer that, Michael, but the other part of me is screaming at me not to answer it. So I'm going to thank you for the question, but avoid giving you a response. Thank you.

It's a good try. We try. But the other question, if you do have two seconds, you mentioned potential deals and priorities, etc. If you could just remind me or us what those strategic priorities were, where they would lie, that would be lovely.

Oh, yeah. I mean, they reflect the priorities we laid out back at the 2019 Investor Day. I mean, we are I mean, a lot of the activity internally, I mean, we've got Sierra and the team with the country's done a fantastic job in commercial. We're actually devoting a lot of time and effort to the customer topic. You see it reflected in the customer growth statistics. You see it reflected in the customer satisfaction feedback that we're getting. We've done some very small acquisitions lately that we think will help us improve that over time. I mean, it's entirely conceivable that we would do a bit more of that by forward. I mean, beyond that, it's pretty opportunistic in the end, Michael, because it becomes, I mean, what's available and what fits with what we've told people we want to do. And it's pretty hard to predict that in advance. Thank you. Thank you.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to John Hocking for closing remarks. John.

Excellent. Thank you, everyone, for dialing in. If anyone's got any outstanding questions, then please just reach out to me or one of the other members of the IR team. Thank you very much for your time.