Zurich Ins Group S/Adr

Good afternoon, everybody, and welcome to Zurich Insurance Group's first half 2022 results Q&A call. On the call today is our Group CEO, Mario Greco, our Group CFO, George Quinn. Before I hand over to Mario for some introductory remarks, just a reminder for the Q&A, we kindly ask you to keep to a maximum of two questions. Mario.

Thank you, John. Good afternoon from my side. As you heard, George and I We're here to answer your question, but before that, let me provide you with a few remarks on the results. So this morning we reported our highest first half business operating profit since 2008, and the second highest ever. We have achieved this despite unprecedented market conditions driven by the war in Europe, higher inflation, and the lingering effect of the pandemic. Zurich is performing very strongly across all of our businesses, and we remain on track to beat all of our financial targets for the second successive strategic cycle. Today, we have announced a 1.8 billion Swiss franc share buyback to offset the earnings per share impact of our German Life Back Book SAID. While the primary goal of the transaction is to reduce capital volatility, The portfolio has been a reliable contributor of earnings. Given it's now possible to immediately redeploy capital to offset this loss of earnings, the buyback will allow us to protect shareholders from any dilution. Our capital position is very strong, and this underpins the promises that we make every day to our customers, distributors, and regulators. We continue to focus on customer needs, transforming Zurich into a leaner more agile insurer that's primed for the future. Results continue to be seen in our growing customer numbers, with more than 850,000 customers added in the first half of the year. In property and casualty, we continue to see the benefits of consistent, disciplined, proactive portfolio management. PNC business operating profit rose 32% to $2.1 billion U.S., driven by a record low combined ratio of 91.9%, as the benefit of recent price increases continue to earn a throw into our underwriting results. The gross return premiums also grew by 13% on a like-for-like basis, with strong growth achieved in both commercial insurance and retail. In commercial insurance, a rate increases of 9%, were stable compared to the first quarter. We continue to see rate increases remaining ahead of lost cost trends into 2023. For life, our consistent focus on protection and unit linked continues to pay off with another excellent set of results. Life business operating profit in the first half grew by 13%. despite unfavorable currency movements due to the strength of the US dollar. This was driven by underlying growth and a much reduced level of COVID claims versus last year. The strategic actions we have taken in Italy and Germany this year further improved the industry-leading capital efficiency of our business, and we are well positioned for future success. Gross written premiums of the farmers' exchanges increased by 15%, driven by the inclusion of the midlife business for a full six-month period and underlying organic growth. Overall, farmers' SPOC also increased by 15% over the prior year period. Sustainability continues to be a key focus for us, and we're pleased to see that this continues to be recognized externally with MSCI recently upgrading our ESG rating to AAA, the highest possible category, of course. On September 27, George will be hosting a webcast where we will explain to you how we're implementing the new IFRS 17 framework at Zurich. Beyond this, I also look forward to seeing many of you in Zurich in November. when we will set out our ambitions for our next strategic cycle. We're confident that Zurich is well-placed to lead the transformation of the industry with sustainable products and services adapted to the rapidly changing expectation of our customers. Thank you for listening, and Giorgio and I are now ready to take your questions.

The first question comes from Wilhel Castel from UBS. Please go ahead.

Oh, hi. Afternoon, everyone. I guess the first one's on capital. The SST is clearly a massive fee. Just trying to understand relative to the sensitivity, effectively why it went so awry, trying to reconcile that. And I guess the knock-on impact of that is just thinking about, I understand the capital, the buyback to offset the earnings. I guess as we look forward, What's the binding constraint on capital? Because clearly FFT is at an incredibly high level. The second one is just thinking about sustainability of margin improvement to come in commercial and that balance between at what level you put the foot down on some volume exposure growth versus margin. Presumably, it's fair to assume that if prices, as you're saying, Mario, are increasing ahead of the lost cost trend into 2023, we should expect continued margin improvement or else equal well beyond that point. Thanks.

Well, Ms. George, on the first one, I'm not sure I agree with the characterization of went so awry. I think if you look at the sensitivity, so we've given updated sensitivities for Q1 today. I mean, the only thing you guys have had to work from prior was Q3. But if you look at the sensitivities we've updated more recently, you can see that we're more or less exactly where the sensitivities would lead you to expect us to be. So, I mean, we're certainly in the territory that we've expected to see, given the... Binding constraint on capital, I mean, you're absolutely right. It's not SST. I guess it's perfectly obvious that it would be very difficult, to put it mildly, to bring us suddenly back to 160%. because of what that would imply in terms of capital move. I mean, from a binding constraint perspective, I mean, typically when you see regular street capital numbers this high, it will be typically other measures, normally more the rating agency topics. But I mean, as you'd expect, our excesses on just about any measure you can choose are all very substantial. So we have plenty of flexibility. And of course, we'll get some more when we close the transactions, the back book transactions that we discussed at length previously. On the margin topic, you're quite right. So I guess we're going to cover this more than once on the call. We still see in commercial price ahead of lost cost trends. We don't expect that to close suddenly. And in fact, at the moment, you've seen a a stabilization of the pricing trend. So we haven't seen the continued moderation we talked about back at Q1. Although at the same time, we have seen a bit of a tick up in inflation. So we've seen the loss cost trend slightly higher. So we get the same answer. We end with the same guidance, even if the composition is slightly different. So we'd expect that to improve well into next year.

The next question comes from Cameron Hussain from JPMorgan. Please go ahead.

Hi. Two questions for me. The first one is on thinking about the proceeds from the back-butt deal. Clearly, the share buyback today is kind of part of the proceeds. I'm just interested in what you might have kind of earmarked the rest of that for, and any suggestions on where you think the business can be stronger. So if you do go down the M&A route, The second question is on gross exposure reductions that you've been kind of making in P&C. I'm just interested in how that's progressing, kind of especially given the kind of continued hardening in kind of property catalogs for reinsurers. Thank you.

Thanks, Cameron. So maybe one comment on the way, in particular, the German transaction works. So you know already that the actual capital flows The result directly from the German transaction itself are actually quite modest in the scheme of the group's overall capital base. The principal benefit we gain is the capital overlay that we impose from a central perspective. And I guess the good news is that, of course, we have that already. We don't need to wait for the closing to have that flexibility. From a perspective of what's it earmarked for, where might we spend it, which markets, which targets, You'll appreciate I'm not going to go too far into that. Number one, because our focus continues to be on the organic plan that the group has. That's the execution of that and execution of the opportunity that we still see across all of our businesses as the highest priority by far. It's good to have the flexibility, particularly in the current market conditions, that if the right property in the right place with the right returns comes up in a way that could benefit earnings and dividend growth, we're in a position where we could consider it. But I guess we don't earmark capital in the way that the question might imply. Although I accept that we do have significantly more flexibility that the transaction creates than we've announced the use of today with the buyback in regards to the earnings dilution. On the exposure and the impact Actually, a hardening market makes this kind of thing easier to do rather than harder. It means that there's plenty of optionality for people out there around how they place this risk. I mean, you can see already from the commentary of various market participants that there's a variety of different levels of appetite out there, and that's part of what makes a good market. I mean, we've so far been ahead of schedule on the NatCat exposure reduction in the US. I think the team there have done an excellent job. It hasn't impacted us elsewhere in the business, so we haven't had substantial resistance or the risk that we lose the parts of the book that we do want to write. But I mean, this is to some degree going to be a continuing process for us. We want to try and limit the amount of volatility that we're exposed to from this particular risk. But the market conditions are actually quite helpful.

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

Well, hi there. George, when you were closing the reserves off for the first half, can you just give us a sense as to what areas, I'm sure you had more of a discussion than normal about inflation outlook, social as well as economic. is give us a reminder or just run through where you still, I suppose, things away or let's put it another way, took a broader range of best estimate. I'm just going to try to get a sense as to, you know, was there still some net addition to things like U.S. liability? Are you seeing any real changes on things like work comp and maybe a bit less from that? So just some some areas of where there was a bit of additional caution in the first half would be useful. Second question, um, in one area you could deploy capital is, is, is, um, a bit more reinsurance for farmers or maybe even, uh, maybe a surplus note investment, um, given, given their surplus ratio. Um, is that just off the agenda because just philosophically you don't want to go back there in terms of, um, volatility or, or, um, Is it a case of waiting to see what farmers buy for themselves in the third-party market and then see if you would step in? Thanks.

Yeah, thanks, Andrew. So closing reserve process at the end of the first half, and maybe not to give a very long summary of how we do this, but our mechanism is that, of course, the company's business units arrive at best estimates. They report this through to the group. The group forms its own opinion. The group may add additional reserves in two forms. One can be specific reserves for particular topics and particular markets. We do that fairly routinely. And we also add, I guess what I'd describe as some form of risk adjustment, an additional margin to reflect the fact that we're in a particularly strong phase of the cycle and we would like to maintain a relatively consistent and steady effect from PYD. So that's not a topic for us in the future. So what's different at the end of the first half of this year? I mean, we obviously pay a lot of attention to the inflationary topic. I don't think that would meet the definition of, say, additional reasonable prudence. So we've nudged up A couple of lines of business, especially in the U.S. So, if I'm not a huge surprise, auto physical damage. We have a slightly higher loss cost trend assumption. Also, commercial property in the U.S., slightly higher loss cost trend assumption. Continuing, I guess, the theme that we've seen over the last several reporting periods, that the inflationary pressure, irrespective of geography, has been pretty concentrated in the short tail lines. And in fact, lost cost trend or lost cost picks for almost everything else, so XSGL, cyber, PI, I mean, you name it. I mean, we've maintained our trend picks around those areas. The one area where we did do something additional, not particularly because we have something that we see in the data, but we did add we nudged up the primary liability pick and if you think of prior commentary that I've given you I think in the past we focused more on excess GL and in fact if you look at I mean excess GL is still the highest loss cost trend assumption in our book auto physical damage is not far behind it but we've also pushed up primary liability just given the continuing concern about that even if we do now start to see a normalization of activity and settlement. It felt like a reasonable step to take. We've maintained the existing policy that we had around the kind of the anti-cyclical component of reserving, so we do continue to add additional prudential margins within the best estimate. Again, just as a reminder, just to protect against the risk that given things are cyclical that we get more pressure later in the cycle. Uses of capital. So where on our list of priorities would there be a bit more reinsurance for farmers? You've heard us say for the last several years that, in fact, you've seen it from action, we've stepped away from routinely providing reinsurance support to the farmers' exchanges, principally because, number one, they don't need it from us because they can buy it from the external market. But just as importantly, it's not really why people own Zurich. So we've maintained a relatively small share in the program just to, in case people worry about the level of commitment that we have to that particular relationship. I think for farmers and for, I mean, what happens around the end of the year on renewals, I mean, if you look at the figures they've reported today, so they've got a pretty hefty combined ratio, the 104 ratio. surplus is down compared to the year end. They're slightly below the bottom end of the target. I think the things that drive that, the things that can help them in the future, there's a bit of interest rates in the surplus. So without wanting to mark this thing to market every 30 days, some of that will have reversed in July, even if there's still a risk that that trend is upward. I think on the business side, I mean, obviously, we have say of what farmers is doing on the business acceptance, on the profitability side. I mean, from our perspective, they're doing all the right things. We benefit currently disproportionately from the rate action that they take. And that certainly drives growth, X, the MetLife P&C deal. And I think at this stage, I mean, our expectation is that the market is probably sufficient to support farmers But we continue to leave open the possibility that if they need support from us, given the significance of the relationship to us, we would definitely take a look at it.

Okay. It's very comprehensive. Thank you.

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

Thank you very much. Just one question on the guidance, please, and one that's a high-level question. on on the guidance i just want to cover you talk about farmers margin recovering in the medium term i'm just wondering if we can give it any more clarity on the the timeline there for that recovery and on the group functions and operations of 800 to 850 that seems quite conservative given your h1 level so i'm just i'm just wondering if you're expecting uh slightly higher than normal in h2 or anything there um And then on the high level, I guess you talk about rate being above lost costs, reinvestment rates being above running yields, strong top-line growth, et cetera. I guess a question I often get from generalists is how all that translates into the outlook over the coming years and what bits they might be missing, competitive pressures, et cetera. I know that's my job, not yours, but sometimes it's helpful to hear the view from management. For their benefit, I'm just wondering if you have very high level sort of cognitive thoughts on how you see that outlook. Big picture, everything combined. Thank you.

All right, Peter, thank you. I'll take question 1A and 1B as guidance question. So on the clarifying, someone raised this with us earlier today. I hadn't intended to give people the impression we were trying to push out the date where this would take place. I'm still expecting it to see it be back to the levels we're more familiar with by the end of next year. So I don't expect to print that number next year, but certainly I expect it to demonstrate that by the end of the year we're back in the territory that we're familiar with. Group functions and operations. I've got the group CEO looking at me across the table. I mean, we've We try and keep the lead on expenses. The one thing that I find very hard to influence is the fact that we have a bit of skew on the spend. It's been pretty traditional for us. If you go back over prior periods, maybe not in every single year, but it's pretty common that you'll see a heavier second half for GFNO on expenses than for the first. That's on their gross expenses. The net that you guys see can be impacted by charges. If If for some reason we're doing something for someone that needs to be charged to them, then that can have some influence. But it's really the skew. I'm not trying to be conservative and create room for outperformance. I do expect us to be in that 800, 850 range by the end of the year. Rate, lost cost trend, and how does the whole of this translate into outlook? I I mean, we'll talk more about this in November. So, I mean, by that stage, we'll be a bit closer to next year. We can maybe make some statements that don't sound as philosophical as what I'm about to say might sound. I mean, I think there's the mechanical part of this, which was the question that was asked earlier. um about how does this um uh impact uh 2023 so there's within the commercial business we've got a margin expansion that's going to continue to benefit us um through that period um i think generally the uh i mean as we look at our ambitions for into the future i think probably i have a sense that the market potentially under underestimates Maybe not so much the rate trend, but the benefits we're going to get from being able to expand the portfolio and grow into some of the areas where we've built really solid foundations that we talked about as strategic priorities three years ago. And I think the other thing, which is currently a bit negative, and you can see it in the more personal lines-oriented players, retail is not having too much fun, especially retail auto. I guess a couple of times this year maybe I've been a bit too optimistic about when we'd start to see the market respond to that, but I still believe you will start to see a sharper turn in the retail market in a way that potentially benefits 2023 much more than it has 2022. So I think from a how does it all translate into outlook, it's not going to change much in the second half of the year, but I think there's there's a longer run to this particular story than I think many people appreciate currently.

That's very helpful, George. Thank you very much indeed.

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

Thank you, George. Thank you, Mario. Just so first of all, thanks for this slide, which talks about the inflation and rate trend by line. It's fascinating that the motor line has exactly matching rates and inflation. George, is that possibly due to commercial auto, which is probably the line for the U.S.? Is that probably that commercial auto is not feeling the same pressure of retail auto that you just even mentioned? Please just comment on that, please. Second question is just on the reinvestment yield. Could you just clarify the guidance for the 50 to 100 million not take. That's presuming the 30th June or 30th July or 10th August because what's happening is obviously not anybody's fault but the US yields are down and also volatile. So I'm just wondering and the reason also I asked George is because this has happened I think in 2018 as well that the reinvestment yield had briefly exceeded the booked yield, but then obviously was for a short period of time. And, you know, the gap has narrowed if you mark the market today. So I'm just curious as to how to understand this guidance. Thank you.

Yeah, great. Thanks, Vinit. So on the auto point, first of all, so why, and I guess I would translate the question as why are we not seeing it being more negative given that that's probably the more predominant picture in retail. And I think you pick out the answer to the question, at least partly. I mean, I wouldn't celebrate commercial auto as a beacon of necessarily all the price trend and lost cost trend that we'd like to see. The lost cost trend is really heavy on commercial auto, just as it is in retail auto, but there's more rate there at the moment. at least partly because of what we've seen in the past around commercial in general. I think the other thing that you need to keep in mind when you look at our auto book and you look at which markets contribute to it, the Swiss business is still the largest part of our motor premium. Now, it's not that the Swiss market is completely immune to inflation. We discussed it a bit back at the Q1 call. But the dynamics, given effects, et cetera, are really quite different to what you might be seeing elsewhere. So I think we have two things that maybe allows us to present a slightly more positive picture. You've got a combination of slightly different dynamic and commercial, but also a wee bit the Swiss picture. On the second part of your question, Apologies, it will make it seem dated. I mean, it is the 30th of June just because it's really hard for us to pick another day on a particular day that might be more relevant because by the time we've done that calculation, it would be irrelevant again. So 30 June is the date we've chosen. So there has been a move since then. Thank you very much.

The next question comes from William Hawking from KBW. Please go ahead.

Hi, Georgia Murray. Thank you for taking my question. George, back on the solvency roll forward on slide 44, within the very high ratio, I'm quite surprised by the fall in the absolute available capital. It's down more than 10% because of market movements. And I guess I'm just surprised by that both directionally and the scale because I thought in absolute terms, you're predominantly a non-life business and you were quite duration matched. So why is your available capital bouncing around so much? And if I could append to that, I've heard very clearly what you said about the sensitivities, but the thing that I'm still a bit uncertain about is that directionally, your sensitivity to bond yields has gone up since you last disclosed it. Based on my basic understanding of the theory, I would have thought that in a high yield environment, your sensitivities are going down. And then secondly, if you, given how much work you must be doing in the background, if you were reporting this first half under IFRS 17 and 9, What do you think you'd be saying that's different to what you're telling us today? Are there any interesting differences directionally that you think are worth mentioning compared with what we're looking at in the current operating numbers? Thank you.

Thanks, Will. So I'm the first one on absolute capital market movements. I mean, we are a liability-driven investor, but as you can see from the balance sheet, it's not just fixed income, government. I mean, we have credit, we have equity, we have private equity. And as you guys have seen, that's all been impacted. So that's bound to have an impact on AFR. That's a risk we accept when we make the choices about the strategic asset allocation. Given the amount of risk that we take there, we think it's a reasonable use of the diversification of capital within the overall model. On the sensitivities, so I haven't tried to model personally whether the change should have been positive nor negative. We've given you the updated sensitivities for Q1. The move that you've seen is in line with that. I mean, for me, the most important point is that by the time we deal with the closure of Italy and Germany, the number will definitely be smaller because that was the whole point. But we'll come back to that later in the year. On IFRS, I ask you to bear with me. So I don't really want to preempt the call from September. So I'll save commentary around IFRS 17. I mean, the very high-level thing I would say is that, certainly from a P&L perspective, given that the vast bulk of what the group does is either P&C or farmers, I mean, you would expect that the impact from an earnings perspective on ours would be at the far more modest end of the spectrum. But we'll get into it in more depth in September.

Can't wait. Thank you, George.

If I thought I could sell tickets, maybe we could have some room.

The next question comes from Dominic Omahony from BNP Paribas. Please go ahead.

Hi, folks. Thanks. Just two for me. Just on farmers, from the slides, it looks like you're anticipating really very, very strong pricing from here, which which should be very helpful. I'm just trying to work out to what extent you're expecting that to be offset in volume, given the comment about the surface position. Should we be expecting quite a sharp drawback in volume? Is that what you're seeing in the numbers that you're seeing? Or actually, is it more moderate? And could a lot of that rate be kept when it comes to the premium? And then the second question. Just in terms of inorganic capital allocation, I realize there's a limit to what you can say, but to the extent that there is inorganic opportunity for yourselves, what I noticed when I look at your last six years, there have been three major areas that you've built. One is Australia, another is Latin, and the third is Asia. Are those still areas that you're excited about, that you see as priorities for building out, or actually are they done yet? and other areas that you'd see as priorities. Thank you.

Yeah, thanks, Dominic. So on farmers, I mean, I know you know this, but just for everyone's benefit, obviously you're looking at the net of policy count impact versus rate. I mean, from a volume perspective, it's quite hard to say in advance exactly what the dynamic is going to be. I think at this stage, I mean, there will be some impact on policy count. But I think in contrast to maybe the experience that farmers had, say, five or six years ago or even longer in prior cycles, it's a very broad-based issue across the entire industry. I mean, you see it in the Q2 numbers across the US auto sector. So I don't expect the policy count side of this to be a particular issue. So I think we expect to benefit far more from rates coming through on the fee than we will from slippage, suffer on slippage from the volumes because of the action they've taken on profitability. And I think that's mainly, that consideration is mainly driven by that relative market performance. I mean, there is one caveat to it. So, I mean, farmers, I think as everyone knows, is number one market, not surprising, is California. California is currently one of the more difficult markets you've seen a number of players respond to the inability to get pricing by essentially withdrawing. We don't expect that challenge on pricing to remain for an extended period because there needs to be an orderly market in California. I don't know quite when that comes. We're not in control of that. But we do expect that to benefit both the exchange and Zurich in the future. But the The view into next year and the guidance that we're giving is really based on an assumption that the relative challenge that most of the players are experiencing will, to some degree, protect the market share position of the exchange. On the inorganic capital allocation topic priority, it's a tricky one. If you look at what we've done in the last few years, And let's imagine we had this conversation in 2016, and maybe we did. I'm not sure we could have precisely predicted what was going to happen. And if you look at the large things we've done, so you've highlighted LATAM, you've highlighted Australia, Asia, more generally. I mean, more recently, farmers, as we discussed on the call.

Can I make a comment myself? Because I thought while George was answering the other questions I mean, the only pattern you can find in our M&A profile geographically is that there has been very little in Europe. And this is because of the scarcity of properties in Europe. But other than that, I wouldn't draw any conclusion on priorities because, as George was starting to say, we have done acquisitions in the U.S., crop and farmers. We've done acquisition in South America, in Asia-Pac, in Australia. And so, yeah, the only lesson or the only rule that I would throw out of our actions in the past is that we find scarcity in Europe.

That's really helpful. Thank you.

The next question comes from James Shark from Citi. Please go ahead.

Oh, hi. Good morning. Good afternoon. I'm just keen to get an update on your tactical reinsurance that you're using in US property side of things. Has rate improved enough there? Are you looking to perhaps allocate a little bit more capital by reducing some of that tactical reinsurance? Secondly, in terms of crop, obviously, as we went into planting season, you would have put through anticipated rate increases, do those rate increases kind of look adequate for what we're seeing now in terms of the weather and the likely yields? Thank you.

Yeah, thanks, James. So on the reinsurance topic, so the two contradictory things we need to manage, so just given the trends, probably we would accept more of that risk. However, as we discussed earlier in the call, we're pushing the US to limit their NACA exposure. For them to retain more, they would need to find a way to exceed the targets that we've given them. I mean, that's not impossible by any stretch of the imagination. But I mean, that contract, since its inception, which I think was back in 2016, I think has reduced just about every single year. I wouldn't be surprised to see it reduce further at the end of this year. On crop, the dynamic on crop is really established by the commodities markets. So you look at price and volatility over given periods in Q1. That tends to set the price levels. We then decide which parts of the portfolio will be seeded into the reinsurance scheme that's run by the federal government They were into planting, growth and harvests. I mean, so far, things look pretty normal. I mean, there's a better drought in some parts of the US. I mean, you guys can see it on the public sources. There doesn't seem to be anything that's a particular challenge in the key markets where we operate. We're particularly exposed on soybeans and corn. But of course, we still have quite a bit to run before we're deep into the harvest. From what we've seen so far, this looks like a pretty normal crop year with normal crop profitability.

Great. Thank you very much, George.

The next question comes from Michael Hutner from Bernberg. Please go ahead.

Thank you so much. I have three questions. One is a facetious one, but maybe it's serious. I don't know. How much stock are you buying yourself? If I listen to your confidence, which I share, but maybe not enough, combined ratio of fantastic growth will be even more. So you should become like Warren Buffett and say, my stock's the best and forget anything else. I'm not sure it's a very serious question. The second one is on life. My understanding on life, yeah, and it's a way to say what a great job you're doing. And then on life... My understanding is the guidance has been slightly amended, maybe not reduced, to do it in local currency rather than U.S. dollars. And I think I understood mid-single digits, and I couldn't quite reconcile that with the figures I see, which seem to be above 10%, so that is kind of maybe good. And then the last question is, I see an RE of 15%, 15.7. If you can do 15.7 with... like mountains of excess capital. What's the real figure? Thank you.

Thank you very much, Michael. On the first one, I think it's a matter of public records. So you can find not only Mario and my personal interests in the company, but also that of all of our colleagues. And you can look at whether there are any individual transactions. They're not identified by name. but you can certainly see what levels of interest we have in the group. And they're very substantial. So not really a facetious question, I think, Michael, quite a serious one. From a life perspective, so I think we always intended that the guidance was going to be local currency, but of course this year we're we're suffering just a touch more stress because of the Euro biased nature of the life business. So from an underlying perspective, I think the life business is doing really well. It continues a really strong track record. So very happy with the underlying performance, but we're just not in control of that exchange rate. It's just not a practice to try and hedge it. We just don't think that's a good use of the group's resources. Now on the rate of growth, So, mid-single digits, the above 10% part. So, I mean, one thing to be a wee bit cautious of here, I mean, our life business has, in prior periods, had a bit like the answer I gave to the GF&O question earlier, skew to the second half. I don't think we'll see quite the same skew for life this year. So we should see a more consistent and steady emergence of performance. So very happy with what Life is doing. Mix is good. The focus on the products that we like is good. The impact of the back book transaction starts to transform the balance sheet for Life. But the dollar strength is just a touch less helpful to Life's headline than it is elsewhere. 15.7, what's the real ROE? I mean, we worked really hard. Well, the entire group worked really hard to get it to 15.7. I mean, we'll bring forward whatever set of targets we decide are the appropriate ones and which KPIs we think are the most appropriate ones to the investor day in November. And maybe we just hold that question until then.

Thank you very much and really well done. Thank you.

The next question comes from Thomas Fossard from HSBC. Please go ahead.

Yes, good afternoon, gentlemen. First question will be on the bag book. George, in the past, you've been very useful in highlighting what you were working on and possibly how close you were in actioning some of these books. Now you've done Italy and Germany. Can you please update where you're standing currently and what is your next priorities, be on the live side or on the PNC side? And the second question will be, in light of a potential economic slowdown in the U.S. slash recession, how should we think about your... a commercial book in North America, any actions or mitigating actions that you have already implemented in order to maybe limit some of the downside if anything possible. Thank you.

Yeah, okay. So on the first one, I mean, even though I think it was kind of quasi-public knowledge, we've tried to avoid publicly acknowledging which parts of the book we were working on at particular periods in time for, I guess, reasons that are perfectly obvious. So I'm going to avoid being specific here. I mean, back at the investor day or the investor update in November, I had highlighted that we had, we certainly had more than two topics on the agenda at various stages of development. That continues to be true today. There are other parts of the back book that we would like to take action on. I think the challenges in these books are maybe a bit more traditional, so they're not the relatively unusual nature of the challenge that the German back book brought us. Maybe more traditional in terms of risk type, profitability, other corporate finance elements. But they are, I mean, they're obviously, they're in the pipeline behind the things that we've just done. And they will take some time to come to fruition. But we're not done yet. I don't think we continue at the same scale that you've seen necessarily. But I mean, this is a project that to some degree probably never ends. It continues well into the future. Economic slowdown, recession, I mean, tricky to say that, I mean, given the scale of market position in the US or globally around commercial insurance, it'd be relatively tricky to position the book to perfectly avoid the effects of economic slowdown or recession. I mean, the one thing that if we get a fairly traditional economic slowdown or recession, I guess we'll focus a bit less on inflation than we do currently. but we're not there yet. I think the way that the team in the US have positioned the boot coming into this phase of the cycle, and I think maybe it was implicit in the commentary earlier. I mean, the structure that we have and the particular sectors that we're exposed to from a commercial player perspective has meant that we don't see the same impact that you might expect from CPI. So, I mean, there are things that we can do at the margin to help us soften the impact of these things, but it would be very hard if we see a broad market-based slowdown or recession to be free of the effects of it. We just could not be.

Thank you, John.

We have a follow-up question from Vinit Malhotra from Mediabanca. Please, go ahead.

Thanks for the opportunity. So my question was just on the slide number 6, please, which is on retail and the net promoter scores and, you know, the growth in the customers and the satisfaction. And I see some big moves there, Italy 8 points, Asia 5 10 points. Could you just comment on what's happening there and also in the context of, I think we've had the discussion last quarter as well between retail and commercial and where the emphasis is and put everything into perspective and also these big moves in these markets. Thank you.

Yeah, thanks, Vineet. So you need to exercise a bit of caution with this slide. So it's absolutely correct in terms of the change. It doesn't give you a sense of where things are from an absolute perspective. I mean, the system itself is obviously something that originates in North America, so we try and be quite careful about the application of it. But, for example, if you look at the farmers' exchanges down one versus Asia-Pac, Japan, in this case, up 10. Farmers' exchanges' absolute level of customer satisfaction is very, very high. Japan is catching up. And I think what you're really seeing here is that, I mean, it's the old adage that if we set targets around things and measure it and measure My colleague, Connie Culture, who's responsible for the customer experience side of things, in particular setting targets and managing the business to those, helping the businesses manage to those targets, has exactly the same approach to this issue that I have on the financials. So I think that's why you're seeing this. We put a lot of effort into this. Connie has asked all the businesses to expand a number of touch points. that they look at so that we get a very broad-based understanding of where we have issues so that we can actually look at things we can execute on to change the outcome rather than focus on one overall number. That's very hard to understand what the attribution of that would be to the various interactions that we can have with customers. So, I mean, we're obviously very happy with the direction. I think all the businesses take this very seriously. It's part of a compensation system, so they need to take it very seriously. But we're really pleased with the progress that we make here. But be careful when you compare the deltas. There are businesses that are making lots of progress, but a slightly different starting point compared to some of the others that are already in a good place.

Also, Vic, the market standards are quite different. So the customer satisfaction idea in Japan is not precisely... same you find in other markets. Also, be aware that at this point, we have customer satisfaction targets in almost every BU. We did not start like that. We started progressively, and now with this year, we have brought it into the target cards of practically all BU's we have around the world.

Thank you, Mario.

Thank you, Josh.

The next question comes from Jan Piers from Credit Suisse. Please go ahead.

Hi, thanks for taking my questions. It was just a couple on the life side. In the slides, it sort of mentions that the business margin in life was impacted by some assumption and modeling updates. I was just wondering if you could elaborate what those were. And then on the life side in the US, it mentions in your own book that you had some slightly negative claims experience on a sort of ex-COVID basis. If you could just elaborate on what was driving that and if there was anything in the farmer's life business as well on a normalised claims basis that was worthy of flagging. Thanks.

Yeah, thanks, Ian. So on the new business margin, essentially what you're seeing there is it's a catch-up of some of the changes that we made from an AFR perspective last year. You may remember that, I think I mentioned it, maybe it was Q3 or Q2, that we had an anticipation of IFRS 17 and the transition date for IFRS 17, which was 1-1-22. We were making some adjustments to best estimates from the life business that impacted AFR, reduced AFR. That flows into new business margin and new business value with a lag. So you're seeing really the effects in a revised new business margin calculation of something we did already last year. Claims experience, the challenge with the Zurich Lifebook in the US is quite a small book. It's quite concentrated, so you can get reasonable amounts of volatility that, I mean, from a group perspective overall, really don't make a particularly large difference, but it does mean that the the claim experience can bump around quite a bit on the Zurich North America life business. We don't see anything there that's a particular issue or concern to us. On farmer's life, I mean, the only issue of note, I think we commented it already, maybe Q1. I think we also had given it an outlook in February. I mean, they have, I think they had about 32 million of COVID claims in the first half of the year. Almost all of that is in Q1. And I think as we look at more recent months, mortality is trending around normal compared to what we would expect to see. So we're not seeing a mortality issue outside of the last remnants of COVID in the US.

That's great. Thank you.

We have a follow-up question from James Chang from City. Please go ahead.

Oh, thanks for taking my follow up. Um, so two for me, firstly, the US PNC business, you've been rebalancing that towards specialty lines and properties to the shorter tail stuff. And a few years ago now, I suppose it was highlighting the inadequacy of race on some of the liability lines. At what stage do you get in a position with the higher interest rate environment with with rate increases coming through to to revisit that strategic allocation? That's my first question. And then secondly, Mario, if we look at the commercial P&C kind of industry, it's a very fragmented one. And one could argue that digital initiatives and various other things mean that scale starts to matter more than it ever has done, whether that's risk prevention or whether it's sourcing of various things. So I'm just keen to get your view on structurally how this industry might be changing and do you think that having bigger scale means that over time you're able to grow market share both in the US and globally?

Thank you. I'll do the first one, James. So on the rebalancing, I think we viewed that and continue to view that as strategic. So the I think it's about having the right mix of risks in the portfolio rather than a short-term view of the particular trends that impact the various components. And the reason for that is, I mean, at the margins, we could probably push it tactically a bit one way or the other, but we can't really completely transform it. And I think if we try and transform it, you end up trying to chase something over time. And I don't think you're ever guaranteed that you get what you want when you do that. So even though I think the market is generally of the view that longer-term lines are in a more attractive place than they've been for quite some time, I'm not sure it changes the fundamental long-term risks that come with them, and therefore we haven't really changed our appetite around them in any significant way.

On your question, James, on market concentration in property and casualty, I would draw a line between commercial and In retail, I think in retail the market has concentrated. With the hardening, a number of marginal or tactical players left the market and haven't seen them back. I think there the market will further concentrate over time because of the importance of skills, data, capital, business experience. but we will see that as a natural progression starting from what we have today. Retail is a much more complex picture because the market is highly fragmented. There hasn't been any visible trend yet. Not easy to find reason for acceleration of this except customer satisfaction. We have been gaining customers because we have been following a policy of targeting customer satisfaction. The customers that we have won have left other companies. So if you sum up this over three years, there are many millions of customers who have left other companies to come to us. And this is the main trend I see in retail. Customers moving. in deciding which company should be bigger which company should be smaller and eventually disappear and i think this will continue over time but it's a slow it's a slow move and although it's a continuous leakage um you you see the consequence in a number of years and not in every single year does that make sense to you james um you use the word

retail a bit too much? Were you saying that the commercial market has become more concentrated or the retail one? I'm just thinking about the U.S. commercial.

Well, yeah, but it is fragmented on the low end. If you go on the high end of the market, if you go to the real global corporate business or even the mid-market, you know, The number of players have concentrated after the crisis, and it's a market which is fairly dominated by, let's say, five, six, seven players. You could find others, but fundamentally these players lead the market, and all customers contact these lead players. And same is, I would say, in Europe. Commercial has concentrated already, which doesn't mean that you don't find marginal suppliers, but they are marginal. I mean, so they don't really make prices and they're not taking its benchmarks.

That makes sense. Perfect. Thank you very much.

The last question for today comes from Michael Hutner from Birnberg. Please go ahead.

Thank you very much also for this opportunity. Two questions. One, Australia, or I shouldn't name it because it was in your capital markets there presentation. You had highlighted three. You've done two. So I'm just wondering whether the last one, which I assume is Australia, but I don't know what the update is on that. And the second is on the Rhine, what would the exposure be to the stop in traffic there? Thank you.

Thanks, Michael. So I don't remember confirming the geographic location of any of the things I put on the slate. So if I suggested that anything was any particular country, that was accidental rather than deliberate. So I think, as I said in reference to someone's earlier question, obviously I'm not going to identify the territories in advance other than to say that the In the same way that we continue to look outside for things that can add to the group, we're well aware that within the group there are parts of the capital that could be working harder for us and we'll continue to look for that. On the Rhine topic, at least based on what I know today, we don't have direct exposure to the things that have been discussed about river level. It's not inconceivable we might have some secondary exposure. Today I'm not aware of of anything that would make this a significant event for us.

Brilliant. Thank you very much.

Excellent. And with that, we'll end the call. Thank you, everyone, for diving in. If you have any more questions, please reach out to one of the Investor Relations team. Thank you.