Good morning or good afternoon. Welcome to Swiss Re 2019 Annual Report conference call. Please note that today's conference is being recorded. At this time, I would like to turn the conference over to John Dacey, Group CFO. Please go ahead.
You dialing in from the Americas, welcome to today's Q&A. Joining me from the Swiss Re side are Edi Schmid, our Chief Underwriting Officer, Philip Long, our Chief Actuary, and Philippe Brahin, our Head of Investor Relations. Because of the current special situation related to COVID-19, Edi, Philippe, and I are in a room in Zurich, maintaining the recommended distance from one other, of course, while Philip Long is in London, joining by phone. Today, we publish the 2019 annual report, which includes our EVM or economic results and our Swiss Solvency Test reporting. We also published our P&C loss ratio development triangles and our sustainability report. As last year, we have prepared a presentation focusing on the most relevant areas of our disclosure, we will briefly take you through this in the next few minutes, highlighting the most important elements.
Firstly, on the economic results on slide four, we provide an overview of the main drivers of the 2019 EVM results. An elevated level of large Nat Cat losses and ongoing adverse U.S. casualty trends significantly impacted our results. There was a counterbalancing effect from the strong performance of Life & Health Reinsurance, as well as an excellent investment result. This led to economic earnings of $2.9 billion in 2019. Details on how this breaks down into the performance of each business segment can be found on the subsequent pages. Moving on to slide 10, we remain focused on delivering our group financial targets. In 2019, the economic net worth per share growth was 8.2%, representing an improvement compared to 2018 but still below our 10% per annum target over the cycle.
Moving on to the section on our economic record, we have demonstrated significant economic earnings strength over time, providing the basis for our capital generation, dividend, and reinvestment capacity. As you can see on slide 13, we have generated about $3 billion US dollars of economic earnings per annum on average over the last five years. This is mainly driven by strong EVM profit from new business, representing the value of new business written in each year after reserving for our cost of capital, as well as the capital cost releases for underwriting investments. While there can be movements from prior year developments or debt costs or tax, these are expected to average closer to zero over the long term.
Today, we also published the group SST ratio as of January 1, 2020, which stood at 232%, including the proposed regular dividend and share buyback program on which the AGM will vote in a month's time. Clearly, the financial market volatility experienced globally since the beginning of this year will have impacted our SST excess capital and therefore our group SST ratio. As things continue to evolve, the board of directors will evaluate the appropriateness of launching the buyback program in the second half of 2020. We will make a decision based on our usual capital management priorities with the best long-term interest of our shareholders in mind. Nonetheless, let me reiterate that the Swiss Re Group remains strongly capitalized and resilient to market shocks.
We've had the chance to do an interim update ahead of our regularly scheduled board meeting yesterday, and I can tell you that as we began the week, the group's SST was comfortably above 200%. Our capital position is also superior when compared to peers as you can see on slide 18. On a Solvency II basis, without the application of any transitional, volatility, or long-term guarantee adjustments, our ratio as of the January 1st would have been in excess of 260%. On slide 22, we show the moving parts for the group SST 2020 ratio. You can see that the contribution of our economic earnings, the capital we deployed into the business through our P&C renewals, and the growth in Life & Health Reinsurance, the impact of our de-leveraging, and finally, our strong capital repatriation to shareholders during the course of the year.
I'd also like to point out on slide 24, on which we highlight our financial flexibility, particularly through the debt de-leveraging, consuming capital not counted as part of the SST capital, and our increased use of third-party capital for selected risk pools. We have also updated the overview of dividend upstreams to the group for you on slide 25. The overall capital repatriation for the 2015 to 2020 period would amount to $13.6 billion. I'd like to conclude my introduction with some comments on the COVID-19 pandemic, which you can see highlighted on slide 21. The group is closely monitoring developments as the situation evolves. As you know, we've developed a proprietary pandemic model to assess scenarios and enable active monitoring. Let me elaborate a little. First, I'd observe that Swiss Re's own business remains resilient in the current environment.
We have long spoken about the depth and breadth of our relationships with our reinsurance clients. That is again serving us well as we continue and increasingly operate remotely. For example, our April 1st renewals focused on Japan are proceeding without any interruptions. Our reinsurance revenues are secure. On proportional covers where primary companies premiums are below expectations or may be below expectations, there may be some impact on our revenues, but we have yet to see anything material. There may be more impact in our primary businesses revenues, but it's too early to say how much. Second, the major impact of COVID-19 on the insurance industry to date is on the asset side of the balance sheet. We entered 2020 with an extremely strong balance sheet overall and prudent positioning on asset risk.
As the pandemic started to unfold, we have put in place hedges that partially mitigate the economic impacts of falling equity prices and widening credit spreads. We have also recently opportunistically lengthened some durations as a partial hedge against further yield decreases. Third, there are potential impacts from this pandemic on our P&C and life and health businesses. We assess all of these potential impacts to be entirely manageable at this point. With respect to event management and cancellations related to specific events, we believe we have an overall market share of approximately 15% to event covers that could be claimed due to COVID-19. We have a specific exposure of CHF 250 million to the Tokyo 2020, and a mid-three digit exposure split between CorSo and P&C Re for other events scheduled over the rest of the calendar year.
We have potential exposures through our credit insured lines at reinsurance and CorSo, but it's premature to estimate any exceptional losses due to COVID-19. Similarly, it's too early to give any indications of industry and Swiss Re's losses related to business interruptions. While the vast majority of property and business interruption covers have a physical damage trigger, some policies may not, and those that do may have specific sub-limits that provide modest covers independent of physical losses. We remain vigilant and continue to support our employees and our clients as the global economy, governments, and society continue to weather this pandemic. With that, I will hand over to Philip Long, our Chief Actuary, for the next session of the presentation.
Okay. Thank you, John, and good day also from my side. The materials published today also include the P&C loss ratio development triangles on an underwriting year basis on which I will provide some remarks. As you can see on slide 27, these triangles cover approximately 75% of our total P&C reserves, as they do not include asbestos and environmental reserves and some other business, including the pre-2004 business. Before we go into specifics, I'd like to point out that our overall reserving comfort is maintained across the group's P&C reserves, and that the adverse trends experienced in U.S. liability, which we highlighted with our U.S. GAAP full year 2019 results, are manageable in the context of our large and well diversified book. Taking a step back, as you may be aware, Swiss Re applies a best estimate approach to reserving, as required under U.S. GAAP.
On slide 28, we have set out a reminder of the reserving philosophy and governance process at Swiss Re. This process remains very robust and transparent. To outline how the process works, when contracts and transactions are concluded, the estimates of ultimate claims are typically based on the assumptions underlying the original pricing of the business. Over time, as the claims experience develops, the actual reserving methods gradually give more credibility to the actual experience, reserves are adjusted from the initial loss ratio. To allow this to happen in a timely manner, we have multiple feedback loops in place between the pricing and reserving actuaries. These links are vital and also take into account qualitative information on trends and market conditions and information from our clients. This aims to improve reserving accuracy and to enable Swiss Re to react faster when actual experience deviates from expectations.
Whilst reserving actuaries propose reserves, the decision is made by regional and business unit management at the regional reserving committees and finally at the group reserving committee. The strong governance process in setting best estimate reserves is complemented by the second line of defense role played by my team, Actuarial Control, who carry out regular independent reviews and assess the positioning of reserves within our range of potential best estimate reserves. Moving to slide 29. You can see the actions taken in late 2019 as a result of increased client notifications, reflecting the functioning of this challenge process and the respective feedback loops. The slide shows the marked pickup in claims notifications in U.S. liability for both P&C and Corporate Solutions at the end of 2019. This led to immediate increases in case reserves as well as IBNRs, as Swiss Re utilized the most up-to-date information to set reserves.
Evidently, these reserve actions led to an increase in our 2019 ultimate loss ratios for U.S. liability lines. As illustrated on slide 30, these increases were offset by improved pricing for both reinsurance and Corporate Solutions. Actions taken to reduce casualty exposure which did not meet profitability levels and selective attractive growth. These actions justify improved profitability for our casualty portfolio. Now, I would like to reiterate the Swiss Re Group's overall reserving strength. Based on the measures taken at the end of 2019, our P&C reserves remain positioned on the upper half of the best estimate range between the 60th to 80th percentile. This also holds true for casualty reserves alone. Liability reserves remain adequate, as book reserves are closer to, but above the midpoint of the best estimate range.
We continue to monitor developments closely in the face of ongoing industry uncertainty and will continue to respond in a timely manner. Overall, Swiss Re has a large and well-diversified P&C reserve book and has the resilience to absorb volatility. With that, I'll hand over to Philippe Brahin, who will introduce the Q&A session.
Thank you, Philip and John, and good day to all of you also from my side. As usual, before we start, I'd like to remind you to please re-register yourself if you have follow-up questions during the call today. With that, operator, can we take please the first question?
The first question comes from Andrew Ritchie from Autonomous. Please go ahead.
I hope everyone's keeping well. First question, SST sensitivities. Judging by what you said, John, if the current ratio is well north of 200, and the actual sensitivities have been less than the disclosed ones, could you just give us a sense as to what the hedging has done with respect to the sensitivities? Could you also, on the same topic, tell us roughly what the sensitivity to credit would be excluding ReAssure? The only other second question I had, you didn't talk about life claims in relation to COVID. Could you just remind us what the underlying assumptions are behind your disclosed pandemic stress? Thanks.
Sure. Maybe I'll ask Edi to answer the second question. With respect to the sensitivities, you're right. Some of the hedges that we've been able to install in February and even this month have dampened the impact of the declines we've seen in equity markets, those present interest rates. I think as a guideline, what we present on page 20 is still directionally the best starting point. While these hedges may be in place for now, we are managing them dynamically, and I think it'd be premature to give you a different set of sensitivities. The other thing I would say is some of these lines, and especially with respect to interest rates, are not necessarily linear, but have a convexity dimension to them, especially over larger movements. As a result of that, I'd be cautious about trying to get a little too precise here.
We currently would plan to give you a formal update based on the July 1st numbers. We'll see what might make sense in providing more information about the sensitivity and/or the overall position when we give our Q1 results at the end of April. With respect to the impact of reducing ReAssure, I think the sensitivity on credit spreads would probably drop by a couple percentage points, call it 2, for an estimate. The good news is the ReAssure portfolio itself was prudently positioned going into this crisis. I think there's no unpleasant surprises there for us or for Phoenix, and we continue to believe this transaction is on target, as we said, to be closed in the beginning of the third quarter.
I'd simply reiterate the other point with respect to that transaction that the positive impact on SST from divesting ReAssure is not in the 232 calculation. In spite of where financial markets have gone, we still believe that's going to be an uplift right now. We'll range it between 10 and 12 percentage points. I think previously we might have said 12 percentage points, it might not be quite as impactful given where we are. It may end up that way. Edi, on the pandemic?
Yeah, thanks Andrew for the question. On our life and health exposure, what we disclose is the one in 200 year pandemic loss, which is on an updated basis, as we disclose, $3.1 billion. Let me give a bit more color how this number is derived. Obviously, pandemic has been identified as a key risk factor for our mortality business a long time. Similar to the Nat Cat space, we have a lot of in-house expertise and built a pandemic model for a number of years, which is in the end, a probabilistic model. You have to picture something like 50,000 different pandemic scenarios applied to the underlying mortality book, which is then described in terms of regions, density of people, the age distributions. All these 50,000 scenarios are run on the population, and then we come out with this loss distribution curve.
The one in 200-year point on that curve corresponds to $3.1 billion. Maybe try to make it a bit more tangible how such a scenario could look like that is equivalent to a $3 billion loss level. Just on a high level, we would talk about excess mortalities in the range of something like 1 per mil. Again, it will depend in each country, depending on the distribution of people, the capability of the healthcare system. Just as a rough number, we're talking about 1 per mil excess mortalities. Maybe I just pick one or two countries to make it a bit more tangible. If we were to look into China, because that's where COVID started and give a perspective. In our pandemic stress scenario at that level, we would be talking about an excess mortality of 1.82 per mil.
This would actually mean that in China, 2.5 million additional people would have to die to reach that level. As you know, today in China, we talk about a bit more than 3,000 people. Obviously, we are far away from that level. That's China, where we have a conservative assumption. If I look, for example, into the U.K., that kind of scenario would be equivalent to an excess mortality of 1.2 per mil. If you apply this to the U.K. population, we would be talking about something like 80,000 additional people killed from this pandemic. Obviously, at this point, it is all very uncertain how it evolves. As China has shown, it's very important that government societies really take decisive measures to slow down or stop the spread and to avoid that the healthcare systems are being overburdened.
Hopefully with these two points in China and in the U.K., it gives you a sense of what level of excess mortality we are talking about. It's very clear that as at this point, we are far away from that scenario, but we now really hope that the measures are taken so that this virus can be contained, and then also the consequent death toll should hopefully be quite limited at the end of the day.
All right. Thanks, Andrew, for your questions. Can we have the next question, please?
The next question comes from Kamran Hossain from RBC. Please go ahead.
Hi. Afternoon, everyone. I just want to touch back on solvency and the SST ratio. I know it's really good news that it will come to above 200. Can you just confirm whether the buyback assumption is still included within that comfortably above 200 or whether there's some kind of pro-rating or assumption that's not in there? The second question is, hopefully, we never reach this point, but what flexibility do you have to run below 200% on an interim basis, given that you will have a uplift from ReAssure coming later in the year? Thanks very much.
Sure, Kamran. I'll take both those. On the first one, we've continued to include a deduction for the share buyback in the calculation of the 232. If it turns out that we decide that the share buyback would not occur, that would be another 5, maybe even 6 percentage points in the SST ratio due to the available capital that's therefore remaining in the group. I think that conservatism is appropriate. The board discussion yesterday was we're in the middle of a very challenging situation. It's challenging for us. It's also challenging for our clients. We'll see to what degree that has an impact on demand for reinsurance over the next quarters.
You could certainly imagine a situation where we see real opportunities to put capital to work on a going forward basis to help serve some of our clients who might be interested in either removing some of their own risks and or enhancing their capital through the use of reinsurance. With respect to the flexibility, I'd say we talk about 220 as a target. I think the board appreciates that we are in this challenging environment where there are areas of stress. We've been proactive in managing what we think are some of the bigger sensitivities that are posed by the financial market movements, and frankly feel pretty comfortable that we've done a good job of managing the volatility and positioned to continue to manage that volatility.
I think when I say we are comfortably above 200, it doesn't mean that 200 is going to be the point where we stop writing business. We have the ability to adjust around that, so long as we continue to maintain the dialogue with the board. I would also say that in addition to the 10 to 12 points we expect when we close the ReAssure deal, we do have sitting on the sidelines here, the $2.7 billion of contingent capital available to us at our discretion to bring into our capital structure. Again, none of that is counted in the 232 SST or the number that I just gave you, which is indefinite, but comfortably above 200.
Thanks, Kamran, for your question. Can we have the next question, please?
As a reminder, if you wish to register a question, please press star and one. The next question comes from James Shuck from Citi. Please go ahead.
Hi, good afternoon, everybody. I hope you're keeping well. Thanks for taking my question. Two things from me. Firstly, on the casualty side of things, I'm just trying to get a feel for where we're at in terms of that reserve development and loss picks given what's happening in the markets as of now. I appreciate your direct exposure to event cancellation, business interruption, et cetera, that might be quite limited. One might expect a casualty crisis 2.0 possibly emerging in 2020 for all sorts of reasons. Edi, I'd be keen to get your view on the outlook on sort of reserving and loss picks on that side. Secondly, just a point of clarification. I know that you're saying that you expect ReAssure to close at the beginning of Q3, and you've been pretty clear on that.
Might it be possible a material adverse change clause be invoked at this stage, or something similar? Just clarify on that point, please. I guess the final one was just around the debt situation. I think you mentioned the $2.7 billion pre-funded sub-debt. You've got $1.9 billion of drawn letters of credit. At what stage would you look to draw down more of those letters of credit, and to actually draw down on that pre-funded sub-debt given what's happening in markets? Thank you very much.
All right, James. Thank you. Maybe start, Edi, on the loss developments casualty.
Yeah. Thanks, James, for the question. I think your question is quite a difficult one to project of kind of the impact of the COVID development, recessionary outlook overlay with the general Nat Cat development in the U.S. I think that's quite a difficult picture to paint. I think excluding COVID for the time being, we really remain on the same view as we were before. U.S. liability has been a very tough space to explain the situation in terms of low rates the last couple of years. The very aggressive tort environment leading to increased severity driven by social inflation on particularly covers in lead umbrella or excess. I think that's continuous. The underlying market has reacted a lot. Rates are going up a lot. Limits offered by carriers are going down. I think that development will just continue.
What now will be the additional, let's say, impact of COVID-19 and recessionary outlook, I think there's many factors, pluses and minuses. You could argue that a recessionary outlook could dampen inflation, so have a positive impact, but there will also be some coverage challenges out there. It's really hard to predict. I think at this point, as you pointed out, we have exposure, as John explained, on event cancellation. Credit insured is exposed, but again, it depends on how the recession develops in terms of scope and depth and length, and then there may be exposures also on the business interruption side. I think John explained that in the beginning, that usually it really requires physical damage trigger, but there is policies out there with sub-limits for non-physical damage, including some infectious disease. There is potential for losses.
I would not see that, let's say, the U.S. liability or casualty space is in particularly additionally impacted by the COVID developments. Some pluses and minuses, and as we explained earlier, we stick to, anyway, a cautious approach to U.S. liability based on these underlying factors. That's what I would say on the casualty one. I couldn't quite catch the second one.
Yeah. I think it was with respect to ReAssure.
Okay.
Let me jump on there. There is no MAC clause in the sales and purchase agreement with Phoenix. As I mentioned, I can say that to date, the turmoil in financial markets has not had any surprising impact on the ReAssure balance sheet, and I don't see any reason why there would be a particular problem. Obviously, the share price of Phoenix has been negatively affected, along with most all the other insurance stocks in the world. The PRA is still evaluating the transaction and has not given their final approval. I think that is largely the one approval that's condition precedent that we're waiting for. There's been no indication that they've got any red flags or other problems there. I think it's not over till it's over, but we've got no reason to be less confident than we were five weeks ago.
Your last question, I think, was related to the contingent capital and sub-debt letters of credit. What I'd say is, we've included these instruments as part of a broader approach to maintain a very robust capital strength in exactly the kind of places we're seeing. We don't feel like we're near a point where we need to call on them. Should we find ourselves for one reason or another in much more difficult circumstances, we have them at our disposal. I'd also say, while the crisis is putting stress on lots of people and lots of places in the industry, just reiterating the comment I made earlier, there may well be some very interesting opportunities for us, especially in our core reinsurance business, to support our clients over the next quarters.
Being sure that we've got enough capital to do that is one of the responsibilities that I hold as CFO of the group. We will try to keep some of this powder dry until we can use it, but we won't be afraid or shy to use it if we think it's in the interest of shareholders and does not otherwise put the group at risk. I'd say in addition to this, you probably remember a long time ago, or it seems like a long time ago, it's probably four years, we've also issued some CoCos which are capable of providing additional capital under true stress situations. I think the one we have, if I remember correctly, had a SST trigger down at 135. We are far away from that.
In the meantime, if we believe it's smart and in our interest to utilize some of this other capital, we'll do so.
All right. Thank you, James, for your questions. Can we have the next question, please?
The next question comes from Emanuele Musio from Morgan Stanley. Please go ahead.
Hello. Hi. I have two questions on COVID-19. The first one relates to the U.S. In U.S., lawmakers are urging insurers to pay BI losses from COVID-19. Policy wording in many cases seems to be excluding BI coverage for pandemics. I was wondering what is your view on this? The last time we had something similar was in the aftermath of Hurricane Katrina, and insurers won the legal battle after years of constant fighting, basically. If you can give me some color in this respect. Secondly, regardless of what the outcome of this element will be, I'm wondering whether this might anticipate a trend where policyholders or lawmakers try to claim on the insurance industry will lead to an increase in legal costs? Perhaps higher attritional losses or anything like that.
Emanuele, as the one American in the room, I'll take my best shot at this. There has been some anecdotal indications where legislatures or individual lawmakers are looking around for deep pockets, and in particular, asking whether the insurance industry might step in here. I think it's pretty clear Swiss Re, as an institution in the industry, our peers and reinsurance clients are keen to play their role correctly in managing some of what are undoubtedly tragic losses along the way. We also are keen not to expose ourselves and our shareholders to paying losses which were not part of original coverages and for which we did not receive premiums. I think, at least at the moment, we've not seen what I would say is a serious attempt to move this concept forward.
It's not obvious to me why the insurance industry should be more at risk on this than any other industry in terms of covers. What we would like, frankly, and you may be tired of us speaking to this, Swiss Re Group has been talking to the protection gap for years. Part of this, especially on the covers for individual lives, is related to that. We are constantly evolving and trying to build products which we think cover real risks. Our ability to absorb a massive amount of true pandemic cover is finite just because of the accumulation. We're happy to try to do more on a going-forward basis. Retroactive redefinition of risk exposures for the industry broadly make no sense to us and no sense to our reinsurance clients. I think you'll see a major resistance by the industry and by reasonable people around this.
Our goal is to do what we can to help support the healthcare industry in particular, to manage this crisis, to use the modeling tools and data that we have to help better inform decisions to mitigate the worst scenarios that we can see play out here. That's where our focus is. Might there be some legal costs associated with this? Yes, there might be. At the moment, we don't see a particular source of losses for us or the industry. We'll watch the space. We're paying attention.
Emanuele, thanks for your questions. Actually, we've come to the end of our Q&A. If you have any follow-up questions, don't hesitate to reach out to any member of the IR team. Thank you again for joining today. We wish you all to remain safe and healthy. Operator, back to you.
Thank you for your participation, ladies and gentlemen. You may now disconnect.