Good morning or good afternoon. Welcome to Swiss Re Annual Results 2019 conference call. Please note that today's conference call is being recorded. At this time, I would like to turn the conference over to Christian Mumenthaler, Group CEO. Please go ahead, sir.
Q&A call. I'm here with John Dacey, our Group CFO, Edi Schmid, our Group Chief Underwriting Officer, and Philippe Brahin, our Heads of Investor Relations. Allow me to make some comments on the results we published today before we take your questions. There are several drivers of the Swiss Re Group 2019 annual results. First, we saw elevated natural cat claims with multiple large and medium-sized events. For instance, Typhoon Hagibis and Faxai in Japan, Hurricane Dorian in the Bahamas, and several events in Australia. Swiss Re has a strong presence in all of these regions, explaining why the impact was large. However, we continue to see these as attractive markets, and they remain profitable for Swiss Re over the cycle. Second, we took decisive actions throughout the year to address the performance of Corporate Solutions.
We increased claims reserves in the first half and implemented further strengthening in the second half as we experienced a pronounced increase in U.S. casualty claims. We adjusted the initial loss picks for 2019, conducted significant portfolio pruning, reduced expenses, and added reinsurance protection. 2019 was a pivotal year for that business unit under a new management team. These actions restore a stable foundation for this business. We're optimistic about Corporate Solutions return to underwriting profitability by 2021. Third, the U.S. casualty trends on which we commented at Investors' Day have deteriorated. We proactively responded by adding to prior year reserves and increasing initial loss picks in P&C. We maintain our overall reserve adequacy and have reduced the risk of further reserve strengthening in the face of future uncertainty. Fourth, moving on to the life business.
Life & Health Re continues to deliver strong and stable results with an ROE on the top end of our target range. Fifth, in Life Capital, we executed on one of our key strategic objectives by agreeing to sell ReAssure to Phoenix at an attractive valuation. This transaction is expected to improve the group's return on capital profile going forward. Sixth and finally, we're very happy to report an excellent result for asset management, including the realization of value with the divestment of our stake in SulAmérica. Looking forward to 2020, we're very pleased with the outcome of the 1/1 renewals. We have reduced our exposure to U.S. casualty new business at the last round of renewals. The premiums written in this line were down 2%. Meanwhile, we pursue our growth strategy in Nat Cat, supported by price improvements.
Our overall nominal price increases of 5% compensate for the impact of lower interest rates and higher loss assumptions. We expect to see an improved combined ratio for 2020 of 97%, supported by further price improvements in upcoming renewals. For Corporate Solutions, price increases of 14% were achieved in January 2020. Together with the ongoing portfolio pruning and cost savings, this supports expected improvements in the combined ratio of around 105% for 2020, while the combined ratio target for 2021 remains at 98%. To conclude my remarks, let me highlight the set of attractive capital management actions which we'll propose to the upcoming AGM. A 5% increase in the regular dividends to CHF 590 per share and an up to 1 billion share buyback program. With that, I'll hand over to Philippe to guide us through the Q&A.
Thank you, Christian. Good day to all of you also from my side. As usual, before we start our Q&A, I would like to remind you to please restrict yourselves to two questions each and register again if you have follow-up questions. With that, operator, could we please take the first question?
The first question comes from Kamran Hossain from RBC. Please go ahead.
Hi. Thanks for taking my questions. The first one is just on the ReAssure deal. Could you maybe talk about your thinking around proceeds from the deal? I guess, closing the middle of this year, you'll get some cash, you'll have the stake. Could you maybe talk about plans for that? Does the, I guess, the strengthening in casualty plus high Nat Cat consume some of that? Would you look to replace it with similarly sustainable solid cash flows? The second question is just on the reserving charge. At what point did you think, we need to address this some more? The impression that I took away from the Investors' Day towards the end of November was certainly that maybe things were fairly under control. I just wanted to get a little bit more color around that. Thank you.
Thanks, Kamran. Maybe John for the first one and Edi for the second.
Sure. Excuse me. This is John Dacey. On the ReAssure, you're right, we get a mix of cash. We expect GBP 1.2 billion plus shares in Phoenix coming through when the transaction closes. That transaction is obviously subject to regulatory approvals. The good news is that Phoenix has been able to raise some funding for the deal as well as get the shareholder vote last week. When this comes in the middle of the summer, we'll evaluate where we go with the funds. I think it'd be premature to suggest what they will be used for. We continue to look for opportunities to write profitable business in our reinsurance book in particular.
In addition to that, I think it's important to note that the impact on the SST ratio of this deal will not be included in the January 1st calculation that we publish next month with the annual report, but will only flow through when we close it. The capital benefits will show up on closing, not before.
Thanks for the second question regarding the reserve strengthening. As you point out, this is mainly around U.S. casualty and in particular, U.S. liability. We spent a lot of time already back at the Investors Day. What really happened towards the end of last year that we saw a significantly more pronounced severity and frequency of large claims out of U.S. liability. Also what you have to picture that in Q4 is the time when the reserving actuaries actually go through the, what we call a priori loss ratios or the initial loss picks that are an important input into setting the IBNR. They went through that again with the underwriters and concluded with all the loss trends we see and still the heightened environment around tort and social inflation.
It was prudent to also go back and increase the initial loss picks for the very green underwriting years like 2018 and 2019. Also out of that will be concluded, out of this feedback loop, that it's also prudent to strengthen the loss ratios we use for that business going forward. That's also why you actually see that enterprise improvement of 5% nominal was then compensated by 1.5% increase in loss pick and the rest to rate increases. It really was a combination of much more pronounced loss frequency and severity out of U.S. liability in the still elevated social environment. Then the time of going through this initial loss pick reviews where we felt prudent to bring the initial loss ratios to an adequate level.
All right. Thanks, Kamran, for your question. Can we have the next question, please?
The next question comes from Andrew Ritchie from Autonomous. Please go ahead.
Oh, hi there. First things first, the 97 combined ratio you talk about for P&C Re, the normalized ratio, can you just clarify the assumptions within that? First of all, what is the assumed CAT budget for 2020, given the growth in CAT exposure? Secondly, I'm assuming there's no expected change. You've uplifted the current year picks for casualty exposures in 2019. I'm assuming you're just assuming they hold there within the 97, as in pricing won't overcome them. You're going to have to hold the current year loss picks at the elevated level for casualty. Second question, back to this casualty question. Edi, I just wanted to clarify, has the issue now widened out beyond LCR, large corporate risks? Large corporate risks was kind of where you encouraged us to focus as being the kind of main issue in November. Is that now not the case?
Is it a much broader issue? Thanks.
Thanks, Andrew, for these two questions. First is around the 97 combined ratio estimate for this year, which is down from 98 we estimated last year. Actually, as you know, last year, we were close to this 98 on a normalized basis. The further improvements comes from three factors. One is price improvement. Obviously the nominal price improvements again need to be compensated by the increases in loss pick. Last year, we had price increases of something like 1%, but with the loss pick we now used for 2019 going back, some of that is lost. It's not that much earnings through into this year. In the 1/1 renewals, we have seen this 5% nominal increase. Again, some of that is compensated by the higher loss picks.
We also have 3.5%, which is nominal, but which we need to compensate for the lower interest rates. This will also go down ultimately to the combined ratio. Again, this will only earn about 50% in this year, and also we have not assumed that the 3.5% affects all the business we write this year. If you factor this in, we get to about 0.6% improvement just through price improvement. The other factor, which you also pointed out last year, there's a scale impact. We wrote significantly more business in 2019 at flat expenses, and quite a bit of that earns into 2020. Again, we have a bit more growth, so that explains another improvement in the combined ratio estimate. There's also a bit of uplift in the combined ratio outlook from the mix in the business.
Last year and again this year, we start to shift the portfolio quite a bit more into the short tail parts, which also adds. These three factors together explain the 97, the 1% improvement versus last year. On the second question is where do we see this elevated social inflation impact in U.S. casualty? I would still say this is much more pronounced in the larger corporate space. You can also narrow it down to certain products in the liability space. It's mainly affecting lead umbrella, Excess and Surplus. It's really the products that pick up the severity of the losses. These large verdicts in the tort environment, they go into these product lines. That's really the space where we see this impact most pronounced.
In really the SME segments, also, if you look at our different Reinsurance clients, it's mainly affecting those carriers that write these large risks, that write the umbrella, that write the excess liability. The more regional clients writing the smaller risks, the SME clients, there we actually see the performance quite in line with expectation. It's not purely only the largest companies, but it's really those that are regarded as deep pockets. It's also these products like the peak of the severity, so the excess and the umbrella. Just to give another example, we call it liability, but this umbrella and excess, they also picked up the commercial motor claim. You can also have very large verdicts if there's a trucking accident, and then the excess claim goes again into the umbrella.
It's picked up under the liability line of business, even though the underlying business is commercial motor. Still, we think this is a big issue in the market. I think we are now a bit at an important juncture. You see a lot of improvement in the original markets. Carriers reuse the lines they deploy on umbrella and excess. They significantly increase prices. On the other hand, you still have the elevated social inflation environment. These two factors need to be monitored very carefully in 2020.
Maybe one word on the budget 2020.
For CAT.
For Nat Cat.
The CAT budget. Yeah. The updated number, as usually only provide off the Q1. Last year, the budget, as you call it, was CHF 1.6 billion. We more pronounced the impact, which is then adjusted for reinstatements and profit commissions and so forth. We clearly think it's going to be again a bit higher because we wrote more net CAT business. There was again some model adjustments. We reflect the trends we see in the business, like in Japan where we expect significant rate improvements, we adjusted the models. The budget will be a bit higher, but it's too early to give a final number.
Okay, thanks, Edi. Andrew, can we have the next question, please?
The next question comes from Vikram Gandhi from Societe Generale. Please go ahead.
Hi, good afternoon, everybody. It's Vik from Societe Generale . Got two questions. Firstly, I just want to go back on the massive reserves review exercise for CorSo, where the conclusion was that the reinsurance reserves were adequate. The comments at Investors Day in November, where I thought the message was, okay, we are aware of these issues, and since we have a reasonably large exposure to this casualty, we're flagging it, but we are on top of it. I hear your comments regarding the previous questions, based on what we see today, wouldn't it be an oversimplification to say that the loss cost trends have significantly accelerated just towards the end of November, December, and the actions that the group has taken are simply a reflection of that? That's question one.
Secondly, perhaps somewhat related to the first, is the level of reserving and the whole debate about U.S. GAAP versus IFRS, and consequently, the best estimate versus the best estimate plus a margin. My question really is, since the best estimate is a range and not a point, what really stops the group from being conservative by reserving at the top end of that range? By design, the long-tail lines can really spring a nasty surprise. That's all from my side.
Thank you. Back to you, Edi.
Yeah. On the first one, which along the same lines as the previous question. At the Investors Day, we clearly pointed out that reserves are adequate at an overall basis, but we also highlighted that if you look more specifically into this U.S. liability space with underlying products, as I explained in the earlier questions around umbrella excess liability, that was a significant focus area, of course, over the last few years, where then also a lot of the reserve strengthening happened. Also, these were the lines then obviously where CorSo decided that they would put highest on their pruning list and get out of these lines. Some of these exposures also are in the reinsurance business. There obviously it's part of a much broader portfolio with other lines in the U.S. and in the global casualty portfolio.
Already at the Investors Day, we pointed out in the U.S. liability space, there is uncertainty. As I explained in the last question, there was clearly a much more pronounced reporting of large losses out of the segments I just pointed out. Going back to the initial loss picks for the green underwriting in 2018 and 2019. We really felt it is prudent to then increase those to reflect these latest trends and also project that some of this elevated social inflation will prevail for a bit longer in the reserving but also in the writing of the new business to really be on top of these issues. We are now back at the level in the reserve range is similar to before, which gives us confidence that we are at the right place.
Clearly this U.S. environment, as I described before, remains quite uncertain. We need to keep watching this space very carefully. Maybe on the second one, John, you want to comment on IFRS versus U.S. GAAP best estimate?
Vikram, my view reinforced by our external auditors, is that they expect our reserving to reflect where we think ultimate losses are going to be. Undoubtedly, there's probably a little bit of flexibility around that. With a book as big as ours, we can't pretend that there's absolute precision in this. I think your question came, was aimed more at why don't we hold more reserves than less. The conversations I've had with our auditors, as well as the policies of the group over quite some time, have been an attempt to get to where we think is the right number, not a right number plus a buffer. Hanging on to those buffers is not something which we do today, we're likely to do tomorrow. We do our calculation, and that takes us into the percentage ranges that you've seen us talk about in the past.
As Edi said, we remain comfortable that we're in pretty good shape here, especially after the actions taken in the fourth quarter. I understand your frustration given where we were on Investors Day. We've got some of it, too. I can reiterate Edi's point that there was new information that came into us on actual claims in CorSo, on notifications and related claims through our reinsurance book that showed up at the end of the year before we finalized our numbers at the end of January. We were compelled to use the latest information we had to make those adjustments. It's frustrating, but that's what we saw. I don't think there's any particular reason for it other than the process Edi mentioned on the calculations for the APL. You should expect that every year-end, we'll continue to do that.
In terms of what the notifications were, I don't think people have been holding back or we've been ignoring anything along the way.
All right. Thanks, Vikram, for your question. Can we take the next question, please?
The next question comes from Edward Morris from JP Morgan. Please go ahead.
Hi. Thank you. Two questions, please. The first, just coming again back to this topic of U.S. casualty. You're talking about doing this on a proactive basis, and it mentions that there's a reduced risk of further additions being necessary in future. On the other hand, it seems that it's a reactive approach to something that you've seen in November and December. I'm just trying to understand, are you now feeling more confident about the level of reserves for the U.S. liability book than you were in November? I think you talked about being at the 50% confidence level for the U.S. liability book then. Are we in a better position now than we were then? The second question is really just around Corporate Solutions. This is the third year now where we've had a very significant negative ROE.
The ROE for this year is actually flattered dramatically by the fact that a lot of the losses were passed up to the P&C Re business. It seems that this business has now effectively depleted all of the equity that was in it in 2017. We're aiming to get back to an ROE of 10%-15% in two years' time. The risk reward around that just feels very, very bad. Does this cause you to again think about the long-term plan for Corporate Solutions? Thank you.
Maybe Edi, and then Christian.
On the first one, again, around U.S. casualty and the reserve strengthening in Q4. The proactive, I really say this is in line with what we described as this best estimate approach. At any point in time, we just want to make sure we reflect all the new evidence we have and also factor in the trends we see in the business. In Q4, we saw these elevated claims, and we went back also to adjust the very green underwriting years, where still a lot is not based on reported but pure IBNR. Proactive means already at that early point in time, increase the a priori illustration initial loss pick to make sure that the new evidence and the trends we see are fully reflected.
As I pointed out and shown, retrade, we are now back in the same range around the best estimate. We feel comfortable. It's fair to say this U.S. liability tort environment is still uncertain. How this is going to continue is really hard to predict. In our assumption for reserve setting and also for the costing into 2020, we assumed this increased severity is going to prevail for a little longer. We see a first sign of, let's say, some of the charges will override some of these really high verdict spikes. There's coming some transparency requirement around litigation funding. Hopefully it's going to peak soon. We think it's going to get a bit worse, which we factor in. On the other hand, as I explained earlier, we also need to understand what's happening in the underlying insurance market.
The significant cuts of limits provided for liability risk, plus the significant rate improvements. Factoring all of this together, we try to estimate as best as possible. Still, there remains some uncertainty. We are now back at a reserve level where we feel confident that it is under control.
Yeah, I'll take the second question, obviously, because obviously we see the same figure that you see, and they're very frustrating. No, very fair challenge, and we all ask ourselves the same question now. We are where we are, and for any option in the future, we anyway need to clean up, do all the cleanup work, bring it back to profitability. The fact that we'll be able to do that, I think is very plausible. If you look historically, this business has been very profitable. It's a very cyclical business, as we know. It's been very profitable in the past. It all had some horrible phases in the past. Just think about the reserves alone that were parked with reinsurance when CorSo was separated in 2012. They produced more than CHF 1 billion of profits during that piece of time.
There have been definitely some very good years, but clearly now it has hit a very hard place. Our view is anyway, we need to fix it. Then the question is, can we transform it into something that is interesting, will be different, as Andreas has shown in the Investor Day and half year. The idea is not to become a huge player, and the old trajectory definitely will not come back.
The question is, can it become something smaller, more specialized? As I say, would de-commoditize the business is one of the key elements. In which sub-lines do we have any competitive advantage? There are some where we have some, where we have demonstrated good tools and a good sense of where the prices are, and some others not. Don't think we just fix it and then go back to the old one. I think that we focus on fixing it and then see what else can we do with it, and can it be transformed into something that makes long-term sense in the Swiss Re group.
All right. Thanks, Ed, for your question. Can we take the next question, please?
The next question comes from Jonny Bloxham from UBS. Go ahead.
Hi there. Thanks for taking my question. It's just one really, and it is a follow-up on the casualty. I just think we need to go to a bit more explicit around the U.S. liability piece and where you are versus best estimate. Obviously at the Investor Day, you were at the 50th percentile on that U.S. liability piece, but the broader book was in the 60th- 80th. Please can you update us on that U.S. liability piece in particular? I would think given this is a large reserve charge, that would have improved, but please could you confirm that? Secondly, I appreciate what you're saying about reserving and it's consistent with your philosophy, reserve at best estimate, no buffers. Has this experience in P&C Re and CorSo led you to think about questioning that? Should you hold buffers your peers do?
I'd just be interested to get your color there. Thank you.
I guess again, I take the first one around the U.S. casualty and more specifically around U.S. liability. With the reserve strengthening, what we said before, we are back in at the same level in the reserve range as we were before. That was casualty overall. We are very comfortable. U.S. liability, we strengthened. Still, I would say, as mentioned before, there is uncertainty around U.S. liability. We are comfortable that this is now a best estimate, reflecting all the trends, all the losses we have seen, plus factoring in this is also to expect to be continued aggressive tort environment. Around U.S. liability, there is still more uncertainty than in the overall reserve phase. That's how I would put it.
Yeah. Maybe I'll jump in.
You take that one.
Jonny, look, yes, would I like to have cookie jars that I could access at will? The answer is yes. Would that make calls like this one a little easier? I would assume so. The fact of the matter is that that's not going to happen at Swiss Re in the foreseeable future. I think where our focus is and where our focus should be is actually on the upfront underwriting. What you've heard Edi talk about is aggressively adapting the pricing, the costing frameworks to this new reality, and being sure that we're faster, not slower in getting those prices in place as we think we have as we go into 2020, so that any new business we bring onto the books is in fact going to be profitable, and we don't have to worry about reserve deficiencies on a going forward basis.
That's where the focus of the group is, and I'm confident that there's enough urgency and focus on this, in addition to frankly, some new people in some important roles in CorSo, in particular, to be able to deliver.
Thanks, Jonny, for your questions. Can we have the next question, please?
The next question comes from Sami Taipalus from Goldman Sachs. Please go ahead.
Yeah. Hi, good afternoon, everyone. My first question is just on the rating agency perspective of financial strength. Could you just maybe provide an update on your level of comfort on rating agency capital and rating agency debt leverage? My second question is just on claims, but not U.S. casualty this time. Could you just provide a view of how you see the Australia wildfires? I guess, we had some in last year, but also how it's going on now, and also potential impacts from the coronavirus. Thank you.
Maybe John, on the rating agency leverage.
Yeah, sure. On rating agencies, we're very comfortable where we stand with S&P, Moody's, and you're probably aware, AM Best. We use Fitch or have used Fitch with respect to the ReAssure business. There's no reason to think that there's any adjustments or changes here. We've not disclosed in recent years the S&P capital. It remains above the current rating, and I can say it still remains above the current rating. I think they, like others, will be happier when our actual results meet our financial targets. I expect them to be interested in seeing how our plans are for delivering that. But again, with a 97 combined ratio in P&C Re, with our Life & Health franchise continuing to deliver, and with our investment risk contained. Delivering strong results in 2019, sitting on $5 billion of unrealized gains at year-end, I think we're in just fine shape.
With respect to Australian wildfires, maybe let me take a first shot. The fires that we saw started in December, continued into January. A number of the reinsurance covers in place actually had us bring back most of the damage that was done into the 2019 calendar year. I think we've indicated we've taken a charge in 2019 on the wildfires in December or January of about CHF 100 million, and we think that's for the fires, the vast majority of the ultimate cost. Subsequent to those wildfires, there have been both hailstorms and floods in Australia, which will be Q1 events in 2020, that we're evaluating as we speak.
I think on coronavirus, at the moment, I suggest that this does not appear to be a significant insurance industry loss nor a significant loss for Swiss Re with the infections that we've seen and the deaths that are related to this. There clearly is some very important economic disruption as a result of this. There will be industries and companies which are going to be severely affected. Most of the covers that might be relevant, that would include some sort of business interruption, typically are on property policies that require physical damage. I don't exclude the possibility that some people might have reached out for specific covers related to non-physical damage. At least in our portfolio, I think we can say we don't see much. Edi, you might want to add.
Yeah, that's a good high-level description. Again, a significant impact on the global supply chain, some business interruption, travel implications, but the vast majority of policies out there, they require physical damage. There are some that include non-physical damage, BI, usually there then these communicable diseases are excluded, and there's a niche market, I would describe it, where you get some coverage for communicable diseases under a non-damage BI cover. It's really a niche. Maybe on the life and health side, although at this point, the bulk of the impact is within China, and there, the different products will respond differently. Most of the impact we see on the medical side. We only have a small book on the medical side.
Most of our business, what we call critical illness, so it's cover for defined diseases. Usually, the coronavirus would not be a covered disease, there may be some very severe symptoms, pneumonia, where there is some coverage available. It's also important to put the event into context. There's still a sort of uncertainty. Hope it's going to get under control soon. The number of deaths so far, while it's a very sad event, if you compare it to an annual seasonal flu, causes about 300,000 to 600,000 deaths on a global basis. The close to 2,000 we have seen so far is not a huge event from a relative perspective. Really hope the thing gets under control. Let's see. At this point, we don't see it as a huge impact to the insurance industry.
Thanks, Eddie, for your question. Can we take the next question, please?
The next question comes from Ivan Bokhmat from Barclays. Please go ahead.
Hello. Good morning. I've got two questions, please. The first one is on pricing across CorSo and perhaps across the primary space and casualty. I'm just wondering whether you can make a statement on whether you see the price improvements that you received as covering the loss cost inflation or not, and the social inflation. The second one would be on the SST. Just wondering if you could give a little more color about the movement in SST since the previous reading of 241 you gave, and maybe a little bit of an update on the benefit from the ReAssure transaction. Obviously, we've seen strong performance of Phoenix share price, but also rates have moved. Perhaps you could update us on that number. Thank you.
Yeah. Maybe I go first regarding the pricing question in, let's say, the larger commercial business, which is the CorSo space. If you go back a little bit after the hurricane losses in 2017 and 2018, we were all hoping for more significant price increases in the commercial space, which has been actually very soft for a long time. It's only really through 2019 where we saw prices to start picking up much more significantly. In the property space, where there have been cat losses, it's probably most pronounced. Throughout 2019, there was much more dynamics going into, particularly the U.S. liability space, relating to what we discussed earlier around the reserve strengthening and what we're doing there. There is, I would say, a lot of pain in the system around U.S. liability.
It's mainly in these umbrella excess commercial motor space I pointed out before, and there you see significant actions by most of the larger carriers. They are deploying much lower limits than before, and they're charging significantly more premium. You asked the important question whether these changes, these lowering limits and increasing prices are good enough to cover the increased level of losses. At this point, we think in 2020, for these most exposed segments like umbrella and excess, we are not yet convinced that this is enough. When you look further down in other segments, in property, other lines, actually those that CorSo also has been growing at much stronger rate adequacy, there I think we're getting in a better space. Clearly, this momentum in the commercial space around different lines has to continue for quite some time.
In these really most exposed areas, in U.S. liability, there we are not comfortable yet that what is happening in the underlying market is good enough. It will take more, and it will take also some improvements in the tort environment. That's why we remain cautious in one/one and also now our reinsurance book, the premium on casualty is 2% down. If we look more closely into the U.S. liability space, where we now track the underlying limits, that we insure in all the treaties, we have reduced exposure to that most exposed space by some 12%. Clearly we want to position us more cautious in that most exposed space at this point in time.
Edi might have to add that, it's maybe obvious, but in CorSo, we basically don't write that business anymore, right, the one most exposed to social inflation. When you say we're not happy with the rates, it's meaningless for our portfolio. It's just an observation on what we see in the market.
The CorSo pruning actions are to a large extent around exactly those most exposed segments, umbrella, excess liability, and Excess and Surplus. Obviously, we have some of that in our reinsurance treaties, and that's where we also not exit, but reduce exposure significantly.
For the absence of doubt, for CorSo, we've shut down the teams. We're not writing new business. We're managing the portfolio as it expires. The second question was respect to the SST. Again, we'll provide you in March with the January estimate for SST, or not estimate, but the actual number that we've calculated. I can give you some directional help, I think. As you said it, as of July 1st, the number was 241. There's probably three factors which would have a negative impact on that. One was the capital deployment of the business, that we continued to go through in the P&C Re business in particular. The second was the reduction of interest rates, in the second half of 2019. The third, we will include as of January 1, the capital actions that we described yesterday, or actually this morning, sorry.
The board approved yesterday for the increased dividend and the authorization for the share buyback. Going positively, the tightening of credit spreads in investment markets and a debt issuance that we did in the second half of the year that's SST relevant, will help that number. The combination, I think, should leave you to believe that the answer is somewhere between the 241, which we identified and what we said this morning, which is we remain above our target of 220. Importantly, that number of January 1 does not include the estimate that we will have for the ReAssure transaction. We've not attempted to update that from the number we've previously provided, which is at 12 percentage points to the SST ratio.
Eventually, we'll see where the Phoenix share price ultimately is and what impact that might have to earnings during the course of the first six months of the year.
All right. Thanks, Adam, for your questions. Can we take the next question, please?
The next question comes from Iain Pearce from Credit Suisse. Please go ahead.
Hi. A couple of questions from me. Firstly, on CorSo combined ratio. You sort of outlined the steps that you see to get you to 105 next year, but you've maintained the 98% guidance for 2021. I'm just wondering what you see as driving the improvement in 2021 with that seven percentage point improvement in the combined ratio. Also on CorSo PYD, not on casualty this time. You've also flagged some negative development in the property line in CorSo and specialty. I'm just wondering if you could give a bit more detail on what's caused that negative development. Thanks.
On the CorSo combined ratio. We are still very confident that we achieve the target we set for 2021, which is the 98. For this year, we also gave an estimate of 105, which reflects all these changes we have been talking about. There's various components, again, building on the decisive management action started last year, so that the pruning of the portfolio will help the significant rate increases we are achieving. I think we showed across 2019, we achieved 12% rate increase across the CorSo book. Just in January, rates were up some 14%, we clearly will maintain this significant rate improvement momentum. As we discussed earlier on, we have reviewed also these initial loss picks, we increased that also in CorSo to really make sure we are at a very solid footing for the business we write going forward.
That explains why, for example, the normalization ended up with a slightly higher combined ratio than we showed before. With all the actions now in place and the rate improvements we are confident we can achieve throughout 2020 and into 2021, we will definitely get to the 98 and we have this 105 estimate out there for 2020. On the second one is the PYD for CorSo. In the second half, it was also around this increase in initial loss picks. You point not only to casualty, there was some also in property, but that was really part of the detailed reserve review we did in the first half year. There are also some of the cases on the property side, some Nat Cat claims, some large manmade claims. We increased reserves on these specific cases. There is not a trend in the IBNR.
It was really that some of the individual cases had to be strengthened in terms of individual reserves. That explains the property and the specialty part. There was also one larger credit loss, where we increased the case reserve.
Okay. Thanks, Iain, for your questions. Can we take the next question, please?
The next question comes from Paris Hadjiantonis from Exane BNP Paribas. Please go ahead.
Yes. Hi from my side as well. Two questions. Firstly, on Japan going into the renewals. Obviously, you are a very large player. You have had to pay quite a lot of claims in Japan over the past couple of years. I was wondering if you can give us a bit of an update of how your conversations with clients are going into the April renewals, and what kind of changes have you made to your risk of view, so to your view of risk for Nat Cat Japan. Also we also have quite a lot of detail out there from the press saying about mid double digit increases in price. If you can give us some detail on Japan, that would be interesting. Secondly, I'm sorry to be going back to U.S. casualty and liability.
In your Investor Day, you were flagging about CHF 8 billion of related reserves being impacted. Obviously, that didn't include CorSo reserves. Given the action you've taken today, can you give us some more detail of where that takes your ultimate loss ratios, particularly for the years which are impacted? If you can give us a bit more detail about which years exactly are impacted. Previously, you were saying 2014 onwards. I think right now we are talking about some of the more recent years. Thank you.
Let me take the first one around the 1st of April Japan renewals. Clearly, we have very high expectations for price increases given the experience over the last two years. Jebi the year before and last year, Hagibis and Faxai, significant losses. As you also correctly pointed out, we have a significant market share in Japan over the cycle with Japanese clients. We have made good profits. Clearly we want to stay in that market, but we will push a lot to get now to price levels that are really commensurate with the risk. We're talking about substantial amounts. I don't want to go too much into percentages, but it is going to be very substantial to also compensate for clearly a more elevated risk review we now have in our models.
As we always do, based on the learnings from large Nat Cat events, we review all the loss evidence and also take the latest scientific evidence and put then the view of risk, the risk modeling on the latest scientific basis. There was a significant uplift in our view of risk. We actually went out with these messages very early in conferences in the market to really make it clear that the market overall is underestimating the Japanese typhoon and flooding risk. That's what we now use as a costing basis. On top of that, we really will go for substantial price increases in the Japanese market. Also then further into the mid-year, we still would expect loss-affected programs and programs with significant U.S. hurricane exposure to achieve also significant rate increases.
Further price momentum, which then backs up our ambition to actually write more in the Nat Cat space. Of course, we need to achieve the appropriate rate increases first. On the second one, U.S. casualty, I was not quite clear where you're pointing towards. Yes, we had about $8 billion of reserves in reinsurance that are U.S. liability. Again, that's U.S. liability in the broader basis. This is not, let's say, this is broader than the more exposed segments I pointed out before. This, the excess liability, the umbrella, that is written by the large cedents, the larger carriers, that's a much more narrow reserve base. I think we quantified it back in the Investor Day as a much smaller number. That's really the more exposed parts.
The CHF 8 billion, that also includes liability reserves with regional clients, where there is a lot of SME business. I would not call that exposed. Obviously there's the CorSo parts, where now we have the ADC in place, the reserves on the CorSo side are now actually part of the reinsurance pool. I cannot give you a reserve number on top of my mind how big that would be.
Yeah, Paris, on the 19th of March, in a few weeks, we will publish our annual report. With the annual report are the loss triangles, and we will have the breakdown, the detail. We have a call, and our chief actuarial officer will be with us to go through these numbers and your question regarding the ultimate loss ratio, where are we and so forth. It will come out in the next few weeks.
Thanks for your question, Carlos. Can we have the next question, please?
The next question comes from Vinit Malhotra from Mediobanca. Please go ahead.
Yes. Thank you very much. One question from me on the U.S. casualty topic. Apologies. Just to clarify, you mentioned the tort environment remains uncertain, and you mentioned that the medium-sized SME clients are coming in line with expectations. I was just wondering, is there any provisions you have taken for this assumption to be tested later in the year? For example, what if the tort environment trickles down to the medium size? Is there a risk that you see as likely, or you see that we'll tackle it when we get to it? That's my first question. Second question is just back linked to CorSo. The 105. When this presentation was made in summer last year, would you say that this trajectory is in line with what you expected for the 105, or would you say that the U.S.
casualty trends, et cetera, have led to some kind of a change here, and you were expecting a bit better for 2020? Thank you.
The first one, once more around U.S. casualty, or more specifically, U.S. liability. Maybe I also make the comment that clearly this is an industry issue. Also, if you look at the filings of all the carriers in the U.S., there was clearly significant reserves strengthening around U.S. liability for the last few years. Why it was not so much in the headline is that it was to most extent compensated by favorable reserve development, mainly in workers' compensation. Those carriers who also have significant workers' compensation book, they could compensate these two. It kind of netted out. Your question again around the protection, how this quite aggressive tort environment, social inflation is going to play out. Of course, there is uncertainty.
As I pointed out before, there are some silver linings, and you see some of these very large verdicts by jurors being overruled by judges. It could peak. As I said before, it's more pronounced at the larger corporates. These are regarded by the jurors, the plaintiff bars as the deep pockets to go after. Also we have seen cases where trucking accident, still the plaintiff bars go after the trucking company. It may not be a Fortune 500 company. It also affects other corporates. It, as I said, goes mainly into these umbrella and excess covers that really pick up the severity of the losses. Where we have not seen it is really in the SME portfolios of the regional clients. That's clearly a space we need to watch very carefully.
That's why I explained before, there's a significant momentum in terms of rate increases and limit cuts. This tort environment is still an area of concern. How these factors play against each other means we need to track this very carefully. At this point, we are not comfortable in that space. That's why we keep reducing exposure. The picture can change six months from now, 12 months from now. We need to reassess.
Vinit, just maybe if I can add, Edi. I think the reserving actions we've taken are not limited only to large corporate related risk. It's line of businesses, where we're on either proportional or in excess of loss treaty and reinsurance. We've taken a look at the underlying risks, and made these pretty significant actions, not only on reserving, but also pricing going forward. I think that's where we are.
Maybe just add, maybe that's basic, but I think obviously, U.S. GAAP is a best estimate philosophy through and through. Which means that the reserving setting process is a completely independent process, overseen by the chief actuary. Edi and John and I have nothing to say in that process. We're receiver of the information, and so the actuaries try based on all information they have to get to the right answer. There's pluses and minuses to that, but it means that there can be on both sides, right? We cannot just start to book things because we're afraid of something. There needs to be evidence, otherwise you can't book anything. Vice versa, there's no way, no temptation, nothing that top management can say, "Let's wait it out," or, "Let's see if things improve," et cetera.
What you get is basically, when people look at evidence, that's what they're seeing, and they try to change the assumption accordingly and come to the right results. It creates more volatility, obviously. I understand the frustration. In part, I'm frustrated myself sometimes. To a certain extent, it's a very honest way of looking at things, and it means you're typically at the forefront of things. It also means there's always risk, right? You don't have buffers to avoid risk.
I'll give Edi a break and try to do the second question myself, and Edi will correct me if I get it wrong. Your question is, at mid-year, are we seeing the trends we expected? I'd say we probably see a slight deviation, but on two dimensions. The first deviation is, yes, we probably have a more negative view of expected losses in the casualty book, especially, but not only other places. That fortunately, has been balanced by a better than anticipated increase in the pricing that CorSo has been able to achieve. Both these have to work their way through the portfolio. Net, one of the reasons we're confident about the 98%, is not because we need 14% price increases for the rest of this year, but rather because we've seen in 2019 an important price increase that will earn through in 2020.
We see in the beginning of 2020, a continuing momentum here. Everyone we talk to sees that or expects that this is going to continue, that will be a wind at the back, in getting us down to the 98.
All right. Thanks, Vinit, for your questions. Can we take the next question, please?
The next question comes from Michael Huettner , from Commerzbank. Please go ahead.
Thank you very much. Good afternoon. Two questions. First, also I have to come back to Paris' question on Japan exposure to Nat Cat. When I add up Jebi, Faxai, and Hagibis losses, I come to CHF 2.4 billion. Your premiums over the past two years from Japan were, I don't know, CHF 1.5 billion gross and maybe CHF 1.3 billion-CHF 1.4 billion net earned premium. This seems rather low. Now you can say 2018 and 2019 were extraordinary, or you can say 2018 and 2019 were the new normal. Even if you achieve, say 10% or 20% price increases, this appears not sufficient. This would give you net earned premiums of CHF 800 million from Japan. Second question, again on CorSo, the 105% combined ratio.
You achieved significant price increases, you mentioned, just before. Is 98 for 2021, then the end of the story, or should you aim for even lower combined ratio for CorSo after 2021?
On your first one, regarding Japan, so 10% or 20% is clearly not enough. The numbers you mentioned. I don't want to give precise numbers, but we're clearly going for more significant price increases. The loss levels have been significant as you did your calculation correctly if you add up Jebi, Faxai, and Hagibis. As I explained before, we use this evidence to update the Nat Cat model for Japan. Still reiterate, you cannot look at the Nat Cat business in one market over a few years only. This needs to be looked over 10, 20 years. There we clearly have made very decent margins in the Japanese market. There's also obviously always these questions around, is this a new normal if you factor in climate change?
Also this, we study very carefully what we actually can see in Japan that at this point we are rather in a phase of elevated natural frequency of typhoon. If you look at it over many decades, there are also phases where you see a bit elevated frequency or lower frequency. In the last few years and also in the future, we think we are in that phase of an elevated frequency. We cannot link it directly to climate change, but we clearly see a higher frequency. All the learnings from the losses we factor into the model. Clearly we need to go for substantial price increases for this business to become sustainable. It's important to look at it over not just a few years. It really needs to be seen in a much longer time period.
Your second question was around the 97, to what extent further price increases are already factored in. Some are already factored. What we achieved in one one, the 5% nominal with all the corrections as we explained. Of course, as projections stand for the forthcoming renewals, we have not yet factored in the compensation for the lower interest rates. Some of that we have factored in, but not all of it. Clearly we'll push in Japan, but also in the mid-years, and as we explained earlier on the casualty accounts, to get further compensated for the lower interest rates. There's further upside and some of that we already baked in. Let's see where we get to.
Maybe I'll jump in, getting back to the corporate solutions. I think it's a similar answer, which is, we've been pleasantly surprised by the pricing increase that CorSo has been able to achieve. Through January, we've been disappointed by the loss cost adjustments we've had to make. Let's see where 2020 takes us. We expect to be able to achieve the normalized 105. If we have reason at that point in time, based on actual price increases and actual loss experiences to make an adjustment to what the 2021 target looks like, we'll do so. For now, I can just reiterate our strong confidence that we, on the current trajectory, we'll get down to 98.
Maybe if I can jump in. Clearly, the one increase from last year we had, of which only part has been in last year, have been eaten up by these change in assumption and APL we have put through. If you think about January 14% increase, that's on the lines we have kept. This is not the main lines touched by social inflation. I think it's extremely unlikely that this will be eaten up by claims inflation in one way or the other, because that's the remaining book of CorSo. I think that makes us quite sure. As of the momentum in the market, the talk, there's absolutely nobody talking about this is enough yet now. There's this continuous momentum. People think this is a multi-year movement. I think all of that makes us quite confident about the 98.
To quite the question, I think we'll look where we go from there after that. Historically, clearly, there have been phases where it was much lower than 97.
All right, Michael, thanks for your question. Can we take the next question, please?
The next question comes from Emmanuel Muzio from Morgan Stanley. Please go ahead.
Hello. Hi, thanks for taking my question. I have one question on Corporate Solutions. Could you please remind me the criteria underpinning the pruning in Corporate Solutions? You referenced your appetite to a different type of risk, for example, smaller or more diversified risks, or is it purely based on rate on line appetite? Lastly, if you can remind me where you are with the pruning process. Thank you.
On the CorSo pruning actions. On the top, we have talked about it a lot already, is the U.S. liability space. In umbrella, in excess, and in E&S, these are lines CorSo is really exiting. There is also other segments where there's significant improving. It's in the marine cargo space, and it's also in the general aviation space and in agricultural. These are lines where we are either exiting or significantly improving. As the lines, as we explained earlier, where CorSo has demonstrated they have the necessary insight, the data to really differentiate and underwrite this business in a good manner. Around property, engineering, these other lines, there we really push for the price increasing. Pruning, we have achieved about 25% of the plans in 2019, and until the end of 2021, we should have achieved about 90% of the pruning.
Obviously, it goes with the respective policy renewals. That's the speed we can go. The rest will happen in 2021. We are well on track to achieve this pruning, which then also will go in line with some expense reductions on the other side. We are very well on plan with this pruning action. It's really in these lines of business where we concluded CorSo has no edge. It's just additional capacity to market. There we execute these actions.
Thanks, Emmanuel, for your question. Can we take the next question, please?
We have a follow-up question from Vikram Gandhi from Societe Generale. Please go ahead.
Hi. Thank you for the opportunity. The first one is on the dividend increase, the 5% dividend per share. I appreciate that's on a lower share count, the impact on total dividend out is not that material. Given the pending sale of ReAssure, which has been a very healthy cash generator, and bit of an underperformance from, let's say, P&C Re and CorSo not producing the desired results, how should we think about the dividend trajectory going forward? The second is on the risk-adjusted price quality, one element of the interest rate, which is 3.5 percentage points. To me, that seems to be too high given the way the interest rates have moved. Of course, interest rates have come down, 3.5 percentage point impact, that kind of offsets the price increase. That just seems too high.
Maybe there's something simple that I'm missing, but if you can just clarify, that would be helpful.
On the dividend, you're right, Vikram. It's a 5% increase. We bought back approximately 3% of the shares with the CHF 1 billion buyback. While it will be appreciated by those that still hold the shares, the overall cost is not going up quite by 5%. The one observation is the strengthening of the Swiss franc means that our payment of the dividends in Swiss franc is a little more in those terms than it would be had the U.S. dollar Swiss franc exchange rate remained absolutely stable. The board discussed the dividend increase yesterday, literally, and is very comfortable with the underlying earnings and our ability to continue to fund not only this year but future years in a stable way. You're right, the ReAssure book was throwing off cash. We will be getting cash in mid-year when the ReAssure transaction closes.
As importantly, the continuing ownership of the Phoenix shares will provide us access to the Phoenix dividend, which in recent history has been around 6% paid out on that investment. We'll continue to book that as long as we own those shares. In the meantime, we expect our reinsurance business, Life & Health Re, as well as P&C Re, to do well, and we expect the Corporate Solutions to return to a healthy profitability in 2021. I think in any midterm plan, we're very comfortable with the dividend position.
On your second question regarding the impact of the interest rates. The first is important that when we underwrite cost of business, we always look at it on an economic basis, which means we discount the future expected claims with the interest rates we see at this point in time. 3.5% across the portfolio may seem a bit high, but I would point out that the average duration of claims settlement in our typical P&C portfolio composition is about six to seven years. The average claim is discounted over six to seven years and then also a small, let's say, reduction in the interest rate curve over six, seven years, then you get quickly to this 3.5% impact versus the upfront premium you charge then for these risks. It's mainly obviously in the longer tail lines, in the casualty lines.
Even on property, it has a small impact. They have two years of claims duration. If you do that calculation correct with the duration, it turns out to be the 3.5% impact of the interest rate drops we've seen towards the end of last year.
Thanks, Vikram, for your questions. Operator, do we have a final question, another question?
The last question comes from Ivan Bokhmat from Barclays. Please go ahead.
Hi. Thank you very much. I've got a small follow-up, please. One on CorSo. Could you please update us on what's the capital position of the business, whether you anticipate a need to strengthen capital anymore? Secondly, it's on Life & Health Re. In your slide 46 on the presentation, it shows some reduction in EBIT for Life & Health Re divisions. If you take away all the one-offs, there's actually a 5%-10% improvement. I was just wondering if you could give some thoughts around the sustainability of the Life & Health Re business and maybe some early indications for 2020. For example, in the U.S., this flu season looks a bit worse, and we're hearing about problems in Australia from your peers. Thank you.
Yeah. Maybe I'll do the second one first. There's no indications that we could provide at this point in time with respect to Life and Health on 2021. I think we've got a broad portfolio across lots of different regions, and there shouldn't be, or at least I've not heard of anything dramatic in any jurisdiction to date that we need to alert people. I think the one big one-off in the 2019 accounts, which on page 46 actually is referred to in the last bullet point. We found ourselves in a curious situation where Life and Health Re had written a series of treaties with Old Mutual a number of years back. Old Mutual renamed itself Quilter and ReAssure. We announced, I think in August of 2019, sold its back book, including the policies related to these reinsurance treaties, to ReAssure.
That transaction actually closed with ReAssure on December 31st of this year. What it made was these reinsurance treaties automatically became an intergroup transaction. It forced us in an unusual moment to have to unlock a set of assumptions on the liability side, marking to market those liabilities with existing interest rates at the year-end. The adjustment was approximately a $300 million technical cost to reinsurance. We took the view that as this business is being marked to market on both sides, we should go ahead and adjust the asset side as well. A similar amount of gains came through at the end of the year to affect that match. That's one of the reasons why the Life & Health investment result looks as robust as it does.
That's a technical correction to a problem that came through as a result of the Quilter transaction for ReAssure. Obviously, if things go as planned, we will not own ReAssure anymore after the summer. For these six months, it's an in-house transaction now. Your first question was with respect to CorSo Capital. We did recapitalize Corporate Solutions at mid-year. That's also when we put the adverse development cover in place with the reinsurance team. The combination of those, I think, leads us to believe that CorSo remains adequately capitalized to do the business it needs to do. The pruning of the portfolio at the 65%, which we expect to come through in 2020, means that the demand for additional capital at least on an exposure basis, is limited. I don't think we've got any expectation that there's any immediate needs for recapitalization.
Australia Life and Health, I think that was the question, right? Just that you know, we are traditionally more long in the group life and not in the individual life. Group life was hit, I think, in 2013. We had a loss there. We could recuperate that over the last few years because the market hardened a lot. Now it's softening again, and we have significantly reduced our position. The current issues are now in the retail market, right? Individual lives, disability, and we're not a big player there, so it's not a huge thing for us.
Okay, Ivan, thanks for your follow-up question. We've come to the end of our Q&A session. If you have any follow-up questions, please don't hesitate and reach out to the members of the IR team. Thank you again for joining today. Operator, back to you.
Thank you for your participation, ladies and gentlemen. You may now disconnect. Goodbye.