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 Momentara, Group CEO. Please go ahead, sir.
Q and A call. I'm here with John Dacey, our Group CFO Eddy Schmid, our Group Chief Underwriting Officer and Philippe Rahin, 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 nat cat claims with multiple large and medium sized events.
For instance, typhoons Hagiwis and Fakshai 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. 2nd, 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.
3rd, the U. S. Catalytic 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 and C. As such, we maintain our overall reserve adequacy and have reduced the risk of further reserve strengthening in the face of future uncertainty. 4th, moving on to the Life business. Life and Health Re continues to deliver strong and stable results with an ROE on the top end of our target range.
5th, in Life Capital, we executed on one of our key strategic objectives by agreeing to sell Visture to Phoenix at an attractive valuation. This transaction is expected to improve the group's return on capital profile going forward. 6th and finally, we are very happy to report an excellent result for asset management, including the realization of value with the divestment of our stake in Solar America. Looking forward to 2020, we're very pleased with the outcome of the oneone renewals. We have reduced our exposure to add 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 dividend to CHF 5.90 per share and an up to CHF 1,000,000,000 share buyback program. With that, I'll hand over to Philippe to guide us
through the Q and A. Thank you, Christian, and good day to all of you also from my side. As usual, before we start our Q and A, I would like to remind you to please restrict yourselves to 2 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 will get some cash, you will have the stake.
Could you maybe talk about kind of plans for that? Or does the, I guess, the strengthening in casualty plus kind of high cat kind of consume some of that? And would you look to replace it with similarly sustainable solid cash flows? And the second question is just on the reserving charge. At what point did you kind of think we need to address this some more?
Because the impression that I took away from the Investor Day in towards the end of November was certainly that maybe things were fairly under control. So I just wanted to get a little bit more color around that. Thank you.
Thanks, Camant. Maybe John for the first one and Helane for the second.
Sure. Excuse me, this is John Dacey. On the ReAssure, you're right, we get a mix of cash. We expect 1,200,000,000 Sterling plus shares in Phoenix coming through when the transaction closes. That transaction is obviously subject to regulatory approvals, but 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, in the middle of the summer, we'll evaluate where we go with the funds, but I think it'd be premature to suggest what they will be used for. We continue to look for opportunities to continue to write profitable business in our reinsurance book in particular. And 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 1 calculation that we published next month with the annual report, but will only flow through when close it. So the capital benefits will show up on closing, not before.
Thanks for the second question regarding the reserve strengthening. And as you point out, this is mainly around U. S. Casualty and in particular U. S.
Liability. And we spent a lot of time already back at the Investor Day. But what really happens towards the end of last year that we saw a significantly more pronounced severity and frequency of large claims out of U. S. Liability.
And 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 ratio, so the initial loss picks that are an important input into setting the IBNR. So 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 2019. And also out of that what we concluded out of this feedback group 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 due rate increases. So it really was a combination of much more pronounced loss frequency and security out of U.
S. Liability in the still elevated social environment, plus then the time of going through these initial loss peak reviews where we felt prudent to bring the initial loss ratios to an adequate level.
All right. Thanks, Cameron, for your question. Can we have the next question, please?
The next question comes from Andrew Ritchie from Autonomous. Please go ahead.
Hi, there. First things first, the 97% combined ratio you talk about for P&C Re 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? And secondly, I'm assuming there's no expected change. You've uplifted the current year picks for casualty exposures in 2019, assuming you're just assuming they hold there within the 97 as in pricing won't overcome them.
You can have to hold the current year loss picks at the elevated level for casualty. Second question, back to this casualty question. And Eddie, I just wanted to clarify, has the issue now widened out beyond LCR large corporate risks? I mean large corporate risk 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.
Yes. Thanks, Andrew. All these two questions. And 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.
So the further improvements comes from 3 factors. 1 is price improvement, but obviously, the nominal price improvements again need to be compensated by the increases in loss pick. So 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. So it's not that much earnings into this year.
In the oneone renewals, we have seen this 5% nominal increase. Again, some of that is compensated by the higher loss picks, but then we also have 3.5%, which is nominal, but which we need to compensate for the lower interest rates. And this will also go down ultimately to the combined ratio. But again, this will only earn about 50% in this year. And also we have not assumed that this 3.5% affect all the business we write this year.
So if you factor this in, we get to about 0.6% improvement just through price improvement. And then the other factor, which you also pointed out last year, there's a scale impact. So we wrote significantly more business in 2019 at flat expenses and quite a bit of debt earns into 2020. And again, we have a bit more growth, so that explains another improvement in the combined ratio estimate.
And then
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 part, which also adds. And these three factors together explained the 97% to 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, excess and surplus. So it's really the products that pick up the severity of the losses.
And these large verdicts and the torch environment, they go into these products lines. So that's clearly the space where we see this impact most pronounced. And really the SME segments, also if you look at our different reinsurance clients, it's mainly affecting those carriers that drive these large risks, that ride the umbrella, that ride the excess liability, the more regional clients rise into smaller risk, the SME clients, there we actually see the performance quite in line with expectations. So it's not purely only the largest companies, but it's really those that are regarded as deep pockets. And it's also these products like the pickup the severity, so the excess and the umbrella.
And just to give another example, we call it liability, but this umbrella and excess, they also picked up the commercial motor claim. So we can also have very large verdicts if there's a trucking accident and then the excess claim goes again into the umbrella that's picked up under the liability line of business even though the underlying business is commercial motor. So still we think this is a big issue in the market. I think we are net a bit at an important juncture. You see a lot of improvement in the original markets.
Carriers reuse the lines they deploy on broadband access. There's significant increased prices. But on the other hand, you still have the elevated social environment, Torch environment. So these 2 projects will be monitored very carefully in 2020.
Maybe one word on the budget 2020 for that cat?
The cat budget, yes. So the updated number, as usual, we only provide after Q1. So last year, the budget, as you call it, is SEK 1,600,000,000 We more pronounced the impact, which is then adjusted for reinstatements and profit commissions on and so forth. So we clearly think it's going to be again a bit higher because we wrote more Nat 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. So the budget will be a bit higher, but it's too early to give a final number.
Okay. Thanks, Sandeep. Thanks, 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 SocGen. Got 2 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. And then the comments at Investors Day in November, when I thought the message was okay, we're aware of these issues.
And since we have a reasonably large exposure to U. S. Casualty, you're flagging it, but we are on top of it. Now I hear your comments regarding the previous questions, but 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? So that's question 1.
And 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? Because by design, the long tail lines can really spring the nasty surprise.
So that's all from my side.
Thank you. Back to you, Yves. Yes. So on the first one, which along the same lines as the previous question. So 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 access liability, that was a significant, let's say, focus area of CorSo the last few years that and also a lot of the reserve strengthening happens. But 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. That 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 Investor Day, we pointed out in the U. S. Liability space, there is uncertainty.
And 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. Plus then going back to the initial loss picks for the green underwriting in 2018 2019. And we really felt it is prudent to then increase those to reflect these latest trends and also project that some of these elevated sales 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 similar to before, which gives us confidence that we are at the right place. But clearly, this U.
S. Environment, as I described before, remains quite uncertain. So we need to keep watching this space very, very carefully. Maybe on the second one, John, you want to comment on IFRS versus U. S.
GAAP 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. This was 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.
And 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. And so 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. And as Eddie said, we remain comfortable that we're in pretty good shape here, especially after the actions taken in the Q4. And I understand your frustration, given where we were on Investors Day.
We've got some of it too, but I can reiterate Eddie'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. And 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 that he mentioned on the calculations for the APLRs. You should expect that every year end, we'll continue to do that.
But 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.
Thanks, Vikram, for your question. Can we take the next question, please?
The next question comes from Edward Morris from JPMorgan. Please go ahead.
Hi, thank you. Two questions, please. The first, just coming again back to this topic of U. S. Casualty.
I mean, 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 December. So 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.
I mean, this is the 3rd year now where we've had 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 and C Re business. I mean, it seems that this business has now effectively depleted all of the equity that was in it in 2017. And we're aiming to get back to an ROE of 10% to 15% in 2 years' time. The risk reward around that just feels very, very bad. So just can you does this cause you to again think about the long term plan for Corporate Solutions?
Thank you.
Maybe Edi and then Christian.
Yes. So on the first one, again around U. S. Casualty and the reserve strengthening Q4. The proactive, I really say this is in line with what we described as this best estimate approach.
So 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. And in Q4, we saw this 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. And proactive means already at that early point in time increase the a priori loss ratio in Scholastic to make sure that the new evidence and the trends we see are fully reflected. As I pointed out and Sean reiterated, we are now back in the same range around the best estimate. So we feel comfortable, but 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 a little longer. We see a first signs of, let's say, some of the judges will override some of these really high worded exposures.
There's coming some transparency requirement around litigation funding. So hopefully, it's going to peak soon, but we think it's going to get a bit worse, which we factor in. But on the other hand, as I explained earlier, we also need to understand what's happening in the underlying insurance market. So the significant cuts of limits provided for liability risk plus the significant rate improvements. So factoring all of this together, which we try to estimate as best as possible.
But still there remains some uncertainty. But we are now back at a reserve level where we feel confident that it is under control.
Yes, I'll take the second question, obviously, because obviously, we see the same figure that you see and they're very frustrating. So 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 very, 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 €1,000,000,000 of profits during that period of time. So there have been definitely some very good years, but clearly now it has hit a very hard place. So our view is anyway we need to fix it. And then the question is, can we transform it into something that is interesting, will be different, as Andreas has shown in the Investor Day in half year.
The idea is not to become a huge player. And I mean, the old trajectory definitely will not come back. The question is, can it become something smaller, more specialized? As you say, decommoditize the business is one of the key elements. So 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 price are and some others not. So 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 for your question. Can we take the next question please?
The next question comes from Jonny Urwin from UBS. Please go ahead.
Hi there. Thanks for taking my question. It's just one really and it's a follow-up on the Casualty. But I think we need you guys to be a bit more explicit around the U. S.
Liability piece and where you are versus best estimate. So obviously, at the Investor Day, you're at the 50th percentile on that U. S. Liability piece, but the broader book was in the 60th to 80th. So please can you update us on that U.
S. Liability piece in particular? I mean, I would think, given this is a large reserve charge, that, that would have improved. But please, could you confirm that? And then secondly, I appreciate what you're saying about reserving, and it's consistent with your philosophy, reserve a best estimate, no buffers.
But I mean, has this experience in P and C Re and CorSo led you to think about questioning that? I mean, should you hold buffer as your peers do? I'd just be interested to get your color there. Thank you.
I guess, again, I'll take the first one around the U. S. Casualty and more specifically around U. S. Liability.
So with the reserve strengthening, what we said before, we are back in at the same level in the reserve range as we were before. So those casualty overall, we're very comfortable. U. S. Liability, we strengthened.
But still, I would say, as mentioned before, there is uncertainty around U. S. Liability. We're 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 thought environment.
So around U. S. Liability, there is still more uncertainty than in the overall reserve phase. So that's how I would put it. And on the buffers, I think
Yes, maybe I'll jump in. Johnny, look, I mean, 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.
But the fact of the matter is that that's not going to happen at Swiss Re in the foreseeable future. And so I think where our focus is and where our focus should be is actually on the upfront underwriting. And what you've heard Eddie 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 20 20, 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 reserved efficiencies on a going forward basis. So 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, Jimmy,
for your questions. Can we have one next question please?
The next question comes from Sami Taipalus from Goldman Sachs. Please go ahead.
Yes. Hi, good afternoon, everyone. So my first question is just on the rating agent 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? Then my second question is just on claims, but not QS casualty this time.
Could you just provide a view of how you see the Australia wildfires? I guess, we have 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 leverage. Yes, sure. So on rating agencies, we've we're very comfortable where we stand with S&P Moody's and you're probably aware of 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 and P Capital, but 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 we're 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 and health franchise continuing to deliver and with our investment risk contained, but delivering strong results in 2019, sitting on $5,000,000,000 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. And so I think we've indicated we've taken a charge in 2019 on the wildfires in December, January of about US100 $1,000,000 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 in 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. And so 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.
Eddie, you might want to add?
Yes, that's a good high level description. So again, a significant impact on global supply chain. So some fees interruption, travel implications. But the vast majority of policies out there, they require physical damage. There are some that include non physical damage BI, but usually there then this communicable disease are excluded.
And there's a niche market, I would describe it, where you get some coverage for communicable diseases under a non damaged 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 is what we call critical illness.
So it's cover for defined diseases. And usually the coronavirus would not be a covered disease, but there may be some very severe symptoms, pneumonia, where there is some coverage available. But it's also important to put the event into context. Still a sort of uncertainty, hope it's going to get under control soon. But the number of tests 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.
So the close to 2,000 we have seen so far is not a huge event from a relative perspective. But really hope the thing got under control. And yes, let's see. But at this point, we don't see it as a huge impact to the insurance industry.
Thanks, Amit, for your question. Can we take the next question, please?
The next question comes from Ivan Bokhmat from Barclays. Please go ahead.
Hi. Good morning.
Hello, good morning. I've got 2 questions, please. The first one is on pricing across CorSo and perhaps across the primary space in Chaos 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? And then the second one would be on the FSD.
Just wondering if you could talk about the give a little more color about the movement in SST since the previous reading of $2.41 you gave? And maybe a little bit of an update on the benefit from the ReAssure transaction. I mean, we obviously have seen strong performance of Phoenix share price, but also rates have moved. Perhaps you could update us on that number? Thank you.
Yes. So 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. And 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.
But then 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. So there is, I would say, a lot of pain in the system around U. S.
Liability. It's mainly in this umbrella excess commercial motor space, I pointed out before. And there, you see significant actions by most of the larger carriers. So they are deploying much lower limits than before, and they're charging significantly more premium. Now you asked an 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 access, 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, they are getting in a better space. But clearly, this momentum in the commercial space around different lines has to continue for quite some time. But 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 Torch environment. That's why we remain cautious in oneone. Also in our reinsurance book, The premium on capital is 2% down. If we look more closely into the U.
S. Liability space, where we now track the underlying limits that we're ensuring all the cases, we have reduced exposure to that most exposed space by some 12%. So clearly, we want to position us more cautious in that most exposed space at this point in time.
Eddy, I might have to add that, I mean, that's maybe obvious, but in CorSo, we basically don't write that business anymore, right? The one most exposed to social inflation. So when you say you're 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. So the CorSo pruning actions are to
a large extent around exactly those most exposed segments, umbrella, excess liability and excess and surplus. But obviously, we have some of that in our reinsurance treaties, and that's where we also not exit, but reduce exposure significantly.
But for the absolute doubt, of course, 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, as of July 1st, the number was 241. There's probably 3 factors which would have a negative impact on that. 1 was the capital deployment of the business that we continue to go through in the P and C Re business in particular. The second was the reduction of interest rates in the second half of twenty nineteen.
And 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. Instead, 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. So the combination, I think, would leave us or 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 level of 220. Importantly, that number on 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 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 1st 6 months of the year. All right.
Thanks, Adam, for your questions. Can we take the next question, please?
The next question comes from Ian Pierce from Credit Suisse. Please go ahead.
Hi, a couple of questions from me. Firstly, on CorSo combined ratio. So you sort of outlined the steps that you see to get you to 1 105 next year, but you've maintained the 98% guidance 2021. So I'm just wondering what you see is driving the improvement in 2021 with that 7 percentage point improvement in the combined ratio. And then also on CorSo PYD, not on casualty this time.
You've also flagged some negative development in the
On the CorSo combined ratio, so we are still very confident that we achieved the target we set for 2021, which is the 98%. For this year, we also get an estimate of 105, which reflects all these changes we have been talking about. So there's various components, again, building on the decisive management actions 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 in the course of course. So book just in January.
Rates were up some 14%. So we clearly will maintain this significant rate improvement momentum. As we discussed earlier on, we have reviewed also these initial loss picks. So we increased that in CorSo to really make sure we are at a very solid footing for the business we write going forward. So that explains why, for example, the normalization ended up with a slightly higher combined ratio than we showed before.
But 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 98,000,000 and we have this 105,000,000 estimate out there for 2020. And on the second one is the PYD for CorSo. So in the second half, it was also around this increase in initial loss picks, but you point not only to casualty, there was some also in property, but that was really part of the detailed reserve review within the first half year, where also some of the cases on the property side, some Nat Cat claims, some large manmade claims, we increased reserves on these specific cases. So there is not like 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, Jan, for your questions. Can we take the next question, please?
The next question comes from Paris Hadjantonis 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 not cutting Japan. So also we also have quite a lot of detail out there from the press saying about mid double digit increases in price. So if you can give us some detail in Japan that would be interesting. Secondly, I'm sorry to be going back to U.
S. Casualty and Viability. In your Investor Day, you were flagging about €8,000,000,000 of related reserves being impacted. Obviously, that didn't include core shore 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?
And 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.
So let me take the first one around the 1st April Japan renewals. Clearly, we have very high expectations for price increases, given the experience over the last 2 years, Chevy, the year before and last year, Hargilis and Fox Shai, significant losses. And as you also pointed out, we have a significant market share in Japan over the cycle with Japanese clients. We have made good profits. So 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.
So we're talking about substantial amounts. I don't want to go too much into percentages, but it is going to be very, 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 model on the latest scientific basis. And there was a significant uplist 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. So that's what we now use as a costing basis.
And on top of that, we really will go for substantial price increases in the Japanese market, yes? 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. So further price momentum, which then backs off our ambition to actually write more in the Nat Cat space.
But of course, we need to achieve the appropriate rate increases first. And on the second one, U. S. Casualty, I was not quite clear where you're pointing towards. I mean, yes, we have about SEK8 1,000,000,000 of reserves in reinsurance that are U.
S. Liability. But again, as U. S. Liability in the broader basis, this is not, let's say, only this is broader than the more exposed segments I pointed out before.
So this the excess liability, the umbrella that is written by the larger cedents, the larger carriers, that's a much more narrow reserve base. I think we quantified it back at Investors Day as a much smaller number. That's really the more exposed parts. The SEK8 billion that also includes liability reserves with regional clients where there is a lot of SME business, I would not call that exposed. And then obviously, there's the CorSo part, where now we have the ADC in place, so that the reserves on the CorSo side are now actually part of the reinsurance pool.
But I cannot give you a reserve number on top of my mind, how big that would be.
Yes, Paris, on the 19th March, in few weeks, we will publish our annual report with the annual report of the loss triangles. And we will have the breakdown, the detail. We have a call and our Chief Architect Officer will be with us to go through these numbers and your question regarding the utility and sales ratio, where are we and so forth. So it will be in the next few weeks. Thanks for your questions, Alex.
Can we have the next question, please?
The next question comes from Vinit Malhotra from Mediobanca. Please go ahead.
Yes, thank you very much. So just one question from me on the U. S. Casualty topic, apologies. But just to clarify, you mentioned the thought 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. So for example, what if the total 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? So that's my first question. And second question is just backlink to CorSo.
So the 105, would you say that 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, etcetera, have led to some kind of change here and you are expecting a bit better for 2020? Thank you.
So the first one, once more around U. S. Casualty or more specifically U. S. Liability.
And 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 reserves development mainly in workers' comp. So those carriers who also have significant workers' comp book, they could compensate these 2. So 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 shores being overruled by judges. So it could peak. And as I said before, it's more pronounced at the larger corporates. These are regarded by the jewelers, the plaintiff bars as the deep pockets to go after.
But also we have seen cases where trucking accident, still the plaintiff parts go after the trucking company, it may not be a Fortune 500 company. It also affects other corporates, but it, as I said, goes mainly into this umbrella and access 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, but that's clearly a space we need to watch very carefully. And that's why I explained before, there's a significant momentum in terms of rate increases and limit cuts. But this thought environment is still an area of concern.
And how these factors play against each other means we need to track this very carefully. And at this point, we are not comfortable in that space. So that's why we keep reducing exposure. But the picture can change 6 months from now, 12 months from now, we need to reassess.
But Vinit, just maybe if I can add, 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 reserve and but also pricing going forward. And so I think that's where we are. Tom, can
I maybe just add, Rob, 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. And Eddie and John and I have nothing to say in that process. So we receive of the information and so the actuaries try based on all information they have to get to the right answer.
So the positive minus of 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. But 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, etcetera, etcetera. So 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.
And that's it creates more volatility, obviously. I understand the frustration. In part, I'm frustrated myself sometimes. But to an extent, there's a very honest way of looking at things, and it means you're typically at the forefront of things. But it does always means there's always risk, right?
You don't have buffers to avoid risk.
I'll give Eddie a break and try to do the second question myself and maybe you'll correct me if I get it wrong. But your question is at the midyear, 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, but that fortunately has been balanced by a better than anticipated increase in the pricing that CorSo has been able to achieve. So both these have to work their way through the portfolio, but
net 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. And we see in the beginning of 20 20, a continued momentum here. And everyone we talk to sees 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 Haid 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 JV, Trami, Faxa and Hachibi's losses, I come to $2,400,000,000 Your premiums over the past 2 years from Japan were, I don't know, dollars 1,500,000,000 gross and maybe $1,300,000,000 $1,400,000,000 net earned premium.
So this seems rather low. Now you can say 2018 2019 were extraordinary or you can say 2018 2019 were the new normal. So even if you achieve, say, 10% or 20% price increases, this appears not sufficient. This would give you net earned premiums of €800,000,000 from Japan. So what are your thoughts on this?
And the 97% normalized combined ratio for 2020 price expectations for April July renewals already included there? And second question on 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?
So on your first one regarding Japan, so 10% or 20% is clearly not enough, the numbers you mentioned. So I don't want to get 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 Chevy, Fox Shai and HOKI BIS. And as I explained before, we use this evidence to update the Nat Cat model for Japan. We'll 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 and 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. And also this we study very carefully what we actually can see in Japan that at this point, we are rather in the 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. And then all the learnings from the losses we factored into the model, clearly, we need to go for substantial price increases for this business to become sustainable. But 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. And your second question was around the 97,000,000 to what extent further price increases are already factored in. So some are reflective.
So what we achieved in oneone, the 5% nominal with all the corrections, as we explained. Of course, as projection stands for the forthcoming renewals, we have not yet factored in the compensation for the lower interest rate. Some of that is affected in, but not all of it. But 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.
So there's further upside and some of that we already baked in. Let's see where we get to.
Maybe I'll jump in and get 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 also 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.
Percent 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. But 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, right? I mean, clearly, the one increase from last year we had, of which only part has been earned last year, had been eaten up by these change in assumption in APLRs we have put through. But if you think about January, 40% increase, that's on the lines we have kept, right? This is not the main lines touched by social inflation. So 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 course.
So I think that makes us quite sure as to the momentum in the market, the talk. There's obviously nobody talking about this is enough yet now, right? So this continuous momentum, people think this is a multiyear movement. So I think all of that makes us quite confident about the 98. And the question, I think, we'll look where we go from there after that.
But historically, clearly, there have been phases where it was
much lower than 97. Michael, thanks for your question.
Can we take the next question, please?
The next question comes from Emmanuel Musia from Morgan Stanley. Please go ahead.
Hello. Hi. Thanks for taking my question. I have one question on Corporate Solution. Could you please remind me the criteria underpinning the pruning in Corporate Solution?
Also, your adjusted your appetite to a different type of risk, for example, smaller or more diversified risks? Or is it purely based on rate online appetite? And lastly, if you can remind me where you are with the pruning process? Thank you.
So on the CorSo pruning actions, I mean, on the top, we have talked about it a lot already, XS and then in E and S, these are lines CorSo is really exiting. And there's 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 agriculture. So these are lines where we are either exiting or significantly proving. And then as the lines, as we explained earlier, Recorso has demonstrated, they have the necessary insight, the data to really differentiate and underwrite this business in a good manner.
So around property, engineering, these other lines, there we really push for the price increase. Crudeing, 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. So that's the speed we can go. And then the rest will happen in 2021.
But we're well on track to achieve this pruning, which then also will go in line with some expense reductions on the other side. So we're very well on plan with this pulling action. It's really in this lines of business where we concluded CorSo has no edge. It's just additional capacity to market. So 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. So the impact on total dividend out is not that material. But given the pending sale of ReAssure, which has been a very healthy cash generator and with an underperformance from, let's say, P and C Re and CorSo not producing the desired results.
How should we think about the dividend trajectory going forward? And 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. I mean, of course, interest rates have come down, but 3.5 percentage point impact that kind of offsets the price increase that just seems to buy? Maybe there's something simple that I'm missing, but if you can just clarify, that would be helpful.
Yes. So on the dividend, you're right, Vikram. It's a 5% increase. We bought back approximately 3% of the shares with the $1,000,000,000 buyback. And so 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 if 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 midyear when the ReAssure transaction closes. But as importantly, the continuing ownership of the Fenix shares will provide us access to the Phoenix dividend, which in recent history has been around 6% paid out on that investment. So we'll continue to book that as long as we own those shares. In the meantime, we expect our reinsurance business, life and health as well as P&C to do well and we expect the corporate solutions to return to a healthy profitability in 2021. So 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, so first, it's 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 will see at this point in time. And 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 and C portfolio composition is about 6 to 7 years. So the average claim is discounted over 6 to 7 years and then also a small, let's say, reduction in the interest rate curve over 6, 7 years, then you get quickly to this 3.5% impact versus the upfront premium you charged then for these risks. So it's mainly obviously in the longer tail lines, in the casualty lines. But even on property, it has a small impact.
We have 2 years of claims duration. So if you do that calculation correctly with the duration, it turns out to be the 3.5% impact of the interest rate drops we have seen towards the end of last year.
Thanks, Vikram, for your questions. Operator, do we have a final question, another question?
Your last question comes from Ivan Bokhmat from Barclays. Please go ahead.
Hi, thank you very much. I've got a small follow-up please. 1 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? And secondly, it's on Life and Health. I mean, just Slide 46 in the presentation, it shows some reduction in EBIT for Life and Health divisions.
Although if you take away all the one offs, there's actually a 5% to 10% improvement. I was just wondering if you could give some thoughts around the sustainability of the Life and Health business and maybe some early indications for 2020. Like 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.
So 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 a lot of different regions and there shouldn't be 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 L3 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 this year. And what it made was these reinsurance treaties automatically became an intergroup transaction. So 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 year end. The adjustment was approximately a $300,000,000 technical cost to reinsurance. We took the view that as this business is being mark to market on both sides, we should go ahead and adjust the asset side as well.
And so 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 health life and health investment result looks as robust as it does. But let's say, a technical correction to a problem that was came through as a result of the quilted transaction for ReAssure. Obviously, if things go as planned, we will not own ReAssure anymore after the summer, but for these 6 months, it's an in house transaction now. Your first question was with respect to CorSo Capital.
We did recapitalize Corporate Solutions at midyear. 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 the 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. And so I don't think we've got any expectation that there's any immediate needs for recapitalization.
Australia, Les and I, I think that was a question, right. I mean, just as you know, we are traditionally more long in the group life and not in the individual life. Group life was it, I think, in 2013, we had a loss there. But 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, in real life visibility. 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 and A session. So 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.