Everyone, welcome to Swiss Re's Media Conference. To everyone here in Zurich and also a warm welcome to those joining us on the phone. Call. I'm Elna Lobotecenko, C3's Head of Media Relations and Corporate Reporting. I have with me today our Group CEO, Christian Mumenthal and our Group CFO, John Dacey.
We will start with a short presentation of our full year 2019 results, and then we look forward to taking your questions. And now I have the pleasure of handing you over to our group CEO, Christian momentarily.
Okay. Thank you, Elena, and welcome everybody on the phone and in particular people here in the room. We appreciate you here. I understand that there's a few competing news today, so thank you for being with us today. So this is our full year results.
As usual, I will try to explain a bit how I see them. I will go through the earnings in context. I'll try to give a bit of context and explain how we at Swiss Re see the results. I'll talk about P and C pricing updates, the renewals in P and C and Corporate Solutions, quick update on Life Capital, our capital actions and then some news on the leadership in sustainability before John Dacey then goes through the details of the figures. So let me start with a very high level overview, as you would expect from earnings into context.
So this covers the earnings of Swiss Re over the last 25 years. So I joined 99, so I've seen most of that myself. The different period we're seeing reminds me a bit of what I saw at the time in the year 2000, 2001. So what you can see on this chart is the light blue line is our cash pricing index. So this is how we see the price quality of the business on the Nat Cat side.
Obviously, there's other lines of business that show slightly different patterns, but I think overall, this explains the development quite well. And the dark blue bars are the earnings we published. So you can see in the 90s earnings going up, and as they went up, pricing going down because things were going really well. And then 2,001, there was 9.11, obviously. And then 2,002, there were some issues on the financial market side, plus also reserve strengthening at the time.
So that made the pricing index go up quite a bit. It would have softened, but then in 2005, not that visible here. We had Katrina, Rita, Wilmar, so huge hurricanes in the U. S, which made it strengthen again. And then as we had further good earnings, it might have come down what the financial crisis is on the asset side.
So that was not a liability problem, that's an asset problem. So the price quality was maintained. And then we had some extraordinary earnings after that, which made the pricing go down. And since 2017, where we had also big net adds, not as big as the shock at the time in 2001. Prices are going down going up slowly on a slower path than EBIT in the year 2,000 and 12,002.
So I guess what I'm saying with that chart is, you can see this is a cyclical business and there's relationship between price and earnings. So when you have a lot of earnings, price go down. When earnings are tougher, prices tend to go up. And so a lot of this phase, I think, can be explained in some parallels to the years 2,000 and one, 2,002. Now another context is to look at the capital allocation of the group to the different business units.
So that's the x axis is proportional to the capital allocated and the y axis is the ROE. You can see P and C had 4.4 percent, life and health, the 12.4 percent, reinsurance overall was at 8%. Then you can see relatively little capital allocated to Corporate Solutions, but that's where we have so far the biggest issue. It's in a turnaround situation with new management since March, new the whole leadership team, new since about June or July. So they're in the midst of heavy work in that segment.
Then you have Life Capital with minus 3.4 percent, explainable through the sale, the agreed sale, but not closed sale, obviously, of ReAssure to Pfenex, which had an impact effect, which we published at the time in the news release of about NOK 300,000,000, NOK 250,000,000. And then finally, group items, that's the cash we hold at the holding level, plus our investment in participations.
This is a whole series of participations we had.
It was a very good year on the asset participations we have. It was a very good year on the asset management side. So these participations, including the 2 of America, which we sold, actually had a good performance. So this gives you all the context into the earnings and hopefully explain a little bit what is where. And so I'd like to go through the, I would say, key 4 drivers for the results overall.
First one is elevated nat cat losses. Second one is this turnaround situation in Corporate Solutions. 3rd one is U. S. Casualty impact, the so called social inflation we're seeing in P and C Reinsurance.
And then finally, on a positive note, the excellent investment results we had last year, all leading to the group net income of 7.27
percent. Let me start with Nat Cat.
So on the left chart, you can see our Nat Cat losses over all these years. So clearly, 2019 was another relatively heavy burden for us, about 50% above what we would expect based on the pricing tools. Obviously, we had where it was much below that, but 2019 was elevated nat cat losses. On the right side, you can see the chart across the world. Our global average nat cat estimated market share is 11%.
And then the nat cats we had last year, some of them, most of them were actually in regions where we had a higher market share like Japan and Australia. Now the reason we are higher in Japan and Australia is also mostly because these countries were touched I mean, Australia and New Zealand were touched by large nat cat loss in 2011 and prices have risen. So we think that on a risk adjusted basis is a more attractive market. You look at the U. S, which is a huge market where we cannot, for capacity reasons, have such a high market share.
So there, that drags the overall market share down. That's the situation. Now I have to say that despite that, the core the combined ratio of the nat capital is below 100%. So even despite being higher than expected, it is still a profitable business even in a year like that. So Corporate Solutions, where the biggest pain was last year, it's definitely in, I would say, turnaround situation with how higher claims come for the year compared to what we had expected, mostly in U.
S. Casualty, so U. S. Liability. The claims speak were in Q2, but also in Q4, there was elevated claims.
And so what we did in Q4 is we did not just book the claims, but we also looked fundamentally at where we picked the losses in the current year, and we all agreed to increase reserves and increase these recent loss picks, as we say, at the cost net loss ratios. We don't have enough we don't have a lot of evidence for that, but in view of the trend and everything we're seeing, we wanted to increase these reserves to a level which we think is sustainable. So there's about 50% is actual losses, 50% is assumption changes in Corporate Solutions on that. Corporate Solutions also progressing on the pruning of the portfolio, which was announced last year. Obviously, there's some time delay effect in U.
S. Gas. When you prune something, you see it over a year from that point of from that moment in time. So about 25% of the pruning happens last year, and nearly all of the rest will be done this year. We get to, I think, 90% or so at the end of this year.
We also have about €100,000,000 of cost savings, which they're well on track to achieve. You don't see the benefits yet in 'nineteen because, obviously, there's some restructuring charges allocated to that, but we're well on track on that. And they also bought some strategic reinsurance cover, mostly from the reinsurance from PMT Re. So the team is in full And we'll let the team do their work. On T and C Reinsurance, some of the same thing, obviously, coming from the client side.
The so called social inflation, you see on the right hand, you see a chart with just one aspect, right, of the system in the U. S. These are the top 50 U. S. Forward looking, the medium, and you can see how this has gone up a lot in the last few years for different reasons.
And so we see some of these developments. And here, too, we decided to increase the initial loss base to increase reserves. And based on that, we felt this was a necessary step to be, as much as we can, ahead of the issue. I think that's our priority, strong balance sheet and being ahead of the issue. On the investment side, we had an excellent return, 4.7% return on investment.
There was obviously some realization of gains in that. But you can see in our balance sheet that the unrealized gains on the balance sheet grew massively last year. That's because interest rate came down, so then you have this massive increase of unrealized gains. So every time you touch the portfolio anywhere, you realize some gains. So that explains part of this performance.
At the same time, the running yield is close to where it was before, so we watch that segment very closely. We try to maintain it as high as possible. And I think most importantly, our Chief Investment Officer, which is probably most proud of the figure on the right, just €5,000,000 impairment during the year on this huge book. So it's the quality of the book is quite extraordinary. So we're not trying to get yields by lowering the quality of the book.
The quality is very, very
strong. So
let me then move to the overview of all the basis units and how I see them and then also maybe a few words about the outlook before I go to the renewals. TNT Re, obviously, 4.4 percent return on equity hit by the nat cat and the trends in U. S. Casualty. If you look at the underlying combined ratio, we get to about 98% time.
The underlying means you ignore previous development, you ignore good luck, bad luck on the nat cat side. So you get to a better quality, but clearly it was impacted by some of these factors. Based on the renewal and our estimates, we think that this expected combined ratio will go down to 97% in 2020. So that means positive outlook on the P and C Reinsurance. On Life Asset Reinsurance, 12.4 percent return on equity.
We're happy with the business. It's running well since a few years. And in terms of growth, we are also optimistic. We see some growth in Asia, in particular, and in large transactions, so that's also optimistic. Corporate Solutions in full restructuring, we've got some really good prices in last year, but a lot of that is beaten up by our changed view about the loss pick.
We continue to see good price momentum, very good price momentum in January, but it means it will take time to fix that. We're actually quite comfortable with the 98% combined ratio 2021 target we've put out, but we also give you an intermediary step here with everything we're seeing of 100 and 5 for this year. So that's why I put it on amber. It just takes a while. It's impossible to fix it just in 1 year as expected.
And then last capital, we had very good gross cash generation, €1,100,000,000 Obviously, we're very happy that we got to an agreement to sell ReAssure to Phoenix. We think that's a very good price for shareholders, a very good solution for the business. It's very good for Phoenix actually, I think. That's going to be highly synergetic as a transaction. Our open box grew quite a lot, 22%, so we're very happy about that.
And then certainly in Switzerland, we had a lot of news the last few days about the partnership you had with IKEA, which was signed now and which means that IKEA is a partner for us for now just in Switzerland and Singapore, but clearly this is a relationship we're going to expand. So let me go now to the pricing. So what did we do at the renewal? You can see on this Slide 11, what we put up for renewals, so that's deals that are actually renewed. So we look at the whole portfolio, one is up for renewal, that's 9.8%.
The outcome is 10%. In between, you have some business we cancel, we don't write. There's some increase on the existing business, either in size or price. And then there's new business that we're able to get. So the overall like for like is plus 2% in volumes.
And then I have to say a few words about price changes because that's the all kinds of numbers and you can't which number. So here you have the whole set of number. So what was clear going into the renewal is that because interest rates have gone down a lot, right, during 2019. So as you go into the oneone renewal, we try to estimate the effect of lower discount rates on pricing in an economic framework, and that's about 3.5%. So that means nominal rate will have to go up 3.5% to just stay at the end point from a discounted economic view.
But on top of that, as I said, well, we changed some initial loss kicks. We increased some of the models we had overall, and that's another 1.5% of change in the bar, if you want. So our people knew they have to do 5% nominal change to just stay where we are from an economic quality point of view. And I'm happy to say we achieved that. We had to cut some business to do that.
We didn't grow a lot because we did that. I don't think the whole market has absorbed or accepted this discount rate factor in the longer tail lines like casualties. So we were not able everywhere to achieve these increases, and which is why we cut quite a bit in casualty. So overall, it means that from an economic base, we say here 0 price increase. I guess, if you really take it on a like for like basis, it's something like 1.5%, because the loss cost probably shifting 1.5 points higher last year too.
We think that this is obviously the January renewal. This is focused on Europe. There's going to be the April renewal in Japan, where we expect more price increases. And then in June July, it's more the U. S, so some of the loss affected parts of that.
So there we expect also some good renewals. And as I said, we are pleased on all of that, the portfolio, the outlook, we estimate the underlying combined ratio in 2020 to be 97, which reflects the price changes, portfolio mix, everything. So that will incorporate everything we're seeing at this stage. Slide 12 shows a little bit more of the breakdown. So on the left side, you can see what was up for renewal.
The main category is the main growth of nat cat again, because we think that's the most attractive line. It's also the one where there was actually price change going up, so that makes sense. And then less growth in some of the other lines with casualty as with a minus 2%. So overall, the allocated capital to this portfolio is about the same as last year. Remember maybe that last year we grew 20%, so there was a significant deployment capital in the P and G portfolio.
So this year, with all of that, it probably stays about the same as it was at the end of last year. So this is roughly where we are. With some shifts between proportional property, here you see plus 11% of capital, but also minus 6% on casualty. So with the lower combined ratio, we expect also some earnings, obviously, to come through over time from this renewal. Corporate Solutions, the oneone renewal is not that big.
Europe has a oneone renewal, but it's not the same as it is in reinsurance, where it's more than 50%. So here, you can see the whole history of price changes, January 2019, with about 5% price improvements. So then during the quarter, Q1, it accelerated. So Q1 overall was 8%, Q2 12%, Q3
14%
and Q4 17%. And that's a reaction to the loss trends that people see, right? It's clearly people are not comfortable with some of the business. Some of it they feel is underpriced. So the overall average for last year was then 12%.
If you take the average, probably going up as you go through the year. In terms of impacting GAAP, you only see that time delayed, right? So it's about it smears out over a year from the point of inception. So you cannot see all of that plus, obviously, as I said, we increased some of the initial loss stakes. So you don't see that much from this or you see nothing, right, from these price increases in 2019.
Probably, in January, we're happy to report 14% price increases on top of what we had last January. So now it's starting to get more relevant. And so we have we believe, right, business and that there is a self correcting mechanism that ultimately gets you to the right position. One word on Life Capital. So obviously, you are aware we announced in December the planned sale of the ReAssure business to Phoenix, transaction value in pound 3.25 €1,000,000,000 The cash proceeds to switch between €1,200,000,000 Obviously, this is subject to some regulatory approvals, some a whole series of approvals.
The AGM of Phoenix has taken place, so the shareholders have approved the deal. In the end, we expect closure midyear. We're going to have a 13% to 70% stake in Phoenix post closing and expect roughly about 12 points improvement in the SST ratio at time of closing. So this is not something that is recognized ex unpaid. And then obviously, there's a lot of focus on the dynamically growing, we call it, B2B2C businesses, so where we interact with other businesses, but ultimately there's consumers behind and it's Life, the Group business and ITQ, they grew 22% during 'nineteen.
Capital management actions, I start with the framework, which is the same in the last many, many years. I can't remember when we changed it, but it's many, many years now. The first priority is to ensure a superior capitalization of the group. So that's the top priority. And that's obviously fulfilled.
We are above 220,000,000 and the exact figure by year end will be communicated, I think, in a few months' time or 1, 2 months' time. Parting number 2 is to keep or grow the regular dividend. So we do that with an increase of 5% to 5.9%. That will be proposed obviously to the AGM, subject to AGM approval. Then party number 3, deploy capital for business growth.
That must be priority number 3. We were able to deploy quite a bit last year, less so right now in this environment. And then the 4th priority is repatriate further excess capital to shareholders, which we try to achieve through the share buyback program, which will be proposed to the AGM later on. And finally, on sustainability, I mean, we talked about this subject for a very long time, but it's getting more popular, as you can see everywhere. But just go through a little bit of history and some of the new announcements we have made.
So historically, we have talked about this issue for a very, very long time, the climate change issue for us 1979. It's the first publication where it was mentioned. In 2003, we announced we're going to go greenhouse gas neutral. So I think we're one of the first companies to do that. You do that by buying certificates basically, right?
So this is sort of a level of getting to CO2 neutral. In 2017, we shifted the whole portfolio to ESG criteria, I think one of the first insurers to do that. In 2018, we had our thermal coal policy excluding some of the most polluting clients. Then by 2019, looking back to 2,003, we had achieved underlying, I mean, we've given ourselves neutral, but we still try to minimize our own footprint. We had achieved a 55% reduction in emissions for employees since 2003.
That's mostly through buildings, buying green energy, etcetera, etcetera. So the hardest piece, obviously, is travel, but on the rest, we have done a huge amount of things. And then now we talk about a new oil and gas policy update, where we will withdraw support from the oil and gas companies. We've set down the highest CO2 usage per gallon of oil. This is going to be stepwise, it's the exclusion of the worst five percent by 2021, the worst 10% of clients by 2023.
But I believe, through all that, we try to motivate clients to be proactive so we're going to support the clients on any path they choose to take to become less polluting. And then 2,030, we're committed to net zero operations. So the difference to this greenhouse gas neutral is basically we're committed to extract CO2 from the atmosphere. So it's not just these certificates. It's actually being 100% sure you captured it and you store it permanently somewhere.
The technology for that is not yet available at large scale. We think it will obviously become available through that, which is why you don't do it immediately. You have to give a certain time. And obviously, in the meantime, we also try to reduce the greenhouse gas emissions per employee further. And in 2,050 is the commitment to net 0 across business, which means also such as our own operation, assets and the liability side.
And with that, I hand over to John Lacey and we will go to Q and A after that. Thank you, Christian.
Maybe a bit more details in some of the business units, but I'll start out with the first page, which is key figures at the group level and simply point out, I think, 2 pieces of information for you. The first is while we separate the P and C Re Business from the Life and Health Re, when we think about reinsurance as a business, the overall return on equity for that business in 2019, a tough year, was still 8% when you combine those 2 together. And I think we believe, as Christian mentioned, the opportunities for us to improve the P and C Reis operating results allow us to believe that we're going to be back into a strong performance over the coming years. The second thing on the bottom right, the shareholder equity for the group increased 5% year on year. That's in spite of paying a healthy dividend to shareholders and buying back 1,000,000,000 dollars in shares.
So I think here again you see the strength of our balance sheet. We continue to run the group with a very strong capitalization. If I go to T&C Re, Christian mentioned a little bit the actual performance, a 4.4% return on equity in the bottom right, not where we think the business is capable. This was undoubtedly affected by the large Nat Cat losses, the typhoons in Japan. We have included, based on Q4, dollars 100,000,000 of losses related to Australian bushfires.
We think the nat cab business continues to be an interesting business for us. You saw in 2019, we increased premiums and P&C Re by almost 20%. We're convinced that that was a smart thing to do. It may not appear in the results of 2019 on the bottom line, but we've repositioned ourselves to take advantage for continued strong prices in these markets as we go into 2020. As Christian mentioned, the combined ratio on a normalized basis of 98% was achieved in 2019.
And more importantly, we've decided to go out with a very comfortable estimate of a 97% combined ratio for 2020's portfolio. I mentioned the growth. One of the positive impacts of that growth on our business is in conjunction with a strong cost discipline of reinsurance, the operating expense ratio actually decreased by 10 percent. It went from 6.9% to 6.2% in the year. This is related to the increase in premiums while costs were strongly contained.
Two parts of the business which P&C Re has continued to invest in, one we referred to as solutions, the other to expand these parts of our business. To expand these parts of our business. In Life and Health III, again, a very strong report, almost €900,000,000 of earnings coming through a return on equity of 12.4%. On the operating margin, you see a large contribution by the financial result. That's not surprising given the nature of the Life and Health businesses.
The one thing I would point out, it appears that the technical result actually reduces year on year. And while that's factually correct, there's one reason that happens. And it's a little complication with respect to the ReAssure transaction. It turns out that Life and Health Re had a series of reinsurance contracts with 1 of the businesses previously called Old Mutual, now called Culture that ReAssure acquired in the second half of twenty nineteen. When ReAssure acquired that business, the contract reinsurance contract between CMC Re and Quilter now becomes an internal transaction.
And as such, we had to unlock assumptions on the liabilities and mark to market those liabilities. In the current interest environment, that led to a technical loss on the liability side of approximately US300 $1,000,000 What we did to make sense of this, consistent with that portfolio, was to realize a similar amount of gains on investments that are also linked to that portfolio. So we neutralize that impact on Life and Health III at the geography and where those come through looks a little different as a result. So that's why the technical margin has a smaller impact. It would have been larger with the exception of that culture transaction.
The running yield of 3.3 percent again holding up strong in life and health with the portfolio in the relatively long duration of the assets that we have here. Again, strong cost discipline, keeping the operating expense ratio down year on year. There's actually an absolute reduction in Life and Health Re of expenses related to the business that they wrote in 2019. The other thing I'd point out, I didn't mention much, but the continued expansion of our Asian franchise in our reinsurance business. Here you see 30% of Life and Health Re now written in Asia, larger than our European business and approaching the size of our American business.
That's 30%, up from 20% 5 years ago. Christian mentioned a lot about core solutions. We took serious actions during the course of 2019. We announced the restructuring that we're doing at midyear. That restructuring continues apace, but it's going to take a little bit of time to continue to earn it through.
You see the combined ratio jumped to 127.9 for the full year. It's not as bad as 2017 when we have the losses from the 3 hurricanes, but it is a number that is acceptable for any reasonable business. This is part of the restructuring. We expect this number to drop down on a normalized basis to 105 for 2020, and we stand firmly behind our target estimate for a 98 combined ratio for normalized combined ratio for the Corporate Solutions business in 2021. On the portfolio, what you see is the business continues to have in 2019 and a large part of our activities in North America and a significant part, 26% still in the other liability sector.
Those are the places where we are actively
putting the portfolio,
in some cases, completely exiting lines of business, excess and surplus casualty business in the United States, the umbrella liability policies in the United States. So when we show this figure at the end of next year, you should see both of those segments of the pie, the U. S. And liability will be a smaller part. The other thing which Christian did mention is those price increases that we see actually allowed us to maintain, at least in 2019, the premium volume that was in fact up notionally year on year.
We expect most of the pruning, 65% of it, to fall away during the course of 2019. On Life Capital, Christian alerted you to the gross cash generation, again, a very strong performance in the context of the ReAssure restructuring and ultimate sale. The net income of minus 1.77 is completely explained by the charge we took in the 4th quarter for the ReAssure transaction. Our charge ended up being US230 $1,000,000 We alerted you in December when we announced the transaction that we thought it would be somewhere a little more than that. But the good news is the share price of Phoenix Group has reacted positively to the transaction and reduced the loss that we've had at the year end.
Christian also mentioned the open book premiums, a strong growth here. You see over a period of time almost 30%. 2019 over 2018, 22% for the open book of the business. Those two businesses continue to perform well. The number of distribution partners on IpdeQ, we referred here at 20 9.
We don't think that includes IKEA, IKEA would be slotted in here. But you see that we've got a history. We've got already a group of large distributors, which we are delivering products, in some cases, truly new products to markets where we can increase the penetration of insurance. On investments, I'm not sure I've got a lot more to say than what Christian had. I can you go to point out the last bullet point on the far left of the slide, the US5 $1,000,000 of impairments is a remarkable number given the size of the balance sheet.
As Christian said, we are not going down in credit quality to maintain this running yield. We are under pressure and over time the reinvestment opportunities to us will bring this number down if nothing changes. That just means we're going to have to get better with our pricing on the product side of P&C in particular. But I do think we have an opportunity to find new investments in other asset classes, including real estate and private debt that allows us to compensate in part. I'd also observe that we finished the year with more than US5 $1,000,000,000 of unrealized gains in our investment portfolio.
That's a US3 $200,000,000 increase from the beginning of the year. And just to reiterate the relative strong positioning, we split the fixed income portfolio into those that targets with less than 5 years of duration and more. And what you see is the longer duration bonds, one, make up a larger percent of what we do and also are paying 2.9%. So as bonds roll off, we're much more likely to have the relatively high paying positions in our portfolio due to natural maturities and see the maturation of some of these bonds paying on average a lower rate, 20 basis points. That's what I wanted to cover, Elena.
I think I can bring it back to you.
Thank you very much, Christian and John. We will now start the Q and A session. I would like to ask you to introduce yourself if you ask the question and say with me your information you're working for. Let's start with questions here in the room. Please wait for the microphone, and then we'll move on to the phone.
Are there any questions? There are one for questions on the phone.
One of the big issues in the man made process is the
growing case.
And I would like to learn if I think both lines are involved, Corporate Solutions and P&C. And I mean, how was the outcome for 2019? And how do you assess the situation? Because I mean, let's say, a year has passed and even more, and you have no idea whether this aircraft will fly in the future?
Maybe I'll start. You're exactly right. We don't have an idea of aircraft Wolffly in the future. What I can say is that as you correctly observed, this is a hit both for our P and C business as well as the Corporate Solutions business. Boeing had a specific cover for the grounding of the fleet.
That cover from our point of view, at least versus 3, has been fully reserved. Boeing also has some exposures, which are not entirely clear for the losses of Ethiopian Air and the Indonesian Airline. We continue to work through what those exposures are and to what degree insurance covers them. At the current time, we feel comfortable that we put up the appropriate reserves for those liabilities in addition to the grounding of the fleet.
Next question.
Felipe, Jaffee. Can we say this post that you were too aggressive with this casualty and long tail business? And what is is the cash generation current ongoing cash generation of ReAssure was its big contributor in Life Capital with cash generation?
Yes, maybe I'll take the first question, right? Obviously, in handset, that's what you say, right? That's a logical thing. But you never know, is it something you could know at the time of pricing or not, right? What you observe is, obviously, at the time of pricing, you look at everything you know at this point in time, you look at the past performance of the business, you try to estimate the future with some inflation and then the years passed.
And then in the U. S. In particular, you have this phenomenon of social inflation, which means that in some jurisdictions, there's very aggressive litigation financing, there's lawyers going off the things, there's serious getting higher rewards. So the trends that we see has been higher than what was costed, right? So you can either say you were not able to see the trends, you missed costed, you can see the trend afterwards developed much in an adverse way.
And it's hard it was hard to see at the time where it would end. So it's quite a mixture of things. It depends how nice you want to be. But clearly, the fact is, there's a difference between both soft cost and the end result.
With respect to your second question on ReAssure, yes, ReAssure has been a material contributor to the cash generation of Life Capital. The good news is we expect the transaction to close during the course of the summer. And as such, we'll get additional cash on closing. We're being compensated with a combination of 1,200,000,000 Sterling, which will come in the door in addition to shares in the Phoenix Group. Those shares, we will hold for a minimum of 12 months.
There's a formal lockup, which we've referenced previously from that time of closing. And while we own the shares, as long as we own the shares, we'll receive dividends from the Phoenix Group the same as all their other shareholders will. And so we expect, in that dimension, a healthy cash flow still coming in. It's unlikely to match the cash flow that we were able to report for 2019, the DKK1.1 billion. But again, we have a one off of the GBP 1,200,000,000 which will come in the door.
And for the absence of doubt, the nature of that transaction has not been or both the cash and the de risking associated with has not been included in our calculations for year end solvency. We're not reporting that. We'll report the SST ratio as of January from January 1 when we report our EVM results in March. That number will be not increased by the ReAssure transaction. We wait until that closes to include that in we have further improvement in our SSG ratio.
Congrats, Maher, Kaka Sansaive. My question goes to Corporate Solutions. As the Boeing case shows, if there are really big loss events, we have risk to be impacted double. And the same goes for deep natural catastrophs. So my question is, how does it works with the diversification model you always claim with Corporate Solutions and reinsurance
and the
double impact of peak losses?
Yes. This is a very fair question, right? So it's not always like that. For example, on Nat Cat side, CorSo was very light last year. So that's one area they were lucky where regions were touched.
But it's I don't think there's a key point about diversification. The key point of diversification is life and health and P and C within reinsurance. That's a very big point. The challenge or the reason why having CorSo is not an education reason. It's more that in reinsurance, you're obviously dependent on clients giving you the business on session rates.
And we have seen in the last few years session rates go down, right? Certainly, in the group times, session rates went down, so clients were keeping more of the risk. There's more question of access to risk, more strategic question of access to risk and having these relationships with these corporate clients. It's interesting actually the IKEA case is a nice case, but this would have not been possible if CorSo didn't have a long standing trusted relationship with IKEA, and that's how the discussion started, right? You have a strong sponsor there who says we trust this RE, they are good partners, and this is how this whole thing came about.
So to me, the proposition that there is no case for policy case for that indication. This is really more this set of access to risk and being close to this corporate science.
Thomas Hengaard from Finance and Wirtschaft. The cash in goes to the coronavirus outbreak. And I would like to know your view on that on the insurance business. I mean, there is cost of life. There is business interruption, all sorts of cancellation things and
yes, business aspects that maybe
even then the supply chain difficulties and so on. So how are how is insurance sector hit by that and in your company, of course,
in that regard? Sure. So
we are tracking, you won't be surprised, but for the coronavirus very closely. We have a large reinsurance business in China, and we have, as our clients, many of the largest Chinese life insurance companies. To put some perspective before I drop down specifically to Swiss Re and to the insurance industry more broadly, it's worth remembering that in any year, there's usually between 35,000,000 cases of a serious influenza. And now the fatalities associated with COVID-nineteen are higher than normal influenza, but that's a one point of reference. The probably more relevant point of reference is those cases of serious influenza typically result in somewhere between about 300,000 and 650,000 actual deaths a year due to a normal influenza.
So while these 2,000 coronavirus deaths are not to be ignored, they are a fraction of what we normally would see in an average year related to a broader set of flu cases. Now that said, people are obviously very concerned about this due to the fatalities associated with it, the incubation period, which seems to be rather long and the high level of infection from person to person. I think at the moment, we don't believe this is a material issue for Swiss Re's insurance businesses. And frankly, it's probably not a material issue for the insurance industry. The number of deaths, many of which will be covered, will not be that important in the overall sort of numbers that are insured.
I think, as you said, the economic losses can be very large. There is going to be significant business interruption in many different segments due in part to the supply chains that have been developed with China as a key component of those supply chains. Most of those interruptions will not be covered by insurance precisely because there's not been physical damage associated with this. And typically, business interruption is part of a property treaty that's related to that physical damage, whether it's a hurricane or an earthquake or an explosion. And you don't see that in this.
And so typically, but not always, but typically, those property treaties would require a physical damage to pay. And so these exposures, while they're going to be very important for specific companies and maybe for industries like travel, like hotels, there are unlikely to be losses for the insurers.
The first question comes from Ben Guider from S&T Global Marketing Intelligence. Please go ahead.
I was just wondering if
you could give a split on Corporate Solutions between no on the impact and the combined ratio between what the management actions were and what the U. S. Casualty reserve strengthening was. So I think it was 16.1 points of adverse development in there, but I was wondering if you could give some kind of a split as to how much of the results down to is down to management actions to correct the business and how much is down to the U. S.
Casualty inflation that you see?
So it's very difficult to disentangle management actions from what we've been doing here. I think the most important management actions clearly is our decision to exit a number of the lines which are performing the worst. What I can say is about 2 thirds of the prior year development that we booked during the course of this year are in that 1 third of the book, which we've decided to exit. We do see negative development in some of the businesses we're keeping, but that's why these price increases, which are related to that business we're keeping, are so important to us, 12% year on year, 14% in the January. So the management actions probably shown a bit of a spotlight on those portfolios, which started to indicate some weak performance in recent quarters.
And the we took a very hard look at midyear, a even harder look when additional claims were coming in, in the 4th quarter to be sure that our reserves are adequate as we close the year.
The next question comes from Olivier Rall from Financial Times. Please go ahead.
I have to follow-up on coronavirus. You said the business interruption don't pay out because it's not associated with property damage. Is that what failure of the insurance industry? Do you think the insurance industry should be paying out for these kind of losses that its clients are facing? The other question was more specifically specific.
The first slide that Christian put up showed the profits were sort of $3,000,000,000 or $4,000,000,000 for much of the past decade, obviously much lower in the past 3 years. Will price rises in your various lines of business be enough to push us profits back up to that $3,000,000,000 $4,000,000,000 range where it used to be?
Take the second one. Yes. Maybe I'll answer your second question. I think our financial targets remain where they are. We think we can earn more than the 700 basis points over the risk free rate.
Risk free rates are down. But when you combine that target with the equity that we've got. You've come to a number which probably is less than 4, but clearly is approaching that. So we've seen no reason to adjust those financial targets. We're very comfortable of the earnings capabilities of this group in a normal year to be able to get there.
And that's coherent with the 97 combined ratio that we've estimated for the P&C Re Business this year. Corporate Solutions, as we said, we expect to still have some noise as we go through this restructuring. But down to a normalized 105 combined ratio for 2020 with the 98 target still very much intact for 2021. So the answer is we expect those blue bars on Christian's chart to go up should in the absence of major new losses that are not part of this normalized expectation.
So I think maybe more specifically, you talk about a few extraordinary years, 'twelve, 'fourteen, etcetera. And it's worth reminding people that there was extremely low nat cat activity, so there was good luck on the nat cat side. There was a lot of reserves releases from the good years after 9eleven, right? Some years where also casualty, right, we made several 1,000,000,000 of profit from that. And that's the time after several years, you start to see it, you start to see you over reactive.
You have too much reserves that they were released at the time. And then it's also time where interest rates started to go down and so whatever you touched in the portfolio had some realized gains. So clearly, these it is quite significant and there were some very positive elements which pushed it above that I think analysts would call a normalized rate. On coronavirus, I'm not sure I understood whether we should we think they should see a product for that or whether you think people will force us to include it into the current product?
I'm just wondering if you think insurance companies should be offering cover for this kind of thing. It's very nice to your shareholders, you're not paying out for coronavirus.
It
seems the economic losses being faced by your clients and the insurance industry isn't playing a part in that at all. It's that a preference for the insurance industry?
Yes. So it would be possible to offer that kind of cover because the pandemic risk is something we have modeled for many, many years. We have a good sense of probabilities. It's a bit of tail risk, so it's not the most diversifiable risk that exists, but it's feasible. There are some very limited covers, I think, that have been sold here and there.
But I think that it shows you that most corporations, right, when there is no virus for a while, forget about the risk. I don't think it's worth spending money
to cover this risk.
So I don't think there was a huge demand. There might be obviously now some more demand, but there might not be a huge demand for that. But for me, yes, there was demand. This is a risk which accumulates. You can see in our risk report, it's one of the biggest risk we have At Teseries, it's not one that's very easy to have huge amounts around, and that's because it correlates.
But if something breaks out, it can be a worldwide cover and diversifies less between geographies, for example. Okay. Thank you.
Are there any more questions here in the room?
Richard Lip from Citi Television. I have
a question about climate change. You said you will reduce or you would exclude support to the most carbon intensive oil and gas companies? What does that mean, exclude support? Does that mean you don't finance that anymore? Does that mean you stop or you try to force them to transform into a more or less pollution?
What does that mean?
Yes. So it's the so oil and gas, while they produce oil and gas, right, there's different ways they can do that and there's different levels of pollution they create themselves in that process. And so what we're seeing is obviously and we see that I mean, there's a whole transformation needed by society overall, I think, across the world. And that's one where we say, we withdraw it's not financing, we're a reinsurer, it's the reinsurance, where we withdraw the reinsurance and over there, we won't invest in the assets of these top 5 and then top 10% worst companies in terms of this current intensity of what they produce. That means that, obviously, if other people join us, it will be part of more pressure, more incentives, right, to find a path towards something that is less polluting, in which case we can continue to support them.
So it's a bit similar to our coal policy. We had last year, we said we won't support, meaning we won't reinsure in Corporate Solutions or Insurance. We won't support companies which have more than 30% that comes from coal. And that's only in the developed countries where we think there's real alternatives available, right? We try to support societies and the transition is a society like China is transitioning.
We can see clear signs. We we support them on that path. So it's part of yes, it could take incentives and we're aware that if you're alone, it's not going to have a huge impact. But on for example, on this call, we're not alone, right? It's starting to have a significant impact.
And so we hope for something similar in oil and gas.
I have a question in 3 parts. First, coming to the first slide you have presented, Christian. What if the last 3 years are going forward the new normal? To what extent are you prepared to deal with that? Your second question is about transfer of risk as you came out with some cat bonds for the first time for many, many years recently.
Is that could you quantify that a little bit? How much risk you're going to transfer to the capital market? And third is the effect of EquiQ with IKEA with these customers, with these kind of customers. Could you please talk a little bit more about the pipeline, what's going on there and the real effect of your top line and bottom line?
I'll take 13 maybe. So I think
on the first slide, and to
some extent, we assume some of the conditions are new normal, right? Low interest rates for a long period of time, I think is a new normal. We don't bet on rates in reinsurance going up a lot. But with 97, if you can't achieve the underlying we can see, right? We can see this underlying, we can see 98 this year, so we believe 97.
With that, we're fine, right? So Reinsurance P and C is achieving its ROE target if we have 97. So it's a better environment than it was 3 years ago, definitely, right? And in that environment, thanks to the scale, the diversification of life and health, etcetera, it's actually okay for P and C Re. So but the bars you saw, obviously, years like us, we were heavily affected by some of the factors which we can explain and which we don't expect.
I'm just repeating all the time. On EQ, yes, I think we I think a lot of you were in the room. Remember, I don't know, 2 years ago when we talked about SoftBank a lot and there was a lot of question why would you go with them, what is it, etcetera. And I told you that the interesting idea is obviously to shorten the value chain and have a company who owns customers collaborate directly with something that's highly efficient digital in terms of insurance solution. And these things take time.
So there was a lot of silence in between, but for example, this collaboration has been 18 months, right? That's how long it takes to understand it, to see how it could be brought together, how it would work. And switching is just a machine, it's a machine room provider for IKEA. We see this IKEA in the lead. I mean, they have their customers, they need to say what kind of product they want, how they want to present it, how they want to embedded into their value chains and processes.
And we particularly provide the software, the machinery, the balance sheet, also the knowledge around the pricing and all of that. So it's unproven, right? I don't want to raise too high expectations. This is a new model. We will see whether it can work with a non insurance brand sells insurance, so that can work.
I mean, we are interested, we are optimistic. Our machine can also work with insurance clients, some insurance clients use it. Although in Singapore, for example, where we don't have an insurance carrier, we work with one of our clients who are the carriers. So this is more about tangling the value chain, right, so that we can deliver the product. So we're more, how to say, a general agent, a general general, Unterneimer, yes, in German, who helps, who can bring the value chain together for these big brands, if they have an interest, right, in selling insurance.
So and I think Maybe just a little bit of
a last thought on these partnerships is the one thing we do have, which these companies like AKA don't have, is a clear interest in balance sheet risk related to the insurance product itself. And so we're also able to use our balance sheet once we've got this technology supporting the interface and to maintain the risk on Swiss Re's balance sheet. So the middle question was around the use of alternative capital in our own business. We announced last year the bringing together a set of resources in the group under the heading of Alternative Capital Partners. I'm pleased that we've been able to demonstrate a real success coming through that.
The first key issue is as we expand our P and C Re business and especially as we expand the opportunities around that cat, we start to run into what are some very large peak risks. And today, by far, the largest peak risk is a windstorm in North America, the famous hurricane that started blowing in the summer. And there is some absolute amount, which we're going to be uncomfortable with given the size of our balance sheet. What we're able to do is continue to serve our clients in accepting that risk, but then retro seed some of it to other people that are more perfectly interested in sharing that risk with Swiss REIT. So the utilization of whether it's cat funds or our sidecar facility or other capital market driven alternatives to share that risk, we believe will work very well as long as we're not developing specific risks for that channel.
We think people over time believe that Swiss Re is a world leader in the assessment of this risk that over time they will see that we're able to write this business to actually grow the business as we did in 2019, and we started again in the property side in 2020 and to bring other sorts of capital in. Swiss Re remains, as best I know as of this point of time, the over its entire lifetime, which is about 30 years, the largest writer of capacitor bonds in the world. The activities of some of the major brokers, Aon, Willis, etcetera, are catching up to that title, but we remain a major player in this marketplace and we expect to continue to be. And the teams that are doing this work literally sit on the same floor in the other building is my treasury team and are spending the rest of their day in this building working with the reinsurance team to be sure that we're all thinking about this risk the same way.
PCV. Of course, your hope is that you can raise this trend by rising by increasing premiums. But on the other side, there is the potential of climate change induced events. And we have still, as you said before, an environment of low interest rates. Do you really think that the price increases, the expected price increases would be enough to break this combined ratio trend increasing trend of the combined ratio only with the price increases?
Yes.
So I mean, we look at the for all these years, we look at the underlying normalized combined ratio, right, without putting bad luck. And obviously, the last 3 years, it looked much higher, right? So we have but the years before, it was much lower than the normalized one. So we don't think obviously, there's elements where climate change is impacting the business where we adapt the costing, as you could see, right? But no, $111,000,000 $104,000,000 $107,000,000 that's not an expected normalized result we would see.
So what we see is in terms of normalized results, the trend is actually positive. It was I think the peak was 100% combined ratio a few years ago in terms of what we expected or actually had, and it's now slowly going down with these price increases. So that's why, yes, we are I mean, we can explain, or at least they can obviously understand how seeing it from the looking just at the actual result without some of this analysis, you see it's going up and it seems to be very high up and there's no way to go down. I think it's the difference between the actual results and then the normalized, but if you just want to understand what's the underlying.
And maybe just to add to that, there are places where we see changes in climate, which are requiring us to more forcefully adjust our models and as a result, more forcefully adjust the price impacts that are required for us to continue to write this business. And so I would expect in some of the renewals we see later this year, price increases, not a 5% average that you saw in renewals, but strong double digit price increases. And we'll talk about those when they actually occur after the April 1 June July. But there's reason to believe that the market understands that the nature of some of these losses related to wind, related to floods, related to fires is fundamentally different than it has been modeled in previous periods. That's one thing.
And then the other tool that we have, frankly, is the portfolio of risk that we underwrite. And there may be some places where we say, yes, prices are increasing, but that increase is not enough, given our view of the expected losses for us to stay in. That's what we've done very dramatically with the Corporate Solutions business, which we expect to work its way through in the next 18 months. But the in P&C Re, we're also paying a lot of attention to other areas where even with new and improved pricing, it's not sufficient.
Also a question about P and C really. On a net basis, were you having reserve strengthening or releases and how much? And another question about CorSo again. I mean, the pruning of the portfolio and the figures I see, I would have expected maybe a little bit faster moves, bigger moves. And also because you say, I mean, in U.
S, most was shredded. So are you on track to get up to speed? Or are you behind the curve?
Let me take the
second one first. We're absolutely on track. And yes, it's a little frustrating that it doesn't show up in these year end numbers already. But when we made the model, actually, right after midyear last year, we expected that only 25% of the risk would be off the portfolio in 2019. And we think another 65% will go through in 2020.
So when we finish the day of the year, we'll be down to the last 10% of risk that we don't want on our balance sheet. Those are related to multiyear policies and some other positions, which require us to remain. But I think at that point, we can say that the impact is going to be truly marginal. I think the little confusion that you see is the increase in premiums really is related to this 12% price increase. So we rewrite the business, even property, even some of the credit maturities.
There are pockets where we get better pricing. And on average, that better pricing is 12% of the business that we continue to write. So that's the positive that's frankly, a little bit of a win to our back, which helps us be comfortable with our 98 target for Corporate Solutions in
the 2021. On reserve releases? I'm sorry, T and C reserve release.
Yes. On T and C reserve releases, I think we've saw last year that one unusual aspect to the 2019 number was in property in the Q1 where we had this additional losses for Jebi, which was a 2018 calendar year event, but because some of our Japanese clients came through with updates, if you will, in our calendar year 2019, we had to make this major increase in Q1 reserves. Over the rest of the year, the property portfolio behaved very well. And in fact, there were some modest releases coming through that property. But Jebi was a negative, which we didn't weren't able to equalize on the property side.
So the vast majority of the rest, and especially in the Q4, that was negative was related to our casualty book and in the casualty book was focused on the U. S. Casualty.
All right. Are there any more questions here in the room or on the phone? Okay. It doesn't seem to be the case. Thank you, everyone, very much for joining us.
And if you have any more additional questions, you know where to reach Media Relations. Thank you.