Ladies and gentlemen, welcome to the Zurich Insurance Group Half Year Results 20 21 Conference Call. I am Sandra, the course operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Mr. Richard Burton, Head of Investor Relations and Rating Agency Management. Please go ahead, sir.
Thank you. Good morning, good afternoon. Welcome to Zurich Insurance Group's First Half twenty twenty one Results Q and A Call. On the call today is our Group CEO, Mario Greco And our group CFO, George Quinn. Before I hand over to Mario and George for some introductory remarks, just a reminder for the Q and A, We kindly ask you to keep to a maximum of 2 questions in the first time around.
And if we've got spare time at the end, we will come back to you. So with that, Mario, over to you.
Thank you, Richard, and good morning, good afternoon from myself. And let me just have some few remarks as an introduction and then we pass to Q and A. This morning, we published one of the strongest ever first half results for Zurich. Our earnings are back to pre pandemic levels despite the continuing impact of the public health crisis and A very high level of natural catastrophes. This performance reflects the improvements made to the business since 2016 in terms of underwriting, simplifying our business and delivery for our customers.
Our focus on customers is leading to higher levels of customer satisfaction, and this drove the growth in customer numbers By approximately $600,000 in the first half and supported growth in revenue across all of our businesses. Since 2016, we have reshaped and improved our property and casualty portfolio. This is allowing us While command ratio fell to its lowest level in over 20 years despite more than 6 points of natural catastrophe losses, We expect pricing to remain strong through the remainder of 2021 and into 2022, And we're well placed to achieve a further strong growth and margin expansion. Our consistent focus on protection and unit linked Life business continues to pace off, and we have improved margins within the business Through continued product development and selective repricing, these actions led to a 44% increase in Life Business operating profits To an all time high level. Farmers Management Services saw a return to growth in the first half, Driven by the improved growth at the Farmers Exchanges, where expansion in the agency force and improved productivity Supported growth.
With the further strengthening of the exchange's distribution through the completion of the acquisition of the MetLife Property This year's extreme weather events, which have touched most parts of the world, underscore the risk of climate change and the need for businesses As part of these commitments, we're planning further actions to reduce emissions related to travel, vehicle fleets, boots, The group's simplification and strengthening of the business over recent years, together with our very strong balance sheet, As economies emerge from the COVID-nineteen pandemic, I have great confidence in the strength Thank you for listening, and we're now ready to take your Q and A.
We will now begin the question and answer
Hi. Thanks for taking my questions. I'll stick to 2. So my first question is on the P and C business and on the PYD. So for the group, it was 2.5% in the first half.
It's a bit higher than previous years and it's 4.8% In North America, I mean, can you give us a bit of commentary on the outlook for the second half? I mean, should this trend be expected to continue? And just the rationale for a slightly well, certainly to see its high level in the first half of twenty twenty one. And then looking at the FFT, You just published 206%. Just thinking about the FST ratio towards the second half of this year, I mean, presumably it's going to hit somewhere close to 2 10%, given that net capital generation or net dividend payment is probably going to be positive.
You're getting very close to that 210% kind of upper end of your range. I know you don't have a range, but that's probably broadly equivalent to 120% on your Z ECM. And I also note that your debt leverage has spiked up a bit this year. I mean, if you have excess capital, Are you going to kind of prioritize delevering? Or are there other things that you'd like to do with that?
Thanks, Elyse. So on the PYD first, so you're right. We are above the normal range that you'd expect to see from us in the first half of the year. It's driven by the U. S.
And if I I mean, if you look across the business, I'd say that the pressure in the first half of the year was certainly upwards. I think given the strength of PYD in the first half, I'd be surprised if we were fully within the range for the full year. I expect at this point, at least, that for the second half, we'll be back in the 1% to 2% range. We do have Regular workers' comp review coming up in the Q3. So I don't yet know what that's going to show us.
But certainly at this stage, I'm thinking that 1 to 2 in the second half with potentially PYD for the full year slightly above the normal guided range. On SST, I'm going to resist the temptation to create an upper bound around it because we tried really hard to get rid of that Last year, I think from a capital perspective, I mean, we're obviously in a good place. We've had a significant move up Through a combination of the market changes and the impact of operating capital generation in the first half, I think you're right. You would expect to see that rise in the second half of the year. So I mean, what would be the priorities?
I mean, I think at this stage, I mean, the past is a pretty good guide To the future, I think if you look at the various leverage metrics, I mean, we're pretty green on almost all of them apart from Tangible debt leverage metric. I mean, we're not able to say of that, but it's not the I mean, it's not something that's causing us any significant concern. I mean, I think from our perspective, I mean, we remain able to take a look at things that are out there. If we think They're advantageous for strategy and would help financial performance. But as always, the targets and the plans don't depend on this, But it's nice to have the flexibility.
We ought to explore them if they do come up.
Very helpful. Thanks.
Thank you.
The next question comes from Peter Eliot from Kepler Cheuvreux. Please go ahead.
Thanks very much. The first one, I mean, after the great results today, on an underlying basis, you've basically already reached your 15% ROE that you were hoping for or sort of thinking effectively you might be able to achieve by next year. So I was just wondering if you could tell us what you think, If anything is still to come from that ROE walk that you showed us, I mean, I guess I'd be especially interested in where we are in the buckets of portfolio Second one, the P and C investment income, you were saying €50,000,000 to €100,000,000 per annum decline. Now you're saying €100,000,000 for 2021. Just wondering what's happened to make this sort of fall faster than expected and whether we should expect That it's continued falling at that rate.
Yes, any clarity there would be great.
Peter, thanks. So on the first one, I mean, one of the media asked me about that topic They gave me flashbacks to November 2019, but I don't think anyone in the room was concluding that the targets were easy to achieve. I think you need to look at them all together. So I mean the delivery of the ROE target is something that's extremely important. I think we've made great progress on that.
As you point out, I'll come back to this in a second. There are some things we want to do around capital allocation that continues to be important to us. But we also need to take care of the cash target. We need to take care of the earnings target. So I mean, all of these things are priorities for us.
When it comes to management of the capital, obviously, the back book topic is high on the list of priorities. Mean, I'm probably not going to say too much about it today because I think it's better to wait until we've actually done something and then we can talk about, I think, what that means and the benefits that, that brings us. But I think in the same way that you've seen us be disciplined around capital allocation in the past, we will do that in the future and we have particular interest On the back book side of things. On the investment income guidance, I think in the past, We certainly indicated a range. I think I've also talked about the fact that, I mean, you need to take the duration of the book into account.
If you look at the gap that we have between book yields and reinvestment yield, it would imply Something, I mean, maybe not quite 100, but certainly something pretty close to it based on what we see currently. And I guess, I mean, what changes what I mean, The gap between the book and the reinvestment yield changes in both directions, I mean, fairly frequently, and we update to give you a sense of what it currently looks like. So I can't tell you that it's fixed, Steve, because of course it's partly dependent on the future track of interest rates. But seen from today with Today's GAAP, the upper end of that range is the more likely outcome.
Hello. Thank you for taking my questions. George, on Slide 20, the Asia Pacific Lifeboat It's still bouncing around quite a lot. I'm trying to figure out kind of what you consider normal. And then when we're thinking about the future, what any incremental impact of one path May or may not still be taking account presumably with true integration costs, but still have more to go on the synergies.
So if you could just help me understand a bit about what's Hoped for on Slide 9. If we're thinking about the incremental increase in that relative to what you achieved last year, the 3,400,000,000 Should we be assuming pretty much all of the incremental increase is coming from non life? Or are there material moving parts in life
So on the first one on APAC Lifeboat, I mean, I think what you've seen this year is a big rebound in Australia. So that's obviously driven by the acquisition. I wish I could tell you the integration was over. It's not Quite over yet. It should be over by the end of this year.
In terms of incremental expectation, I mean, given what the team are telling us, I mean, we're not quite at the business case that we presented back At the end of 2017, when we announced the transaction. So I think I mean, I'm still optimistic that we could see a bit more From where we are today. So I think there is room for Australia to improve further. Obviously, a big driver of the benefit has been the recent repricing. We think there's also some product redesign to come in the market in Australia, which We'll actually dampen some of that volatility, which has been a challenge in the market in the past.
And the end of this year should see More or less the end of the integration cost side of it and the full benefit of the synergies that we had planned for the transaction. On the cash remittance topic, so is it all P and C? So the short answer is definitely no, If you think of what drives this, I mean, obviously, a big chunk of its earnings for this year. But some of it's going to be catch up to what's happened in the prior year Because, of course, what we've had at the very start of this year is really still impacted by the Impact of COVID on earnings and in some cases on balance sheets. And if you look at what we did last year, I mean, even though we had a very significant cash generation, I mean, there were 1 or 2 regulators who were still encouraging businesses to wait.
And while it wasn't that material for us overall, Those tended to be more life oriented than P and C. So I think you'll see a wee bit of a
That's really helpful. Thank you, George. Thank you.
The next question comes from Michael Huttner from Berenberg. Please go ahead.
So the I have two questions. One is, is there more? And here, it sounds mysterious, it's not mysterious. When you sell insurance policies, the premiums booked over year. And so the Effectively, there's a lag benefit to price increases.
So I just wondered if you could give us a figure for how much we could add for the lag to the figures you've published today. And then the other figure, the figures which would be interesting, you I think it's on Slide 6. It's you said some mischievous buzz. And I was just wondering whether you could give us the numbers, the Effectively, the inflation costs which you're seeing. Thank you very much.
Yes. Thanks, Michael. So on the first one, I try and avoid to give forecasts Because Mario will remember them and hope me to.
I can tell you further with
results, he's not listening.
So I mean there is I think we all have an expectation that pricing will continue to benefit earnings from where we are now. There's not only a lag benefit from the price increases that we've seen. If you look at price trends in the market, I mean, it looks as though this trajectory in the commercial market is going to be pretty gentle. I mean, I think in the second half of the year, I'd be surprised if it was as strong as it was in the first half. I'm already surprised it was as strong in the first half as it was in the second Last year, but you will see further benefits from P and C.
So all things being equal, which is the claims experience, Would expect to see further improvements in the technical underwriting margin for P and C. On Slide 6, so there's 2 ways you can do this because the IR team actually use a spreadsheet. So they I think the thing is to scale, but that's a bit unhelpful. If you look at so we're seeing loss cost inflation Around the same level as the end of last year, so somewhere around the 5 mark, maybe just slightly above. Some of the drivers It's what we've seen before, so no real change.
And I mean, there's not a lot of new information in the market. I mean, we've seen Some of these larger settlements have been announced around opioids and the Boy Scouts But on the broader social inflation topic, the courts are just starting to reopen. So it's still too early to get a read on trajectory. But I mean given what we've seen in the past, I mean we feel pretty comfortable with Overall, inflation assumption, but somewhere in that 5, 5.5 type range.
Brilliant. Thank you very, very much.
The next question comes from Richie Endri from Autonomous. Please go ahead.
Hi, there. Two questions, please. First of all, George, are you encouraging us On the Life business to basically take the BOP reported, adjust for the €50,000,000 positive one off, but add back the COVID Losses and that's new run rate for Life. I mean, the problem is the Life business has a lot of variables in recent years, Acquisitions, a lot of FX noise and COVID. And I just wonder if maybe There's noise as well because the underlying is overstated slightly because the COVID is overstated because there's allocation issues there.
So what I guess, can you give us any guidance as to what you think the kind of right run rate is for Life now? And has there been a step up? And is that just sort of more normal markets that's driving that? 2nd question, farmers, What are the tools and what are the protections in place for the surplus ratio in the second half of the year? Because the service ratio have ticked down more than I expected, I thought you I thought farmers had bought MetLife Below book, so I thought there'd be a gain there.
So are there any remaining tools to use about surplus ratio? And what are the cat
Great. So on the first one, so I think the if you look at what's changed over the prior year, then the I think the most obvious standout feature is the topic that I covered earlier with Will. So I mean, we've managed to get the Australian business, I'm going to say we, I'm talking about our CEO and the team in Australia because it's not as if Afak wants to do with it. I mean, Dave managed to get this thing back more or less on track. So I think in terms of, I mean, what's sustainable and durable, that change is not something I expect to see Reverse anytime soon.
Now the issue around COVID mortality versus excess mortality generally, I mean, we've certainly seen that in the pharma's book, which I guess is not really relevant to the Life guidance, but the point is. So for example, if you look at the performance From a mortality perspective, Q1 is really heavy for excess death claims driven by COVID. They still have excess death claims in Q2, but they actually have superior mortality overall. So I think there is some of this that you need to be a wee bit careful of in terms of The temporary impacts. But having said that, I mean, if I was looking at how I would do this, I would certainly adjust for The topic that we discussed on the call was this morning in Europe.
If I chat to the Australians, they don't add back Everything that we've seen from the Australia improvements in the first half, so they're assuming that some of The claim experience is temporary. But as I mentioned also to Will, I think we'll also see further improvement from them through the second half of this year into next. I mean, overall, from a run rate perspective, I think we're probably slightly better than the 10% Above guidance that we gave compared to the numbers for last year. I mean, I agree that I'd want to be a wee bit careful around some of the mortality benefit we've seen in some of the markets more recently. On the exchanges, so I'm going to make a caveat to begin with.
I'm not the CFO of the Farmers Exchanges. So I mean, obviously, I have a very keen interest in these topics in the same way that you do. But I'm going to be careful about how much information I get into That's really a topic for them rather than for us given they're an independent organization. Now on the surplus, so why might the surplus be A bit lower than perhaps an external observer would have expected. They've ended up deciding to place less reinsurance.
So if you think of, I mean, how that transaction is worth for them, I mean, I think what you described in terms of the acquisition Something at a discount is true. But they certainly had intended earlier to increase The core share by more than they have in the end. And I think that's driven by a feeling that the Maybe they have more reinsurance protection than they feel they need. And I guess part of that will be driven if you look at the historical Reference points for the surplus ratio for pharma is not quite as high as it's been in the last 18 months, but it's been a lot lower And the figure they ended up with. From a reinsurance structural protection perspective, they still have in place The structure that has protected them very effectively over the course over the last couple of years, in particular, dealing with wildfires, And there's no significant change to how that operates compared to the past.
So I know talking to the team at Pharma's on the exchange side, I mean, they feel comfortable with their capital levels and don't feel that it's a topic of particular constraint for them.
Okay. Thanks.
The next question comes from Bill HarteCastler from UBS. Please go ahead.
Hi, afternoon, everyone. Reverting back to Slide 6, if that's okay, And thinking about commercial and North America specific, if you were to carve out North America commercial standalone, is it Possible to give us a broad idea of the extent of underlying improvement year on year on margin or half and half? And is this trend Accelerating or slowing down. Given, I guess, what Michael was saying about the non immediate recognition of the price and the spreads narrowed a few points, Presumably, we should be expecting a similar level of improvement over the next 12 months, given the pricing trajectory you discussed. And then the second one is on expense ratio.
I guess, can you give us an idea of how much of this improvement is sustainable? To what extent is there operational leverage at play? And how much is perhaps one off fee if traveling and stuff reverts back to some form of normality? Thanks.
Yes. Thanks, Will. So maybe if I reverse the order, not the questions, but the point you made on ZNA. I think it would be I mean, other than going back to Michael's point about the lag effect of the price rises that we've seen, I think to assume that Pricing continues with the same spread over loss cost inflation that we see in the first half is mean, I think it touched too aggressive for me. So I think as we go through planning this summer, I mean, I expect to see I don't expect to see a significant drop And what we expect to see in the commercial pricing dynamic, but I don't expect it to be quite the same as we've seen in the past.
So we wouldn't be planning for that. So you would anticipate seeing year on year improvement, but not quite at the same pace as we've seen In the first half of this year. In terms of quantum, I mean, if you look at the covered businesses at that commercial rate indicator, I was talking about it's about half of ZNA's book, maybe slightly less, but around that type of level. And I think using that And assuming that it can earn in Philly over about an 18 month period, that's a pretty good guide, I would model The margin expansion that we see between price and loss cost trends. On operational leverage, So I mean, I guess, a good point.
So obviously, part of what we've benefited from over the course of the last 12, 18 months is maybe a Slightly lower expense base than you'd anticipate to be sustainable. But Mario did make the point in his intro to I mean, there are some aspects of what we do. I mean, seen from today and especially from this week with the IPCC report earlier in the week, There are elements of the operating model change that may forget expenses. I mean, just from a sustainability perspective, We want to see changed. And in fact, we were communicating that last night to our leadership team.
So I mean, I do expect that some of this comes back, but I'm not convinced it's particularly material. And in fact, the concept that we typically discuss with The businesses in planning, we have an internal concept called growth credit. And basically, to the extent that Businesses present incredible plans around growth. We will allow them to grow expenses not at the same rate as top line, But certainly, the level required to make sure that clients are looked after as we would expect them to be looked after. So I think there is a bit of operational leverage.
So you will see some bounce back, but I don't think it's that significant in the context of the overall group.
Brilliant. Thanks.
The next question comes from Anthony Young from RBCCM. Please go ahead. Hi, thank you. Just one question actually on the Life book. So I see your plan is to focus more on Capital Life and Protection businesses.
Could you give some color on what's your plan on the corporate savings and savings annuity placed in the future? Because I think Slide 22 Seems that the NBV for these two business lines are low. Thank you.
Yes. Thanks, Anthony. So I mean, we prefer protection. That includes the corporate market. I mean, we are a significant player in corporate.
We try and leverage The relationship we have for the I mean the large commercial P and C business that we have to get good access To organizations that are looking for a corporate risk protection. It tends to be a more competitive market though. I mean, The distribution mechanism tends to mean that the pricing is quite keen. But it seems from a Zurich perspective, I mean, these tend to come in Large I mean, obviously, large total amounts. We don't have quite the same overhead that you'd have, for example, on our retail business, which I guess is pretty obvious.
So for us, I mean, the maybe we refer to it as corporate life and pensions. It's the Protection and the savings component rather, I'll point to the annuity component in a second. It's something that's an area of interest for us. So we are looking to grow that, But you are right that the margins are not as strong as we see in other parts of the book. But that's not a key concern Faraz.
On the annuity topic, annuity is not a preferred risk for us. So The asset risk that comes with annuities and annuitization options is not something that sits well Within our capital model, I mean, we tend to either avoid it or look for other ways to offer our clients the ability to seek annuities Subparties, so the annuity sides of The risk profile is not an area of particular focus for us.
Thank you.
The next question comes from Asik Musaddi from JPMorgan. Please go ahead.
Yes. Thank you and good afternoon, George and Mark. Just a
couple of questions I have is, first of all, on cat Losses, I mean, yes, we have been seeing that cat losses for most of the insurers and reinsurers have been pretty high for last 3, 4 years, And we are seeing the same again for first half as well. Now, Sushri, at one point, did mention that companies need to be mindful of increasing cat losses And don't know what it was intended for. Was it for primary? Was it for themselves? Who knows?
But clearly, there is some evidence about So I mean how do you think about your 3% budget for cat losses? Do you think that needs to be higher And some of the prices increase could basically help support you move that number higher before impacting any profitability. So that's the first one. And secondly,
I mean, I'll just go back
to the previous question around annuities. I mean, yes, you made it very clear annuities is not really a preferred business. I mean, but how would you think about your U. K. Life business overall?
I mean, is that something you would continue to maintain, which would Include other parts as well, just not annuity. So how would you flag that? Thank you.
Great. So on the cat topic first, I think you're right. Just one point. So when we updated guidance at the beginning of this year, We raised the cat loads to be 3.5%, just for everyone's benefit. I mean, I think it's a tricky topic because on one hand, I mean, these are clearly annual contracts.
So they we're not taking long term bets on the risk that Climate continues to drive significant increases in cats, claims and cat losses. I think at the same time though, I mean, obviously, natural catastrophe business is a very hard business to judge on any short term period. So you need to be careful with the capacity that you deploy. And I think for us, that's why it's important to try and just be relatively consistent around The proportion of risk that we carry that's related to CAT, that we don't try and expand into A market that we perceive as being particularly profitable because of the volatility that it brings us. So I think consistency is going to be the most important topic for us here.
We do look at it very carefully. In fact, assuming earlier this week, Christophe, who runs the North American business, his team were talking to me and Sierra, who's the Head of Commercial, about our stance And particularly CATRIS over the course of the next couple of years. So I mean, I think we have views on how we can optimize this Into the future, but it's a hard business to take a significant operational bet on because of The volatility, I think that's really something that's best left for the reinsurance. On the annuities, so the actually, we like the U. K.
Life market. The team there are very focused on protection products. We've had a new product in the market for about 24 months now. We've had quite a bit of success in selling it. And the annuitization of The annuity part of the business that we did in the U.
K, I mean, we've been pretty successful at re ensuring that and blocks as we go. So the U. K. Team have managed over time to keep any exposure that the business brings from a annuity perspective actually quite low. So UTT is not an issue in the U.
K. U. K. Light market is one that will be light, and I continue to look for further growth there.
That's very clear. Thank you. Thanks a lot.
The next question comes from Vinit Malhotra from Mediobanca. Please go ahead.
Yes. Good afternoon, George, Maria and everybody else. Just the first topic is from my side on frequency benefits of COVID. So I can see from some of the notes that 1.2 points has benefit has been the benefit in 1H, Giving us the 58.3 attritional loss ratio, would you be doing Just adding it back in and then trying to work out the whole spread between pricing and claims inflation, which you talked about? Or would you say that in the new COVID, post COVID world, you're going to continue to have some benefits?
Just curious to hear your thoughts on frequency, Trends and benefits. 2nd topic is just a clarification. I've seen some media head I think from a media conference about your Comment on German floods of $150,000,000 to $200,000,000 maybe euros but What I don't I'm trying to understand is that the 5% outlook today for the full year Nat Cat seems to imply that 2 hedges being perceived as a 3.5% kind of normal Cat, to edge, is that the correct reading or is are you expecting significant reinsurance recovery from Gentlemen, so any clarification would be helpful. Thank you.
Yes. Thanks, Vinit. So on the frequency topic, Honestly, I don't have a really good answer for you. Immediately, I'd need to go and ask someone closer to the underwriting on that topic. So If you allow me, I'll get Richard and the team to come back to you on that.
I mean, it feels natural it feels reasonable to me that There must be some impact on our project. I just I don't know off the top of my head on that one. So if you allow us, we'll come back. On German floods, dollars 150,000,000 $200,000,000 is the number. And you're absolutely right that the gains we've given around CAAT for the second half is not that we're incredibly optimistic that We're going to see a very benign second half of the year.
But just given the way the reinsurance program is structured, I mean, that does provide us with some measure of protection. And therefore, that's what drives our outlook for the second half. I think if we had a quieter first half, We'd be giving you a slightly different perspective on the second half of the year.
All right. Thanks, George.
The next question comes from Thomas Fossard from HSBC. Please go ahead.
Yes, good afternoon. Two questions on the P and C side. The first one will be related to maybe to complement the question Michael and Will. Can you talk a bit of your economic Combined ratio, I mean, actually, you reported this morning quite nice improvement in the reported combined ratio. But What about the economic combined ratio?
And also because you're pointing to your in your comments to a higher Reserving situation or better reserving situation at the end of H1. So Looks like potentially you may have moved again the loss peak. So any Information on this will be of interest. 2nd element will be on the 8% P and C Growth in retail, it looks like, I mean, pricing is still around 0. So I mean, could you be a bit clear on where the growth is coming from and what is driving this?
Thank you.
Yes. Thanks, Thomas. So on the first point on the economic combined ratio, I guess we'd all have to Agree on what economic combined ratio meant. But I mean, I assume it's on the time value of money mainly rather than the capital charges. And I guess the key issue being that, I mean, given the comments earlier about the impact of interest rates, some of that movement in the combined ratio is actually required To maintain earnings.
But I mean, I guess you can see that the impact of the improvement in technical underwriting Profit completely overwhelms the impact of interest rates even if you model it forward for the entire Duration and the entire turnover of the portfolio. So I mean, I don't have a number I can give you for the economic combined ratio. I guess the good news is when interest rates are this low, there won't be that much difference between an economic complaint ratio and the actual one that we're currently printing. You mentioned within that, I mean, you raised the issue of loss picks. So I don't think we've changed the philosophy in the first half of the year.
So I mean, we've tried to be very consistent. So the loss cost The trend that I mentioned earlier is pretty much in the same area that we had for last year. So that means we're carrying The same assumptions through into these loss picks for inflation as we start 2021. I think if anything, the I mean, the very recent experience on the more recent years is probably slightly better as we ended 2021, then we would have assumed a year earlier. I exclude liability from that given that, that takes some time to develop.
At least the early signs around the preserving at the end of 2020 would give Made the impression that things are actually stronger than we would have assumed a year earlier. On the retail side of things, so I mean we do have Pretty strong growth in retail. I think that's probably one of the most surprising things for me. I think we certainly I had anticipated that Retail might be under more pressure than has transpired. I think because of the way the particular market positions that we have that we're not So concentrated in some of the ultra competitive parts of the market where maybe some of the frequency Change and the point that Vinnie mentioned earlier, it started to feed back into pricing.
But if you look at our retail markets, I mean, we've seen pretty good growth everywhere, perhaps with the exception of Zurich Business in Latin America, where because of the, I guess the later incidents of COVID, they've had more restrictions. So for example, the mass consumer business in Brazil has had a pretty tough First half to twenty twenty one. But the retail business has gone well, and it's gone well pretty much across the board.
The next question is a follow-up question from Mr. Andrew Ritchie from Autonomous. Please go ahead.
Hi there. Sorry to return to the topic of reserves. I can see there's been some holding back of the divisional PYD at Group Centre, but I'm more interested in Specifically North America, I remember, George, last year, you strengthened some of the casualty years to the recent years Against you sort of reinvesting some of the work comp releases. Is that continued in the first half? I'm just trying to understand Yes.
So you're still holding loss picks up in some of those casualty classes given there's really a lack of data on claims The last 12, 18 months. So that's the first question. The second question, you acquired Financial advisor business in Italy recently. This is your first sort of forum to There was a slightly surprising acquisition. Maybe just outline what the rationale was behind that deal?
Thanks.
Yes. Thanks, Andrew. At least we have your name the right way to write it. On the reserves, So what to say on this? It's a little bit of pit for the current year.
I mean, they are not particularly different from what you've seen in the prior year. We did go back and address some older year issues that you can associate with some of The public changes are some of the mass topics. So I think that's why You might see the picture that you see from North America. And it's quite important to point out that that's ahead of the workers' comp review That will take place in Q3. So I mean, I think from a reserving position, I mean, I thought we were in a good place.
Last year, seen from today, I'd say that we're in an even stronger position overall. On the Financial Advisor business,
Can I add a point to this, Andrew? Also, remember that we are In the hardening markets, and this is something that always happens in the hardening markets, where one of the benefits is that you negotiate For the past conditions, right? I mean, because they don't base their assessments on future. They only base their assessment on what they have seen already. So the knowledge there is the past, and the past is Different and worse than what we have today in
the books.
And that creates the typical situation in a hard market That reserves are better quality in a sense than ever before. That happens every time, and we're seeing this happening even this time.
On the Acquisition that we made very recently or we've announced recently, I mean, this wasn't something where we sat down earlier operator. And so you know what, we need to go ahead and acquire some financial advisers. I mean, this is something that is I mean, it's clearly connected to the relationship we have with Deutsche Already, this is a group who sells Zurich product. And I mean, for us to take this step will benefit the business in Italy From a longer term perspective, but it doesn't change the group's stance on how we expect to run the business in future. Okay.
Thanks.
And Andrea, remember that we have been working with this network for almost 15 years, Successfully for us and successfully for them. So for us, it was a natural thought when we I heard that Deutsche Bank was selling them to consider the acquisition, and now this gives us the opportunity to connect them to the insurance agents and use the Customer basis of the insurance agency to foster the sales results on the life side, This network is quite good at selling unit linked products, which is also our priority in Italy. And so It was just grabbing a nice opportunity in the market.
Okay. Thank you.
The next question is a follow-up from Mr. Vinit Malhotra from Mediobanca. Please go ahead.
Yes. Thank you for the opportunity. Just trying to follow-up again on the combined ratio as I mentioned. Just on this pricing, I mean, if I look at the Europe and North America Commercials, the European commercial pricing 2Q is roughly 13% And almost very close to the 14 of North America. Could you just comment on where this is coming from?
Because 1Q was 11. Any comments on that would be very interesting. And second question is just on Slide 18, I think, The one where we show the retail SME, KYC, all it's got ex COVID. And it's nice to see an 80 basis point I thought for a while this segment was kind of flattish. Could you say where this could be coming from?
Because I The COVID frequencies and everything is cleaned out here. Any comments are also interesting. Thank you.
Yes, okay. So on the first one, U. K, that's U. K. Commercial market that's driving this.
I think I talked already at the end of the year I mean, the U. K. Was catching up pretty rapidly on the U. S. And I mean, that's why you see the outcomes that you see here.
I think if you look at the retail business generally and look at where The improvement is coming from I mean, it's a wide range of markets. And in fact, it's easier if I exclude some of them than to list all of them. I mean, I think the I mean, a market where traditionally you don't see a lot of price movement and we tend to be a much bigger motor player, which is a market that has more challenges, is Switzerland. So I mean here, it's not a big driver of what you've seen in terms of the improvement. But if you look at all of the others, I mean, most of them tend to contribute in some way.
I mean, overall, the picture is still fairly flattish. So the business benefits from the fact that Some of the things that in fact, I mean, the point that you made earlier about frequency, maybe some of the change in behavior, I mean, we benefit more from that than we do from pure price, apparently.
All right. Thank you. Appreciate it.
We have a follow-up question from Michael Huttner from Berenberg. Please go ahead.
Thank you. And you probably Said this already, so apologies. But how much of the aggregate cover have you used up? And how much is still left before you hit the Not the cover, but the retention before you benefit from the cover. And then the second, and this is really cheeky, Is there anything you can say about dividends?
So I was trying if I say the question politely, it would be to say, well, if I pretended to be a Board member, I'm not, I would look at the excellent solvency, the wonderful cash and the clear the strong trend in net profit, and I'd be ready to put a big increase number, but I'm not sure if the board thinks like that or do they think more in terms of what's sustainable?
Thank you. Thanks, Michael. I thought this first question was quite cheeky already. So, I mean, all I can say on the first topic is that We won in the aggregates at the end of the first half. So as I mentioned earlier, I mean, just given the cat load assumption that we have, I mean, any reasonable modeling allowing for the franchise requirements on the cat would suggest that we will attach it At some point in the second half of the year, but I can't give you a current update.
Well, I can't. It's not the right one. I won't give you a current update. This is probably a more accurate statement, so sorry for that. On the dividend topic, I think all the things that you listed as considerations are correct.
The only thing that's a wee bit off is time. So typically, the Board does this starting in December. So I mean, it won't be until the end of the year that this is a topic that we get into in-depth with the Board.
Okay. Thank you very much.
The last question for today's call is from Peter Eliot from Kepler Cheuvreux. Please go ahead.
Thank you very much for the opportunity to add some. First one, I mean, I guess, you've given us very clear guidance on what the pricing And loss cost inflation is doing, so we can model the outlook. I mean, you've also mentioned that the tighter terms and conditions. I'm just wondering if qualitatively, George, you could sort of give us a feel for how you'd be building that Into our model as well and the sort of materiality of that on the margin outlook. That was the first one.
The second one, just returning to your guidance, I guess, You've upped a little bit the outlook for the group functions and operations in terms of Just wondering if there's anything in particular that surprised you in that segment that's operator.
Thanks, Peter. So I'll do the GAAP and O change first. I mean, not really. I think the I mean, there's a series of drivers of it. So we've got adverse FX in the first half.
We've got some financing cost Related to the Met deal, we've given up some investment income. And I'm currently charging the businesses less for Services than we were at this point last year. I think probably the only change that I've decided to make is that I'm not planning to go back and charge them more I'll take it back to where it was, say, at the half point last year. That puts more pressure on the corporate center to adapt and adjust. I think generally that's a good pressure to have in the 1st place.
On the tighter terms and conditions, It's a really tricky one. I think the I mean, I guess, if we went back to prior Markus, you have to go back quite a long time to find the last one. I mean, the way that I remember it and it is the way I remember it rather than I can Prove it. That tends to be the aspect that has more longevity. It tends to be the thing that eliminates some of the frequency that deductibles have gone up.
Some of the soft market Options that you give to customers to put claims to you, they're removed. In terms of quantum, I don't I honestly don't know today. And if I I think if we could put a quantum to it, I think the Chief Actuary would have Another reserve strength addition to offset it for the time being until it was proved. So I think it's something that will benefit us and not just this year, but actually even more as we move into the future. But I can't give you any sense of size and Not even materiality, but I think it's extremely important for us.
And it's part of I mean, it's one of the things that Sierra and the entire commercial team actually focus on most because it's a thing that will still be here when the rate is not quite as high as it is today.
That's great. Thanks very much.
Well, thank you everybody for dialing in today. If you do have any So I guess you guys are all aware. This is Richard's last outing as our Head of IR. Well, I guess you hope it's the last. On behalf of Mario and the entire team, I just want to say thanks for the fantastic job you've done, Richard.
I'm sorry to see you leave this role, but I'm looking forward to seeing you The Europe,
John. I'm looking forward to it too.
I will
take that. Thank you, Richard.
Thank you, everybody.
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