Ladies and gentlemen, welcome to the Zurich Insurance Group Update for the 3 Months Ended March 31, 2021 Conference Call. I am Alice, the Chorus Call 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 now be recorded for publication or broadcast.
At this time, it's my pleasure to I hand over to Mr. Richard Darden, Head of Investor Relations and Rating Agency Management. Please go ahead.
Good morning, good afternoon, everybody, and welcome to Zurich Insurance Group's 1st Quarter Results Q and A Call. On the call today is our group CFO, George Quinn. But before I hand over to 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 as we know that some of our peers also have calls straight after So with that, I'd like to just hand over to George for some introductory remarks.
Richard, thanks very much, and good morning and good afternoon, everyone. And thank you for joining us on what I know is a very busy day for all of you. As you've seen from this morning's press release, the group's made a very strong start to the year. We've got good growth across all the businesses. And it's important to remember that this is against a prior year quarter that was largely unimpacted by the pandemic.
The performance demonstrates, we believe, both the strength of the business and the successful positioning of the group to take advantage of growth opportunities as the world emerges from the challenges of the global pandemic. In the Q1, our P and C business continued to perform well with top line growth of 14%, Driven by the strength of Commercial Insurance. Pricing momentum in Commercial Insurance remains strong. All regions I've seen higher levels of price increase in the Q1 than you saw a year ago. And we expect the current pricing conditions To continue through this year and to next, supporting further improvement in the underlying accident year loss ratios.
Life and the Farmers businesses have also performed well with a focus on unit linked and protection products Leading to strong growth in new business value. And while the finance exchange, which are, of course, owned by the policyholders, So return to growth even before the inclusion of the acquired MetLife P&C business, which will add to growth from the 2nd quarter. Balance sheet remains very strong with the solvency test ratio. And this allows The acquisition of the MetLife P&C business, EMEA didn't close in the Q1, 2 0 1%, well above the target levels that we communicated back in February. Before I give you some thoughts about the remainder of the year, I just want Comments that there's been no change to the level of COVID-nineteen P and C claims, net of frequency benefit.
So this remains at the $450,000,000 net figure level that we reported back in February. Looking ahead, it seems clear to me that given the strength of the Q1 that we were perhaps a little cautious in our guidance for the P and C net and premium growth. And if you remember, Richard and I stretched the definition of mid single digits. I think we've been now saying that it's more likely to be in the upper single digit range compared to what I indicated back in February. On the clean side, you have seen in the press release that we've got a higher than usual level of nat cat events in the first So, primarily the Texas freeze.
And so assuming that all things are equal, I. E. We have So the usual Nat Cat experienced for the remainder of the year, that would have added 1 percentage points to the combined ratio overall for the year. And Life, the Q1 saw some additional mortality, a level that was similar to the second half of 2020 was about $120,000,000 driven primarily by the U. K, U.
S. And Latin America. Mortality has been improving steadily as the lockdown measures and the successful rollout of vaccination programs That's led to a significant improvement, and that's particularly true in the UK and the U. S. If we look ahead for a second, I think the strength of the Q1 trends and the continuing improvement in the underlying P and C margins gives Me and all of us great confidence as we look out to the remainder of the year.
And with that, I'll be happy to take your questions.
We will now begin the question and answer session. Participants are requested to use only handsets while asking a question. The first question comes from the line of John Hocking with Morgan Stanley. Please go ahead.
I've got two questions, please.
Firstly, on inflation, there's a lot of data points flying around about how much inflation we're seeing, particularly In areas for construction, some lumber costs, etcetera, I wonder if you could talk a little bit about what you're seeing there and how you expect it to impact The results. And then secondly,
I just wonder if you could give a little bit
of color please in terms of the rate increases, particularly the U. S, It's also ratio increase ex workers' comp.
And if you can give
us a commentary on the line, that would be very helpful. Thank you.
Yes. Thanks very much, John. So on the inflation topic, Maybe just to remind everyone of something I've said in the past. And I think if you look at our book, I guess most people Perceived the inflation risk around workers' comp. We've talked in the past about the fact that we I mean, we don't have A mark to market view of the inflation assumption.
We tend to have quite a backwards well, backwards is the wrong way to express it, but we've got a longer time series And the assumption, we go back several years. I think we've also highlighted that we haven't fully taken adversity, Actual versus expected on the workers' comp side. So that gives us some measure of protection, but I think it's a topic that Everyone needs to keep in the front of their minds. On the lumber cost topic, I mean, I think the only immediate impact you say this other than the fact that it will appear in some of the claims that We've already incorporated in Q1. I mean, the most obvious place where I see it is that I think for the first time, it's come up in the Our assessment for Texas Freeze topic, so as we've been looking at the potential cost of that, but we've allowed for some of The price inflation that we've seen around some of the things that will be required to repair Some of the damage that we're seeing.
From a price perspective, I mean, it's another strong quarter. I think in commercial, this is the That's a straight quarter of double digit rate increase. If you look across the various lines of business, I mean, the picture is not very different compared to where we were at Q4. I'd say that Property and liability are slightly down compared to where they were. So I think I talked back in February about the fact that They were both reasonably deep into the 20% plus territory.
They're both now, from our perspective, Around the 20% level. Workers' comp, any slightly weaker. So I mean, overall, I mean, I think the move that you've seen in, certainly, U. S. Commercial down from the 18 points that we reported back in Q4 down to 14 in Q1.
I think if you adjusted out for workers' comp, you'd be somewhat slightly north of 14 points. I think if you look at the book more broadly, there's a couple of things that are relatively important to bear in mind. I think the U. S. Market has a relatively continuous renewal pattern.
Europe is a bit different. So you tend to see a bit more seasonality. Q1 is typically pretty heavy, Germany and Switzerland. And those markets have quite different pricing dynamics from the UK. So I think When we see what happens at Q2, I think you'll still see a very strong market.
And potentially, I think you'll see Europe Come up again in Q2 because the UK has a much more significant impact than April 1. So overall, I mean, trends are really pretty good. We expect this to translate into underlying Underwriting improvement and of course when we get to Q2, I'll give you a more thorough update on that.
Excellent. Thank you.
The next question comes from the line of Peter Eliot with Kepler Cheuvreux. Please go ahead.
Thank you very much. Two questions, please. The first one, just on the guidance. Jordan, you obviously you mentioned that Now you're thinking you were too cautious on the P and C growth. I'm just wondering if you could sort of highlight any of the other areas And the guidance outlook that you gave full year 2020, where you sort of changed your view over the next over the last 3 months?
That's question 1. Question 2, just on the nat cat impact, Just to help understand the impact. So just wondering whether you've allowed for any seasonality in that or whether it's just as simple as saying Plus one point for the full year equals means you're sort of plus 4 points over the normal budget for Q1. Just understand that. Thank you very much.
Yes, great. So on the guidance topic, Peter, I think the I mean, I think if you look at, I mean, what we're seeing internally and you're allowed for the comments, I'll come on to the nat cat topic in a second, but if you're allowed for The press release commentary around nat cat, you allowed for the COVID topic. I think we still expect to be roughly, I mean, what we had planned for even before that. So I think it was a sign that the underlying trends are probably stronger than we anticipated, which is It's less relevant this year potentially because of the impact of Texas Freeze, but it's a strong sign for next year. So I think the underlying improvements is important.
On nat cat impact, So we do allow I mean, when we look at what we anticipate in each of the quarters, there is a seasonality pattern to it. So It's not prorated. And essentially, simply what we've done for the time being is look at the excess level for Q1 And add that to our expected levels for the remainder of the year. That feels like the most transparent Way to do it, but you guys can make your own assumptions about what that means for the remainder of the year. But I mean, for the same thing, we've seen that I mean, what's typically one of the later quarters deliver, I mean, quite significant nat cat loads, and that's why We've made the commentary that we have.
Great. Thank you very much.
The next question comes from the line of Andrew Ritchie with Autonomous. Please go ahead.
Hi there. I wonder just on North America P and C growth, if I back out The effect of crop, the underlying growth is a bit behind rate. Is there still Remedial actions going on there, has there been a significant change in retention? Or is this just So possibly still COVID overhang effects. I'm thinking particularly on workers' comp sort of payroll effects, which presumably are still coming through.
That's the first question. Second question, just remind me, would the Q1 Texas freeze loss count towards Global aggregate nat cat, I'm not sure I can't remember if all events count towards that or whether there's a big franchise deductible on those kind of events. And remind me, does that global cat aggregate cover run calendar year? Thanks.
Yes. Thanks, Andrew. So on the first one, I think when you break out the North American numbers, obviously, the crop Price change has had a pretty significant impact. I think the reason why you maybe don't see all of what you see on the North American business isn't so much the impact So COVID, I'm sure there's still some of that in the number. I mean, I suspect that a more significant driver is probably the fact that And the actual exposure that we take at these price levels is less.
So the And if you think of the way the corporates tend to approach it, I mean, they're certainly, they have the same budgetary constraints that we do. And it's a pretty common response to this type of pricing environment that people will increase deductibles, maybe buy a bit less cover. So you've got these two things And partly offsetting each other, but I mean net net, it still means that you have a much higher quality commercial book in North America. On the Q1 Texas freeze, so the answer is yes, and it's a calendar year cover. So and if you can imagine, this thing certainly passes the franchise requirements for the global cat aggregate.
Okay, great. Thanks.
The next question comes from the line of Will Hardcastle from UBS. Please go ahead.
Hey, afternoon, guys. Just two quick ones to wrap up, given those questions. What industry loss of something have you seen, therefore, in the Texas windstorm? It sounds like it has been at the bottom up regarding a number of comments, but have you used a top down view as well? And then on the second one, I guess, given the extent of the rate and credit spread benefits in Q1, has sensitivity to rising rates from
here moved significantly versus the ones you provided at the
full year?
So on the first one, Will, I mean, as always, it's a bit of both. So it's a relatively unusual event. Although I mean, I've been talking to the claims team a few weeks ago, Actually, we have some experience from the tornadoes last year. So we've got some clients that have been impacted both by the tornado and by the freeze. So we've got a bit of insight into, I mean, how some particular properties are exposed to particular And loss so I mean, the way the team would have done it for the time being because there's not a lot of They haven't been fully through the loss adjustment process.
So at this point, we've taken the notifications. The team has looked at some of the experience from last year. We've come up with ranges. The thing is driven by maybe it's not a really short list that we're talking. I mean, Couple of tens of actual events tend to drive the overall outcome.
And so we're focused mostly on those to try and look at Well, that's from the perspective of notification and top down from our knowledge of that particular Exposure of property. And I think as I mentioned earlier in response to John's question, I mean, we have had added a few Additional things, for example, to incorporate and some of and it's not really demand surge inflation. I think it's more the commodity and the Probably from the COVID driven inflation topic around lumber, commodities in general. On sensitivities, I mean, we haven't updated it. I mean, they will have moved because, of course, they're not entirely linear, they're certainly I mean, it'd be wonderful if this thing was completely parallel, but of course, we all know that's not true.
But I think for now, I mean, given that The Q1 move is mainly driven by interest rates. And I think almost the entire market move is interest rate related. I mean, the non reality is not so important for that particular topic.
Okay. Thanks.
The next question comes from the line of Vinit Malhotra with Mediobanca. Please go ahead.
Good afternoon. Just a follow-up, George, there was a comment in the press release about mortality. And just wondering whether you were trying to suggest that we should be more cautious about mortality than back in mid February. I think you did say that there wasn't much of a change, but just wanted to cross check that, so mortality guidance. And the second question is more about When you are hearing more and more about semiconductor shortages and those kind of things affecting car manufacturers, and I don't know what else.
But I mean, are you seeing some of those side or second order claims in business interruption or other areas, Which could be COVID linked sort of? Thanks. I'm just curious about that. Thanks.
Yes. Thanks, Fenehee. So I think on the first one, I think there's 2 offsetting effects. So I think if you if I look at mortality now compared to what we were expecting back in February, I would say that UK, U. S.
Is probably slightly better than we were anticipating. I mean, certainly, the decay Pattern that we can see is faster than we had anticipated. Having said that, though, we're seeing more from Latin America, Particularly Mexico and Brazil. Having said that, I mean, looking at the strength of the Life business overall, I don't think it changes the overall outcome. So I mean, I bet that the comment I made at the top of the call around the underlying trends on the P and C side, I The underlying trends actually on Life looked pretty good too.
But I mean, the reason for giving the guidance was that I mean, within the Life segment, it will be visible. You've certainly referred to it just given the impact, however, the underlying business is actually doing pretty well and We certainly play a bit stronger than we anticipated back in February. On semiconductor shortages in the Some of the shutdowns and other issues that we've seen. I mean, I think it's a pretty complex Topic from an insurance perspective, I think the risk actually cuts both ways because I mean, in theory, I If you're more directly exposed to the semiconductor sector, I mean, any damage in that world It's going to be a bit more expensive because of the BI consequences. On the flip side, on the recipient end, because of the Short time working or the other restrictions.
I mean, arguably, the gross income level might be lower. So I think it's really hard to draw a very clear conclusion, depends a bit on maybe how the book is positioned overall. I mean, as with everything, there's a few positives and negatives, and those 2 are the most obvious to me.
Thanks very much.
The next question comes from the line of James Shuck with Citi. Please go ahead.
Hi, good morning, George and everyone. On the solvency positions to 201%. I appreciate that number is quite volatile and you have a floor number of 160. You don't have an upper end range anymore. But under the old Z ECM basis, if we just apply the same kind of multiple relationship between SST and Z ECM, Then 10.1% would be at the top end of the previous range.
So just trying to get a feel for at what stage do you see yourself as having So it is capital. I know you're going to tell me that it's volatile and it can come back. Presumably, there's some things you can do on the life back book that might take out that volatility And should actually even add to the FST ratio if you were to do things around that. So any update and thoughts around the surplus capital Potential, please. Secondly, on profit insurance.
So I just want to be can you just remind me how you Book, the combined ratio is up to half year and then the true ups you have in the second half of the year, Obviously, very high increase in commodity prices. Does that mean that you're still expecting similar combined ratios on that crop business Relative to history. Thank you.
Yes. Okay. So on SST, So I suspect if we were looking at Z ECM, we would be through the top end of the range. I mean, I think we gave a number Back in February, and it feels to me we've had a bigger move than that. I think when we think about surplus capital, we just think the capitalization in general, I mean, the priority is really the thing that you highlighted and that's about where is the money and what's it doing At the moment, so I mean, we're very active looking at capital allocation.
I mean, I want to avoid that. I'm always talking about it Rather than actually producing evidence that we've done something about it, that's going to be a very important priority for us this year. I certainly hope that as the year goes on, I can actually report on some tangible progress. Now, I mean, what do we do Was that on the day that we get it? I don't know yet.
Obviously, our priority would be to put it back into the business And hopefully, actually, in a higher return on capital that's more consistent with The rates that owners would expect us to earn on the capital they provide us, it's just too early to say at this stage. So priority for me, It's a combination of making sure we have allocated capital allocated as rationally as we possibly can within The normal constraints. And I think we'd also like to bring down some of the sensitivities. I mean, I think it's pretty clear that From a model perspective, we've got some features tend to dominate the risk landscape, and I would like it as some of those movements were a bit smaller. And we are thinking about how we would achieve that.
On the crop insurance side, I mean, it's an interesting one. I think from a I mean, from a purely financial perspective, The stuff tends to all be written in Q1. We then earn it mainly through Q2, Q3 and then into the early part of Q4 when typically the yield and revenue topics are worked out. I mean, given where we were last year underlying on the combined ratio, I mean, crop would probably end up I mean, there's no change to our expectation in terms of crop profitability. It's not reliant on investment income for obvious reasons.
But it would point to end to be at the upper end of combined ratios or loss ratios, in particular, for our book. So you may see a small impact from earning through more crop premium. But again, as I said, I mean, given the improvement We're sitting on the commercial side. I don't really expect that to be visible. Maybe just a last comment on crop risk.
I think the I mean, in general, I think the move on prices, I think it's generally a positive topic overall. I mean, The actual crop cover has a bit of complexity between the prices struck at planting and then the price that's achieved in the market. I mean, obviously, we've actually had a pretty decent planting season so far. And I mean, the current market conditions give Farmers every incentive to get the stuff into and out of the grounds. So it's too early to make any forecast, but I mean, Crop certainly doesn't start the year in a bad place.
Okay. Thanks very much, George.
The next question comes from the line of Michael Huttner with Berenberg. Please go ahead.
Thank you. Can you talk about MetLife, how much this will add this year and the extra silver endos because It seems to happen a bit quicker. And the second is on the one off. I suppose I'm asking, how many is this €400,000,000 or whatever €1,000,000 you added to COVID is going to come out to run offs, but maybe you could just say Whether you change the expectations run off, I think it's between 1.5% and 2.5%. Are we now in the middle of range expectation or so?
Thank you.
Yes. Thanks, Michael. So the on MetLife, I guess, we've closed at a I mean, probably a couple of months Quicker than we expected. So if you go back to what we said before, I mean, there's a from a Zurich money perspective, we've got about 2 point Just more than $2,300,000,000 on investments. We've got some restructuring that will be incurred between us and the exchanges Through the remainder of this year.
It will have a positive impact on income for the management company as we look through this year. It will obviously depress the reported fee level, but you'll see more fees. And I think if you look out at the 18 months, I mean, you should start to see Right. Relatively clean and through about a 10% return on that 2.3 Just over $2,300,000,000 investment. So you'll see some this year, but you're going to have to wait about 18 months to see the clean run rate.
On a runoff, no change to guidance around that topic. I mean, I think we've tried to be Reasonably cautious on, I mean, what we've guided to over the last several years to maintain some consistency and predictability around the topic Ken, from what I see and what we've been doing in Q1 and not only in Q1, but actually throughout all the last couple of years, No reason to change that. So still anticipating 1% to 2%, somewhere middle of the range would be ideal, but Only 1% to 2% is my expectation.
And there's no sorry, don't shoot in here. It's no It feels like COVID claims have been over reserved. Is that I mean, is that looking at reinsurers certainly? The
so I think it's too early to reach I think there's a number of litigation topics running. And while I'm not concerned about the risk around those topics, I'm not really convinced there's a huge amount of conservatism in the numbers that we have. And if you look at what we've booked, I mean, it's predominantly actually Europe, which is kind of unusual given it's a commercial topic. You know the outcomes that are taking place in a number of key markets. And it would be great if we did see Some of that reversed, but I mean our plans don't anticipate that at this stage.
And certainly, I haven't reflected any of that in any guidance around the expected level of runoff from reserves.
Thank you very much. Thank you.
The next question comes from the line of Ashik Musaddi with JPMorgan. Please go ahead.
Thank you. Just a good afternoon, everyone. Just like a couple of questions. First of all, is with respect to Farmers Sorry, with respect to solvency to last quarter, if I remember, you missed the solvency ratio by 6%. This time, it is better By 6% to 10%.
Can you give us some moving parts? I mean, I guess it is to do with interest rates, but again, some color on that would be very helpful as to What drove a significant increase or say, how much is the macro benefit here? And secondly, I mean, You mentioned in terms of combined ratio or say in terms of losses, cat losses, 1 percentage point higher because of the cat losses. Would you say that all these price increases that are coming through this year will offset that versus the expectation that You had at the beginning of the year? Or would you say that this 1 percentage point incremental cat losses is just like a negative on a net basis?
Would you say there are offsetting factors so that we don't need to change our combined ratio forecast, which we would have, let's say, yesterday? Any thoughts on that would be helpful.
Yes, great, Ashik. So on the SST number, I mean, I need to be careful because I think on prior Q1 calls, I've given quite a lot of detail that almost was an earnings release. So I'm going to be given to add it in too much detail, but essentially, there are only 3 moving parts that have been irrelevant this quarter. There's The economic profit that we generated, I mean, you can obviously assume that that's somewhat impacted by the impacts of The excess nat cat losses and the Texas freeze topic we've been discussing throughout the call. You've got the dividend accrual And plus or minus, those two things are close to offsetting each other.
And then in the middle of it all, I've got interest rates. And that's about it. I don't really I mean, there are other smaller things, but they're really not as significant as those other 2. So this quarter, at least, the movement is actually relatively simple and straightforward to follow. Okay.
On the combined ratio, I have a bit of a challenge that I'd of course, I need to know exactly what everyone forecasts For the combined ratio for us for the year. If I say generally that I mean, certainly, if you'd ask me If we had this discussion back in February and I've looked at my plan for the year, Do I now need to add 1% to the plan for excess nat cat losses in Q1? I do not. So I've clearly got more rates coming through than the plan anticipated, and that will help absorb some part Of the Nat Cat impact in Q1, but I mean, we're highlighting it for the For sake of transparency.
Okay. So it's fair to say that some part of this 1% extra drag would be offset by the rate increases. Yes. We are not going into the aesthetics of that number like whether it's 0.5% or 1%, but at least some part of that will be offset. Okay.
That's an excellent summary.
Okay. Thank you. Thanks a lot.
Your next question comes from the line of William Hawkins with KBW. Please go ahead.
Hello. Thank you very much. George, can you
just be clear, what was the Texas freeze loss that you booked in the Q1? I'm sorry if I'm being foolish, but I know you've gotten to give them the full year, but a lot depends on what all the other experience was to actually back out what the hit was. Could you be a bit clear about the dollar impact of the Texas freeze? And then on Farmers, 4% growth Relative to what that business has been achieving in the recent past is quite an interesting acceleration. You've made reference So the new business volumes and the commercial rideshare business.
But I wonder if you could just briefly talk a bit more about what's happened there. And do we now plug in 4 For the full year, are there any kind of base effects or seasonality issues that we need to be aware of? Or if anything, is it maybe even accelerating, it could be higher by the year end?
Yes, great. So on the first topic, I'm going to resist the temptation to give you a dollar number. I mean, the main reason for doing that is the net impact So, it's important. So, if you look at the thing overall, North America is high versus planned or expected Cat impact for Q1, Europe is low. The 2 don't fully offset each other, But that's why we end up with one point.
So I mean from that you can work out that Texas 3 is slightly higher And there's a slight positive from a European perspective. Farmers growth, Q1, so I think you're right. And of course, we're comparing this quarter to same quarter last year, which If you look at the dynamics, the rideshare companies tend to You're quicker to react, anticipate. So there's already some impact of GWP or on GWP in the Pharma's numbers at Q1 last year. I mean, the more kind of the pure retail side of it, obviously, it reflects actual experience.
So we've seen rate share bounce back in Q1 of this year. So that's a much larger contributor to the 4%. That's important because, of course, the fee benefit of that is lower to the management company than the broader retail positioning. But I mean, we've seen a good growth on both sides. We do expect it to increase as you go through the remainder of the year.
If you look at The different dynamics, I'm going to put MetLife P and C to one side for a second. So that will be an overlay on top of the whole thing. If you look at it, I mean, we're going to have an absence of prior year negative, Which will drive growth that we report through the year. So the refunds that the exchanges delivered to customers mainly in Q2 last year And the obvious return of fee that triggered for the management company, you won't see that certainly in Q2. So that will have an obvious impact.
From a rate perspective, which is the main driver at the moment, If you look across the book, I mean, auto pricing in the U. S. Is pretty competitive. So if we are seeing growth Wealth Exchange is the same growth you're seeing at more than non standard, which is obviously it's not the bulk of the book, it's only a certain proportion. Homeowners is much stronger.
But again, if you look at the rest of this year, we expect the 4% to rise and not because of ride Yes. The combination of what's happening in the absence of negatives from the prior year, underlying dynamics around pricing. And then on top of all of that, we'll have MetLife P and C come in as of Q1 Sorry, Q2. It's very
helpful. Thank you. Thank you, Josh.
The next question comes from the line of Michael Haidt with Commerzbank. Please go ahead.
Thank you very much. Good afternoon. Two questions. Retail first. While you had strong price increases in commercial, which Definitely more important to you than retail.
Both premium volume and pricing in retail appeared under pressure in the Q1. If correct, you had nominal price increases in retail of roundabout 1%, probably below lost cost inflation. What are your thoughts on retail at the moment? In the last call, you already indicated retail is not that part of the business you want to particularly grow. Second question, you published the SFCR report.
So if I may, I would like to ask a question about Zurich Deutsche Herold and the solvency more general, if I remember correctly, you applied a standard model for the solvency calculation, which cuts the negative interest rates at 0. In addition, you applied a 16 year transitional as well as the volatility adjuster For your solvency calculation, excluding this, your solvency ratio is still comfortable at 170% level. How comfortable you feel about the capitalization of Zurich Deutsche Aerot from a purely economic Perspective. And do you have any reinsurance protection in place? Just to make sure, The fact that you apply the standard formula for Deutsche Herold does not affect your Zurich SST ratio, right?
So thank you, Michael. So the second one is a bit complex. So we'll do the first one relatively quickly. So I think your summary on retail's rate was one caveat. So I think the market condition, I mean, you guys can see it.
I mean, certainly more broadly than I can with all the different companies you all follow. But it's a sector that's generally more under pressure at the moment. So I don't think we see it as negative, but it's obviously It's not producing either the margin expansion or the growth that we're seeing on the commercial side. So that doesn't mean we're negative on retail. Just a reminder that, I mean, when we say strategy for the current economic cycle, retail was a significant part of it.
And while we're prioritizing growth in commercial currently, we are trying to make sure that we make the investments, we build the capabilities. We really have that customer driven focus around retail. So when we start to see the term in the retail market, we're well positioned for that. But it's Absolutely true that it's a more challenging market than commercial currently. On SSCR, and I think I mean, your summary of the different components is good.
The choice of type of model for Solvency II has no impact on SSG. And in fact, I think As you've heard us discussed before from an SSD perspective, we apply an internal model across our businesses. So on economic so how do we feel about the capitalization of Zurich Deutsche Herald? I think we feel pretty good. The company is, We believe well capitalized for the risks that it carries.
And I think if you look at it on a local basis, Maybe you'd be more positive about the positioning of the organization. The challenge is, and I guess This is at the heart of your question. When we look at it from an internal economic model perspective or a Solvency II sorry, SST Economic model perspective, it looks a bit different. The volatility is higher. The Return on capital is lower.
And I think that's certainly something we want to look carefully at whether we have Alternative ways to try and manage that risk. From a protection perspective, We don't have any significant economic reinsurance in place. And the primary path we've taken over the last several years is really about the ALM. And so most fortunate, more long dated Fixed income in the portfolio, but I think even there, we try and be careful that you don't go from one extreme to the other. I mean, certainly, the business is all capitalized in its local market.
But when we overlay Aron, give the world's it brings a sensitivity and level of return that I wouldn't say we're entirely comfortable with.
Excellent. Thank you very much.
The next question comes from the line of Rene Farooq from Credit Suisse. Please go ahead.
Hi, everybody. Thanks a lot. First question, we're starting to see commercial U. S. Players seeing the benefit of rate Yes.
So those are giving us some numbers in Q1. And that's potentially going to accelerate, Plus, obviously, yields are going up. So in that context, what are your latest thoughts on how long you think this pricing cycle is going to go on for? I realize it's an open ended question, but just some thoughts will be interesting. And then secondly, on SST, I think like a normalized kind of growth in that number based on if you take out COVID 2020 is probably 7 to 8 points a year, that's economic profit minus dividend.
Given Life margin, especially pricing and net life, do you think that goes up materially this year on an underlying basis? Thanks.
Yes. That's the
question. So on the first one, I mean, recognizing that it requires maybe even just psychic capabilities that I can't really Claim to possess. I can only tell you what I can actually see at the moment. So we've obviously reported the effects For Q1, we I can already see April numbers And April numbers give me significant confidence about the continuation of the relatively High level of rates that we've seen so far. So April is quite an important date for both U.
S. And U. K. So we've seen a small drop coming into Q1. April looks pretty good for me.
And we will see what May June, bring us. I mean, I think if you look out a bit further and you look at all the things that are out there, I mean, there is I mean, you talked about the interest rate topic. We've talked earlier on the call about inflationary Issues that seem to rear their heads. I mean, there are evidently significant risks still in the market As evidenced by a number of fairly obvious events over the course of the last few months. I mean, there's There's an element of what's happening in the commercial market, which is simply trying to get the level of return back to a level that's commensurate with the risk.
When did we reach that point? I'm not convinced that it's imminent. So I don't expect the market to completely roll over. I do expect we'll start but we'll continue to see the market maybe ease in a few areas. The gap between headline price and loss cost inflation is still very substantial.
And I expect us to maintain a substantial gap Through the through all of 2021. 2022, we can discuss later in the year. You said it or you want to come back, Fenech.
No, no. I was just nothing.
Okay. On the 7 to 8 points, so I mean And given there's a predictive component for that and the one thing that I mean, we're in a quarter that's relatively late On P and L, in particular, bottom line information, I want to get I think I want to avoid that after 3 months of the year, I signal an expectation that the economic profit generation It's materially shifted. I think it's a topic we should come back to later in the year, but we've clearly had a very good start to 2021.
Thank you very much. Thank you.
Today's last question is a follow-up from Mr. James Schuck with Citi. Please go ahead.
Paul, thanks very much for the opportunity. So just keen to know, one of your peers mentioned about claims inflation slightly picking up in Q1. I think the model they cited model changes and increase in litigation funding costs. So just Interested to know whether you saw that in Q1 and also if you're able to comment on any large loss experience that you may have seen just Given those frequency impacts in the quarter? And then secondly, just quickly on the debt leverage, you obviously issued debt for the MetLife deal, Taking you above your kind of historical run rate, what's the intention with that debt?
Would ultimately, will you pay it down and return to On normal levels. Thank you.
So on the on loss cost trends, so we just completed The Q1 piece of work. I mean, within it, there are moves within the overall lines of businesses. The overall picture is not vastly different from the one we talked about last year. I think we also need to be careful that the I mean, the amount of data So that we have from last year is definitely impacted by some delay in activity. So for example, from a liability perspective, I mean, it would be relatively easy to get carried away positively.
So it's a time being we've held everything on the basis that There's just delay in the information coming to us. But I mean, by and large, the overall our overall view of loss cost inflation Hasn't really changed. Large losses, so large losses is interesting. So the I think this is one of the better last Sorry, better large loss quarters that I can remember. But I mean equally, we're not extrapolating that into the remainder of the year Either.
On debt coverage, intentions are I mean, it's the financing structure is an abundance of caution. You will see us Bring it back down to the levels that you're more familiar with for us.
Great. Thank you very much, George.
Thank you.
This concludes today's June day session. I would now like to turn the conference back over to Mr. Berlin for any closing remarks.
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