Ladies and gentlemen, welcome to the Zurich Insurance Group Q3 Results 2020 conference call. I am Anton, your host for the day. 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&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Mr. Richard Burden, Head of Investor Relations and Rating Agency Management. Please go ahead, sir.
Good morning and good afternoon, everybody. Welcome to Zurich Insurance Group's third quarter 2020 Q&A call. On the call today is our Group CEO, Mario Greco, and our Group CFO, George Quinn. As usual, for the Q&A session, we kindly ask you to keep to a maximum of two questions. Before we start the Q&A, as usual with the Q3, George will make a few introductory remarks before going on to your questions. George, I'll pass over to you.
Thanks, Richard. Good afternoon, good morning to everyone. In all the third quarter, the group overall has successfully managed what has been a series of unprecedented challenges related to COVID-19. Not only that, but a global recession and of course, a record number of hurricanes making landfall in the U.S. We've continued to register strong growth in property casualty, driven by commercial insurance, but we've also seen our life business return to growth in Q3. The P&C business pricing momentum and commercial remains strong both in North America and in other regions, and we expect this to continue through the remainder of this year and into next, which will support further improvement on the underlying accident year loss ratio.
Our balance sheet remains very strong with a conservatively calibrated Z-ECM solvency returning to the midpoint of the 100%-120% target range. Over time, we think that Z-ECM has served us well. It's informed our decision to move away from interest rate sensitive life business already over a decade ago. Having said that, the high level of calibration and conservative assumptions that underpin the model, I think reasonably cause unnecessary uncertainty. Therefore, we intend to change reporting from the fourth quarter to focus on the Swiss Solvency Test ratio. It's obviously still conservative, but it's much more aligned to metrics that you see reported by peers.
The COVID-19 perspective, you'll have seen already today that we've reported claims net of the associated frequency benefits at an unchanged level since the end of the first half at $450 million. I think as you know from handling the crisis, we've worked hard to further clarify wordings for the policies being presented new. Today I'm happy and I'm confident that we only have limited exposure to any new developments from the pandemic. The combination of a flexible and resilient business model and the increasingly evident return to higher commercial pricing gives me great confidence that we'll emerge strongly from this year's disruption and being well-positioned to take advantage of new opportunities as they present themselves. I'm now happy to take questions.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment, may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. Once you register, an operator will be with you and will ask for your name. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to mute all handsets while asking their question. In the interest of time, please limit yourself to one question. Anyone who has a question or comment may press star and one at this time. The first question comes from Jon Hocking from Morgan Stanley. Please go ahead.
Thank you for the delivery. I've got two questions, please. Looking at the rate of momentum, particularly in North America business, can you give a little bit of color in terms of what you're seeing from three through to Q and how that might be impacted by the types of lines in those renewals in industry courses? That's the first question. Secondly, on Farmers, obviously the top line's been impacted by what's been going on in the world and also to rebates. How confident are you that once we get through this difficult period, we're gonna see the top line get back to normal growth trends at Farmers?
Thanks, Jon. On P&C pricing. You see the overall headline numbers today, the trend has not slowed down in Q3. If you look at the key commercial markets, which is the main driver of size, if I take the North America the overall picture would be, I mean, pretty much exactly the same to the first decimal point. Within that, there's been a bit of movement. You see property at roughly the same level. We would say that liability is actually progressively stronger again in the rate environment in Q3 compared to Q2. Motor, slightly down compared to Q2, obviously, property and liability dominate the book.
Well, I think some of these inaudible rates are just to continue. You've seen some of it come through the top line in quarter. This year is obviously not a seasonal yet. You'll see more of them next year. I think if we look at the growth rates that we're reporting today and we look at the plans that we have for next year, you will see a pick-up in growth. As I said back at the half year, that with currency, we thought that the headline number would be flat through the year and maybe underlying up 2%. I think we're going to be a lot stronger than that before we get to the end of the year, and we'll be stronger than that again next year. On Farmers, there's clearly still work to be done. Obviously.
Can you still hear me?
You cut out at the beginning of the following speech, George.
Yeah, sorry. I was just saying that there are two more payments related to those topics in the Farmers number.
The, um
Can you still hear me now, Jon?
I can hear you. You're cutting in and out, but I can hear you now.
Sorry about that. Technology is wrong. Farmers, obviously we had the CHF 211 million we reported in the first half, which is the return of frequency benefit. We've got the impact of the commercial rate share. They are still selling great, but at a lower level than we've seen in prior years. That will have some positive impact. The main focus both at the exchange and in the conversations that we have with them is trying to draw that policy going through the print, because that's crucial for the growth next year. We've seen some early positive signs over the course of the last couple of months. I think it's obviously way too early to declare victory.
It's that policy against growth topic that they're completely focused on working through the Management Company to try and support the exchange and deliver that. Farmers has more work to do.
Excellent. Thank you.
The next question comes from Andrew Ritchie from Autonomous. Please go ahead.
Hi there, George. The question, obviously I'm aware of the large losses in Q3, but I wonder if you could just give us a commentary on the underlying more attritional loss type trend you're seeing. You've strengthened slightly from a loss pick from liability in the U.S. in the first half. I wonder, obviously, it's hard to judge what's going on in the underlying loss environment. Do you have any updated view on underlying loss trends in some sensitive areas? Again, whether indeed pricing is still for sure part of any loss trends? That's the first question. The second question is on the life outlook. There was a degree of confidence expressed in a full recovery in profitability in the second half. At the half year, what's your latest thoughts on that?
In particular, I guess one area that's come to light additionally since the first half is Australia Disability Income. I don't know if that's impacting your outlook in that business.
Yeah. I think from the starting with what we see currently in terms of technical profitability. Trends ex-COVID, ex-CATs are very similar to the ones we saw in the first half of the year. Obviously you saw that improvement. We're seeing that significant price trend net of the impact of loss cost inflation. That feeds into our underlying performance. When we get to the end of the year, I would expect to report a set of numbers that would be completely in line with the commentary you're hearing around price. On loss cost trends, our view is not different today. It can bump around a bit. Overall from a pricing perspective or the loss cost elements we add into pricing, if we look it on a basis that we think is more consistent with the U.S. peers, we see it around 5%.
I think I gave some commentary at the half. There's a wide range of actual assumptions underlying the business with xx GDL being the standout. I think from all the reviews that we've done, I think we're happy that what we've done expresses the structural inflation trends. On the life outlook, recovery profitability. We said before that the second half, the reduction in the second half are weighted principally because of what we're doing in Australia. That actually seems to be true. We haven't seen anything in the Australia market that is different from what we've expected. In fact, I'd say that it actually could be slightly higher. If I compare every three things today to how we saw them in the first half. We're now through a round of price change on the DI market.
We've seen, again, over the recent months, some good performance from the business following that. You will see, I think, what we've indicated in the second half. That is a significant contribution from the Australian life business, mainly because of what we did with reprofiling. It obviously helps that the entire market is doing the same thing. It creates a very positive trend. My guess at this stage is that probably, that trend of increasing prices is not over yet on the DI side of the Australian life market.
Great. Thank you.
The next question comes from Peter Eliot from Kepler Cheuvreux . Please go ahead.
Thanks very much. I had two on the ZECM, really. The first one, you've always been quite clear on your target range under the ZECM ratio. I know now you're moving to SST being the primary reporting metric. I guess the obvious question is, what's the target range you have in mind there? How should we think about that? Then the second question is, I understand there were some modeling changes that caused you to get closer to the SST framework. Just wanted to quantify what the result from modeling changes was on the ZECM under your course this quarter. Thank you.
Yeah, thank you. On the first one, if you see a load will come with the target range in February when we switch to SST. We have done the work to try and calibrate it in a way that we think is consistent with what we do on ZECM. We've also looked at what other people do in terms of the ranges they give. I don't think we're going to surprise anyone. I think the range will be very familiar when you compare it to what you would typically see from similar players in the European context. That's something we'll formally bring forward in February. From a modeling change perspective, really what I'm saying, first of all, is that the vast majority of the change between ZECM is driven by market or market-related movements in the quarter.
Obviously, credit and equity has generally been very positive, really slight offset, post-quarter movement on interest rates. There are two relatively small adjustments we've made. One is around how we look at reserving for One Life. We've made that consistent between ZECM and SST, and there's also some updates on the life specific portfolio in the quarter. The vast bulk of the change is also in the market, which I think is what you'd expect.
Great, thank you. You're being very technical on the first point. I mean, I guess your main European peers is Solvency II rather than SST. You're not quite comparing apples with apples when we look at the target ranges, and there's probably not a lot you can say on that, but I guess you're under business policy print as well. I guess that's great stuff.
It's a good point. I think there's only so much that we can do to make the things comparable. I mean, we're obviously the Solvency II exercise, and it's not relevant for us anyway because of the legacy system. I guess if we were very mathematically precise, you would end up with a different target range if you were trying to be super competitive with European peers from the SST as a recent and more conservative measure of solvency. Having said that would be confusing for people if we did that. It would be our intention, and I think to accept the fact that this particular model is a bit more conservative. I think most people ignore as well or have an understanding of roughly the kind of range of conservatism that's in there.
We always say target range is pretty consistent with what you'll see from some other peers. Again, we won't surprise you by, say, bringing a lower target range because we think it's more conservative. We won't do that. We'll stay consistent with the others.
Okay, great. Thanks so much.
The next question comes from Anuj Parekh from Credit Suisse. Please go ahead.
Yeah. Hi, thank you very much. It's good to be here, Will. Just on the ZECM, you're still going to be obviously using it internally to drive your economic thinking, but you're not telling us what the number is. We'll get less frightened when the thing falls below 100 and start asking questions on calls and stuff. It does give you more leeway in the public sphere to do things that you might not otherwise do, and the one presumably would be interstate-rate risk and asset risk. Just wondering if you'd comment on that, whether that's something that, in my view, is a good thing to align you with others. What are your thoughts on having that leeway? Secondly, on underlying combined ratio picture.
If we take the CHF 450 net number, which presumably hasn't changed since 1H, You're running at a 96% combined ratio in the first half, I'm guessing, with some additional Kind of deserving, just wondering what your thoughts are on underlying combined ratio. If we start thinking about next year, the numbers are astronomical here in terms of claims inflation, there's pricing, there's climate change, and it's just lots of big numbers. If you could give us some thoughts to help people are modeling, that would be great on the underlying combined ratio for 2021. Thank you.
Yeah. Okay. Fair thanks. On the ZECM topic, I think, again, we'll do more of them in February. We'll bring forward the overview of the target capital ranges. I mentioned earlier to Peter that we would expect that to be very much in line with what you've seen elsewhere. We've had some significant conversations internally, including, I know, a conversation with ZECM somehow in the background, but not showing it to you. I think the way we've agreed to do this is that SST will become the prime measure for the company. It will make it suddenly more consistent, for the reasons that you're all well aware of, but won't make it entirely consistent, which is obviously true of all companies. I think it's good enough to govern by.
The thing to bear in mind, though, is that we have a number of corporate finance measures that we need to manage day in, day out. Even though we don't talk about S&P a great deal today, it's obviously something we think about a lot. We've got certain stress liquidity models. We've got other capital models. All of these things have to be translated into decision-making. I think also, you shouldn't think of ZECM as something that was kind of given to us, and we all adopted it. I think it obviously makes far more sense if you see the railway line. ZECM was a development of, I guess, the way the company and the people who run the company think about risk. Even if we no longer have ZECM in the future, I don't think you'll see any significant change in how we perceive certain types of risk.
I think it's similar on the interest rate topic. That decision that we talked about a lot, about 10 years ago, if not more, already to deprioritize the more interest-sensitive guarantee products. I mean, I wasn't outright happily surprised that it was only ZECM that drove that decision. I think it was the thinking of the people around the table. You could take ZECM out of the mix, but I don't think it changes the perceptions that most of the senior management team have about risk and how we should deploy our capital. We will use SST as the prime measure going forward. On what's happening underlying, it's actually an easier conversation to have in February because I can go to you, and from Andrew's comment earlier, I can actually show you some numbers. I can show you the improvements.
We can talk about what that means when you then roll that forward into next year. We expect to see a significant continuing improvement in technical profitability. The margin improvement is different between the headline price and underlying loss ratio inflation. There's obviously more than sufficient to offset other factors, for example, lower interest rates. We do expect to see a continued improvement in the overall economics of the commercial part of our P&C business. It'll be easier for me to give that in detail when we come back next year. I think just to give you one jumping-off point, I did talk at the past year call that we saw about 0.7 of the combined ratio or loss ratio improvement if you take out the excess CAT and COVID-19 and other things. We saw ourselves towards the bottom end of the 95%-96% range.
I would expect that that probably improves again before the end of the year. That gives a starting point for next year, which we'd expect to improve upon further.
Okay. That's really clear. Thank you.
The next question comes from Tobias Bateman from RBC Capital Markets. George, you're ahead.
Hi, George. It's Thomas Bateman. It's not the first time I've been called Tobias. Yeah. Okay. Two questions on P&C. The first one is, you had brilliant rate rises this year. Listening to next year, do you think premium growth will begin to match or exceed rate rises? If I look at the jaws between rates and P&C growth, the jaws actually seem to be widening as the year goes on. Any thoughts on that for next year? The second question is just on credit claims. How sure or confident are you in your estimates, or has it changed over the years? Are you more confident now? Do you have any numbers on how the prior year marks have played compared to maybe how much maybe could be a true or not? Thank you.
Yeah. Okay. On the first one, if you allow for the time code, the figures I gave earlier, I mentioned the 18 and 16 for commercial in the U.S. and in Europe. If you allow for the fact that commercial is about half of the book overall, you allow for the underlying loss ratio inflation, that means you'll see that half of the headline number comes through as growth. You will start to see a much higher growth rate next year. A bit of those allows us to do things within the portfolio to try and improve some of the characteristics. One of the things we've talked about already before is, for example, from a credit perspective, it feels like a good point at which to think about starting to rein in capacity.
I don't think you'll see precisely 50% of the headline number, but you will see it get much closer next year. You should see a significant fall through in the P&C business overall. Certainly far more significant than this year. COVID claims. There's a psychological thing that happens with COVID topics around, it can make you feel incredibly confident. Then there's a mathematical thing. We've been running this process since around March, the components have moved around a bit, but the totality of what we've reported hasn't changed significantly. We reported today that the net number is in the same territory. We've looked at the risks that we have from what's taking place now in Europe and whether that may drive the possibility of another significant loss. When we run the models, we just don't see that outcome.
Of course, that's a combination of the exact circumstances of what's taking place now. Actually, more importantly, the fact that some of the things that gave rise to claims before, the limits are exhausted, or the contracts are renewed on a different basis. It's not as if there's zero additional risk. When I look at what the scenarios tell me, maybe we could have a large property loss equivalent. While I wouldn't say that we don't pay attention to it and we're not careful, it's just not a major source of concern for us. We find that we have the COVID topic more or less actually behind us at this stage. From an IBNR perspective, I think I said it the half year, that half of an IBNR. Believe it or not, that continues to be true today.
That's very helpful.
The next question comes from Nick Holmes from Société Générale . Please go ahead.
Hi there. Thank you very much. Two questions. The first is with business interruption. Do you have any concerns left about adverse legal rulings, or do you think we can now basically draw a line under that issue? Secondly, with the dividend, is there any concern you have that the Swiss regulator might try to copy the French and Italians and become a little bit stricter? Thanks very much.
Yeah, thanks, Nick. On the BI topic. Risk is adverse legal rulings. I think if we look at all the exposures that are out there, I don't think that we have a view that we have any particular material risk out there. Certainly, there's always a risk that in one particular action or in one particular court case, you can lose. The trends that we've seen have tended to be fairly favorable to the insurers. If you look at the U.S. as the main example, the wordings, the exclusions have generally held up well there. I think the FCA in London has been the exception so far, although I would point out that certainly on the wrongdoing position was upheld.
I wouldn't be surprised if along the way, and by along the way, I mean probably over the next year or even longer, we do from time to time see something go against either Zurich or the industry at large. From what we can see in terms of what that would mean financially, there's nothing that's particularly troubling me at this point. I think we have a good estimate. We certainly have some residual risk, but the residual risk is a very small proportion of what we've seen in the first wave. I guess I'm as confident as you can be around something that you don't control, like a legal topic.
That's very clear.
From a dividend perspective-- Sorry, Nick. From a dividend perspective, I would say from a general regulatory perspective, I think we benefited from the fact that FINMA took a facts and circumstances approach to the payment of dividends last year. FINMA asked that all the Swiss institutions, including the insurance companies, take a look at stress scenarios and form a view of those risks prior to the payment of dividends. We did that, but you have already seen that led to the same decision as the one that was taken initially. I'd be confident that FINMA is likely to do something, although, it will partly depend on the circumstances that we find ourselves in in January and February of next year.
The most important thing that we can do is make sure the company is well capitalized, make sure that we've got the cash in the right places, make sure we deliver the performance underlying that we've committed to. I think at that point, we've done everything that we can. I think the positive thing is that FINMA has demonstrated that they're a fairly consistent organization. They have conducted stress tests over the course of the year. I think they're well informed in terms of where the industry is down, in terms of where the individual company is down. I can't tell and I'm very confident that Sam will continue to look at it case by case rather than take a very broad brush approach, which for me personally doesn't make sense.
That's great. That's very clear. Thanks so much.
The next question comes from Vinit Malhotra from Mediobanca . Please go ahead.
Yes, thanks very much, George. My two questions. The first one would be, I guess just looking at the sales figures in LatAm raises the question for me that in the life we saw what looks like a 22% growth, and in non-life we still see compression. In life, I mean, in non-life, you've mentioned the market leading our business. If you could just maybe want to quickly and could just comment on what's happening in the LatAm business would have been the first question is. Second question is, with the pickup in U.S. senior, the reinvestment yield has been quite a surprise. Do you think this is going to be a topic for next year's pricing or the premium that you can still become quite happy on six?
Yeah. Thanks, Vinit. I think in LatAm, obviously we are in different channels. That has some impact. The life growth that you're seeing has been driven by a very strong recovery from the joint venture with Santander. I think between the Zurich team and the Santander team in the various countries they're in there, they've done a great job in finding ways to bring that growth back. It's not the first time we've seen that from them, so I'm not surprised that they've again demonstrated a really superior sales capability. I think the challenge on the P&C side is, I mean, we're more mass consumer. It's typically not always linked to the same things that causes you to interact in a branch or with a bank cash machine where you can actually buy through Santander products in Latin America.
I mean, it's typically much more connected to mass consumer grown white label sales. I think that's been a bit harder to try and find ways to bring back. I mean, from what we see the partners do, I think year-to-year probably you start to see that growth coming back. It's just taken a bit longer. I think the circumstances for the retailers is maybe slightly more challenging than it has been for the banks. I think that's part of why you see this slight lag on the P&C side versus what I've seen. On the 10-year rates, obviously the increase in the 10 years is a relatively recent phenomenon. We haven't tried to update the numbers this week to reflect or model what the impact of that's going to be.
I mean, obviously, I can see the reinvestment rates that we've gotten at in the P&C business through Q3. I think year to date, it hasn't really changed the picture significantly from what you saw for the half year. I think I just make the point that we're not a highly interest rate sensitive business. If we do see in the U.S. market interest rates pop up, I mean, that does allow some room to accept a slightly lower technical margin, but yet achieve the same overall economics. I think in my experience, this has to be a bit of a lag. I think actually if we see a sustained pick up in the 10-year, there's probably a period where that actually gives a bigger benefit to the insurer. It won't last forever and the market will eventually correct.
If we do see a sustained pick up, I think that will actually work in our favor in the short term. From a longer term perspective, I don't think it changes that much. The key drivers are the other things we've discussed to this point.
Thanks so much.
The next question comes from Edward Morris from JPMorgan. Please go ahead.
Hi, everyone. Thank you for taking my question. The first one just relates to targets that you outlined around a year ago at the Investor Day. I think it's fair to say that this year hasn't quite panned out as you expected. I just wondered if you could update on how you're thinking about the targets over the 2020 to 2022 period. You've got ROE, cash remittances, what have you, EPS growth. Should we be calibrating our expectations around 2022 now? I'm just interested in your thoughts on your ability to deliver them for next year and then in 2022. Second question. I mean, thank you. You've already given quite comprehensive comments on how you think the regulators would think about the business.
I wonder if you could just provide a few more thoughts on your own view of the prospects for dividend growth this year. Obviously, earnings are a little lower than maybe expected. Appreciation of Swiss franc means that the dollar cost of your dividend has increased this year. Sure competitors in the sector are going to be minded towards having a flat dividend. I just wondered if you had any thoughts on how you're likely to approach that decision later on. Thank you.
Yeah. Thanks, David. I think on the targets, in the last crisis cycle, it was really important to us that every single year we ticked all the boxes on the target. When we set the targets last time, I think one of the targets, which was EPS growth, I think that was always something you had to measure over the course of the three-year period, we certainly had the same aspiration around ROE and cash remittance. Of course, as you point out, this is a year that we did not anticipate, I guess no one did. Having said that, we said at the half year that our expectation is that through the course of the three-year period, we can deliver the targets that we've committed to. That's ROE, that's cash remittance, and that's earnings per share growth that we introduced just over a year ago.
We talked about a year ago. I think as next year, and I'm not going to try and qualify them all, I think on the ROE type sort of things, I expect a significant bounce back. I don't necessarily anticipate at this stage that the pandemic topics continue to have a significant impact into next year other than the change in the expectation of what's going to drive the group's performance, i.e., something that's maybe a bit less retail oriented and a bit more commercially driven. From a cash remittance perspective, I guess it's pretty clear that they're going to be at the lower run rate this year. We mentioned it at the very start of the year, there will still be some impact from financial markets related topics to COVID or actual COVID claims.
Over the course of the year, we expect to start to see it come back in line with the run rate. We've been looking at it very recently. Our expectation is that by the end of the three-year period, we will achieve at least the commitment we've made of CHF 11.5 billion of cash remittance. Earnings growth, obviously this year is going to be significantly disturbed. It creates a new basis into next year. While I'm not going to make any promise, all things being equal, you would expect to see a much higher growth rate. Of course, it's the start to end picture that's most important. All of what we currently do is aimed at making sure that we can drive out that performance that we committed to.
If you think of each of those three things in that context and half-year's comments around timing, we are committed to the targets that we gave last year. We're not revising them. On the dividend topic, it's tempting, but I'm going to resist the temptation to start giving guidance. I think all I can say is this, David, we have a policy, and you guys have seen us operate this policy for the last three some years. Within that period, we've had some volatility. You've got a gauge into how we think about that topic there. My expectation is we have a policy, and we're going to apply that policy. At this point, I can't say more than that.
That's understood. Thank you.
A reminder. If you wish to register for a question or a comment, please press star and one. The next question comes from Michael Huttner from Berenberg. Go ahead.
Two questions. One is on the U.S. tax. I seem to remember last time when the tax rate dropped, it impacted your remittance from the U.S. a little bit.
The second one would be on the combination. Your comments today seem much more positive than half year. They were already a bit strong at half year, but I'm kind of guessing much stronger half underlying this year. At the half year, I seem to remember you were pushing away or pushing back to thinking that maybe we could reach 93% and below at some stage in the foreseeable future. It sounds like this is actually something you're beginning to think. Is that a fair comment? Have you built reserves using all these benefits which would allow you to do that?
Thank you, Michael. First of all, on U.S. tax, obviously we don't know what will happen to the tax rate yet, but maybe just a helpful reminder to everyone that about half of the profitability comes from the U.S. Therefore, for each one additional point or change of one point on the tax rate, you can expect about a 0.5 Point change on the group's tax rate. From a remittance perspective, appreciating that I don't know what will come, the impact on remittance last time came from some of the exceptional things that weren't the actual change of rate, in particular, the so-called BEAT tax. I have no idea what will happen with that. If I had to assume it will stay in place or doesn't become more onerous.
I wouldn't expect. Other than the incremental tax cost, that you'd see any significant impact on U.S. remitted profits of the group. Obviously it's very early stages, but there are only very high-level proposals. It's not even clear that the policy exists in the right parts of the U.S. legislative process to actually push through some of these things. I think the only gauge I can really give you at this point is for every 1% move in the change in the rate that the U.S. would enact, you can expect about a half point change on the group. On the combined ratio. First of all, I apologize. I'm going to resist the temptation to roll along my stomach with your forecast about the future. Maybe it's to reiterate some of what I said earlier.
I said we were towards the top end of the 95, 96 range. I expect to see further improvement through the second half of the year on an ex CAT basis. Again, I think although at the landing point for this year, a revised view or an updated view of what's happening on price, I think it would be a bit mad for me to give you forecasts today. The one thing that's clear to me, and I can see it in the numbers, is that accident year performance continues to improve, which is exactly what you'd expect to see given the rate environment what we're currently in.
Just a quick follow-up, I know you answered Ed's question very similarly. It kind of indicates, or maybe I misunderstood, adjusted for interest rates, you're still improving the possibility between fee is improving. Surely that would mean that you'll beat your targets now rather than be in line. Do you see beyond your targets?
No. You need to think of what's taking place on the technical side, i.e., the margin improvement in the context of the duration of the assets. If you create on the P&C business, you've got about a five-year duration. You need to increase it to a level that at least offsets. I think the point I made earlier was that we're actually above that point today. You have to hold onto it for five years to achieve that outperformance over the period. I can only have a certain visibility into the future, but I'm not sure I'd be yet ready to give you a view that far out. Currently at the moment, what we're seeing is more positive.
I think one thing to keep an eye on, Michael, I think we said earlier in the year that in commercial, certainly much stronger than we had allowed for in the targets that we established at Investor Day back in November last year. Having said that, we need that strength because rates have not decreased. In some ways we're not quite strong as the underlying assumptions that we had when we put those targets together. We not only need higher rates to help us with the investment income challenge, it's also going to help us with some of the pressure that I think you're generally seeing around the retail side of the business. Our commitment is that we'll deliver the targets that we signed up to a year ago. I can't promise we're going to do better than that.
Absolutely. Thank you so much. Thank you for your very thorough turn out. Thank you.
Next question for today is a follow-up question from Peter Eliot from Kepler Cheuvreux. Please go ahead.
Thank you. When we come back on board. I guess that sort of a few pennies that obviously you looked at a few years ago now being bought. A lot of things have changed since then, and you've acquired many things yourself in that time. I'm just wondering if I could give you an opportunity to remind us of how your thinking on M&A has evolved over the time frame and how your sort of priorities might have changed and whether post-COVID world there might be some opportunities or any general comments that you might be able to make on the outlook.
Yeah. Thanks, Peter. Richard was telling me that we're coming to the end of the Q&A, so I was hoping that I would avoid this question. I think that we wrote the last things being bought, so I appreciate the way you've phrased that. I think for us, our approach to M&A has been I think it's well signaled. The types of things that we do, the things we've done in the past are a pretty good gauge for what we think about in the future. It tends to be in-market focused. We're not dealing with large multi-market integration topics. I don't think our philosophy is necessarily going to change. In general, that's worked pretty well for us. I think from our perspective, there's no reason to change that.
I will add the normal disclaimer, though, that the responses I gave to Michael earlier about targets that we have for the three-year period, they're entirely okay. You don't require a lot of relying on a doing M&A endpoint on the cycle. There's no pressure or driver to do that. Of course, if the right opportunity emerges that would help us get to one of our strategic priorities a bit quicker in the price regime, then of course we would take a look. There's no change in the way that we think about it compared to what you've seen from us over the course of the last several years.
Okay. Thanks so much.
Thank you. I think that was our last question. Thank you very much, everybody dialing in today. Obviously, if there are further questions, the investor relations team is available. Please do not hesitate to reach out to us. Otherwise, stay safe and have a very good afternoon. Goodbye.
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