Ladies and gentlemen, welcome to the update for the three months ended March 31st, 2019 conference call. I'm Sherry, the conference 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&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's my pleasure to hand over to Mr. Richard Burden, Head of Investor Relations and Rating Agency Management. Please go ahead, sir.
Good morning, good afternoon, everybody, and welcome to Zurich Insurance Group's first quarter 2019 Q&A call. On the call today is our Group Chief Financial Officer, George Quinn. Before we start with the Q&A, I'd just like to remind you, please keep your questions to a maximum of two, and if we have time, we'll come back to you later on in the call. Before we start with the Q&A, George will just make a few introductory remarks. George, over to you.
Thanks, Richard, good morning, good afternoon to all of you. Thanks for joining the Q1 call. Just a reminder, before we start the Q&A, the focus obviously on Q1 and again at Q3 this year is on revenue trends, also some qualitative commentary on the performance of the business. You'll see the full earnings detail again at the half year. Over the first quarter, we've made a strong start to the year, we believe that we're fully on track to meet or exceed all the targets for this year. The results clearly show that the strategy is working, while the quarter has also seen benefits from the full inclusion of the Latin American acquisitions that we announced last year, we've also continued to strengthen our customer and partnership propositions with the group having entered into a number of incremental distribution agreements in the year to date.
Perhaps most notably, P&C pricing trends have continued to improve, particularly in North America, if anything, have accelerated over the course of the quarter. Rate is clearly in excess of claims cost. In the rest of the world, trends have remained broadly stable, we have seen some strong performances, particularly in our Swiss business, as well as from some of our smaller country units. In terms of Nat Cat and weather, I would describe the first quarter as relatively benign. There have been a number of weather events around the world. These have tended to focus on areas where we're less exposed than perhaps some of our peers are, resulting in overall cat losses that are slightly below our normal quarterly expectations. Our life business also continues to deliver on the strategy of focusing on capital light and protection business.
This continues to support good growth, which aims to balance return on capital, cash generation, and new business margins, which, as you've seen today, remain at an attractive level. Our Swiss and Irish businesses have had a particularly strong performance over the quarter in the corporate life and pensions segment. Farmers continues to deliver a steady performance, continue to execute on its strategy to strengthen the agency force, and customer metrics have continued to improve. The surplus ratio has improved further and stands at the highest level for the exchange for some time. Of course, this will support future growth in the business. The quarter also confirms our very strong capital position with our Z-ECM ratio at 125%, providing us with continued capital flexibility.
We continue to review opportunities to release capital from non-core areas of the business, following the announced sale of the U.K. employers' liability book back in December, and the more recent announcement of the transfer of our USAA book to Enstar in April, we've effectively removed all legacy A&E exposure from the group balance sheet. With that, I'm now happy to turn to Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands that will ask a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Michael Huttner, JPMorgan. Please go ahead.
Good morning. Good afternoon. Great results. On the pricing, or volume, I'm not sure which. I was amazed, +4% like-to-like growth, in terms of volume pricing, +2%. Is the volume or the premium total of 4%, given that you'd kind of half made us understand it'd be flat this year, a clear decision by the group saying that, yeah, account margins, yeah, we'll open the tap, and in other words, we'll reach better than 96% by the end of the year? Then the second question on Solvency. You did say it was strong. I was hoping that you would kind of say, "Oh, yeah, but we had to adjust full year, and there's a reason why." I just wondered whether you could explain a little bit the moving parts. The 125%, which for me is the same figure as December, obviously for you it's up 1%.
It didn't feel as strong as I was hoping. I just wonder if there's something missing. I would have expected the sale of these back books to release more capital.
Thanks, Michael. In the first question on pricing, I guess we're not open the tap kind of people, are we? We typically have a far more disciplined approach than that. I think if you look at what drives it, I referred to some of it in the intro. In some markets, we have seen stronger growth than we expected. Some of that was part of the direction we gave the business. Some of it is tactical, just given market conditions. We certainly haven't sent a message to the business that now is the time to go all in across the market. In fact, last night, we briefed our leadership team on the information we were presenting today, one of our most senior underwriters joined the call to say that it's important that all the underwriters focus on the trade-off between retention and price.
Just given the current market conditions, you can probably push a bit harder. There isn't a volume goal out there. We haven't instructed people to grow across the various markets. In some places over the course of Q1, we've not only been able to achieve the rates, which I'll come to in a second, but some of the businesses, for example, the Swiss one, have produced good growth. On the rates topics, if you allow me, I'll make a couple of comments on that before I move to the solvency topic. Certainly if you listened to us after the year end on the road show, I'd have said that we had a pretty cautious outlook on pricing.
If you now look at what we've seen in the first quarter, especially in the U.S., the headline rate is now higher in Q1 than it was in any quarter last year. We're a bit over 4%. We see the claims inflation trends to be broadly consistent with the figures that we saw last year, just in the low twos. If this continues, there is the potential of reasonable margin expansion. For the benefit of those of you that might try and compare the pricing numbers that we have to the ones you get from the peer group over the course of the last few days, the ex workers' comp number would be about +6, just to put it in context.
All right.
On the solvency topic, I think you're completely right. I think the reason that you don't quite see the picture that you may have expected, given the market movements from a spread and an equity perspective, you certainly have expected to see some recovery of the change we saw in Q4. What really offsets this is mainly interest rates, actually. A combination of interest rates moves and in particular, the shape of the curve is what drives this currently, particularly impacts the pension fund side of things. I take the point. I guess my intro comment was more about the absolute level than the relative positioning.
Okay.
Next question comes from the line of Andrew Ritchie, Autonomous. Please go ahead.
Hi there. I guess one of the reasons why pricing appears to have picked up is there's greater fear on the industry on the state of, let's call it, prior loss costs, not current loss cost trends, particularly in casualty lines. Can you give us any sense of, have you looked again recently at what's in sort of developing in terms of underlying loss trends on your liability reserves in particular? Have you felt the need to take any more remedial action? You've been taking some of the good news from workers' comp and adding to those lines. I guess I'm just trying to get some sense about the real confidence in higher prices coming through to better margin or whether they may get eaten up in more conservative loss picks, given the heightened uncertainty on prior year loss trends for the industry.
Could you give us a quick update on Australian Life? On the OnePath deal closure. Industry trends appear to have got worse again in terms of claims, and is that going to affect the likely profit coming from that acquisition? Thanks.
Thanks, Andrew. On the drivers behind the pricing change, my gut feel is it's more than just a fear about prior developments or even the need to have a more conservative pick on the current accident year. That may be an element of it. There's a basic profitability challenge, and you see it in the commercial market more broadly last year. For us, as you guys all know, even though we don't publish the detailed results today, we run Q1 in the same way that we run any other quarter. We've been through our normal reserve process. There's nothing in there that, had I presented it today, would have surprised you.
You referred to the fact that last year we had made some changes, especially in the U.S., where we've seen pretty strong growth reserve release around the workers' comp topic, and we'd recycled some of that into more conservative positions on, for example, GL. That's not something that's continued into Q1. Like any business, we have pockets of reserves that are more challenging. We have other pockets that are certainly more positive, and we still see the bias as more positive than negative in our book. Maybe just on the current accident year side of things.
Again, I think there, given the action that we'd taken last year, we would expect to see improvements in current accident year picks, especially around the U.S. Again, as I look out towards the end of this half when we file the report, I'm not seeing any evidence that would lead me to expect to see something other than that at this stage. Australian Life, I guess you guys, you've heard from the reinsurers over the last few days, and you've seen already some of the challenges in the market because of the Royal Commission hearings. Maybe I talk on industry, then I'll talk about our own business and how that performs, and then I'll touch on closure date. In industry, more broadly, you've seen a number of challenges, both on growth and on DI in Australia.
Particularly impacts the bank-owned sector, so certainly impacts the business that we intend to acquire. From a Zurich perspective, our business actually has been doing very well. We've taken market share over this period. The business has suffered a bit on DI, but the overall performance continues to be pretty strong. In fact, when Australia recently gave an update, and if we had been presenting the investor day presentation today, you would see stronger numbers in terms of the outcome for Australian Life. I think there will be more work to do around OnePath when we acquire it. That's not entirely a surprise, given what we knew was coming. The bank-owned sector certainly has more challenges than maybe the other names, including Zurich have currently.
In terms of closure, we expect it to close in Q2, so we should own this by the end of the quarter.
Thank you.
Next question comes from the line of Nick Holmes, Societe Generale. Please go ahead.
Hi there. Thank you very much. Just one question following up really on the question that's been asked before, but in a different way. Do you still expect the combined ratio to be at the upper end of the 95%-96% target range? Could it be better? That's basically what the numbers are suggesting. Is it just too early to say? Thank you.
Yes, thanks, Nick. That's a very good way of asking the same question. We're not changing the guidance around the combined ratio today. We've told you to expect that we'll see this at the upper end of the range. We are seeing more positive signals than we expected around pricing. We're not currently changing guidance.
Okay. It's too early to say.
That's what that would imply.
Yeah. Lovely. Thank you very much.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from the line of Vinit Malhotra, Mediobanca. Please go ahead.
Hi there. Hi, everybody. Just quickly, maybe one question because my pricing question has been addressed. The growth that we saw in EMEA, particularly Switzerland, you say Swiss commercial. Is it the commercial like large commercial? Is it retail? Is it international programs, or is it domestic? Are you able to give us a bit of color? The reason for asking this is also, again, a bit of a follow-up on an earlier question from Michael that how is the growth, how are you thinking about your portfolio and the growth? Basically, what has happened in Switzerland commercial space? Thank you.
Yes. Today, our Swiss business has been focused on the larger end of commercial. In fact, one of the things that the team has been doing is trying to find ways to be a more significant player on SME. Certainly, the growth that you see in Q1 is driven by our traditional markets in Swiss commercial. I think we're hopeful that over the course of this year, certainly next year, that we'll see the business here take up a more significant market position around SME. That's not what's driving it in Q1.
This was a higher combined ratio in the past, the large commercial portfolio. Is that one of the reasons why you're No?
No. Sorry to interrupt you, Vinit. I think you have to have it in your mind that when you look at large commercial generally in the global business, you tend to associate it with higher combined ratios. That's just not true of the Swiss business. Swiss business is very attractive. We're delighted to see this growth here.
Okay. Thank you very much.
That was the last question.
Thank you very much, everybody, for dialing in today. Obviously, if you do have further questions, please don't hesitate to call any of the investor relations team. With that, thank you very much and have a good afternoon.
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