Executives
Debra Broek - Head of Investor Relations and Rating Agency Management
Pierre Wauthier - Chief Financial Officer and Member of Group Executive Committee
Analysts
Michael Klien - Nomura Securities Co. Ltd., Research Division
Marc Thiele - Mediobanca Securities, Research Division
Michael Igor Huttner - JP Morgan Chase & Co, Research Division
Brian Shea - BofA Merrill Lynch, Research Division
Andrew Ritchie - Autonomous Research LLP
Stefan Schürmann - Bank Vontobel AG, Research Division
Andrew Broadfield - Barclays Capital, Research Division
Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division
Vinit Malhotra - Goldman Sachs Group Inc., Research Division
Atanasio Pantarrotas - CA Cheuvreux, Research Division
Ralph Hebgen - Keefe, Bruyette, & Woods, Inc., Research Division
Fabrizio Croce - Kepler Capital Markets, Research Division
Zurich Insurance Group AG (ZFSVY.PK) Q3 2012 Earnings Call November 15, 2012 7:00 AM ET
Operator
Ladies and gentlemen, good morning, or good afternoon. Welcome to the Zurich's results reporting for the 9 months through September 30, 2012, conference call. I'm Gorin, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Mrs. Debra Broek. Please go ahead, madam.
Debra Broek
Thank you, and good day to everyone. Welcome to Zurich's 9 months results reporting. It's a pleasure to have you join us. And we will start with a few opening remarks from Pierre, and then we will quickly turn to Q&A. So Pierre, if you could please start us out with some remarks.
Pierre Wauthier
Okay. Thank you, Debra. And good morning, and good afternoon, ladies and gentlemen. I'm not going to go over the presentation, but we had several calls and questions this morning, so we thought it would be useful to perhaps clarify a few points upfront.
One is with regard to General Insurance, and just to clarify that the strong underlying performance in GI, with the underlying loss ratio of 61.6%, includes the crop losses of $50 million that we recorded in the quarter.
The second point I would like to clarify. Also in General Insurance, we highlighted already last month the financial adjustment in Germany of $550 million, but the GI results also include $60 million of tax rulings. And if you adjust for both, the combined ratio would then be 94.7% for the 9 months and 94.5% for the -- this 3 quarter.
Moving on to Global Life. Here, I would also like to clarify that there are 2 key aspects to take into account. One is the FX impact, as well as the change in methodology for Corporate Life & Pension business. And if you adjust for those, the new business value would be flat compared to the prior period.
Moving on to Farmers. Just would like to further; one, emphasize that, on a third quarter discrete basis, the combined ratio for Farmers Re was 0.99 but also that the exchanges benefited from the focal [ph] settlement to the tune of near $200 million, which had a positive impact on the surplus ratio of 1.3 point. The rest actually being due to underlying improvement.
Moving on now to net income. The further clarification is the net income being lower is really due to the lower realized gains for the quarter, as last year included over $700 million of gains in derivatives for hedging purposes, while this year, actually, the derivative position generated some losses. Also keep in mind at the same time, however, that our shareholders' equity still increased to $34 billion and that the -- both -- Swiss Solvency and economic capital ratio both remained very strong with 178% and 110%, respectively. And as a result, our capital and solvency position is well within our AA range.
So I hope these clarifications are useful. And with that, let's open it to questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Mr. Michael Klien from Nomura.
Michael Klien - Nomura Securities Co. Ltd., Research Division
My first question would be on the new business value on the life side. You mentioned that, with the adjustments in the prior periods, that would have been flat. Considering that AP was up 12%, obviously, the margin is still down year-over-year. Can you maybe provide us with some more granularity for the change to margin mix, and also how we should expect this to change in the coming quarters? I -- should we be expecting a return to the old margin, or is this now the new level of profitability? And also in this regard, could you help me understand why in Switzerland you're again writing life business with a negative new business margin in Q3, as you did in Q2? And my second question would be on asbestos, actually, which we saw Swiss Re this quarter increasing reserves. Are you seeing any reason that you should look at asbestos reserves in the U.K. again? And also can you maybe remind us what the timing is of your regular detailed reserve reviews on asbestos, specifically?
Pierre Wauthier
Okay. Michael, thanks for your question. I'll try to summarize them first. The first was on the new mid business margin being down and what should you make out of it. The second question was on Switzerland also in Life, and why are we writing at the negative margins. I'd like to highlight, the negative -- the margin year-to-date is positive. And then on reserves, if I understood it correctly, there were 2 questions. One was, what should we think about the level of reserves? And more specifically, when were the reserve reviews occurring, and with that, what should we think about U.K. asbestos? So let me take each of them in order. With regard to the new business margin, it's down 21%. This is essentially due to a very specific business which we wrote in Chile, which is biannual business where the characteristics of this business is actually to have a new business margin. It's something, therefore, that is a one-off and has been influenced by this very specific business. I'd like to remind you that the way we look at the business is much more on a return on risk-based capital employed. And from that perspective, the business is exceeding our hurdle rates. So we're very happy with the business. It's just that the new business margin doesn't reflect that -- the risk/return, and therefore, it has had an impact in this quarter. This is a business that you write once, so it is recorded and therefore would not have an impact in the coming quarters. And we continue to write our business generally at the same levels of profitability that we are targeting. If I move on now to the second question, which is Switzerland. Now the new business value for Switzerland was still $4 million. Agreed, it's not very high. I think what you have to recognize is, within the new business value, there are actually 2 parts. One is the business that we're truly developing, which is more on the Corporate Life & Pensions side where the margins are satisfactory. But you also will get some business, i.e., new premiums paid from old business, as well as distribution of still traditional products to the agent, which put a downward pressure on the margin. If I move, then, onto the reserves, so just to point out that, year-to-date, the development of reserve has been 2.9% positive or $617 million. And then, of course, this is reduced by the Germany adjustment, which still keeps the reserve development positive for the year even after you include that. So from that perspective, the development is not as positive but it is still positive. As I mentioned in the webcast, the reserve margins are also unchanged. Finally, with regards to the reserve review, we perform a review on an ongoing basis, including, of course, with the long tail line of business, specifically for the U.K. asbestos. We have continued, of course, to monitor it carefully, and we see trends being in accordance with our expectations.
Operator
The next question is from Mr. Marc Thiele from Mediobanca.
Marc Thiele - Mediobanca Securities, Research Division
My first question is, in the investment income in General Insurance, it seems to have fallen off the cliff. So if I look at the run rate compared with the previous quarters, and I'm referring to the $600 million on Page 19 in your supplement. What's the underlying we should use for our forecast? Was there anything exceptional that we need to consider? And then the second question is related to the restructuring charges in the third quarter, which have jumped to a higher level sequentially, which may have to do with water council [ph] agreements. Can you provide some guidance of what's still to come in the coming quarters?
Pierre Wauthier
Sorry, I didn't understand the second question. It's the impact of which charges, exactly?
Marc Thiele - Mediobanca Securities, Research Division
The restructuring charges, the USD 103 million in the third quarter.
Pierre Wauthier
So foreign investment income. Well, there's nothing extraordinary happening this quarter. It's -- if you -- really, what is happening is that we're reinvesting at lower yields. So as a result of that, in line with the entire industry, we're seeing a drop in our net investment income. If you look at how it has developed from last quarter to this quarter, our running yield has dropped by about 10 to 15 basis points, depending on which business you're looking at. And then, of course, on the new money, the impact is bigger as rates have fallen. So other than that, I don't think that there is any specific impact. With regards to GI, there is also the impact of a capital repatriation to the group, which has had a negative impact on the capital base. But within the group, it's been capital that goes at the corporate center. Finally, there is also an impact on -- due to FX, especially as, on an average FX rate basis, there's been a weakening of pretty much all currencies against the dollar, particularly the euro. With regards to the restructuring charges, I mean, as you know, we have an expense program where we're reducing the cost. Part of that, of course, does involve restructuring charges as we review the business to be the most efficient as possible. If you compare these restructuring charges to last year, they're a little bit higher but relatively in line with what we had last year at the same time, $103 million versus $85 million, to be precise.
Marc Thiele - Mediobanca Securities, Research Division
Yes, yes, it was $20 million the quarter before. I was just wondering if you have sort of taken more this quarter and then we should expect to drop back to the levels that you had before. Or would you suggest this will level off slowly?
Pierre Wauthier
So I think you have to put it into the context of the efficiency programs that we have put in place. As initiatives are implemented, some of them will generate some restructuring cost. And I'm sorry, I cannot be more specific at this time, but we will provide an update on that at our Investor Day.
Operator
The next question is from Mr. Michael Huttner from JPMorgan.
Michael Igor Huttner - JP Morgan Chase & Co, Research Division
This one -- I have 2 questions. One is -- and forgive me if it had been asked already, one is the ZZR reserve. I didn't quite understand if it's -- how much comes through to shareholders of $50 million in the quarter? I know you gave figures in the presentation of year-to-date, a figure of 90-odd million after a total of about 150 million, but I wasn't sure what the net impact to shareholders is. And the other question is on -- it's a little bit obscure, and I shouldn't have asked this, maybe offline, is -- in Farmers Re, the capital of Farmers Re is used in the surplus ratio of Farmers, and so I'm kind of wondering whether the capital here is being double-counted. You see, if you think of a kind of one of these math diagrams, one circle which is Farmers, and the other which is Zurich, and the intersection here seems to appear in both. And I just wondered if -- am I right in this and how much does it double counting, if it's right? I mean, I have no idea. Is there? Yes, the question for the ZZR is not about the $50 million. But I understand that the mechanism just keeps accelerating, so you're soon looking at hundreds of millions and then the numbers do matter.
Pierre Wauthier
So first on the ZZR. And there is a little more detail provided on Slide 48 of the Investor Presentation. What has been transferred so far in 2012 was EUR 147 million. And of that, the impact to -- sorry, the impact to shareholders was -- no -- EUR 91 million. Yes, sorry, it was EUR 91 million. And of that, within the third quarter, the impact was approximately EUR 20 million of the EUR 91 million. You have to keep in mind, with regards to the ZZR, that the addition to the ZZR is really, as the 10-year average declines, we put up a reserve corresponding to the difference between the guaranteed rates and that average rate. As long as the rate of deceleration is the same, there is no reason to accelerate the provision to the ZZR. Actually, on the contrary, unless you fall into rates that become negative, the rate of deceleration should decline. So in theory, your ZZR will decline, although you start to hit lower guaranteed rates. Let's not get too complicated...
Michael Igor Huttner - JP Morgan Chase & Co, Research Division
I like your -- no, no, I'm not -- but my understanding was slightly different. It was to do with the cohorts, say, the 4% and the 3.5%. That's why I was worried, you see.
Pierre Wauthier
Okay. So clearly, as -- there's several things that are happening, though. Indeed, as you go into a lower rate, you start to hit other guaranteed rates, but at the same time, you're having a lower amount of reserves, as well as you're having some runoff. So you don't necessarily see an acceleration of that provision. With regards to Farmers Re, there are several points. With regards to the way the surplus ratio is calculated in accordance with the NAIC grouping, the Farmers Re capital is included as part of the surplus ratio. However, the way the regulator, and we also, look at the capital and solvency of the exchanges is really individually at each of the exchanges level, which does not include Farmers Re. And it is the individual Farmers Exchanges that benefited from the focal [ph] settlement. And all 3 exchanges had very robust ratios in the third quarter.
Operator
The next question is from Mr. Brian Shea from Bank of America Merrill Lynch.
Brian Shea - BofA Merrill Lynch, Research Division
I just wanted to make sure I understand how your reinsurance program works with respect to the Sandy loss you're going to have. I appreciate that it's too early for you to give us any number about what your gross loss could be, but hopefully we could talk just kind of factually about how the reinsurance program will work. I'm looking at Slide 41. It looks like you guys will eat the first $500 million. And I just wanted to confirm, that's -- does that include the loss that will come from Farmers Re? And then secondly, hopefully, that loss would not be bigger than $500 million, but if it were, that first layer of co-participation, if you could give us an indication of how big a -- big your co-participation would be. And maybe just as any general remarks you're going to make, that I've missed here, but just, surely, how does the reinsurance work once you know your gross loss.
Pierre Wauthier
Okay. Brian, actually, your understanding is quite correct. So the retention for the U.S. cat program, which is relevant here, is $500 million. After that, you have a co-participation, which on average is 36%, but perhaps I'd like to point out that the co-participation is lower at the beginning than at the end. So the impact right after the $500 million, if you want the Zurich portion, would be lower. And it does not include Farmers Re. However, you may recall that, in the whole account quarter share, there's actually a limit to the amount of cat, which is $240 million. And we have sold, so far $185 million, if my memory serves me correctly.
Brian Shea - BofA Merrill Lynch, Research Division
I've got everything, except for the last bit. So the whole account is $240 million. And then what was the final number you mentioned?
Pierre Wauthier
What has been consumed so far of that layer, which is around $180 million. I can't guarantee you the 185 million, but around $180 million is correct.
Brian Shea - BofA Merrill Lynch, Research Division
Right, okay. So the maximum that you could -- that Farmers Re could pick up would be $60 million, roughly?
Pierre Wauthier
Roughly for this year, keeping in mind, of course, that we also have a cat budget for the fourth quarter.
Operator
The next question is from Mr. Andrew Ritchie from Autonomous Research.
Andrew Ritchie - Autonomous Research LLP
I just wonder if you could give us a sense, Pierre, of the sort of cash flow for 2012. You've obviously -- you supplied an update, but -- and I'm not sure of what it was for 2011. You've talked about how the economic solvency, ECM, has increased year-to-date. I'm guessing it would have increased a bit more in Q3. But just give us a sense because, obviously, we're trying to grapple with net income that's quite depressed. I appreciate there's a lot of noncash items in that net income number, but can you just give us any sense of how you're thinking about group cash flow over the course of 2012? I guess, the second question, just on the U.S. nonlife pricing environment. I was interested, maybe give us a sense of what's happening to your retention levels in the Commercial Lines operation and what's happening on Personal Lines rate increases at Farmers versus your peers. You're obviously talking about accelerating Personal Lines rate increases. And I'm just curious to know what Farmers is doing on that front.
Pierre Wauthier
Okay, Andrew. Happy to answer these questions. So cash flow 2012, actually, that is another topic that we have flagged for Investor Day. Just to put it in perspective, though. The -- as you said, one, there are some items which are noncash. Second is, if you look at the net income so far, it's already $2.7 billion which, by coincidence, is about the dividend that we paid last year. And this other topic that I keep in mind with regards to cash flows and how we look at it: We also look at what is the sustainable cash flow of the business. So you really need to look at the cash flows in terms of underlying cash flows and how they could evolve and then, together, with regards to our capacity to pay cash. I think it's really a combination of the operating cash flow as well as the capital position which, as you know, is strong. And the third aspect would be the underlying business performance, which here again is strong, particularly in GI, with the low underlying loss ratio. If I move now to the price...
Andrew Ritchie - Autonomous Research LLP
Sorry, is it -- just because -- is that the same as saying, in your view, the underlying cash flow generation is, more or less, stable?
Pierre Wauthier
I didn't say that. I believe I said that we were looking at the underlying cash flows, but the cash flow is also influenced by what the statutory profits are in the local businesses. And the fact that losses emerge, even though it may not be an immediate cash flow, will of course reduce the ability of the subsidiary to pay up the cash flows.
Andrew Ritchie - Autonomous Research LLP
Okay. That -- okay. It seems -- but on the other hand, do you think the performance is -- the underlying performance is strong but there's plainly going to be some statutory cash flow pressure. I thought that's the message.
Pierre Wauthier
I think that's a fair summary, which is why -- the thing is, remember, in that -- well, actually, on that very Slide 36 we have the central liquidity pool, which is there to absorb volatility in the cash flows year-on-year. So that is another consideration we have together with the capital position and financial strength of the company. With regards to the pricing environment, in U.S., we have continued to increase rates. And if you look in particular at comparable lines such as Commercial Lines, that is where we've had strong increases in commercial markets, in particular, of around 7%, so I think we're in line with the market. Keep in mind also that we've been at it for quite a long time now since 2009. So we're continuing to increase rates and then workers' comp continues to be in the double-digit environment, at around 10%. With regards to Farmers now, we are indeed increasing rates, with the rate increases approved of over 6% in homeowners, close to 6% in auto, but the 5 increases are actually in the double-digit range for homeowners and around 8% for auto. And what you're seeing, actually, in the results is that you'd -- in the third quarter, you're just starting to see the impact on the rate increases, therefore, we do expect indeed an acceleration of that in the coming quarters.
Operator
The next question is from Mr. Stefan Schürmann from Bank Vontobel.
Stefan Schürmann - Bank Vontobel AG, Research Division
I have 2 questions, in fact. The first one is on SST. You saw, like, a 6 percentage points improvement for derisking. I mean, can we -- you just elaborate on that? I'm -- I didn't quite get what you have done here and is that -- in relation, is it raising GAAP? Maybe an update on that as well. And the second question, just a general update on the hedging structure. Did you change anything here, or is that unchanged?
Pierre Wauthier
And so I'll -- I think there were 2 questions, on the restructuring charges and the derisking. Let me take the restructuring charges...
Stefan Schürmann - Bank Vontobel AG, Research Division
No, sorry, hedging. I mean, the hedging structure in place on equities and so.
Pierre Wauthier
All right, okay. Slightly different subject.
Stefan Schürmann - Bank Vontobel AG, Research Division
Slightly, yes. Sorry.
Pierre Wauthier
Okay, so on the hedging structure, it has stayed essentially unchanged. So we still have our equity puts active, and our swaption [ph] program is slightly altered but essentially unchanged as well. So we've refined and improved it a little bit, actually. With regards to the derisking, if you look then at Slide 20, there are several things going on. The key one is really that the derisk -- the -- sorry, our internal model is calibrated at a AA level, which means 1 in 2,000, whereas the SST is calibrated more or less at the 1 in 200s. And the derisking has a much bigger impact in the tail and therefore had a bigger impact on the economic capital model, as compared to the SST ratio. That's why you see the direction is the same but the proportion on impact on that ECM is more important than on the SST ratio.
Operator
The next question is from Mr. Andy Broadfield from Barclays Capital.
Andrew Broadfield - Barclays Capital, Research Division
Got 3 questions, if I may. The first one, when I listened to your presentation this morning, you painted, I thought, a very bleak picture of the situation in Germany. I just wondered, at a group governance level, how you feel Germany was able to get into quite the pickle it got into. I think, not just on the GI side, but I think this was -- seemed a bit of a surprise Q1 with the ZZR charges. Well, I think, overall, it feels like that was a little bit distant. So I'm just wondering whether, notwithstanding the change you made in Germany, more the control process at the group level overlooking the regions, whether there's been any changes there or whether you felt the need to be any changes there. It's first question. Second question, just a quick one on the dividend, following up a little bit on Andrew's question earlier. The $1.5 billion capital release at the non-core businesses, I think you're $1 billion through that at the end of last year. I might be wrong, but I think it was $1 billion. Can you just remind me where you are with that? I think there was a fair chunk expected to come out this year, which I guess, it's to some extent helped the cash flow and therefore the dividend. And then the third question, just wanted to reconcile North American Commercial. I think you said that it was a 4% increase in premiums, yet your price increases and your increased retention and all the good news you seem to be referring to in that market would imply that, that should be higher than 4%. I was just wondering if there is something going the other way.
Pierre Wauthier
So all right, let me address each of these questions in order. Germany, how do we feel about it? Well, we are disappointed. I think we've got to be very clear about that. I'd like to put this in perspective, though, because there were issues that we had identified for some time now. And what you've been seeing in the disclosure of this $500 million was really the result of many corrective actions that had been initiated some time ago. For example, the creation of a center of excellence for Europe in order to improve the governance process, the standards, et cetera. And it's really -- all these initiatives take time. So in order to get the right data, you need to go into the systems. Sometimes, you even need to reprogram in order to get the data. If you look also at the accounting, we decided also some time ago to move to a multi-standard accounting platform, which is SAP-based, which is consistent with our group. There's a lot of reprogramming needed. That's when you review the processes and, as a result, moving it to the standards that we feel is right for the businesses. What happened is that, as these initiatives started, they converged in the third quarter to being close to being finalized and that's where the results emerged. Where we are today is, the bulk of these initiatives have or are in the process of being finalized, which is why we feel comfortable that the bulk of the issues have been addressed. And as you know, we also conducted a review outside of Germany in General Insurance, and that also gave us confidence that Germany was an isolated case, which goes back to my initial comment which is why we also did this review and initiated these initiatives some time ago, because Germany was a bit too much relying on manual processes and there was too much focus on statutory versus IFRS...
Andrew Broadfield - Barclays Capital, Research Division
Sorry, is it just -- is it fair just to say then, therefore, that this is really a consequence of the work you put in, not a -- the work you put in and the consequences of it, we actually say this is chicken and egg, I guess, maybe, but the numbers...
Pierre Wauthier
To a large extent, it is, yes. It's the initiatives that we initiated that really gave us the level of granularity that we wanted in order to have a much better understanding of where we are. You should also -- it's not all of this. On the medical malpractice, there has been truly, industry-wide, a clear trend in increasing cost, which has also been impacting the results. But it's really these 2 influences. If I move on now to the dividend, on the non-core businesses, we will again provide an update at the Investor Day, but we're making very good progress there, as I'll be able to demonstrate. Just as a reminder, Zurich specialty limiteds, we put an [indiscernible] open cover that has further progressed. And we're making also further progress at center and at Eagle Star. But again, if you could wait for another 2 weeks, I'll give you more details about that. Finally, with regards to North America Commercial, the business has actually been growing 6% -- sorry, no, in Global Corporate, which includes North America, so there's been good growth there. And then NAC is 4% indeed, which is a bit higher than the average rate increases. But you have to take into account that there are 2 things happening at the same time: One is the pure rate increases but there's also re-underwriting happening at the same time. So this will also have an impact on the premium growth, as opposed to rate increase growth.
Andrew Broadfield - Barclays Capital, Research Division
Then you said the retention was getting better. That sounds like that's your selective retention than total retention if you're shedding business on re-underwriting.
Pierre Wauthier
The retention on the renewal business is getting better.
Operator
The next question is from Mr. Thomas Seidl from Sanford Bernstein.
Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division
Two questions. One, I go back to General Insurance expenses, looking at Slide 11, and some of the more structural changes going forward. To what extent are you still confident that we are going to see this 350 million cost savings that were once programmed? And secondly, I think, on the U.S. side, I wonder whether you -- when you think about these rate changes, workers' comp but also other long-tail liability business in the U.S., and -- is it already at a level that should allow to see a reversal of, let's say, lower reserve position we had on these lines?
Pierre Wauthier
Okay, so on the first question, and Slide 11, we have, excluding DAC commission and tax items, a slight increase in the other underwriting expenses. If -- that includes, however, the impact of the IAS 19 pension cost as well as the growth in International Markets. If you look more closely, for example, at North America Commercial, you would see actually an improvement in the expense ratio. And I do not -- and I think you would also find a similar trend in Europe, except that, as premiums are declining, you don't necessarily see that in the ratio itself. We're making good progress on our cost savings, and we will provide you with an update at the Investor Day. And it seems that it will get a lot of attention, but we'll be happy to report on that.
Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division
But the tax item, if I may jump in here, this is going to stay the additional tax burden, for example, in premium tax in Germany.
Pierre Wauthier
The tax item is, to a very large extent, a one-off. The tax item is essentially a catch-up on a cumulative basis of several years. So there will be a small portion or fraction of that which indeed will be ongoing, but by and large, the 0.4 is a one-off.
Debra Broek
[indiscernible] rate changes in the U.S.?
Pierre Wauthier
No, long-tail liabilities, reserves. Sorry, long-tail liabilities was your second question?
Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division
Yes.
Pierre Wauthier
On the long-tail liabilities, I think there are life -- these long-tail liabilities actually include lots of things. We feel comfortable about where the reserves are. And as I mentioned on the webcast, the reserve margin is unchanged. We're seeing some very benign developments in most of the lines of business. I think the one that we're watching a little bit is the asbestos and environmental where reviews are ongoing. But overall, I would say we feel comfortable with our long-tail line.
Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division
I was hoping sort of maybe that if you had a 10% rate increases in workers' comps that this would actually now again increase the pop-on [ph] workers' comp. But it is not yet the case, I understand.
Pierre Wauthier
Sorry, I had other lines in mind. On the workers' comp, we're seeing actually positive development overall.
Operator
The next question is from Mr. Vinit Malhotra from Goldman Sachs.
Vinit Malhotra - Goldman Sachs Group Inc., Research Division
Just a few questions. If I can quickly come back to Germany, and we've been hearing the comments, so I appreciate it. But if I go back, I think it was 2007 Investor Day, there was a mention of the German business model and a $135 million cost saves from industrialization of processes. I'm just wondering if this problem actually began then, or is there no link to that? And the reason I ask is because cost saves look good on the year there in that respect. Is this something that you all thought about? Or is this something that you see a link in? And then just on the general -- on the Global Corporate, very, very strong increase in third quarter volumes and rates. You mentioned the increasing exposure, but if you could just comment on retention level. Because you mentioned increasing retentions even when pricing is going up. So are these clients that you're facing with price increases not going away and because they can't go away? Or what -- if you could give a little bit more granularity there. And lastly, on the -- a little bit more on the investment side. With derisking in the last few months in life and nonlife, what is the investment reads? And what is the IRR you're making on the new life business?
Pierre Wauthier
Okay, thank you, Vinit. So 2007, is there a link to the cost savings? Look, there is no indication that there is, as far as we know. So what we have established was a program to improve the German business, which is what we started, as I mentioned, a couple of years ago and have made very good progress there. There are many aspects to Germany, and therefore, I would not make a link specifically to that. If I move on to the retentions rates going up even though we're increasing our pricing, well, I think, if you look at the U.S., what we've seen is that our competitors are also increasing rates, and therefore, we're not unlike them. As a result, I think that's what allows us to increase our retention across most lines in this particular space. Europe, of course, is different. We are taking, in some cases, serious underwriting actions, and that has had an impact on our European premiums, which are down 2%. And then certainly, in some areas, retentions are low. And as you know also, we focus on International Market where we've seen very good increase. With regards to our reinvestment yields, we're currently reinvesting at an average rate of close to 2% in GI and around 2.5%, 2.6% in life insurance. And with regards to the IRR in our new business in life, as you know, our focus on life is unit-linked and protection and fee-based businesses. Therefore, it is, by and large, insensitive to interest rates. So we keep writing our business at our target RBRMs, as we call them, which are well in excess of our hurdle rates.
Vinit Malhotra - Goldman Sachs Group Inc., Research Division
And just if I can follow up. You mentioned in your video recording that the life risk margin benefited from lower claims as well in third quarter -- or 9 months, I can't be sure. But is there something there that happened which you would like to point out now, or nothing really exceptional?
Pierre Wauthier
There was a clear trend that everyone was clearly going to lead a healthy life over the next decade [ph]. I could tell you with certainty that, yes, the claims is going to be better. But look, essentially, what we're seeing is that the mortality developments have been a little more favorable than we expected, particularly in Switzerland, Germany and the U.K. And as a result, it helped the margins. There is and has been an ongoing trend of improving mortality. Of course, we'll see if that develops. We're just recording what we see.
Operator
The next question is from Mr. Atanasio Pantarrotas from Cheuvreux.
Atanasio Pantarrotas - CA Cheuvreux, Research Division
I have some question left. First of all, on your capital position, I wonder, which part of the annualized capital gain, included in the AFS reserve and equity, is used in your capital model, if fully included or only the part of the G&I or nothing, given that there was a sharp increase in this reserve during the third quarter? The second question, regarding your hedging program. If I have understood correctly by your financial statement, the hedging cost was around $168 million. Now given the size of your put option on equity, is it correct to assume that the hedging cost in the next quarters could not -- could be quite nonmaterial, or even positive, in the case of equity market decline? And the third, the last question, is on the general reserve in the life business, the ZZR. What we can expect going forward in the next years, given that it is very likely that the average 10-years yield will decline further into next year. So we cannot assume to see every year, in this environment of low interest rate, every year, a negative impact. And which could be this impact?
Pierre Wauthier
Okay, so thank you very much. Which part of the capital gains are in equity? So the shareholders' equity as well as our AFR take a mark-to-market approach. If you look at our shareholders' equity, the shareholders' portion of the unrealized gains is close to $4.7 billion, based on gross unrealized gains of almost $10 billion. And that shareholders' portion is also reflected in our economic model...
Atanasio Pantarrotas - CA Cheuvreux, Research Division
Totally? Sorry, totally included? Or maybe partially excluded the part, which is -- which covers life liability in order to not avoid the...
Pierre Wauthier
Okay, yes. This is -- the $4.7 billion is after life policyholders' share and after tax. The SST ratio, by the way, is on a pretax basis but after policyholders' share portion. That is our economic model. So that's what's included in the economic as well as in the shareholders' equity. With regard to the hedging program, by and large, your assumption is correct. So we had a loss, thanks to improving equity market, it should be less important. And then if indeed equities decline, then the hedge program or the puts that we have in place should increase in value. And thereby, since they're fair valued, that would be reflected in the P&L. And then finally, on the ZZR, as I said, it's a smooth line going down as interest rates remain low, and therefore, the profile of what's happening to the ZZR provision should, broadly speaking, be similar. And of course, it depends on your outlook whether you consider that interest rates are flat or whether you look at a forward curve. Keep in mind, however, that over the time also, these reserves are declining.
Operator
The next question comes from Mr. Ralph Hebgen from KBW.
Ralph Hebgen - Keefe, Bruyette, & Woods, Inc., Research Division
I have 3 things. One is, you mentioned on the -- in the video conference that, in your General Insurance business, the rate increases which you are putting through are ahead of claims inflation, and I was wondering whether you would be able to give us some additional comments on that, perhaps quantitatively, that would be good, or qualitatively perhaps, commenting on various lines of business, specifically commercial in the U.S. but also your businesses in Europe and how they perform according to this dynamic. The second question relates to Germany again, I'm afraid. You said on the conference call that the bulk of the issues was addressed and that you're hoping to finalize ongoing surveys and investigations into the business by year end. Is that mostly going to be qualitative? Or can we expect an additional charge to be included in the full year results? And the final one is just a point of detail: Would you be able to identify whether, and if so, how much the charge was -- sorry, the claim was relating to Isaac?
Pierre Wauthier
Okay, so Ralph, I'll start with your last question, which is the impact of Hurricane Isaac. I can tell you it was really small. I do not have the number in my head, okay, but it is in the single-digit range, which is what I thought. With regard to rate increases, it's really very difficult to answer your question. Again, I'd say, by and large, the rate increases exceeded our claims cost. They vary by line of business, but for example, we're seeing some pressure a little bit on the homeowners that's why the rate increases will be stronger in that line of business to more than compensate for that, and I think it would be too long of a conversation over the phone. So I'll keep it there. The rate increases are exceeding claims inflation. And we do look at it line by line, absolutely. Then I -- if I move on to your second question, I guess, which was Germany and other additional charges. We completed most of the analysis that we want to do. There is still some more detailed analysis that is still ongoing and will be completed by the time we report our year-end results. And at that time, we will give you an update. I think I cannot be more specific about that because that would be speculation. We need to do the work, but we want to, at the same time to give you the assurance that we feel comfortable that we have addressed the bulk of the issues. So really, from a reserve perspective, from an accounting process perspective, we feel comfortable at that stage. And what the outcome will be, I guess, we'll see at the time. But certainly, we're not talking of something similar than what we announced last month. It's that...
Operator
Your last question for today is from Mr. Fabrizio Croce from Kepler Capital Markets.
Fabrizio Croce - Kepler Capital Markets, Research Division
I have actually a very simple one. Before you guided, not guided, but you said actually that the running yield has decreased some 10 to 15 basis points in the year. Now if we enter the time machine and we go one year ahead from now, this would mean that next year we should expect the running yield to be down some 40 to 60 basis points, which potentially is a little bit overstretched. So my question is, if you could give us some figure on which base or -- that we could use as a base in order to model the running yield for next year, in the 9 months? Then the second question is about Sandy. Sorry, I know you don't disclose any figure. For me it's only to understand if I get it right from a geographic point of view or I'm right assuming that, actually, the region which was affected by Sandy is not exactly Farmers land in terms of -- these are not the operation that normally are covered by -- not -- sorry, this is not the geography which normally is covered by Farmers but it's rather a region which is covered by Foremost and 21 Century, potentially North American Commercial? And then last, simply to get it really straight to the point, shall we expect some dividend cuts for next year? Or do you think that the CHF 17 are a reliable level still?
Pierre Wauthier
Okay, so 3 questions: one, running yield; second, the impact of Sandy in a little more detail; and third, the dividend. With regards to running yield, let me give you a few points there. The average duration on GI book is about 5 years, and the average duration on our Life book is around 7 years. The running yields on GI is about 3.2% and, on life, is about 3.9%. And as I already mentioned, the new running yield in GI is slightly below 2%, and in life insurance, it's slightly above 2.5%. So I hope that will give you enough indications for you to model that. With regard to Sandy, there is impact to Farmers, you're right. It's essentially limited to -- or more prominent on 21st Century and Foremost because that's where -- they've got the homeowners property and then NAC. Keep in mind that you've got the National Flood Insurance Program, which will cover a lot of the losses. So this is more about auto losses; to some extent, some home; and then on the commercial, it becomes more complex. There's business interruption, which is the probably most complex area of the whole catastrophe. And then finally, with regards to the dividend, as you know, this is a shareholders' approval of a board recommendation, which will take place in April. When we look at the dividend, we take a series of factors into account. One is the underlying performance of the business, the cash flows, the capital strength and solvency position, which, combined together, are the elements that we look at for -- in making then that decision. And I think, if you look at all these criteria, you've got a strong underlying performance, you got a strong capital position. It's got still good cash flows. And these are all the elements that we'll take into account.
Fabrizio Croce - Kepler Capital Markets, Research Division
So actually, stability. Okay.
Operator
Ladies and gentlemen, that was the last question for today.
Debra Broek
Okay. Thank you very much for joining us. And I would just like to remind you again also that November 29 is our Investor Day here in Zurich. So we hope to see many of you there. And other than that, thank you for joining, and have a good day.
Operator
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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