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Executives

Debra Broek - Head of Investor Relations and Rating Agency Management

Martin Senn - Chief Executive Officer and Member of Group Executive Committee

Pierre Wauthier - Chief Financial Officer and Member of Group Executive Committee

Analysts

Michael Klien - Nomura Securities Co. Ltd., Research Division

Michael van Wegen - BofA Merrill Lynch, Research Division

Atanasio Pantarrotas - CA Cheuvreux, Research Division

Andrew Ritchie - Autonomous Research LLP

Andrew Broadfield - Barclays Capital, Research Division

Daniel Bischof - Helvea SA, Research Division

Farooq Hanif - Citigroup Inc, Research Division

Marcus Rivaldi - Morgan Stanley, Research Division

Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division

Kamran Hossain - RBC Capital Markets, LLC, Research Division

Stefan Schürmann - Bank Vontobel AG, Research Division

Vinit Malhotra - Goldman Sachs Group Inc., Research Division

Fabrizio Croce - Kepler Capital Markets, Research Division

Andreas Frick - Bank am Bellevue AG, Research Division

Zurich Insurance Group AG (OTC:ZFSVY) 2012 Earnings Call February 14, 2013 7:00 AM ET

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to Zurich Insurance Group Annual Results 2012 Conference Call. I'm Goran, the Chorus Call operator. 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 very much, and hello to everyone. Welcome to the 2012 annual results of Zurich. It's a pleasure for me to be here today with our CEO, Martin Senn; and our CFO, Pierre Wauthier. So without any further ado, I will turn it over to Martin Senn.

Martin Senn

Thank you very much, Debra and good afternoon, ladies and gentlemen. And also thank you for taking the time to join us today on this call. Our 2012 annual results reflect a very challenging year. Although overall we are pleased with our strong underlying performance and extremely satisfied that we, once again, proposed a sustainable and attractive dividend of CHF 17 a share. As the dividend payment will be paid from the capital contribution reserve, it is exempt from Swiss withholding tax. Our underlying profitability continues to be strong. We have made good progress in all of our core segments and delivered an excellent investment performance. We were pleased to see top line growth accelerating in our target markets and we continue to have a strong balance sheet with USD 34.5 billion in equity and $4 billion of cash flows to support our dividend, demonstrating our sustainable commitment to our shareholders. This all shows that we are progressing on our strategy to deliver on our 2013 targets. And with that being said, I am now more than happy to take your questions together with my CFO, Pierre Wauthier. Thank you very much.

Question-and-Answer Session

Operator

The first question is from Mr. Michael Klien from Nomura.

Michael Klien - Nomura Securities Co. Ltd., Research Division

I've got 2 questions. So first question would be on German life. As I understand it, you have substantial unrealized gains in Germany that you could use up to support the famous ZZR, but rather you're choosing to fund this from discretionary allocation from shareholders' equity at the moment. Now my question is if the environment were to improve with reference rates finally, going above guarantees again, there would obviously be no need for further additional ZZR, but any allocation from shareholders funds that you have already done would be lost. So if this is correct, would it not be preferable, therefore, to first try to harvest gains to pay for the ZZR rather than pay the ZZR from discretionary allocation from shareholders' funds? And my second question is on the strong underlying improvement in the loss ratio. As I understand it, the strong improvement seems to be coming from benefits that are coming through now from the re-underwriting pruning, price increases, and so on, all these efforts that you have been pushing through. And as I understand it, you're continuing to push through further actions, so what kind of underlying improvement can we expect this year and maybe also for 2014?

Martin Senn

Can you repeat, summarize the second question which was -- is it relating to life or is it...

Michael Klien - Nomura Securities Co. Ltd., Research Division

On the nonlife side in terms of the improvement on the underlying loss ratio, my understanding is that you have been achieving close to 3 percentage point improvement in the underlying loss ratio year-over-year and I guess, now obviously in kind of the first effects from low hanging fruits from the efforts that you have been pushing through. And now that I guess, the efforts are going to be a little bit tougher to further see improvements, what kind of improvement can we still expect in 2013, 2014?

Pierre Wauthier

Okay. All right. So thank you, Michael. So on German life -- so first of all, you did notice I think an improvement in the German life results for the fourth quarter, which was due essentially to 2 aspects. One is just part of the rebalancing of our portfolio there were also realized gains actually in Germany, which did help our results and the other big part was the lowering of the terminal bonus, which also helped these results. Going forward, I think it's very difficult to determine whether a realized gains strategy is better or worse in the current environment. You're assuming that interest rates will go up, frankly, actually if they did, we would be indeed very pleased because overall it helps us. You have to take into account first of all, the aspect of how the ZZR works. Remember it's a 10-year average of a 10-year bond. So the impact on the ZZR would actually take a long time before you would have a meaningful impact into appreciating the ZZR. And then with regard to the realized gains, you can argue that right now -- the fact that we do not realize gains allows us to have optionality I think is the best way I could describe it. In that that when you realize them it was -- have either going to the policy holder or mostly for the shareholder making that decision right now is, in our opinion, not the best environment and certainly, if we do stay in the low interest rate environment it's just mortgaging the future, which we do not think is the right approach. And of course, we reevaluate that approach on an ongoing basis and, I guess, should interest rates improve further then we could reconsider. But right now in this low interest rate environment, we feel it's an appropriate strategy. With regards to the underlying improvement as Martin will want to assert it further, I think we're continuing just on execution of our strategy, which is on rating action, pricing actions, constantly reviewing and optimizing our portfolio. There are still some further improvement to do, I think, on the claim side, would be one of the aspects but also we can further improve the underwriting of the portfolio. And then as mentioned and as you saw in the earlier part of the analyst presentation, we also have rate increases ongoing. So -- and then I guess, we're continuing on the execution of our expense program, which would also help the combined ratio further.

Martin Senn

Just to add to that I fully agree, of course. It's very difficult, Michael, to try to pinpoint specific rate on the underlying loss ratio -- acting policy. But I should say, though, what I mean there's going to be a limit to how much further that attrition loss ratio can drop. You mentioned it correctly low hanging fruits have been harvested. In fact, we've been stumbling over fruits lying on the floor and now it gets a bit tougher but we continue executing on the strategy, which is working our combined ratio, 3 to 4 percentage points lower relative to our competitors. That has been the plan defined in 2010. This plan is valid until the end of the year that's what we're working on, and we [ph] as well mentioned the point on our efficiency program where we have made good execution by the end of last year and just reiterate what we said at Investors Day, we will deliver as well on that program.

Operator

The next question is from Mr. Michael van Wegen from Bank of America Merrill Lynch.

Michael van Wegen - BofA Merrill Lynch, Research Division

Two questions. First one, I would like to go back to the German life operation. Could you -- listening to what you said previously, my interpretation is that the strong profitability that we've seen in Q4 is largely one-off and going forward, we likely should see a similar trend as seen earlier in the year in terms of impact from the ZZR. Is that fair to say or do you think actually profitability for the full year is a fair reflection of earnings power for the German business, German life business going forward? That's question number one. Question number two is in relation to your updated reinsurance program and the trends that we see in large claims and nat cats. We've seen large claims and nat cats creeping up over the past few years for yourself. Do you expect the updated reinsurance program to have any impact on sort of the normalized 5-year average level of your large claims and nat cats or do you think that would still continue to have a similar trend?

Pierre Wauthier

Okay, very happy to do that, Mike. So to your first question, our business operating profit was 13.3%. We indicated, I think more of a 300 run rate for our ongoing life operations. I think indeed there were some -- it was a very strong result due to some very specific actions. Going forward, I think the 3 to maybe 300-plus run rate is a good proxy, but you also have to take into account that we added Zurich Santander, which added $105 million to the BOP and that, of course, we not only expect to be ongoing but also hope that we will continue to see the strong growth that we've experienced in 2012 and that therefore, would give you a good basis for your run rate going forward. On the second point on the reinsurance program, we have a slide on the analyst pack which is Slide 43, which gives you an idea of the year -- 5-year quarterly average which is 9.4%. We obviously watch this trend very closely. We take it into account on our plan going forward. So I think it is therefore, priced on a going forward basis into our estimates. And then with regards to our insurance program, we slightly altered it, and it's on the following slide. And what you will see in particular is that we have increased the retention to 750 million on our U.S. program from 500 million the year before. But we've also increased the top layer, and we feel given the strength of our capital, it's a more effective way of protecting it. And also addresses your point, which is, well, if you have an increasing Cat environment, wouldn't you want more protection, which is exactly what we're doing by giving and adding this additional layer to our reinsurance program.

Operator

The next question is from Mr. Atanasio Pantarrotas from Cheuvreux.

Atanasio Pantarrotas - CA Cheuvreux, Research Division

I have 2 questions. The first one is back on the Life. I saw that there was a sharp increase driven by good volumes but also by the market effect in unit-linked liabilities and investment count of liabilities of around some $15 billion in 2012. So I wonder if this could translate in a higher net profit in the Life business in 2013, thanks to the higher commission income. And if this could offset the likely further margin -- investment margin decrease due to the lower interest rates. The second question is on hedging. Do you have any program to implement a hedging strategy also in 2013 in order to lower your capital consumption in the investment side?

Pierre Wauthier

Maybe just starting on the question 2. If I correctly understand, you were asking if we have an equity hedge for 2013. Was that the question?

Atanasio Pantarrotas - CA Cheuvreux, Research Division

Yes, basically yes. I know this would be I mean, this would be something that should expire in the next quarters, if I remember well, and if you think to roll forward this production strategy.

Pierre Wauthier

Yes, thank you for the clarification. Typically, we do not [indiscernible] give any indication and forecast on our hedging strategies. What I only want to elaborate is that keep in mind the context of the hedge, we did execute at the time it was in a situation where we had an increase in the inventories in the Eurozone and based at the time we communicated the basic driver for that equity hedge loss start to tail out some of this tail risk due to a potential break of the euro. That tail risk is substantially decreased and at this point, we just leave it as such, but we do not know our markets well [ph] and our investment strategies. We manage asset relative to liabilities and risk-adjusted basis, and that's how we will continue to do so. Maybe I can quickly hand over to the first question to Martin.

Martin Senn

Yes, will be happy to. So on the unit-linked, if you look somewhere in the Annual Report, the 115 billion is indeed a substantial increase over 2011. And if you look at the composition, the very vast portion I think it's around 75% or let's say 3/4 is equities. And equities increase has driven the increase in asset management, which would indeed increase for the fees and is a good thing for our business. Partly mitigating that as we communicated earlier, we have also protected the margin, which means that there's a dampener effect as well on the upside and on the downside risk in order to stabilize, if you want, the profit margin that we derive from the unit-linked business. But of course, we are very pleased with the increase in the equity markets but also recognize that equity are volatile, which is why we have this partial hedge in place.

Operator

The next question is from Mr. Andrew Ritchie from Autonomous Research.

Andrew Ritchie - Autonomous Research LLP

Two quick questions, thanks. Pierre, at the Investor Day, you helpfully sort of gave us some pointers to think about the growth or potential growth in cash flow for the group in 2013. I wonder if you just briefly revisit that. My core assumption is that the nonlife cash flow should grow because we should be looking at the bulk or net income number adding back Germany because that's already been reflected in 2012 cash flow. Farmers, I'm assuming you'd expect to release a bit of capital at Farmers Re given the decline in your share of the quota share. And, I guess, on the changed group reinsurance program, I appreciate your retention's gone up in the U.S. but the tail risk has gone -- tail risk protection has also increased, whether in cash flow if that should not change reinsurance program so maybe just the overall question is just give us a sense of how to think about cash flow trajectory for the group in '13. Second question, could you just talk a little bit about running yield and normalized. I mean the running yield fell something like 40 to 50 basis points over the course of the year. I'm talking here discrete General Insurance only. I think the running yield in Q4 discrete was around 2.6. You have indicated you're reinvesting around 2, 2.25 or maybe just give us a sense where you think you're reinvesting now and what further kind of degree of your compression we should think about.

Pierre Wauthier

Andrew, on the potential cash flows, I think by and large what I indicated the last September was correct, i.e. that the bulk is, generally speaking, a good indicator of General Insurance, we've already incorporated in our cash flow forecast both the Germany insurance adjustment, as well as Storm Sandy on a going forward basis. If you look at the cash flows, you would not have that influence so it’s already incorporated into our cash flow forecast. Farmers. So you're right, of course, that the fact that we would use the quota share does reduce the RBC. The vast majority of the cash flows really come from Farmers Management Services and a 1.5% reduction in the quota share, yes, it does reduce it. But it's not really material if you look at the total AFR of our group, which is in excess of 35 billion. So yes, in theory, in practice, it's not going to make a huge difference to our capital requirement. And then your last point about the change in reinsurance, so thanks for coming back to that because one of the key benefits or one of the benefits of the reinsurance program is that by ensuring at the higher level, it actually reduces our capital requirements. So we are getting actually indeed a capital benefit from that. Now remember that we manage our capital within our target range of 100% to 120% and as long as we're in this target range, we do not foresee in principle any material capital action.

Andrew Ritchie - Autonomous Research LLP

And so in effect it is an economic capital generator to some degree, that change of reinsurance structure?

Pierre Wauthier

Correct, your way of describing it. I'm sorry, and on the yields, so as you remember our maturity on the TI side is shorter than on the life and our running yield has indeed decelerated a little bit faster. Our current running yield on the GI book is 3%, almost exactly. And then on the -- so that's around 20, a little over 20 basis points reduction. And on the life-side, we're around 3%, 5%. This is actually a very small decrease compared to the third quarter.

Andrew Ritchie - Autonomous Research LLP

So were you reinvesting GI on the minute in terms of what you think you're getting on your money right now?

Pierre Wauthier

At the very minute, I have information that the reinvestment on GI is 1.8% and at the very minute, I would assume it's higher, because interest rates have gone up since the beginning of the year. On life insurance, it's a little north of 2.2%.

Andrew Ritchie - Autonomous Research LLP

Okay that was 1.8% as of year-end '12, you're talking?

Pierre Wauthier

Yes. It's a blended yield, of course, with all currencies taken into account.

Operator

The next question is from Andrew Broadfield from Barclays Capital.

Andrew Broadfield - Barclays Capital, Research Division

Two questions. The first one's on the combined ratio, let us focus on your loss ratio improvements year-on-year, which has been, looks, like it's been gone for a long time. But I'm just conscious, if I look at the reported combined ratio it really hasn't got better since 2008, I guess. But when I look at my calculated underlying combined ratio, stripping out all the reserve movements losses, et cetera. If you still got that year-on-year-on-year. So I guess my question is, do you think you're going to finally get to the combined ratio to catch up with what seems like an improving underlying? Or do you think this demand, which is [indiscernible] what is measured gets done perhaps there's a few thing that aren't being measured that need to be measured to put in that gap in? So that's my first question of combined ratio. The second question relates to investment yield, again. And away from the specifics a little bit, but you think you had quite a clear investment strategy I think, which is relatively, I don't know, mechanical maybe the wrong word, but it's very strictly regime that you run on it I'm just wondering whether you started to readdress that at all, or do you think there's any need to? And within that whether you can just give us some indication of how much you're prepared to explore a liquid assets investments, is all.

Martin Senn

Thank you, Andy. Maybe I'll start and then Pierre probably will flavor up my response if with regards to the first question on the improvement on the combined ratio, you're right. From the improvement in the underlying attrition loss ratio. And clearly, we have all the same crystal ball, we cannot chart what sort of nat cat to hit us. We have for last year, we have Sandy. The year before, you remember we had quite a few nat cats, the floods in Thailand, the floods in Australia, the earthquake in New Zealand, the earthquake, tsunami and nuclear fallout in Japan. And of course, these are events which do hit the combined ratio after you are making a very important point on recognizing that the underlying profitability is substantially improving in the combined, which is attritional loss but as well I think on the expense ratio we expect to make further progress as we have this efficiency program in place. And with that, we become definitely much more resilient, we become much more profitable and Mother Nature hopefully is going to help in the future, and that is going to, as well, going to drive combined ratio altogether. This just is a holistic statement. Now with regards to the second question, you called our approach mechanical. I think maybe I'll find a better translation and call it disciplined. Disciplined in a way that we really are driven by the continuation of risk, and we think how many units of risk do we have available and [indiscernible] this units of risks best of play to get the sweet spot for our shareholders and so with that as well the best time for the BOP. And so we do not in principle intend to change that, we're always exploring, of course, new asset classes, new opportunities let me be very clear, we may be rather intensive, be a little bit late to the game, be a little bit too early to the game because we obviously want to test all the different new asset opportunities in a stringent away before we are executing on those. So I won't -- as we speak now, we will not expect any radical changes from our strategy, from our investment strategy as we have it in place. There will always be some fine-tunings, there will be some rebalancing as we have seen in the fourth quarter but there will be no massive changes because our liabilities we do not expect to change massively. And before we put much more money in the investment strategy, we want to think on where could we put that capital, that average [ph] capital in the underlying business. Before we then lever up in this portfolio, you might even think about how to give it back to the investors before taking more market risk. So we do expect kind of a continuation of the approach we have had in the past. And I think Pierre want to jump in.

Pierre Wauthier

Just 2 clarifying points, Andrew. Look, at the end of the day, what matters is actually the net income, okay? Because that's what gets to the shareholders and then you work all your way up through the BOP, combined ratio, expense ratio, loss ratio. So the underlying loss ratio is important, but certainly not the only component. And this clearly, our intention to focus and continue to focus on BOP [indiscernible] and therefore, we not only have actions on the underlying, we take into account as I mentioned earlier what are the trends that we observed in terms of nat cats and large losses to incorporate it. And incorporate it in our pricing with focus on reducing the expense ratio, as well we have our expense program to reduce debt across our businesses. And of course, also focusing on the net typical expenses. There is as you may recall, also what I call Zurich Santander effect, which is indeed that you see the improvement in the loss ratio and there is some offset in the expense ratio. But for us and from a management perspective, the clear focus is on business operating profit, improving the overall combined ratio and not just the underlying loss ratio. To your second question just to complement what Martin said, just given slightly more touch of granularity, everything you said we agreed that's really our philosophy. It's important. It's part mechanical because it means we do adjust, and we constantly review the relative risk and optimize within that. The liquidity risk within our portfolio as you may recall, we look at it from a risk-based perspective, is 8%. And it's true that from that perspective, there is room for potentially further increasing it, but it's all about the risk return and making sure that we understand it, which is what Martin also said. They look important that we first understand before we go and being the first mover is not necessarily the best thing to do in this or any environment.

Andrew Broadfield - Barclays Capital, Research Division

If I may just quickly come back, I think the -- just on the investment side of things, I guess, the only -- in part of my challenge or question is risk-based models have huge assumptions about the risk capital that any asset class requires. And if you work like closely with that then you're making the presumption that the model is right, which I guess we have to some degree, but I ask myself but have you tried to challenge some of that assumptions going in? I mean you talked about 8%, well frankly someone else's model might be 2% or 20%. So I'm just wondering whether you've sort of revisited some of those assumptions at all and challenge them a bit or whether you just pretty happy with where you are? It sounds like you're pretty happy with where you are with that.

Martin Senn

I think we are pretty happy where we are without any doubt and the challenges, obviously coming to look at other opportunities as you have said with such as more liquid assets. But then again, we truly need to understand the behavior of any new asset consideration, the behavior in absolute terms and relative terms reliability and of course, what we always very interested in where do we get as well any diversification benefit in enhancement of diversification benefits because that would really then risk that just give us more return and excess return and just to get more return that looking at the risk adjustment of that is not how we look at things. That's why we don't look isolated at the opportunity out in the financial market. We look at the opportunity in combination with liabilities as we potentially want to keep the risk allocated to assets, stable an increase return or obviously, if you take another even keep stable returns and lower the rates. If you don't get that form, you wouldn't do it just to get more return is not the consideration we're doing, there are always 2 sides to the equation. There is the risk and an expected return expectation, and we feel that we have quite a good experience and a good handle on that.

Operator

The next question is from Daniel Bischof from Helvea.

Daniel Bischof - Helvea SA, Research Division

Two questions from my side both on GI. Firstly, at the Swiss business reports combined ratio for 65% to Q4, maybe you could explain what was going on there and there were again some reserve releases related to the whiplash cases. And then on Germany, where you're expecting that the operations should refer [ph] to business as usual. Now it's been a while since Germany was running as usual, so I'm just trying to get a sense what to expect going forward. So if you strip out $130 million of additional reserves in Q4, the underlying combined ratio was probably around 95%, which is actually not that bad for Germany. So my question, would you consider the underlying Q4 result as stable or are there -- the attritional or large losses alter below average?

Pierre Wauthier

I'll be happy to take this answer. So on the Swiss business, you're right. We did see some further benefits on whiplash. So a large portion of the vast majority, I should say of the result is linked to that. The underlying performance of the Swiss business we're happy with. With regards to Germany, your calculation is correct, but I would like to highlight that Q4 was relatively low in terms of catastrophes. So the number is perhaps slightly flatter. Of course, if we don't have storms, we'll continue to be good.

Operator

The next question is from Farooq Hanif from Citigroup.

Farooq Hanif - Citigroup Inc, Research Division

I wanted to ask about the reinsurance support in Farmers Re, kind of what is the thinking there going forward because as you pointed out it's quite a small program at the moment. But just wondering whether there's potential for that to increase. Second point is you commented -- you made 2 statements about realized gains and unrealized gains, which is, the unrealized gains obviously have gone up because yields have gone down. And you've got a bit of a rebalancing, I guess, in your credit side. How do we -- how can we think of -- sort of level of realized gains going forward, I understand this is obviously a very difficult question to answer, but I mean the overall level of realized gains obviously didn't increase that much year-on-year. Given the vast increase in the available unrealized gains to Farm, is there going to be an increase in realized gains rate going forward?

Martin Senn

Well it is -- thanks, Ferro. Let me start with the second question then Pierre take the first one there. We cannot make any forecast and this is not how we manage the portfolio. We do not manage the business by realizing and not realizing any gains, just to give you a bit of a flavor here, we did have to rebalance the portfolio with our managers rebalanced the portfolio. This is due to the fact that we have a massive movement in financial markets with equities going up in credits spreads narrowing and then with that, what really happens there was as you're correct to say that credits and spread securities were rebalanced. You have probably some sector rotation within credit products. There was, I think, a rebalancing with the strong performing sovereigns. There was probably a little bit of raising cash to pay large claims in the U.S. There was, as well, an outright sale of some equities to reduce the exposure to stay within strategic asset allocations and some of that gives you this kind of realizations. And if markets stay flat, then you don't rebalance. If markets move, then you start rebalancing and we do not predict markets, we manage simply assets relative to liabilities risk-adjusted.

Pierre Wauthier

So one last comment on that. Keep in mind, there's a mechanistic effect. The higher the underlying gain any time you touch anything you're forced to realize a gain and since your unrealized gains are bigger, the realized gains become bigger for the same activity of purchasing a sale. On Farmers Re, so it's a small reduction. I mean from 20% quota share to 18.5%. I think the key rationale or the reason why we thought it was a good thing for the Farmers Exchanges, is that it does provide further diversification of flexibility. We're very happy with the reinsurance program we have in place with quota share -- so we're very happy with the reinsurance program we have with the Farmers Exchanges, sorry. And going forward, we will continue to have discussions with our partners and the Farmers Exchanges for our and their benefit, of course.

Farooq Hanif - Citigroup Inc, Research Division

If I may just very quickly follow up on unrealized and realized gains, I mean I realize this is an accounting thing. But can you provide one more piece of information? If yields remain where they are and spreads remain where they are, how quickly would that unrealized gain on bonds, the bond part of it pull to par?

Pierre Wauthier

Let me answer it differently. The average maturity on the GI book is roughly 5 years and the average maturity on the Life Book is around 8 years, I think. So that gives you an idea of how it would naturally mature. But we always have a minimum of bond sales that we would also have, so just taking the maturity probably is a little bit too low in estimating by when the bonds would go to par.

Operator

The next question is from Mr. Marcus Rivaldi from Morgan Stanley.

Marcus Rivaldi - Morgan Stanley, Research Division

Pierre, you mentioned on the video this morning that around the German review that the remaining phase is not focused on financial items, so other things. I'm wondering if you can just maybe give a bit of a color about what that means and what other maybe implications it has for other parts of the business. And then secondly, just if I may just follow back on some question from Farooq just now, regarding the Farmers quota share. You answered the question really more for, I guess, from the Farmers' perspective given a more flexibility. But thinking from your perspective, is this the start of a trend of much lower quota share participation going forward do you think or at the very least much more competitive economics around that quota share from your perspective?

Pierre Wauthier

So on the first question, which is what's going on, it's really -- we want to have I think on the financial side, we established what is the financial impact. And therefore, made the necessary adjustments. What we are continuing to review is really to understand what were the contributing factors to that. And that's really the part that is still going on and which requires a little bit more time. On the Farmers side, I think it is a decision of the Exchanges in terms of how much reinsurance they want to buy. We have a long-standing relationship. We are, and have been, happy to reinsure the Exchanges over the last year and I would expect that to continue. And I think it also lines the interest of the Exchanges in Farmers, which I think is also a good thing. There's a lot of story, last point perhaps I think is also a lot of trust between the Exchanges and ourselves, we also would like to keep that, I think, the quota shares is one expression of that.

Operator

The next question is from Mr. Thomas Seidl from Sanford Bernstein.

Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division

I have 2 questions, one on Farmers, the underwriting performance of Farmers, of course I appreciate you don't own the Farmers Exchanges. But the liability of the exchange, of course, critical for this fee business, so I note that looking at Slide 67, that the underlying loss ratio, excluding mother nature, so to speak, had deteriorated significantly over the past year and I wonder how you think about what could be done and what is being done to improve the situation there. And secondly, with regards to the U.S. business, we note now 2, 3 years in a row of good rate changes and I wonder how this has impacted your view on the robustness of the long-tail reserves at Zurich. Has it improved, as you would expect or is it still a situation like 12, 15 months ago?

Pierre Wauthier

Okay. So let me understand -- let me answer the first part on the underlying performance of the Exchanges. If you look actually at the Page 67, I agree with you that the dark blue line doesn't look good. If you look just a little bit finer, you start to see a slight improvement over the recent quarters. Keep in mind that we put significant rate increases through the system, 12% -- double digit in most cases both homeowners and auto. And we also taking some significant reunderwriting action on the nonstandard auto book, as well as on the commercial book. And these 2 are really focused on improving the combined ratio of the Exchanges in order to ensure that they can grow their surplus and maintain their profitability and maintain a healthy capital base. So all the actions that we took in 2012 are really -- or I'm sorry, the Farmers Exchanges took and that we are close -- help them in that, are really meant to ensure the profitability and the surplus growth over time so that they have enough capital to support their business. Because these actions were taken in 2012 and that they need time in order to earn through in the premium, these measures are only showing through relatively slowly. And then on the rate increases, I think your question was, we've made some rate increases that's good. How do you see that going forward? Look, we have in many markets a -- first of all, it's maintaining profitability, making sure that we meet our returns and that we get the appropriate rate in the current environment. Current environment is supportive, I think what's happening to us is also happening to others, namely that we do have a lower investment income. So there is a structural need to lower further the underwriting profitability, all other things being equal in order to compensate for the lost investment income. And that I think is giving support to the trend that you've seen in rate increases, and we're hopeful that if the market remains disciplined, then we should continue to see a trend of moderate rate increases.

Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division

And then how does the...

Pierre Wauthier

We do have the power, the pricing power to do that, as well as growing the business as you saw in the fourth quarter where we accelerated growth despite the fact that we continued to have those rate increases.

Thomas Seidl - Sanford C. Bernstein & Co., LLC., Research Division

And should we then think that the reserves for past [ph] in the U.S. is getting better as you get stronger margin, I think the rate increases are slightly above the need here to compensate for lower running yields?

Pierre Wauthier

Look, we book our reserves as we do our best estimate. What we do expect is indeed the rate increases will contribute to further lower the combined ratio, that is absolutely correct.

Operator

The next question is from Kamran Hossain from RBC.

Kamran Hossain - RBC Capital Markets, LLC, Research Division

I've got a couple of questions. The first one is on business mix. How much impact do you think -- sorry, in German Insurance, how much impact do you think this has had on the underlying loss ratio? And just looking at the year-on-year change in premiums, your global corporate has gone up 8% so it seem would be a high-margin business. And the second question is on U.K. Personal Lines. Slide 40. Reporting that you're seeing 14% increases in the U.K. Personal Lines rates in Q4, just interested in a few more details about this.

Pierre Wauthier

Yes, I'll answer the U.K. Personal Lines and I will ask you to repeat the first question, which I didn't understand. On the U.K. Personal Lines, we are continuing to take strong rate increases at 14%, it's not hugely different from the 15% we had in 2012 nor is it very different from the rate increases we had in 2011. Keep in mind that this is a market that is very competitive and which was not profitable by a long measure back in 2010, 2011. We're pleased with the progress we've made, we've substantially reduced our combined ratio and actually are profitable in that line of business. So we're quite pleased with that. And we need to remain disciplined, of course. The second question, I'd ask if you could repeat it, because I'm not sure I understood it exactly.

Kamran Hossain - RBC Capital Markets, LLC, Research Division

Well, I'll just come back to the first question, I think I'm just surprised that you're seeing 14% increase in Personal Lines, given the kind of -- the rate moves being reported by market indices. On the first question was on business mix in German Insurance what impact you believe this has had on the underlying loss ratio.

Pierre Wauthier

Oh, okay. I get it. Right. So look, the rate increases of 14% in Q4, remember this is a rate increase Q4 2012 over Q4 2011. So there were still rate increases going on in that it's not just a discrete quarter over the previous quarter. And that's what it is. I mean, since we report it for the U.K. Then on Global Corporate, the business mix, clearly, the fact that we've grown Global Corporate faster than other GI businesses and that the combined ratio in Global Corporate was in the low 90s relative to the other businesses has been a contributing factor to the improved combined ratio I didn't do the exact calculation, but you could work it out. I just would like to keep in mind that at Global Corporate we're very pleased, of course, with the progress we're making. It's also a volatile line of business.

Operator

The next question is from Mr. Stefan Schürmann from Bank Vontobel.

Stefan Schürmann - Bank Vontobel AG, Research Division

I have 2 questions. First one is on top line especially in Europe in nonlife, I mean we saw like in Q4, Germany was down roughly 10%, Italy was down 8%, Spain 12%, I mean is this a trend, is that deliberate action you have taken there? Just maybe get some feel here and how much maybe it affects to your results, so I ignored [ph] that one. And the second question is on restructuring charges, you basically reported $118 million of the restructuring charges in Q4. Is that -- it's now or should we expect more to come in 2013?

Pierre Wauthier

So I think restructuring charge, we recorded overall for the year $200 million of which $72 million for the fourth quarter. And I think you dropped your first question.

Stefan Schürmann - Bank Vontobel AG, Research Division

Sorry? I mean I just have to -- I mean, in Q4 statements of $118 million, so maybe I was mistaken on that. And you got my first question?

Pierre Wauthier

Okay. On Europe, I thought you had dropped it, but anyway, look, the point on Europe is that we continue to be focused on profitability, take the necessary rate actions that are required, we just discussed about the U.K. where we took 14%, we continue to take rate increases in other lines of business. And the impact it has is, while we're satisfied with the profitability that we're experiencing in the business, excluding Germany, but you look at Spain, you look at Italy, we're having a really good combined ratio I think it's is reflected in the overall 97% combined ratio that we have for Europe, and it's really at the core of our strategy, which is that we focus on getting the return required for a risk-based capital at indeed if needed at the expense of limiting our growth. In Europe we have very limited growth GDP growth overall, and we're seeing the impact of the recession on our ability to grow premium. Restructuring charges. On Page 19 of the financial supplement, we show a structuring charge of $72 million. I'm not sure where you're $118 million is coming from.

Stefan Schürmann - Bank Vontobel AG, Research Division

Those restructuring provisions underwriting is not included in both, so maybe -- sorry about that.

Pierre Wauthier

Okay. So there are other items, which then make the difference between the $118 million, in a sense.

Operator

The next question is from Vinit Malhotra from Goldman Sachs.

Vinit Malhotra - Goldman Sachs Group Inc., Research Division

I wanted to put the focus a bit more on the Global Corporate growth. I mean it's been local currency flat for 2 years and suddenly in the fourth quarter, we're seeing probably a 15%, 18% growth local currency basis. They could be one-off contract but could you give some color on where it's coming from, why this is happening now, the pent up demand over 2 years is it -- [indiscernible] deep price increases which remains constant, so clearly you're still being disciplined along with this growth. So that's the first question. Secondly, on the Life, just staying on the risk margin side, there has been an uptick although in the fourth quarter, there was also an expense margin increase, but there has been an uptick in the Life risk margins and should we just comment on -- I had to assume that, that trend kind of increases or stabilizes going forward?

Pierre Wauthier

So look, in Global Corporate, yes, we have been experiencing strong growth. I mean it's mostly in North America and in Asia -- sorry in International Markets. Europe growth has been [indiscernible] i.e. growth has been more subdued. We've seen strong successes, we've won major contracts. I think we enjoyed very promising in the Global Corporate, and I think that is the underlying vision of the progress. There is also, just to keep in mind, as we showed on Slide 9, there has been a transfer right between North America Commercial and Global Corporate. So while with the growth in Global Corporate is 12%, it's 9% on a like-for-like basis. So that's within that 9%, I think it's fundamentally, I think we're doing a good job versus our competitors. Just as simple as that. We've been in this Global Corporate business for a while, we've been very focused on that business, I think we're starting to see the dividends paying out. And then on the risk margin, I think you're referring to the business operating -- no, sorry. The risk margin improvement has, in local currency, actually improved slightly even though you see here on a reported basis, a slight decrease. And then there has been some negative impact in the U.S., which has and it was a one-off effect and has had an influence on that result.

Vinit Malhotra - Goldman Sachs Group Inc., Research Division

Sorry, the U.S. is in the fourth quarter, I presume?

Pierre Wauthier

I think so, but I couldn't be sure. Second half this year, oh sorry last year, 2012. It was in the fourth quarter. So fourth quarter.

Operator

The next question is from Mr. Fabrizio Croce from Kepler Capital Markets.

Fabrizio Croce - Kepler Capital Markets, Research Division

I have a fundamental question and a very simple one. The fundamental question is following: we had a pretty benign claims here overall in terms of nat cat because at the end of the day, yes, you had Sandy but you don't even exhaust the natural CAT budget of companies and also for you it was a claim but nothing dramatically. Still it is a way from 17% of your BOP, and actually it provokes volatility into your results. So the question is, and I'm sorry that I go back to this reinsurance coverage, but what we are seeing is an increasing amount of nat cat. We are seeing retention rates of primary insurance company and you, in line with those as well going into this trend, but it seems actually that we are assisting to earnings volatility shift from the reinsurance to the primary offer, and so my question is out of the markets, which are becoming very tough, of the prices of the reinsurer -- are reinsurance which are too high or is actually the appetite for more underwriting risk, which starts to take to force actually company to take more risk charge of the shareholders? So it's really a fundamental question, I need to understand why you did this increase of retention. And the second one is a very simple one. If you could update on the dividend part after the one without tax charge after this year's dividend.

Pierre Wauthier

So I'll answer the second question because it's simple. We have about $10 billion of remaining additional paid in capital. The proposed dividend would amount to $2.5 billion, roughly speaking, which after dividend means that the remaining reserve would be around $7.5 billion to $8 billion. On the more fundamental question, look, if you look at our program relative to our peers of a similar size, our retention is towards the lower end interestingly, and in many others have a much higher retention. And for us it's really being about what is the right balance between the retention we hold, our capital position and what it does on an economic solvency and the reasoning has been that we have a strong capital, the last reported one was 110%, AA solvency ratio, 178% SSP. And the benefit of that is that if you do believe indeed in the trend of increasing catastrophes and then actually, increasing the higher layers would be the thing to do. It protects our capital base, it protects our solvency, that's why I mentioned, and it's mentioned on Page 44 that we have an overall reduction in RBC. Now it's true that then any of the losses between $500 million and $750 million would hit us harder. If you go just a little bit further into the details of this coverage though, you will also notice that we have also refused the coinsurance part. The coinsurance part last year was 36% on average, we've now reduced it to 10%. So that we get a much better protection at the $750 million layer. So overall, when you look at all these things we feel this is the better protection. And yes, we could argue about it that you can have a different view, but I think given where we are and what we want to achieve, we thought it better suited on our earnings.

Vinit Malhotra - Goldman Sachs Group Inc., Research Division

Sorry for going back on this one, but the increase that we are seizing on the nat cat not on frequency actually. We have more event but not -- if you look to the real large event, the frequency is actually the problem.

Pierre Wauthier

But you will notice actually that we, first of all, have the global aggregate CAT treaty and we have further increased the level of coverage for this global aggregate CAT treaty, so exactly your point, so we agree with you.

Operator

The last question for today is from Mr. Andreas Frick from Bank am Bellevue.

Andreas Frick - Bank am Bellevue AG, Research Division

I just have a, I think, very simple one, so again sorry for the German nonlife reserve strengthening. We all know you have announced $426 million reserve strengthening for Q3 2012. Now I have recorded that in my model also a $100 million reserve strengthening for the second quarter 2012. And then also $100 million for the third quarter 2011, and $120 million for the fourth quarter 2011. And as I understand now as you say in the press release, you have $60 million for the lines impacted in the previous quarter plus another $70 million for other business lines. So I would say there's another additional reserve strengthening in Q4 2012 of $130 million, so the first question, is that correct? And then if that would be correct I have $656 million reserve strengthening in 2012 overall? And if I compare that with your Slide 10 where you have the underlying loss ratio, then I have a number for the Germany reserve increase in the third and the fourth quarter of $372 million, which is far below my number of $656 million. Can you maybe explain where I do the mistake in the calculation?

Pierre Wauthier

$280 million restatement and everything matches, actually your calculations are quite accurate. Very good. So it's really the restatement that makes the difference here [indiscernible] to effect.

Operator

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Martin Senn.

Martin Senn

Thank you very much, and in closing, I would like to note that there were a number of factors, complicating factors affecting our results in 2012. This is a challenging economic environment, related claims such as Sandy, we've spoken about it and we have also spoken about reserving issues in our German General Insurance business. With all this, we delivered a strong underlying performance with improved underlying profitability, and I want to stress that our group continues to generate strong sustainable cash flows.

We remain focused on the execution of our strategy. We are growing where we want to grow, and we are very well capitalized with our solvency AA target range. We remain committed to delivering sustainable long-term value to our shareholders and to being, of course, this is our higher ambition, the best global insurer. We measure that, we measure that in terms of our customer satisfaction. We measure that with regards to our employee engagement and we measure that, as well, with our shareholders satisfaction i.e. total shareholder return we're able to generate with all of that.

Now I want to thank you for now for the dialogue, for your questions, for your critical feedback we always receive, we tremendously appreciate that which is a basis for us to continue to improve in how we run Zurich. And I wish you great rest of the day and good luck in the market. Thank you.

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. Bye.

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